How does one say this without feeling a little embarrassed? After all, our finance minister, Mr Hafeez Sheikh, is a career World Bank bureaucrat and really ought to have known better. Perhaps, they accidentally handed him the wrong script to read, because his remarks in Washington DC for the World Bank and IMF spring meetings sound more like the sorts of things he should be saying upon his return to Pakistan.

Maybe I have it all wrong, but I doubt that. You see, here’s how it normally works: in Washington DC, the attending ministers and finance officials usually craft their remarks around the message they have brought to the meetings. When they get home, their remarks usually revolve around what they brought back from the meetings.

But Mr Sheikh seems to have got it all backwards, or maybe I just don’t get it. While in DC, his remarks revolved around all the aid pledges he has obtained from donors big and small, about the “resilience” of Pakistan’s economy, about the stout character of the Pakistani people who will weather adversity with forbearance and how the magical stream of remittances will foot our import bill well into the future.

This might all be very well indeed but I think he threw that pitch at the wrong audience. That’s the message he should have delivered upon his return to Pakistan, assuring an anxious country that help is on the way, that things are not as bad as doomsayer columnists like me love to make it sound. While in DC, though, he should have taken a page out of the book carried by the African finance ministers and focused more on what reforms his government is implementing, or thinking about implementing, to meet the challenges that rising oil prices and slowing global growth will inevitably bring.

“We are addressing falling foreign investment by improving the business climate through fiscal reforms,” said Manuel Chang, finance minister of Mozambique, going on to add how his government anticipates dwindling inflows and, therefore, seeks to encourage growth in small business start-ups to boost employment.

They also talked about greater regional economic integration as the best way to mitigate the impact of the global crisis, to encourage greater regional flows of trade and investment so that countries that are dependent on the European Union as a destination for their exports can find an alternative market.

Now don’t get me wrong. I’m pretty sure that each one of these gentlemen can be taken to task for their handling of their country’s economy. I’m sure there are plenty of problems in their countries, like unemployment and inflation and fiscal rigidities and an overarching dependence on aid inflows. I’m also willing to bet that they have their own problems with pain-in-the-neck columnists pinpointing their faults in the newspapers all the time.

But while in DC, they chose to focus on the reforms they are working on rather than crow about the aid promises that they have secured. And the reason is simple: in DC you are speaking to your creditors, and they want to hear your story and they’re hoping your story revolves around concrete steps you’re taking in the here and now to help your economy stand on its own feet. In short, in DC they want to hear about the reforms, while in Islamabad they want to hear about the aid promises.

In other forums, Mr Sheikh talked about how democracy is striking roots in Pakistan, helping promote the rule of law and an unfettered public discourse. That may be very well indeed, but with all due respect, it’s not really his story to tell. If he’s celebrating the virtues of democracy today, what was he toasting during his years of service under the rule of General Pervez Musharraf?

He also talked about the unhappy inheritance that befell the infant democracy when it assumed power: plummeting reserves, falling currency, collapsing growth, skyrocketing subsidy expenditures and so on. The difficult path to stabilisation that was adopted as a response was also mentioned, and “just when things were beginning to get better, we were struck by the floods.”

The problem with building your story like this is it makes your creditors more, not less, nervous. His talk at the Brookings institution, to take one example, sounded just like last year’s budget speech, which was fine on the floor of the National Assembly where it was pitched to TV viewers. But coming from a finance minister, this story seems massively misplaced in Washington DC. Rather the story he told should have begun with a blunt and candid assessment of where the economy stands today, how he sees the challenges the country is facing going forward and what exactly he is doing about meeting those challenges. The lengthy political exposition and the almost reflexive invocation of the floods, could have come at the end as a reminder to the audience of the difficult circumstances Mr Sheikh is working within.

In an opinion piece for the Wall Street Journal titled, “Pakistan’s untold economic story” (April 24), he chose to emphasise the positive aspects of Pakistan’s economic story. The piece was studded with pearls like this line: “Business contracts have been consistently honoured.” Try telling that to the poor saps holding their ‘sovereign guarantees’ in the power sector! Elsewhere in the piece, he declares that “Pakistan was not immune to the global financial crisis”. Very true, but tell us Mr Sheikh, will Pakistan be immune to the coming period of global financial instability? What are you doing to prepare for this inevitability? Does he seriously believe he can woo investors from the West at a time when his creditors are shaking their heads at him?

Mr Sheikh has had difficulty with his story for far too long now. Almost from day one he has let politics distract him constantly. Of course, the politics he has to negotiate is powerful stuff, not to be underestimated, but as finance minister, he is a critical interlocutor between the political elites of this country and their creditors, both domestic and international. As such, it is fair to expect that he should know how to speak to these creditors, how to address the sources of their anxiety and back his words up with concrete actions.

Published in The Express Tribune, May 3^rd, 2012.

The power sector is one place where the sun never shines. From finance to trade, from the State Bank to the water bureaucracy, all those departments of government whose work touches on economic policy in any way are bound by legislation to release a set of data about their respective domains according to certain schedule. The power sector is one big exception to this disclosure requirement, and this exception needs to be rectified.

