Dr Pasha is currently serving as the Chairman of the Advisory Panel of Economists to the Planning Commission and Convenor of the Economic Advisory Council of the Prime Minister of Pakistan. He has formerly been Federal Minister for Commerce and Trade, Finance and Economic Affairs, Education and Deputy Chairman, Planning Commission in three different governments.
From 2001 to 2007, Dr Pasha was UN Assistant Secretary General and Director of the Regional Bureau for Asia and the Pacific of UNDP. Dr Pasha has an M.A. from Cambridge University, and a Ph.D. from Stanford University. He is currently the Dean of the School of Liberal Arts and Social Sciences at the Beaconhouse National University (BNU), Lahore, Pakistan.
DR AISHA GHAUS-PASHA
Dr Ghaus-Pasha is currently member of the Advisory Panel of Economists to the Planning Commission and member of Economic and Revenue Advisory Councils of the government. Previously, she was a consultant at the UN Department of Economics and Social Affairs in New York. She has been a member of several government-constituted task forces, committees and commissions on public finance, social sectors, poverty alleviation and institutional reforms.
She has a PhD in Economics from The University of Leeds. Aisha, who has published over 75 books, journal articles and reports, is currently the Director of the Institute of Public Policy at the Beaconhouse National University, Lahore, Pakistan.
Kicking off the discussion, Aisha Ghaus-Pasha hones in on the government's revenue target for the current fiscal. Terming the revenue target for FY12 as "optimistic" she asserts "you cannot achieve this with normal growth".
While acknowledging the efforts of the finance minister as well as the FBR head honcho; Aisha Ghaus expects the fiscal deficit to persist at about 5-5.5 percent of GDP. This deficit will in turn be financed through commercial banks; crowding out private sector and hampering future growth prospects. She also draws attention to trend of rising prices, arguing that inflation will likely persist above 12 percent in FY12
Dr Hafiz Pasha joins the discussion with a stark warning: "the elephant in the room is the implication of the subsidy withdrawal which no one is focusing on". "If the government reduces subsidies by Rs 230 billion, you will have an astronomical increase in prices of utilities," he says adding that inflation could shoot past 15 percent in that situation.
"Pakistan is terribly close to runaway inflation," says Pasha adding that five years of persistently high inflation has cemented expectations of rising prices among people. "Plus they have inflation coming through the back door because of the larger deficit financing," says Pasha. "It does not make sense to think the inflation rate would come down significantly in this situation," says Pasha.
WHAT REFORMS?
While the country is faced with a dire need for radical reforms, Hafiz Pasha laments that the echelons of power in the federal capital are echoing a different sentiment. "There have been serious conversations in the offices in Islamabad arguing that let us splurge, because we are in a bonanza! There have been suggestions from the highest officials to ignore the misconception that there is any crisis, let us spend and inject money because we need to win votes," he reveals.
Referring to the on-going debate over phasing out blanket subsidies and taxing the agricultural sector, he questions, "do you think that in the fourth year of the election cycle, the government is going to be serious about the withdrawal of subsidies? Do you expect them to jeopardize their vote bank?"
With that, Aisha Ghaus asks: "do you think that a 50 percent hike in salaries of government employees followed by a 15 percent hike in the same in the following year was really necessary?" Acknowledging the need to protect lower income groups she adds that this increase should have been limited to those employed in grade 16 or lower.
Both experts are highly critical of populist projects that claim to be pro-poor. Aisha Ghaus is certain that yellow cabs and green tractors are enough to run Punjab's budget into the red.
Hafiz points to the ineffectiveness of blanket subsidies and ad hoc social support programs by highlighting that "food consumption has collapsed in the last five years". He asserts that rising consumption levels are largely being driven by the elite adding that these trends prove that "the poor are suffering, especially in urban areas" and the gap between rich and poor is widening. And this disparity has been worsening over the past few years. According to Hafiz, "during the Musharraf period, the top 20 percent of the population was taking 50 percent of the increases in income while the bottom 20 percent bagged just 6 percent of the same". He fears that stagflation in the economy may persist if the government opts for populist measures eyeing the upcoming elections.
