Kaiser Bengali Explains the Economic Performance of Shaukat Aziz

Kaiser Bengali Explains the Economic Performance of Shaukat Aziz
The News, January 27, 2008

Kaiser Bengali is currently working for Collective for Social Science Research, a research company based in Karachi, economist Bengali has also served as the managing director Social Policy Development Centre between 2001-2004. Here he talks with TNS about a range of issues and gives his own economic blueprint which is closely tied up with politics. Excerpts of the interview follow:

The News on Sunday (TNS): How do see the relationship between military regimes and economic progress?
Kaiser Bengali (KB): There is a myth about development and economic performance of military regimes. In Pakistan, Ayub Khan, Ziaul Haq and Musharraf have all received unprecedented support from IMF and World Bank. In the case of Musharraf, it was the rescheduling and, of course, money that was coming as rental from the United States for using our space.

There were four factors which contributed to the high growth during the Zia period, none of which can be located in Zia's economic policy. The oil price shock hit the world in 1973 but it was 1975-77 when the first emigrants from Pakistan began to leave for Saudi Arabia and it was 1978 when the remittance inflow began and it peaked in 1982onwards. So the price of the oil price shock was borne by the Bhutto regime but the benefits were accrued by the Zia regime. This rate of remittance inflow gave the govt sufficient fiscal space.

Second, there were very large investments made during the Bhutto period that had long gestation periods. The Pakistan Steel Mills construction started in 1974, and it started commercial production in1982. Similarly there were Heavy Mechanical Complex, Indus Highway, Heavy Electrical Complex, Port Qasim and Ittehad Chemicals (chemical lindustry's foundation was laid in 1970s and chemicals are a major input in a large number of consumer industries). So this investment in the 1970s began to fruit in the 1980s leading to large chunk of output increases.

Third, because of Afghan war Pakistan received enormous amount of foreign funding, almost unlimited.

And fourth, Zia resorted very heavily on borrowing and deficit financing. When he took over the debt-GDP ratio of the country was 24%and in 1988 when Zia left the scene, it was 48%. So if you get manna form heaven your performance will be good. However, the poor performance of Zia regime became apparent in the 1990s and till later.

TNS: What happened in the 1990s?
KB: In the 1990s the civilian governments had no fiscal space because all the resources they had were mobilized for repaying the dept which Zia had left them. You will recall in 1984, Mahboob ul Haq, Zia's finance minister floated whitener bonds with a ten year maturity period. They matured in 1994. If you look at the budget of 1994, debt service rate went very high - almost 40% in nominal terms. Zia government had collected money and spent it [on defense], so in 1994 Benazir government had to repay that money.

So, if you say 1990 were not an era of good economic performance, it was there were no resources. I once asked somebody very senior in Nawaz Sharif government as to why the ninth five year plan was not being prepared. His reply was that whenever the economic team met, all they discussed was when was the next installment due and where would the money come from. He said there was no point in discussing any thing else.

TNS: In this backdrop how do you look at the economic performance of Musharraf in the last eight years?
KB: GDP growth rate is an average of growth in its component sectors. So in the years that GDP growth rate was around 8%, in 2003 for instance, banking sector growth rate was 29% and the automobile sector growth rate was 45%. Now if you have some sectors where growth rate is so high, your average will go up, even if the variance is very high.

The banking sector growth rate was high because the government, or the State Bank rather, allowed consumer financing from 2002 onwards. The monetary outcome was thate you could get a loan for a house, car, fridge, camera, if for nothing else, a vacation or a personal loan. Banks made enormous profits out of consumer credit and profits are a component of GDP. A lot of this credit was going in for buying cars so automobile production went up by 40-45%.

So basically it was a one legged growth and that one leg is consumer financing. You remove consumer financing, everything else collapses. You are only managing an economy for your numbers to look good, for headlines.

