M. Ziauddin analyses the circumstances under which the PTI government will present budget 2019-20 and the steps to be taken to reset Pakistan's economy back on the road to progress.
The storm that seems to be fast gathering momentum on multiple fronts – political, economic, judicial etc. – has given rise to some troubling questions about PTI-led coalition government’s ability to get its first budget passed by the Parliament. So far, no one is predicting the government’s failure to get it through. Nevertheless, the budget debate is expected to be too acrimonious, too noisy and too divisive, threatening the very survival of the government.
Significantly, none of the real authors of the budget would be in the House to defend their proposals as all of them are un-elected members of the cabinet. Minister of State for Revenue Hammad Azhar, who is most likely to read out the pre-prepared budget speech and Federal Minister for Water and Power Omar Ayub would surely over-work their vocal-chords to be heard over the high pitched noise. Still, they are no match to the budget veterans of the PMLN and the PPP.
Murad Saeed would, of course, be there to shout, over the din of budget debate, about the corruption stories whose shelf-life has already expired.
The onslaught
Most likely the opposition onslaught would be led by leader of the Opposition, Shahbaz Sharif. But PPP Chairman Bilawal Bhutto Zardari and the PMLN’s former Prime Minister Shahid Khakhan Abbasi, in their own respective ways, are expected to be equally deadly. And Parliamentary Party leader of the PMLN Khawaja Asif and Khursheed Shah of PPP would surely contribute more than the needful to a decidedly rancorous debate.
If one were to go by the stories reported in the media so far, the budget for 2019-20 would most probably be a document of front-loaded IMF conditionalities, mostly relating to price and rate hikes of essentials and withdrawal of subsidies affecting the lower middle and poorer classes of society, leaving the next generation reforms to the program’s post-approval stage.
https://www.youtube.com/watch?v=dH3xtbmcS5k
The show-down
And that is when perhaps the real show-down would take place between a politically weak, much harassed and panicky government and the all- powerful private sector of Pakistan. This would most likely happen between September-December 2019. It is because of the success of the latter in all the past 22 rounds of show-down that Pakistan had won the ignominious title of being the one-tranche country.
It is at this stage that the government would, most probably, be forced to seek waivers and in case the Fund refuses to oblige, Pakistan is likely to be left with no option but to leave the program with the PM’s adviser on finance, Hafeez Shaikh returning home to UAE where he has his business interests.
Since the conditionalities attached to the first tranche do not impact one way or the other the ruling elite of the country, especially its rich private sector rentiers, governments in Islamabad find it politically safe to introduce them with alacrity.
There is no tradition in Pakistan of people coming out protesting against price hikes. And if at all some people dare show their protesting faces on the streets our Interior Minister, Ejaz Shah formerly of ISI and IB, can be called out to carry out his threat of chatrool.
Casino economy
It is only when it is time for implementing the Fund’s second generation reforms which demand our rich and the mighty to give up part of their perks and pomp that real trouble begins. These rentiers are basically traders, not entrepreneurs. They have been increasing their margins not by producing quality products efficiently but by pilfering water, gas, electricity and labour costs. They have also been using under-invoicing and over-invoicing to launder money out of the country. The Stock market operates more like a gambling casino. And most black money gets parked in the real-estate.
We all know that IMF reforms only lead to stagflation, recession and massive unemployment. Still, now that we have entered into one we would better implement the reforms envisaged in the program honestly and diligently without asking for any waivers.
Perhaps this is the only way to get rid of our rentier class which has captured all our productive sectors and have been plundering them since perhaps the mid-1980s. They have completely destroyed whatever industrial base there was in this country built between 1947 and 1977. They have rarely reinvested their surplus profits in rehabilitation and modernizing of their production units. They are not known to ‘waste’ their unearned incomes on adding value to their products and neither do they believe in spending on innovation.
According one of our eminent economists Dr. Kaiser Bengali, agriculture and manufacturing, the commodity producing base of our economy has deteriorated to levels where output, exports, revenues and employment opportunities are effectively declining.
