PAKISTAN'S ECONOMIC PERFORMANCE PAST, PRESENT, FUTURE

MUHAMMAD ASHFAQ
Aug 18 - 24, 2008

At the end of Second World War, decolonization and the movement toward independence gathered critical momentum. The partition of the Indian subcontinent created one country with two wings West Pakistan and East Pakistan divided by more than a thousand miles of Indian Territory. A country which started its journey with countless problems at the time of its partition in 1947 now has become 40th largest economy of the world and 5th Muslim Economy, but still struggling for proper utilization of internal as well as external resources. At the time of partition of sub-continent, Pakistan only got 34 factories out of 911 and it had to start from the scratch.

Pakistan started its history with a net outflow of 'human capital' as skilled Hindu businessmen and technical workers migrated to India with virtually no indigenous industrial capacity at partition and without an entrepreneurial class that could fuel the industrial expansion. However the inward migration of 6.5 Muslims brought an influx of workers as well as a critical group of able civil servants who helped to administer the country.

The new country did not have a currency of its own and its infrastructure consisting of roads, railways, telephone, telegraph and postal services was extremely inadequate. The large irrigation network that had been built by the British in the Punjab stood divided between the two parts of East and West Punjab. The country also lacked human and institutional infrastructure to support a modern economy. One of the few positive features in Pakistan in 1947 was the substantial irrigation of network that had been developed during the day of British rule and continuously expanded in the subsequent years.

From 1947 to 1958 Pakistani economy had an annual GNP growth of 3.2 percent, a sluggish rate that showed the structural weaknesses of the economy. However manufacturing grew at an impressive rate of 9.6 percent and construction at a strong 6.8 percent. By contrast agriculture lagged considerably growing at only 2.8 %. The reason why Pakistan has such a low level growth rate is that the economy was mostly centered on agriculture with agriculture contributing to more than 50% of output. East Pakistan being a predominantly jute-growing area and West Pakistan heavily based on cotton. Much of industrial growth was centered in the protected consumer goods sector with the large scale manufacturing sector accounting for 5% of GDP.

An analysis of economic policy from 1947 to 1958 showed a series of ad hoc reactions to crisis. The Korean War proved a huge blessing for Pakistan by causing an upsurge in the demand for Pakistani exports mostly raw cotton and raw jute and assisting in the creation of a nascent entrepreneurial class.

The period from 1958 to 1969 was characterized by the paradoxical combination of the biggest growth rates in Pakistani history and large increases in income inequality, inter regional differences and the concentration of economic power. While the period has strong macroeconomic management it paved the way for a series of problems that were exacerbated in subsequent government.

The economic indicators were extremely impressive. Agriculture sector grew at a respectable rate of 4.1% over the period while remarkable rates were achieved in manufacturing 9.1% and trade 7.3%. GNP growth rates hovered near the 6% mark throughout the decade. Economic growth was very strong from all fronts especially in comparison to 1950s and 1070s. In sectoral terms agriculture shrank to 41.5% of GDP while manufacturing sector increase to nearly 15%. The large scale manufacturing sector doubled in importance as the economy coasted on the higher growth rates. However the statistics on income distribution, wages and human capital development told a different story. Income inequalities increased substantially in 1960s.

The key priority of Ayub administration was to achieve rapid rates of economic growth and develop Pakistan's industrial capacity. Ayub decided to centre his strategy on private sector. In order to achieve this second five year plan 1960-5 envisaged the removal of administrative controls and the maintenance of monetary discipline and price stability to provide a macroeconomic environment conducive to private investment.

In my view point, Ayub's industrial policy was the hallmark of his rule. The key development was that the policymaking was tailored exclusively to promote industrial investment. Pakistan industrial development corporation (PIDC) was formed to spearhead the industrialization drive by providing the critically needed capital and then withdrawing in favor of the private sector which lacked the skills or the finances to undertake very large projects. As the profits came became wider spread an entrepreneurial class emerged and provided the dynamism that had been absent in the 1950s. This class helped accelerate the rate of growth in the large scale manufacturing sector to more than 15 % during the decade. Thus Ayub's Industrial policy stood vindicated.

Pakistan's agricultural sector in the earlier stages of its development also suffered because some of the necessary inputs were not available in the country and could not be imported conveniently due to foreign exchange constraints. Mechanization was slow to take place and it was only in the mid sixties that we started importing tractors. The number of imported and domestically manufactured tractors has increased from just above 4000 in 1966-67 to an estimated over 22,000 in 1986-87.

