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Paper
no. 135
THE PAKISTANI ECONOMY
National Security Vs Human Security
by B.Raman
In a joint open letter titled "Pakistan in the 21st century--A Renewed
Alliance", addressed to the Government of Gen.Pervez Musharraf on June 6,2000, the
Islamabad-based representatives of the UN Development Programme (UNDP), the Food and
Agriculture Organisation (FAO), the UN Children's Fund (UNICEF), the International Labour
Organisation (ILO), the UN Population Fund (UNPF), the World Health Organisation (WHO),
the World Food Programme (WFP), the UN Educational, Scientific and Cultural Organisation
(UNESCO), the UN High Commissioner for Refugees (UNHCR), the UN Information Centre(UNIC),
the UN Drug Control Programme (UNDCP) and the UN Industrial Development Organisation
(UNIDO) stated as follows on the Pakistani economy:
* Pakistan faces a crisis in its development. On the basis of
present and past experience, its pattern of development will not--indeed cannot--provide
an acceptable standard of living for the majority of its population. Pakistan's
development is unsustainable.
* Among the symptoms: The 2.8 per cent annual growth in its
population means that a further 110 million Pakistanis may join the existing 140 million
by the year 2020. A Pakistan of 250 million people will face extraordinary difficulties in
terms of the pressure placed on its resources and on its governance. The level of human
development, as measured by access to education, basic health and family planning
services, safe water and sanitation, continues to be one of the lowest in Asia.
* "With almost six million people unemployed, this number is
expected steadily to increase by 500,000 people each year. Environmental deterioration in
all parts of the country is steadily undermining the livelihood of millions of people. The
public sector development budget is under unprecedented pressure, while domestic and
foreign investment has stagnated. There is widespread disillusionment with the
institutions of the Government, which have failed to serve the people.
* "Pakistan needs development of the people, for the people,
by the people…. To most Pakistanis, access to a job is probably the biggest single
indicator of effective and sustainable development. Response to this aspiration poses an
enormous challenge to the nation. The current level of unemployment/under-employment is
estimated to be 16 per cent of the population of working age or 5.8 million.
* "With a 2.8 per cent rate of population growth, another
1.1 million young people will be added to the labour pool every year, at least half of
whom cannot expect to find work at the present rate of labour absorption. …Pakistan's
future will depend on its ability to stimulate private investment, domestic and foreign,
within an overall context of globalised competition for markets and investment resources.
* "Furthermore, it is clear that mismanagement of state
assets has in the past served to divert scarce public resources away from priority
development needs. The structural reforms, including privatisation, must therefore be
sustained. None the less, there is a real concern for the effects of this process on the
people of Pakistan and on their potential for achieving sustainable development. A
people-centred development agenda must maintain a balance of these issues.
* "The very necessary focus on reducing the
budget deficit should not obscure the reality that Pakistan's principal budgetary problem
has long been a markedly poor rate of domestic resource mobilisation and a seriously
inequitable sharing of the tax burden. Unless this issue is addressed, Pakistan's
long-term development potential will continue to be crippled by cutting critical
development expenditure, rather than raising more domestic resources.
* "Moreover, within the overall budgetary
parameters, there is a need for balance between military expenditure and what has come to
be termed as human security. Structural reform is no panacea; in the short to medium term,
there will be need for a programme of measures to address the needs of those segments of
society which do not immediately benefit from the effects of enhanced economic growth, or
whose livelihood is adversely affected by the process of adjustment.
* "The wholly appropriate reliance on private capital for
promoting economic growth, stimulating productive enterprise and providing employment
should not distract from the need for an effective regulatory capacity within the public
sector, as an expression of public purpose in counterpoint to private profit.
* "The entirely sensible reliance on private
capital for developing many elements of economic infrastructure should not obscure the
limitations of such potential and the corresponding need for the public sector to continue
to invest in areas that are, for the foreseeable future, of marginal profitability. The
recognition of the important role that the private sector, commercial and not-for-profit,
can and should play in social investment should not conceal the reality that most of such
investment will still have to derive from the Government, which accordingly needs to be
reformed and strengthened, not marginalised."
WORLD BANK'S VIEW
Talking to the press on Pakistan's current economic scene on June
9,2000, Mr.John Wall, Chief of the World Bank Mission in Islamabad, said:
*"It is very difficult for any Government to manage the
economy with tax revenues as low as 13 per cent of the GDP. In the early 1990s, there was
an estimate that the Government's total revenues will improve from 17 per cent of the GDP
to 21 per cent. On this basis, the Government worked out its spending outlays. However,
the revenue fell to 15 per cent of the GDP subsequently.
* "It is very difficult for the Government to meet its
obligations in this situation. Total Government revenues should be equal to 21-22 per cent
of the GDP and tax revenues should contribute at least 18 per cent of the GDP. This simply
means additional tax revenues equivalent to five per cent of the GDP.
