Shaheed Zulfiqar Ali Bhutto

Mohtarma Benazir Bhutto

 Party Structure History Ariticles & Issues

CHAPTER 2 - THE ECONOMY

The Review of last Peoples Government's Economic Performance
  

The Peoples Government assumed power in October, 1993 at a time when the country, in the words of the then non partisan Caretaker Prime Minister, was at the verge of a financial collapse. To avert this possibility, the Caretaker Government had signed an extremely tough economic program with IMF which conditioned the economic policy of the new Government throughout its tenure. The Peoples Government accepted the program the principal in the larger national interest as otherwise the position of country's reserves was so perilously low, at less than $ 300 million, and a run on the foreign currency accounts would have resulted in bankruptcy of the country. However, the Peoples Party retained with itself the flexibility to implement the program in a manner which was least harmful or damaging to the people of Pakistan.

The Peoples Government's economic policy revolved around two main elements. First, restoration of country's macro-economic framework i.e. reduction in budget deficit, control of money supply, stabilization in balance of payments and stemming of inflationary pressures. Second, building of nation's highly debilitated physical infrastructure and human resource base which had emerged as the single most important factor limiting the growth potential of the economy. The restoration of macro framework was a prerequisite for revival of growth in the economy whereas acceleration in the rate of growth was only possible through a major program of expansion of physical infrastructure. Thus the two elements of economic policy were designed to lay a foundation of a major revival of economic activity in the country and to push the standard of living of the common man.

Notwithstanding inheriting a run down economy, the Peoples Government faced boldly the challenging task of macroeconomics stabilisation and structural reforms. The process made under the Peoples Government has to be viewed in the context of performance during the full three years of its tenure. In important sectors of the economy, there was significant progressive transformation, even though in some areas, the performance fell short of the ambitious targets that the Government had set for itself. These achievements, led according to the IMF report on Pakistan's economy for 1995/96 to a growth rate of over 6% and restoration of the rate of economic growth from the low point of 2.4% reached in 92-93 , reduction in inflation, massive increase in foreign investment, reduction in the trade gap, reduction in the debt as percentage of GDP and improvement in the balance of payments, a substantial reduction in fiscal deficits, implementation of basic reforms in tax structure, extension of sales tax, lowering of import tariff from 110% to 55% , first ever imposition of wealth tax on agriculture. There was impressive progress in enlarging the scope of the private sector and large scale and diverse program of privatization was successfully accomplished, along with deregulation of sanctioning procedures and prices. The substantial improvement in the external position succeeded in attracting a record inflow of foreign investment. During the three years of Peoples Government , there was accelerated investment both in infrastructure as well as grassroots projects in the social field and in population planning.

The Peoples Government undertook the enormous task of readjustment to a dramatically changed and worsened scenario of external resource availability. US aid had ceased after Soviet exit from Afghanistan, workers remittances have declined sharply, and donor assistance had stagnated. The country had then increasingly to rely on capital markets and foreign private investment. Consequently the Peoples Government designed innovative policies to attract private sector investment, both local and foreign, for the development of much needed infrastructure projects. The challenge before Pakistan, which the Peoples Government has been responding to, is that we must not flinch from taking essential and sometimes unpopular measures for sustaining the economy. However, these measures have to be implemented within a democratic framework, with sovereign legislatures, a free press and an independent judiciary.

Notwithstanding is successes, the performance of the economy in the last few months of the Peoples Government, came under severe pressure from the organised efforts of politically hostile groups, to sabotage the economy, as a means of ousting the Peoples Government, before the expiry of its lawful term. Apart from strikes and no tax campaigns, there was a mischievous effort to destroy the credibility of the Government (and the country) with foreign investors and international institutions. Despite the dislocation suffered by the economy, from the activities of these saboteurs, the Peoples Government was able to maintain adequate reserves, to meet international obligations and had, in fact concluded a new agreement with the IMF toward the end of October 96. The strategy of economic disruption having failed, the opponents and the Caretakers are already discovering the high price that the country has to pay for eroding external confidence in the country's integrity and its economy.


A. MAJOR ECONOMIC ACHIEVEMENTS 1993-96

  • Increased GDP growth rate from 2.4% per annum in 1993 to 6.1% per annum in 1996.

