JOURNEY THROUGH THE HISTORY
SHABBIR H. KAZMI
Aug 20 - Sep 2, 2012
During the rule of incumbent government it has become visible that even if some quarters make the best efforts to derail Pakistan's economy, they could do little. The country has a robust economy and this was established in FY12 when GDP growth rate touched 2.5% and exports barely missed US$24 billion target, despite worst outages of electricity and gas. Pakistan could have performed better had uninterrupted supply of energy products could be ensured at affordable cost.
When experts talk about robustness of country's economy some of the critics feel amused. However, they tend to forget the conditions faced soon after partition. When Pakistan attained the sovereign status in 1947 from the colonial rule its average economic growth rate in the earlier period was higher than the average growth rate of the world economy. Average annual GDP growth rate was 6.8% in the 1960s, came down to 4.8% in the 1970s, improved to 6.5% in the 1980s. Average annual growth fell to 4.6% in the 1990s one again with significantly lower growth in the second half of that decade.
During the 1960s, Pakistan was seen as a model of economic development around the world and there was much praise for its economic progress. Karachi was seen as an economic role model around the world and there was much praise for the way its economy was progressing. Many countries sought to emulate Pakistan's economic planning strategy and one of them, South Korea, copied "Five-Year Plan". Later, economic mismanagement in general, and fiscally imprudent economic policies in particular, caused a large increase in the country's public debt and led to slower growth in the 1970s and 1990s. The economy recovered during the 1980s with the introduction liberalization, deregulation and privatization policies.
Historically, Pakistan's GDP has grown every year since 1951 recession. Despite this record of sustained growth, Pakistan's economy had, until a few years ago, been characterized as unstable and highly vulnerable to external and internal shocks. However, the economy proved to be unexpectedly resilient in the face of multiple adverse events taking place during 1998-2002 period.
During this period the world experienced Asian financial crisis. Pakistan faced economic sanctions in the aftermath of nuclear test. Then came global recession of 2001-2002 and Pakistan also faced drought like situation. A severe drought - the worst in Pakistan's history lasted for about four years. Other factors included heightened perceptions of risk as a result of military tensions with India, with as many as one million troops placed on the borders, and predictions of impending potential of nuclear war and above all the post 9/11 military action in neighboring Afghanistan, with a massive influx of refugees from that country.
Despite these adverse events, Pakistan's economy kept growing and economic growth accelerated towards the end of this period. This resilience led to a change in perceptions of the economy, with leading international institutions such as the IMF, World Bank and the ADB praising Pakistan's performance in the face of adversity.
Over the years revenue collection improved. As a result of economic growth, introduction of tax reforms aimed at broadening of the tax base and more efficient tax collection as a result of self-assessment schemes and corruption controls in the Federal Board of Revenue and the privatization of public utilities and telecommunications ushers a new era. Pakistan aggressively cut tariffs and assisted exports by improving ports, roads, electricity supplies and irrigation projects. Pakistan managed to double development spending from about 2% of GDP in the 1990s to 4% in 2003, a necessary step towards aimed at accelerating GDP growth rate.
Liberalization in the international textile trade has already yielded benefits for Pakistan's exports and the country also benefited from freer trade in agriculture. As a large country, Pakistan hopes to take advantage of significant economies of scale and to attain a significant share in world trade of textiles and clothing. Pakistan was expected to benefit from its competitive advantage, particularly due to low labor cost engaged in producing made-ups..
Growing stability in the nation's monetary policies contributed to reduction in interest rates, and a great expansion in the quantity of credit, changing consumption and investment patterns. Pakistan's domestic natural gas production and its use in automobiles saved the country from the adverse effects when crude oil price touched news highs during 2004-05. Pakistan also moved away from import substitution to export-led growth, a model of economic growth successfully implemented by Southeast Asian countries that also proved highly successful in China.
Beginning 2008 Pakistan's economic outlook is facing stagnation. Security concerns stemming from the Pakistan's involvement in 'War on Terror' has created instability and led to the decline in FDI from a height of approximately $8 billion dismal number during FY12.
Concurrently, the insurgency has forced massive capital flight from Pakistan. Combined with high global commodity prices the impact has been devastating. With the increase in trade deficit erosion in Rupee value became a cause of concern.
Pakistan had to once again approach the International Monetary Fund to meet its debt servicing obligations. Consequently, S&P lowered Pakistan's foreign currency debt rating to CCC-plus from B, just several notches above a level that would indicate default. Pakistan's local currency debt rating was lowered to B-minus from BB-minus. Credit agency Moody's Investors Service cut its outlook on Pakistan's debt to negative from stable due to political uncertainty, though it maintained the country's rating at B2.
