A meaningful analysis of the Pak economy that takes into account its heroin trade.

 B. Raman

 Director, Institute For Topical Studies, Chennai.

            Any meaningful analysis of the Pakistani economy has to treat Pakistan and the Taliban-controlled Afghan territory as one economic zone. Otherwise, one would not have a clear understanding of Pakistan's economic difficulties and how its economy continues to survive, even after the suspension of the International Monetary Fund (IMF) assistance, despite frequent predictions of its certain collapse.

            The only major source of revenue of the Taliban administration is the agricultural tax on opium producers and the duty levied on heroin refineries. There is practically no foreign trade except the transit trade through Pakistan, no foreign investment and no remittances from non-resident Afghans living outside Pakistan.

            Despite this, the Taliban has managed to run a primitive administration in 90 per cent of Afghanistan paying the government servants, including the militia members, their meagre salaries and pensions regularly, feed the population without any reported instances of starvation deaths, run an Embassy in Islamabad and overseas offices in New York and certain other cities, keep up skeleton domestic airline and telecommunication services and a radio station (Radio Shariat), which broadcasts to overseas Muslims. Its leaders and officials, except the Amir, Mullah Mohammed Omer, travel abroad frequently.

            Maintenance of even such minimal State functions would not have been possible, in the face of UN sanctions in force since November last, but for the indirect budgetary support from the Pakistani Government. Such budgetary support was being given by Islamabad even to the Burhanuddin Rabbani Government in the past and it has now been stepped up since the Taliban captured power in Kabul in September, 1996.

            Islamabad has been meeting the cost of the entire POL and foodgrain, particularly wheat, requirements of the Taliban. The continuing heavy wheat imports by Pakistan from the US and Australia (US $ 205 million during July, 1999--February, 2000) are to meet its own shortages as well as the needs of the Taliban. In addition, Islamabad has been paying for the missiles and missile technology from North Korea partly in cash, partly in wheat and partly in fertilizers.

             In return for the budgetary support from Islamabad, the Rabbani Government previously and the Taliban presently have allowed the Pakistani military and intelligence establishment to transfer the training camps for the terrorist groups operating in India to Afghan territory to escape US pressure for action against them by Islamabad. This transfer process started after the administration of the US President, Mr. Bill Clinton, temporarily placed Pakistan on the so-called watch list of suspected state-sponsors of international terrorism between January and July, 1993, and has since been completed.

            Similarly, to circumvent the US demand for action against opium cultivators, heroin refineries and narcotics smugglers in Pakistani territory, the previous Nawaz Sharif Government started the transfer of all heroin-related infrastructure to Taliban-controlled Afghan territory and this has been expedited by the present government of Gen. Pervez Musharraf. The latter has planned to complete the process by the year-end.

            The area under poppy cultivation in Pakistan and the production of opium gum from which heroin is extracted have been reduced dramatically from 32,000 (in the 1980s) to 629 hectares and from 800 to 17 metric tons respectively. As a result of the transfer of this infrastructure to Afghan territory, the area under poppy cultivation has doubled since the Taliban seized power and the opium gum produced has been increasing by 24 per cent annually, making Afghanistan overtake Myanmar as the largest opium producer of the world. Last year, 1,670 metric tons of opium gum were produced.

           While the opium cultivation in Afghanistan is largely in the hands of Afghan farmers, all heroin refineries in Taliban territory are owned by Pakistani narcotics barons, enjoying the protection of the Pakistani military and intelligence establishment. The total value of the foreign exchange earned by the narcotics smugglers of Pakistan is estimated at US $ two billion per annum. This amount has prevented the Pakistani economy from collapsing despite 10 years of continuous recession since 1990, when Washington imposed sanctions under the Pressler Amendment.