In sum the legacy of Ayub years is mixed. While the consolidation of economic of the management and high growth rates were important achievements, the growing income inequality and wage stagnation, the neglect of human capital and the growing dependence on foreign capital inflows all promised a less than rosy inheritance for future regimes. The period of the 1960s can be divided into two sub-phased. The first phase, which lasted until the war with India in 1965, was focused on relaxation of controls on prices and distribution, and an intense effort was made to liberalize the economy, but this effort received a setback in the period 1966-70 due to the costs imposed by the war, bad harvest, and a slowing down of external assistance.

YEAR

REAL GROWTH RATES (%)

1960's (Average)

6.8

1970's(Average)

4.8

1980-81

6.4

1981-82

7.2

1982-83

6.7

1983-84

4.8

1984-85

8.7

1985-86

7

1986-87

5.7

1987-88

5.8

1988-89

7

1989-90

5.6

1990-91

7.7

1991-92

2.4

1992-93

4.4

1993-94

5.1

1995-96

6.6

1997-98

1.7

1998-99

3.5

1999-2000

3.9

2000-01

2.0

2001-02

3.1

2002-03

4.7

2003-04

7.5

2004-05

8.6

2005-06

5.8

2006-07

6.6

2007-08

5.8

Source: State Bank of Pakistan 2008


COMPARATIVE REAL GDP GROWTH RATES (%)

COUNTRY

2004-05

2005-06

2006-07

2007-08

United States

3.9

3.2

3.3

2.2

Japan

2.7

1.9

2.2

2.1

Germany

1.2

0.9

2.7

2.5

China

10.1

10.4

10.7

11.4

Korea

4.7

4.2

5.0

5.0

Singapore

8.8

6.8

7.9

7.7

Malaysia

7.2

5.2

5.9

6.3

Indonesia

5.0

5.7

5.5

6.3

Thailand

6.3

4.5

5.0

4.8

India

7.8

9.2

9.2

9.2

Bangladesh

6.1

6.3

6.7

5.6

Sri Lanka

5.4

6.0

7.5

6.3

Philippines

6.2

5.0

5.4

7.3

Source: World Economic Outlook (IMF), April 2007

In 1971, Pakistan shocked by the secession of East Pakistan and the defeat in war with India. The end of the war marked the accession to power of Zulifkar Ali Bhutto a charismatic leader who envisaged a broad restructuring of the country's industrial and agriculture sector. The period from 1970 to 1977 was to witness the most ambitious socialist oriented reforms in Pakistan's history and the strongest attempt to date to assert outside political authority over the country's bureaucracy and army.

In many respects the performance of the economy during these years was the worst in Pakistan's economic history. Although the GNP growth rate was a respectable 5%, agriculture and manufacturing had very sluggish growth rates, with agriculture growing at an average annual growth rate of 2.3% from 1970-1977 and manufacturing not performing much better hovering at the 2.3% mark. In comparison with he strong performance of the 1960s (8%) these years represented a significant setback for Pakistan. An 8.9% growth rate in the construction sector and a 4.4% in the trade sector helped give Pakistan's GNP figure some respectability. Between 1972 and 1980 all indicators suggest an increase in income inequality.

In the first three years the economy staged a recovery from the war and boosted its export performance and foreign reserves. The period from 1974 to 1977 was marked by the disastrous combination of macroeconomic and oil shocks, inclement weather and flooding, and the policy impact of nationalization.

In sum the 1970s was characterized by a combination of macroeconomic shocks a mistaken nationalization campaign and neglect of agriculture. The most positive features of the Bhutto years were the rapid growth of the small scale sector and the greater attention paid to protecting the rights of rural tenants and industrial workers.

At the institutional level Zia restored the power of the Planning Commission to guide the economy. By observing the main economic indicators it is fair to conclude that these were positive during the decade but the foundations for the macroeconomic instability were also laid in this period. The growth rate in GNP was over 6% during the period with agriculture having an annual average growth rate of 4% and manufacturing at 8.8%. In explicit contrast to 1970s the 1080s were a period of reversal from public sector-led growth strategy. The key economic problem was the widening gap in the balance of payments and fiscal accounts throughout the 1980s. Despite average inflows of $3 billion of workers remittances the current account deficit averaged between 4 and 5% of GDP. For several years in the 1980s instability in the current account deficits defined by conventional wisdom as a situation where deficits cannot be covered by normal capital inflows or drawdown of international reserves and where policies are urgently needed to correct this imbalance was prevalent.

The 1980s were the golden years of the Pakistani remittances inflows. Averaging about 3 billion dollars per year for most of the decade these remittances accounted for 10% of GDP and 45% of current account receipts eclipsing revenues from merchandise exports. It was estimated that deposits of Pakistani residents on foreign banks increased from $700 million in 1981 to $1.7 billion by 1987. Although the $1 billion increase was small compared to the annual remittance inflows of $3 billion it was nevertheless significant in that it allowed this capital to escape the tax net.

