Prime Minister Benazir Bhutto argues that Pakistan can look forward to a better future

Do you see an imminent resolution to the dispute with the MQM in Karachi?

Karachi is much more peaceful today than it has been; violence has declined appreciably due to the co-ordinated efforts of the law enforcement agencies. I am a political person and I believe in solving every political and non-political issue through dialogue and discussion. I do not believe in confrontation and, being an optimist, I always hope and look forward to the best.

The government and the Altaf Group had been engaged in dialogue in order to find ways to resolve the problems in Karachi and I am sure that we will soon resume these discussions. The most important issue on the government's agenda is the restoration of peace and harmony, and we hope that the Altaf Group will soon realise that its confrontational strategy is useless, and will give the people of Karachi a break. I believe that, if the Altaf Group prolongs the situation in Karachi any further, the city's people, who are already fed up with violence and disruption, will hold Altaf Hussein accountable.

I am confident, however, that we can move ahead with the dialogue. There have been fresh contacts recently and the Altaf Group team has been meeting with the Governor of Sindh. The leader of the government's negotiating team has renewed the invitation to representatives of the Altaf Group with particular reference to re-opening avenues for negotiation with them. Their positive response would help to bring early peace to Karachi.

What have been the economic effects of violence in the city?

Despite the general law and order situation, Karachi continues to receive an encouraging response from foreign investors. This surely is an indication that there is no economic stagnation in Karachi.

Recently, the ground-breaking ceremony for an ICI chemical plant took place in Karachi. The investment, at US$450 million, is ICI's single largest investment in the world. In January this year I performed the ground-breaking ceremony for a coal-fired power project at Keti Bender, not far from Karachi, and, more recently, another ceremony for the huge Karachi Mass Transit Project, largely funded by Canadian firms. These major events should dispel the impression that Pakistan, particularly Karachi and its surroundings, is economically stagnant.

How do you gauge present relations with India?

Much as we would like to have normal and tension-free relations with India, a number of outstanding problems have impeded our progress in that direction. My government has been sincerely trying to resolve all outstanding issues, including the core dispute over Jammu & Kashmir. Foreign Minister-level talks in January 1994 did not yield tangible results because of the negative attitude of the Indian side, and we are concerned over the stalemate between us. We hope that the deterioration in our relations can be halted by progress in resolving the Kashmir issue, which will also make it possible to settle other differences.

In this context, Pakistan has made several specific proposals to promote non-proliferation, arms control and disarmament. We are waiting for a positive reply from the Indian side. We have also proposed an agreement for the mutual reduction of armed forces, which would enhance security at lower levels.

We hope that, now that the general elections in India are over, the new government will shun a rigid stance and enter into a meaningful dialogue with us to solve these contentious issues. Nevertheless, we must be cautious: India continues to engage in an arms build-up. The deployment of Prithvi missiles, the development of the Agni ballistic missile and India's ambitious nuclear programme, coupled with its ambivalent attitude to the Comprehensive Test Ban Treaty, do not auger well for the region's security.

The nuclear issue has clouded relations with the US. Do you see relations improving in the near future?

Since my government assumed office, we have made concerted efforts to improve relations with the US, which had reached a stalemate due to the imposition of the Pressler amendment. The Clinton administration has responded positively, and continues to assure us that it wants to revitalise and broaden relations, especially given the changed world scenario after the end of the Cold War.

A non-proliferation regime in South Asia must be equitable. There is increased realisation of this in the US. We look to the US administration to take a mature and balanced view of the situation. I am confident that the Brown amendment will form the basis of a redefined relationship between Pakistan and the US. It will enable the two countries to broaden and deepen mutually beneficial co-operation in diverse areas, including economic co-operation.

Rumours of a coup attempt circulated in late 1995. Were these rumours unfounded?

The matter is sub judice, and I would not like to comment. I will say, however, that democracy in Pakistan is now an integral part of Pakistani society; all institutions of state are operating under their well-defined roles.

How are relations with the IMF?

Let me make it very clear at the outset that the government has never relented in its commitment to pursue basic economic strategies aimed at achieving macro-economic balance and pressing forward with economic reforms and structural changes.

Under ESAF/EFF (1993/94-1995/96), we could not achieve certain targets for the second year of the programme, such as GDP growth and fiscal deficit and inflation reduction, because of supply-side constraints. Three consecutive failures in the cotton crop coupled with bad weather affecting minor crops reduced GDP and pushed up inflation.

However, we have continued to make substantial progress in terms of implementing the structural reforms envisaged under ESAF/EFF. For industries, the sanctioning process has been eliminated and only very few price controls remain. Most restrictions on foreign investment have been removed. In agriculture, export duties and restrictions have been eliminated and in-put subsidies are being phased out. The exchange and trade regime has been liberalised and the rupee is freely convertible on the current account. Financial reforms have led to the disbandment of quantitative controls on money supply and the autonomous powers of the Central Bank have been enhanced. Progress in privatisation has been fairly rapid: more than eight industrial establishments have been privatised. A milestone was the disposal of strategic shares in the Kot Addu Power complex along with transfer of management. Work is in progress on privatising power and gas distribution systems as well as the Pakistan Telecommunications Corporation. The exemption of agriculture from direct taxes is being gradually eroded, the federal government has already imposed a wealth tax and three of the provinces have levied an agriculture income tax. The fourth province might introduce a similar tax in the next budget. Last but not least, there is now a greater stress on decentralisation, privatisation and deregulation and opportunities and incentives are being provided for greater public participation in national development.

