November 14 , 2008

Pakistan’s Fiscal Management Gone awry

 

Like a spendthrift mendicant, the present government of Pakistan has decided to add some forty new members to the 15-member Cabinet with the possibility of some more portfolios being offered to MQM and JUI, both members of the coalition. And, on the heels of this huge expansion came the announcement that the Cabinet had decided, on November 5, to reinstate some 6,000 officials who had been inducted into official or semi-official setups during Benazir’s second stint and who had been shown the door on her own dismissal on ground of corruption. 

The exact cost of the reinstatements has to be worked out by a Cabinet Committee set up for the purpose, but the Federal Information Minister, Sherry Rehman, briefing the media on the Cabinet decision said that their seniority would be restored and billions of rupees would be paid to them as back pay for the entire period since they were removed from service! Then, there will be the running expenditure on maintaining them on the pay rolls in addition to the functionaries who might have been recruited to replace them.

While the current year’s budget (July 1, 08-June 30.09) made provision for payments to the reinstated judges, no such provision was made for these 6,000 sacked employees.  It has to be a supplementary grant and a deficit financing that would add further to the inflationary pressure.

Mr. Shaukat Tareen, the Financial Adviser (minister) told Reuters on November 7 that Pakistan needed $3.5 billion to $4.5 billion quickly to fill the financing gap. Over the next two years, it would need $10-$15 billion to avoid a balance of payments crisis. 

The total foreign exchange reserves held by the country have fallen from a high of $16.5 billion in October 2007 to $6.76 billion on Nov. 1, 2008. Even of this amount, the State Bank held $3.53 billion while the rest was with commercial banks.  Standard & Poor and other international agencies have already downgraded the ratings of Pakistan for creditworthiness. The country has ceased to be an attractive destination for foreign investors. Many have withdrawn their investments and there is a general flight of capital. That is the grim reality on the ground.

On the other hand, Mr. Asif Ali Zardari, Pakistan’s President, said in an interview with a prestigious US daily that he expected the Western world to offer $100 billion to Pakistan to bail it out of its fiscal crisis. That is self-delusion gone totally haywire!

He returned empty-handed but with lots of good wishes from his informal visits to Britain and the US. They were themselves going through a financial crisis next in magnitude to the Great Depression. But, he did bring back memories of his pleasant encounter with the “gorgeous” Sara Palin, the Republican Vice-Presidential candidate. 

He then made his first official visit to Pakistan’s “all-weather friend”, China which, as usual, offered project aid but no cash credit, despite its $1.8 trillion reserves.

His next visit was to Saudi Arabia, and his media managers held out much hope of the royal family providing the much-needed financial crutches to his administration. That has not happened but his team members reported that the Saudi government appeared willing to meet the oil needs of Pakistan on deferred payment basis. The Saudis are still working out the details. Pakistan meets 82% of its total oil imports by Saudi oil.

A closer look at the decision concerning the reinstatement of as many as 6,000 sacked employees, reveals that the decision is totally subjective and partisan. It had no national or administrative compulsion. And, it is specific to the PPP workers placed on public payrolls between Nov. 1993 to Nov. 1996 and sacked during Nov.1996 to December 1998. The objective was, and continues to be, to reward PPP activists for their services to the party irrespective of their being qualified or not for the slots they were plugged into.

The decision to reinstate the thousands of PPP ‘jialas’ is no cause celebre for the nation or even for the bureaucracy. In an editorial on the subject, Dawn of November 7 has pointed out how various regimes, beginning with that of Ayub Khan, had removed officials reluctant to follow the line of the new ruler. It commented: “The cumulative effect of five decades of tinkering with the bureaucracy is now visible in the marked decline in its efficiency, continued corruption and a feeling of insecurity even among the efficient and the honest.”

Z. A. Bhutto hamstrung the bureaucracy by deleting the constitutional guarantees to civil servants in his Constitution of 1973. These guarantees provided the civil servants the security of service they craved and had remained a part of all earlier constitutions. That enabled them to audaciously serve the country instead of being cowed down by politicians with hidden personal or group agendas.  With the promulgation of the 1973 Constitution and the removal of the chapter on Services, the civil servants felt themselves to be totally at the whim of their political bosses. For survival they turned into sycophants and/or sought security in pelf through corruption. The “steel-frame” left behind by the British had become a pliant Plasticine frame – its form and shape were there, but its strength and spirit had gone.

Gen. Zia started giving liberally extensions in service to senior officers on the verge of retirement. That ensured the subservience of such officers to Gen. Ziaul Haq’s pleasure; but it also ensured the end of their self-respect and dignity.

As for the immediate and long-term foreign exchange requirements of the country, a reliance on the IMF appears inevitable.  By the time this column appears in print, Pakistan would have already made a formal request to the IMF. The media din against the terms and conditions likely to be imposed by the IMF is perhaps based on a misunderstanding.  The IMF wants to ensure that the economy remains progressive and productive with the recipient of its aid falling in line with the march of globalization. Above all, it should be in a position to pay back the loans. Often it insists on a cut-down of unproductive expenditure in both the defense and civil sectors. That militates against the partisan agenda of an elected government. For it has to keep an eye on the expectations of the electorate and carry out its commitments to the masses. The decision to reinstate 6,000 sacked employees is a glaring example of what is likely to go against the grain of the IMF and a scientific approach to the country’s economic and financial issues.

The cabinet decision was perhaps calculated to become a fait accompli before a request was made to the IMF. The installation of a juggernaut cabinet and the reinstatement of thousands of sacked employees are thoroughly wrong steps from the point of view of the country’s economy that has been fast winding down.

                      arifhussaini@hotmail.com