no child behind
from a neighbour
Quest for a new strategy
The government now envisages developing most infrastructure projects with the private sector's collaboration
By Alauddin Masood
The Infrastructure Investment Conference, to be held in Islamabad from May 11-13, might become the precursor for a new strategy for the development of Pakistan's infrastructure projects in future. Till recently, the government had itself been building and managing infrastructure projects, funding these mostly by borrowing money from donor agencies, from foreign direct investments (FDIs) or through bilateral arrangements. The government now envisages developing most infrastructure projects with the collaboration of the private sector, local as well as foreign.
The investment in infrastructure projects, with private participation, has so far averaged 1.4 per cent of the gross domestic product (GDP) in Pakistan. Over the next decade, the South Asian Association of Regional Cooperation (Saarc) region, including Pakistan, however, needs to invest about 7.5 per cent of its GDP per annum in infrastructure to sustain the GDP growth rate of 7-8 per cent. In the infrastructure sector, electricity and roads require huge investments, followed by telecommunications and urban services like water and sanitation.
There cannot be two opinions about the fact that infrastructure plays a major role in the continuous and sustained economic growth of a country. Without improving quality and service coverage in power, water supply, sewerage treatment, transport and communications / logistics, one can neither imagine industrial growth nor any improvement in the quality of lives of the citizens. That explains why most countries spend so heavily on infrastructure development.
However, infrastructure development requires mobilisation of a huge amount of resources, which often does not permit governments to allocate sufficient funds to bring infrastructure in conformity with the modern requirements. To overcome this impediment, an increasing number of countries across the globe, including developed states like the United States, have evolved a new and innovative system where the public and private sectors join hands to develop infrastructure as a service delivery tool.
Known as public-private partnerships (PPPs), under this system instead of the public sector procuring a capital asset and providing a public service, the private sector creates the asset through a dedicated standalone business and then delivers the service to the consumers in return for payment that is linked with performance. The PPP modality of developing infrastructure and then delivering services to the consumers permits the public sector to reduce its capital expenditure and convert infrastructure costs into affordable operating expenditure spread over time.
Further, the PPP modality allows partners to concentrate on activities that suit their skills the best. For the public sector, that means focusing on developing policies and identifying service needs; while for the private sector, the key is to deliver those needs efficiently. Given these advantages, an increasing number of countries are now embracing the PPP modality for providing quality services to their citizens. In New York, one of the metro / rail stations has recently been built under the PPP framework; while in Manila the authorities have successfully solved the chronic problem of supplying potable water to the citizens using the same framework.
In Pakistan, the government has set up a dedicated agency -- the Infrastructure Project Development Facility (IDPF) -- to generate PPP projects with various implementing agencies (line ministries, provincial governments, local bodies, state-owned enterprises, etc). The authorities believe that by employing the PPP modality less than half of the funding required for infrastructure development can be covered through the public resources; while for addressing the overall infrastructure needs, the government can work jointly with the private sector in order to bring in massive investment needed for major improvements.
PPP project evaluations in Pakistan focus on transport and logistics (including provincial / municipal roads, rail, seaports, airports, fishing harbours, warehousing, wholesale markets, slaughter houses and cold storages), mass urban public transport (including buses, and intra- and inter-city rail), municipal services (including water supply, sanitation, solid waste management, low-cost housing and health / education facilities), and small scale energy projects, excepting those facilitated by the Private Power Infrastructure Board and the Alternative Energy Development Board.
In addition to affordable / timely services, the government's objectives in promoting PPP projects are to clear the huge backlog in basic services, like water, sanitation, solid waste management, transport and rural electricity. A decline in public sector investment in infrastructure, as a percentage of the GDP, in the 1990s has resulted in creating a huge backlog and high maintenance costs of infrastructure. Efforts to attract private investment in the power and telecom sectors have shown that such plans can be materialised and can contribute to meeting the funding gaps in infrastructure.
Reflecting high priority assigned to efforts supporting economic growth and competitiveness, Islamabad has adopted a strategic approach to accelerated development of Pakistan's transport sector, focusing on the National Trade Corridor (NTC), linking major ports in the south with major cities and trade corridors to the north. Currently, the ports, roads and railways, along this corridor, handle 95 per cent of the external trade and 65 per cent of the total land freight; thus, they contribute 80-85 per cent to the GDP. Now, Pakistan's goal is significant reductions in time and cost of moving goods through the NTC and, thereby, improving industrial competitiveness. The modernisation of the NTC alone annually requires an investment of about $ 1 billion in the medium-term. In addition, the repairing of critical road links destroyed / damaged in the October 2005 earthquake is another priority area.
While better infrastructure is not only critical for business, but also for human development, in the country's rural areas some 40 per cent population still lacks access to power and about 75 per cent to health facilities. In many areas, education and market facilities are accessible only by dirt tracks. Not only there is a dearth of clean water supply and sanitation services, public transport, health care and education facilities also require expeditious improvement.
It is heartening that following the PPP modality, Pakistan has built a pipeline of 44 projects, worth $ 1.4 billion, in mass transport, roads, energy and municipal services. Noteworthy projects in this category are $ 300 million Karachi Mass Transit Project, Lahore-Sheikhupura-Faisalabad provincial expressway, Lakhpass Tunnel, Karachi Wastewater Reuse, Gujrat Solid Waste Composting, Karachi-Hyderabad Superhighway, Lodhran-Khanewal Section of N-5 and Tarnol Interchange at N-5.
Other initiatives already under way include Islamabad IT Park, Multipurpose Water Reservoirs, Federal Board of Revenue (FBR) Automation, Charsadda Solid Waste Management and Kalinger Water Supply. Some other projects proposed to be implemented under the PPP modality include Islamabad-Rawalpindi Mass Transit, Karachi Circular Rail, Bus Rapid Transit System and Intra-City Bus Terminal, Hyderabad-Mirpurkhas Road, bridges over the Indus river, Lahore and Faisalabad Solid Waste Management, Lahore and Faisalabad Water Metering / Billing systems and Office Complexes in Islamabad.
To showcase PPP projects to potential investors, operators and financiers from across the globe, Pakistan is now organising the Infrastructure Investment Conference from May 11-13, 2008. To be held in Islamabad, the conference is likely to be attended by Asia-Pacific region's leading institutional investors, fund managers, corporations, regulators, policy-makers and industry experts to examine investment opportunities in Pakistan.
A leading infrastructure advisor / investor / manager, with a portfolio of infrastructure assets valued at more than 120 billion Australian dollars in 25 countries, Macquarie has already shown interest in participating in the conference in association with the Foundation Securities. Meanwhile, the World Bank has also commended Pakistan's PPP plan for providing better public services through improved infrastructure and assured Islamabad to extend its help / cooperation in the execution of PPP projects.
writer is an Islamabad-based freelance columnist.