The State Bank, to use one example, maintains one of the most rigorous disclosure regimes in our country. Every fortnight, for instance, it releases data regarding monetary aggregates which if read properly can tell you a great deal about where the money is coming from and where it is going. Every three months it releases its quarterly report which gives a detailed snapshot of where things stand in the economy in areas as diverse as banking and manufacturing. Every year it releases its annual report, and sometimes makes quite a splash with it too. Look on their website and you’ll find regular data being released on the conduct of treasury bill auctions to deposits of scheduled banks to non performing loans to assessments of the health of the financial sector.

Similarly the finance ministry is bound by legislation to disclose key data as well. You’ll find fiscal data as well as the all important Economic Survey available on their website. Likewise, trade data is available in detail from the Federal Board of Statistics, and from the State Bank as well, and water discharges and inflows into the major dams and barrages can be obtained from Wapda.

But when it comes to the power sector, there is nothing. The channels report numbers for daily deficit between supply and demand for electricity when riots erupt in the streets, but even this number is obtained ‘informally’ from the Pepco spokesman who is under no legal compulsion to provide it, nor to explain how the figure has been arrived at.

Try getting the following data: fuel stocks at the Gencos, daily power ‘purchased’ from the Gencos, from Wapda and the IPPs, and monthly or quarterly transmission and distribution losses. This basic operational data which will tell you a little bit about the health of the power sector, but none of it is disclosed.

Besides operational data, there’s also financial data. The ease with which bulk consumers are able to contest Pepco’s bills tells us how dubious their billing methodology is, and this dubiousness grows out of the lack of transparency in Pepco’s operations. Dubious billing then leads to dubious claims on losses, and equally dubious demands to hike the tariff by ‘124 per cent’ in order to fix Pepco finances.

Of course, Pepco is not a listed company, and therefore has no compulsion to maintain a professional chief financial officer (CFO) like PIA or KESC or OGDC or PPL. No professional CFO means there aren’t any cash flow statements that one can take seriously in our power sector, leaving critical decisions like tariff adjustments to be made on dubious data.

Visit their website as an example and click around. Under the tab ‘News & media’ for instance, you’ll find the last entry is from 2010. Apparently, Pepco has no news for the media since that date. Under a tab called ‘Subsidies’, entries for tariffs stop in 2009, giving the impression that power tariffs have not been adjusted since then. And so on. The whole site is full of useless and outdated information.

It doesn’t have to be this way. We know that internally Pepco maintains a reasonably rigorous reporting stream on operational data. Financial data is another story. But operationally, we know that daily reports are received in Lahore from Gencos all over the country on details from flue gas emissions to megawatt hours of electricity produced. At any point in time, Pepco’s internal operational data stream can tell you how much electricity each turbine in each Genco is producing, and what the composition of the flue gas emissions is from each individual smokestack. They can also tell you how much gas is being received from their stipulated supplier and what the furnace oil stock position is in each storage tank. In short, operational data exists in substantial detail, is collected on a daily basis and transmitted to the headquarters. But there the stream stops.

Two things are needed very urgently. One is to develop a template for the disclosure of regular data by the power bureaucracy. The template should include daily requirements, fortnightly, monthly, quarterly and mandate an annual report. The second thing is to draft and pass the legislation that would make this disclosure regime legally binding on the Pepco management. Both the State Bank and the finance ministry are bound by legislation to release a minimal amount of critical data according to a predetermined template and schedule.

Data disclosure of this sort is critical for two main reasons. First it provides a benchmark against which to measure performance and to hold management accountable. It’s fair to expect that some tampering takes place with the data, but too much tampering sets off alarm bells, like what happened with the poverty figures released under Musharraf’s regime, based on the PSLM survey of 2004.

The second reason is that such data releases allow media and other professional bodies to monitor events closely. Think about how the media raises an alarm every time government borrowing from the State Bank begins to rise. This is because we know that this borrowing will result in inflation down the road. Mandatory disclosure regimes make it possible to anticipate the arrival of a major event, like inflation or a slide in the value of the currency brought on by a ballooning deficit in the external account. Such a disclosure regime needs to be mandated upon the power bureaucracy as well, to limit the space where discretionary and arbitrary numbers are cooked up, and to create a data series that can become the benchmark to measure Pepco’s performance and to anticipate the arrival of major events like a strong spike in demand, or dip in supply of power.

Published in The Express Tribune, April 19^th, 2012.

In the fourth year of its rule, the government has held its third ‘energy conference’ that has yielded nothing that the other three did not. At this stage, continuing to hold long and ‘high profile’ discussions about the energy crisis does nothing more than demonstrate the government’s lack of seriousness about the issue.

October 2011 is not that long ago, and that is the month in which our lethargic Minister of Water and Power, Mr Naveed Qamar — the makhdoom from Hyderabad — held his midnight press conference at the end of a long deliberation by the cabinet on the state of the energy crisis in the country. The deficit between supply of and demand for electricity had touched 7500 MW, the largest it has ever been, and riots had engulfed cities and towns across Punjab.

Who even remembers the promises that were made back then? Here’s a refresher: we were told the government has a handle on the power situation, that there is a new plan, that the situation would be “brought under control” within “48 hours” (at another point in the same press conference, he said it will take “36 hours” to bring the situation under control), that he was “sorry” that the public had to suffer through such prolonged power outages.

