THE PAKISTAN ECONOMY A Clever Game of Bluff
By Sarwar Lateef
The crucial question that West Pakistan has yet to ask itself is the price it is willing to pay for the “integrity and solidarity of the country” This is not altogether surprising. On any reckoning the cost of the military crackdown in East Bengal has already proved much too high for an economy that is quite as poor as Pakistan’s. But West Pakistan’s elite has so far chosen to cushion itself from the full impact of the economic crisis. The budget for 1971-72 calls for and imposes some sacrifices. These are, however marginal in nature and the underlying assumption continues to be that Pakistan can somehow ride this crisis out, and that normality is round the corner. It is a clever game of bluff, and if no one calls this bluff Pakistan may get away with it.
The crisis in Pakistans economy has been building up for some time. The war with India, two successive years of drought and declining net aid have contributed to a rather uneven economic performance during the third Five Year Plan which ended in June 1970. Gross National Product, according to official estimates, rose by 5.7% per annum as against a plan target of 6.5%. The official figures show signs of padding and the World Bank has estimated GNP growth during the Third Plan at 5% per annum. The main vehicle of growth was the agricultural sector. The industrial growth rate actually fell during the Plan, and in 1969-70 recorded a mere 6% increase.
The growth in the economy took place despite a sharp fall in the investment level which declined as a percentage of national income from 18.3 in 1962-65to 13.5 in 1969-70. Public plan outlays were 30% short of target in terms of current prices and probably much lower in real terms.
This was due to rising non-development spending, particularly defence, whose share in the gross domestic product rose to 3%. Exports did rather well but exchange availability in the Third Plan was 30% short of actual requirements. The foreign exchange constraint was due to rising debt service obligations, which currently account for one-fifth of Pakistan’s export earnings, and a shortfall in foreign aid.
SOCIAL COST
To quote President Yahya Khan’s Economic adviser, Mr. M. M. Ahmad, “the achievements of the Third Plan were fairly encouraging in economic terms but their social cost was high”. Both regional and personal income disparities widened sharply. The elite was protected by low taxes and liberal subsidies. Social expenditure was geared to urban middle class needs. And there was little effort to raise the ratio of taxation to GNP which at 8.9% well below the 15% considered optional for an optimal for a country like Pakistan. Real wages of workers declined by third during the 1960s resulting in considerable industrial unrest. Urban unemployed in 1969-70 were estimated at 20% of the industrial work-force.
Things seem to have got even worse in 1970-71. Mr. Ahmad’s budget speech draws attention to the “long shadows” cast on the economy by the cyclone and floods of 1970 and the man-made disaster of 1970. While nature was unking to agriculture in both parts of the country” says he “human strife held back industrial production” Industrial growth in 1970-71 is not expected to exceed 2.50% and the economy’s growth rate is exposed to be below the rate of growth of population which is 2.8%. No precise figures are available on export performance. But Mr. Ahmad attributes the Rs40 crores decline in reserves largely to a fall in exports. Central Government revenue collections which were estimate at Rs904 crores, were Rs. 116 crores off the mark, while non-development spending was Rs. 50 crores above the budget estimates, reflecting flood and cyclone relief, higher defence outly and higher subsidies to PIA. The actual annual plan outlay for 1970-71 was only Rs. 698 croers, Deficit financing at Rs 155 crores accounted for nearly a quarter or the capital budget.
There is, therefore, little doubt that the Pakistan economy is in bad shape. But are there any early prospects of recovery? Much depends on the assumption’s one makes about the extent of disruption of the East Bengal economy, and the extent the which “normalcy” in terms of West Pakistan’s short term objectives can be restored. Of the two major crops in East Bengal, little is known about the state of rice sowing. Jute sowing were more or less normal, and western observers estimate at most a 510% fall in the jute crop. As for tea, some estates are “normal”, but a good many are working only to 25-30% capacity due to scarcity of labour. The tea industry, it is believed, will take two to three years to recover fully. East Pakistan’s industrial base is small. A majority to the 42 jute mills have been opened, but again, because of labour shortage, are working to 30% of one shift, rather than a normal two to three shifts.
EXPORTS
Exports of manufactured jute and tea are therefore likely to fall again this year. But raw jute export prospects are better as low mill consumption and carry over stocks have led to a pile up of 2.5 million bales of stocks. But East Bengal export prospects depend on the army’s ability to move exports to the sea and get it out of the ports. The rail link between Chittagong and Sylhet is known to be out of action, and road and rail links throughout East Bengal badly damaged. How quickly these can be restored is anybody’s guess. The World Bank team that visited East Bengal recently is not “optimistic” on this score.
