Gasping For Some More Gas

Weave an image of a General who can deal with frigates, fiscal deficit and foreign direct investment with equal panache. That's Pervez Musharraf who, while continuing to be a thorn in India's side, is equally at ease being the chief financial officer of Pakistan. Economic renaissance is fast emerging as the leitmotif of Musharraf's rule. Beset by a rising debt burden, poor tax base, and dependence on official donors for more than a decade now, the new president, with ample support from the imf, is trying hard to beat the bad times.

Unfortunately, his economic elixir coexists with his firm belief that Kashmir must stay a burning debate, without realising the negative impact of the proxy war on Pakistan—in its rising defence spending and domestic debt—and other nations, many of which are its life-support.

In its December 2000 report on Pakistan, the sovereign rating agency, Standard & Poor's (s&p), London, categorically says "... bilateral and multilateral financing flows have been disrupted by nuclear tests, a limited war with India, and a successful military coup. Additionally, the Pakistani government's ongoing support for the Taliban regime, its safe harbour for terrorist organisations, and its perpetration of violent acts within Indian territory all serve as irritants to its crucial official creditor relationships."

Analysts feel Musharraf must realise that post-Afghan war, global equations had changed irrevocably. Last year, even Clinton hinted that Washington's South Asia policy has now moved from the Cold War line of containing the Soviets to containing its ally-run-amok.

In fiscal health terms, the republic ranks among the worst. Says Sakib Sherani, chief economist at abn Amro Bank, Pakistan: "The massive debt burden (both domestic and external), or 'overhang', combined with a persistent decline in the gdp growth rate (6.7 per cent in the '80s to 2.6 per cent in fiscal 2000-01), has led to declining levels of investment. And reduced outlays on critical long-term expenditures and the poverty level in the '90s are most worrisome." Adding to the woes is the defence expenditure, which, currently at Pakistani Rs 131.6 billion, is a little more than that of the development spending (Pak Rs 130 billion). Today, defence and debt servicing together accounts for 61 per cent of the total government expenditure, bleeding the economy dry.

Ashok Bhatia, associate director of Sovereign Ratings in s&p and in-charge of Pakistan, sums up the situation perfectly. To him, if the Indian economy can be compared to a jumbo jet running on auto-pilot, "Pakistan is like a small plane without gas". A rampant resistance to taxation and a historically low national savings rate, averaging only 13 per cent of the gdp over the past three decades compared with India's 20 per cent, has only worsened the matter.

Simply put, Pakistan's woeful credit story is linked to politics. Its overwhelming reliance on imported savings and multilateral aid is decades old. And now, deep into a debt trap, strict fiscal management has become more than imperative. According to s&p estimates, 84 per cent of Pakistan debt is owed by the government, and out of that, 93 per cent is owed to the official creditors and hence geopolitical developments have a direct impact on the economy. Agrees New York-based Moody's Investors Service: "The country's medium- to longer-term debt payments capacity remains precarious due to the ongoing fiscal and external financial weaknesses that are exacerbated by profound political vulnerabilities."

As a result, Pakistan's economic history is coupled with the history of its governments and their tumultuous relationships with the bilateral and multilateral creditors. Remember, along with imf lending, in 2000-01, Pakistan received $1.2 billion in Paris Club (bilateral creditors) debt rescheduling. Musharraf is haggling for a three-year imf programme as a continuation of the present one, plus assistance from the Paris Club and in all cases, economic observers will tell you, the creditors are asking for peace with India.

But the proxy war has made the entire subcontinent a nuke bazaar. Add to this the spectre of the jehadis, running on drug money. The jehadi proteges—the Taliban—hobnob with Osama bin Laden, which, together with the heroin trade, makes Washington extremely wary of Pakistan. Even Iran is enraged over the assaults on the Shi'ites. The pressures, therefore, are mounting. Admits former Pakistani finance minister, formerly of the World Bank and currently ceo of Emerging Markets Partnership, Shahid Javed Burki: "The links with the fundamentalists are a liability". But he seeks Cold War allusions to add that "the US must also realise that Pakistan has been left holding the baby while the world washed its hands of it."

Recently, at the nomination hearings of South Asian officials of the Bush administration, Washington spilled the beans to say it wants Pakistan to deliver on nuclear and missile proliferation, terrorism and drugs. This is the precarious Catch-22 situation for the general—he digs his fiscal grave if he ignores the concerns of his present and potential benefactors. Points out Bhatia: "It's difficult to pinpoint direct political influence in the imf programme. But it's also possible that to justify political ends, economic means are used."

After Musharraf became the Chief Executive, he closed down the finance ministry for three days, rebuilt the economic team, and, on November 15, 1999, launched a successful Eurobond exchange offer prepared by the Nawaz Sharif administration. Sharif, by freezing the non-currency deposits a day after Chagai Hills, inflicted a permanent damage to the economy. Pakistan had always relied extensively on inward remittances from the diaspora and the freeze ended up as a "complete loss of faith". It was disastrous. Though Pakistan has more non-residents in numbers than India, in 2001, 'official' inward remittances to India was almost 10 times higher. Even now, the Pakistani government is forced to tap the hawala market to buy forex at a premium.

Musharraf's exchange programme, and agreements regularising close to a billion dollars of foreign currency loan arrears to commercial banks, ended the cycle of sovereign defaults set off in May 1998. After a year in which Pakistan made $325 million in net repayments to multilateral creditors, G7 sanctioned the new imf programme. Since then, Musharraf has been able to bring down the budget deficit, though at the cost of macro growth.

Pakistan's strong popular resistance to taxation is linked to a crisis of public services delivery. At about Rs 130 billion, development spending is a little less than defence spending in the 2000-2001 budget. And only $20 billion out of this is earmarked for special programmes. The result: population growth rate is unchecked at 2.3 per cent a year, infant mortality is still 95 out of 100, and female literacy is an abysmal 13 per cent.

Money is scarce. But arguably, the current regime is better-placed to enhance revenues.After a detailed 26-city survey, the tax net has been widened. There is an ongoing process to assign a National Taxpayer Number to all Pakistanis. Yet another initiative is the broadening of the general sales tax base. For the first time ever, the Central Board of Revenue receipts exceed Rs 400 billion. The general would go for growth, but for the severe shortage of capital.

So, Pakistan is zooming in on fdi—the safest and the most efficient form of overseas capital. But just like the governments, even Wall Street and portfolio managers take a cautious long-term perspective. Says Arindam Bhattacharjee, portfolio manager at the Emerging Markets Management: "We don't see a short-term economic relief... When the economic fundamentals are weak, people focus on politics and there the sentiment isn't good... Pakistan as a country call is negative." His company, for example, did pump in $50 million in Pakistan three years ago, but today the figure's blank. The weariness of the geopolitics has become an universal bother.

Internal political turmoil, lawlessness, incessant policy reversals, perceptions of a slothful bureaucracy, and inefficient legal system don't help either. Nor do the killings of US businessmen in Karachi. Says Bhatia: "Governments do not honour signed deals. While Bhutto signed the hubco ipp, it was rescinded by the Sharif regime."

For General Musharraf, the economy could be the ultimate wake-up call. There is a very real threat that if he continues the proxy war in Kashmir, eventually there may be only a few left to heed his call for yet another bailout.