And then came the kicker. This time, we were told, the government was serious. This time it was “no more Mr Nice Guy”. This time a series of “reforms” would be initiated that would bring professional management to the country’s power sector, taking matters out of the hands of the power bureaucracy. “There will be no more sacred cows in the matter of bill recoveries,” he famously declared, creating the following day’s headlines. I’ll bet ‘sacred cows’ everywhere chuckled. “There’ll be no more ministers very soon either buddy, if you’re not careful,” they probably said to each other. “What were sacred cows doing in the picture to start off with, Mr Minister?” I asked in “Pakistan’s power woes” (October 5, 2011, The Express Tribune), a piece I wrote right after watching that press conference. How painful it is to retrace those steps now!

On November 21 last year, minister Naveed Qamar presented a list of some of these ‘sacred cows’ to the National Assembly in a written reply to a question. The list gave a breakdown of which government department owed how much on outstanding electricity bills, and included Rs3.5 million owed by the Supreme Court, Rs422 million owed by the Pakistan Railways, Rs120 million by the Rangers, Rs49 million by the Senate, Rs8.2 million by the ISI and so on, rising to a grand total of Rs70 billion. A brief light was cast upon the ‘sacred cows’, putting names and numbers together in a rare moment.

But by February of this year the ‘sacred cows’ had their way. PEPCO’s receivables rose by 21 per cent in six months to cross a record Rs347 billion. Further ‘meetings’ were held to determine who owed how much, and the government of Punjab found itself having to rebut public claims from the ruling party’s people that it owed the largest amount, being forced to remind the public through a handout that the provincial governments owed more than Rs76 billion, of which Punjab’s share was around three billion, if one deducted the amount owed to Punjab in the form of electricity duty collected on its behalf by PEPCO.

By December 2011, however, a category known in official circles as ‘influential defaulters’ had an outstanding amount of Rs98 billion, an amount that had stood at Rs80 billion about three months earlier, according to a report published in this paper. How did this amount rise by so much at a time when the government was supposedly launching a ‘recovery drive’ of sorts to end the era of ‘sacred cows’?

One answer is provided when we look at what happened when the government tried to move against the ‘sacred cows’ from November onwards. First, the matter got sucked into the political whirlpool that consumes all efforts to reform our government structure and policymaking. Loud and cantankerous efforts were made to collect a bill from Punjab with no corresponding effort to collect a much larger amount from the provincial government of Sindh, for instance, thus ensuring that the entire exercise will become another casualty in the political firing line.

Second, the effort to collect outstanding power bills ran into counterclaims from the ‘sacred cows’, which argued that amounts owed to them under other heads should be adjusted against the recoverables. So if KESC owes to PEPCO for power purchases, the finance ministry owed to KESC for tariff differential claims. KESC therefore holds payment until the finance minister delivers, and if pressed, offers to adjust its receivables against its payables. Resolving ‘anomalies’ such as these conflicting claims can take years, which leaves the power sector equally illiquid, and the exercise loses its purpose.

Throughout the so-called ‘energy conference’ hosted by the prime minister, the ‘sacred cows’ smiled. Coming at the end of a months-long effort to collect outstanding bills, this conference made no mention of where the amount of recoverables stands today, no effort to tally the successes and failures of the so-called recovery drive from November onwards. No follow-up list of the ‘sacred cows’ that continue enjoying their access to free and abundant electricity. No effort to seek a way out of the impasse created when recovery efforts run into counterclaims and ‘anomalies’ in the billing process.

In fact, the ‘energy conference’ was little more than a waste of the government’s energy spent in talking about futile efforts to ‘equitably’ share the burden of loadshedding (what formula will be used to determine which province should get how much electricity?). Meanwhile the great wheel of misfortune continues to turn, and the ‘sacred cows’ will continue to chew their cud as our streets burn and our children carry on their education by candlelight.

Published in The Express Tribune, April 12^th, 2012.

There is no power crisis in Pakistan, but there is a crisis of power. There is an important difference here and until that difference is understood, we will sink deeper into this abyss. Let me explain.

What we typically call the ‘power crisis’ in Pakistan is not a shortage of electricity. The so-called ‘power crisis’ is, in fact, a state of affairs that grows out of three different areas where the government has failed.

First and foremost, there is a fiscal failure. The inability of the government to raise revenues for its growing expenditure requirements means it is unable to pay for the expensive and imported furnace oil to run its power plants. As a result, much of our power generation capacity sits idle throughout the year. The circular debt that we hear so much about is basically an inability to pay the bills for furnace oil that pile up and are eventually converted into loans for the Pakistan State Oil, racking up more and more debt and interest charges through it all.

The second major failure is the issue regarding the scarcity of fuel. Pakistan’s indigenous reserves of gas are dwindling and no new major findings are on the horizon. As existing reserves continue to decline, the growing shortages of this vital fuel are creating bitter wrangling and feuding among all the stakeholders whose businesses depends on gas. So fertiliser manufacturers are at odds with Punjab’s textile magnates who use natural gas as a fuel for their captive power plants to run their industries and meet their export orders. Both of these players perform a vital role in our economy as fertiliser is a key input for the agriculture sector that sustains our food supply and cotton output and textiles are our largest foreign exchange earner, which makes it very difficult to choose winners and losers between them.

The biggest loser in this wrangling over dwindling gas reserves is our power sector, which relies on gas as a primary fuel. More than two-thirds of our electricity is generated from burning fossil fuels — what industry insiders call ‘thermal power generation’ — and when natural gas is not available, they are forced to rely on imported furnace oil instead.