By Kaleem Omar
The Ministry of Finance seems to have got its wires crossed when it comes to the timing of holding a three-day Infrastructure Investment Conference in Islamabad from May 11-13. One says this because it was only a couple of days ago that Ishaq Dar, the finance minister in the new PPP-PML(N)-ANP-JUI(F) coalition government, held the outgoing Shaukat Aziz government responsible for "figure fudging" and "creating a mess" on the economic front.
Warming to his theme at a press conference at the Prime Minister's Secretariat in Islamabad on April 9, Dar claimed that the Aziz government had "overspent" Rs 558 billion. He said the details of this "fudging" of figures and "overspending" would be table before Parliament for action against those who "violated" their own Fiscal Responsibility Law.
According to Dar, the country's economic situation is so alarming that the new government has had to revise downward all macro-economic projections made by the previous government, including the GDP growth rate for the current financial year from 7.2 to 6.0 per cent. He said the fiscal deficit target for the current fiscal year had surged from 4.5 per cent of the GDP to more than 6.0 percent, while the Federal Board of Revenue tax collection target for the same period had to be scaled down from Rs 1,025 billion to Rs 990 billion.
Dar said inflation had gone up from 6 to 10 per cent, the current account deficit had gone up from 3.5 per cent of the GDP to 10 per cent, and that there was a very real possibility the interest rate on Pakistani bonds issued in overseas financial markets going up from 200 basis points above LINOR (London Inter-Bank Offered Rate) to 600 basis points by June 30, 2008.
Dar claimed that the "mismanagement" of the economy by the Aziz government had resulted in "over-spending" of Rs 558 billion from the national exchequer, and that if the new government did not take corrective measures then the fiscal deficit for the current financial year would hit 9.5 per cent of the GDP by June 30, 2008.
Dar said that these figures would be presented before that National Assembly's Standing Committee on Finance and the Public Accounts Committee for scrutiny of the facts, where former Prime Minister Shaukat Aziz and his entire team of economic managers would be asked to explain the "sad state" of the economy.
Dar also lashed out at Mohammedmian Soomro's caretaker government, which, he said, was also responsible for this "mess", as it, too, took no steps to avert the situation. Instead, the caretaker government increased POL prices and electricity tarrifs. He claimed that more than 73.6 per cent of the population lived below the poverty line, based on an income yardstick of two dollars a day per capita. This statement of his was nothing new, however. It merely reiterated what this scribe had said in an article in the Business & Finance Review section of The News International several months ago.
Even so, I suppose one should commend the fact that Dar, unlike many ministers past and present, at least reads the newspapers. If more ministers made a habit of doing so and paid heed to what various newspaper columnists have been saying for years, maybe the economy would not be in quite such a big mess today as it is.
The trouble with many people in government in this country – whether they are politicians or bureaucrats – is that they tend to think that they have a monopoly on wisdom and no one else knows anything. This, of course, is a very narrow-sighted and erroneous view. In fact, nobody has a monopoly on wisdom. Even a 10-year-old child can tell you something that you don't know. The moral of the story is that one should keep an open mind about such things and examine suggestions on the basis of what is being said, rather than on the basis of who is saying it.
The question that needs to be asked in the present context, however, is this: in the light of Dar's assertions concerning the poor state of the economy that his government has inherited, does the Ministry of Finance honestly believes that now is the best time to be holding the Infrastructure Investment Conference for potential foreign and domestic investors?
Won't these potential investors tend to shy away from putting there money into infrastructure projects in Pakistan, if no less a person that the current finance minister is telling the world that the previous government had resorted to fudging figures relating to the nation's accounts and had resorted to massive over-spending? Such serious allegations are hardly likely to bring potential foreign investors flocking to Pakistan. Potential domestic investors, too, are likely to stay away in droves.
Given all this, could it be that the decision to hold the Infrastructure Investment Conference next month was taken by the previous government or by the caretaker government, and hence the rosy picture of the economy painted by the papers. That is certainly the impression one gets after going through the working papers prepared by the Ministry of Finance in connection with the conference.
Among other things, the working papers state: "Over the past three years, Pakistan has experienced an impressive economic growth rate averaging 7.7 per cent per annum, thereby achieving inclusion in the league of 'New Economic Champions' according to the World Economic Forum." The papers go on to state that the "investment trend has also been positive, with foreign investment increasing from $ 1.26 billion in 2003-04 to $ 4 billion in 2006-07."
This, however, is not to say that the papers do not make any valid points. They are, for example, right on target when they state: "In the present context of a rapidly multiplying population and a rapidly industrialising economy, the Government of Pakistan faces a monumental challenge of adequate infrastructure delivery in a timely manner to facilitate economic growth and to meet Pakistan's growing infrastructure demands."
The working papers point out that "limited fiscal space and gaps in public sector capacity to undertake infrastructure projects justifies the potential for private sector involvement, with the government also recognising the need to engage the private sector to fill these inherent gaps."
One such strategy, the papers add, "that has proven its viability and success, especially in the developed half of the world, is public-private partnership (PPP) in infrastructure. A PPP initiative has been taken by the government to attract private participation in infrastructure projects." The problem with getting the private sector to invest in infrastructure projects, however, is that most categories of large infrastructure projects have a long gestation period before they make a profit. This means that it can be years before private investors see a return on their money.
Given this fact, governments in developing countries like Pakistan often have to resort to guaranteeing potential private investors a high rate of return in order to persuade them to invest their money. A case in point are the independent power producers (IPPs) that set up thermal power plants in Pakistan in the 1990s and the early years of the new millennium under the then-Benazir government's 1994 Energy Policy, which guaranteed the IPPs an internal rate of return (IRR) of 18 per cent a year.
This was a very high rate of return (China, for example, offered an IRR of only 12 per cent on power projects), and the capacity and energy payments that the Water and Power Development Authority (Wapda) had to shell out to the IPPs from the mid-1990s onwards almost bankrupted the authority.
Solution: provincial autonomy
The Balochs have not been provided with even the basic human rights enshrined in the Constitution of Pakistan
By Arif Tabassum
Senator Dr Abdul Malik Baloch was born on January 15, 1958, in Turbat (Kech). He got his initial education in Turbat before doing his FSc from Government Science College, Quetta. Later he did his MBBS from Bolan Medical College, Quetta. He joined the Baloch Students' Organisation at a very young age, in a period when the movement against Ayub Khan was at its peak. Through his political career, he has been affiliated with many Baloch nationalist parties and currently is vice-president of the National Party for Balochistan.
In 1988, Dr Abdul Malik Baloch contested elections from Turbat and became a member of the Balochistan Provincial Assembly. He also served as the health minister, but due to difference of opinion with the then-Chief Minister late Nawab Akbar Khan Bugti's he after some time. In 1990 he was again elected to the Balochistan Provincial Assembly, where he remained active as an opposition member. In 1993, he won his seat for the third consecutive time and served as the education minister. In 2002, he contest for a National Assembly seat and lost the election, blaming massive rigging by the establishment to ensure his opponent Zubeida Jalal's victory.
