An Opportunity Surrendered Deliberately
Brigadier (R) Samson Simon Sharaf
The 13 year nuclear sanctions on Pakistan served to stimulate home led growth, exports and import substitution. During this economic quarantine, the growth, inflation and poverty lines remained static while parallel economy grew. The parallel economy sustained the lower middle and poor class in terms of jobs and subsistence. This was also the time when Pakistan had to address its external balance of payments through the IMF interventions.
The nuclear sanctions failed. International consumer manufacturers were aware that they were deprived a big share of dumping their products and could ultimately be overtaken by domestic led growth.
The seizure of foreign currency accounts in 1997 broke the dollar rupee parity and Rs 47 and drove the local currency into a nose dive. It also shattered the confidence of people. Logically, the weak rupee should have led to a surge in exports that never happened. This explanation was enough to break the myth that a weak rupee was imperative to increase exports.
In the 2000s, Pakistan made concerted effort to break out of the IMF interventionist programs. The Central Bank debt retirement section and money changers worked expediently to arrest the nosedive and stabilise currency markets. However there were inbuilt Trojans at work. The import substitution programmes of car manufactures were way behind schedule and becoming a liability on impossible debt servicing costs. The Central Bank was left with just three weeks of reserves. Yet the black currency markets were growing due to unchecked flight of capital. Ironically, under the pricing mechanism of 1994, IPPs with tax exemptions had recovered investments and begun remitting profits and outsourcing costs abroad. They were now poised to play a leading role in the economic potential of Pakistan. New energy manipulators had arrived to earn windfalls.
Sales Tax started as a VAT and was abandoned by FBR in 2000-2001. It scared the small time entrepreneurs in the manufacturing sector in awe of the high handedness of FBR and military led tax surveys. This backbone of Pakistan’s very strong unregulated economy was poised to close production and change tracks as soon as time permitted. The tax became an inflationary levy benefitting the top tiers of businessmen and jump started an inflationary trend. Ultimately, the entire buck was passed on to the consumers who had no capacity to claim refunds.
As the inflation and consumer price index continued to rise, Pakistan was ripe for quick injection of funds that through consumerism could be manipulated for the benefit of overseas markets. This meant that any remittances into Pakistan had to be grabbed back through the rising import bills and short term bubbles of consumer prosperity. In the meantime the perception of Pakistan as a bankrupt and ungovernable nuclear state was reinforced. Pakistan though helpless and yearning for such cash, had no plan to absorb it into the local economies if it ever came.
Come 9/11 and the entire political economy changed. Sanctions were lifted and debt rescheduling came through. By 2002, overseas worker’s remittances and balances transferred from abroad in the banking system jumped from $ 900 million to $ 4 billion. USA pumped billions in logistical support payments for operations in Afghanistan and FATA.
In order to maintain the rupee parity the Central Bank quickly absorbed as much as it could but soon ran out of the mopping up and sterilization capacity. The rupee began to appreciate from 65 to 57. Despite over $ 13 Billion in the system reserves and ignoring the historic precedence that a weak rupee never boosted exports due to a high import input factor, the government decided to devalue the rupee.
The government also ignored the basic theory that any country in a trade deficit must regard unexpected and non-fundamental appreciation of domestic currency as a boon to be used for cheaper imports and resetting of import priorities. A strong rupee also meant lower imported energy costs but that wasn’t the priority. Rupee was prevented to strengthen to 50 versus the dollar, ostensibly not for the exporters to survive but to tie strings to the growing economy that could be manipulated later.
By 2003, Pakistan’s currency printers were in over drive. The problem that it created was that every Rupee the Central bank dished out into the market carried a return at the time of over 17% for the commercial banks while the dollars it got in return were earning less than 2%. The difference of 15% meant that the budgetary resources were to be strained to cough out the difference. Rather than address this issue, it was decided to leave Rs. 1 Trillion in the banking system to restore the parity of rupee to dollar at 2%. The negative fallout of this floating 1 Trillion that equalled the entire long term savings of Pakistan from 1965 was never addressed. This money floated around like a monster. The banks’ profits in a single year jumped from Rs. 30 billion to Rs. 100 billion because they could now lend retail at 14% while paying the depositors 2% slumping deposits.
In order to harness this windfall, the government made the third fatal error of the trickle down effect and consumer led growth that had previously failed in the ASEAN. Unlike the tourism industry of Thailand, Pakistan’s domestic growth was already squeezed due to the levy of Sales Tax. Hence began the era of import oriented consumerism. Pakistan became a haven for investors seeking quick and easy profits in the absence of hedging policies. There was too much money chasing too few goods and logically consumer imports grew rapidly and with it the exponential inflation and high cost of living.
Sadly, even the main domestic growth sectors were discouraged. The bumper wheat crop was bought at very cheap prices and exported. Later, food deficits were made up through very expensive imports. In order to ease such a damaging policy, the man planning and ushering Pakistan’s agricultural revolution Dr. Zafar Altaf had earlier been shown the door. This manipulation of wheat, sugar, rice and cotton was to become a regular feature through unchecked cartels.
The circular debt in the energy sector was one of the two manipulative triggers to collapse the economy at will. As late as 2005, WAPDA was crying hoarse on the impending crises due to pressure from IPPs. There were corporate lawyers both from WAPDA and IPPS preparing litigation cases just in case the government defaulted. Ironically, the IPPs had already recovered investments and were pledged for expansion. So was the Telecom sector that underwent exponential growth. Little did we realise that every call we made or every bulb we switched was in fact accounted against our import and profits remitted in dollars.
With 2007 elections in mind, the government remained reluctant to adjust fuel prices commensurate to the international rates. This exerted a huge pressure on the national exchequer. Belatedly, when the decision to raise fuel prices was finally taken, it also triggered the circular debt issue.
These simultaneous crises signalled the cartels to take out their money and flee. A fortune was deliberately surrendered so easily under the very nose of an India centric security establishment.
To be continued………..