  • Reduced budget deficit from 9.5% of GDP to less than 6% of GDP and successfully negotiated waivers from IMF for faster deficit reductions. This allowed the Peoples Government to introduce far ranging social programmes in the health and education sectors, to provide employment to hundreds of thousands and to ensure that increases in utilities and other user prices are kept to a minimum. The target in 1996-97 was 4.7%;

  • Reduced non-development expenditure as a % of GDP allowing the Government to increase allocations to the social sectors;

  • Increased the education budget to 300 % above that in October 1993;

  • Increased the health budget by 65 % above that in October 1993;

  • Electrified 18,000 towns and villages at a rate five times that of the PML-N Government;

  • Provided gas connections to over 1.5 million consumers in cities, towns and villages;

  • Provided employment to hundreds of thousands of people;

  • Increased foreign exchange reserves to $2.4 billion in June 1996. When the Peoples Government was unconstitutionally removed on November 5, 1996, these foreign exchange reserves were still double those left by the PML-N Government;

  • Lowered tariffs to 55%;

  • Defence expenditure as a percentage of GDP declined;

  • Obtained firm contractual commitment of US$ 8 billion private investment in the fields of power, petroleum and chemicals with over US$ 3 billion being received in Pakistan from 1993;

  • Announced and implemented a Power Policy ending 15 years of load-shedding. An independent assessment made by a high level mission of international lending institution has indicated that Pakistan's energy sector policy has led to investment commitments of more than $ 6 billion which is more than the combined investment attracted by Eastern European countries since demise of the Soviet Union or by China in its energy sector in the same period. This is a clear testimony to the success of the policies adopted by the Peoples Government, which laid the foundation of a solid economic revival in the country;

  • Announced and implemented a Petroleum Policy which in 3 years from 1993 led to the signing of 50 agreements with national and international companies as against only three agreements in 1992-93 for the exploration for oil and gas in Pakistan involving investment of over $581 million. When the Peoples Government was removed an additional 29 agreements were pending signing involving direct risk investment of over $ 126 million in Pakistan;

  • Announced and started implementing Big City Packages costing Rs.150 billion;

  • Built 300,000 low cost residences for workers providing shelter to over 1 million people;

  • Carried out a successful privatization programme which was acknowledged worldwide as being fair and transparent. The Government even letters of appreciation as to the transparency of the process even from unsuccessful firms;

  • Reduced growth in money supply from an average of 20% during the period of PML-N Government to less than 15%;

  • Expanded the tax base through the introduction of General Sales Tax which led to an increase in tax receipts from Rs.160 billion to Rs. 267 billion, representing a positive increase in the tax to GDP ratio;

  • Imposed for the first time in country's history, agriculture wealth tax and pursuaded the provinces to levy agriculture income tax.

Notwithstanding the successes, areas where the Peoples Governments performance fell short of the target was the behavior of prices and the ratio of debt servicing. The unusually high monetary growth of the Nawaz regime continued to exert its influence on prices through lagged response. The international prices of some essential food items, such as edible oil also contributed to higher prices. However, as the latest IMF report on Pakistan's economy shows the rate of inflation had stabilized and had started to come down when the Peoples Government was dismissed. The recent increase in prices as a result of the Caretakers reckless decisions show that the Peoples Government acted as the dam against lender conditionalities. The debt servicing ratio increased due to the accumulation of past debt.

B. ECONOMIC AGENDA 1997-2002

  • The Peoples Government will complete its programmes disrupted by the dissolution and ensure that the nation reaps the benefits of those policies. The following will constitute the core elements of the Peoples Government economic policy:

  • Increase tax revenues by a vigorous pursuit of tax evaders and a search for undeclared assets abroad. The tax system will be streamlined and the number of tax payers increased. There will also be a vigorous pursuit of cases in the courts system where billions of rupees are held up;

  • Decrease tax rates levels thereby encouraging more people to pay taxes. The first reduction will be in the 1997 budget. This will include an increase in the base income of salaried and professionals exempted from tax to give them some relief from the vagaries of inflation;

  • Maintain a stable macro-economic framework by keeping a low budget deficit, a prudent expansion in money supply, equilibrium in balance of payments and stability in prices. In an economy that crucially depends on inflow of private foreign capital, a stable macro framework is a pre-condition to inspiring confidence among foreign investors to lead to more job creation and more growth;