In March 2006, Dr Abdul Malik Baloch was elected to the Senate of Pakistan. He is also member of one of the Senate's standing committees. The News on Sunday interviewed him recently. Excerpts follow:
The News on Sunday: What are some of the major political concerns of the people of Balochistan?
Dr Abdul Malik Baloch: The major political concerns of the people of Balochistan are not much different from that of other oppressed nations in Pakistan. As is the case with Pashtuns, Sindhis and Seraikis, the Balochs are also faced with issues pertaining to their identity, control over their natural resources and provincial autonomy. They have not been provided with even the basic human rights enshrined in the Constitution of Pakistan. For more than 60 years, the federal government has been exploiting Balochistan's resources to feed the ruling elite; on the other hand, the people of the province have not accrued any benefits and thus remain underdeveloped.
Since the country's inception, the establishment has not allowed democracy to flourish in the country. It has been able to manage the country's affairs in this manner with the support of capitalists, feudals, sardars and drug mafia. Unless the establishment stops interfering in the democratic process, the concerns of Balochs and all other oppressed nations will remain -- and this will be at the cost of genuine steps for bringing about a real social change.
TNS: Are mega projects in Balochistan a mere rhetoric or reality?
AMB: I don't think that mega projects can address the issues of oppressed nations like Balochs. If Mekran Coastal Highway has been built, it should not be considered as a favour to the province -- one should take into account that not even a single highway was built in the area prior to this. As far as the Gwadar deep seaport is concerned, it not part of the province's development agenda ñ the project has strategic importance for China. My analysis is that China is foreseeing a blockade from the United States in the next 15 to 20 years, and then the country will be able to use the port for its transit purposes.
The Gwadar deep seaport project was awarded to a private contractor along with 2,500 acres of premium land, whose current market value is more than Rs 27 billion. On the other hand, even the commercial activity in the area has not resulted in any benefits for the local population. For example, the revenue generated through the port goes to the federal government. Similarly, the labour and transportation facilities here are from the other provinces. What has the much-trumpeted project given to the local population?
The Merani dam has been built to irrigate only 32,000 acres of land. What about the remaining 15 million acres of land in the province? Likewise, the natural resources at Saindak, Rekodak and Sui are being exploited by the federal government. In short, the current situation of exploitation of Balochs is even worse than it was in the British period. Having vast natural resources as well as potential for economic development, Balochistan's current overdraft is Rs 34 billion, its social development indicators are low and the poverty level is high. So, what kind of justice has been done to the province in the name of mega projects? I believe that mega projects are positive developments, but their use, operational mechanism and unjust distribution of resources are the basic issues that need to be addressed first.
TNS: Despite being strong advocates of democracy, why the nationalist parties and groups boycotted the recent general elections?
AMB: The nationalist parties of Balochistan realised that they would not be able to get their rights without forging an alliance with other democratic forces in the country. Thus, they formed the Pakistan Oppressed Nations Movement (Ponm), and then became part of the Alliance for the Restoration of Democracy (ARD) and later the All Parties' Democratic Movement (APDM). Baloch nationalist leaders took the boycott decision as components of the APDM, though they tried to make other partners realise that without Mian Nawaz Sharif the boycott would be meaningless. However, despite strong reservations, they accepted the APDM's decision to boycott the elections. I personally think that it was a politically incorrect decision that will have negative effects -- had they contested the elections they would have been able to fight for their rights in the parliament, but now they would not be able to do so.
TNS: It is being said that nationalist parties covertly took part in the elections through independent candidates. Is it true?
AMB: Baloch national parties generally boycotted the elections, but in some constituencies their members -- who did not agree with the boycott decision -- contested them as independents. However, they did this against their parties' consent.
TNS: What are your expectations from the new federal government with regard to the issues of provincial autonomy and the ongoing military operation?
AMB: Though the history of both the Pakistan People's Party (PPP) and the Pakistan Muslim League-Nawaz (PML N), at least as far as Balochistan is concerned, has not been great to say the least, Balochs have no choice but to have positive expectations from them. Baloch leaders told the two parties that they will support all their positive steps; and demanded that they stick to the Charter of Democracy and the Murree Accord to address the issue of provincial autonomy, restore the judiciary, ensure the parliament's supremacy, end the ongoing military operation in Balochistan and to allow freedom to the media.
If the PPP and the PML-N fail to do so and betray the people, we will be the first ones to show our street power against them. For a democratic Pakistan, the two parties must keep all the democratic forces, both within and without the parliament, with them to evolve consensus on all national issues. I am afraid that if the ruling coalition fails to adopt this approach, the establishment will play its role and pave the way for yet another undemocratic government.
TNS: Do you think that the PPP-led coalition government in Balochistan will be able to deliver?
AMB: As an individual, the new chief minister, Nawab Muhammad Aslam Raisani, has so far proved to be a principled and clean politician. It is expected that he will at least try his best to deliver, but I have no expectations from his allies. Most coalition members were also part of the previous government and had set new records of corruption. I am sure that they will main these records, even if they fail to improve upon them. Most of them remained part of the General Musharraf regime for more than eight years and supported all his actions against the interests of the province. However, after the recent elections, they became lotas. How can one expect these people to safeguard the interest of the province? I think that Nawab Muhammad Aslam Raisani will face a lot of problems in delivering with this sort of allies and will ultimately fail to do anything good for the people of Balochistan.
TNS: What have you learned from your experiences as a Senator?
AMB: I think that the Senate of Pakistan is just a debating society like Hyde Park, where one can speak at length on issues without anyone paying much heed. For almost last three years, Baloch Senators have highlighted the issues of the province in every session of the Senate, but to no avail. Though the previous government even admitted that in the last three years nothing could be discussed thoroughly in the Senate except Balochistan, one cannot see any action on the ground as a result of those discussions.
The Senate is not autonomous in its decisions, to say the least. For example, it has no role in the national budget-making process. Likewise, it lacks equal representation as is generally claimed ñ in other countries, the federal areas have no representation in the upper house of the parliament, but in Pakistan, Islamabad has representation in the Senate, which is basically the right of the provinces. To make the Senate full of zip, it has to be given more legislative powers with equal representation. It should not be a floor only for discussions; their should be implementation on its decisions also.
The establishment has at last stopped distrusting the ANP
By Faheem Hussain
The results of the recent elections, especially in the NWFP, are being rightly seen as a victory against Islamic fundamentalism and as a victory of moderate democratic forces. It is an irony of history that the victory of a secular, progressive party, the Awami National Party (ANP), which in the past was accused of being anti-Pakistani and was always distrusted by the establishment, is now being hailed by the democratic forces in Pakistan as the last hope to contain militancy in the NWFP and to bring peace to the troubled region.
It is an irony of history that scions of a family whose loyalty has always been put in doubt by the powers-that-be are now being entrusted to save Pakistan from the horrors of terrorism. I am referring to the Ghaffar Khan family and to two of his descendents, Amir Haidar Khan Hoti, the new chief minister of the NWFP, and Asfandyar Wali Khan, president of the ANP and a member of the National Assembly. These are the people who have been entrusted with the delicate task of talking to the militants and with finding a solution to the violence in the NWFP, which threatens to spill-over into the rest of Pakistan.