* "Pakistan is facing a very difficult balance of payments
situation, mainly due to large trade deficits. Exports are less than imports, debt
servicing exceeds foreign inflows and there are difficulties on the capital account. On
the external front, the only solution is to increase exports. The country needs to be more
competitive and efficient by reducing the costs of doing business, like reducing interest
rates and other input costs of the industry. The Central Board of Revenue (CBR) and the
Water and Power Development Authority (WAPDA) are a heavy drag on anyone wanting to do
business in Pakistan…. Unless and until these are reformed, the prospects of an
efficient economy will continue to be bleak.
* "Pakistan also has a very serious social infrastructure
deficit. All the basic social indicators are the lowest in Pakistan despite its having a
per capita income in South Asia behind only Sri Lanka. There are very few countries in the
world where school enrolment is falling. In Pakistan, evidence is that enrolment in
education is falling."
THE STATE OF THE ECONOMY DURING
1999-2000
The Government's Economic Survey for 1999-2000
released to the public on June 15,2000, indicated the following revised estimates for the
year:
THE GDP
* The GDP grew by 4.5 per cent as against 3.2 per cent in
1998-99. This was largely due to bumper rice, wheat and cotton crops and the increase in
the output of agriculture-related industries such as fertilisers and textiles.
BUDGET DEFICIT
*" The budget deficit amounted to Rs. 183.7 billion, being
six per cent of the GDP as against the target of 3.5 per cent. The comparative figures
were RS. 205 billion (7.7 per cent of the GDP) in 1997-98;and Rs. 177.7 billion (6.1 per
cent) in 1998-99.
* During 1999-2000, the total tax revenue came to Rs.351 billion
only as against the target of Rs.372 billion.
DEBT SERVICING
* There has been an exponential growth of debt servicing since
1984-85, threatening the macro-economic stability of the country. Public debt has grown at
a fast rate, both in absolute number and in relation to the GDP.
* Domestic debt in relation to the GDP averaged 44 per cent
during 1990-97. It rose to 48.8 per cent in 1997-98; 49.9 per cent in 1998-99; and 51.1
per cent in 1999-2000. (Comment: Since 1990, every Government in Pakistan has been
promising in its budgets that it would borrow less and retire more debts in order to
reduce the total debt, but has not kept the promise. The Musharraf Government has been no
exception. In its budget for 1999-2000 presented in June, 1999, the Sharif Government had
promised a net reduction of Rs.15 billion in domestic debt during the year. During July,
1999-May, 2000, the Sharif and Musharraf Governments, between themselves, had borrowed
from the banking system Rs.111 billion as against a total debt retirement of Rs.58 billion
only. Thus, there was a net increase of Rs.53 billion in domestic borrowing)
* The interest payments on domestic debt have increased from
Rs.37 billion (3.6 per cent of the GDP) in 1990-91 to Rs.186.5 billion in (6.4 per cent of
the GDP) in 1998-99 and Rs.194 billion (6.1 per cent) in 1999-2000.
* About 81.5 per cent of the tax revenue or 65.9 per cent of the
total revenue went towards debt servicing (both interest and principal), affecting the
Government's ability to spend on key development activities.
* Debt servicing accounted for 56.8 per cent of the current
expenditure and 48.7 per cent of the total expenditure in 1999-2000. In 1990-91, interest
payments amounted to 29.1 per cent of the total revenue and 38.6 per cent of the tax
revenue. It increased to 47 per cent and 58.1 per cent respectively in 1999-2000.
* Debt servicing amounted to Rs.314 billion as against the target
of Rs. 287 billion.
* By the end of June, 2000, disbursed (committed and received)
and outstanding external debt (medium and long-term) rose to US $ 25.5 billion or 39.4 per
cent of the GDP. External debt service payments have risen substantially and reduced the
net inflow of foreign resources. However, due to re-scheduling of debt repayments,
external debt servicing during 1999-2000 is expected to decline by 8.5 per cent to US $
1.4 billion, or 2.2 per cent of the GDP.
* There was a declining trend in the commitments and
disbursements of aid. These are likely to amount to US $ 1.65 and US $ 1.96 billion
respectively during 1999-2000.
CURRENT ACCOUNT & TRADE DEFICIT
* During July, 1999-April, 2000, the current account deficit
declined sharply by 34 per cent to US $1.19 billion. During the same period, exports
increased by 9.8 per cent to US $ 6.99 billion and imports by 10.9 per cent to US $ 8.34
billion. The increase in imports was mainly due to the rise in POL prices and not due to
any major increase in the imports of machinery and raw materials for manufacture. The
deficit in services widened by US $ 224 million. Workers' remittances from abroad declined
by 9.5 per cent. The total foreign exchange reserves stood on April 29,2000, at US $ 1.43
billion as against US $ 1.73 billion on June 30,1999.
* Exports covered only 83.1 per cent of the imports as against
83.9 per cent during the corresponding period of 1998-99.
AGRICULTURAL OUTPUT
* Agricultural output increased by 5.5 per cent as against a rise
of 1.9 per cent in 1998-99 and a target of 4.3 per cent. It amounted to 25.9 per cent of
the GDP as against 25.6 per cent in 1998-99.
