.. t. ? Either the mission is visiting the country and having meetings with various government departments, or the heads of these departments are rushing every week to Washington to plead for more time and/or money. This is reminiscent of countries like Brazil and Russia in the 80s and 90s when they were drowning in debt and faced mounting poverty. And did the IMF and World Banks policies help them recover? The answer is “No.” In fact they made the situation much worse.
From 1980 to 1989 Brazil paid $148 billion in debt servicing on a loan of $ 64 Billion. Ten years later, having paid $148 billion on the debt, Brazil now owes $121 billion. This illustrates the viscous cycle that the IMF puts its borrowers into. In Russia, the IMF contributed to Russias collapse in 1998. Competition combined with intelligent privatization and correctly channeled investments in capital markets could have brought about the growth that Russia was so desperately searching for, but the IMF never emphasized competition and economic growth.
Instead they imposed their rigid, set, standard formula reducing inflation and cutting budget deficits. Insisting on a fixed exchange rate, it destroyed all prospects for export of oil, gas, and energy, which earns Russia half of its money leaving the country in tatters. Whenever the IMFs policies fail, they give the standard excuse of poor implementation by government officials, corruption and the lack of political will. Policies are made within constraints. The IMF refuses to acknowledge these constraints just as it refuses to make country to country adjustments. No two situations are alike.
How can the IMF expect one standard plan to solve every type of problem? It is obvious to laymen in economics that it cannot. Yet the geniuses at the IMF cannot see this. It is not the fault of the IMF that countries have taken loans and are now in debt. On the other hand, they are completely responsible for the havoc their policies have caused, and are causing, in victim countries where hunger and poverty have increased many fold instead of having been reduced. The particulars of the IMF and World Banks policy in Pakistan were recently announced and by the Government of Pakistan and were approved by the overseeing organizations.
The three-year structural reform agenda is basically focused on the budget and on the restructuring and strengthening of the financial position of public enterprises. Substantial efforts are to be made to broaden the base of domestic taxes, revamp tax administration, implement the restructuring plans for the energy sector and a number of other public sector enterprises, and raise the productivity of government expenditure. The government is also to move forward with the privatization of financial institutions, trade liberalization, and to make further progress in the development of the market-based foreign exchange and payments system. The main points of the agenda are as follows: Agriculture The governments strategy in this area is to limit the role of the public sector, transfer management to the private sector, strengthen local capacity, and assist in natural resource management and environmental protection. The governments control over imports of fertilizers and the remaining restrictions on imports and exports of agricultural commodities are to be reduced. The wheat subsidy is to be phased out as well, and the private sector will be gradually allowed to participate in the wheat market on terms similar to those of the public sector. The functioning of the agricultural credit market will be improved by gradually phasing out credit subsidies and directed credit and by developing more effective, market-based credit institutions.
Social policies Pakistans Social Action Program (SAP) was launched in 1992 to expand and improve the countrys very weak social services in elementary education, primary health, population welfare, and rural water supply and sanitation. The second part of the SAP (now underway) emphasizes improvements in the quality of services, particularly education, and the maximization of the impact of expenditures. The SAP program will continue to be agreed upon on an annual basis by the government, the World Bank, and other participating donors. In 1998/99, the government is to ensure that total rupee expenditure (not including foreign project assistance) for basic social services will be at least PRs 56.5 billion, including at least PRs 5.5 billion on critical quality-enhancing nonsalary expenditures in the provinces and federal areas. The focus in education is to be on enhancing the quality of services through improvements in the teaching environment; provision of textbooks and materials; and greater access to educational opportunities, particularly for girls. The objective of the healthcare sector is to be on strengthening of basic health care and family planning services at the community level. Transport Pakistans growth and export potential depends importantly on the modernization of its outmoded transportation systems.
To improve the transport system, the government will implement a reform program over the next three years to upgrade and expand the countrys highways, railways, and ports. The highways are to be improved through the incorporation of tolls and through the encouragement of private sector investment while the railway is to be prepared for privatization by the end of 2000. Infrastructure In Pakistan, the provision of basic infrastructure and services in the urban and water sector lags considerably behind the rapidly growing urban population. To improve the living conditions of the urban population, particularly those of the poor, major efforts are proposed to improve Pakistans water supply and sewerage and solid waste management systems which include reforms to develop local governments capacity to meet this need with private sector participation in urban services delivery. Power sector In the energy sector, Pakistans reform program is to increase the efficiency and reliability of energy supply and to create a competitive market structure.