Artificial growth numbers
As Dr. Bengali said GDP growth reported year to year “is artificial, as wealth is being created largely through speculation in the stock market, the property market and the commodity market. Pakistan has become a casino economy and the development projects are identified, not in the public interest, but by the interest of the contractor (thekedar). The management of the economy, particularly post-2000, has rendered it hostage to foreign interests.
“The ashraafia have enough financial cushion to bear the brunt of the emerging crisis. In any case, all they will have to worry about, when the crash is imminent, is how to reach the airport to fly out to the safety of their stashed-away investments abroad. The awam, the bulk of the population, will be left facing mass unemployment and inflation---and poverty and hanger.”
Excellent budgetary ideas
Dr. Bengali has proposed three excellent budgetary ideas. The finance ministry would do well to closely study them and try to include these ideas in the new budgetary proposals being presented to National Assembly on June 11, 2019:
Dr. Bengali’s other proposals also merit consideration:
1. Ban all non-essential imports
Cheaper route to energy self-sufficiency
Dr. Bengali’s suggestion to shift the basis of electricity generation from imported fuel to hydel and domestic coal needs to be looked into from the angle of getting rid for good of circular debt – the albatross around our economic neck.
The first step to be taken in this regards should be to retrieve the file that contains the German Development Department, GTZ’s mid-1990s comprehensive paper on exploiting the small and medium waterfalls in KP. It was estimated in those days that the waterfalls were capable of producing as much as 40,000 MW of electricity with small investments and using appropriate local technology.
All impediments in the way of approaching the matter should be cleared forthwith. Once these power projects come on line and are linked to the national grid, we could resort to the luxury of completely stopping purchase of electricity from the 11 or so IPPs.
https://www.youtube.com/watch?v=jyxy9Y19Nuk
Round and round goes the circular debt
To begin with, it was the massive corruption that had afflicted WAPDA during the 1980s, especially during the chairmanship of two retired Lt. Generals – General Raziq and General Zahid Ali Akber (the last one had literally decamped to foreign lands with his loot) that had led the World Bank to stop aiding the Authority with concessional assistance for adding to the public sector generating capacity. The World Bank had accused the Authority of missing the completion schedules of WB aided power projects by years and estimated costs by millions.
Around mid-1980s the World Bank had opened a separate window to make available costly loans for setting up power generation units in the private sector using costly imported furnace oil. Hubco was the first IPP that General Zia’s government was negotiating when the General died in a plane crash. So, the negotiations spilled over to the incoming elected government of Prime Minister Benazir Bhutto.
Indeed, by 1986-87 the country was facing massive load-shedding leading to wheels of economy coming to a halt for more than half of their daily operations because of the delays in setting up new generation plants. This was at a time when consumption of electricity had risen manifold due to sudden increase in the use of air conditioners and white goods like washing machines and fridges etc. as the country was getting flooded with the first Afghan war-related dollars.
Zia’s power folly
This power folly of the military government of General Zia and the resulting massive load shedding was inherited by the incoming PPP government. Prime Minister Benazir Bhutto was left with no option but to reduce the massive load-shedding and get the wheels of economy turning round the clock once again by adding more IPPs to the generating system.
Thus, a firm foundation was laid down for what by the turn of the century had turned into the menace of circular debt with no end in sight to its disastrous consequences.
Beginning of the end
But this was not the end of the story. It was just the beginning as when the second Afghan war related dollars started flooding the country after 9/11 the then military government of General Musharraf sent the nation on massive consumer spending spree. This time even those earning no more than Rs. 50,000 a month could buy a car, a washing machine, a motorbike, a fridge, an air-conditioner etc. on easy instalments offered by the commercial banks. Once again we were consuming energy by leaps and bounds while not a single generating capacity was being added to the power sector. This obviously led to a second round of massive load shedding by 2007-08 forcing many industries to close down as the price of available electricity had sky-rocketed.
Meanwhile, the global collapse of the economy following the failure of the mortgage economy of the rich world had caused the world oil prices to go through the ceiling reaching almost $ 150 a barrel.