* The output of major crops grew by 9.6 per cent as against a
target of 5.4 per cent and an actual decline of 0.04 per cent during 1998-99. The minor
crops output increased by 2.7 per cent as against a target of 4.5 per cent and an actual
growth of 4.3 per cent in 1998-99.
* Wheat production increased by 7.9 per cent to 19.27 million
tonnes from 17.85 million tonnes in 1998-99. When final figures are received by end-July,
it may touch 21 million tonnes, leaving one million tonnes for export. The cotton crop
increased by 27.8 per cent to 11.24 million bales. Rice production increased by 10.3 per
cent, but the production of sugarcane, which normally accounts for one-sixth of the total
agricultural output, declined by 16 per cent to its lowest level in four years. Pakistani
analysts have pointed out that the credit for the increase in wheat, cotton and rice
production should go to the policies initiated by the Nawaz Sharif Govt. The sugarcane
crop, which was planted and harvested after Gen.Musharraf took over on October 12, 1999,
was a major failure.
INDUSTRIES
* Production of textiles and cement increased by 8.5 per cent and
4.5 per cent respectively, but the benefits thereof were neutralised by a steep decline of
24 per cent in sugar production. As a result, while large-scale manufacturing registered a
zero growth, medium and small-scale industries recorded a growth of 1.5 per cent.
DEFENCE EXPENDITURE
* The defence expenditure amounted to Rs. 143.37 billion as
against the original provision of Rs. 142 billion.
PEOPLE BELOW POVERTY LINE
* The total number of people below the poverty line increased by
146 per cent from 17.8 million in 1987-88 to 43.9 million in 1998-99. In 1998-99, 32.6 per
cent of the population was below the poverty line.
BUDGET FOR 2000-2001
The Federal budget for 2000-01 released on June 17,2000, has been
projected as the first part of a three-year perspective plan for economic revival. This
perspective plan has the following targets to be achieved by the year 2002-03:
* A six per cent GDP growth rate.
* A four per cent inflation rate. Presently, it is around 3.5 per
cent.
* An 18 per cent investment-GDP ratio.
* A fiscal deficit of 3.5 per cent of the GDP.
* A current account deficit of 0.5 per cent of the GDP.
* Foreign exchange reserves amounting to 12 weeks value of
imports as against four weeks at present.
These targets are proposed to be achieved by the following means:
* Reducing the growth in public debt.
* Broadening the tax base.
* Expenditure control.
* Austerity in public expenditure.
Other targets are:
* Increasing allocations for the social sector.
* Launching poverty reduction programmes.
* Greater attention to small and medium-scale industries.
* Promotion of savings without increasing interest rates.
* Better governance.
FISCAL DEFICIT
* Proposed to be decreased in 2000-01 to Rs.162.2 billion or 4.6
per cent of the GDP.
TAX REVENUE
* To be increased by 23.92 per cent from Rs. 351 billion to Rs.
435.7 billion.
* Collections from direct taxes to be increased by 25.23 per cent
from Rs. 109.8 billion to Rs.137.5 billion and from sales tax by 43.8 per cent from Rs.120
billion to Rs.172.6 billion.
* Wealth tax abolished and the maximum rate of income tax reduced
from 35 to 30 per cent. Interest rates for national savings schemes reduced by 1.5 per
cent in respect of future investments.
SUBSIDIES
* Expenditure on subsidies to be reduced from Rs.14.43 billion to
Rs.11.83 billion.
DEBT SERVICING
* Would amount to Rs. 306 billion-- Rs.175 billion towards
domestic debt servicing and the balance towards foreign debt servicing.
EXTERNAL RESOURCES
The budget anticipates the receipt of Rs. 178.5 billion from
external sources under the following heads:
* Project aid--- Rs. 41.6 billion.
* Commodity aid---Rs.42.5 billion.
* Other aid---Rs.18 billion.
* Debt rescheduling---Rs.31.9 billion.
* Concessional oil supply by Saudi Arabia--Rs.40 billion.
* Repayments of F-16 advances by the US--Rs.4.4 billion. The US
was to return this amount partly in cash and partly in wheat. In view of the bumper wheat
crop, Pakistan has now refused to accept wheat.
The anticipated external receipts include the following:
* The Asian Development Bank ---Rs.39.8 billion
* The World Bank--- Rs.23 billion.
* The Islamic Development Bank -- Rs.18 billion.
* Japan -- Rs.15 billion.
* The International Development Association -- Rs.4 billion
* Commercial borrowings --Rs.2.7 billion.
* Germany -- Rs.1.9 billion.
* The UK-- Rs.1.3 billion.
* The European Economic Community-- Rs. 762 million.
* Switzerland-- Rs. 653 million.
* China-- Rs. 596.7 million.
* The International Fund for Agriculture Development-- Rs.581
million.
* France-- Rs.533 million.
* Kuwait-- Rs.500 million.
* Netherlands-- Rs.487 million.
* The European Investment Bank-- Rs.474 million.
* Belgium-- Rs. 473 million.
* Saudi Arabia-- Rs. 450 million.
* UNDP-- Rs.264 million.
* OPEC--Rs.185 million.