The third major failure is of governance. Managing shortages is a delicate business, and requires some skill in its execution. If you want to understand how power shortages are being managed by our government, look at how water allocations are handled in the agriculture sector and you will get an almost perfect answer. Canal water is usually taken first by the local landlord, and after all his needs are satisfied, whatever is left is allowed to flow downstream where the smaller farmers are left to fight over it. The further away one’s farm is from the canal headworks, the lesser the likelihood that any water will be left by the time it reaches you.

Something similar happens with the scarce electricity in our distribution system, with one important difference. Unlike water, electricity does not flow according to gravity. Its movement through the transmission and distribution system can be channeled and controlled very precisely. This means that there is little difference between upstream and downstream players because electricity can be sent to its point of consumption much more easily than water can be.

So privileged consumers — those for whom electricity is made abundantly available and often for free — are scattered all over the country and they include government offices, ministerial residences and military installations, offices and housing. One of the saddest statistics I have ever come across was the one that showed the government’s outstanding electricity bills standing around Rs350 billion, which is the exact size of the outstanding payables in the circular debt. Not only does the consumption of this privileged class of consumers result in shortages for everybody else, but the cost of providing them free electricity has to be borne by those who regularly pay their bills i.e., you and me.

Given these three failures — fiscal, fuel and governance — no amount of additional power generation capacity will help in alleviating the power crisis. More than anything else, what Pakistan needs right now is the proper exercise of political power to raise revenue, arrange alternative fuel supplies and bring transparency to the way electricity is allocated within the system. Until then, our streets will continue to burn.

Published in The Express Tribune, April 5^th, 2012.

Caution: experimental thoughts ahead!

Should countries spend their way out of recession and debt difficulties? For many decades now, a creditors orthodoxy has said that the most appropriate response for a developing country’s debt difficulties and recession is to bring discipline to government finances, spend less and tax more to reduce the fiscal deficit and stop a ruinous cycle of borrowing.

This orthodoxy has been enshrined in the numerous IMF programmes since at least the early ‘80s, long before the formation of any ‘Washington Consensus’. Of course, throughout those decades, only developing countries found themselves on the business end of this orthodoxy, and any critiques that emerged of this thinking were easily brushed aside by the powerful cartel of international financial institutions (IFIs) that represents the interests of sovereign creditors.

Pakistan partook greedily from the coffers of these IFIs since the early ‘80s, but because we were useful pawns in a superpower contest, much of the discipline in public finances called for in these programmes could be dispensed with. Our early borrowings from the IMF — two facilities in the early ‘80s — were both criticised within the Fund as being “mere financing” and no reform.

But in the 1990s all that changed. As we signed onto a Structural Adjustment Facility in 1988, at the conclusion of the Afghan war, the demands for discipline in public finances became serious, waivers became harder to obtain, and reform in the structure of government became the policy north star. For all our self-critical commentary on economic matters, we tend to forget that the decade of the ‘90s saw some very important reform measures advanced, when capital markets were freed up, Sales tax legislation was passed, the first privatisations began, and the power sector was opened up to private investment. None of this would have happened had it not been for pressure from our foreign creditors to bring government finances under control.

And we were not the only country pursuing these policies. Throughout the world, the orthodoxy spread like wildfire with the collapse of the USSR. Eastern Europe and Russia were in the cold grip of ‘shock therapy’, and countries in Latin America and Africa, too, stood on the doorstep of the IMF and struggled with the demands to curb government expenditures and raise revenues.

Strong opposition was voiced against this orthodoxy, and the opposition rose to a crescendo in the wake of the financial crisis in East Asia in 1997. One of the strongest defectors from the orthodoxy was Joseph Stiglitz, who in the wake of the East Asian crisis, famously declared that the IMF had prescribed the wrong medicine, that countries facing a sudden collapse of growth should not retrench their expenditures and should not hike up interest rates, but rather should grow their way out of their difficulties by following a “counter cyclical” fiscal and monetary policy.

In short, Stiglitz was telling the world that the right policy for East Asian countries would have been to spend more and pay for it through short-term borrowing, wait for growth to resume and then let the dividends of that growth pay off the short-term debt. Of course nobody listened to him, at least nobody in a position to make a difference, and even when they did listen it was with jaundiced ears, with extreme prejudice.

But the opposition to the creditors orthodoxy that Stiglitz embodied did not go away and today many of them are having their ‘I-told-you-so’ moment. Today, the orthodoxy has come home to bite, as creditors in the Eurozone struggle with another set of countries that has borrowed its way into oblivion, except this time, the set of countries happens to be in their own backyard.

Today, we behold the spectacle of the creditors dithering in the face of a visceral opposition to their agenda on the streets of Athens. This is no longer food riots in Cairo or a general strike in Lima or student riots in Jakarta. This is Athens — the seat of western civilisation, as we were taught in ‘Civ 100’. This is a country that can say no to its creditors safe in the knowledge that if it goes down, they go down with it. And after weeks and weeks of stalemate, this country has finally done what decades of turmoil in the streets of developing countries was not able to do: it has caused its creditors to blink.

The bail out of Greece agreed to in “marathon” talks that dragged on for 13 hours has “closed the door to a disorderly default” according to Christine Lagarde of the IMF. But more importantly perhaps, the agreement opens the door to further debt write downs in the future and that is the important part. Because with this agreement, the creditors orthodoxy that has a pedigree which spans the decades and the continents begins to come unhinged. Quite possibly, for the first time ever, the representatives of major creditors are questioning whether curtailing deficits should be a bigger priority than safeguarding growth for a country in the throes of recession and burdened with debt.