It is a good sign of the times that when COAS General Kayani briefed the ruling coalition on the security situation in Waziristan and Swat, Asfandyar Wali Khan was present. Previous military and civilian regimes would never have trusted the ANP with such sensitive information. Ghaffar Khan (affectionately known as Bacha Khan) was jailed by the British for resisting their imperialism. He and his son, Wali Khan, were jailed numerous times by the Pakistan government after the independence.
Since the 1930s, this party in its previous manifestations and now has always represented the democratic and secular aspirations of Pashtuns, and has always had a large following in the NWFP. The victory of the Muttahida Majlis-e-Amal (MMA) in the 2002 elections was a gross aberration manufactured by the Inter-Services Intelligence (ISI) agency. The February 18 elections clearly show where the majority of Pashtuns stand.
"The Pashtuns do not want explosive belts; instead, they need school uniforms. They do not want violence and hatred; rather they have voted for a peaceful democratic regime that will bring economic growth, social justice, education and health to the backward areas of the NWFP," Afrasiab Khattak, provincial president of the ANP, recently said.
If one asks a young Punjabi student or professional whether they know who was Ghaffar Khan, they will look completely nonplussed and will show their ignorance of this great figure in the history of the subcontinent. I am speaking from experience. I have done this experiment several times with young educated people within and without my family, and inevitably I get the same blank stare. It is not their fault that they are ignorant of the history of this region. They are not taught about the real history of the independence movement against British imperialism in India. The school textbooks give a conventional history of the independence struggle, concentrating on Jinnah, Nehru and Gandhi, ignoring the role played by the people like Ghaffar Khan and his party, the Khudai Khidmatgars (Red Shirts).
If at all they are told something about Ghaffar Khan, it is in the negative -- he was an ally of Gandhi, he was opposed to the creation of Pakistan, he wanted a separate homeland for the Pashtuns, etc. Anyone who was for a joint struggle of all Indians against the British imperialism, independent of their religious beliefs, and who stood for a united India was labelled as a traitor in Pakistan. What is not recognised is the anti-imperialist role of such people in India and their contribution to British withdrawal from the subcontinent.
In the same context, one can mention the failure to commemorate the 100th birth anniversary of Bhagat Singh (born on September 27, 1907) in Pakistan, especially in Lahore. He and his revolutionary ideas have been airbrushed out of the official history of the independence movement. Here is this young man from Lahore who gave his life in the anti-imperialist struggle and who was hanged at the tender age of 23 along with his comrades, Rajguru and Sukhdev, in Lahore Central Jail, Shadman, at 7 pm on March 23, 1931 - and we do not even have a plaque there to commemorate his sacrifice.
Last week Professor Syed Irfan Habib of the National Institute of Science, Technology and Development Studies in New Delhi spoke about Bhagat Singh to students at the Lahore University of Management Sciences (Lums) and reminded them of an illustrious son of this city who laid down his life for the cause of freedom. Professor Habib was in Lahore in connection with the inauguration of his new book, entitled To Make the Deaf Hear: Ideology and Programme of Bhagat Singh and His Comrades. He reminded the audiences of the thoughts and writings of this remarkable young man. He reminded that Bhagat Singh stood for three things besides independence from the British rule: internationalism, meaning a broad anti-imperialism alliance; a government that represented the poor, which means reorganisation of society on a socialistic basis; and secularism, which was represented at that time by a joint struggle of all the people of India against the British rule.
Professor Habib also informed the audiences that Bhagat Singh's revolutionary movement consisted of students and young people of all faiths. He told them about the remarkable document of membership of the Naujawan Bharat Sabha, founded in 1926 in Lahore. The Sabha took a strong stand on secularism. Before enrollment, each member was made to sign a pledge that he would place the interests of his country above those of his or her community. The young revolutionary comrades of Bhagat Singh came from all religious affiliations, like Ashfaqullah Khan, Chandrashekar Azad, etc.
While Bhagat Singh and his comrades were in jail, they went on a prolonged hunger strike, lasting more than 90 days, to protest against the conditions in jail. One of their comrades, Jatin Das, had to pay the ultimate price for this. During the hunger strike, Bhagat Singh and his comrades would sing songs like the following, with which I end this article:
Kabhi wo din bhi ayega
Ke jab azad hum honge
Yeh apni hi zamin hogi
Yeh apna asman hoga
Shahidon ki chitaon par
Lagenge har baras mele
Watan par marne walon ka
Yehi nam-o-nishan hoga.
(The writer is a visiting professor of Physics at the School of Science and Engineering, Lahore University of Management Sciences.)
It is important to understand the concept of public-private partnerships in order to avail their full benefits
By Durriya Zaidi
Pakistan slipped to 136th position on the Human Development Index, out of 177 countries, in 2007. The country, thus, faces a serious threat in this area, which is a leading cause of poor governance, corruption, poor health and education, and poverty. The government is overburdened with excessive commitments; hence, most public services like poverty alleviation and human development are overlooked in the face of core issues like 'defence'. Additionally, Pakistan's unstable and volatile political situation does not allow a consistent policy to be implemented effectively. The absence of a consistent policy regarding the human development sector and the lack of effective mechanisms for achieving common national objectives have resulted in widening the gulf between the government and civil society. In the struggle to improve the quality of life of the poor, the disadvantaged and the marginalised, this gap needs to be reduced, if not eliminated entirely.
A public-private partnership (PPP) is a special feature of governance that can be described as "a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards." A PPP can be any kind of infrastructure or service, such as a new hospital or bridge or highway, a new type of technology that delivers services in a faster and more efficient manner, or a new federal government building -- anything that citizens typically expect their governments to provide.
PPPs span a spectrum of models that progressively engage the expertise and capital of the private sector. These include 'design-build' (the private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the private sector); 'operation and maintenance contract' (a privately owned operator, under contract, operates a publicly-owned asset for a specified term, while ownership of the asset remains with the public entity); 'design-build-finance-operated' (the private sector designs, finances and constructs a new facility under a long-term lease, and operates the facility during the term of the lease; while the private sector transfers the new facility to the public sector at the end of the lease term); 'build-own-operate' (the private sector finances, builds, owns and operates a facility or service in perpetuity); 'build-own-operate-transfer' (a private entity receives a franchise to finance, design, build and operate a facility -- and to charge user fees -- for a specified period, after which ownership is transferred back to the public sector); 'buy-build-operate' (transfer of a public asset to a private entity or quasi-private entity usually under contract that the assets are to be upgraded and operated for a specified period of time; while public control is exercised through the contract at the time of transfer); 'operation lease' (a private sector operator receives a license or rights to operate a public service, usually for a specified term, often used in IT projects); and 'finance only' (a private sector entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue).