* Canada-- Rs.137 million.
DEFENCE EXPENDITURE
YEAR INITIAL ESTIMATES REVISED
1996-97 Rs. 131.39 bn Rs. 127.44 bn.
1997-98 Rs. 134.01 bn Rs. 133.83 bn.
1998-99 Rs. 145.00 bn Rs. 143.47 bn.
1999-00 Rs. 142.00 bn Rs. 143.37 bn.
RS. 133.49 bn (four per cent plus of GDP)
The expenditure on military pensions (Rs.26.1 bn) has been
shifted to the budget of the general administration for the first time on the ground that
this was in keeping with the practice in many countries. If one includes this amount too,
the proposed defence expenditure during 2000-01 would come to Rs. 159.59 bn, an increase
of a little more than 10 per cent.
HIDDEN DEFENCE EXPENDITURE
No details are available regarding the hidden defence expenditure
relating to the following:
* The budget of the Inter-Services Intelligence (ISI), which is
generally concealed in the budget of the general administration.
* The salaries and allowances of military officers on deputation
to civilian departments and the public sector industrial units. These are met from the
budgets of these departments and units.
* Expenditure on military nuclear and missile development and
acquisition.
* Expenditure on science and technology relating to the armed
forces. The allocation for S & T has been increased from Rs. 120 million in 1999-2000
to Rs.15.7 bn (Rs. 2.8 bn out of this for information technology) to be spent during the
current and the next financial years. How much of this would be for purely civilian
purposes, how much for military purposes and how much for dual purposes?
* Nuclear, missile and other military supplies by China. How much
in market rates, how much at concessional rates and how much free of cost?
GENERAL ADMINISTRATION
The allocation for general administration has been increased by
126.9 per cent from Rs.19.4 bn to Rs.Rs.48.1 bn. This increase is possibly due to the
transfer of military pension from the defence budget to the budget of the general
administration.
ANNUAL DEVELOPMENT PROGRAMME
Allocations for economic and social development have been
increased by 20 per cent from Rs.100 bn to Rs.120.4 bn. Out of this, Rs. 44.37 bn is to be
spent on transport and communications, Rs. 21 bn on poverty alleviation, Rs. 15 bn. on an
integrated public works programme to provide relief to the unemployed/under-employed,
Rs.1.8 bn. on social services and the balance on schemes like the food support programme
for the poorest of the poor etc. According to the Economic Survey for 1999-2000, 6.12 per
cent of the total labour force of 137.51 million were unemployed. However, the UN
organisations have estimated that 16 per cent of the labour force is
unemployed/under-employed.
HAS THERE BEEN A HEROINISATION OF THE PAK
ECONOMY?
Any meaningful analysis of the Pakistani economy has to treat
Pakistan and the Taliban-controlled Afghan territory as one economic zone. Otherwise, one
would not have a clear understanding of Pakistan's economic difficulties and how its
economy continues to survive, even after the suspension of the International Monetary Fund
(IMF) assistance, despite frequent predictions of its certain collapse.
The only major source of revenue of the Taliban administration is
the agricultural tax on opium producers and the duty levied on heroin refineries. There is
practically no foreign trade except the transit trade through Pakistan, no foreign
investment and no remittances from non-resident Afghans living outside Pakistan.
Despite this, the Taliban has managed to run a primitive
administration in 90 per cent of Afghanistan paying the government servants, including the
militia members, their meagre salaries and pensions regularly, feed the population without
any reported instances of starvation deaths, run an Embassy in Islamabad and overseas
offices in New York and certain other cities, keep up skeleton domestic airline and
telecommunication services and a radio station (Radio Shariat), which broadcasts to
overseas Muslims. Its leaders and officials, except the Amir, Mullah Mohammed Omer, travel
abroad frequently.
Maintenance of even such minimal State functions would not have
been possible, in the face of UN sanctions in force since November last, but for the
indirect budgetary support from the Pakistani Government.
Such budgetary support was being given by Islamabad even to the
Burhanuddin Rabbani Government in the past and it has now been stepped up since the
Taliban captured power in Kabul in September, 1996.
Islamabad has been meeting the cost of the entire POL and
foodgrain, particularly wheat, requirements of the Taliban.
In return for the budgetary support from Islamabad, the Rabbani
Government previously and the Taliban presently have allowed the Pakistani military and
intelligence establishment to transfer the training camps for the terrorist groups
operating in India to Afghan territory to escape US pressure for action against them by
Islamabad. This transfer process started after the administration of the US President, Mr.
Bill Clinton, temporarily placed Pakistan on the so-called watch list of suspected
state-sponsors of international terrorism between January and July, 1993, and has since
been completed.
Similarly, to circumvent the US demand for action against opium
cultivators, heroin refineries and narcotics smugglers in Pakistani territory, the
previous Nawaz Sharif Government started the transfer of all heroin-related infrastructure
to Taliban-controlled Afghan territory and this has been expedited by the present
government of Gen. Pervez Musharraf. The latter has planned to complete the process by the
year-end.