This crisis was inherited by, once again, a PPP government, this time led by the President Asif Ali Zardari, the surviving spouse of assassinated PPP chairperson, Benazir Bhutto. Since Zardari’s financial shenanigans had become legendary the world over, his regime suffered from declining flow of concessional assistance for obvious reasons.
In any case, the world itself had gone into a lengthy recession mode with the multilateral aid agencies working overtime to save capitalism itself from getting the drubbing of its life-time. In fact, contrary to the prescription of Washington Consensus in such circumstances, new money was created by the rich countries to save their economies and revive a virtually collapsing capitalism.
So, by the time we entered the last IMF program in 2014, Pakistan was suffering from massive load-shedding accompanied by galloping circular debt. Today we seem to have enough generation capacity but its output is so costly that the entire economy seems to be collapsing under its weight. And it seems without first getting out of the circular debt trap there appears to be no way Pakistan could reset its economy back on the road to progress and prosperity.
The storm that seems to be fast gathering momentum on multiple fronts – political, economic, judicial etc. – has given rise to some troubling questions about PTI-led coalition government’s ability to get its first budget passed by the Parliament. So far, no one is predicting the government’s failure to get it through. Nevertheless, the budget debate is expected to be too acrimonious, too noisy and too divisive, threatening the very survival of the government.
Significantly, none of the real authors of the budget would be in the House to defend their proposals as all of them are un-elected members of the cabinet. Minister of State for Revenue Hammad Azhar, who is most likely to read out the pre-prepared budget speech and Federal Minister for Water and Power Omar Ayub would surely over-work their vocal-chords to be heard over the high pitched noise. Still, they are no match to the budget veterans of the PMLN and the PPP.
Murad Saeed would, of course, be there to shout, over the din of budget debate, about the corruption stories whose shelf-life has already expired.
The onslaught
Most likely the opposition onslaught would be led by leader of the Opposition, Shahbaz Sharif. But PPP Chairman Bilawal Bhutto Zardari and the PMLN’s former Prime Minister Shahid Khakhan Abbasi, in their own respective ways, are expected to be equally deadly. And Parliamentary Party leader of the PMLN Khawaja Asif and Khursheed Shah of PPP would surely contribute more than the needful to a decidedly rancorous debate.
If one were to go by the stories reported in the media so far, the budget for 2019-20 would most probably be a document of front-loaded IMF conditionalities, mostly relating to price and rate hikes of essentials and withdrawal of subsidies affecting the lower middle and poorer classes of society, leaving the next generation reforms to the program’s post-approval stage.
https://www.youtube.com/watch?v=dH3xtbmcS5k
The show-down
And that is when perhaps the real show-down would take place between a politically weak, much harassed and panicky government and the all- powerful private sector of Pakistan. This would most likely happen between September-December 2019. It is because of the success of the latter in all the past 22 rounds of show-down that Pakistan had won the ignominious title of being the one-tranche country.
It is at this stage that the government would, most probably, be forced to seek waivers and in case the Fund refuses to oblige, Pakistan is likely to be left with no option but to leave the program with the PM’s adviser on finance, Hafeez Shaikh returning home to UAE where he has his business interests.
Since the conditionalities attached to the first tranche do not impact one way or the other the ruling elite of the country, especially its rich private sector rentiers, governments in Islamabad find it politically safe to introduce them with alacrity.
There is no tradition in Pakistan of people coming out protesting against price hikes. And if at all some people dare show their protesting faces on the streets our Interior Minister, Ejaz Shah formerly of ISI and IB, can be called out to carry out his threat of chatrool.
Casino economy
It is only when it is time for implementing the Fund’s second generation reforms which demand our rich and the mighty to give up part of their perks and pomp that real trouble begins. These rentiers are basically traders, not entrepreneurs. They have been increasing their margins not by producing quality products efficiently but by pilfering water, gas, electricity and labour costs. They have also been using under-invoicing and over-invoicing to launder money out of the country. The Stock market operates more like a gambling casino. And most black money gets parked in the real-estate.
We all know that IMF reforms only lead to stagflation, recession and massive unemployment. Still, now that we have entered into one we would better implement the reforms envisaged in the program honestly and diligently without asking for any waivers.