In an increasingly competitive global environment, governments worldwide are seeking new ways to finance projects, build infrastructure and deliver services. PPPs have become an effective tool to combine the strength of both sectors. They can provide much needed capital to finance government programmes and projects, thereby freeing public funds for core economic and social programmes, while also maximising efficiencies and innovations of private enterprise. PPPs enable the private sector, newly emerged as a major entity in the development sector, to share the government's burden. Here stand the three components of society: the government, the for-profit sector and the not-for-profit private sector. Each of these has a different agenda -- the government seeks authority, the for-profit sector seeks profit and the not-for-profit private sector seeks development. The provision of public services cannot be accomplished by any one sector in isolation from the other two; it requires a collaboration of all the three sectors.
Each section of the society has different limitations that must be overcome. The civil society lacks resources -- they have the community involvement and know the priority issues of the community in which they operate, yet they cannot accomplish what is needed due to lack of resources. The government sector is engaged in too many things, and is unable to manage the scale and multitude of projects efficiently. Finally, the private sector, which has recently taken an interest in community welfare, lacks time. Corporate social responsibility is the latest trend and companies want to improve their reputations by promoting public welfare initiatives. To succeed in this competitive world, the private sector organisations need to be constantly focused on gaining an edge in their core business. Therefore, they have the resources, but lack both time and know-how to implement projects on the ground.
The private sector's participation in poverty reduction efforts achieves effective and extensive outreach, community involvement, and 'client-responsiveness' and accountability. Private sector institutions have been successful in outreach, due to their diverse geographic and activity scope. Their presence in local environments has enabled the processes of development to reach the communities. Non-profit enterprises particularly work in collaboration with community-based institutions and with indigenous networks of community organisations, making them more responsive and accountable directly to the beneficiaries of their programmes. The public sector can use these characteristics in its poverty reduction efforts.
PPPs offer other exciting opportunities to achieve a number of public policy outcomes, including the means to combat social exclusion by integrating the public and private components of local communities -- including local government, local politicians, local community and voluntary groups, and the local community itself; the chance to reform local public services, making them more accessible to the local community and more responsive to their needs; and the opportunity to develop cost-effective ways of providing local services to meet social needs that are able to use resources from both the public and private spheres, and to build upon local networks for their implementation.
Given the non-systemic and unregulated nature of the diverse private sector institutions, they need to address many issues in order to optimise their involvement in poverty reduction efforts. These include a combination of factors, such as: i) balancing scale of operations with impact; ii) sustainability of their development programmes; and iii) management and governance issues. What is required for a concerted poverty reduction effort is a partnership that builds upon the successes and the comparative advantages of the private sector institutions, and which reduces friction arising from the shortcomings of the sector. Opposition to PPPs often cites the loss of public control that occurs when a private sector company is involved in financing, building or delivering a public service. One of the greatest challenges for PPPs is to manage the differing agendas, priorities and limitations of each partner. Different work ethics and practices of each partner pose a difficulty that can be overcome by playing the strengths and offsetting the weaknesses.
Since the early 1990s, the government of Pakistan has promoted PPPs to increase access to and improve the quality of public services. Countries that have long financed infrastructure projects directly from fiscal budget allocations often lack the necessary institutional and regulatory capacity to facilitate private participation in infrastructure provision. This is the case with Pakistan as well. In comparison with international PPPs, which focus on the development of infrastructure, PPPs in Pakistan are working more on service delivery, like the provision of health care or education. PPPs are used as tools for poverty alleviation because the government, unlike that in other countries, has neither the means nor the capacity to provide social services. In this case, core issues take precedence like 'defence' over development. Other governments, especially those in the West, have better work practices than the Pakistani government and are able to more effectively provide social services to their populations.
The new governance paradigm that is emerging in the world, and also in Pakistan, is based on collaboration between government, the for-profit sector and the not-for-profit private sector. Traditional boundaries between the state, the business sector and the citizens' sector are eroding, and both for-profit and not-for-profit sectors are making an increasing contribution to producing public goods and delivering public services. The single most critical feature of the new governance paradigm is the shift for the state from being the primary producer, controller and owner of goods to a fair referee that enables private enterprise to provide economic and social goods and services.
It is important to remember that civil society is in no ways a substitute for the state; rather, the former complements the latter. Civil society cannot flourish in the absence of a strong and facilitative state. A developing society requires a strong state, which needs to establish a set of enabling policy and operating conditions in order to fully harness citizen initiative for public benefit. As key public services such as education and health are increasingly being delivered by the private sector institutions, government and the private sector institutions need to bring to the table viable models for PPPs, for the delivery of social sector services. Civil society needs to play a more proactive role by documenting its experiences, sharing best practice and bringing viable options to the table for discussion. Enhanced community involvement and more institutional private sector participation can help to ensure that there is a sense of accountability and responsibility in all service providers.
Education is the only way to take the people out of poverty cycle
By Haroon Raheem
Education is the first and the best stepping stone for everything good in life. The accumulation of the human capital is not possible with education. That is why it is widely recognised as one of the monumental challenges in reducing poverty and accelerating development in Pakistan. It is also a truism that education is the only way that may get the people out of vicious circle of poverty and deprivation. Democratising education by improving both its coverage and its quality is critical to overcoming the social and economic inequality that currently afflicts Pakistan. Ensuring that all children have the opportunity to learn critical skills at the primary and secondary level is paramount to overcoming skill barriers that perpetuate underdevelopment and poverty.
Though most people recognise the importance of improving the quality of education systems for reducing poverty and inequality, and for increasing economic development, how to do so is less clear. A government's approach to reform needs to change as the system improves and should also take into count the cultural shift; as the allied attributes of 'uniformity', 'regulation', 'demarcation' and 'provision' have now been replaced by 'diversity', 'incentives', 'flexibility' and 'freedom of choice', respectively.
In recent years, there has been an increased debate on the role of public-private partnerships (PPPs) in education, as the focus shifts from mere input-based to more incentive-based educational reforms. The PPPs in education are playing an important role in enhancing the supply as well as the quality of human capital, and are burgeoning in different parts of the world. Governments are increasingly sharing this primary responsibility through a variety of subsidiary arrangements. Some governments are contracting services out to the private sector, to non-governmental organisations (NGOs) and even to other public agencies.
A government's interest in promoting and financing education can be buttressed by the private sector's provision of education, particularly in the case of Pakistan where private schooling is growing exponentially, including among the poor. Part of the reason for this seems to be that public schools are performing poorly, with high teacher absence rates, lack of teaching activity and low pupil achievement levels. Public perception about the service delivery by government departments has also deteriorated. Yet, the spread of private schooling exacerbates social inequality, since the poor are necessarily excluded when private schools are not publicly funded. If fee-charging private schools increasingly attract households, it suggests that parents perceive them to be operating with some competitive advantages relative to public schools.