As I have already mentioned, we had to alter the pace of fiscal adjustment and tariff reduction in the budget for 1995-96 due to supply-side constraints which were beyond our control. But, as is evident from the measures enumerated above, we have continued to implement the broad policy reform agenda with great vigour and commitment.

When the new financial year began in July 1995, certain unfavourable trends emerged on the foreign trade account, with a decline in exports and a sharp rise in imports. This adversely affected our foreign exchange reserves, which declined significantly, though never to alarming levels. To arrest further falls, the government decided in October to take emergency action. The rupee was devalued by 7 per cent, a regulatory duty of 10 per cent was imposed on imports and petroleum prices were raised. Action was thus taken to stimulate exports and to restrain domestic demand.

To further shore up our balance of payments position and restore confidence, we negotiated a stand-by arrangement with the IMF. It is worth noting that, while stand-by arrangements usually deal with the problem of immediate stabilisation, the agreement with Pakistan contains a number of provisions for structural reform.

We are confident that we shall not only be able to implement the stand-by agreement but also negotiate a new, multi-year ESAF arrangement by the end of 1996.

I may mention that the performance of the principal sectors of the economy during the current year has been very encouraging. After three years of low growth, output will rise by over 6 per cent in 1995-96. Progress has been particularly striking in agriculture, where output will rise by over 6.6 per cent, with cotton recovering from the problems which have plagued it in recent years. The external position has stabilised to a considerable extent. Exports are picking up, and imports slowing. Foreign reserves have stabilised at a reasonable level. The government is doing its utmost to reduce the budget deficit. Tighter demand control combined with improved output has helped to contain inflationary pressures. The performance criteria for the quarter ending December 1996 provided in the standby has already been met.

I may conclude that economic prospects for Pakistan are very encouraging. We are moving towards macro-economic balance, both on the fiscal front and in the external account. The agenda of economic reform is being implemented vigorously. We are confident that Pakistan has embarked on the road to economic progress and sustained growth of high quality.

Foreign investment is a vital element in economic development. What measures have you taken to build investor confidence in Pakistan?

We have taken a number of measures to build investor confidence. We pulled down the retrogressive system of approvals, sanctions, permits and licences to put Pakistan on the road to a free enterprise economy. The gamut of productive activity, be it economic, social or service, is now open to foreign investors, who can hold up to 100 per cent equity in any productive venture without a Pakistani partner. The Pakistani rupee has been made fully convertible and foreign investors can repatriate funds at any time without restriction. The macro-economic stabilisation programme is successfully under way. Through strict fiscal discipline, we have been able to bring down the budget deficit from 8 per cent to 5 per cent. Exports are increasing, improving our balance of trade. These measures have had a very positive effect on price structure and inflation is falling.

The economic liberalisation, deregulation and denationalisation policies which we started some six years ago have been in operation continuously. There is complete consensus among all major political parties and splinter groups over our policies.

We have designed a number of policy packages for attracting investment in the agro-food industry, chemicals, electronics, energy and special industrial zones. The concessions and incentives offered are matched virtually nowhere else in the region. To consolidate various measures taken by the government, and to help investors in their investment decisions, we have set up a one-stop-shop, the Board of Investment (BOI), which has identified a number of profitable projects on which pre-feasibility studies have been prepared and distributed amongst potential investors.

With a view to acquainting the international investor community about Pakistan's investor-friendly environment, and the availability of a large number of incentive packages, Pakistan organised investment conferences in many capital and technology resource-rich countries such as the US, the UK, Germany, South Korea, Malaysia, Singapore and Japan.

Besides these physical measures, we have been successful in creating an investor-friendly culture within the bureaucratic circles of Pakistan and the international investor community is finding a discernible change in the economic culture of the country. Our efforts have generated a lot of confidence, and more than US$25 billion-worth of investment pledges.

What are the key challenges ahead?

As the head of a government of a developing country with a large population, issues and problems demanding my attention are many. I can read out a long list of pressing issues and problems, but I shall confine myself to listing just a few.

Within the country, issues requiring urgent attention include unemployment, low literacy levels, lack of healthcare facilities, especially in rural areas, and a political opposition that refuses to rise above partisan considerations even on non-controversial issues. On the regional and international canvas, we have a many times larger country to our east which continues to develop and stockpile weapons of mass destruction, posing the most serious threat to Pakistan. We also have to counter an adverse Western perception of our peaceful nuclear programme, a perception that is, ironically, fuelled and strengthened by propaganda from India. We also, ofcourse, have the Kashmir issue, which enjoys a high priority on our agenda.

So, you see, I have quite a long list to handle.

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©Kensington Publications 1996