After a relatively peaceful but economically stagnant decade of the 1990s, the year 1999 brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan's urban middle class.
Pakistan became one of the four fastest growing economies in the Asian region during 2000-07 with its annual growth averaging around 7% for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty, creating millions of new jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.
The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07. Volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators.
The decade also witnessed adverse impact of the war on terror on Pakistan, eventually turning the nation into a frontline state in the increasingly deadly conflict that shows no signs of abating. There are signs of recovery with the restoration of democracy, an increasingly assertive urban middle class, vibrant mass media and growing civil society.
The Zardari-Gilani government inherited a relatively sound economy on March 31, 2008. It inherited foreign exchange reserves of $13.3 billion, exchange rate at Rs62.76 per US dollar, the KSE index at 15,125 with market capitalization at $74 billion and the country's debt burden on a declining path. However, soon the situation started deteriorating and the first four months of 2008-09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government.
A question is often asked why Pakistani economy has done well under military governments and performed poorly when led by politicians? To put it all in perspective, let's recall how late Dr. Mahbub ul-Haq, the renowned Pakistani economist who is credited with the idea of UNDP's human development index (HDI), explained the corrosive impact of political patronage on economic policy in Pakistan.
The questions also arise what went wrong? Why one of the fastest growing economies in the Asian region until two years ago was totally forgotten in the region? Firstly, the speed and dimension of exogenous price shocks (oil and food) were of extraordinary proportions. Secondly, the present government found itself totally ill-prepared and clueless in addressing the challenges arising out of the shocks. While rest of the world was taking corrective measures and adjusting to higher food and fuel prices, Pakistan lurched from one crisis to another.
Despite peaceful election and a smooth transition to a new government, political instability persisted. For a protracted period there were no finance, commerce, petroleum and natural resources and health ministers in the country. It gave the impression of having little sense of direction and purpose. A crisis of confidence intensified as investors and development partners started to walk away. The stock market nosedived, capital flight set in, foreign exchange reserves plummeted and the Pak rupee witnessed massive erosion in value. Pakistan's macroeconomic vulnerability had grown unbearable.
While the country was moving rapidly towards the IMF, the ministry of finance had prepared the plan to bring $4 billion by June 30, 2008 through four transactions. A kick-off meeting was scheduled on April 23, 2008 at the ministry to give a final touch to the various roadshows. These transactions were canceled on April 20, 2008. Who ordered the cancellation of $4 billion transaction? This cancellation prompted balance of payment crisis and the rest became history.
The economy continues to remain in intensive care unit and is barely breathing thanks to the injection of funds from the IMF, World Bank and Asian Development Bank. The economy is not on the radar screen of the government and as such the economic managers have no relevance in the current political set up. The exit of Shaukat Tarin caused a massive difference. At least he tried his best to inject financial discipline but paid the price of teaching prudent financial management.
Over the years many heads of central bank came and went away and slot of finance minister was also filled repeatedly to bring some respite. After Tarin's departure, Abdul Hafeez Shaikh assumed the position of finance minister. However, he has to face a lot of resistance and often he failed in getting support from his own ministry and other ministries. The man who had successfully implemented ëPrivatization for People, program also failed in concluding any privatization transaction. He also failed in recovery of US$800 million from Etisalat.
Pakistan's economic conditions remain far from satisfactory not because of suffering from any contentious problems but blatant violation of code of governance. The country is suffering from worst energy crisis only because of gross mismanagement. It is an irony that policy planners know the problems as well as the solutions but often fail in taking timely prudent steps.
Iran offered to supply 80,000bpd crude oil on deferred payment, US$250 million to meet foreign exchange component of Iran-Pakistan gas pipeline and even 1,000MW electricity. However, no offer has been accepted as yet due to extreme pressure from the United States. While many countries were exempted from imposition of any economic sanctions Pakistan even didn't succeed in selling wheat in exchange of oil.
Though, some of the cynics say that since independence Pakistan has remained subservient to the policies of United States, the recent experience is 'too disappointing'. In a haste to open up Nato supply route, those at the helm of affairs proved too generous by not charging any handling fees. But what the country has received in exchange, increase in attacks by terrorists having safe heavens in Afghanistan.
Attacks on security installations clearly suggest that militants must have gone through strenuous combat training, have the latest arsenal at their disposal and have embedded their agents within ranks and files. Even a more disturbing fact is that militants having safe sanctuaries in Punjab and Balochistan come to Sindh and return after accomplishing their missions.