The area under poppy cultivation in Pakistan and the production
of opium gum from which heroin is extracted have been reduced dramatically from 32,000 (in
the 1980s) to 629 hectares and from 800 to 17 metric tonnes respectively. As a result of
the transfer of this infrastructure to Afghan territory, the area under poppy cultivation
has doubled since the Taliban seized power and the opium gum produced has been increasing
by 24 per cent annually, making Afghanistan overtake Myanmar as the largest opium producer
of the world. Last year, 1,670 metric tonnes of opium gum were produced.
While the opium cultivation in Afghanistan is largely in the
hands of Afghan farmers, all heroin refineries in Taliban territory are owned by Pakistani
narcotics barons, reportedly enjoying the protection of the Pakistani military and
intelligence establishment. The total value of the foreign exchange earned by the
narcotics smugglers of Pakistan is estimated at US $ two billion per annum. This amount
has prevented the Pakistani economy from collapsing despite 10 years of continuous
recession since 1990, when Washington imposed sanctions under the Pressler Amendment.
The military regime's efforts for a revival of the legitimate
economy have been unsuccessful so far. There has been a decline of US $ 58 millions in
remittances by non-resident Pakistanis and the portfolio investment flows amounted to US $
34.6 million only till January-end, the lowest figure since 1990-91.Even this meagre
portfolio inflow was neutralised by a large outflow, resulting in a net negative flow.
The IMF shows no signs of resuming its assistance, discontinued
since May 1999.According to a statement by Mr.Ishrat Hussain, the Governor of the State
Bank of Pakistan, ("News", June 16,2000), the IMF had imposed four
conditionalities-- a levy of General Sales Tax (GST) on retailers, GST on services,
agricultural income tax and satisfactory conclusion of negotiations for the revision of
the agreements with the independent power producers (IPPS). The Pakistani press has been
speculating that a reduction in defence expenditure is also one of the conditionalities,
but this has not been admitted by the Government.
According to Mr.Hussain, the Federal Government has already
initiated action on the GST and asked the provincial governments to impose the tax on
agricultural income, which was within their jurisdiction. He also claimed that the
Government has reached mutually satisfactory tariff revision agreements with 13 IPPs and
that only the negotiations with HUBCO have got stalled due to the intervention of the
judiciary in the matter.
He hinted that if despite all this the IMF still delayed the
resumption of assistance to Pakistan, it could only be due to political reasons. He said:
"We are negotiating with the IMF, but as you know and I know, I will not be telling
you any secrets about what will be the reaction of the IMF Board. I can't predict because
if they say you have to do nuclear non-proliferation or something, I am not going to guess
them…..I will have to keep a contingency package of my own, one way or the other,
with or without the IMF.When the proper time comes, then we will talk about it."
From the legitimate economy, there has been more outflow of money
than inflow, but despite this, the State has not defaulted in the payment of salaries and
pensions to public servants as the Russian State has been doing and in interest payments
to overseas creditors, there have been no reported instances of the private sector failing
to pay the wages of the workers in time, the value of the Rupee vis-à-vis the dollar has
remained steady at around Rs. 54.20, the inflation has remained at around 3.5 per cent,
there has been a bull run in the Karachi stock exchange with a record 42 per cent increase
in the share index in January and February and, most amazingly,the foreign exchange
reserves have reportedly doubled to US $ 1.43 billion since October,1999.
It is suspected that this amazing phenomenon of a seeming
robustness of the State finances despite the comatose state of the legitimate economy has
been made possible by assistance from the thriving illegitimate economy of the narcotics
smugglers. Since June last, the State has tapped this illegitimate reservoir for a little
more than US $ one billion to overcome its difficulties---US $ 300 million by the Sharif
Government to meet the increased expenditure due to the Kargil adventure and over US $ 700
million by the military regime.
Quoting State Bank of Pakistan (SBP) sources, the
"News" of March 16,2000, reported: "There was excess liquidity (of US
dollars) available in the kerb market of foreign exchange which is being fully absorbed by
the central bank...... The present inflows of exports, remittances and foreign direct
investment are not enough to meet the international trade gap and the cost of debt
servicing. The difference is being covered through open market buying to maintain a
reserve level of around US $ 1.5 billion. SBP has done this since June, 1999."
If the suspicion is proved correct, what the Governments of
Mr.Sharif and Gen. Musharraf have been doing is nothing but state-sponsorship of narcotics
production and smuggling to prevent an economic collapse and to sustain the ability of the
State to maintain a high level of defence expenditure and to finance the covert war
against India in defiance of increasing international pressure to stop it.
This suspected heroinisation of the Pakistani economy with
official blessing has not received the attention it deserves in Western capitals and Tokyo
and in the multilateral financial institutions.
ISLAMISATION OF THE ECONOMY
Gen. Musharraf, who has repeatedly avoided a head-on
confrontation with the Islamic parties and often succumbed to their pressure on various
issues such as the Comprehensive Test Ban Treaty (CTBT), the moderation of the blasphemy
laws, action against the madrasas and restoration of the Islamic provisions of the 1973
Constitution, has also found himself constrained to at least show pro forma paper progress
on the demand for the Islamisation of the economy, in order to keep the religious forces
at bay.
