And with a mandate just large enough to legislate and run policy, but not large enough to tamper with the structure of the Constitution (unlike 1997), the electorate has given Nawaz Sharif just enough space in which to deliver on his promises and not an inch more.

So as the old saying goes: let the games begin. Given that the first 100 days are the most crucial, when the government has the largest room for manoeuvre and is least constrained by the play of vested interest, its actions during this time will be the best indicator of its intentions.

Here are two things that we can reasonably expect to see concrete movement on right away: approaching the IMF to shore up the deteriorating reserves, and the grant of MFN trading status to India.

In both cases, the groundwork has already been done. Mr Ishaq Dar should speak first and foremost to the State Bank and get a detailed briefing on the state of the reserves. He should ask first for the detailed numbers on the reserves, followed by the repayment schedule to the IMF.

He will discover that the next fiscal year, which begins July 1 and ends next June, is the last year of repayment to the IMF as such. Total repayments scheduled during this fiscal year are somewhere around $3.3 billion, with two large payments looming — one in August, the other in November — each of which is just under $400 million.

At the State Bank he will be told by most that the situation is deteriorating fast. The treasurer is likely to complain that he is having a hard time keeping the rupee steady without adequate firepower to back him up. The monetary policy department is likely to tell him that interest rates cannot be brought down so long as the reserves position is shaky.

Mr Dar should then ask them what advice the State Bank gave to the outgoing government regarding the reserves. If the position is indeed as shaky as it is being painted, he should say, when did they first begin to sound the alarm bells?

If he feels that the State Bank advised the outgoing government to leave the decision of approaching the IMF to the next government, then Mr Dar should ask them whether this was an economic decision or a political one, and who at the central bank wishes to take responsibility for this advice.

A large sprawling meeting with treasury heads and exchange companies — the sort that Mr Saleem Mandviwalla so eagerly sought — should be avoided because nothing useful ever comes out of them.

Instead, Mr Dar should make up his own mind whether or not an approach to the IMF is needed or whether Pakistan can weather its last year of repayments and capital account stress without any support from the lender of last resort.

The only point he needs to have urged upon him is to do this fast, and signal it unambiguously to the markets. This is not a 100-day agenda, this should be done in the first 10 days.

Let’s not repeat the worst mistakes of 2008, which included a government heavily distracted and excessively hopeful that bilateral aid would make any approach to the IMF unnecessary. Time should not be wasted tallying up projections of possible inflows from bilateral sources. We either resolve to ride out the next year on the strength of our own balance of payments, or we get support from the IMF. There is no option C.

Mr Dar is a known quantity in the money markets. Many players there — whether treasury heads of major banks or exchange companies — have been around long enough to remember the last time Mr Dar headed things at Q block. Some of them even worked with him during those crucial days, when Pakistan floated on a wafer-thin raft of ice, managing its payments to foreign creditors and oil suppliers on a day-to-day basis.

Things are not that bad this time round. Another positive here is that Mr Dar is not really a ‘technocrat’ of the sort that the outgoing government relied upon. The typical technocrat has a tough time being heard or being taken seriously by his cabinet colleagues.

By contrast, Mr Dar is a political insider with deep roots in his party and equally deep links with the party leadership. He should not have as hard a time getting his way as his predecessors did, which places a burden of expectations upon his shoulders at the outset.

In the power sector, the new government must do two things if it is serious about delivering on its campaign promise of ending loadshedding in two years. First it must amalgamate the ministries of petroleum and water and power into a single ministry of energy. Then it must shine a light on the power bureaucracy, and develop and implement a plan to choke off all sources of arbitrary decision-making within it.

Both tasks involve more tedium than rocket science, and both are possible in the first 100 days. Without doing this, the new government will find itself going round and round in the same circle that the last government went dizzy in. The whole power crisis will then necessarily devolve into the question of arranging liquidity for PSO so it can pay for the next consignment of furnace oil.

Of course there’s the fiscal side, probably the most important which merits special treatment. But for now, some of us will be watching carefully to see how serious the government is about resolving the economic issues facing the country, and the first steps they take within days of coming into office will tell us a lot about their seriousness of purpose.

So like I said, let the games begin!

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com
Twitter: @khurramhusain

This is good, and should be the approach of any interim government. The moment is an interesting one where the play of economic forces shorn of any political push and pull is visible. And the moment can, in some respects, be said to have begun a lot earlier, a few months before the arrival of the interim government.

Consider the question of the circular debt as an example where, as of August, something unusual has been happening. On nine separate occasions, Pakistan State Oil (PSO) was allowed to go into ‘technical default’ without anybody in Islamabad finding it a matter of grave urgency. Technical default basically means that payments to the supplier were delayed. And now, one more time a tender was ‘postponed’ for a shipment due to arrive by May 5 because of lack of funds to open the letter of credit.

This represents a new chapter in the story of the circular debt.

At this point, the interim government is promising just enough money to let one shipment of 70,000 tons land on May 9, to allow for enough power generation for the three days around voting day.

A load-management plan has been drawn up, and quotas of electricity handed over to the various distribution companies. According to the new load-management plan, industrial and commercial areas will bear the brunt of the shortages for the few days when polling and the counting of votes is under way.

That’s as short term and ad hoc as it gets, and of course that’s exactly how it should be under an interim government. But something interesting has happened as the government’s minimal attention wavered: PSO drifted into default, and fuel
shipments have been jeopardised.