And that is the crux of the matter for us. Since 2008, we have been committed to a path of austerity in the face of collapsing growth and rising unemployment. Of course, we have not delivered on our commitment with any level of earnestness, but the question is: Should austerity even be the yardstick for us? It’s time to revisit this question I think, because one thing the torturous negotiations around the Greek debt debacle have made very clear is that austerity causes growth to drop, which makes debt servicing even more difficult, which necessitates more borrowing. This is exactly what they call a vicious circle, and where creditors in Europe have agreed that austerity alone will not lead Greece out of its difficulties, I would like to know how the same road is expected to lead us out of our present cul de sac.

Published in The Express Tribune, February 23^rd, 2012.

It is undeniably one of the best ideas of the past decade. Opening up trade with India is exactly the sort of boost our economy needs to break out of its lethargic ‘low growth-high inflation equilibrium’.

The last time our economy received such a boost was when the Middle East oil boom got underway. We were able to tap into the lowest rungs of that boom by becoming an exporter of raw manpower. And those exports opened up a stream of remittances that have carried us through some of the most difficult periods in our economic history.

Now a boom is underway to our east, in India. And once again, we need to find a way to tap into this boom. The engagement this time will be a lot more complicated since it involves a two-way trade process in which some parties stand to gain and some to lose.

But a trade engagement with India makes far more sense than going to western countries and practically begging for ‘market access’. Think about the absurdity of it. We line up outside western capitals asking for preferential market access in the name of aid, ‘trade not aid please’, arguing that this is the best way to help the flood affectees or assist Pakistan bear the costs of the war on terror. Meanwhile, these same western countries are lining up for access to India’s growing market, from which we have voluntarily locked ourselves out for silly reasons!

The most logical thing to do is to open up a trade engagement with India and stop asking western countries for preferential market access. Of course, a trade engagement with India will require some homework from our end first and that’s something relatively too new to us.

For instance, when drawing up a ‘negative list’ of prohibited items for trade with India, the commerce ministry complains that industry representatives are slow to cooperate with the ministry in providing their input. The chambers of commerce for their part complain that individual industry players are slow to provide any input to the chamber leadership.

The fact is, our industry players have a hard time thinking about anything beyond very narrow and very short-term vested interests. They prefer to remain obsessed with the latest SRO from the Federal Board of Revenue or the direction of interest rates or latest gas allocations. Of course, all of these day-to-day matters are very important and deserve attention, but far too many industry players remain obsessed only with these sorts of things and are totally incapable of taking a broader view of things when asked to do so.

This is why the commerce ministry finds it so hard to get any input when drawing up the negative list. When they do draw up the list and present it before the cabinet for approval, protests are quick to materialise from industry quarters that they were ‘not consulted’.

Something along these lines is what appears to have happened during February 14’s cabinet meeting, when the commerce ministry was denied cabinet approval for its negative list of 636 items. It is not clear what exactly the objections were, but reports indicate that ministries of textiles and interior raised objections.

The interior ministry probably objected to some items it perceived as ‘sensitive’ or of a security nature that were not present on the list. Leave it up to interior, and chewing gum will be on the list, too, for being a ‘security threat’ for Pakistan. Never mind that suicide bombers are able to ply their trade with impunity within Pakistan without resort to any items imported from India. If only interior had a better track record in suppressing the traffic in bomb-making materials. But then again, suicide bombers don’t really seek cabinet approval before carrying out their acts, which doubtless, makes it difficult for the interior ministry to deny them permission!

The textiles ministry needs to simply be wound up. I don’t know anyone in the textile industry who thinks the ministry is serving any useful purpose at all. Perhaps, it should be demanded from them to produce a report on what their achievements have been thus far. I’d love to read through that report and write about it!

The fact of the matter is that the process of ‘stakeholder consultation’, which the commerce ministry has tried to implement while drawing up the negative list is something our government and industry reps are still unaccustomed to. It is one thing to travel the world in search of our next fix of cheap aid — whether preferential market access or budgetary support — but it’s another altogether to participate in a serious policy process that aims to anticipate and fine-tune a trade policy that will transform the fortunes of many groups. One big positive to come out of engagement with India is that we are learning to do the latter.

Published in The Express Tribune, February 16^th, 2012.

The latest report on Pakistan’s economy produced by the International Monetary Fund (IMF) lays stress on two key vulnerabilities that pose a danger to the fledgling stabilisation effort that was launched in November 2008. These two vulnerabilities are the growing fiscal deficit on the one hand, and a weakening external account on the other.

Regarding the external account, the biggest impact of continuously sliding reserves will be felt in the value of the currency. With large withdrawals looming in the form of debt service obligations, the impact is no longer something to be whispered about. “[S]taff considers the rupee to be somewhat overvalued relative to fundamentals” says the report, going on to add that “declining reserves, strains in global financial markets, and commodity price variability suggest there is considerable uncertainty about the extent of overvaluation.”

In plain English: “The rupee is set to fall against the dollar, but we cannot say by how much”. The only way to pre-empt this outcome is to heed the advice offered up in the State Bank’s quarterly report: “Pakistan must make all efforts to ensure the resumption of financial inflows.”

The IMF stops short of such a categorical declaration, perhaps because efforts to resume financial inflows in the short-term have a great deal to do with the Coalition Support Funds that are stuck, which in turn have a great deal to do with ongoing high-profile military diplomacy between Pakistan and America.