The nature of these advantages suggests how the private sector can be used to improve educational outcomes of children. The main advantage of publicly-funded, but privately-operated, education is that it harnesses the expertise, efficiency, energy, and financial and management skills of the private sector to provide better value for taxpayers' money. Consequently, PPPs provide a more flexible way of promoting education, since they allow governments to overcome inflexible salary scales and other civil service restrictions, and increase transparency of government education spending by making the cost of education services more visible. Decentralised decision-making at the level of the school is thought to be more responsive to parents' needs and to foster local level accountability.
The government-funded low cost private schools offer today's most dramatic example of how an essential government function can be reconceived through PPPs to accommodate entrepreneurial initiative, private sector investment, competitive forces, the profit motive and the performance -- toning all within the context of public funding. By now, there is irrefutable and convincing supporting empirical evidence that PPPs carry very secure potential, not only for long-term viability but also for sustainable quality education at affordable cost to the less-privileged and disenfranchised sections of society.
The Punjab Education Foundation (PEF) is striving to promote quality education through PPPs. It is ensuring equity, access, quality, efficiency and financing of the low-cost private schools. The vision of PEF is to promote quality education through PPPs; encourage and support the efforts of the private sector, through technical and financial assistance; innovate and develop new instruments; and enable the private sector to offer wider educational opportunities at affordable cost to the poor. The Foundation-Assisted Schools (FAS) programme provided an example of how the education enterprise has been redesigned across Punjab. It has demonstrated that through PPPs quality education can be imparted at a much lesser cost than in the public schooling system.
The financial assistance on per child enrollment basis is driven by considerations of equity and access to all. This model was introduced in 2005. The target schools under the PEF's FAS programme are those charging up to a maximum of Rs 300 per month as tuition fees and related / allied charges (excluding board examination fees). The financial assistance on per child enrollment basis, provided by the PEF, cannot be spent on anything else but the promotion of education -- salaries of teachers, development of teaching material, library, classrooms, furniture, laboratory, purchase of equipment, etc.
The delivery of quality education is the most significant variable for financial assistance provided by the PEF. The Quality Assurance Test (QAT) is the chief determinant for the continuation of partnership agreement. The financial assistance to the recipient institution has to be discontinued in case the school does not meet the quality standards set by the PEF. It is mandatory for continuation of the partnership that at least two-thirds students of the partner school under the PEF-FAS must pass the QAT with at least 40 per cent marks. Almost 500,000 students enrolled in 1,100 schools are benefitting from this programme in poor areas of the province, particularly in slums.
The FAS programme has incorporated a theory of organisational change in education too, by creating a sound school choice that has improved the education quality in two ways: by providing immediate choices to students who could not thrive in their current schools and by exerting a competitive pressure on the system to improve by sharing with it innovative examples that have worked. This programme has engrossed the entrepreneurial talent from beyond the traditional education sector, inculcating fresh thinking about how to design, operate and sustain high-performing schools.
The programme tries new approaches to schooling, from curriculum and instruction to culture, leadership, governance, technology, parental involvement, contracting, partnerships and infrastructure. FAS schools are facing healthy competition among themselves, so they pay attention to what other schools are doing and what parents seek, as well as meet the academic and operating standards of the PEF. Holding schools accountable for their academic results through bi-annual QAT, as well as their compliance with PEF rules through effective monitoring and evaluation mechanisms, are the major strengths of this model.
Study of the last three QATs indicated that schools performance have been improved to a great extent over a period of time. Average result of the first QAT was 63 per cent, of the second 77 per cent and of the third 79 per cent. FAS schools are enrolling a large number of deserving students, especially in districts with the highest concentration of out-of-school children for whom there exists a big achievement gap. The enrollment growth rate in the 1,100 schools has been quite stimulating -- 47 per cent on the whole with a ratio of 52 male students for 48 female students.
Through the FAS programme, the PEF is opening doors for children across Punjab who might otherwise have been denied of the facility of education and is providing these children with opportunities to escape the cycle of poverty, gain a voice in their community and experience a better quality of life.
writer is a director with the Punjab Education Foundation, Lahore.)
Pakistan may ultimately adopt the Chinese development model
By Syed Nadir
With several economic pressures and mounting challenges, the new government has a lot on its plate with regard to formulating an economic policy that provides relief to the masses. While formulating a new economic policy, previous policies would have to be considered and predictably they are likely to face a lot of criticism. The current policy -- based primarily on adjustment, privatisation and liberalisation -- is part of an international financial institution's (IFI's) promoted strategy.
Along with criticism of the policies the backlash against the United States and economic policies formulated by organisations based in the US, such as the IMF and the World Bank, a review of the economic strategy is likely. There are going to be a lot of calls to search for alternatives, as the current trend in economic policy formulation may be viewed as merely based on the diktats of foreign actors.
In all likelihood, the Chinese development model is likely to be promoted as an alternative. China has achieved consistently high rates of economic growth and, by all economic measures, has performed exceptionally well. However, in the past few years, strains in the Chinese economy have become more and more noticeable. Question marks have arisen whether China can accumulate or gain access to the requisite amount of resources to sustain its economy.
Pakistan is already facing similar problems. Power shortages and increases in commodity prices highlight the vulnerabilities our economy suffers from in the face of supply bottlenecks. Before this situation gets better, it is likely to get worse. The country's economic managers are unlikely to adopt policies that would contract demand and lead to a slowdown in growth. Rather, the policies are likely to continue to focus on macro-economic expansion.
In the short-run, increasing demand to stimulate growth may lead to impressive macro-economic statistics; however, supply is unlikely to keep pace with demand in the long-run. Increases in supply would take a few years to materialise, and then too there is no guarantee that they would meet demand at that time.
One of the major challenges that the Pakistani economy is facing today is that of imported inflation. Prices of almost all commodities from food items to oil are increasing. While it is not the sole reason, China's development is one of the reasons for the steep increase. The Chinese development model remains largely labour-intensive and inefficient. Inputs as a percentage of output remains high; therefore, the ever increasing need to secure resources from foreign sources. China has engaged nearly the entire African continent in various mineral extraction deals. Similar deals have been made with Latin America and Asian nations, most controversially with the military regime in Burma.
Pakistan, unlike China, is far from being in a position to enter the competition for securing resources. This process not only requires a lot of financial resources to offer to prospective governments, but also an international clout to tackle criticism. Pakistan, which has now become entangled in a complex web of state-to-state relations, and has developed various interdependencies, is at least not in the medium term likely to be able to dictate terms to anyone.
However, considering the current situation more pragmatically, supply side bottlenecks that the Pakistani economy is facing today highlights an important shortcoming in economic planning. We continue to focus on populist short-term measures, which create skewed and unsustainable growth. This growth benefits the few and marginalises the masses creating a string of economic, social and political strains that our institutions are not able to withstand.