With all the mismanagement of the power sector and its fuel supplier over the past five years, it’s fair to say that in spite of it all, such a state of affairs was not allowed to happen.

The country’s drift towards a complete fuel dry-out in the power sector has occurred in the period when political ownership of the consequences has weakened, and the best hope for revival right now is the arrival of a new government that will have to own the problem. In short, politics must rescue the power sector from complete illiquidity.

Take another example. Since 2011 or thereabouts, our banks had grown accustomed to a rather convenient arrangement that was creating winners all around, a dangerous state of affairs in the financial world.

This is how it worked. The State Bank of Pakistan (SBP) lent money to the banks through what they call an open market operation (OMO), which is a tool used by central banks all over the world to manage short term liquidity issues in their financial system. Except it wasn’t so short term here. Banks would pick up this money then lend it on to the government.

In August 2012, the SBP made its most detailed comments on this practice. This is what it said: “Since the scheduled banks know that SBP is the ‘liquidity provider of last resort’ and that the fiscal authority is a major borrower, they, at times, take an aggressive position while investing in government paper. Specifically, they bid excessive amounts in the auctions of government securities, over and above their actual funding/liquidity position, and then cover this position next day through discounting from the SBP.”

Translation: banks are lending more money to the government than they have in their coffers, because they are confident that they’ll pick up whatever additional funds they require from us through the short-term OMO.

There are grounds for complaint here because this is not what an OMO is supposed to do. It’s meant to be short-term lending, usually for a week or so, to either inject or mop up liquidity from the system, depending on whether there is an excess or deficit in its supply. It is not meant to turn into a money-creating operation.

The government of Pakistan, however, indulged in this affair heartily since around 2011, with the amounts being borrowed through this mechanism rising to a high point of almost Rs600bn.

Everybody knew all along that this had to be unwound, but nobody wanted to say it aloud, not even the SBP. Until now. For the first time the SBP says that “this approach cannot be sustained” and has begun to actually unwind the practice, bringing down the amounts being lent through the short-term window to less than half in a matter of weeks.

Why did the SBP wait until the arrival of an interim government to begin unwinding this merry-go-round? I’m willing to bet that the dissipation of political pressures and the absence of a proper “fiscal authority” with ownership of its finances had something to do with it.

Of course, all this means that a fairly large mountain of problems awaits the incoming government, because the fiscal situation and the power sector are both now running on empty. Over the years, a series of informal, ad hoc mechanisms have arisen to deal with the many dysfunctions the economy has been struggling to cope with.

In the two cases given here, the mechanisms both addressed liquidity issues — whether of the power sector or the financial sector. And it’s interesting to see how both mechanisms have fared in a time when political pressures have dissipated. The power sector drifts towards total illiquidity while the State Bank finds expanded room for manoeuvre.

Periods of interim governments open an important window into the workings of Pakistan’s economy. And perhaps it’s worth our while to study such moments, past and present, in more detail to see how the play of economic necessity proceeds when
the play of politics stands temporarily in abeyance.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

Twitter: @khurramhusain

They are right to eschew any deals with the IMF and leave such policy decisions with long term consequences for the next government. After all, the interim government has a limited mandate to hold elections in a fair manner and then exit the stage.

It was thus a little out of line for the financial advisor, Mr Shahid Amjad Chaudhry, to complain about the terms of the 2008 Standby Arrangement. He went to Washington DC to attend the annual spring meetings of the IMF and the World Bank, and also held some consultations with the IMF on the outlines of a possible new facility to help with the repayments of the last one.

So far so good. But it was a little beyond the call of duty to complain about the stringent repayment requirements of the last facility or about the conditionality attached to it. That was a decision made by the last government in the midst of a balance of payments crisis, and it is not the job of the financial advisor of an interim government to pass judgement on it five years later, and that too before the very creditors whose help he was discussing.

But that being a minor point, the good news here is that the interim government is resisting all temptations to play saviour and rightly keeping itself within safe bounds of a minimal agenda. Of course this means that the incoming government will have little time in which to find its feet, and realise that we are drifting towards another balance of payments crisis if corrective steps are not taken very quickly.

Fortunately though, much of the groundwork for these steps would already have been done. There’s lots to fault the last government on regarding its economic legacy, and where Hafeez Shaikh clearly struggled to be heard when he tried to sound a note of caution regarding the direction in which the country’s balance of payments was headed, he found that there were other voices that were contradicting him and arguing that all was well.

The other voices, we are told, included State Bank Governor Yasin Anwar, who is still around to see the fruits of his efforts bloom. But the other one is gone, Minister of State for Finance Salim Mandviwala. So now that the can of an inevitable approach to the IMF has been kicked a few months further down the road, all it means is that the incoming government will have very little time to lose and will need to knock on the IMF’s door within weeks of being sworn in.

But unlike 2008, there is an upside here. Back then the newly minted PPP government took many months to realise that the country’s balance of payments was deteriorating and carrying it towards a financial crisis. Even after the realisation set in, much time was wasted in the hope that the Friends of Democratic Pakistan would come to our aid and an approach to the IMF would not become necessary.

As early as July 2008, during his maiden visit to Washington DC as Prime Minister, Mr Yusuf Raza Gillani was told in very clear terms by everybody he met that he should quickly get onto an IMF program before any other bilateral aid could be arranged. But the government held on to the hope that the Chinese would come through with cash assistance, or that the Saudis will arrange another oil facility of the 1998 sort. As late as August, then finance minister Naveed Qamar was continuing to sound optimistic notes about the possibilities of a $7bn oil facility that the Saudis had given their assent to. Of course no such thing had happened.

