VIEW: Spot-fixing — Andleeb Abbas - Sunday, March 06, 2011

Source : http://dailytimes.com.pk/default.asp?page=2011\03\06\story_6-3-2011_pg3_3

Any money that is not earned from a process of income generation is equivalent to a robbery. As the sources of cash flows dry out, the fatal strategy of printing more money to make do is being recklessly exercised

The country, economy, government, are all in a spot. They all need to be fixed; but by whom and how is the billion dollar question, which everybody is trying to figure out. The economy has been battered by a government whose expenditure has beaten all records. The increase in prices of petroleum products, which had to be postponed twice due to public pressure, finally came with a vengeance as almost 9.9 percent increase had to be made to fund a government whose extravagance is boundless. With the Reformed General Sales Tax (RGST) becoming a victim of opposition from parliament, the president decided to impose his authority to levy flood surcharge and excise duty to get out of strangulating tight spots. In the pipeline is two percent monthly increase in the electricity rates to become eligible for IMF standby arrangements.

However, all sorts of tariff hikes and aggressive tax collection drives have failed to fill in the huge gap of money coming in and money going out mostly to feed in the insatiable demand of the men in power. The economy is haemorrhaging so badly that most of the doctors are unwilling to treat it. The IMF is expressing its reservations on backing an economy that has become addicted to bail outs; other lenders like the World Bank and the Asian Development Bank are also playing hard to get. What solutions does the government have to plug these gaping holes? They have resorted to the really creative ones, i.e. beg, borrow and steal. These are the typical plug the hole management techniques providing a shallow veneer of sustainability but eroding the fundamentals beneath, causing financial eruptions in the form of inflation, foreign direct investment (FDI) flight and mass unemployment.

One such spot-fixing strategy is to print more money. In fact, it is a misnomer to call it a strategy; it is just a euphemism for theft; printing money is as bad as dealing with counterfeit currency. Any money that is not earned from a process of income generation is equivalent to a robbery. As the sources of cash flows dry out, the fatal strategy of printing more money to make do is being recklessly exercised. According to one estimate, the currency printing presses are working overtime to dish out notes almost worth two billion rupees per day. This is, and will, always be an economy-fatal strategy as it erodes the earnings of the economy, making it to lose its depth and stability. The purchasing power of a million is worth thousands and being a millionaire in this inflationary environment is no longer an entry to the club of the elite. The word trillion may become common if the money printing business keeps up its over-capacity performance.

The other strategy is to scan all those countries that are still semi-receptive to our economic distress and do a ‘damsel in distress’ presentation act in front of them. China, US, Turkey have all done their bit and it is time to go back to the Muslim faithful friends. The president went to Japan to get a feel of a non-traditional partner in borrowing and then ended up in Abu Dhabi and Kuwait discussing various pending payments that can be materialised to pay off the immediate economic crisis prevailing in the country. The state of affairs is so bad that any pittance anywhere is welcome and thus door to door borrowing is not dishonourable enough.

As the government tries to get out of one mess after another, it has no time to think about the long-term impact of this immediate spot-fixing it is embroiled in. One of the casualties of this headless pursuit of the purposelessness is the treatment being met out to the development of the backbone of industrial development, i.e. the engineering industry. Pakistani exports have long been blamed for being dependent on primary goods like cotton and other agri-products with little contribution from the engineering goods which dominate any developed country’s export list. To encourage the development of this industry, the Engineering Development Board designed a National Engineering Exports Development Strategy that envisaged different ways of providing incentives and relief to this industry to make it attractive for entrepreneurs and investors. These included tax exemptions, subsidies and duty refunds, etc. However, the Federal Board of Revenue (FBR) has rejected most of them, making this crucial strategy a non-starter. FBR is already exploring new ways of imposing taxes and increasing revenue generation sources and is in no mood to approve any scheme, which might dent their scarce resources. This is a huge setback to an industry on whose development the country’s development depends. If you look at China, India or any other country that has moved out of being a predominantly agrarian to a more diversified economy, the growth and development of their engineering industry had a huge contribution in it.

The IMF wants the fiscal deficit to be contained to 4.7 percent while the government is negotiating for 5.5 percent. Presently, it is above seven percent. However, even to limit it to 5.5 percent they are using the autocratic method of issuing presidential ordinance to override parliamentary opposition. The frightening measures of imposing 15 percent flood surcharge and an additional 1.5 percent excise duty are typical despotic impositions to pay for the corruption in high places. Other measures include withdrawal of tax exemption status for industries like fertilisers, pesticides, branded milk, etc.

Such state of panic management only postpones the inevitable. The inevitable is that as long as the rot in the roots is not addressed, these measures will keep on destroying the foundations of our economy. When the fundamentals are not addressed, the building is going to be structurally so weak that a minor shake up will put huge cracks in its structure and that is exactly what is happening to our country. With a make do, conceal the crevices strategy, all relief measures are going to be transitory. The rot in the economy is directly proportional to the rot in the men in charge of the economy. Their own deep-rooted insecurities have made this country, with huge potential, insecure about its very existence. The fault lies not in the strategy making but in the strategy makers. Until and unless the country is not purged from the fatal toxics deeply rooted in our leadership ranks, development and stability will be just oft-repeated political clichés.

The writer is a consultant and can be reached at andleeb.abbas1@gmail.com