DEBT BURDEN
Hafiz Pasha explains how the government spending spree is being financed through the hard earned livelihoods of the nation. "There are two methods of financing when your fiscal account has a large deficit: one is through the BoP, through the current account deficit, you stuck in resources; second is that the private sector generates the surplus," he says.
While acknowledging that the private sector surplus has surged in recent times, he warns that this is not because of rising level of savings in the private sector but because "private investment has fallen to its lowest level ever". The expert highlights that government borrowing from private banks has crowded out prospective borrowers who would have used the resources for generating economic activity. The slowdown in activity in turn may erode private savings, in due time.
"Commercial banks are not playing any intermediary role," he contends pointing out that the big 5 banks have earned close to 20 percent profits at a time when economic growth has been severely stunted. He says that this is only happening because the public are "obediently putting deposits in banks and getting 5 percent return at a time when just inflation stands around 15 percent".
"In essence, the households are subsidising the government which is able to pick up their savings at lower rates," he sums up. Given this situation, if interest rates paid to depositors were to be raised to at least match the level of inflation, the government would be forced to pay at least 20 percent return on its borrowings.
NUMBER FUDGING Besides finding fault in the government's method of financing the difference between its expenditure and revenues, the Pashas also find the official fiscal deficit questionable. While the government estimates that its fiscal deficit for FY11 stands around 6 percent, Hafiz Pasha reveals that factoring in inter-corporate debt from the energy sector and outstanding payments from commodity operations will push this gap closer to 8 percent.
In fact, the experts note that government officials are in a habit of conjuring up figures that belie facts. Rejecting the official unemployment rate of 5.9 percent, Hafiz Pasha asserts that independent research puts the proportion of jobless Pakistanis at a whopping 12 percent.
Deflating the euphoria over record foreign exchange reserves, he points out that out of a tally of $17 billion; $8 billion are owed to the IMF while $3 billion are deposited with commercial banks. "Essentially you are operating with an import cover of one and a half months," he said.
A CLEARER PICTURE
"If you want to have an idea of how long we can last in this populist, pre-election environment, the answer lies in looking at the BoP and not the fiscal account, because we can still manage the fiscal account by simply printing money, but the BoP cannot be managed like this because unfortunately we cannot print dollars," Hafiz says.
Dismayed by the "complacency" of the government as well as the media towards the BoP, he inquires why "our exchange rate reserves have not shown an upward trend, despite the dramatic improvement in the current account?"
The answer, he says, lies in the "bottom half" of the balance of payments; the capital account which has deteriorated over the same period. Explaining further, the veteran economist points out that inflows of aid and investments from abroad have dwindled and investors have pulled out some investments from the country. While acknowledging that rising remittances have helped prop up the country's external balances, he terms this increase "a one-time jump that will not sustain".
"The Middle East is collapsing, Libya is in deep trouble, South Africa has told its workers that they will not give extensions to their workers, Europe is about to die, officially, USA is in a state of semi-permanent recession- these are not ideal labour market conditions globally," says Hafiz Pasha.
Besides, the government's crack down against foreign currency exchanges has scared some people into using official channels for the transfer of funds while fear of inquisition from foreign authorities has driven Pakistanis abroad to diversify their assets into the country. He forecasts that as the oil import bill climbs, this surplus will deteriorate into a deficit which would in turn also reflect in the exchange rate. The veteran economist points out that the country will also soon begin repayment of loans obtained through the IMF. He warns that the combined effect of these factors will deteriorate the current account.
"When that happens all hell will break loose," he warns elaborating that the dearer oil imports would further hamper exports and the balance of payments would deteriorate rapidly.
"Export receipts are delayed-either people transfer it or delay it because they want to gain through the speculations, people start earlier imports because they are worried that the currency will dip down the road. At the same time, there is flight of capital, so what would have taken 2 years, happens in 6 months". Aisha Ghaus recalls that this impending crisis is similar to that faced when sanctions were slammed on the country in the wake of the nuclear tests and again in 2008.