When Shaukat Tarin became financial advisor, he had to start from scratch. A panel of economists had to be assembled and, huddled for days in the ground floor rooms of the Lahore Gymkhana, they worked to produce a roadmap, an economic plan of sorts, which called for strict efforts to restrain the yawning deficit.

On the other track, there was a large effort at persuasion that was required to get the cabinet to accept the inevitability of an IMF approach. Of course this effort was aided along by the sharply negative turn of events from October onwards, but nevertheless, the approach had to be made from scratch and in a very short timeframe.

No such problem awaits the incoming government this time. Hopefully they’ll be quick in realising that they need to get onto a program before the crisis arrives. And once they’ve decided, much of the spade work for the actual facility appears to already have been done.

There will remain the pesky question of “prior actions”, the code words used by the IMF to indicate that they will ask for some difficult conditions to be met before any money can be disbursed. These “prior actions” are bound to include revenue measures, such as removing tax exemptions from powerful business groups, and perhaps tariff reform in the power sector, both politically difficult to achieve.

But if push should come to shove, the government may be able to get the IMF to back down from demands for “prior actions” by playing the American card. This will be the key to watch out for. Will the new government insist on money first and deliverables second, or will the IMF succeed in staring them down by insisting on “prior actions”?

From what we hear, the IMF did indeed speak of “prior actions” with the Pakistani team during their discussions in DC, but the finance advisor chose not to dwell on that aspect of the talks in his public remarks upon his return. A fair amount of consensus is already building that an approach to the IMF will be necessary very soon. What remains to be seen now is how well they’re able to manage this question of “prior actions” and how the international community plays its cards at the crucial time.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

On his return from Washington DC, where he had gone to attend the spring meetings of the International Monetary Fund and the World Bank, a routine affair held every year and attended by finance ministers and central bankers from all around the world, Mr Chaudhry said the IMF is “keen to engage with the new government” and help in providing the assistance required for meeting all external debt obligations.

According to the advisor, the IMF is offering $5 billion in a quick disbursing loan called the extended fund facility that carries a higher interest rate compared to the stand-by arrangement the last government took out in November 2008. What this would essentially mean is that Pakistan would take out another loan, on higher interest rates, to repay the one that was taken in 2008.

This would buy us another few years at least, until the $5bn have been digested, and another balance of payments crisis begins to loom.

A pattern is now unmistakably clear. Something is broken in the bowels of Pakistan’s political economy, as a result of which the country keeps getting washed up on the shores of a balance of payments crisis. Each time this happens, money arrives from abroad, usually through the IMF, and pulls the country back into the water.

For a short period of time, which varies depending on the amount of the bailout, all seems fine. Then once more, the reserves begin hitting all-time lows, the financial sector begins to twitch uneasily, the rupee begins to falter, talk begins to swirl about the central bank’s ‘firepower’ and noises begin to be made about another bailout.

This pattern has been repeating itself with predictable rhythms for almost a quarter century now. Of course, the broken political economy has been around a lot longer, but the repeated approaches to the IMF really began with the structural adjustment facility of 1988.

Every new government is extended a bailout of some sort, sometimes a large one like in November 2008 which lasted the entire period of the PPP government, and at other times a small one like the stand-by given to the Musharraf regime in 2000, which was barely enough to take the country forward for another six months.

Of course, the Musharraf government, which was in the dog house in its first three years, became the beneficiary of the mother of all bailouts in 2001, not only through the IMF, but also because of a generous renegotiation of all Paris Club debt obligations.

But always, as if on cue, the bailout money runs out and the crisis resurfaces. Not only that, it also takes the same form every time — a rapid drainage of liquidity from the financial sector which necessitates extraordinary administrative measures, while emergency liquidity is pumped into the system from the central bank, and the government goes on a crisis call to the IMF.

As predicted by almost everyone, this time is no different. Nobody in the world wants to see instability in Pakistan at a time when Nato is preparing to extricate itself from its ruinous war in Afghanistan. If basic stability can be purchased in Pakistan for a mere $5bn, then so be it. A small price to pay.

Of course, the addiction to foreign bailouts breeds its own dysfunctions. Everybody remembers clearly how the PPP government behaved towards the economy in its first few months, seeing the approaching balance of payments crisis through indifferent eyes, comfortable in the assurance that outside powers will never let the country sink, that external help will arrive before anything untoward happens.

The repeated operation of this cycle of bailouts has created a political economy of its own, a set of perceptions which holds that it is the job of outside powers to keep the economy on an even keel, that it is the job of the donor community to govern the country. For the rulers, whether civilian or military, the deliverables of government comprises politics and politics alone.

The quarter-century legacy of repeated recourse to foreign-funded bailouts includes the withering away of domestic expertise in economic management. Sakib Sherani has written ably about the emptying out of all serious economic expertise from the Planning Commission, whose best minds have gone over to the World Bank or the IMF (‘Managing the economy’, Dawn, Jan 27, 2012).

Today the government lacks the capacity to even articulate a clear line on crucial national issues like the power crisis or dwindling gas reserves, or tax reform or anything else for that matter.

Where a clear line can be developed, the government lacks the muster and capacity to see to its implementation, as in the Federal Board of Revenue reforms that have languished for at least a decade, if not longer if one were to trace the beginnings back to Vito Tanzi’s advice on value-added tax in the late 1970s.