Perhaps this is the only way to get rid of our rentier class which has captured all our productive sectors and have been plundering them since perhaps the mid-1980s. They have completely destroyed whatever industrial base there was in this country built between 1947 and 1977. They have rarely reinvested their surplus profits in rehabilitation and modernizing of their production units. They are not known to ‘waste’ their unearned incomes on adding value to their products and neither do they believe in spending on innovation.
According one of our eminent economists Dr. Kaiser Bengali, agriculture and manufacturing, the commodity producing base of our economy has deteriorated to levels where output, exports, revenues and employment opportunities are effectively declining.
Artificial growth numbers
As Dr. Bengali said GDP growth reported year to year “is artificial, as wealth is being created largely through speculation in the stock market, the property market and the commodity market. Pakistan has become a casino economy and the development projects are identified, not in the public interest, but by the interest of the contractor (thekedar). The management of the economy, particularly post-2000, has rendered it hostage to foreign interests.
“The ashraafia have enough financial cushion to bear the brunt of the emerging crisis. In any case, all they will have to worry about, when the crash is imminent, is how to reach the airport to fly out to the safety of their stashed-away investments abroad. The awam, the bulk of the population, will be left facing mass unemployment and inflation---and poverty and hanger.”
Excellent budgetary ideas
Dr. Bengali has proposed three excellent budgetary ideas. The finance ministry would do well to closely study them and try to include these ideas in the new budgetary proposals being presented to National Assembly on June 11, 2019:
- Reduce current expenditure, including non-combat defence expenditure. The ball-park estimate of savings resulting from the following steps is said to be as much as 20% of the budgeted estimate for next year’s current expenditure. He suggested the following spurious ministries and divisions be abolished forthwith: Education and training; Housing and Works; Human Resource and Training; Industries and Production; National Food Security and Research; Climate Change; National Harmony; National Heritage and Integration; National Regulations and Services. And the following Divisions be merged with their original Divisions: Defense Production—Defense; Information Technology and Telecommunication---Communications; Postal Services---Communications; Revenue-Finance; Statistics---Finance; States and Frontier Regions---Kashmir and Gilgit- Baltistan Affairs.
- Introduce principle of “Right of First Purchase’ in land/property transactions. Every proposed transaction, with details of size, structure and price, be placed on a designated website for say, 20 working days and any third party to have first right to purchase the land/property at, say, 20% above the specified value. This measure, in the opinion of Mr. Bengali, will curb speculative trading in the land/ property market.
- Introduce the principle of ‘Right of First Purchase’ in imports. Every proposed transaction (Letter of Credit), with details of product and price, be placed on a designated website for, say, 20 working days and any third party to have first right to purchase the product at, say, 20% above the specified CIF value. This measure, Dr. Bengali believes, will curb under-invoicing and protect local industry.
Dr. Bengali’s other proposals also merit consideration:
1. Ban all non-essential imports
- Shift electricity generation to hydel, domestic coal and off-grid solar
- Rehabilitate Railways and shift inter-city goods transportation from road to rail as rail consumes one-third less fuel per tonne/kilometer than road transport. Long distance by container trains and onwards by container trucks, (river-ways can also be used for goods transport to save on fuel).
- Amend FDI policy to encourage investment that earn export value greater than profit repatriation
- Reduce GST (Goods) rate to 5%; single stage (no adjustments, no refunds) to promote manufacturing
- Strengthen capital gains tax measures in capital markets to discourage short-term speculative trading
- Revive PIDC’s role in setting up industries in private-public partnership mode. Industries be set up with majority public funds and private management and sold to private partner after achieving commercial production
- Fix retail petrol prices at $150 equivalent to conserve consumption and imports to compensate for (short term) revenue loss on account of reduction of GST (goods) rate
- Implement a 10-year federally funded scheme to develop one million small/ medium sized urban residential serviced plots annually across the country. The multiplier impact of the scheme will produce two benefits: One, it will boost employment in a variety of sectors across the country; Two, the increased household income will expand consumer demand and revitalize domestic industry.