TNS: What is the other leg of the economy?
KB: Largely there are two legs of an economy, agriculture and manufacturing. The services sector is the body. If you look at the national accounts, more than 50% of growth of GDP is coming from services sector. Agriculture is stagnant, and so is manufacturing barring one or two sectors, like automobiles. Today we have an economy with weak legs and a bloated body. It is not sustainable.

TNS: What is wrong with consumer financing?
KB: What it did was that it increased money supply in the economy. In the first two years, inflation remained low because there was excess manufacturing capacity in the country. So factories which were operating at two shifts began to operate at three shifts and the supply increased. But once that capacity was reached demand continued to increase because people kept going to restaurants and kept paying out of credit cards. Once supply was constant and demand continued to increase inflation was the result. Sp today we have runaway inflation, nearly double digit and food inflation which is certainly more than12%.

Another things that has happened is that a lot of demand has been created for imported products. We are importing billion dollars worth of mobile phones. We are importing cars, because we only assemble cars here. And with cars come petroleum imports as well.

So we have created two problems: inflation that is out of control and a trade imbalance. Our imports have risen sharply while the exports are stagnant. And this is what the coming government is going to inherit. Just as Zia gave a debt mountain to the incoming government, the Musharraf regime is going to give the next government a massive foreign exchange crisis.

TNS: What about the outgoing government's privatization policy?
KB: Our services deficit which has always been very small is rising sharply because of our privatization and foreign investment policy. All the large entities have been privatized to foreign companies. And the investment (FDI) has been in terms of telecommunications, mobile phones and food. All of these companies earn their profits in rupees but remit their profit in dollars. So there is dollar outflow in terms of profit remittance against which there is no dollar inflow. We have created a liability without creating a countervailing asset.

In 1999 total profit remittance outflow, which in monetary language is called reverse remittance, was 97 million dollars a year. Today it is close to a billion dollars and rising.

TNS: About PTCL, is there a justification for a profit-making enterprise?
KB: There was no real policy or principle involved. This is a neo-liberal government which believes it is not the business of the government to be in business. What they have done is that that have sold PTCL to a company which is a state enterprise. So de facto their policy was that is not the business of the Pakistani state to be in business in Pakistan but it can be the business of a foreign state to be in business in Pakistan.

TNS: There is a massive power and energy crisis n the country. Where did we go wrong?
KB: The last investment that was made in the power sector was in the Ghazi Barotha project, which was an achievement of the political governments of the 1990s. In 1988, the Benazir govt. saw a power crisis coming and they went ahead with establishing thermal power plants which takes about three years to build. If those power plants had not been setup, we would have seen the same situation in 1990sthat we have today. There would have been power outages for eight to ten hours.

Since 1999, the Musharraf regime has not invested n a single megawatt of power. In 2001, we had surplus power, today we are living with power shortage. When Benazir's govt. contracted to buy power at 6cents per hour, there was excessive criticism. Today, for one project they are contracting at 11.5 cents per hour. Today, the world knows that we have a power crisis, it will increase its power knowing that Pakistan has no choice but to buy.

So it is mismanagement of the highest order of the economy. All the investment that they talk about is either portfolio investment, which is the stock market, equity markets or soft investments like telecommunications. These are all investments which do not require these companies to build any brick and mortar and steel structures. So if they have to leave at 24 hours notice, they don't lose much. What do banks lose, furniture?

TNS: But they have paid huge licensing fees.
KB: That is peanuts compared to the kind of profits they have made. They have recovered several times their licensing fees.

TNS: So are big dams like Kalabagh the only solution to the energy crisis?
KB: Dams don't produce water, they only store water and you don't have water. Even now you cannot store water in Tarbela and Mangla to their full capacity.

TNS: You are a strong advocate of low GDP growth rates. Comment.
KB: For about ten years we need to run an economy where the finance minister and the prime minister have the courage not to get good headlines. We need to invest in infrastructure which has deteriorated to a point that we don't have productive capacity.