The 1980s saw the widening of the fiscal deficits which averaged 8% as proportion of GDP in the second half of the 1980s. Despite this development expenditure declined as proportion of GDP from 8.6% in the 1980 to 5.9% by the end of the decade. Non development expenditures including defense, public administration and the subsidies on wheat, edible oils and other goods continued to increase. Inflation according to the official statistics averaged 6.7% compared to the high 13.9% average for the 1970s. Monetary policy remained conservative the rate of money creation was slow by international standards: in part the budget deficit was financed.

The period from 1988 onwards witnessed the revival of democracy in Pakistan and difficult transition to civilian rule after years of military dictatorship. There was a fundamental consensus on basic economic policies but a lack of continuity of programs and policies. Administrative ad hocism and policy reversals and adventurous economic initiatives failed to cash in the advantages if this economic policy consensus. Instead each group used these mechanisms to establish political power and supremacy.

Overall there has been a deceleration in GDP growth down to 4% with agriculture growing at a rate of 3.3% and manufacturing at a rate of 5.9%. Export growth at constant prices has been negative, current accounts and fiscal deficits had widened and external debt servicing has risen significantly to almost 40% of export earnings-an unbearable burden on the economy. Incidence of poverty is estimated to have worsened.

On a more positive note, during the 1990s Pakistan succeeded in attracting significant foreign direct investment (FDI) for the first time in its history. The streamlining of administrative regulations and the removal of the investment licensing regime led to the inflow of $500 million by 1998. Given the growing importance of private capital, Pakistan's success in attracting FDI, which currently represents about 7% of private fixed investment spending in Pakistan , contests favourably with competition such as India and other lower income countries .It is well established fact that the decade of 1990s was a decade of lost of opportunities for Pakistan. Many nations of the world made visible progress but unfortunately Pakistan was lurched in crisis. Political instability during 1990s made adverse affects on Pakistan economy.

When Musharraf regime came to power every major indicator was showing a negative result. The GDP of Pakistan with 135 million people was just 62 Billion US dollars with the per capital income of about 450 dollars making Pakistan one of the poorest countries in the world. The foreign direct investment was at a time low of 322 million Dollars. The foreign exchange reserves were only 500 million US Dollars which not even equal to one month of imports. There was a power crisis in whole of the country. Agriculture that makes up about 70 percent of the GDP was not showing desired development due to not availability of water at right time and exploiting water reservoirs issues. Imports and the exports were not showing any considerable increase for quite a long time. The current account deficit was at all time high and had reached and unbearable 4.3% of the economy. Internal and external debt accounts for about 93% of the economy. Debt was about 38 billions dollars. The largest chunk of the budget was going on debt serving with 2nd largest going on defense and very small amount was left for development allocation, health, education etc.

A robust performance in the real sectors of the economy in the first half of the fiscal year, the steep rise in imports of machinery and industrial raw materials, and continuing high domestic demand all indicate that GDP growth is likely to improve to 7.0% in Fy2005. An important factor is agriculture's envisaged strong performance. Output of cotton, the most important cash crop, is likely to be as much as 50% higher than in FY2004. Also, wheat, the largest crop in terms of value added, is expected to be boosted by prevailing high market prices, relatively early sowing, and timely rains. Moreover, an over 65% surge in imports of agriculture machinery and a 50% raise in gross disbursement of agricultural credit in the first half of FY2005 point to better prospects of agriculture. Accordingly, sector growth is forecast at 5.0% in FY2005. The growth of industry sector in FY2005 is estimated at 10.0%.

During the 2005-06, Pakistani economy showed the growth of 5.8 %, agriculture sector played its vital role, 6.3% growth, manufacturing 8.7 %, construction 10.2%, services sector 6.5 %. The robust and phenomenal growth of 8.6 % was backed by consistency in economic policies of the government, foreign remittances, financial assistance by United States etc.

In the year 2006-07, economy showed the 6.8% growth rate and two sectors, agriculture and manufacturing contributed less as compared to last year 3.7 % and 8.2 % respectively but the driving force was the service and construction sector 7.6 % and 17.6 % respectively. Pakistan's economy has shown flexibility against many serious problems both internal and external and grew at 5.8 % during the year 2007-08. Agriculture sector grew at 1.5 % which is yet single largest sector of economy contributing 21% to GDP and employing more than 44% workforce of Pakistan , while manufacturing sector showed reasonable growth of 5.4% during the year 2007-08. Total investment declined to 21 % of GDP as compared to last year 22.9 % contribution.