The government is getting broadly similar advice from the representative of its creditors and its own central bank — which is that you can’t go it alone. Pakistan may have shut down Nato supply routes thinking that the cost such a move would impose on Nato forces in Afghanistan would be prohibitive, and like last time, it would compel America to heed Pakistan’s wishes in the war on terror. But if the IMF and State Bank advice is read properly, it clearly tells us that the cost for Pakistan is also very large indeed. So in this ‘mutual assured destruction’ gambit, who will blink first? The answer lies in that zone of “considerable uncertainty” that the IMF mentions with regard to the extent of the impact that frozen inflows will have on the value of the rupee.

The report contains gems buried everywhere in the narrative. I particularly liked this sentence for its Godfather-esque quality — “Any further contemplation of monetary policy loosening should await clearer disinflation signals, and the SBP should be ready to tighten policy if inflation or external pressure increases.” Translation: “Don’t even think about lowering interest rates any further!”

Banking sector vulnerabilities are repeated throughout the report, at one point making reference to the need to quickly pass deposit insurance legislation that apparently has already been drafted. The language is similarly tough: “Action is needed to address the NPLs (non-performing loans) and bank supervision should be strengthened. Remaining problem banks need to be resolved without delay.” Note the last two words, “without delay”. These “problem banks” may not be very large and do not present any systemic risk as such, but nobody knows how a bank failure will play out in Pakistan for one simple reason: our banks have been state-owned for the past four decades or so of our history.

Could a contagion effect break out, where a small bank failure triggers panic withdrawals and sends the rumour mill into overdrive, forcing other well capitalised banks to also come under stress? Quite obviously so, which is why the IMF repeatedly calls for addressing the rising NPLs, strengthening bank supervision and also passing deposit insurance legislation. But above all, it urges the government to nip the problem in the bud and resolve problem banks “without delay,” meaning “get your ass moving on this gentlemen!”

And this is not the only area where urgency is required. Regarding fiscal issues, for instance, the report says that the year-end deficit is likely to hit seven per cent of GDP, which is higher than the 6.6 per cent of the last fiscal year. “[F]iscal vulnerability is high and needs to be addressed urgently,” the report says, going on to add that the last NFC Award has made the job more difficult because of a “large and unbalanced devolution” of spending responsibilities to the provinces.

Rising domestic debt is the most likely outcome of continued fiscal deficits, presenting “substantial rollover risks” due to the banks appetite for shorter tenors. The report echoes Moody’s assessment of Pakistan’s banking system in pointing out that growing sovereign exposures on bank balance sheet present ‘event risk’ for banks.

All of this has been known for a long time now. The urgency of the language is to be noted, as are the growing stakes in the ongoing freeze in relations with our largest creditor and ally.

Published in The Express Tribune, February 9^th, 2012.

Looks like it’s back to business as usual at the State Bank. After a bombastic annual report that raked the government over the coals for its ‘governance’ failures, the newly-released first quarterly report has reverted to the mealy-mouthed language typical of State Bank publications. Have the ‘governance’ failures outlined in the Annual Report been fixed? Or is the quarterly report too polite a forum from where to stir such controversies?

Having pegged the country’s economic difficulties on ‘governance’ failures, one would expect that the State Bank would track the governance record closely in subsequent pronouncements.  Instead we have a press release accompanying the first quarterly report with the tagline: “Government making headway towards improving its finances”.

The release points out an improvement in revenue collection in the first quarter, saying the budget deficit dropped by 0.3 per cent of GDP compared to last year. A drop is good news in a time when all that goes up rarely ever comes down — so on the face of it a reduction of the quarterly budget deficit does sound like good news.

But even the most obsequious choice of words cannot hide the most basic realities. The central bank preferred to open its press release on an optimistic note, delivering its otherwise grim assessment with a cheery smile. But a closer reading of the report itself shows the tenuous ground beneath this optimism. Of course it takes an exegetical treatment usually reserved for the Old Testament to extract any meaningful sense out of State Bank publications, and this quarterly report is no different.

Take the drop in the quarterly budget deficit target for instance. The chapter on fiscal policy explains the drop with these words: “The strong growth in tax revenue was largely due to import-related sales tax, which was supported by higher unit value of crude oil and fertilisers during the quarter.”

It’s fair to say that revenues have grown in the first quarter of this fiscal year, but it’s misleading to present this data as evidence of the “government making headway towards improving its finances”.  The State Bank did not withhold its caveats in the annual report so one is entitled to wonder why they’re doing so now.

The report is silent on the predicament of the public sector enterprises (PSEs). This is surprising considering how much noise the annual report had kicked up about these entities and their fiscal burden, and also surprising because “settlement of circular debt of power sector PSEs and public procurement agencies resulted in a substantial Rs 572.2 billion increase in the stock of total debt & liabilities, during the first five months of FY12”.

Have the governance weaknesses at the PSEs, that the annual report screamed about, been resolved?  Has the State Banks voice been ignored?  We’re not told, in spite of the continuing crushing fiscal burden that these enterprises place on public finances, the State Bank chooses to drop that potato altogether in this report.

On the external sector, the picture gets truly grim. True to form, the accompanying press release begins its paragraph on the external sector by blowing some sunshine about last year’s strong numbers before coming around to the business at hand: “The pace at which the current account deteriorated during the first quarter of FY12 took many by surprise”, going on to mention that in September 2011 alone, the current account deficit touched one billion dollars.