The withering away of all state capacity for reform, for governance, for addressing the country’s economic ills, is a direct consequence of heavy donor community involvement that Pakistan has become addicted to. Of course, no donor can fix this problem for us. The solution has to come from within.

An attitude has taken hold that the matter cannot be fixed, that the minds of those in power cannot be changed, that the dysfunctions are too deep and that are too many vested interests clinging on like barnacles that would prevent any rectification.

It’s a tempting view, and perhaps by retirement I might be seduced by its fatalistic allure. But not yet.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

Twitter: @khurramhusain

The interim government had its job cut out for it from day one. So let’s first acknowledge the difficulty of the situation they stepped into before anything else.

But some of the missteps have been regrettable and carry serious consequences. The biggest misstep thus far has been the delay in appointing a finance minister, a serious individual who can credibly cut through the hype that the power-sector bureaucrats routinely serve up to extract more public resources to pay for their inefficiencies.

Nothing shows the seriousness of this misstep more than the loadshedding afflicting large portions of the country.

Part of the loadshedding derives from unexpected acts, like attacks on a gas pipeline in Uch which put a sudden and large strain on furnace oil stocks and disrupted the 16,000 tons supply per day benchmark that Pakistan State Oil (PSO) had set for itself.

But a large part of the reason for the loadshedding is the mushrooming circular debt, a problem so old and so well-known by now that the words are part of common parlance. The other day, my rickshaw driver knew the term.

Immediately upon arriving in power, the freshly minted interim government was faced with an intricate and old problem whose proportions are so large that it will be weeks before the gentlemen can figure out anything about it. The only one amongst them who has an idea is the minister for petroleum, Suhail Wajahat Siddiqui, who has seen the problem up close and personal as chairman of PSO’s board.

Here’s how these things typically work. First the power generation falls precipitously. A meeting is convened. The water and power people are asked why. They respond they are short of fuel stocks and have no option but to shut down power plants.

Then the petroleum people are called. They’re asked why the fuel shipments aren’t being made. They reply they have an LC (letter of credit) that is about to become due and they need money to retire it, else Pakistan could default on its external obligations. The water and power people haven’t paid their bills from the fuel consumed thus far, so they have no option but to ask for payment up front for any further fuel deliveries.

The water and power people are asked why the bills haven’t been paid, and they roll out a presentation they made almost five years ago, ‘…cost of generation … recovery issues … Karachi … Fata….’ they drone on. ‘Our customers don’t pay us, we have no money to pay our fuel supplier, and influential peddlers disallow us from disconnecting large defaulters,’ they say.

At this point the prime minister will scratch his head and plunge into thought. ‘How much money is required to get the fuel moving again?’ he’ll ask PSO, usually represented by the managing director and the minister petroleum.

An amount will be quoted, usually outlandishly large, like Rs80 billion or so. ‘No, no, we can’t manage that’ will come the reply and the finance ministry will be called. ‘How much can you arrange secretary sahib?’ the prime minister will ask.

‘I have nothing sir, you know that,’ will come the reply.

The conversation will follow a predictable path after that, where the original amount quoted by the petroleum guys will be whittled down to just around double figures, eight, nine, 10 billion or so.

Finance will be ordered to arrange the funds immediately, and water and power will be ordered to prepare a plan to improve recoveries for their sector.

A press release will be issued: ‘The prime minister, taking serious notice of the power situation obtaining in the country, has ordered the immediate release of….’

All this will happen with furious media coverage of power shortages everywhere as an accompaniment. A year or two ago, there’d be accompanying footage of power riots, but it looks like the people have tired of that sort of thing.

Now its just stock footage of people in markets sitting in dark shops and fanning themselves with a hand-held implement of some sort that gets the job done.

But once the oil starts to flow, PSO retires its LC, and the power plants whir back into motion, the lights come back on and everything is forgotten. Until the next LC becomes due, and the whole drama repeats itself.

This is why we need serious people at the helm in finance. People with experience, so we’re not learning the same lessons over and over again.

The power crisis in this country is acquiring deadly proportions: only five years ago for instance, we were spooked by numbers like 40 or 50 billion as outstanding or overdue amounts. Today, the amounts being quoted are ten times that much, and the only thing we’ve learned is the term “circular debt”.

We killed a year blaming the power crisis on the Musharraf government. ‘Not one megawatt…’ went the line in the opening years of this sordid story. Then we killed another year or two blaming it on the international price of oil. ‘Deteriorating fuel mix…’ went this line.

We spent the last couple of years blaming it on a culture of exclusivity that allows some to enjoy unlimited electricity without ever having to pay their bills, until we realised that this line was propagated by the water and power bureaucracy largely as an excuse for their own incompetence, because the bills themselves are of dubious merit.

We cannot continue like this for much longer. It is imperative for the incoming government to understand that the power crisis stems from a failure to bring about reform in the power sector.

We’ve wasted five years already looking for someone to blame for the power crisis. Let’s not waste another five trying to punch our way out of this paper bag.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

Twitter: @khurramhusain

The next day, on the same pages of the same newspaper, there appeared another article on the same theme. This one written by Michael Krepon, cofounder of the Stimson Centre, focused more specifically on Pakistan’s growing nuclear arsenal.

