By: Qazi Hussain Ahmed
Ameer, Jamaat-e-Islami Pakistan

The Prime Minister, while talking to newsmen in Islamabad on July 11 1998, has singled out the sanctions imposed by G-8 countries as the primary cause behind the current economic turmoil. He said the nation had to pay a price for its decision to go nuclear. However, that decision has earned her independence, dignity and honor, which are priceless. The Finance Minister echoed similar sentiments when he said the present difficulties were a direct outcome of the sanctions, and the country will survive if only half the money due from IMF was made available.

Such utterances are belated attempt to deflect people’s attention from the hard facts of economic mismanagement so widely practiced during the last decade, particularly in the last 18 months. The crisis in hand, billed as the outcome of the nuclear testing, has not evolved over night. Country’s economy has been running on artificial respiratory system for several years now. What is, however, ironic is that it is not the so-called international donors community that has discontinued the respiration supplies: a series of missteps committed in the wake of nuclear blasts, have grievously eroded the confidence of the market.

Anatomy of the Crisis

The foundations of the current crisis were laid by the previous Government of Mr. Nawaz Sharif when in April 1991, to ease the pressure from the Pressler Amendment restrictions, it allowed resident Pakistanis to open and maintain foreign currency accounts (FCAs), and floated a number of other expensive schemes for mobilization of foreign exchange resources. Through a crafty method, which required surrender of dollars to Government on the guarantee of exchange risk cover at nominal fee – which was significantly below the rate of devaluation – FCAs also became direct borrowings of the Government. Simultaneously, the Government also began contracting short and medium term commercial debt at high interest rates not only from foreign banks but also from international market, which were previously taboo in official finances.

The Benazir Government followed the tracks and did nothing to reverse this policy. Indeed, it was during her Government that still newer methods of short-term expensive borrowings were invented. The country heard for the first time that such precious resources as the earnings of PTC and PIA were to be pledged for seeking more loans. It was also during her tenure that for two consecutive years, 1995 and 1996, there was a run on foreign currency accounts, and the default was saved only after the IMF agreed to avert it and the country accepted tougher conditionalities.

The Second Nawaz Government has only added fuel to the fire. Far from breaking it the begging bowl was laid wide. It was seeking foreign loans even on the pledge of remittances. To appease IMF and obtain its funding, it massively reduced tariffs and gave huge concessions to big businesses, all in the grab of economic revival. A year later in 1997-98, rather than getting more revenues, it could barely collect as much as collected in 1996-97, which was the worst year of economic performance in country’s history.

At the end of June 1998, the total deposits under the FCAs were estimated at more than $ 12 billion, of which about 70% ($8.4 billion) were those of the residents, all mobilized between the period 1991 to June 1998, i.e. in just seven years. This means the Government has been using more than a $ 1 billion of residents’ deposits alone for meeting its foreign currency requirements. On the other hand, except for a brief period in 1994-95, at no point in time, the reserves of the country have risen above $2 billion (mostly hovering around $1 billion), indicating that the government has been using these deposits with out caring as to how it would meet a sudden in demand for withdrawals.

Besides the FCAs, there are obligations in the form of short term commercial debt and other foreign currency denominated bonds, such as FCBCs, DBCs and FEBCs. By the end of June 1998, these obligations are estimated at around $7 billion. Then there is the official long term debt owed to donor countries and multilateral agencies which is estimated by the end of June 1998 at about $25 billion. This is the debt, which was traditionally contracted by Pakistan until 1990. If we exclude FCAs for a moment, our debt come to $32 billion, of which the short-term debt is more than 20%, all added in the last 7 years.

The comparison becomes far more alarming when the FCAs liabilities are also added. The total short term debt then is nearly 42% of total debt, or 72% of long term debt. Finally, let us point out that the long term official debt in June 1990 was merely $ 15 billion and outstanding amount in FCAs (which were restricted until then to non-residents only) was only $2 billion. Thus is the last 8 years, the Government of Nawaz-Benazir combine have piled up additional foreign liabilities of $26 billion, averaging more than $3 billion annually. In 8 years they have added significantly more to country’s indebtedness than in the first 42 years.