The government is to encourage private sector investment in new energy supplies while initiating the restructuring and partial privatization of the energy utilities. The government will consider restructuring and privatization of Pakistan State Oil Ltd., the largest oil marketing company, while shares of SNGPL, a major gas distribution company, will be offered for sale to investors. The government is also considering restructuring the Oil and Gas Development Corporation and natural gas tariffs will be adjusted to achieve a rate of return on assets as agreed with the World Bank. Environmental issues One of the most pressing issues in sustainable development for Pakistan is the strengthening and improved monitoring and enforcement of environmental protection. The areas of concern include the inability of provincial environmental protection agencies to design cost-effective strategies for the enforcement of National Environmental Quality Standards and other provisions of the Environmental Protection Ordinance, and the absence of a pollution control system. The steps that are to be taken over the program period include the development of provincial capacity for monitoring and enforcement, the implementation of mass awareness programs, the development of a comprehensive pollution control and environmental impact assessment system, and the increased enforcement of compliance by the industrial sector with sound pollution control.
Government The effectiveness of the government in public expenditures is limited and contributes to poor economic performance, low investment, and inadequate social services. The politicization of routine decision making has weakened the civil service and diverted expenditures to lower-priority activities. To prevent this, the government is to downsize itself to a reasonable number of staff so as to increase its processing efficiency. Statistical issues In addition to plans for the improvement of the quality and timeliness of data on public expenditures, the government is to address remaining deficiencies in the economic database of Pakistan: in national accounts, through Public enterprise reform During the course of 1997/98, seven major public sector enterprises developed plans to restructure their operations and to improve their financial performance so as to increase their efficiency and/or prepare for privatization. Public debt management Due to the high levels of public debt and its effects on the budget, the government is to adopt a debt management policy to reduce the debt and debt-service ratios.
Banking sector The banking reform program has already started to stem the losses from the politically motivated lending and subsequent operating losses. The efficiency of the banking sector has been improved through a change in management and by reducing overstaffing and the excessive numbers of branches. Regulations and financial disclosure standards have been brought to international levels to increase transparency. The central banks autonomy, especially in monetary policy and banking supervision, has also been strengthened through the amendment of the law. This is to lead to the privatization of the rest of the government controlled banks over the next two years. Reform in the Foreign exchange market Pakistan is to increase the role of market forces in the process of determining the exchange rate by developing the spot and forward markets, and by eventually having a freely floating exchange rate. Tariff reform Plans have been made to remove the remaining restrictions on exports and imports and to further lower import tariffs. The elimination of import bans on textile products is expected to be agreed upon during negotiations between Pakistan and its main trading partners.
Only tariffs applying to automobile imports will remain for balance of payments reasons. Tax reform The focus of the tax reform program is to achieve larger revenues from tax collection, while promoting a more equitable distribution of the tax burden and greater documentation of the economy. To achieve this, the tax base is to be broadened by including previously untaxed income and under taxed sectors, and tax administration improved in order to provide scope for a lowering of statutory tax rates. A comprehensive review of the income tax system is also to be completed soon, and the recommendations from the review are to be implemented in the 1999/2000 fiscal year. Expenditure and civil service reform Improvements in expenditure policy are to concentrate on maximizing its effectiveness and developmental impact. To achieve this the government is to reduce spending on lower-priority activities by reducing the public investment program, lower spending on personnel, allocate resources toward high-priority and essential operating and maintenance expenditures, provide adequate money for basic social services which are part of the SAPs, and improve the planning and monitoring of budgetary expenditures. Pakistan is currently at the brink of complete collapse.
It has got to the point where the army has stepped in and declared martial law and the people are happy about it! This shows how desperate the situation is. For many of the poor and starving, martial law represents their last hope as everyone including their government and international financial institutions has betrayed their trust. The question arises as to what the military can do to alleviate the problems and stem the collapse. The following are some suggestions: a) Until now taxation structure has been a dependent on import related taxes and excise duties. Along with sales and income taxes for mobilizing revenues no matter how poor the enforcement, the speed of imposed tariff reform program effects the capacity of the taxation structure to raise adequate resources to meet operational expenditures.
The slowdown of industrial activity has also weighed greatly on this factor. Therefore there is a great need to place a structure which taxes incomes of all sources equally. b) Contrary to popular belief high rates of return on government issued instruments do not necessarily increase savings rates. They, instead, influence the switch from one instrument to the next. This encourages an outflow of capitol.