“A nuclear arsenal built on very weak economic foundations is inherently unstable,” wrote Mr Krepon, arguing that strengthening Pakistan’s economy is inherently in India’s interest, and the best way to accomplish this is through increasing bilateral trade and investment between the two neighbours.

The concerns expressed by both authors are old, but not outdated. If anything, both articles are reminders that amidst the chaos and flux of a rapidly evolving moment, amidst the heady excitement of the first truly democratic transfer of power that Pakistan is undergoing, old concerns regarding the eventual viability of the state not only continue to linger, but are growing in urgency.

Connected to the question of long-term viability is the matter of Pakistan’s enduring resilience. Another way of asking the same question, therefore, is not “how will Pakistan survive?” but rather “how has Pakistan survived?” The two questions are intimately linked.

Pakistan has survived due to its rich natural endowments. These include water and gas. Allow me to explain.

Pakistan is built around a river system, a hydraulic society so to speak. The rich water endowment means a flourishing agriculture forms the base not just of the economy, but the entire system of livelihoods that holds the country together.

Contrary to what the ambassador says in a small parenthetical comment in his piece, Pakistan is not “glued by the army” but it is held together by its agriculture.

Having seen Pakistan’s economy up close for many years now, I’m struck by how large a role agriculture plays. Every year, the land throws up its rich harvest on two occasions: the cotton crop which starts coming in during August, and the wheat crop which is harvested from April onwards.

Both these crops are big enough to make the country a player in global markets. Both employ a labour force so massive that during their harvesting, industry leaders complain that the cities get emptied out and labour becomes a scarcity.

Both crops have large and significant industries built upon them, whether transport and storage, or processing. In the case of cotton, Pakistan’s largest employer — the textile industry — grows atop the bountiful harvest.

Both crops are huge players in the country’s credit markets, whether formal or informal. The size of the commodity operations that support the wheat procurement drive compares favourably with other enormous heads in the government’s budget, like power subsidies. And the textile sector, which is an extension of the cotton crop, is the country’s largest private sector consumer of bank credit.

The size of the commodity chains that are built around each crop, from the upstream fertiliser and pesticides sector to tractors and tube wells, to the marketing and distribution infrastructure and the labour force requirements in not only the harvest itself but the transport and marketing and distribution, are so huge that they form the backbone of the country and its economy.

The scale of the activity that gets under way every year when the harvest comes in is large enough to employ a labour force estimated to be more than 55 million people.

Couple this with the natural gas reserves that have fuelled our industry, and fired our stoves and ovens and geysers and served as feedstock in our fertiliser industry.

Today Pakistan is shielded from the full impact of hundred dollar oil because domestic gas accounts for almost half of the country’s primary energy consumption. The only sector that has had to largely absorb the costs of hundred dollar oil is the power sector, and the circular debt is testament to the enormous destruction that high oil prices have brought with them.

Pakistan is built on nature’s bounties, far more than anything else. Here lies the secret of the country’s ‘resilience’, its capacity to bounce back, to muddle through.

No matter what the provocation — earthquake, floods, war, sanctions, recession — the arrival of the harvest twice a year gets the wheels moving, money starts to circulate, and an army of farmers and day labourers and brokers and stockists and middlemen and moneylenders and truck drivers begins to articulate itself, imperfectly mediated by another army of petty officialdom, and often gorged upon by large landowners and their connections in high levels of government.

Having seen all this with my own eyes, I must confess I’m not as troubled by the growth of the militancy and the bombings as I am by watching this natural endowment begin to erode away.

Pakistan’s natural gas is running out, and our food security — the backbone of the country’s resilience — is now in question, driven by growing water scarcities and deep dysfunctions in the agrarian economy.

The militancy and the extremism can be swept aside once their lifeline of support from within the state itself is cut off, and once the forces of mainstream economy
and politics begin to assert themselves.

Without under the table support from certain sections of the state itself, militancy and extremism will suffocate in this environment, and the ballot box will assign them their true place in our society, like it always has.

But getting the forces of mainstream economy and politics to articulate themselves properly, especially in the face of the growing scarcities that are coming our way, is the real challenge.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

Twitter: @khurramhusain

Here is some of the business that needs to be tended to without delay.

Top on the list is a fiscal deficit opening up like the Red Sea on the command of Moses. The tax authorities have a mammoth target of almost Rs789 billion to chase in the final quarter of the fiscal year, and this after a massive downward revision of the annual target by Rs255bn.

The interim government will have little time to devote to the structural dysfunctions that lie at the heart of this situation. The real scale of the deficit will become clear only after we have a new finance minister who is willing to disclose all off-book expenditures that have been incurred by the government thus far, with some estimates saying this could send the total budget deficit as high as eight per cent of GDP.

Compare that to what was budgeted at the start of the fiscal year: 4.7pc. To get an idea of what a 3.3 percentage point slippage means in this situation, consider that Pakistan’s total tax-to-GDP ratio is less than 9pc. In any such calculation, each percentage point matters, but even more so when your base is so low to start with.

The Federal Board of Revenue, upon whose shoulders the task of bridging this yawning deficit has been left, is making aggressive efforts to extract a few more drops of revenue from an otherwise famously indifferent tax machinery.

They’ve shaken down the textile industry, by first demanding Rs300bn as total defaulted amount on assorted taxes, and then settling the issue with recoveries of around Rs4bn from various units.

Now they’re turning their attention to other sectors. This time, according to media reports citing unnamed “officials”, they’re claiming Rs45bn from almost 150 companies as outstanding tax liability.

