Op-ed: Pakistan’s economic malaise, is there any will to tackle it?

Whenever International Monetary Fund’s delegations visit, Pakistan’s representatives keep mum about the politically-motivated odious nature of our debt burden.

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Pakistan’s economy is, currently, faced with myriad problems.  These problems have been compounded by inconsistent and erratic economic policies followed during democratic and praetorian periods. Successive rulers kept taking loans and spending them as if they were grants. External Debt in Pakistan increased to US$ 113803 million in the third quarter of 2020 from US$ 112858 million in the second quarter of 2020 (State Bank of Pakistan). The debt is econometrically projected to be around US$ 117500 in about 12 months’ time. By end of the year 2021, it would be about US$ 118500 million.

Pakistan’s debt burden has a political tinge. The USA rewarded Pakistan by showering grants on Pakistan for joining anti-Soviet-Union alliances (South-East Asian Treaty Organisation and Central Treaty Organisation). With the advice of the Harvard group of economists, Ayub Khan tried to steer the economy in a planned and prioritized manner. A perspective and five-year plans were drawn up, implemented, and evaluated after the due period. The less said about the subsequent period, the better.

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The grants evaporated into streams of low-interest loans, which ballooned as Pakistan complied with forced devaluations or adopted floating exchange rates. Soon, the donors forgot Pakistan’s contribution to a break-up of the ‘Soviet Union’. They used coalition support funds and our debt-servicing liability as ‘do more’ mantra levers.

In economics, there are burden-of debt models that could help decide how productively the debt should be so used that both principal and debt-service could be repaid. Unfortunately, we spent the debt as if it were a non-repayable windfall bonanza.

Odious debts

Apparently, all Pakistani debts are odious as they were thrust upon praetorian regimes to bring them within anti-Communist (South East Asian Treaty Organisation, Central Treaty Organisation) or anti-‘terrorist’ fold.  To avoid unilateral refusal of a country to repay odious debts, UN Security Council should ex-ante [or ex-post] declare which debts are ‘odious’ (Jayachandaran and Kremer, 2004). Alternatively, the USA should itself write off our ‘bad’ debts.

But Pakistan and its adversaries are entrapped in a prisoner’s dilemma. The dilemma explains why two completely rational players might not cooperate, even if it appears that it is in their best interests to do so. .The ‘ prisoners’ dilemma’ was developed by RAND Corporation scientists Merrill Flood and Melvin Dresher and was formalized by Albert W. Tucker, a Princeton mathematician.

No sustained action for the forgiveness of odious debts

Several IMF and US state department delegations visited Pakistan. But, Pakistan could not tell them point-blank about non-liability to service politically-stringed debts. The government’s dilemma in Pakistan is that defense and anti-terrorism outlay (26 percent) plus debt-service charges leave little in the national kitty for welfare. The solution lies in debt forgiveness by donors (Peace and the Public Purse).

Debt forgiveness (or relief) helps stabilize weak democracies, though corrupt, despotic, and incompetent. Research shows that debt relief promotes economic growth and boosts foreign investment. Sachs (1989) inferred that debt service costs discourage domestic and foreign investment. Kanbur (2000), also, concluded that debt is a drag on private investment.

Read more: Pakistan’s economy to make a comeback in 2021 by 1.5 percent growth: Moody’s report

In fact, economists have questioned the justification of paying debts given to prop up a regime congenial to a dominant country. They hold that a nation is not obliged to pay such ‘odious debts’ (a personal liability) showered upon a praetorian individual. Legally also, any liability financial or quasi-nonfinancial, contracted under duress, is null and void.

In an interview with Associated Press, Pakistan’s prime minister called upon the world community to write off the debt burden of poor countries so as to help them cope with the COVID19 epidemic (Dawn March 17, 2010). But, his voice proved to be a voice in the wilderness.

No formal application for write-off

Successive Pakistan governments treated loans as freebies. They never abided by the revised Fiscal Responsibility and Debt Limitation Act. Nor did our State Bank warn them about the dangerous situation.

What a pity! Whenever International Monetary Fund’s delegations visit, Pakistan’s representatives keep mum about the politically-motivated odious nature of our debt burden. They lack the nerve to tell them point-blank Pakistan’s non-liability to service politically-stringed debts. The government’s dilemma in Pakistan is that defense and anti-terrorism outlay plus debt-service charges leave little in the national kitty for welfare. The solution lies in debt forgiveness by donors (Peace and the Public Purse).