The first Government of Nawaz and the second Government of Benazir were sacked on the ground that they had brought the country at the brink of default. Mr. Moeen Qureishi, in his address at the floor of the Senate, gave details of how the Nawaz Government had pushed the country towards bankruptcy by undertaking such economically unlivable schemes like the yellow cabs and the motorways. Similarly, Farooq Leghari also feared bankruptcy before he sacked the Benazir Government. Evidently, even at those occasions, the possibility of default was so real that they justified removal of the Government.

There has been no improvement since then. The SBP report of 1996-97 has clearly pointed out that short-term expensive loans are contracted to retire official loans, which were contracted, on extremely low cost. The present Finance Minster has no qualms when he pleads that Pakistan needs G-8 assistance only to repay their loans. He fails to notice that these very words contain the true state of Pakistan’s economy: it is already broke pending, at best, a formal announcement.

Nuclear Tests

Evidently, the economy was fast heading toward a breakdown. In our view, a window of opportunity was opened by country’s decisions to go nuclear. The nation solidly stood behind the Government and was prepared to make whatever sacrifices required to face the challenges the retaliatory response of the big powers would have posed. There was never a doubt in anybody’s mind that this act of ‘defiance’ will not be met with kindness. The nation’s resolved to test fully factored in the costs it had to incur for this act.

What the nation, however, did not expect was that the Government would rob it of its fundamental rights and foreign currency accounts in the grab of emergency. The euphoria of testing hardly lasted the night of the testing, as the nation woke up to discover that it was stripped of its precious political rights and life-time savings. This was followed by a series of confidence-shattering decisions – a budget that did not take into consideration that impact of impending sanctions, withdrawal of immunity on FCAs, a hoax call for defreezing of FCAs, mishandling of IPPs, panicky response to the threat of default, curbs on imports etc. – that sent the stock market into tailspin, wiping out nearly 30% of its capitalization, and forced the rupee to lose more ground in a month than it lost in the last 5 years.

Thus the opportunity, which had led some Cabinet Ministers to claim that Pakistan’s tests were uniting and India’s were divisive, was squandered mercilessly. The extremely short-lived euphoria has yielded to a state of despair. The national mood is despondent, it sees no light at the end of long and dark tunnel of Government’s follies.

The donor countries also believe that the crisis was not a result of nuclear testing. A State Department Spokesman, denying the rumors that the US was working on a bail out plan for Pakistan, remarked that the present crisis in Pakistan was not a result of suspension of G-8 funding, which in the first place did not go into effect for another 6 months. Rather, it was the result of polices pursued over the 18 months.

Loss of Confidence

Is there a way out of this morass? Can the Government steer the country from the brink of a financial collapse? These and similar questions are agitating the minds of every Pakistani. In our view, there are ways to retrieve the situation or at least to minimize the adverse consequences being felt and are likely to be faced in future. But the present Government would not be able to see us through this crisis. This is a considered view, based on the premise that the Government has lost the confidence of the market.

Indeed, the most pressing problem facing the country is the loss of confidence on Government’s ability to mange its economic affairs. Almost every single Government move on the economic front since its decision to go nuclear has acted as a bane for economic activities. This is not to suggest that each one of these decisions was bad. Only, that the market no longer trusts Government’s word, and is more likely to misperceived its moves than to see tem in their true perspective.

To be precise, the normal signaling mechanism between the Government and the market has broken. It is hard to find a method, which can repair and revive this mechanism. Confidence is not a tangible asset. It belongs to the realm of perceptions, formed over a long period of time and tested on the touchstone of predictability of actions and credibility of commitments. For 50 long years, despite earning a horrendous reputation in running the administration of the state, the successive Governments had somehow preserved the state’s reputation of fulfilling its financial obligations. That reputation has been remorselessly destroyed by the decision to freeze foreign currency accounts. And as is true of all matters of reputation and trust, it is not required that the breach be repeated several time before the confidence is lost. A single event may suffice.