            The military regime's efforts for a revival of the legitimate economy have been unsuccessful so far. Its high-profile drive for the recovery
of outstanding bank loans has brought in only Rs. 14 billion out of Rs.212 billion--a recovery rate of about 6 per cent. The previous democratic governments of Mr. Sharif and Ms. Benazir Bhutto had a better record of recovery.

            Tax collection has improved by 20 per cent, mainly due to the payment of past arrears by some defaulters due to fears of the military regime in the first few months after the General seized power, but the regime has not been able to significantly increase the number of new tax-payers. Moreover, despite the increase in the tax collection, the total revenue during the current financial year ending June is expected to reach Rs.355 billion only as against the budgetary target of Rs. 379 billion.

            Till December-end, the State has already borrowed Rs. 13 billion from the open market as against Rs.5.7 billion till December-end of 1998, for budgetary support. Despite an 8 per cent increase in exports (due to a bumper cotton crop) to US $ 5.48 billion, the foreign trade gap has increased during the same period by 43 per cent to US $ 1.16 billion due to a 13.3 per cent increase in imports to US $ 6.64 billion.

            Ninety-five per cent of the increase in the value of imports was caused by the rise in POL prices and the heavy wheat imports. The delay by the Clinton Administration in implementing its commitment to the Sharif Government to reimburse partly in wheat the payments made by Islamabad before 1990 for the blocked F-16 sale has aggravated the difficulties of the military regime.

            There has been a decline of US $ 58 millions in remittances by non-resident Pakistanis and the portfolio investment flows amounted to US $ 34.6 million only till January-end, the lowest figure since 1990-91.Even this meager portfolio inflow was neutralized by a large outflow, resulting in a net negative flow.

            The IMF shows no signs of resuming assistance till the Govt. imposes agricultural income tax, extends the general sales tax to retailers and services (expected in July), satisfactorily concludes its negotiations with Western independent power producers and cuts the defense budget, which now amounts to Rs. 142 billion, being 33 per cent of the State revenue and 27 per cent of the expenditure. Though the Government claims that it has been spending only about 3.5 per cent of the GDP on defense, it is estimated to be 5 per cent plus.

            From the legitimate economy, there has been more outflow of money than inflow, but despite this, the State has not defaulted in the payment of salaries and pensions to public servants as the Russian State has been doing and in interest payments to overseas creditors, the private sector has not failed to pay the wages of the workers in time, there has been no worrisome increase in unemployment, the value of the Rupee vis--vis the dollar has remained steady at around Rs. 54.20, the inflation has remained at around 3.5 per cent, there has been a bull run in the Karachi stock exchange with a record 42 per cent increase in the share index in January and February and, most amazingly, the foreign exchange reserves have doubled to US $ 1.5 billion.

            This amazing phenomenon of a seeming robustness of the State finances despite the comatose state of the legitimate economy has been made possible by assistance from the thriving illegitimate economy of the narcotics smugglers. Since June last, the State has tapped this illegitimate reservoir for a little more than US $ one billion to overcome its difficulties---US $ 300 million by the Sharif Government to meet the increased expenditure due to the Kargil adventure and over US $ 700 million by the military regime.

            Quoting State Bank of Pakistan (SBP) sources, the "News" of March 16 reported: "There was excess liquidity (of US dollars) available in the curb market of foreign exchange which is being fully absorbed by the central bank...... The present inflows of exports, remittances and
foreign direct investment are not enough to meet the international trade gap and the cost of debt servicing. The difference is being covered through open market buying to maintain a reserve level of around US $1.5 billion. SBP has done this since June, 1999."

            What the Governments of Mr.Sharif and Gen. Musharraf have been doing is nothing but state-sponsorship of narcotics production and smuggling to prevent an economic collapse and to sustain the ability of the State to maintain a high level of defense expenditure and to finance the covert war against India in defiance of increasing international pressure to stop it.

            This officially-blessed heroinization of the Pakistani economy has not received the attention it deserves in Western capitals and Tokyo and in the multilateral financial institutions. (
April 30, 2000)