In a judgement of November, 1991, the Federal Shariah Court (FSC)
had declared all interest-based financial transactions as unislamic and illegal. None of
the civilian Governments enforced this ruling. On an appeal from a private party, the
Shariah Appellate Bench of the Supreme Court had ordered the Government on December
23,1999, to have the judgement of 1991 enforced by June 30,2001.
Consequently, the Musharraf Government set up a Law Ministry Task
Force on the Islamisation of the Economy headed by Mr.Mahmood Ahmed Gazi, a member of the
National Security Council (NSC), and a Commission on the Transformation of the Financial
System (CTFS) headed by Mr.I.A.Hanfi, former Governor of the State Bank of Pakistan.
In a statement issued on June 30,2000, the Government said:
" The Government is determined to eliminate riba (interest) from the financial system
by June 30,2001. The present regime is committed to Islamise the economy and bring all
fiscal laws in consonance with the Holy Quran and the Sunnah. The Government hoped that it
would be successful in transforming all fiscal laws, whether relating to the Government,
commercial banking or foreign transactions, in accordance with the provisions of the
Shariah"
It remains to be seen how serious is the Government in its
intention to Islamise the economy by the end of the current fiscal year.
INDO-PAKISTAN TRADE
The advantages of the normalisation of trade relations with
India, without linking the issue to the Kashmir and other questions, were frequently and
intensely discussed during the previous regimes of Mrs. Benazir Bhutto (1993-96) and
Mr.Nawaz Sharif (1997-1999). There has been a decline in the frequency and intensity of
the debate since Gen. Musharraf seized power on October 12,1999, but the arguments used
pre-October to mark clearly those in favour and against still remain valid and hence need
to be recalled.
During the debate of 1993-96, the two questions, which Mrs.Bhutto
faced from her critics, were:
* After having demanded at almost every meeting of the
Organisation of Islamic Conference (OIC) since 1993 that the Islamic nations should impose
economic sanctions against India for the alleged violations of human rights in Kashmir,
how could Pakistan grant India the Most Favoured Nation (MFN) status and remove the
existing curbs on bilateral trade?
*After having repeatedly accused India of infiltrating terrorists
into Karachi and Punjab for destabilising Pakistan, how could she allow the free flow of
vehicular traffic across the border, which would inevitably follow a greater flow of
trade?
During her regime, there were conflicting signals on the issue
from different ministries and departments and a vocal community of retired senior
bureaucrats headed by Mr.Abdul Sattar, the present Foreign Minister, strongly opposed
normalisation of trade with India.
As against them, sections of the business community were vocal in
demanding the relaxation of the trade restrictions. Reflecting their arguments, the
"Dawn" of Karachi (December 23,1995) wrote: "Who in Pakistan gains by not
having normal trade with India? The smugglers. And who loses? The Government of Pakistan.
On an average, the goods, if imported legally, would attract about 30 per cent import
duty. Pakistan is thus losing customs revenue of Rs.10 billion. How long shall we permit
the import of Indian textile machinery shown as made in Germany or Switzerland and let
such companies or importers pocket the vast difference between the German or Swiss prices
and the far lower Indian prices?"
It added: " The All-Pakistan Textile Mills Association has
urged permission for the import of textile machinery from India from time to time as that
is cheaper and would reduce the cost of production of textiles and make Pakistani textiles
more competitive, but the Government has not moved in that direction for political
reasons. Mr.S.A.Enam, former President of the SAARC Chamber of Commerce, has pointed out
that fears that Indian goods would flood Pakistan were exaggerated. The MFN would be fully
effective only by 2002 and six years is a long enough period for Pakistan to prepare
itself to meet India on an equal footing in exports…Iron ore imports for Pakistan
Steel from India would be cheaper than from Brazil and Australia. In 1995, Pakistan had to
import 5,000 tonnes of black gram, 500 tonnes of pulses, 2,000 tonnes of potato, 2,000
tonnes of onion and 60 tonnes of ginger. Some of these could have been had from India at
better prices than from countries like South Korea and in a short time."
Another analyst wrote in the same paper: "Our continued
infatuation with the dream of an Islamic economic bloc, whose prospects have always been
suspect, but whose feasibility becomes increasingly doubtful with the emerging détente
between Israel and the Arabs, has been one of the major reasons why we have failed to take
seriously the experience of East Asia, notwithstanding the fact that it comprises two
large Muslim countries. It is difficult to understand why Pakistan should stand out as the
only significant developing country to practice a politically-inspired trade policy, if
only against one country. Economic co-operation in South Asia has also been inhibited to
some extent by the fear among some of the smaller countries that India, being the largest
economy in the region, is likely to receive a disproportionately high share of any gain
accruing from such co-operation. These fears are not without substance, but are often
exaggerated by those industries and sectors in the economy which are likely to lose, while
the potential beneficiaries (of trade with India), by far the more dynamic elements in the
economy, who have been denied patronage and access to resources, have little voice in
policy formulation."
There was another reason why this issue acquired importance in
the eyes of large sections of the Pakistani business and analytical communities.
