In­ter­view: Dr. Muham­mad Yaqub

SouthAsia talks to Dr. Muham­mad Yaqub, for­mer Gov­er­nor of the State Bank of Pak­istan, in this ex­clu­sive in­ter­view

Southasia - - CONTENTS -

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.

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