Unfortunately, this is exactly what has happened with Pakistan. There is no hope that this Government would be able to retrieve the country from the economic morass in which its policies have led it. The only honorable way for the Government, which also precludes the possibility of complete chaos in the economy, would be to resign and let a new set of people manage the economy and restore the market confidence.

Indeed, Benazir and Nawaz Sharif have taken turns in bringing the country to the present state of economic collapse. There has been absolutely no difference in the economic management of the two governments. Both relied on foreign loans, indiscriminate privatization and depended heavily on the support and assistance of IMF /World Bank, which authored all major policy initiatives during this period. Their priorities were highly misplaced, such as yellow cabs, motorways, in the case of the NS, and excessive reliance on private power, in the case of BB. Besides enriching themselves, both promoted crony capitalism at the expense of the State.

Corruption, nepotism and politicization of economic decisions have been the distinguishing features of their rule. Both would be quick to ask sacrifices from the poor of the country, while they maintain a life of extravagance and profligacy. The nation sees little differences whether the PM House builds a polo ground or a cricket stadium; whether the palaces are maintained in Surrey or in Raiwind. They have finally began to appreciate what we have been calling for the last five years: Nawaz and Benazir are the two sides of the same coin.

We have no hesitation to suggest that the continuation of present Government may jeopardize its critical security interests as it seems keen to plead the super power to lift the sanctions. The manner in which the Government is holding talks on this subject as to what guarantees it may be willing to give to seek resumption of G-8’s funding. A weak and incompetent Government may be tempted to bargain country’s critical interests on CTBT, NPT, Nuclear Program and Kashmir.

New Leadership

The country needs a new leadership to pass through this crisis. It is not a crisis, which can be handled through technical fixing, although that is also critically required. More importantly, the country faces a crisis of governance: the loot and plunder committed by recent Governments have grievously damaged people’s trust on their leadership. The sacrifices required by the country cannot be asked for those whose conduct is significantly lacking in setting up a self-example.

The new leadership has to be honest, dedicated and competent to face and effectively steer the economy through the present crisis. The foremost problem of the economy is the restoration of people’s confidence and trust on the word of the Government. The new leadership must be seen and believed, from the outset, as someone, which has a verifiable record of credibility. The leadership must have deep and strong political roots among the people. It cannot comprise of people who are not politically grounded. Its ranks and cadres should be willing and able to dedicate themselves for campaigning to lift people’s morale and build their confidence on institutions of the State.

As we have clearly pointed out, the two political parties, PPP and PML(N), have proven beyond any doubt that despite having successive turns for one full decade, they are incapable to provide a clean and honest leadership to the people of Pakistan. The people are now looking toward Jamaat-e-Islami, for filling the void created by the crisis of leadership. Jamaat is the only organized political party, whose ranks are made up of highly dedicated, disciplined and motivated workers. Its leadership is known for its integrity, competency and hard work. Jamaat belongs to the people; it is neither a stooge in the hands of feudal lords nor an instrument of acquisition in the hand of industrialists. Its leadership lives a frugal life and its workers are drawn from poor and middle classes. The programme of Jamaat is focused on Islam, as it believes that it is only a reference to Allah that promises a true and lasting solution of our economic and social problems.

Jamaat has done considerable research in developing a response to the emerging crisis. In March 1997, on the eve of the inception of the Second Nawaz Government, the Institute of Policy Studies had carried out a detailed analysis of the external sector and warned the Government that it must accord top priority to managing the external debt crisis. It was pointed out that unless the explosive growth in debt was checked, by initiating a major reforms in fiscal management and drawing a programme of debt retirement, there was no hope that the impending financial collapse can be averted. On the contrary, the Government’s response was to design a scheme that borrowed an additional $250 million from the residents, that too in the name of "Prime Minister’s Debt Retirement Programme (Qaiz Utaro Mulk Sanwaro). Since then, the Government has been using rhetoric as a substitute of substantive policy initiative.

