President Asif Ali Zardari has stated the age-old mantra of developing countries, - most recently in Brussels at the first-ever European Union summit on Pakistan: Pakistan needs trade, not aid. No pledges in this regard were made and senior European officials merely agreed to study future ways to boost commerce with Pakistan.
It stands to reason that at the end of the day the EU will look at ways that may boost trade with Pakistan but within the limitations imposed by its charter and what the EU member countries regard as their economic and, in the case of Pakistan, their political/security interests. It may also be recalled that the Indian Premier Manmohan Singh, ushered back to power on a wave of public support in the recently held Indian elections, spoke of what his mandate allowed him during his meeting with President Zardari in Russia - a mandate that was a reiteration of India's usual stance: when is Pakistan going to deal with acts of terror planned in Pakistan and executed in India.
According to some reports Zardari shooed away reporters at that time and behind closed doors requested for more time. This was later denied by Minister for Foreign Affairs, Qureshi. However, there was no mention of Kashmir by our President, no mention of alleged Indian involvement in supporting terror attacks in Pakistan, and no mention of the proliferation of Indian consulates in the South of Afghanistan that is being viewed with extreme suspicion by our armed forces.
Significantly President Zardari did not appear visibly encumbered either by a mandate or its lack thereof, or by our constitution as it exists today ie post-Musharraf's massive tinkering. But what probably amused the Europeans when he requested trade not aid was the fact that he has been requesting aid almost since he won the presidential elections. All his trips abroad have been for the express purpose of generating money.
He has not sought loan write offs which would have increased his popularity within the country as that would not have subjected us to rigid IMF conditions that include ending of subsidies and high interest rates, but an increase in the loan amount. His supporters state with a degree of credibility that the global recession militates against loan write-offs.
It is relevant to note that the Pakistan government is under the impression, or such has been stated post-budget 2009-10, that the 5.3 billion dollars pledged during the Tokyo meeting of the Friends of Pakistan on March 17 this year would be in the form of grants; yet few are convinced that such optimism is warranted. No donor country has openly pledged that the amount is to be in the form of a grant and past precedence militates against such an assumption for two reasons: (i) Pakistan has performed poorly in terms of performance indicators and has consequently suffered a decline in its low interest rate loan allocation (with around one percent interest charge) from multilaterals in recent years. This viewpoint appeared to be the same as that noted during President Zardari's visit to the US recently with senators and congressmen and women clamouring for greater oversight over how Pakistan spends money. And (ii) what has been mentioned above ie that with the continuing recession and large relief packages to the banking industry and the commercial sector it is doubtful if bilaterals can afford to extend the amounts pledged leave alone give them as grants. Pledges rarely if ever translate into actuality - a fact that even war torn Afghanistan during the Bush days - realised to its own cost.
Be that as it may trade must always be preferred over aid: the former incorporates net income in foreign exchange while the latter implies pay back of loans and, over time, may take an ever larger pie from the budget for just paying off interest on past loans as well as the principal as when it becomes due. Trade also lubricates the wheels of industry and employment opportunities rise and consequently there is greater affluence within the exporting country.
Thus the logic is sound. So why is President Zardari's call not finding a chord of support in this country? Not even amongst the exporters? The answer unfortunately is rather simple: the climate for enhancing investment or indeed for promoting exports does not exist in Pakistan at the present moment in time. Part of the reason for this is external to government policy. Global recession has hit sale of consumer items hard and it is little wonder that Pakistan's major export item, textile and products, have been particularly hard hit due to the global recession.
But there are internal factors as well that are responsible for the inability of the industrial sector in general and the exporting sector in particular to promote exports as they are at present grappling with a range of factors that are inhibiting expansion and indeed maintaining productivity.
The issue of inadequate energy supply that is seriously compromising our productive capacity has been aired often enough. The issue may well have been the failure of Musharraf's government to invest in the energy sector and a rising circular debt however the present government has allowed the inter-circular debt to accumulate, which is compromising the ability of the various corporations/agencies involved in the energy sector to pay each other off, with the real prospect of Pakistan State Oil being unable to import oil. True the Term Finance Certificates were issued that did relieve the circular debt somewhat but it has begun to mount again.
High interest rates in the country are also compromising the ability of the industrial sector to borrow and that again is negatively impacting on the productive sector. It may be recalled that large scale manufacturing sector suffered a decline of 7.7 percent in 2008-09.
The budget claims that it is supporting the export sector. An Export Investment Support Fund of Rs 40 billion or half a billion dollars is to be established. The government would contribute Rs 10 billion, another Rs 10 billion would be contributed by the Export Development Fund and Rs 20 billion would be contributed by governmental agencies through mopping up surpluses in commercial banks.
Thus it is not clear whether the envisaged amount will be realised; or remain a pipedream. Another Rs 10 billion will be for SME sector jointly financed by the government and the private sector: again it is not clear whether the private sector would participate in the current climate. A venture capital fund of Rs 10 billion is also to be established, as well as a new DFI and allocation for Ministry of Industries will be increased by 335 percent though it is not clear what additional duties would be carried out by the Ministry.
The claim made in the budget speech was specific: "our tax and duty measures in Budget for fiscal year 2009/10 would revolve around...reviving manufacturing and industry, especially export oriented industry." This claim proved to be grossly inaccurate and forced the government less than a week after the budget was announced to agree to 125 amendments in the Finance bill inclusive of withdrawing the turnover tax at 0.5 percent, and to treat tax collected by authorised dealers in foreign exchange from export proceeds as minimum tax.
To date these amendments have only been agreed and not approved. However, if the amendments are implemented, as promised, then such a massive change in the budget's taxation measures within a week of the budget announcement would have resulted in some resignations anywhere else in the world. In Pakistan this is not likely. And the fallout may well be higher carbon tax on petrol with inflationary implications or a rise in the budget deficit unless (i) assistance from the FoDP is not grant assistance and (ii) a massive slashing of the Public Sector Development Programme like in 2008-09.
What will have to be ignored because there is no other option is the fact that the government by reducing or eliminating subsidies and continuing load shedding render our industrial sector in general and textile sector in particular, uncompetitive in the world market as it would be forced to pay for the most expensive electricity in the region and that too not available throughout the working day. Thus even if the export funds envisaged above do provide cheaper credit though there was nothing in the budget speech to indicate that cheaper credit would be provided yet more expensive inputs may negate the positive impact of the funds.
To conclude requesting trade and not aid at this time when the country's economic managers are unable to either promote productivity or indeed provide critical infrastructure like energy is not going to make an appreciable difference to our exports. But having said that trade not aid is a good tried and tested slogan.