But this isn’t even the beginning of it. The report unhappily notes a “$1.9 billion reduction in SBP’s liquid foreign exchange reserves from July to Nov 2011”. The outflow of reserves drained market liquidity, so the SBP pumped over Rs300 billion into the banking system through what they call open market operations (OMOs). The sums involved in the outflows and market management operations are matched only by the government’s borrowing requirements during the same period.

And it gets better. About the worsening external account, the report says it was “on the cards” but the “timing and magnitude was unexpected”.  If it was “on the cards”, gentlemen, may we ask from where you quarried your optimism in the July and October 2011 Monetary Policy Statements, specifically in October when you described the foreign reserves as “comfortable?” Or was that comfort “on the cards” too?

“Pakistan must make all efforts to ensure the resumption of financial inflows,” the report declares after noting that export proceeds will continue to drop, leaving us with remittances as the last surviving inflow through which to finance a growing import bill.

The ramifications of this should not be underestimated. The report points to two areas of vulnerability as forex reserves continue declining: market liquidity and the currency. In both cases the central bank has had to intervene to stabilise things, with large scale OMOs and currency interventions that depleted SBP reserves. But how long can the State Bank hold out like this?  One lesson from the crisis of 2008 teaches us that continuously declining reserves at some point can trigger panic withdrawals and quickly turn into a financial and banking crisis. We don’t know where that point lies, and we sure don’t want to find out from experience. When one recalls those days, one understands what the State Bank means when they say “make ALL efforts” to resume financial inflows.

Deteriorating terms of trade is only the first step in an adverse external environment that everybody knew we were entering as far back as July. The next step is external debt service obligations that get going in a big way in February with a $1.2 billion payment to the IMF, rising to $4.1 billion before end June, according to the report.

Caught between growing government borrowing and depleting reserves, the State Bank is standing in a very unhappy place these days.  Given the seriousness of the situation, one wonders why they’re choosing to back away from the heady tone adopted in the annual report. Did a messenger arrive bringing clarity regarding the government’s compulsions?

Published in The Express Tribune, February 2^nd, 2012.

On the eve of America’s massive escalation of its war in Vietnam, Herbert Marcuse (1898-1979, German philosopher, known as the father of the “New Left”) warned it about submitting to “a defence that deforms the defenders and that which they defend”. Marcuse’s polemic focused on a growing militarisation of society and individual consciousness. He saw a peculiar danger facing American modernity from the potent mix of prosperity and militarisation, from consumerism at home and imperialism abroad.

The words were written in 1964, and were neither the first nor the last warning that America’s commitment to underwrite global order had produced a dangerously overdeveloped military apparatus. In fact, America’s stint as a superpower with global commitments has been accompanied by a steady drumbeat of dissident voices that have warned about the growing danger from the militarisation of America’s state and society.

The most famous early warning came from Dwight Eisenhower, three days before the end of his Presidency, when in a remarkable speech he warned of the “grave implications” of the “conjunction of an immense military establishment and a large arms industry”.

“We must guard against the acquisition of unwarranted influence… by the military industrial complex,” he said, explaining that the “very structure of our society” was at stake.

Nor is America the only country that holds out lessons of the damage that an overdeveloped military apparatus can inflict upon its host society. The rapid bursts of industrialisation that Germany and Japan saw in the decades before and after World War I were also spearheaded by a military establishment. In both cases, the industrialisation was accompanied by a growing belligerence towards their neighbors, by the emergence of a political will to subordinate all social institutions and human consciousness to the needs and demands of the military. Eventually, the growth trajectories of both these countries carried them into disastrous wars the scars of which are visible on their faces to this day.

I don’t know whether the advance of German and Japanese industry was accompanied by any dissident voices warning about the disastrous stakes involved in subordinating all of society to martial virtues. Common sense says there must have been voices of reason trying to calm the turbocharged march into great power rivalry. And hindsight tells us they were eventually proved right.

Examples of overdeveloped military institutions are not hard to find in our time. And in every such case — and I challenge you dear reader to find me an exception — such overdeveloped military ambitions have taken their own society down a path of extreme destruction, of extreme degradation of human consciousness, of complicity in great crimes, of a public culture commanded by paranoia and deluded symbols and false arrogance, of the virtual enslavement of the populace in the clutches of poverty, disease and ignorance, towards “a community of dreadful fear and hate” as Eisenhower warned.

In short, every such defence has “deformed the defenders and that which they defend”.

But great power rivalries are not the only crucible where such militarised monstrosities are forged. Regional rivalries can get the job done just as well. Nor does one have to be a great industrialised power to harbour such ambitions of arms and glory. Poor countries have their own peculiar strengths in such endeavours.

Pakistan has had an overdeveloped military establishment for many decades now, but an important turning point marks the evolution of its growing dominance over state and society. In the sixties, our concept of any ‘strategic defence’ could be summed up in two phrases: “the defence of the East lies in the West” and “waiting for the Seventh Fleet”.

The thinking at the time was that any attack on the Eastern wing would be countered by opening a front on the West, forcing the enemy to fight on two fronts. Secondly, the thinking took as an article of faith that being an ally of the superpower meant that its armed might would always come to our defense.