Cheaper route to energy self-sufficiency
Dr. Bengali’s suggestion to shift the basis of electricity generation from imported fuel to hydel and domestic coal needs to be looked into from the angle of getting rid for good of circular debt – the albatross around our economic neck.
The first step to be taken in this regards should be to retrieve the file that contains the German Development Department, GTZ’s mid-1990s comprehensive paper on exploiting the small and medium waterfalls in KP. It was estimated in those days that the waterfalls were capable of producing as much as 40,000 MW of electricity with small investments and using appropriate local technology.
All impediments in the way of approaching the matter should be cleared forthwith. Once these power projects come on line and are linked to the national grid, we could resort to the luxury of completely stopping purchase of electricity from the 11 or so IPPs.
https://www.youtube.com/watch?v=jyxy9Y19Nuk
Round and round goes the circular debt
To begin with, it was the massive corruption that had afflicted WAPDA during the 1980s, especially during the chairmanship of two retired Lt. Generals – General Raziq and General Zahid Ali Akber (the last one had literally decamped to foreign lands with his loot) that had led the World Bank to stop aiding the Authority with concessional assistance for adding to the public sector generating capacity. The World Bank had accused the Authority of missing the completion schedules of WB aided power projects by years and estimated costs by millions.
Around mid-1980s the World Bank had opened a separate window to make available costly loans for setting up power generation units in the private sector using costly imported furnace oil. Hubco was the first IPP that General Zia’s government was negotiating when the General died in a plane crash. So, the negotiations spilled over to the incoming elected government of Prime Minister Benazir Bhutto.
Indeed, by 1986-87 the country was facing massive load-shedding leading to wheels of economy coming to a halt for more than half of their daily operations because of the delays in setting up new generation plants. This was at a time when consumption of electricity had risen manifold due to sudden increase in the use of air conditioners and white goods like washing machines and fridges etc. as the country was getting flooded with the first Afghan war-related dollars.
Zia’s power folly
This power folly of the military government of General Zia and the resulting massive load shedding was inherited by the incoming PPP government. Prime Minister Benazir Bhutto was left with no option but to reduce the massive load-shedding and get the wheels of economy turning round the clock once again by adding more IPPs to the generating system.
Thus, a firm foundation was laid down for what by the turn of the century had turned into the menace of circular debt with no end in sight to its disastrous consequences.
Beginning of the end
But this was not the end of the story. It was just the beginning as when the second Afghan war related dollars started flooding the country after 9/11 the then military government of General Musharraf sent the nation on massive consumer spending spree. This time even those earning no more than Rs. 50,000 a month could buy a car, a washing machine, a motorbike, a fridge, an air-conditioner etc. on easy instalments offered by the commercial banks. Once again we were consuming energy by leaps and bounds while not a single generating capacity was being added to the power sector. This obviously led to a second round of massive load shedding by 2007-08 forcing many industries to close down as the price of available electricity had sky-rocketed.
Meanwhile, the global collapse of the economy following the failure of the mortgage economy of the rich world had caused the world oil prices to go through the ceiling reaching almost $ 150 a barrel.
This crisis was inherited by, once again, a PPP government, this time led by the President Asif Ali Zardari, the surviving spouse of assassinated PPP chairperson, Benazir Bhutto. Since Zardari’s financial shenanigans had become legendary the world over, his regime suffered from declining flow of concessional assistance for obvious reasons.
In any case, the world itself had gone into a lengthy recession mode with the multilateral aid agencies working overtime to save capitalism itself from getting the drubbing of its life-time. In fact, contrary to the prescription of Washington Consensus in such circumstances, new money was created by the rich countries to save their economies and revive a virtually collapsing capitalism.
So, by the time we entered the last IMF program in 2014, Pakistan was suffering from massive load-shedding accompanied by galloping circular debt. Today we seem to have enough generation capacity but its output is so costly that the entire economy seems to be collapsing under its weight. And it seems without first getting out of the circular debt trap there appears to be no way Pakistan could reset its economy back on the road to progress and prosperity.