In 1991, when we were part of the IJI Government, Mr. Nawaz Sharif constituted a Committee on Self Reliance which was headed by Senator Khurshid Ahmad and comprised, among others, Qazi Aleemullah, the then Finance Secretary, Dr. Arshad Zaman, then Chief Economist/Special Secretary Planning Commission and Mr. Shaukat Mirza, then Chairman, Exxon Pakistan. The report had identified the Government’s excessive borrowings as the primary source of country’s dependence both externally and internally and developed a programme of self reliance that revolved around introducing reforms that would have restored Government’s solvency and transferred the burden of economic development on the private sector.

We support the slogan of self-reliance so profusely uttered presently in all Government circles. However, we are of the considered view that neither the Prime Minister nor his Cabinet colleagues have the slightest idea as to what it really means. The true meaning – which calls for living a life that does not coerce you to accept the demands of your creditors – is contained in the Report of the very Committee which was constituted by Mr. Nawaz Sharif himself. That report continues to gather dust since its submission in April 1991. Ironically, it was the same time, when in blatant disregard of the recommendations of the Committee, Government devised still newer methods of borrowing foreign resources, when the real need was to use the occasion of suspension of US assistance to effect a fundamental reform in country’s economic management.

The crisis is a clear manifestation of the fact that interest-based system, sooner or later, will bring misery on poorer nations. The Prime Minister, in his national-wide address on 31 March 1997, had noted that the country would not prosper so long as it continues to wage the war with Allah and His Messenger, which is being going on through the institution of Riba. He pledged that he would end this war and appointed Senator Raja Zafar-ul-Haq as the Chairman of the Commission for Islamisation of Economy to prepare a report for the elimination of interest at the earliest. The Commission submitted its report in August 1997. To this day the Government has not initiated any action on this report. This is not surprising, in view of the fact that the rulers have deluded themselves by assuming that promises are never made to fulfill.

The Report on elimination of Riba has developed a comprehensive strategy for removing interest not just from the banking system but from the Government finances as well. Indeed, it is the Government, which is the root cause of promoting usurious behavior in the country. It sucks more credit annually than the rest of the economy. What is worse, unlike the business, which borrows to create productive assets, Governments, borrowings are largely for consumption, as it now meets even its salary bills from borrowings. No scheme of fiscal restructuring would promise to lay the foundation of a solvent State unless it significantly curtails Government’s borrowing powers and no scheme of resolving the incipient financial turmoil will succeed unless it seeks significant concessions from existing debt servicing obligations and reorient the basis of such obligations, away from interest and toward Islamic methods of financing.

Based on the last year’s performance, our current account deficit is not more than $2 billion. Even if we were to assume that sanctions will create a gap of this amount – although Finance Minister believes there is a gap of only $1.5 billion – there is absolutely no need to panic. This gap would have been easily filled by surge in remittances and other support from expatriate Pakistanis if their confidence was not shattered by the decision to freeze foreign currency accounts. This view is supported by the fact that turmoil has begun even before the actual impact of sanctions. The reason is the complete drying of home remittances and flows in the foreign currency accounts. Hence, the crisis may well have been contributed by the anticipated sanctions, but it has been triggered by cold reaction from expatriate community to the negative measures adopted during the night of the nuclear tests. Then, despite unequivocal assurances to the contrary, Government announced devaluation of rupee, further eroding its credibility with those who represented critical hope under the new circumstances.

More importantly, a cut in imports of this size would not lead to unbearable miseries nor would it create the turmoil witnessed in the last few days. This cut can easily be accomplished through curtailment of non-essential imports, such as luxury cars, whose imports, ironically, have been made cheaper in the current budget.

Finally, let us point out that the poor of this country is in need of major concessions and relief, The successive Governments have neglected the welfare of the poor, particularly during the last decade. The main plank of Jamaat’s economic programme will be a broad – based package of relief to the poor, most notably in the prices of wheat and electricity. The resources for this programme will be raised from cutting the massive wastage that goes on in economic management of the country.

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