When former prime minister and finance minister, Shaukat Aziz encouraged consumer-led economic growth, little did he realise that in the coming years this will fuel unprecedented inflation and widen the gap between the rich and the poor. Being a former banker, Aziz created an economic environment that suited the banks and their clients through distribution of loans and leases. While the national kitty filled with foreign exchange reserves from dollars that poured in, in the shape of loans and aid from the donor countries and multilateral lenders as a reward for supporting the so-called global war against terrorism, the economy stood on weak and unsustainable pillars.
The foreign aid not only helped in building foreign exchange reserves, it also boosted GDP growth to an average 6.8 per cent annually. Yet, the euphoria of economic boom in the first half of this decade didn’t last a year and the weak financial foundations started to crumble. So much so, that the country had to ask the International Monetary Fund for aid to avoid defaulting on debt. Economic growth slowed and the consumer prices emptied the savings of the middle class.
This is a lesson for the economic managers, if they are willing to learn. Aids and loans support an economy, but temporarily. These create an artificial boom or a bubble that bursts when realities start emerging. It makes you dependent and a beggar for life. A steady and strong economy doesn't solely depend on loans and foreign investment; it is based on domestic investment and financial institutions strong enough to sustain a recession. Only a strong manufacturing base, diversified export, long-term infrastructure development and safe security environment can ensure sustainable economic growth.
Since inflation has averaged 24 per cent in the first four months of this fiscal year, the PPP-led coalition government has little option but to reduce money supply and curb bank borrowing, which is expected to slow economic growth. A finance ministry official said that within few weeks the government would officially revise the macro-economic indicators and targets including GDP growth forecast. The IMF predicts that Pakistani economy this financial year will slow to 3.5 per cent of the GDP, while the government may revise the target to just over 4 per cent, or the slowest in seven years. The Finance Ministry is also likely to revise the average 12 per cent inflation target to 20 per cent, according to the ministry official. The trade deficit may reduce this year as the cost for importing fuel is coming down because of lower global crude prices and this may have a positive impact on the current account deficit. Lower international oil prices, is likely to help the economy in the remaining seven months of this fiscal year, yet an economic revival may not happen soon as the government needs to recover and then sustain before kicking off again.
The IMF predicts that 2009 will be another tough year for the world economies and a recovery was not in sight. The American and European countries have already admitted that their economies are facing a recession. The Middle Eastern nations are not making windfall profits from their oil sales as they did earlier this and last year. The Far East economies are also suffering because of the economic crisis world-over. Under the present global circumstances, it would be very unfair to expect the Pakistani economy to do well. The US is the biggest consumer market for Pakistan and when sales drop in America, the exports from the country are also likely to suffer. Secondly, the central bank’s discount rate, or key interest rate, is at a 10-year high of 15 per cent, the loans have become more expensive for the industry. For all, the next couple of years is the time for consolidation, while one can only hope that the government doesn’t mismanage the IMF funds and uses them judiciously to repay debts and revive the economy ruined by successive regimes.
However, with loans come greater responsibility to manage those funds and generate resources to repay that debt. Finance Adviser Shaukat Tarin had already announced that the IMF funds would be used for balance of payments and to boost foreign exchange reserves meaning these would go into repaying the debt due until the financial year that will end in 2010. The government is also seeking loans and investment from Saudi Arabia, China, Islamic Development Bank, Asian Development Bank and the World Bank. However, one issue not being discussed by economists and analysts is that all these loans would increase the country’s total foreign debt, which already stands at more than $40 billion. Receiving loans won’t end government worries. The economic managers would then have to worry about generating resources to pay the huge debt, while keeping the economy going, with minimum inflation and more income and employment opportunities.     
Besides tightening of management on the macro-economic front, the other area where the government needs to focus is monitoring the foreign currency exchange companies as it was revealed that allegedly one company, Khanani & Kalia, and a few others exported billions of dollars illegally, thus, depriving the country of much-needed foreign exchange reserves. The loopholes in laws to regulate the trade of foreign currencies lend itself to varied interpretations by owners of the exchange companies. The moneychangers claimed that law allowed them to export the currencies. The State Bank of Pakistan needs to look into those laws and ask the government to legislate to strengthen those laws. Given the involvement of exchange companies in outflow of overseas currencies, the experience leaves no room for them to be allowed to export the currencies.     
Secondly, under the conditions agreed with the IMF, Pakistan has to reduce its fiscal and current account deficits. This is a tough ask and it can’t be achieved unless the government not only decides to cut non-development expenditures, but also implements it. It needs to come up with a clear strategy for raising domestic resources and cut public expenditure and imports. However, at the very start, the government has faltered by repeatedly saying that it has no intention to levy tax on agriculture, which is an IMF condition for the loan. The plans to revamp the taxation system and increase tax collection may not succeed unless the government is ready to take tough decisions of bringing agriculture in the tax net and also impose tax on capital gains.
Raising tax collection should be the government’s first priority in any case. Resorting to burden the people already under the tax net hasn’t helped in the past and it won’t help in future as well. The taxpayers have to be convinced that not only the taxation system is judicious with every sector of the population that is contributing its share in the national kitty, but also that the government is using that tax money properly.