PRESENT PERFORMANCE:

According to Government sources, the inflation rate measured by consumer price index (CPI) averaged at 11 % during the year 2007-08. The main reasons behind this sky rocketing inflation rate is food and energy crisis particular in Pakistan and generally around the globe. From 2003-04 to 2005-06, Pakistan's exports were growing at 16 % per annum due to consistent macroeconomic steps taken by government but in recent years, the performance of this sector is not encouraging and on the other hand, massive imports posed series threat to the foreign reserves and according to latest news, State Bank of Pakistan has only $ 7 billion. Due to this, trade deficit has reached at very alarming position. During 2007-08, our imports grew by 28% and major share was from Petroleum, edible oil, and import of raw material was responsible for this surge. Current conflict over vote of confidence and impeachment of President Musharaf has created instability for investment for local and foreign investors. The continue stock market crisis, law and order situation in the two provinces of federation, high inflation, energy shortages are big issues in front of newly elected democratic government.

CURRENT ECONOMIC CHALLENGES:

==> Political Instability due to President impeachment and law; and order issue.

==> Crash of stock market

==> Unprecedented rise in food and energy prices.

==> Shortage of foreign exchange resaves with state bank of Pakistan.

==> Decline in foreign investment due to worsening law and order situation in Balochistan and

==> N.W.F.P

==> Food inflation

==> Power shortage which has paralyzed the whole country.

==> Decline in GDP growth rate

==> Poor performance of agriculture and manufacturing sector.

==> Alarming trade deficit.

==> Consistent devaluation of Rupee as compared to Dollar.

==> Budget Deficit

SUGGESTIONS TO TACKLE PROBLEMS:

==> Investor friendly environment to get foreign investment.

==> Proper attention towards agriculture development.

==> Immediate measures to reduce power shortage in country by use coal.

==> Restriction on unnecessary imports and increase in exports by identifying new markets.

==> Continuity in economic policies.

==> Human resource development

==> Efficient and stable financial markets.

==> Building new dams for sustainable availability of water for agriculture.

FUTURE OF ECONOMY:

The key to ensuring Pakistan's future macroeconomic stability lies in strengthening other institutions that can complement and support broad economic development. There is no doubt that Pakistan has the abundance of natural resources, we have fertile land, four seasons, attractive ports, water, hardworking people, internationally famous rice and cotton products, marble, Thar coal and many more. The crying need of the hour is to reframe the economic policies to immediately increase exports by penetrating into new markets by expanding base of exports. Without developing agriculture sector in the country Pakistan can not have economic development in future and this will help government to control food crisis in sustainable. Pakistan's long term prospects will depend upon the interplay of evolution in political and social developments, economic policies to be pursued, the quality of governance and institutions, and most important investment in the human capital. It has become quite obvious from both Pakistan's own history and the experience of the developing countries that sustained economic growth and poverty reduction cannot take place merely on the strength of economic policies. Political stability, social cohesion, supporting institutions, and good governance are equally important ingredients coupled with both external environments for achieving economic success. Pakistani is facing inconsistency in GDP growth rates in past and following measures will be helpful to achieve better development.

==> Production in agriculture must be enhanced because of its large share of the GDP. Agricultural production can be improved by taking two kinds of measures. First, the government must provide facilities to small and medium landowners to cultivate their lands. These facilities may include the provision of seeds, fertilizers, machinery, and water. Second, the government must play an important role in determining the prices of the goods produced in the agriculture sector. It is really discouraging to farmers when they are not getting adequate prices for their products, exacerbating rural flight to urban areas.

==> In the industrial sector, the government must place emphasis on the development of small and medium industries. The government can facilitate this by providing targeted loans to this sector. Pakistan can substantially increase export earnings from light industry in the areas of carpet and textiles, sports equipment, dairy products, etc. The sick heavy industrial units promoted in the past should be rationalized, because they have become a burden on the economy. India is a classic case study of effective transition in this regard.

==> Continuity in economic policy is an essential component for sustained growth. Pakistan's track record has been such that one government has completely changed the policies of its predecessor. Some examples of such fickle policies are those dealing with privatization, construction of the Lahore-Islamabad motorway, and various agreements with power companies.

==> There is a need to create inter-provincial harmony in Pakistan. In the past there has been a perception of deprivation and exploitation of the smaller provinces by the larger ones. Inter-provincial tensions have revolved around issues of resource distribution, investment and employment, water issues, etc. These factors hinder the growth rate of the economy. Pakistan needs to create inter-provincial harmony to achieve better growth. ashfaq8585@hotmail.com