Once again, of course, the real amount will end up being negotiated between the companies and the tax authorities, who will settle for a lot less than the initial amount demanded.

It’s an old pattern, where the tax authorities announce the discovery of a massive tax evasion effort on the part of a given sector, apply some strong coercive measures like freezing bank accounts of large companies or arrest their employees. Recall the case with the telecoms in the summer, when the tax authorities loudly announced a Rs47bn “scam” in the evasion of interconnection charges.

As part of that affair, the offices of a major telecom company were raided, its accounts frozen, and the entire sector summoned before the National Accountability Bureau (NAB) to answer corruption charges. So where did that whole affair end? In a negotiated settlement the outlines of which were never made public.

How this game plays itself out every time is in part a function of how well organised the sector in the crosshairs is.

So the telecoms were caught on a weak wicket because they had no industry association to represent their collective interests, unlike the textile sector which put up a spirited fight against the tax authorities because they have strong representation, either through the All Pakistan Textile Mills Association or other association leaders who managed to bog the tax authorities down in long and painstaking discussions.

Banks and oil and gas sectors are not very well organised to articulate a collective interest and could be more vulnerable, whereas the retail sector is unlikely to find itself audited so ferociously because it is highly cohesive in clumps, dispersed and very reactive.

Another entity with a “recovery drive” of its own to launch is NAB, which had been tasked with recovering power-sector bills last month. The Ministry of Water and Power had asked NAB for help in recovering unpaid electricity bills, and each power distribution company (DISCO) had been asked in February to provide a list of all defaulters who owe more than Rs100,000.

The lists were provided to NAB in March, and the total recoverable bills added up to Rs166bn, according to press reports. The lists included individuals, companies and government departments, including military and Rangers’ establishments.

But funnily enough, the list from Islamabad’s DISCO also included the name of NAB, which had defaulted on an amount of Rs291,000. So now what? How embarrassing that the bill collectors’ own name should feature on the list of people from whom outstanding bills need to be coercively collected!

In on-record comments reproduced in the media, NAB made it clear that it disputed the amount it had been billed. “We used some rooms in a building of the Ministry of Finance in sector G-5 but Iesco [Islamabad Electric Supply Company] sent us the bill of the whole building. We are negotiating with Iesco on the issue. Otherwise there is no outstanding amount,” their spokesman told this newspaper, before going on to threaten all other parties on the defaulters’ list with public naming and prosecution.

But they’re likely to find that just like NAB, all other parties on the list also dispute the amount billed to them — that they also would like to negotiate with the relevant DISCO — and they also feel that “otherwise there is no outstanding amount”.

So where will this lead us? The aggressive pursuit of tax or other bill recoveries always creates embarrassing situations for the government and for those being pursued.
Inevitably, if pushed too hard, the injured party has the right to move the matter into a court of law and end the whole affair.

It is with this knowledge that industry representatives are able to inevitably stare down the tax authorities or bill recovery authorities and settle the matter on an amount far below what had originally been demanded. In the months to come, there’ll be a lot of negotiating to do by a lot of parties to keep a desperate government at bay.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com
Twitter: @khurramhusain

The Economic Survey of Pakistan for fiscal year 2007 and 2008 made mention of the “large fiscal slippages” in that year, noting that the budget deficit was likely to come in at 6.5 per cent of GDP, against a target of 4.5 per cent.

The reason was “subsidies rising to an unsustainable level” with power tariffs and fuel as the main culprits and an “extraordinary increase in development spending”.

Continuing, the survey lays out the consequences of policy failures in that year:

“Government borrowing from the State Bank of Pakistan has reached an all time high, leading to excessive monetary expansion and thus becoming one of the principal sources of inflationary build-up in the country. In other words, financial indiscipline during the year, mainly on account of political expediency, has already caused severe macroeconomic imbalances, for which Pakistan is likely to pay a heavy price in terms of deceleration in growth and investment, and the associated rise in poverty; the widening of current account deficit and the attendant rise in public and external debt; a loss of foreign exchange reserves and the associated pressure on the exchange rate, and most importantly, higher inflation and the accompanying rise in interest rates.”

So in the final year of his reign, the general’s government succumbed to “political expediency” and abandoned all semblance of fiscal responsibility, commissioning enormous increases in “development expenditures” which in an election year basically means racketeering to buy votes, and record high printing of currency notes. It laid the foundation for the double digit inflation that hit us in 2008, as well as the rapid decline in our foreign exchange reserves which sent the country back to the IMF by November of 2008.

How could it all come crashing down so fast? After all, hadn’t the general’s government presided over some of the highest growth rates that Pakistan had ever seen?

There were two important narratives about the general’s growth rates.

One was the official narrative, peddled by his government in its public pronouncements. This narrative went something like this:

“We inherited a government ruined by a decade of mismanagement from civilian rule. We implemented the right policies, brought the fiscal house back in order, restored the country’s creditworthiness and thereby laid the foundation for growth. Once investor confidence was restored, through continuity of policy and clean governance, investment poured forth and Pakistan experienced its highest ever growth rates.”

In a time when incomes rose rapidly, the stock market spiralled upwards creating a wealth effect of its own, when the streets were cluttered with billboards enticing everyone to spend on lavish new imported goodies, when the banks were chasing you with money to lend against little more than a signature, when dinner conversations reminisced about the 1960s, when every week brought new rumours of another powerful global brand that was interested in setting up an assembly line in Pakistan — remember when Porsche and Mercedes were rumoured to be in talks to set up facilities here? — the giddy optimism of that era swept all before it.

