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-à-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)