When you are investing in infrastructure, and by that I also mean cities which are totally chaotic where no foreigners wants to come, and physical and human infrastructure, the results are going to come after a while. So you are not going to get any output and the GDP is going to be low. Ten years later when you have infrastructure in place then you can target double digit growth rates. That growth will be based on real sectors - on agriculture and manufacturing outputs, not an hot air balloon sectors like mobile phones. By doing so, you will have a massive boost in employment, income generation and poverty reduction.

As for inflation it will be controlled by switching expenditures from current heads to development heads - by abolishing concurrent list ministries and reducing defense expenditure.

TNS: In an idea economic model, what sort of a role do you see for the private and public sector.
KB: Private sector is good in producing those commodities, which are low technology and require small capital investments. We have seen that our private sector is unable to put together large outlays. We have no one in this country of the caliber of Tata or Ambani in India. These are areas where the state will invest.

TNS: But then the state tends to over staff?
KB: There is no problem with that. This is where your economic and social values come in. Is the purpose of the state merely to fill the pockets of profit makers? Or is the state supposed to work for the welfare of the maximum number of people?

It's a value judgement. When Shaukat Aziz went out for all out privatization, he made a value judgement. The welfare of the people of Pakistan didn't matter, what mattered was the corporate profits and he made that decision accordingly. As a state we need to determine what are our values. Are we prepared to have a few people who can enjoy summer holidays in Switzerland and the rest of the people virtually starving? If that is acceptable, then fine. We should follow that policy.

TNS: And now to the most immediate issues. How do you look at the current food crisis?
KB: There was a mala fide intention to begin with. The Shaukat Aziz ministry (Finance) predetermined the growth rate they want to achieve. So when you increase the wheat output you increase the agricultural sector growth rate. When you do that GDP growth rate will go up.

There was something else that was suspect here. The estimate for the wheat crop is made after the rains, but this time they mad an announcement of a bumper crop before the winter rains and, based on that announcement, allowed certain part to export wheat to India, apparently half a million tones. After that transaction was complete, the rains came and news began to come in that we are going to have a normal crop. A normal crop means that you import two million tones of wheat which is a routine.

Because they had earlier announced a bumper crop, they took time to admit that they were wrong. So the LC for import of wheat was also delayed. One wheat had been exported and we had a normal crop, the wheat market knew there was to be a shortage. Now stockists every wherein the world will behave like that that when they know there is a shortage and prices can go up, they withhold their stocks. They are not evil people. This is normal behavior and this is what a market economy will do if there is a shortage.

They made another mistake. Instead of placing an order for 2 million tonnes of wheat, they placed an order of 1.5 million tonnes of wheat first. Then they realised this mistake and placed another order for half a million tonnes of wheat. After their first order, the signal had already gone out in the market that shortage will remain. So they continued to withhold stocks. If they knew that wheat was arriving and prices will fall, they would have released stocks and that would have taken care of the shortage.

TNS: Prices of other commodities have doubled alongside?
KB: There are two components of economic management: fiscal policy and monetary policy. The State Bank is following a restrictive monetary policy while the finance ministry is following a liberal fiscal policy, one is contradicting the other and neither of them effective. The government is borrowing heavily from the State Bank for its expenditure. That means the money supply increases. On one hand, the State Bank is trying to restrict money supply by increasing interest rates, and on the other the government is raising the money supply. When money supply increases prices will rise.

There is another reason for increasing food prices. Our agricultural yield per acre is constant on declining for most crops because we are not investing in our land, in supporting agriculture. The government's adhocism is causing problems. When the government suddenly imported tomatoes and prices crash. As a result the farmer will not grow tomato next year, shifting the crisis to the next year.

For eight years Shaukat Aziz has mismanaged the economy like no other finance minister. Because Shaukat Aziz knew he does not has to go back and ask people for votes, he couldn't care less about what he did to the economy. All he had to show for was the stock market performance which is only hot air.