Look beyond General stereotypes

Indian Express, 23 February 2005

A change in policies has brought about a turnaround in Pak economy. The country has managed to raise GDP growth to over 5 per cent. Inflation has fallen below 3 per cent. Fiscal deficit has been curtailed

Budget 2005 is around the corner. On the wish list of economists who want to see high growth in the economy is a clean-up of the tax system, an improvement in tax administration, privatisation of public enterprises and reform in the banking sector. Given the support the UPA requires from Left parties, these goals seem to be distant. Yet these sound growth-oriented policies have not been so difficult for our neighbour to attain.

In 2000, the Pakistani economy was on the brink of collapse. Per capita GDP growth had fallen from 3 per cent in the 1980s to 1.2 per cent in the 1990s. Government debt had risen beyond 100 per cent of GDP and interest payments had risen to 6.8 per cent of GDP.

In three years, a change in government policies has brought about a turnaround in the economy of Pakistan. The country has managed to raise GDP growth to over 5 per cent. Inflation has fallen below 3 per cent, the fiscal deficit has been curtailed and public expenditure growth brought under control.

A loan from the IMF and World Bank in 2000 helped save Pakistan from default. But it came in 12 tranches with very specific conditionalities to be fulfilled before the release of each tranche. The IMF agreed to give the loan only after a stand-by programme which tested the government’s commitment to implementing the conditionalities.

These conditionalities were very strict since Pakistan has had a bad record of not complying with them. Ishrat Hussain, Governor of the State Bank of Pakistan, the central bank, remarks that in 2000 when Pakistan successfully completed the stand-by programme with the IMF, it was the first time that the country, known as a ‘‘one-tranche country’’, ‘‘demonstrated such high degree of responsible performance’’ and was able to get three tranches of the loan in one go.

The IMF-World Bank conditionalities for Pakistan included introduction of a goods and services tax, cuts in tariffs, improvements in tax administration, privatisation of public-sector banks, private-sector entry in telecommunication, reforms in the oil and gas sector and privatisation of electricity.

Pakistan had followed India’s example in the slide into state domination of the country, and the banking sector in Pakistan had been nationalised in 1974. Twenty years later, PSU banks in Pakistan were like India’s, with NPAs, inefficiency, high costs and poor services. One of the performance criteria of the Fund-Bank Country Assistance Strategy (CAS) to Pakistan was the sale of United Bank Ltd and Habib Bank. As the progress report of the World Bank on CAS notes, the government of Pakistan did this successfully.

Indeed, the major support portion of the World Bank loan, a sum of US $416.5 million, is to the financial sector. Part of this money went for schemes for voluntary retirement to reduce the size of the staff in public-sector banks. As a consequence of privatisation, the share of public-sector banks in deposits has fallen from 90 per cent to 20 per cent. Reforms have also been initiated in the oil and gas sectors. The Oil and Gas Regulatory Authority is in place and will start regulating the sector as soon as the rules are in place. Though reforms in the power sector have not been satisfactory, some beginnings have been made.

While the IMF loan is now fully drawn, Pakistan continues to get long-term assistance from the World Bank.

In brief, Pakistan has made some very positive achievements in economic policy in recent years. We can only look enviously at their ability to drop the share of PSU banking from 90 per cent to 20 per cent within two years. The question relevant for India is: Can we not undertake growth-enhancing reforms on our own? Surely India has both the resources and the expertise to undertake these reforms itself, without assistance from the World Bank or IMF.

The government of Pakistan was asked to remove tax exemptions from National Savings Schemes, to implement a 15 per cent GST, to enact a Fiscal Responsibility Bill, to broaden tax base, to improve tax administration and to establish only three levels of tariffs. Surely India does not need the IMF or World Bank to tell us that these are good economic policies. Or is it that we also need the help of the IMF or the World Bank in order to take on vested interests on issues such as privatising PSU banks or introducing the GST?

Ila Patnaik

Ila Patnaik