Benefits of Write-Off: Debt forgiveness (or relief) helps stabilize weak democracies, though corrupt, despotic, and incompetent.  Research shows that debt relief promotes economic growth and boosts foreign investment. Sachs (1989) inferred that debt service costs discourage domestic and foreign investment. Kanbur (2000), also, concluded that debt is a drag on private investment.

Read more: Pakistan’s Economy at 2030

Political parties without economic agenda

Parties win elections by pandering to the base sentiments of the people. A key element of election slogans is always ‘change’. But, the nitty-gritty of the ‘change’ remains a strictly guarded mumbo jumbo. Sincerity demands that the parties should spell out their policies with regard to various factors of production, i.e. land, natural resources, the socio-economic milieu, labor, capital, and organization. But, they keep mum about their agenda. In their hearts, the leaders knew that the voters have little choice. They would vote either for the charisma of one leader or against the hatred of another. The voters do not force the leaders to give a dispassionate perception of the country’s problems along with an inventory of prioritized solutions.

Intellectual apathy has been the hallmark of elections. There is no tradition of political parties having shadow cabinets with a bagful of alternative policies. The taxation proposals do little to squeeze the haves. Nothing is done to reduce the inequitable distribution of wealth and economic power. No heed is paid to the structure of our society. How did the filthy rich, the feudal lords, and the industrial robber barons come into being? If accumulated wealth in a few hands is rooted in wrongdoing, a considerable chunk of it should be mopped up. Vested interests resist the change.

The British created a class of chieftains to suit their need for loyalists, war fundraisers, and recruiters in the post-’mutiny’ period and during the Second World War. A royal gubernatorial gazetteer states: “I have for many years felt convinced that the time had arrived for the Government to try to introduce some distinction for those who can show hereditary services before the Humble Company’s rule in India ceased. I have often said that I should be proud to wear a Copper Order, bearing merely the words ‘Teesri pusht Sirkar Company ka Naukar’ (Third generation Company’s servant).”

A feudal aristocracy was created whose generations ruled post-independence governments. Some pirs and mashaikh (religious leaders) even quoted verses from the Holy Quran to justify allegiance to the Englishman (amir), after loyalty to Allah and the Messenger (PBUH). They pointed out that the Quran ordained that ehsan (favour) be returned with favor.

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The ehsan were British favors like titles (khan bahadur, nabob, etc), honorary medals, khilat with attached money rewards, life pensions, the office of honorary magistrate, assistant commissioner, courtier, etc. A Tiwana military officer even testified in favor of O’Dwyer when the latter was under trial. Ayub Khan added the chapter of 22 families to the aristocracy, a legacy of the English Raj.

About 460 scions of the pre-partition chiefs along with industrial barons created in the Ayub era are returned again and again to the Assemblies. They do not allow agricultural incomes, industrials profits or real estate to be adequately taxed.

Economic advisor’s view of the economic malaise

In his book Growth and Inequality in Pakistan: Agenda for Reforms (pages 383 to 403), Hafiz A. Pasha has unwound the tangled skein of Pakistan’s economic malaise. He laments that income-and-wealth-tax rules and regulations are so drafted as to facilitate ‘state capture by the elite’.

The tax-concession-and-exemption laws” give special privileges to different vested interests. The privileges are in the form of “preferential excess to land, bank credit, etc, which facilitate the faster accumulation of assets”. He visualizes “elite “as “the conglomeration of rich powerful people in society”.  Among the “elite state captors”, he includes “large land-owners, defence establishment, multinational companies, urban property developers, and owners, and so on” (page 383, ibid.).

To Pasha, this group has, since partition, enjoyed tax privileges, like exemption from income tax on agricultural incomes (now devolved upon provinces after the 18th amendment). There are only 13,438 landowners (with an average land holding of 435 acres) constituting only 0.2 percent of the population of farmers in the country. The large landowners own about 11 percent of the whole farm area (Agriculture Census 2010).

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Under the pressure of the International Monetary Fund, a tentative agriculture-income tax was imposed in the Punjab and Sindh exempting holdings of 12.5 acres. The maximum tax rate was Rs. 250 per acre for farms exceeding 25 acres. It yielded only about five percent of the average net income per year.

Later the tax was imposed on net incomes exceeding Rs. 300,000. Income up to Rs. One lac was tax-exempt. The revenue from this tax during 2017-18 was paltry Rs. two billion equivalent to only 0.07 percent of the net income from crops.