But it wasn’t to last. Amidst the merrymaking and partying and mushrooming “event management” companies that hosted massive raves in country farmhouses with imported bartenders and DJs, there walked a grim bunch of naysayers.

“It won’t last,” went the other story. “It’s all cosmetic, fuelled by cheap liquidity, itself the product of American largesse and excessively accommodative monetary policy.”

The naysayers built their case thus:

“Pakistan is receiving record levels of inflows from the international community in return for its support in the ‘war on terror’, and this money is fuelling a bubble economy. The whole thing will end in a terrible hangover: high inflation and a balance of payments crisis, as the monetary build-up works its way through prices and the growing current account deficit eats up your reserves once the concessionary inflows inevitable dry up.”

The speed with which the entire growth miracle of the general unravelled is the clearest vindication of the naysayers’ version. In the final weeks of the general’s reign, as the curtain dropped on the mirage with which he had kept the country distracted, his minions took to the practice of repeating a few lines over and over again on the air to salvage the ever diminishing kernel of credibility from the whole affair.

“Pakistan attracted $9 billion in foreign investment last year,” declared Salman Shah, caretaker finance minister who had mirages of his own to pursue. He cited the case of a domestic bank that had found an equity partner from Malaysia which had pumped in a little less than a billion dollars as an example of the government’s success. He gave the example of Merrill Lynch, which had released a comically bullish report on the prospects of Pakistan’s economy, arguing that Wall Street firms were famous for being thorough in their research, and this report was a vote of confidence by Wall Street in the government’s policies.

Of course the equity partner in the domestic bank lived to see the value of his investment plummet when the stock market unravelled, and found himself holding the disempowered end of the bargain when he was kept out of important decisions such as senior staff appointments.

And of course Merrill Lynch went bankrupt shortly afterwards, largely on account of foolish investments made in worthless assets, and was sold for a pittance to the Bank of America. So much for Wall Street’s vote of confidence, so much for the famous foreign investor from Malaysia.

Today the general is promising to take us back to this time of mirages. The only thing one can say in response is: thank goodness he’s asking for the privilege to do so, and not snatching it!

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

Anybody who has trekked in difficult terrain knows how painstaking a task walking and stepping and charting a course can be. A simple 30-foot climb can become long and arduous, requiring the mind to be fully focused on every step while being mindful of the path ahead.

A pole vault is relatively simpler by comparison and can get you up to 30 feet in a matter of seconds.

It’s useful to recall the difference between these two modes of “getting there” when considering the state of play in our economic re-engagement with India.

A pole vault gets you up there within seconds, but can’t keep you there for long, and the landing can require a pretty large cushion if it’s not to do any injury. A trek, on the other hand, is slow and arduous, requires a constant exercise of the mind to pull off, but gets you there in a reliable and sustainable manner.

If a “normalised” trade relationship with India is a state of affairs we imagine at some point in the future, it’s best to start thinking of the journey there more as a trek than a pole vault. This was the basic conclusion that I arrived at after a two-day conference in Delhi on the subject hosted by one of India’s premier economic think tanks.

Our own journey to the conference was a little like a trek itself. Part of the Pakistani delegation to the event crossed into India on foot across the Wagah border. While sitting at the checkpost, enjoying the warm hospitality of the customs officials and filling out our immigration forms for entry into India, the news arrived that a militant attack had taken place in Srinagar.

Almost immediately questions began to be asked. What will this mean for our entry prospects? How will this impact the dialogue at the conference? What will this mean for the larger prospects of normalised trade ties?

As it turns out, neither our entry nor the state of the dialogue at the conference were impacted even in the slightest. We were all welcomed with broad smiles, and the discussions at the conference were not allowed to be obstructed by shrill shouting in the media.

Of course every terrorist attack, whether in India or in Pakistan, is a matter of utmost seriousness and needs to be condemned in the most unambiguous words. But it was refreshing to see that not a single participant at the conference was willing to allow the agenda to be held hostage by the killings.

Over the next two days, as I sat and listened to the debates following each paper presentation, it occurred to me that some themes keep reasserting themselves as the dialogue around the normalisation of trade ties between India and Pakistan moves forward.

The first theme is the two-sided nature of the discussions. There are the “data” people, and there are the “supply chain” people.
The former tend to be academics and the latter businessmen.

The “data” people concern themselves with questions like estimating what the potential size of trade volumes between India and Pakistan can be if trade relations were to be normalised.

This research gives us an idea of the scale of the proposition that is under consideration, and some of the papers presented during this conference were putting the figure at $20 billion. That is almost as large as all of Pakistan’s non-oil external trade, for reference. Think about that for a moment: the size of Pakistan’s trade with India can potentially grow to become as large as the size of our non-oil trade with every other country of the world combined!

The supply chain people specialise in “ground realities”, so to speak. For example, currently India and Pakistan operate one land border crossing, at Wagah, and infrastructure bottlenecks at this crossing limit the kind and volume of cargo that can cross.

For instance, the lack of handling facilities for containerised cargo means that it is still not possible to transport across the border many of the items on the positive list for the land crossing.

Issues of this sort are numerous and need to be worked through in meticulous detail. The growth of trade volumes needs to be assessed for its beneficial as well as its harmful impact, and each country needs to set its agenda for negotiation in light of this.

