Moving towards a 'failed state'?

A "failed state" is the one whose social, political and economic structure is not functioning satisfactorily and its people and the rest of the world do not trust the state institutions. Are we heading towards this concept is being debated privately these days. Let us examine this question taking into account some of the serious issues facing the country and the government's will to resolve these.
During the last three years, law and order situation has worsened. Policing function has been politicised and has become an integral part of political parties in power. This is resulting in an ineffective force that is unable to maintain law and order, which is prerequisite of a successful state.
The worsening law and order situation has compelled the business community to pay huge amount as Bhatta money for their survival to gangs, supported by various political groups. The Sindh Home Minister has confirmed that those recently arrested in various targeted killings, looting and demanding Bhatta charges are in fact supported by various political parties.
The unrest among the business community, failure of law-enforcement agencies and unwillingness of the political forces to resolve their differences is becoming the main cause of flight of capital and relocation of business activities elsewhere; resulting in unemployment and rising crime rate in the city. Its impact is being felt throughout the country. This is like if Karachi sneezes, the entire country gets cold.
Despite the fact that the country went through a prolonged struggle for restoration of judiciary, the lower judiciary remained inefficient, dishonest and lethargic. Millions of cases remain undecided throughout the country due to rampant corruption within the system at various levels. Provision of justice remained rare and is as expensive to a common man as ever and state organs remain passive in this respect. A state that denies justice to its citizens hardly survives.
Corrupt practices are frequent in all governmental activities. These are in fact white collar crimes. Systematically, money is being siphoned from state-owned entities (SOEs) and commercial governments departments, eg TCP, Pakistan Railways and many others.
Whether these relate to appointment of Chairmen of OGDC, Highway Authority or NICL, all indicate that these acts are of similar nature and for corrupt purposes. These corrupt practices have not only caused financial collapse of these institutions, but have become burden on national exchequer also.
About 900 billion rupees have been siphoned out from these companies during the last three years. As these are being rescued by our financial institutions on sovereign guarantees, it is feared that these non-performing loans may collapse the entire banking system thereby collapsing the entire economic structure of the state.
Other stories of rampant corruption by the senior office-holders of the present federal and provincial governments are being regularly discussed in electronic and press media. However, there has not been any serious condemnation of these corrupt practices by any senior member of the governing team. No serious desire has been expressed to reduce leakages through structural change and reorganisation by inducting professionals. This shows that corruption has been legalised in our society.
There are no anti-corruption laws in place resulting in a free-for-all. National Accountability Bureau is non-functional and is expected to remain so during the present tenure of the government. There is either good governance or bad governance but now there seems to be no governance at all in Pakistan.
Circular debt of energy sector, amounting to billions of rupees, is still awaiting a final resolution. No serious effort has been made to resolve. It looks like it will further increase as the time passes. Consequently, several energy companies are under severe financial stress.
Foreign investors are hesitant to invest in Pakistan due to worsening law and order situation, undefined and unstable government policies. Recently, an overseas investor in Pakistan has advised the government regarding its inability to enlarge its presence in Pakistan due to these reasons. Therefore, foreign direct investment is continuously on the decline and has gone down by 22 percent during the first five month of this fiscal year as reported by the SBP recently.
Fiscal deficit may touch almost 500 billion rupees during the first half of this fiscal year, indicating severe leakages in tax collection system and unbalanced government spending. The rising deficit is resulting in heavy government borrowing mainly from central bank that resulted in substantial hike in discount rates. The inability of the SBP to restrict the government's unlimited borrowing is hurting private sector expansion. There is unanimity of views that lending to government must be restricted to avoid further stagnation of economy instead of raising discount rate. There is negligible private sector borrowing due to rising cost of borrowing. With 14 percent discount rate, our economy cannot come out of stagnation; instead, it is retarding industrial activity, creating unemployment and making Pakistani exports more uncompetitive.
"Government's heavy reliance on banking system for financing its spending needs has been a key risk factor in achieving the basic objective of the financial system in Pakistan, jeopardising the monetary stability, long-term growth and investment," says the State Bank of Pakistan Financial Review 2009-10 released recently. The SBP foresees that the government's dependence on commercial banks will further increase in 2011 and beyond due to Stand-By Arrangement of the IMF and the SBP Amendment Bill 2010. If the borrowing tendency remains unchecked, it indicates possible collapse of economic structure.
The decision to resort to the IMF funding with harsh conditionality and without debating it in the national assembly has been a critical factor for economic stagnation. This conditional financial assistance seems to be without lawful authority as it was neither debated nor approved by the national assembly. This seems failure of the elected representatives' forum to assert its authority over foreign agreements. The IMF never made it conditional that the terms of funding must be approved by elected representatives. It seems the funding was given to assist corrupt system. It may be quite legitimate for the future governments to refuse to pay back these loans.
One of the harshest conditionality was to impose Reformed General Sales Tax (RGST). The smooth passage of RGST legislation through the national assembly seems doubtful, jeopardising the continuation of the IMF programme. Government being habitually spendthrift and unwilling to explore other sources to balance its revenue and expenditure may soon resort to hefty borrowing, further endangering the economic growth.
There is severe shortage of electricity and gas. This has started damaging the commercial and industrial activities. To overcome electricity shortages, the government resorted to acquire rental power plants at huge overpricing resulting in serious charges of corrupt practices. The ministry should not have allowed rental power plants based on gas, due to its already known shortage. Even the Asian Development Bank raised reservations on permitting gas-based plants. However, the government remained indifferent. Non-provision of gas to these plants triggers rental capacity payments as per agreements irrespective of power generation. The exchequer would start feeling the pinch of these decisions for years to come.
Shortage of gas is resulting in partial closure of industrial activities at a substantial cost to the exchequer. Currently over 100,000 power looms remain idle during these closures where almost 400,000 workers are affected. It is also being alleged that gas rationing plans that are currently in place are unjust and uneven. Frustration among the industrialists continues to grow. In support, the chief minister of Punjab has also threatened to march against the federal government for this injustice. The closure of industrial and commercial activities has created multiple socio-economic issues. So far the government remained unsuccessful to improve the situation.
The federal and provincial governments habitually announce public holidays closing down all economic activities unnecessarily that result in economic loss to the national exchequer. The shutting of Karachi whether it be for the arrival of Dr Imran Farooq's body or for celebrating Sindhi cultural festival announced recently by the Chief Minister, both affected national economy and must be deplored. This reflects a non-serious attitude that is pushing the state into serious economic crisis.
Despite substantial increases in support prices of crops during the last three years, government's reluctance to tax agricultural income surprises many and is regarded as an irritant to broaden tax base; instead, the government is insisting to impose RGST. The continuous decline in tax collection as a percentage of GDP must be taken seriously and desires unconventional steps.
The government seems to lack vision on important national issues facing the nation. It is feared that the government may collapse owing to its own failures and tarnished image due to its insensitivity towards major economic issues. There is also public perception that the political and democratic system has failed as it has not produced desired results for a common man. If the government is allowed to be dragged down, we may be moving towards a "failed" state.
(The writer is Chartered Management Accountant from UK and is LLM. (Commercial Law) from Northumbria University UK.)