Federal Finance Minister Shaukat Tarin chastised the economic managers of the Musharraf era for structural imbalances that, he maintained, continue to plague the economy after 22 months of the PPP-led government took over the reins of control.
Out of the two economic managers of yesteryear namely Shaukat Aziz, no longer a resident of this country and a man who has remained largely silent on attacks against his government's performance, and Salman Shah who continues to defend the policies of the Musharraf era in the media by claiming that the economy was performing considerably better in February 2008 as opposed to January 2010. So which one of these gentlemen is presenting an accurate picture?
Tarin has claimed that the Musharraf government's economic managers printed 1.3 trillion rupees, money that was not backed by an increase in productivity, leading to inflationary pressures. Few would challenge this figure for the simple reason that unlike inflation, the total currency in circulation is a quantifiable statistic released routinely by the State Bank of Pakistan and cannot be manipulated.
What he failed to mention was that even though his government tightened monetary policy yet it has failed to increase productivity due to a four-fold flawed production promotion policy, if indeed any production promotion policy is in place since March of 2008. These flaws are (i) continued failure to deal with the energy shortfall that has reduced output and led to high unemployment levels.
To argue that Tarin must be credited for forcing the Gilani government to undertake a third party audit of rental power projects which highlighted irregularities in contract awards thereby successfully stopping the Ministry of Water and Power from taking decisions that were patently non transparent and violative of the public procurement rules is unlikely to find several admirers for the simple reason that Tarin is a member of the Cabinet, which is collectively responsible for all decisions taken; (ii) a policy focusing on public sector led growth which, in the face of private sector reluctance to invest given the energy shortfall as well as the law and order issues, has been compromised because of the government's decision to slash 50 percent of Public Sector Development Programme to enable it to its meet its deficit target as agreed with the IMF; (iii) in spite of heavy engagement of the World Bank in reforming and rationalising the tariff structure, Tarin has been unsuccessful, like his predecessors, in formulating an equitable tax system defined as one where the source of income tax reflects the true stock of wealth in this country.
The bulk of this untaxed wealth, given the declining rupee value, continues to find its way outside the country - wealth that cannot be used for supporting investment within the country - the result is a disturbingly low and static tax to Gross Domestic Product (GDP) ratio; and (iv) the government has failed to delink farm output from the vagaries of weather conditions nor supported farm based industry to raise agricultural product. Lack of rains is expected to seriously reduce farm output in the current year with ramifications on the economy during the year. Thus without a rise in productivity, it is a foregone conclusion that the government would be unable to check the balances that began during the Musharraf era namely the current account imbalance, the budget deficit as well as the fiscal deficit.
Critics of Shaukat Tarin point to high lending rates as yet another decision, taken no doubt at the instigation of the IMF, that is impacting negatively on GDP.
Inflation Tarin maintained as aforementioned was due to unjustified printing of money, a policy that would find no defenders anywhere in the world Salman Shah must be aware. Be that as it may according to statistics released by the present government inflation has been halved. The question then becomes: why are the country's opposition parliamentarians so dissatisfied with the performance of the current batch of managers? The reason is simple: declining inflationary figures no longer reflect increasing public dissatisfaction over the way the economy is being run by Tarin. Instead of enhancing supply/productivity, which would support growth, Tarin continues with demand contraction policies to reduce inflation. This is largely attributable to the fact that prices of essential items remain hostage to not only profiteering and smuggling, but also to considerably higher utility prices sourced to the four Letters of Intent that Tarin signed and submitted to the IMF agreeing to full cost recovery, an economically viable option with disastrous consequences for the poor.
Be that as it may the year 2007 as well as the first two months of 2008, before the PPP formed a government in the Centre, was marked by two disastrous policies that even a freshman economics major would refuse to endorse. First and foremost, Shah's decision to continue to subsidise oil locally in spite of a massive rise in its international price led to an unsustainable budget deficit, estimated at over 7 percent of GDP. For Shah to argue that the fault lay with the political leadership of that time would be tantamount to abrogating his own culpability in this regard. Economic decisions are collective cabinet decisions and Salman Shah had the option to resign; as has Shaukat Tarin if he disagrees with any government policy. Thus ownership of flawed economic policies must reside with the Minister of Finance specifically and on the entire Cabinet generally.
And second, the failure to invest in infrastructure, notably energy, and to take effective and timely measures to mitigate the possibility of the construction of dams by India that has resulted in reduced water supply to Pakistan. In addition, the basic economic policy thrust did not change during the Musharraf era in three important aspects namely in raising the tax to GDP ratio, by continuing to appoint heads of autonomous organisations for their influence rather than their competence, which compromised the productive potential of these institutions and an inordinately high reliance on foreign aid in the form of loans as well as grants. To allege that the PPP government continues with these flawed policies is evident with one important difference: while post 9/11 the floodgates of assistance were fully open this began to change during the last year or two of Musharraf era, a reversal that continues to this day.
The foregoing reveals what has been reiterated by many an international consultant as well as assistance agencies with respect to Pakistan's economic policies: policies in this country have not changed appreciably over time, and all governments - right wing, military or left wing - continue to follow reform prescriptions supported by donors in their endeavour to access foreign loans; and only faces have changed over time. This does not preclude disastrous policies associated with one government or another, the nationalisation of the Bhutto era, freezing of foreign currency accounts during the Sharif era, and overstaffing and reinstatement by Benazir Bhutto era that led to the financial demise of many a state-run institution requiring massive government budgetary support. More recently, these trends continue as the country struggles to follow the dictates of the IMF though with one important difference: conformity is not leading to any rise in foreign disbursements in spite of pledges.