Additionally, there are those who bring an entrepreneurial energy to the dialogue, by imagining all the linkages that are possible given some relaxation in visa regimes.

Then there are those who bring a vested interest to the dialogue and they take various shapes: from those who are eager because their business stands to benefit to those who are apprehensive because their business stands to lose.

Finally, there are those who bring emotive appeals, whether to the unfairness of how the process is moving forward, or to linkages with non economic issues. Often these emotive appeals are couched in the language of indelible suspiciousness, born of animosities that view the world through a “them and us” prism. The latter crowd, however, is a diminishing breed.

The point to bear in mind through it all is this: the size of the proposition under discussion is enormous, a game changer. Growing trade volumes with India will work in a way unlike any other trade regime we currently have
simply because of the long land border, shared history and linkages.

And number two: emotive appeals are unhelpful because the road to the final goal is a long, arduous and methodical one.

Steady, deliberate and measured steps will get us there in a far more reliable and sustainable way than
any attempt to pole-vault ourselves into position.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

Twitter: @khurramhusain

The simple answer is no. But the times are far from simple. For one, Pakistan’s own energy crisis is getting worse exponentially. By some estimates, put out by the Petroleum Institute, the country’s oil import bill will cross $50 billion in a little over 10 years’ time. That’s about five times what it is today.

Put it another way. Our peak shortages of gas today are just over one billion cubic feet of gas per day. By 2025, just over 10 years from now, these shortages will hit eight billion cubic feet, assuming a growth rate of four per cent per annum.

It’s hard to overemphasise the significance of this. Pakistan is one of the few countries in the world that has been relatively insulated from the full impact of the oil price hikes of the past decade precisely because we’ve had indigenous natural gas to fall back on.

As the price of oil went into triple digits, our consumption of indigenous natural gas intensified, until today when it accounts for almost half of our primary energy consumption in the country.

The result is all around us. The growing shortages have aggravated inter-provincial disharmony, and inaugurated an ugly chapter in our economic history: the bitter wrangling between industry and sectors over gas allocations.

Seen through the prism of Pakistan’s growing gas crisis, the Iranian pipeline seems like a solution as natural as the gas it will presumably carry. But as a wise old professor once wrote: geography proposes, history disposes.

The proximity of Iranian gas is geography’s proposition. But the sanctions imposed on that country by the international community hold the destiny of this proposition in their hands.

Let’s not underestimate the forces that stand behind the sanctions. Let’s recall that in addition to America, the EU and the UN all have Iran-specific sanctions in place.

US sanctions on Iran began with an executive order that became effective on Nov 14, 1979. Since then, there have been 24 additional executive orders tightening the noose further, the last of which became effective on Oct 9, 2012.

The earliest sanctions seized Iranian government properties in the US, went on to block all assets that were pledged to American banks, and in 1995 made illegal any investment by American firms in the Iranian oil and gas sector.

The latest executive order, of October 2012, goes so far as to “prohibit any transfers of credit or payments between financial institutions or by, through, or to any financial institution, to the extent that such transfers or payments are subject to the jurisdiction of the United States.”

This clause unplugs Iran from the global clearing house of all inter-bank payments as far as they are processed through New York.

Then on Dec 26, 2012, came an amendment to this order, issued by the treasury department, which expanded “the categories of persons whose property and interest in property are blocked” if they are found “to have provided material support for certain Government of Iran-related entities or certain activities by the Government of Iran”.

A little further down, the note clarifies that amongst the entities to whom it is prohibited to “provide material support” is the Central Bank of Iran and amongst the “activities by the Government of Iran” that are prohibited from being provided support to are the “purchase or acquisition of US bank notes or precious metals by the Government of Iran.”

And there’s the clincher. With these laws in place, you cannot transact with Iranian banks, you cannot make a payment to the Central Bank of Iran in dollars, and you cannot make that payment in gold without running the risk of being unplugged from the US financial system.

But as mentioned earlier, there are complications. Carefully read the myriad documents where the sanctions laws are clarified and you’ll notice strange loopholes in the text.

For instance, the prohibitions laid out earlier, according to the clarification, will “not apply to any activity relating to a project:
“1. For the development of natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Turkey and Europe;

“2. That provides to Turkey and countries in Europe energy security and energy independence from the Government of the Russian Federation and the Government of Iran; and

“3. That was initiated before August 10, 2012.” Basically the red lines the US is trying to draw around Iran are not so red when they touch the matter of helping break Europe’s energy dependence on Russia. So can Pakistan ask for some of the red to be taken out of the red lines for the sake of its energy security as well?

The history of the sanctions clearly tells us that an executive order issued by the president would be enough for the purpose, without requiring any congressional approval.

So will Pakistan really press ahead with the project? Are the red lines drawn by the Americans really all that red after all?

It’s highly unlikely that Pakistan will risk calling the US warnings about sanctions a bluff. But it’s equally unlikely that the Americans will allow the sanctions to be triggered — that requires a determination from the secretaries of treasury and state — and push Pakistan’s economy into meltdown, because that is what would happen to us in the event. Our economy cannot withstand that sort of a blow, anymore than it can withstand the continuous declines in its gas supplies.

What’s more likely is that Pakistan is using Iran to build a negotiating position on some other table, and when the offer there is up to par, they’ll bargain geography’s proposition away on the tables of history.

The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com

Twitter: @khurramhusain