A renowned Economist and Educationist of Pakistan

Sartaj Aziz: Well, Pakistan is facing not just one crisis but a series of multidimensional economic crises mutually reinforcing each other.  Most severe of these is the fiscal crisis. In the past five years since 2007-08, our fiscal deficit has 6.5 to 7% of GDP each year against the target of 4 or 4.5%. Cumulatively this has become a very serious problem. Last year the overall deficit was Rs. 1200 billion. In fact, this growing deficit is creating many problems; first the excessive printing of currency notes increases inflation, secondly heavy borrowing by the public sector crowds out the private sector and the resultant high interest rate it discourages economic revival. The impact of double digit inflation for the last six years has affected the common man directly.

The second emerging problem is the current account deficit and the external situation. Last year it was reasonable because of high prices of cotton but this year our textile exports have fallen by 10% and our reserves are also falling rapidly and the rupee is losing value gradually.

The third crisis is the slow growth rate in the last six years. We are having a growth rate of only 2.5% to 3% a year with income distribution being uneven and a population growth rate of over 2%, there is hardly any increase in per capita income. So, the poor are becom ing poorer and unemployment is increasing. Furthermore, a contributory factor in the slow down of growth is the steady decline in the ratio of investment to GDP. This is partly because of geo-political factors and law and order situation and partly due to corruption and poor governance. In early ’90s the investment GDP ratio was over 20%. It has now declined to 12 or 13% from which you can get a growth rate of only 3%. In addition, the energy crisis is also contributing in slowing down the growth rate, factories are shutting down because of longer power breakdowns and high prices of electricity and gas.

Without revival of the economy we cannot solve any of these problems, i.e. poverty, unemployment or inflation. These are the multidimensional economic crises which are affecting the economy of Pakistan. In other words, structural problems, some of which we inherited like current account and fiscal deficits but these problems have been further compounded by poor governance and have created a sense of despondency in the nation.

JWT: Do you think Punjab is facing discriminatory treatment as far as power supply is concerned and is there any immediate solution for the circular debt problem.

SA: First of all the circular debt problem was caused by high petroleum prices in 2007-08. Oil prices went up from $70 to 140 a barrel but the government could not increase the electricity prices accordingly. The electricity companies kept on purchasing oil at high prices and selling electricity at low prices. Since the government did not have enough money to compensate the difference, it started accumulating as circular debt. But this has been further compounded by poor governance reflected in increased line losses and theft. We also have serious issues in terms of efficient utilisation of installed capacity. The companies do not have enough money to buy oil; our thermal capacity is 13000 MW and because of lack of maintenance now generates only 7000 to 8000 MW.

There is no easy solution but apart from finding resources to reduce the circular debt, the energy crisis can be solved if concerted efforts are made to reduce line losses and improve the efficiency of the existing plants. In the medium run we have to increase our dependence on our own resources, i.e. coal and hydro power.

As far as discriminatory treatment for Punjab is concerned, it can be verified from a comparison of load-shedding in different provinces. If Punjab is facing longer hours of power breakdown as compared to Sindh and KPK, then obviously it is discriminatory treatment. On the other hand, the discrimination is more serious in case of gas because in this case a provision of the 1973 Constitution has suddenly been invoked to give more gas to Sindh and KPK without giving consumers in Punjab some time to adjust to this reduction.

JWT: Industries are being shifted from Karachi to Punjab, Jordan and Bangladesh. Where this situation will take us to?

SA: This is a serious problem. The worsening situation of law and order, threats of terrorism; poor governance and corruption are the major factors to shift business concerns from Karachi to other cities in Pakistan and from Pakistan to other countries. In fact, we are entering a phase of ‘de-industrialisation’.

JWT: Economic activity is snail-paced globally, even the developed countries are facing an economic crisis. In this scenario where do you see Pakistan after two years?

SA: The global economy has been in crisis since 2007, the recovery in America remains very slow and now Europe is in a more serious situation after the recent euro crisis in Greece, Spain and some other countries. This has affected our export prospects since the demand for our products has declined in these countries. Naturally, the competition becomes tougher when demand is lower. So, first of all we have to improve our efficiency which requires that we have to reduce the cost of doing business in Pakistan. Apart from the lower demand for our exports, the energy cost is very high, there are bureaucratic hurdles as well. Secondly, we have to go for more regional cooperation because the Asian markets are not as depressed as the European markets. So, the most important task is to develop a ‘look-east policy.’ Pakistan is dealing with these options by increasing its engagement with SAARC, ECO and other regional organisations.

JWT: You had a dream of border free and common currency region for South Asia when you were finance minister. Is that dream still relevant today?

SA: Yes, it is still relevant but it will take time.  There was a group of eminent persons which SAARC Summit had appointed in the last 1980s; they presented a roadmap to start with a preferential trade area then a free trade area then a common market and then a common currency. So, these are the stages of regional integration but it is moving slowly as we have not even completely gone from preferential trade area to free trade area up till now. There was a decision of SAARC Summit in January 2004 whereby by 2013, we would have only 5% duties on each others’ exports and eliminate all non-tariff barriers. But this target is not likely to be achieved.

JWT: The government which passed the budget 2012-13 is facing the political crisis. Do you really think that the government can fulfill its promises which they made in the budget?

SA: Obviously, it is going to be a very difficult task because it is an ambitious budget. The expenditure side of the budget totals Rs. 3203 billion. Our own resources are Rs. 1775 billion leaving Rs. 1428 billion as the unfilled gap. So, one can see the difficulty easily. Our total tax revenues are estimated at Rs.2500 billion and non-tax revenues at Rs.730 billion. But after transferring Rs.1459 billion to the Provinces, net Federal Revenues will be only Rs.1775 billion. Unfortunately, our debt servicing alone is Rs.1142 billion and we require Rs.545 billion for defense. Nothing else is left and all the non-development and development budget will have to come from borrowing either from external borrowings or from internal borrowings further adding to the debt burden. The new government which has taken over will be under immense pressure and their ability to deal with the economic difficulties will remain weak.