Pakistan's hopes of emerging as the gateway to the Central Asian Republics (CARs) have
been belied so far. Its trade with the CARs has not picked up and continues to be
microscopic. The projects for improving road communications to the CARs and for the
construction of gas and oil pipelines from Turkmenistan to Pakistan have remained stalled
due to the hostility of the CARs to the Taliban regime in Kandahar.
Most of the projects of the Economic Cooperation Organisation
(ECO), involving Pakistan, Iran, Turkey, Afghanistan, the CARs and Azerbaijan, have
remained on paper without implementation. In the meanwhile, Iran has made steady progress
in developing road and rail communications with the CARs through Turkmenistan, thereby
threatening to foil Pakistan's aspirations of emerging as the outlet for regional trade.
The setback to Pakistan's aspirations is only partly due to the
insecure conditions in Afghanistan despite the Taliban's controlling 90 per cent of the
territory and the CARs' hostility to the Taliban. Another equally important reason is the
reluctance of the CARs to make huge investments in road, rail and pipeline construction
unless and until they are confident of extending their trade through Pakistan to the more
lucrative Indian market.
"The Nation" (March 15,1995) reported that the CARs
have expressed their concern over the refusal of Pakistan to allow their goods passage to
India. And an editorial in the "Dawn" (August 28,1995), explaining the lack of
enthusiasm of the CARs for the various projects proposed by Pakistan and the ECO, said:
" To the CARs, economic realism is far more important than puerile romanticism (based
on religion)."
While total opposition to normal trade with India till the
Kashmir issue is resolved has mainly come from the Islamic parties and the Urdu press,
serving and retired bureaucrats have been cautioning against any hasty decision and
advocating an exercise to build a national consensus on the issue.
As part of this exercise, Mrs. Bhutto had organised in Islamabad
in December, 1995, a brainstorming session attended by Government officials, officers of
the intelligence community and non-governmental experts. The Pakistani press reported that
all the Government officials, including Mr. Riaz Khokar, the then Pakistani High
Commissioner in New Delhi, and intelligence officers advised Mrs. Bhutto against any hasty
decision.
The local press quoted the then Finance Secretary as telling
Mrs.Bhutto: "We, as a nation, cannot compete with India. Our industry needs reform
and restructuring to be competitive. Necessary studies must be conducted first."
It also quoted the then Foreign Secretary as telling her:
"Though multilateral and regional agreements must be honoured, a detailed and serious
study of the issue is necessary. There is no room for urgency at the moment."
It would be incorrect to think that past opposition to normal
trade with India was only from religious parties and compulsive India-baiters. Many
independent analysts and retired senior bureaucrats such as Mr.Abdul Sattar, the present
Foreign Minister, also strongly argued against this. They said:
* Pakistan should learn from the experience of Bangladesh, whose
markets have been flooded with Indian goods without its drawing any corresponding benefits
for its exports to India.
* Despite the present curbs, the Pakistani market is already
being flooded with Indian consumer articles procured by Singapore-based firms and
re-exported to Pakistan. Even after paying the customs duty, their prices are much lower
than those of quality goods made in Pakistan. Such instances of dumping, to the detriment
of Pakistani industries, would increase if the policy was reversed.
* Pakistan is not bound to give MFN status to India just because
India has extended it to Pakistan. It can definitely deny it or make it conditional under
Article 24, paragraph 11 of GATT 1994 relating to special arrangements for trade between
India and Pakistan. According to them, this para says: "Taking into account the
exceptional circumstances arising out of the establishment of India and Pakistan as
independent States and recognising the fact that they have long constituted an economic
unit, the contracting parties agree that the provisions of this agreement (GATT) shall not
prevent the two countries from entering into special arrangements with respect to the
trade between them, pending establishment of their mutual trade relations on a definitive
basis."
In 1996, when there were reports of Mrs.Bhutto toying with the
idea of delinking trade from the Kashmir issue, Mr.Abdul Sattar strongly criticised her.
He wrote in the "Dawn" (April 29,1996): "Pakistan has so far used trade as
part of an integral policy towards India…Tensions and perceptions of threat to
security do not permit normal, good-neighbourly relations in any field…The assumption
cannot be that past policy (of linking trade with Kashmir) was wrong; that our political
leaders, professional analysts and public opinion were misguided; and that, now, all of a
sudden, the Government has attained enlightenment, so that regulation and caution should
be discarded in favour of free and even preferential trade with India."
After Mr.Sharif came to office in February, 1997, those
businessmen favouring normalisation of trade relations again took up the matter. They told
Mr.Sharif:
* The immediate beneficiaries of normal trade would be the lower
middle class and the poor people (supply of low-priced Indian essential articles), the
manufacturing sector (cheaper raw materials and machinery spare parts) and the State (more
customs revenue).
* In the short and medium term, there is unlikely to be any
significant increase in the imports from India, except of light engineering goods such as
bicycles and motorised two wheelers. The lower middle class, the poor and the
manufacturing sector have already been getting whatever they wanted from India through
smuggling or third countries. The affluent sections for whom quality is more important
than price would continue to shun the poor quality Indian goods.