Of course the 1971 war proved that both these elements of our defence were deluded, to say the least, and the country paid the price through a disastrous and blood-soaked dismemberment, a humiliating defeat that saw the post-war world’s first successful separatist movement and the first ever “humanitarian military intervention” by any country.

The security establishment that dragged the country into this disaster spent the next decade licking its wounds and nursing its pride back to health until the 1980s, when geography and history conspired to bequeath unto it a new set of implements with which to resurrect its search for a ‘strategic defence’. The nuclear weapons programme made its most meaningful advances under the cover provided by the Afghan war, and the machine of covert war that plies its deadly craft with the use of irregular militias was assembled during this time.

Today, more than three decades later, both these tools of our ‘defence’ hang like a millstone around our necks. Today we remain stubbornly stuck in a ‘defence’ that we embraced decades ago, and that “defence” is deforming us and the homeland we seek to defend. Thanks to the military’s misguided stewardship, Jinnah’s Pakistan has already been cut into two. Today it is a breeding ground for dreadful fear and hate, an isolated pariah that happily gives safe harbor to the world’s deadliest criminals and ideologies while flaunting the will of the world community.

A degradation of mind and body has accompanied our growing reliance on this ‘defence’. Our school textbooks have been injected with hate and apocryphal tales to sustain the requirements of this ‘defence’, and the memory of our founding fathers — Jinnah and Iqbal — has been desecrated to make it fit the mould of militarised nationalism. Our hospitals are starved of resources, our public schools turned into grazing grounds for herds while fiscal resources are ploughed in unknown quantities into an opaque and unaccountable military budget. From our politics to our economy, to the minds of our children and the classrooms in which they are taught — no area of our society has escaped the footprint of this defence, which has deformed us and that which we defend.

Published in The Express Tribune, January 19^th, 2012.

The government’s growing entanglement with the courts and the sudden and mysterious emergence of Imran Khan are part of an old game that has been played in this country for many decades now. But would it not make sense to simply let this government finish its term, since the end is in sight already? Why risk a messy transition when a clean one is coming your way in any event? A look at history provides some clues. I’m reminded these days of the game that unfolded as the Soviet Union began its withdrawal from Afghanistan in 1988. The decision had left the Pakistan Army facing a number of crucial questions.

First question: what to do with the government left behind by the Soviets? What fate to mete out to the then president Mohammad Najibullah? The answer was obvious. Najibullah must go and be replaced by a dispensation consisting of the mujahideen factions and their khaki overlords in Pindi. The second major question was: how to deal with India, the neighbour perceived by them to be indelibly hostile to Pakistan. The superpower alliance had served as a protective umbrella of sorts. But with the alliance withering away, Pakistan would be left to its own devices against a far larger army to its east. The answer here was to take the machinery of covert war that the American’s had helped build to fight the Soviets and turn it towards India. Pin their army down in the mountains of Kashmir, and possibly expand the theatre to Indian Punjab as well.

Remember the brief flowering of the Khalistan movement in Indian Punjab? Remember the hoopla in Pakistan when it was said that Benazir had handed over to the Indians a list of all Pakistani assets in Indian Punjab said to be part of the Khalistan movement?

If you questioned military officials in those days regarding their perception of India as an indelibly hostile neighbour, they would talk to you about Brass Tacks and Siachen. And clearly, they found it inconvenient to redirect their machine for covert war towards India while having to look over their shoulder at the civilian government, a paranoia especially stoked by the Khalistan list incident. A very similar realignment is underway in Pakistan today, as another superpower army prepares to withdraw from a decade of war in Afghanistan. And a very similar set of questions arises in the wake of this withdrawal.

Question one: what to do with Hamid Karzai once the Americans are gone? Answer: he can join Najibullah, Kabul must be ruled by a dispensation chosen in Pindi. Today, if you ask any military official about India, they will talk to you about Cold Start. The need to be wary of the army in the East remains. The instruments of preparedness now include a beefed-up nuclear deterrent, the protection of which itself has become a new strategic objective.

The present moment has the benefit of offering an alternative to the Americans, something that was not available in the late 80s. Hence, the frequent trips to China, from the DG ISI to Imran Khan’s night flight to Beijing the day after the Lahore rally, to the COAS’s five-day sojourn there only recently. Which brings us to the big question: why now? Why try and bring the government to grief at this point, so close to the finish line, when all you have to do is wait a year? My best guess is that the timing has everything to do with the talks going on with the Taliban.

We know that Kabul and Pindi are both engaged in their own talks with the Taliban to negotiate an end to the hostilities. We also have reason to suspect that they are both trying to disrupt each other’s efforts. We know the talks are treacherous and delicate, as the events of Jamrud, Orakzai, Khyber etc., are making clear day by day. It must be monumentally inconvenient to undertake such a delicate task while having to constantly look over your shoulder at the civilian government, particularly its ambassador in DC. Enter Imran Khan, with his strong stance to end the hostilities through talks, along with Shah Mahmood Qureshi by his side, talking about Cold Start and protection of nuclear weapons.

The court entanglements of the present government bring to mind the no-confidence motion of 1989, an episode BB narrowly survived but which left her government mortally wounded. The rise of Imran Khan brings to mind the rise of Nawaz Sharif. Just like the hidden hand in those days was preparing the ground for the new reality that would emerge following the Soviet withdrawal, so today, it is girding itself for a post-American Afghanistan and it needs its own people in a civilian set-up to see its efforts through.

Published in The Express Tribune, January 12^th, 2012.