A more practical proposition for decreasing the deficit would be for the government to lower yields on its securities and saving schemes. Taxation should also be brought up to date and been adjusted to levy new issues rather that old. c) To assist industries interest rates will have to be cut further in order for these operations to breathe. d) The industry should weed out the units that do not operate up to a certain efficiency standard so as to allow the inflow of cash to competent units. Ceasing to provide revival packages to dying industries as Pakistan has being doing for the last decade can do this.
They need to let the free market take its course and eliminate non-competitive firms. e) The rupee is substantially overvalued and must be allowed to float so as to allow exports to sell fairly in international markets and to make foreign products less competitive in local markets. In turn, a revamping of the monetary system to correctly assess drawback claims would greatly improve the financial situation. f) There is one government servant for every thirty-five Pakistanis. Therefore the government needs to right-size itself so as to improve its efficiency and cut back on expenditure on benefits.
The multiple layers of required processing shake the present effectiveness of policy. A smaller, more efficient government would mean that policies would not hit the streets after the fact. g) A problem far greater than corruption is the lack of competence in public sector enterprises. There is a need for more specialists in key departmental positions instead of the present use of generalists to man key positions. h) Pakistan currently spends more than twice as much as India and Sri Lanka do per student at the primary and secondary levels.
Hence there is a need to restructure the social aspect of the public sector through decentralization, so as to bring about greater efficiency. I) After the acquisition of nuclear weaponry, Pakistan needs to review its defense spending and the size of its army. There is no real need to be spending more than the size of the budget on a defense that could, most probably, never be required. k) It also needs to establish independent institutions to conduct a thorough accountability for the governments actions so as to dissuade corrupt officials from stealing, evading taxes and mistreating the poor people living and working on their land. l) The quality of political leadership also needs to be improved.
Decreasing the incentives of holding a seat in senate or assembly can do this. For example, the discretionary power to give tax breaks could be taken away. The economy could be further decontrolled and privatized. The income tax forms for those in office and heir immediate family should be made public for their time in office so as to control corruption. In this way the politicians and their relatives, who control a lot of the agricultural and industrial sectors, would have a harder time evading taxes and mistreating their labor.
m) The government also needs to stop focussing on debt servicing which is obviously impossible at this point, and start focussing on getting the debt either absolved or completely restructured with equitable interest rates. Money saved from the reduction of the annual spending on debt servicing could then be used for financing re-prioritized infrastructure related developmental programs. Primarily focussing on deprived areas, particularly in the smaller provinces, and for financing human development programs and social safety nets for the less privileged segments of the population, the country could provide its present lower class with an option that they have not had before. This is the option to improve their lot through hard work and with the opportunity to break free of the controlling feudal system. After all, capital is not such a major constraint if there is an educated labor force that can deploy the existing capital productively.
The major setback to growth is the lack of human capital that can absorb technology and the experiences of other countries to leapfrog a number of developmental stages Which is what Pakistan needs to do to undo the damage done by the colonists. It is people that make the biggest difference, not the capital hat they are using, since assets are just a means to an end. On the other hand, expanding good-quality education can create islands of skill wherein important skills in various key disciplines can be developed so as to push up the growth rate. To support this, I believe that all investments in, and incomes from education should be exempt from taxation. Furthermore, money saved from debt-servicing could be used for public sector investments in agriculture to enhance yields per acre in essential food production, thereby placing a constraint on the drain of foreign exchange being used to purchase imports of agricultural commodities like wheat and edible oils. This would make these vital food products cheaper and more accessible to the poorer citizens going some way to reducing hunger.
As wheat and ghee, (a local edible oil), are major mainstays of the local diet, they should be made completely tax-free and subsidized, so as to further cheapen their prices. I feel that this would go along way towards lightening the burden on the poor. Investments in agriculture are also critical as it continues to be the mainstay of the economy and provides a livelihood for a large majority of the population. It can also play a strong role in supporting small-scale industry and in checking rural-urban migration. If the military decides to impose these policies, or policies similar to these, Pakistan may have a hope of avoiding what appears to be an inevitable crash of its economy. The situation of the poor and under privileged could also be alleviated eventually as long as the government decides to start spending money on developing an infrastructure that can help feed the hungry by providing them with jobs. Nevertheless, there are no easy options left.
Only the painful ones remain. It is, however, important that the pain of reform be distributed equitably, and not born largely by the poorer classes, as is very often the case. There are tough times ahead. Unfortunately, there is little evidence that the Pakistani ruling elite is aware of the gravity of the situation; or that it has what it will take to steer the country out of its mess.