Spearhead Analysis – 16.03.2018
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
In a scathing write-up on the challenges facing the Pakistan economy, Dr. Ashfaque H. Khan has summed up the economic state of affairs of Pakistan. The situation can at best be described as gloomy and at worst as disastrous. It is, however, an objective assessment from an economic standpoint and one that needs to be considered seriously by the present and aspiring politicians as well as the Military, as it poses serious risks to the national security of Pakistan. Given the geo-political developments in the region, the deteriorated relationship with USA, and the impending inclusion of Pakistan on the Financial Action Task Force (FATF) Watch List by June 2018, the situation is all the more worrisome.
With just over three months left for the present government to complete its five-year tenure, the emphasis seems to be on wiling away the time and passing the buck on to the interim set-up and then the newly elected government. The architect of financial destruction, who has brought the country to such a low level is now residing abroad and has been declared an absconder by the Courts. It’s a pity that such men are allowed to wreak havoc on a system and then disappear, and re-appear for people have very short-term memories. According to media reports the Army Chief in a background briefing to the media has called him a ‘disaster for the country’.
There is no denying that in 2013 the PML-N government inherited a poorly performing economy, but they had enormous opportunities to revitalise it had they been sincere in their efforts to improve the condition of Pakistan and its people. Unfortunately, for the government the priority sectors were the high profile low utility projects. As a result, we witnessed a mushroom growth of Metros, Buses, Roads, Bridges and Underpasses, instead of Hospitals, Schools, Universities, Water conservation, and Population control. In the process the rapidly growing population continues to experience poor conditions and the state appears to be turning increasingly lawless and chaotic. Weak governance structures, myopic vision, hubris, and institutional confrontation has deteriorated the state of Pakistan.
The challenges highlighted by Dr. Ashfaque include:
- Stagnant / declining investment (both domestic and foreign),
- Slower economic growth and rising unemployment among the youth,
- Growing income inequality,
- Rising illiteracy,
- Declining school enrolment and health-care facilities,
- Unprecedented rise in corruption.
- Large fiscal and current deficits,
- Unsustainable rise in public and external debts,
- Unpaid bills amounting to over Rs.2.5 Trillion parked out of the budget,
- Ill-thought NFC Award,
- Unattended power sector issues,
- Widened gap between public and private sector,
- Slow progress on CPEC and the Financial Action Task Force (FATF) issues.
The greatest and the most immediate challenge for the new government would be to prevent insolvency and protect the country’s balance of payments that is expected to be the legacy of the present government:
- Foreign exchange reserves of around US$6 Billion (same as in 2013)
- External debt and liabilities close to US$100 Billion.
In its latest report the IMF has stated that it expects fiscal deficit to be at 5.5 per cent, current account deficit at 4.8 per cent and GDP growth at 5.8 per cent. It states that “risks to Pakistan’s medium-term capacity to repay the fund have increased”. Are we then going to go back to the IMF for another bail-out package? This is what the PML(N) government did in 2013 and in the process none of the required reforms were undertaken, once the loan amount had been received.
In the face of such daunting issues, the new government has a Herculean task facing it, and setting the course right would require hard decisions and hard times. Neither the politicians, nor the people of Pakistan appear to be ready for sacrifices. The recent FATF threat seems to be all but forgotten as the deadline draws closer. No efforts are being made to find alternatives or improve the situation. Instead of allaying the fears expressed in the FATF meeting, the government appears to be considering an Amnesty Scheme to bring in undisclosed funds into Pakistan, with a no-questions-asked policy and at a low tax rate. This is exactly the type of behavior that comes under the global ambit of Money Laundering. Amid somewhat confirmed rumours about the scheme, Senator Raza Rabbani stated that, “This is a matter of grave concern and will be opposed in parliament……are a license for big businessmen to commit illegal acts and then get the opportunity to legalise their ill-gotten wealth”.
It is a fact that the PML-N government is again reacting on an ad-hoc basis with a knee jerk reaction to improve its fiscal deficits and declining reserves. Having exhausted all opportunities in the past to improve fiscal discipline and revenue generation, the government is again employing easy way out tactics to ease their exit on a high note and in the process garner votes at the expense of the future of Pakistan.
The fact is that the government is planning to introduce the Amnesty Scheme before the implementation of the FATF Watch List to try and maximize the benefits, instead of coming up with viable alternatives to enhance revenues through implementation of an objective and broad-based taxation policy. The government in their exuberance is expecting Billions of undisclosed dollars to pour into the country to buffer the reserves and help meet the rising deficits. How this will improve the Balance of Payments is anyone’s guess. Miftah Ismail has confirmed that “in order to make the amnesty successful it would have immunity under other prevailing laws like anti-money laundering laws”. The scheme is likely to be announced in March.
In stark contrast of the Government’s claims of a no-questions-asked policy, the eminent National Accountability Bureau (NAB) Sindh stated that in the case of any illegal money whitened under any amnesty scheme, NAB has right to investigate the source if it is suspected that the source was illegal. This assertion by NAB is in direct contravention of the aims of the proposed Amnesty Scheme. There is the additional threat, that the government would be out of office by June 2018, and the ‘hapless’ people who do bring in their funds under the Amnesty Scheme would be left at the mercy of the incoming government, which could be forced to enforce new legislation to investigate the source of funds, especially in view of the inclusion on the FATF watch list and pressure from multi-lateral agencies, if Pakistan is forced to approach them for additional lending to avoid insolvency. As in the past the government has come up with an ill-thought out and ill-conceived policy, where the other institutions are not fully on board. Credibility of policies and reforms is paramount, and with constantly oscillating policies in the past that credibility has unfortunately been severely eroded.