A new form of 'slavery'
A critical evaluation of the impact of IMF programmes in Pakistan from 1988-2007
By Farheen Hussain
As of 2008, it has been two decades since Pakistan initiated its first Structural Adjustment Programme (SAP) with the International Monetary Fund (IMF). According to the figures quoted by the IMF, in January 2008 Pakistan had a total of $ 860,133,330 credit outstanding; most of which is in the form of Structural Adjustment Facility (SAF), and Poverty Reduction and Growth Facility (PRGF) loans. These loan facilities target Pakistan's negative balance of payment (BoP) position, through improvements in current account, by bridging the gap in budget deficit and by controlling inflationary trends. The host of conditionalities attached with the SAPs are directed at the four 'ations' -- stabilisation, liberalisation, deregulation and privatisation. By entering in agreement with the IMF, Pakistan is bound to the string of conditionalities, thereby compromising a huge amount of leeway our policymakers have in deciding the course of the country's economic policy.
Two decades and billions of dollars worth of loans later we must review the level of success our relation with the IMF has conferred upon us and also at what cost? The macro reforms of price stability and sustainable internal and external deficit have barely been achieved with an increase in the rate of inflation from 7.2 per cent in 1988 to 8.0 per cent in 2007, and a negligible decrease in the current account deficit (as per cent of gross domestic product -- GDP) from 4.5 per cent in 1988 to 4.3 per cent in 2007. However, at the same time, Pakistan's budget deficit has decreased significantly from 6.7 per cent in 1988 to 3.8 per cent in 2007. How do we interpret the failures and at what costs have some of the 'successes' been achieved? Under the IMF, what is the policy mix that Pakistan is forced to adopt, and has it been successful in incorporating poverty alleviation and income redistribution?
Current account deficit
The defining feature of all stabilisation programmes is the emphasis on controlling the balance of payment (BoP) by reducing the current account, which can be reached either by decreasing imports or increasing exports. While higher export receipts accrue more foreign exchange, lower import volumes are only favourable if concentrated on luxury consumer goods or those which provide adverse competition to the infant domestic industry. Under IMF dictated stabilisation policies, import growth has been reduced; however, the decline is concentrated in capital goods. The cutback of capital imports is hindering industrialisation and, in the long-run, will only enhance Pakistan's need for the import of industrial inputs and capital since the domestic industry is incapable of producing either locally.
Another major chunk of the current account deficit is external debt; the government has the option of reducing this by decreasing debt-servicing through debt-retirement or rescheduling. While a decline in debt-servicing through debt remittances or write-offs releases resources for investment or consumption without future liabilities, debt-rescheduling transfers liabilities to future generations. In Pakistan, successive governments have simply resorted to transferring debt to the future governments, making it even harder for the economy to be weaned off IMF loans.
As noted earlier, the budget deficit-to-GDP ratio has decreased appreciably; however, there existed a range of policy choices to achieve this end and the one adopted by Pakistan was far from ideal. Preferably, the budget deficit should be reduced through revenue mobilisation and cuts in government expenditure. Revenues can be raised through direct or indirect taxation; the former impacting the rich the latter largely the poor. Expenditure reduction can be attained through cuts in wasteful government expenditure, such as the defence budget. Much to the country's misfortune, a perusal of the government's behaviour reveals its failure in effective revenue mobilisation through the installation of progressive taxation; with most expenditure cuts concentrated in the development budget. The withdrawal of agricultural and production subsidies has further damaged the development of the small- and medium-enterprises, and the agricultural sector.
The Pakistani economic planners, at the behest of the IMF, have chronically attempted to manage inflation by suppressing domestic demand, through expenditure cuts on development works and infrastructure building. Especially in the aftermath of 9/11, as Pakistan's financial situation improved dramatically due to US aid worth $ 10 billion combined with remittances flowing in, the government's economic growth was fuelled by this cheap credit. This resulted in the often quoted 6.8 per cent 'impressive' GDP growth that was entirely consumer driven, as opposed to investment driven; with the previous government taking no measures to overcome key bottlenecks in the economy through a much needed dose of structural reforms. As industrial capacity remained stagnant and the cost of domestic production only increased, the sector had an inelastic supply of food stuff, resulting in the unprecedented hike of 14 per cent in their prices.
Impact of stabilisation on poverty and income
Needless to say, the impact of the macro-economic policies dictated by the IMF has been borne by the poor. In 2001, the IMF initiated the PRGF with its core strategy focused on accelerating economic growth through liberalisation and privatisation (similar to the SAPs), all the while assuming that the higher growth rates would magically alleviate poverty through the 'trickle-down' effect. Since the PGRF lacked the policy mix and political will to institute any holistic structural change, the situation for the most deprived has only worsened. The measure of inequality in Pakistan, the Gini coefficient, increased from 0.35 in 1988 to 0.43 in 2007, in which the country slipped to 136th position on the Human Development Index, out of 177 countries. Failure of building industrial infrastructure not only led to low capacity of industry and the consequent increase in food prices, but it also did not generate employment, with the unemployment rate climbing from 3.5 per cent in the 1980s to 7 per cent in 2007-08.
Since the IMF loans are released in tranches with each transaction conditional on the fulfilment of certain deficit targets, the government is hard pushed to reduce its fiscal deficit by the quickest means possible. The outcome of this has been the slashing of the combined health and education budget to two per cent, and the withdrawal by the federal government of the provision of federal deficit grants to provincial government in its revised 1997 National Finance Commission (NFC) Award. The provincial governments, in turn, have started financing their deficits by cutting social sector expenditure from 17.7 per cent in the 1980s to 4.3 per cent in 2007; so, once again, the poor bore the brunt of 'stabilisation'. This steady divestment in Pakistan's human capital is not only creating massive economic disparities, but also making our so called 'impressive' growth increasingly unsustainable.
It is evident that the IMF-led stabilisation has a one-track focus on slashing current account and budget deficits through the quickest means possible, while aggravating the deep-rooted institutional failures, poor infrastructure and the lack of good governance. Indeed, if the IMF was interested in bringing about genuine change, it would have not neglected such glaring realities. At the heart of this is not just the issue of billions of dollars worth of debt that Pakistan owes to the IFI (whose major contributor is the United States), but more so the level of power this allows a foreign agent to wield in matters of our national interest.
As the struggle for the genuine democracy and national sovereignty continues in Pakistan, we must not overlook the need to purge ourselves from the control of foreign agencies. With every IMF agreement, we sell off a chunk of our national sovereignty and, thereby, compromise on the effectiveness of the democratic process. Those who hold the levers of power in our country are attempting to 'stabilise' the economy without understanding its fundamental structural inadequacies, all the while safeguarding their personal interests.
The State Bank of Pakistan's recent report clearly suggests that remedial measures are required to put the country's economy back on track
By Hussain H Zaidi
The State Bank of Pakistan's (SBP's) Second Quarterly Report for financial year 2007-08 presents a rather disappointing picture of the economy with regard to its performance in the first eight months (June 2007-February 2008), as well as projections for the remaining period, of the current financial year. The unsatisfactory performance of the economy is shown by three major macro-economic indicators: fiscal deficit, current account deficit and inflation.
