ISLAMABAD, 12 August — Does Pakistan need a new monetary and business strategy to attract foreign private investment, and respark sluggish growth that has failed to respond despite piecemeal incentives? The central bank and the government even now keep hoping that their monetary policy, budgetary measures, smalltime tax breaks and reduced customs duties will deliver. But, investors, industry, business and independent economists point out that the country continues to experience a negative output growth since mid-1990s. The trend seems to be accentuating as the present government completes its three years of what it claims to be a period of reform and putting together a growth package.
In the run upto to Oct. 10 national elections many dissenting voices are being raised, questioning the policies, the government has persuaded over the last three years. The government of president, Gen. Pervez Musharraf and its members are not contesting the October polls as a party or a group. But, the government that will emerge as a result of the elections, will have to face a lot of music on this score, unless it makes a break with the past. But, that may not be possible to do completely as Gen. Musharraf will continue to dominate the governmental scene in his capacity as president and chairman of the proposed National Security Council (NSC) that will have a powerful presence of the armed forces, as he is trying to invent a new administrative-political system.
The question that is dominating the present worries over the economy is: Why, and how, the country failed to make a big leap forward inspite of the ostensive, military-led "stability" since Gen. Musharraf took over Oct. 10, 1999.
Over the last three years, the present government and the State Bank of Pakistan (SBP), the central bank, have tried to manage the economy largely through the monetary policy, and to some extent the exchange rate regime. That was considered feasible and a short cut to stem the economic deterioration and a recessionary situation.
Domestic economic policies, particularly freezing of $11 billion private Foreign Currency Accounts (FACs) of resident and expatriate Pakistanis, which, in fact had already been consumed over the previous eight years starting 1991. It totally shattered the confidence of domestic and foreign private investors.
The heavy dependence on monetary and exchange rate policies could have been a useful first aid to the economy, but it has failed to respark growth. New investment has taken place only in selected high-profit sectors like autos, cement, textiles and sugar.
Facing serious management problems both in terms of a heavy budget deficit equaling upto 7.0 percent, the government resorted increasingly and repeatedly to raising prices of state- owned utility services. It ranged from electricity, natural gas, petroleum, telephone to telecom, besides a host of indirect taxes, including IMF-ordered enforcement of VAT-type general sales tax (GST) on scores of items from packaged food to medicines. The price of electricity, for instance was raised on eleven occasions, to 47 percent in less than two and a half years of the present government. Prices of other utilities tell the same story.
It squeezed the consumer to the maximum, heavily slashing his purchasing his power. Demand was hit, badly. More than 4,000 large industrial units, unable to do business and ruined by government’s mercurial policies, shuttered down. Many of them defaulted in repaying loans to banks, as the amount of non-performing and defaulted loans rose to close to Rs.240 billion. That worsened the balance sheets of the state-owned banks.
The banks, in a bid to make up for the default, and foot the bill for their own inefficient, corrupt, highly wasteful and huge staff, raised the interest rate to a historic high of 25 percent.
As a result, the cost of production, rose across the industry, making exports less competitive compared even to Bangladesh and India. One of the reasons that state prices and cost of bank services went on a rising spree, was the government’s intention to privatize all of these loss-making entities, and before it happened, make them profitable for the prospective buyers. These enterprises, looted and plundered by bureaucrats who ran them, were costing the national exchequer more than Rs.200 billion a year. Costs and prices went on skyrocketing, the purchasing power continued declining.
"Under conditions of a large negative output gap in the economy and excess capacity in many of the largest industries, monetary policy appears to have tested its limits in terms of catalyzing new investment by private sector...In an environment where non-economic factors — such as geopolitical and domestic political risk — are likely to continue exerting a disproportionate influence on investment decisions for the foreseeable future, monetary policy will need to be complemented — rather than countered — by the fiscal stance to respark growth," a foreign bank report says, about the present situation.
Even though the central bank, a year ago, adopted a pro-active policy to stimulate the economy, bank credit off-take by the private sector has stagnated or declined. As of March this year, the banks had 67 percent more liquidity than the central bank had mandated to be retained as statutory liquid reserve (SLR), up from 49 percent in June 2001. Inspite of the excess liquidity, the banks continue to be restrictive in offering advances to the private sector for fear of default. But, they are doing good business with selected blue chip borrowers, including, mainly, foreign multinationals. Most of the banks prefer investing in government securities that are safe though of lower yield. Even though the banks’ average lending rate is now down to 12-13 percent, much business is not taking place.
SBP, in its last report, for January-March, 2002 quarter says, the quarter "saw a worsening of the relative decline in net credit that was already visible in the preceding second quarter." The nine-month period that ended March 2002, "recorded Rs.43.1 billion growth in net credit to the private sector, representing a stunning 47 percent fall compared to Rs.81.2 billion extended during the like period of fiscal 2001.