West Pakistan’s economy is also in trouble. Wheat stocks are inadequate as result of a poor crop, and it is estimated that 500,000 tonnes of foodgrains may have to be imported. Industry is badly hit by the disruption in inter-wing trade. A market of Rs. 140 crores a year has suddenly virtually disappear, and stocks worth Rs 40 crores have accumulated. The foreign exchange constraint will also act as a damper on capacity utilization which is believed to be already very low. And to the extent that the deficit financing of last year contributes to inflation, labour unrest will probably break out again.
All this would suggest that Pakistan cannot expect much more than a 1—2% increase in Gross National Product in 1971-72 on the most optimists calculations it cares to make. This view is apparently not shared by Mr. Ahmad whose budget is a curious exercise in figure juggling and concealment of facts. The assumptions he makes appear to be hopelessly unrealistic and even naive. Revenue receipts in 1971-72 at 1970 tax rates are estimated at Rs.877 crores. Rs. 90 crores up on the actuals for 1970-71. Despite a Rs 20 crores increase in defence outlay, Mr. Ahmad expects a revenue surplus of Rs. 108 crores.
The development programme is put at Rs.550 crores, but an “operational shortfall” of Rs. 33 crores is anticipated even before a rupee has been spent. Thus the Rs. 517 crores annual plan, which Rs. 18 crores smaller than the 1970-71 annul plan, is to be financed by Rs.256 crores o external assistance, and Rs. 261 crores of internal resources. Net capital receipts will contribute Rs. 24.5 crores, revenue surplus Rs. 109 crores, and the provinces Rs.33 crores,. The balance of Rs. 94.5 crores is covered by additional taxation of Rs.58.6 crores, leaving an uncovered deficit of Rs 35.9 crores.
Revenues at existing tax rates have clearly been overestimated The 10-20% increase in revenue is highly unlikely if the economy is growing by only 1% or 2%. The foreign aid estimates, “based mostly on old commitments” assume a Rs.16-crores rise in disbursements over 197071 which is clearly way out. Aid in the pipeline could not be anywhere near $538 million. Cash balances are also to be drawn down by Rs 95 crores, reflecting the tight resource position.
If these resources do not materialize, as they are unlikely to the temptation will be to raise taxes once more or cut down on development outlay. And here the cushion available to Pakistan is the allocation of Rs. 279 crores for East Bengal out of the Rs. 550-crore annul plan. It will in any case be difficult to spend this money without a proper administration functioning in the province. A cut-back here is also preferable politically to higher taxes and will ease the budgetary position, though at an enormous long run cost to the economy.
The budgetary position will probably be even worse if one takes into account the impact on central finances o the worsening budgetary position of the provincial governments. In the long run West Pakistan will have to bear much of the financial burden of the army’s atrocities. But Pakistan is not looking beyond the next six months. If it can sit out these six months, it hopes that the West will come to its rescue.
Pakistan’s capacity to hold on depends largely on its foreign exchange position . Its reserves at the end of April were estimated at $138 million, of which gold reserves totalled $53 million, foreign exchange $67.2 million and special drawing rights $16.9 million. The State Bank of Pakistan estimates reserves will fall to $ 20 million by the end of September in the absence of fresh aid authorizations. Pakistan cannot expect much from its exports and will probably be lucky to maintain the level attained in 1970-71.
WORLD BANK ESTIMATE
The World Bank has estimated aid requirements for 1971-72 at $500 million, food aid requirements are estimated at$125 million, and cash requirements at $175 million. The food aid may come through but other types of aid will probably await a “political settlement.” Non project aid the pipeline may not exceed $75 million. Pakistan’s unilateral moratorium on bilateral debt servicing will save it approximately $120 million. But this still leaves a debt servicing burden of $80 $100 million, to meet obligations to international institution and suppliers, credit interest and capital repayments. China and Iran may be helping out a bit , but a foreign exchange gap of at least $200 million remains to be filled.
The Americans may well provide some of this, and the Pakistanis could survive a short period of austerity. As Indonesia has shown, countries do survive without aid, India cannot, therefore, assume that the economic squeeze will tell on Pakistan within a fairly short period of time. What is obvious, however, is that Pakistan cannot afford a prolonged military occupation of East Bengal without upsetting the delicate political balance in the West wing.
Reference: Hindustan Standard 14.7.1971