A ray of hope amidst gloom
Mohammad Jamil


The Supreme Court has restrained the Balochistan government from granting the mining lease at Reko Diq to any mining company till the final decision of this case. Reko Diq’s proven gold and copper reserves are worth $ 260 billion, while the estimated reserves are to the tune of $ 3 trillion. Amidst news of rampant corruption, challenges of fiscal and trade deficits, there is a ray of hope in the light of news that precious gold reserves explorations in Reko Diq project in the province of Balochistan could help pay back foreign loans and ensure a prosperous future as well.

Dr. Samar Mubarkmand’s resolve to help Pakistan fully develop the gold mines using indigenous technical capacity and trained manpower is indeed encouraging, and has injected a new sense of hope and optimism in the nation. Member Science and Technology of the Planning Commission and Chairman of the National Engineering and Scientific Commission Dr Samar Mubarakmand has submitted in the Supreme Court that Pakistan is self-sufficient and does not need foreign help to develop the Reko Diq mines. However, the government should formulate monetary and fiscal policies to revive the economy, which will result in increasing revenues and employment opportunities.

Governments throughout the world formulate fiscal and monetary policies to achieve robust economic growth, stabilize the economy, collect targeted revenue for meeting to meet non-development and development expenditure, and to generate employment opportunities. In Pakistan, the governments of different shades did go through the rituals of making monetary and fiscal policies, but mostly failed to achieve the desired objectives. The State Bank of Pakistan has decided to maintain the existing discount rate of 14 per cent, whereas other countries have reduced interest rates after financial meltdown and recession to revive their economies. But Pakistan is obliged to increase electricity and gas tariff to meet the conditionalities of the IMF to the detriment of trade and industry and the people at large. Unusually high bank interest and frequent hikes in the prices of utilities is producing a cumulative effect on general price level and the cost of production, thus making Pakistani products uncompetitive in the international market. Our economic managers do not realize that it is cost-push inflation in contrast to demand-pull inflation; yet they increase interest rate to increase cost of production.

The finance ministry has warned the government that the foreign exchange reserves, currently at the highest level, will start dwindling when the repayment of the International Monetary Fund’s loan begins next fiscal year. The ministry in its debt policy statement 2010/11, released late last month, said that Pakistan’s foreign exchange reserves saw an increase of $4 billion to reach $16.9 billion by the end of FY2010. But there is nothing to write home about, as foreign exchange reserves have increased due to the IMF’s support for balance of payments, but at the same time it will create problems in debt-servicing next year when Pakistan will start paying installments and of course interest. The IMF in November, 2008 had approved a $7.6 billion standby arrangement for Pakistan to stabilise the country’s economy; and later the loan was increased to $11.3 billion in August, 2009. But instead of increasing the debt, the government should take measures to strengthen the corporate sector, which will result in increased production, more revenue to the government, and exports to bridge the gap between imports and exports. It will also reduce the prices of commodities in the local market. The government should assess the fiscal and monetary policies besides taking steps to bolster exports and foreign currency flows in order to reduce reliance on external financing, because IMF’s dictates and conditionalities are the sure recipe for disaster. The trade and industry has expressed concerns over the monetary policy, announced by the Governor State Bank of Pakistan. They said that it is the need of the hour to reduce and gradually bring the interest rate down to single-digit, but SBP has maintained the 14 percent bank rate without any justification. They further said that interest rate is highest in Pakistan as compared to the rest of the world, and the exporters have become uncompetitive in export market due to massive overheads. It has to be mentioned that even SBP Governor himself admitted that government could not achieve any monetary goal by increasing discount rate, yet he has failed to realise that highest bank rate prevailing in the country is resulting in a mass number of defaulters.

It has to be mentioned that if the total of foreign remittances by Pakistani expatriates and other foreign currency inflows vis-à-vis services and foreign direct investment services etc are less than the trade deficit figure then we have current account deficit; if they are more, then Pakistan has a favourable balance. In fact, once during Korean War and then during 1973 during oil crisis, Pakistan had a favourable balance of trade and favourable current account balance. However, all governments in the past had focused on export of textiles, and since the time Pakistani expatriates started sending remittances the governments seemed relaxed and no serious effort was made to increase the non-traditional exports to non-traditional markets. In the past, the sluggish growth of exports and foreign direct investment in Pakistan was compensated by the inflow of overseas Pakistanis’ remittances from mid-seventies till now. After 9/11 events, overseas Pakistanis started transferring their cash assets to Pakistan, and the average remittances went on increasing from $ 3 billion to $5 to annually, and recently have increased to $8 billion.

Anyhow, economic turnaround needs massive investment, which is major determinant of mechanism for employment generating and poverty alleviation. But the quantum of savings and investment are inadequate to meet the challenges of unemployment and poverty alleviation. The basic reason for Pakistan’s debt problems also arise from inadequate domestic savings, which compel Pakistan to borrow. As a result of insufficient savings, the investment level is not enough to provide jobs to the unemployed. Pakistan’s savings rate is 16 per cent of the GDP, which is the lowest ranked in Asia. And with rising inflation, the incomes of the middle income and lower income groups have eroded, which has adversely impacted savings. Whereas small savings are nuts and bolts of development, Pakistan needs massive investment to sustain the economic growth. For achieving seven per cent growth, investment level of 21 per cent of the GDP is required on the basis of Incremental Capital Output Ratio (ICOR) of 3 to 1. Since domestic savings are approximately 16 per cent of the GDP, Pakistan has to generate about 5 per cent direct foreign investment.

To address the trade deficit, the government will have to cut down on imports of luxury items such as cars, electronic gadgets and even mobile phones for the time being. The government is considering an increase in customs duty on import of luxury items and excise duty on locally produced goods. The decision of the government to reduce the size of the cabinet by half is appreciable. However, this measure is not enough to meet the challenges of fiscal and trade deficit, which is the cause of Pakistan’s debt mountain. The government must show zero-tolerance to corruption, reduce the prices of gas and electricity, lower the discount rate and should say ‘no’ to IMF because if it has to follow IMF’s policies then Pakistan would neither be able to increase its exports, nor would it be possible to give relief to the masses who are suffering from run-away inflation. The government functionaries must remember that policies should be business friendly, but at the same time they should ensure that there is no tax evasion. However, the leadership has to take the lead; it must ensure good governance and then expect from others that they pay due taxes.