In no uncertain terms, the Pashas consider this crisis to be an existential threat to the country. "It is just an assumption that states necessarily survive. There is no theorem that states that all states will always survive," warns Hafiz. "Be realistic, how long can this situation persist?" he inquires rhetorically. He adds that the country's debt has risen to unmanageable levels and that the government will inevitably end up at the IMF's window sooner than it can pay off existing dues.
He recalls that the then PM Nawaz Sharif, balked at the 300 pages of conditions that were put forth by the IMF for economic assistance to the country in 1998. He warns that if this comes to pass, the new set of conditions put forth by the international lender would be much more comprehensive, including many "non-economic adjustments".
The former federal finance minister warns that depreciating the local currency would not provide a significant thrust to stagnating exports. "The structure of our major exports, textiles is such that most of any price benefit is passed on to buyers," he explains adding that on the flip side, "devaluation of 15 to 20 percent would impact domestic prices in the form of imported inflation".
GRAND PLANS WITHOUT RESULTS
Hafiz Pasha claims that government's initiatives such as "Aghaz-e-Haqooq-e-Balochistan", the 18th Amendment and devolution are "irrelevant" because despite these steps, core issues remain unresolved. While insisting that he supports these initiatives, Hafiz Pasha laments that a serious lack of co-ordination and planning have left these grand plans in the lurch.
Aisha Ghaus draws attention to poor governance and the resulting corruption in government departments which she opines has become "deeply entrenched".
"The core of the problem is the elite who is eating up all the rents and we have reached a point where there is very little left to take home. Rent-seeking can only take place when rents are being created but there are no rents left," she insists. Aisha Ghaus elaborates on the devolution debacle highlighting that provinces have not been allocated sufficient resources to manage some of the functions transferred to them; while other functions have simply shifted between departments of the federal government.
"A significant number have been abandoned, because the provinces said that 'we don't want to take them', and the federal government didn't give the agreement to finance it," she adds.
Hafiz Pasha highlights that of the 10 divisions devolved in the first phase, only one was of material significance. The reason for this impasse according to Aisha Ghaus, is politics. "No one wants to let go. These are big ministries that involve substantial assets like workers' welfare fund, employees' old age benefit institution". "Absolutely; the bureaucracy, the security establishment, they don't want to let go," Hafiz chimes in.
Aisha asserts that even the provincial governments know that the process of devolution will not be comprehensive, citing the relatively paltry allocation of Rs 1 billion for devolved divisions, against recurring expenditures that typically run three time as high.
The two experts also draw attention to the transfer of many departments which were supposed to be devolved, to various arms of the federal government. "The most senior secretary in the government of Pakistan is the cabinet secretary, and it is a division focusing on the running of the entire government," says Hafiz adding that "they are now going to be responsible for the delivery of the peoples' work program."
He adds that the list of projects that were to be devolved but has been further centralised, is longer than the number of departments actually devolved. "CDA is also responsible for film censorship, education and health; it is like a mini government sitting there, and it is all under the cabinet division," says Aisha Ghaus.
"Thinking that you are going to complete everything in two months is not how things are done," she said adding that government should supplement its goals with rapid research and effective trouble shooting to achieve such targets. The experts assert that barring such comprehensive solutions, the quality of service provision will fall, at least until the provinces can develop capacity to fulfil their responsibilities.
Hafiz Pasha asserts that the government and media have both ignored blaring contradictions and quagmires in recent political developments. Referring to the collection of sales tax by provinces, he asserts that collection of proceeds from Karachi Port Trust by the Sindh government "is an act of unilateral declaration of independence". He warns that such moves will create a domino effect. "Punjab may say we are not going to give food surplus to Sindh. Now instead of strengthening the federation, you have created a devil through the 18th Amendment," says Dr Pasha.
Echoing the grim outlook presented by Hafiz Pasha; Aisha Ghaus sums up that the social fabric has been severely damaged by persistent inequity and injustices in the system. "I am hoping there is no total anarchy but things settle down before that," she concludes.
Interview by Ali Khizar & Ayesha Aftab
An interview with DR. HAFIZ A. PASHA & DR. AISHA GHAUS-PASHA
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