  • Promote investment will be the key for achieving an accelerated rate of economic growth. Policies along the lines of energy and petroleum policies will be designed for sectors, like communications, highways, ports and shipping etc. and those sectors using indigenous resources;

  • Promote the acceleration of oil and gas exploration to ensure mamimisation of indigenous energy resources;

  • Accelerate the process of deregulation. They key areas of reforms would include further liberalization of financial sector giving greater autonomy to banks and other financial institutions before and after privatization in their operations, greater role of market forces in determination of exchange rates, removal of restrictions on the operations of capital markets and mobilization of resources, greater and easier access of private sector to foreign exchange resources;

  • The process of privatization will be accelerated by early disposal of those infrastructure units where the financial advisors have completed their work. The role of capital markets in the process will be enhanced by placing significant portions of these shares in the capital markets;

  • Grass root changes in banks and financial institutions will be instituted. Except for National Bank of Pakistan all banks will be privatised, with full security of employment to employees;

  • An infrastructure development bank will be established as part of the public-private partnership. The bank would be devoted will be majority owned by the public sector for financing the infrastructure projects;

  • An export development bank will be established which would be devoted for the financing exportables from Pakistan. The resources for the bank would be met from the export financing scheme of the SBP and diversion of resources from other uses which would be significantly curtailed after the privatization of DFIs;

  • Recovery of stuck up financial resources shall receive top priority. Advances and any rescheduling shall be closely monitored to ensure against abuse;

  • Service perks of government servants will be gradually discontinued and replaced with higher cash in hand emoluments.

  • The Peoples Government also plans to initiate some new revolutionary economic programs in the country. Salient features of these programs are given below:-

Social Safety Net

  • Poverty alleviation and welfare of the most vulnerable segments of population will be accorded top priority in the new economic program of the Peoples Government. The resources of Zakat, Ushr, Baitul Maal, Old Age Benefit Scheme and other welfare oriented sources would be extended and the coverage of population significantly expanded. The coverage of pension would be expanded to almost all workers. The international donor agencies would be approached to support the social safety net programs of the Government in view of the structural reforms being undertaken by the country. Examples of such support and their success in insulating the poor from the adverse effects of structural adjustments is now well known.

  • As part of this programme the Peoples Government will provide large number of 60 sq.m. area plots for housing. The owners can collectively take up development on the OPP or Khuda Basti models. The idea is to effectively eliminate the land-grabber, on which the poor have to depend on their housing needs. "A plot for every family " is the ultimate objective

Debt Crisis and its Solution

  • The most important economic problem facing the nation is the staggering public debt which has reached a figure of Rs.1,400 billion at the end of 1995-96. Fiscal, monetary and exchange rate policies are now a hostage to this pivotal problem of the economic management. An increasingly high proportion of current expenditure is devoted to the debt-servicing both domestic and foreign. In the budget 1996-97 almost Rs.200 billion would be spent under this head, whereas the interest payments alone have surpassed defence spending.

  • The debt crisis is the legacy of martial law regime which, having squandered foreign aid and failed to impose taxes at the right moment and ruthlessly borrowed to perpetuate its unconstitutional rule. Subsequent Governments did not have enough courage to face the problem and added their bit to the accentuation of the problem. The last Peoples Government took the radical step of using the privatization proceeds for retirement of public debt.

  • The Peoples Government undertakes to frontally attack the problem of public debt management through the following elements:

  • all proceeds from privatization of public sector units, especially infrastructure projects, will be used exclusively for the retirement of public debt;
  • internationally all accepted methods of debt retirement, such as debt-equity swaps, debt conversation, debt sell-off and transfer etc. would be allowed for early disposal of public assets and consequent retirement of debt;
  • depending on the circumstances, the Government would not hesitate in requiring its creditors, both local and foreign, to enter in negotiation for debt rescheduling and restructuring with a view to seeking relief from mounting and unbearable debt servicing burden; such occasionals have occurred in the case of other developing countries who have successively re-negotiated their debt;
  • a policy will be adopted to gradually liberalize the capital account of the balance of payment, thereby passing on the exchange liabilities to the private sector;
  • public sector investments will be primarily restricted in social sectors or such economic sectors where commercial yields are marginal but have large social returns. This would release borrowing pressures on the Government;
  • budget deficit would be cut basically by cutting non-development expenditure and effecting savings in implementation of development schemes.

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