The fiscal deficit in the first half of the current financial year (July-December 2007) constituted 3.6 per cent of the gross domestic product (GDP), which is almost double the fiscal deficit in the corresponding period of the preceding financial year (2006-07). The increase in fiscal deficit is due both to decline in revenue generation -- as tax revenue grew only by 10.6 per cent, as compared with 25.1 per cent in the corresponding period of the preceding financial year -- and increase in current expenditure -- which increased to 7.8 per cent of the GDP from 6.7 per cent of the GDP in the corresponding period of the preceding financial year.
In rupee terms, the country's total expenditure increased to 981.9 billion from Rs 783.8 billion (by 25.27 per cent) in the corresponding period of the preceding financial year; while the total revenue increased to Rs 625.6 billion from Rs 614.8 billion (by only 1.75 per cent) in the corresponding period of the preceding financial year. The current expenditure increased to Rs 775.1 billion from Rs 581.4 billion (by 33.31 per cent) in the corresponding period of the preceding financial year. This means that the country's total revenue is not enough to even finance its current expenditure. The country's revenue-GDP ratio decreased to 6.3 per cent from 7.1 per cent in the corresponding period of the preceding financial year. On the other hand, the tax-revenue-GDP ratio decreased to 4.5 per cent from 5.0 per cent in the corresponding period of the preceding financial year. The non-tax revenue-GDP ratio also decreased to 1.8 per cent from 2.1 per cent in the corresponding period of the preceding financial year.
Current account deficit
The current account deficit in the first seven months of the current financial year (July 2007-January 2008) reached $ 7.5 billion, as compared with $ 5.1 billion in the corresponding period of the previous financial year. The current account-GDP ratio increased to 4.8 per cent, which is 1.2 percentage points higher than that in the corresponding period of the previous financial year. The country's trade deficit, which is the major component of the current account deficit, constituted 7.9 per cent of the GDP in the first eight months of the current financial year (July 2007-February 2008), which is 1.5 percentage points higher than that in the corresponding period of the previous financial year.
In value terms, the trade deficit was registered at $ 7.8 billion in the first seven months of the current financial year (July 2007-January 2008) from $ 6.2 billion in the corresponding period of the preceding financial year. This increase can be attributed to many factors. For example, the expansionary fiscal policy added to the aggregate demand, which pushed up the demand for imports. Hence, in the first eight months of the current financial year (July 2007-February 2008), the country's imports grew by 21.8 per cent, as compared with 9.9 per cent growth in the corresponding period of the preceding financial year.
Exorbitantly high oil prices in the international market also added to the country's import bill. Though exports increased by 7.9 per cent, almost double the rate at which they grew in the corresponding period of the preceding financial year, export growth lagged behind import growth by 14 percentage points. The capital account balance, the other side of the balance of payment (BoP), has also registered a slight decrease, as capital account surplus came down to $ 4.6 billion in the first seven months of the current financial year (July 2007-January 2008) from $ 4.8 billion in the corresponding period of the preceding financial year. As a result, the overall external account balance has gone into deficit of $ 2.5 billion.
The consumer price index (CPI) inflation in the first eight months of the current financial year (July 2007-February 2008) was registered at 8.4 per cent -- 0.7 percentage points higher than that in the corresponding period of the preceding financial year. The SBP sees fiscal deficit and the way it has been financed as the major contributor to the rising inflation. The rise in current spending drove up the aggregate demand, which was translated partly in increase in imports and partly in price increase. To meet the fiscal deficit, the government relied heavily on borrowing from the central bank, which despite being the most convenient source of borrowing is the most inflationary form of deficit financing. In the first nine months of the current financial year (July 2007-March 2008), the government's borrowing from the SBP jumped to Rs 359.3 billion, as compared with only Rs 25.6 billion in the corresponding period of the preceding financial year.
Having summarised the performance of the economy in the first half of the current financial year, let us now turn to the SBP's projections for its remaining part. According to the central bank, in the current financial year, the real GDP is expected to grow by 6-6.5 per cent, below the original target of 7.2 per cent, as well the previous year's growth rate of 7 per cent. The SBP has identified two major reasons for this: slowdown in large-scale manufacturing (LSM) growth and disappointing performance of major crops, including cotton and rice. In the first half of the current financial year, the LSM has grown only by 4.5 per cent, as compared with 8.3 per cent in the corresponding period of the preceding financial year.
Conversely, inflation is currently estimated to be in the range of 8-9 per cent, well above the 6.5 per cent target for the current financial year, as well as 7.8 per cent rate in the preceding financial year. The fiscal deficit for the current financial year is projected to surpass the original target of 4 per cent and reach 5.2 per cent of the GDP, as compared with 4.3 per cent in the preceding financial year. It may be mentioned that the Fiscal Responsibility and Debt Limitation Act, 2005, makes it obligatory for the government to restrict fiscal deficit to 4 per cent of the GDP.
The current account deficit is also expected to reach 6 per cent of the GDP, from the original target of 5 per cent and the 5.2 per cent rate for the preceding financial year. The major reason for this increase in the current account deficit-GDP ratio is the increase in trade deficit, which is projected to reach $ 15.9 billion from $ 13.5 billion in the preceding financial year, while the original target was $ 13.1 billion. The country's exports are estimated to meet the target of $ 19.2 billion, while the imports are projected to be in the range of $ 35 billion. However, given the recession in the United States, which is Pakistan's single largest market, it will also be difficult to meet the export target. Hence, the trade deficit may exceed the estimate of 15.9 billion, leading to further increase in the current account deficit.
It seems apparent that the country's economy is going to experience a slowdown in growth, increased inflation, and higher fiscal and current account deficits. As the projected growth rate of 6-6.5 per cent is still healthy, the slowdown will not a serious problem per se. What, however, is a matter of serious concern are the increasing macro-economic imbalances -- fiscal and current account deficits, and mounting inflationary pressures. If not reversed, these imbalances will further weaken the very foundations of the economy, shake public and investors' confidence, compound the public debt problem, further reduce the country's credit rating, and greatly depreciate the value of the currency.
Only in the first eight months of the current financial year (July 2007-February 2008), the Pakistani rupee has depreciated by 3.5 per cent against the US dollar, due mainly to the worsening current account position. In theory, currency depreciation helps push up exports and bring down imports. However, in actuality, a number of factors bear upon the currency depreciation-foreign trade nexus. In case of Pakistan, any potential advantage conferred by currency depreciation on exports is likely to be offset by inflation, power shortage, fall in demand in major markets like the US, and increasing competition in the international market of textile and clothing products, which account for 65 per cent of Pakistan's total exports. As far as cut in imports is concerned, nearly 23 per cent of Pakistan's imports consist of petroleum products, for which demand is largely inelastic -- it does not respond much to change in price. Weakening of the economy will also make the country more dependent on external assistance and, thus, more vulnerable to foreign pressure; and constrain the capacity of the new government to make independent decisions on such key issues as 'war on terror'.