*India would have initial advantages because of low wages and
better skills as compared to Pakistan, but this would motivate the Pakistani manufacturing
sector to improve its competitivity.
Mr.Sharif could not push through the idea due to continued
opposition from the religious parties and large sections of the serving and retired
bureaucrats and the intelligence establishment. In addition to arguments used in the past,
they also highlighted the alleged large-scale subsidies in respect of utility rates in
India and its alleged use of non-tariff barriers to discourage imports from Bangladesh.
Proposals for the sale of surplus electricity to India were
stalled. Presently, trade with India is restricted to 573 items and is negligible (an
average of Rs. One billion per annum two-way). The debate on this issue since Gen.
Musharraf took over has not been as intense as it was pre-October, 1999, but there have
been two indicators of some significance:
* In the budget for 1999-2000, the Sharif Government had cut
import duty by 10 per cent on the import of 325 items from India. Continuing with this
policy, the Musharraf Govt, in its budget for 2000-01, has further cut the import duty on
100 of these 325 items. The cut varies from 10 to 20 per cent. The 20 per cent cut has
been mainly on machinery and spare parts and certain food articles such as milk powder,
potato and onion. The 10 per cent cut has been mainly on iron ore and chemicals.
* The Musharraf Government has formally agreed to the
construction of a gas pipeline from Iran to India through Pakistani terroitory in return
for an annual royalty payment of US$ 600 million by Iran.
IRAN-PAKISTAN-INDIA GAS PIPELINE
The proposal for an Iran-India overland gas pipeline through
Pakistan was first discussed at the meeting of the Pakistan-Iran Joint Ministerial
Economic Commission in 1994 during the Prime Ministership of Mrs. Bhutto. Pakistan agreed
to a feasibility study being conducted by the National Iranian Oil Company in association
with Australia's Broken Hill Proprietory (BHP). Subsequently, it was decided to associate
Shell also with the feasibility study.
The Cabinet Defence Committee of Mrs.Bhutto approved the proposal
in principle in 1995 subject to two conditions. First, initially, the pipeline would cover
Pakistan only and its extension to India would be considered at a later stage. Second,
Iran should agree to cut the price for the gas demanded by it, as it was 40 per cent more
than the price demanded by Turkmenistan.
Teheran rejected the suggestion that the pipeline should
initially cover Pakistan only. Because of this and the strained relations between Pakistan
and Iran over the post-1996 developments in Afghanistan, the matter got stalled.
The proposal was revived by Teheran during Gen. Musharraf's visit
to Iran in December, 1999. The General and Mr.Abdul Sattar, who had accompanied him,
reportedly saw this proposal as an opportunity to remove the tensions in the relations
between Teheran and Islamabad. On his return to Islamabad, the General set up a committee
consisting of officers of the GHQ and the Ministries of Commerce and Petroleum to
re-examine the original Iranian proposal for the pipeline to India.
The committee recommended that the proposal be accepted in
principle and Gen.Musharraf sent the Secretary for Petroleum to Teheran in March, 2000, to
convey this to the Iranian authorities. Islamabad reportedly suggested to Teheran that it
should draft a memorandum of understanding to be signed by Iran, Pakistan and India
providing for an international monitoring of the pipeline to remove Indian concerns over
possible disruption of the gas supply by Pakistan. It was reported that, at the same time,
Pakistan made it clear to Iran that it would not agree to any Indian inspection of the
pipeline in Pakistani territory.
In April, Iran requested Pakistan for a formal communication in
writing of its acceptance of the proposal in principle before it could discuss the matter
with India. While addressing the ECO summit at Teheran on June 10,2000, Gen. Musharraf
said: " We are hoping for perfect understanding among the member-countries of the
ECO. That is why we have recently signed a document giving our agreement to the gas line
project linking Iran, Pakistan and India. "
This announcement has already come in for criticism from those
sections of Pakistan, which had in the past opposed normal trade and economic relations
with India till the Kashmir issue was resolved. In its attempt to sell the proposal to
public opinion, the military Government has been highlighting the following advantages for
Pakistan:
* Pakistan would receive from Iran an annual royalty fee of US$
600 million, which would be a valuable addition to its foreign exchange reserves.
* The project is meant to improve Pakistan's political and
economic relations with Iran and would not dilute Pakistan's stand regarding normal trade
with India.
* There could be other economic benefits for Pakistan such as
Iranian assistance for the construction of an oil refinery in Pakistan and Iranian POL
supply at concessional rates.
* This would facilitate Iran-Pakistan co-operation in restoring
peace in Afghanistan.
* This would impart a fresh lease of life to the hitherto
comatose ECO.
Till now, the criticism of his action in Pakistan has been muted.
It remains to be seen whether he is able to stick to his decision if the opposition
gathers strength from the religious parties.
(8-8-00)
(The writer is Additional Secretary (retd),
Cabinet Secretariat, Govt. of India, and, presently, Director, Institute for Topical
Studies, Chennai. E-mail: corde@vsnl.com )
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