Interview: Dr. Muhammad Yaqub
SouthAsia talks to Dr. Muhammad Yaqub, former Governor of the State Bank of Pakistan, in this exclusive interview
The World Bank says it is ready to provide support to Pakistan’s future economic road map. How can the country make the best use of this?
Up to the early 1970s, the World Bank mostly provided project assistance on soft terms that proved helpful in building the productive capacity and physical infrastructure of the country. The recent World Bank assistance, however, has mainly come in the form of lending for policy reforms, budgetary support and technical assistance. It has usually been wasted without producing any concrete results. But, at the same time, it has built up our foreign debt.
Like its predecessors, the PML-N government is also taking ad-hoc economic decisions and has not given a coherent and internally consistent long-term economic road map so far. If it could lay out a long-term vision and road map to overcome the country's chronic economic problems, the availability and proper use of World Bank loans would ease the pain of policy reforms and also help enhance the country’s productive capacity.
But notwithstanding the statements of its leaders, the PML-N has not really come out with a comprehensive package of macroeconomic policy reforms. The finance minister takes pride in having been able to get commitments of loans of more than $12 billion in the next three years from multilateral institutions. But, in the absence of structural reforms, these loans will basically be used in firefighting. Given the huge public-sector debt, the lack of capacity to service it and without a comprehensive economic road map, lending by the World Bank and other multilateral organizations would only encourage the government to remain in the firefighting mode and this will add to the external debt burden. What ails the Pakistani economy and how can the country recover from its current problems?
Generally, the mother of all our current economic ills is the lack of good economic governance while, in specific terms, mismanagement of the budget is to blame for our economic woes. The former has led to poor economic planning and internally inconsistent macroeconomic policies that have hurt the rate of savings and investment and promoted stagflation. The latter has created the burden of huge public-sector debts and a high rate of inflation.
The first requirement for our economic recovery is that the budget should be brought under control. The tax base should be expanded to bring the rich and the powerful – absentee landlords, operators in the underground economy, professional groups, unincorporated business and industry, the land mafia and real-
estate tycoons and other 'rentier classes' – in the direct tax net. Additionally, a consumption tax of the VAT variety should be introduced and the economy documented. Tax administration should be freed from corruption and inefficiency.
All this should help increase the currently low tax-toGDP ratio over time. Increased revenue should then be spent on employment-generating and growth-promoting activities rather than wasting it on current expenditure or prestige projects. The loss-making public-sector enterprises should be privatized. With the budget under control, the government will have to lay down a comprehensive macroeconomic framework within which the private sector could operate.
It is a tall order but without good governance, a fundamental improvement in the budget situation and a road map for policy reforms, the country will continue to move towards hyperinflation, debt trap and the collapse of the balance of payments. Do you agree that the Pakistani economy cannot function in isolation and the concept of decoupling is not workable since there is always an interchange of trade and investment between countries?
The country cannot live in isolation in the current age of globalization and economic interlinks among countries. Pakistan has to improve its efficiency of production and the rate of output growth and ensure relative price stability to be able to compete in the world markets. It needs to generate foreign exchange not only to meet the country's import requirements for essential consumer goods and machinery, raw material and spare parts but also to continue to service its foreign debt. Was the policy of deregulation correct when it was implemented?
Till the 1970s, the world was divided between the public sector-dominated and centrally-planned socialistic economies and the private sector-oriented, marketbased free enterprise economies. Since then, the world has moved to a single system of reliance on the private sector as the engine of economic growth within a strong regulatory framework to control excesses and oligopolies. Pakistan did the right thing to take the public sector out of production and distribution sectors and privatize industries and businesses that were nationalized by the first PPP government led by the late Z. A. Bhutto.
However, we failed to develop a strong and effective regulatory framework within which the private sector should operate. This has created a dual society where a minority lives in an island of prosperity in an otherwise deep ocean of poverty.