Agricultural income is a tax haven

The potential revenue from agricultural income is Rs. 103 billion (based on 2017-18 Gross Domestic Product) if it is treated at par with urban tax income.

The water charge is one-tenth of the actual cost incurred by the government. (Rs, 15 billion). The water charge is less than Rs 100 per acre.

The procurement price of wheat, at Rs.1300 per 40 kilograms, is 25 percent higher than the price of imported wheat (Rs. 90 billion provincial subsidies). The concession on agricultural incomes lows water charges and high procurement price “add over Rs. 200billion to the incomes of large farmers.”

Read more: PM Khan: Passing oil prices impact unavoidable to avert further Pakistans debt burden

The government barred from undertaking land reforms

A 3-2 vote judgment of the Shariat Appellate Bench of the Supreme Court of Pakistan in the Qazalbash Waqf v. Chief Land Commissioner, Punjab case on August 10, 1989 (made effective from March 23, 1990) blocked land reforms in Pakistan. It uncannily strengthened feudal aristocracy. Pakistan can’t do away with all jagirs as did India way back in 1948 because of the afore-quoted judgment.  Mufti Muhammad Taqi Usmani writes in his lead judgment:

“ 1. … Everything in the world actually belongs to Allah and he has granted humans the right to utilize them within the limits of divine laws. … There are certain obligations on the person who uses the land. The right to property in Islam is absolute, and not even the state can interfere with this right.

  1. Islam has imposed no quantitative limit (ceiling) on land or any other commodity that can be owned by a person.
  2. If the state imposes a permanent limit on the amount of land which can be owned by its citizen, and legally prohibits them from acquiring any property beyond that prescribed limit, then such an imposition of limit is completely prohibited by the Shariah.”

The two dissenting judges, Nasim Hassan Shah and Shafiur Rahman argued that a limit on landholdings was necessary to reform society and alleviate poverty.

Could our parliament reopen the case to align it with its dream of a Medina welfare state? Medina state, like Singapore, owned all land. Are jagirs a divine or a British gift? How did the filthy rich, the feudal lords, and the industrial robber barons come into being? If accumulated wealth in a few hands is rooted in wrongdoing, a considerable chunk of it should be mopped up. Peek into the pre-partition gazetteers and you would know the patrilineage of many of today’s Tiwanas, Nawabs, Pirs, Syed, Faqirs, Qizilbashs, Kharrals, Gakkhars, and their ilk.

Read more: Ghias Khan on how Engro aims to help Pakistan expand economic growth by 2030

Taqi Osmani overlooked that a feudal aristocracy was created whose generations ruled post-independence governments. Read Zahid Hussain’s article, ‘House of feudal’, in the April 1985 issue of Herald. Is it anathema to look into the origin of land grants or wealth accumulation in the public interest? Why not tax them heavily to fund the basic needs of the downtrodden?

According to Pasha, “the lump sum budgetary allocation for defence in 2018-19 is Rs. 1492 billion this is equivalent to over 30 percent of the total projected federal current expenditure budget for the year.

A critique of Pasha’s view

A bitter lesson of history is that only such states survived as they were able to strike a balance between constraints of security and welfare. Garrison or warrior states vanished as if they never existed. The client states, living on doles from powerful states, ended up as banana republics. We should at least learn from the European security experience. In Europe, potent external threats forced weaker states to coalesce.

History shows some states collapsed suddenly while others decayed gradually. Just think of what great status were empires like Austria-Hungary, Spain, Portugal, the Netherlands, Sweden, and Tsarist Russia (exposed to the 1917 revolution), and even the erstwhile USSR.

A common feature of all strong states had been that they had a strong military and civil institutions, de jure capability to defend their territory and policies that favoured the citizenry rather than dominant classes — feudal lords, industrial robber barons, and others.

Read more: Vision 2030: Pakistan’s uphill battle

India’s rising defence expenditure ratchets up Pakistan’s defense outlays. Unless India lowers its defence outlay it is difficult for Pakistan to reduce its defence expenditure.

Factors contributing to Pakistan’s economic malaise are obvious. However political will to grapple with them is lacking.

Mr. Amjed Jaaved has been writing freelance for over five decades. He has served the federal and provincial governments of Pakistan for 39 years. His contributions stand published in the leading dailies and magazines at home and abroad (Nepal. Bangladesh, et. al.). He is the author of eight e-books including The Myth of Accession. He knows many languages including French and Arabic. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.

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