Is Pakistan’s economy really at the verge of a collapse?
Let us look at the facts at first. Last year, the GDP grew by 2.4 per cent; the service sector marked a growth of 4.1 per cent, the agricultural sector 1.2 per cent
1 and remittances topped $11,201 million.
But the industrial output was down and the budget deficit remained high. It is estimated that the energy crisis which the country faced throughout the year alone undercut the growth by about 3-4 per cent growth. Prospects of economic recovery this year remain equally uncertain. Deadlines for foreign debt and service payments
2, increase in the oil import bill, fall in exports, etc are more than likely to pull down the economic graph.
So by the above accounts, the economy seemed to be teetering on the precipice of disaster, adding to the much discussed doomsday scenario for Pakistan. History, however, shows that Pakistan’s economic trajectory, since 1947, has been erratic and inconsistent, and yet it has escaped the fate of a failed state.
What were the reasons that led to such critical periods and more importantly, what facilitated the recovery of this ’fragile’ economy time and again? Is it as popularly believed, the efforts of the international community and organisations that donated generously to keep the economy floating or the result of efforts and polices of various domestic governments? This article attempts to make some sense of the chaotic past and present.
In the period immediately after Independence, Pakistan inherited one of the largest irrigation systems and a well-connected road and railway system. However, the State did not take advantage of these existing provisions, leading to a de-capitalisation of resources. The system of land tenure and the outdated agricultural technology used did not favour production, thereby stagnating agricultural growth leading to an import of basic food items. It also faced severe challenges in the manufacturing sector as only two textile mills and one cement plant was set up in this region by the British.
Ayub Khan’s era witnessed an average growth rate of 5.4 per cent and was widely known as the ’Golden Age’ and dubbed as the ’role model’ of all developing nations.
3 After almost a decade of volatility, food prices stabilised
4 and there was a sharp increase in public and private investments. However, a disclosure of a Planning Commission report that close to seven families comprised of 91.6 per cent of private domestic deposits and 84.4 per cent of assets led to widespread protests resulting in the downfall of the Ayub regime.
Four key factors could be identified that brought about this crisis.
First, in the process of steering industrial growth towards import substitution of consumer goods, various protection measures such as incentives and indirect subsidies in the form of Bonus Voucher Scheme, tax rebates and exemptions were provided. These measures helped local manufacturers earn huge profits but made the goods internationally uncompetitive. Second factor was a policy that was designed to favour the elite to increase the national savings rate but the increased income did not translate into savings.
5 The third factor was the change in the nature of large inflow of foreign aid from grants to interest loans
6 adversely affecting the economy as close to 34.5 percent of the GDP was spent on debt servicing as against 4.2 percent in the early 60s. In addition, the regime’s grand subsidies and expenditures led to a serious fiscal crisis. The fourth factor was the ’Green Revolution’ of the 60’s that only benefited the large landowners rather than the masses because of the lack of effective land reforms.
This set pace for the socialist policies of Zulfikar Ali Bhutto’s (1972-77) regime which launched a large scale nationalisation drive. Popular belief is that nationalisation harmed the economy drastically, however, according to some experts of this polarised debate, the division of Pakistan in 1971 had such an extreme effect on the economy that nationalisation was the only remedy to save it from bankruptcy.
This regime faced consequences similar to the previous government as widespread demonstrations led to the expulsion of the Bhutto Government. However, the similarity more or less ends there. Some of the key factors that led to the economic instability other than the obvious one, that the country experienced secession, are outlined below.
Public sector investments of this regime accounted for almost 70 per cent. However, the defeat in the 1971 war led to an increase of investments in unproductive spheres such as the Defence and public administration which accounted for 11.4 per cent against the industrial sector with a 2.5 per cent. The Bhutto government while dealing with an over-valued exchange rate hastily devalued the Rupee, cut down subsidies and tariffs for import which directly affected private investors’ confidence.
7 Bhutto also had to deal with unprecedented oil price shocks and repeated natural calamities of severe droughts and floods. The economy remained adrift on an IMF loan, $500 million dollars from Islamic countries and workers’ remittances.
As popularly believedm Zia ul-Haq’s regime (1977-1988) not only benefited from inflow of US aid during the Soviet invasion of Afghanistan
8 but also from workers’ remittances of close to $25 billion which led to an improvement on the balance of payment front. This also directly benefited the poorer sections of the society (around 10 million people). Another important factor was the increase in fixed investments from 15.5 to 16.77 per cent of the GDP.
9 Investments in textiles increased from 17.9 in 1977 to 37.4 in 1988. Average export growth rate also rose from 10.32 (1973-78) to 14.33 per cent (1978-88). As expected, along with the Soviet withdrawal from Afghanistan, the loans and debt relief measures were also withdrawn.
Both democratic regimes of Benazir Bhutto and Nawaz Sharif were burdened with multi-faceted pressures that included debt servicing, reduced aid after the end of cold war, fall in remittances after the Gulf boom of the 80’s fizzled out, restrictions after nuclear testing and serious law and order crisis.
Total fixed investments still demonstrated an increase to 17.95 (Again owing to an increase of private investments from 7.1 to 9.22). However, by the end of the decade public fixed investment reduced to 5.31 per cent of the GDP but private investments remained relatively strong. A related problem that transpired from the regimes’ own doing was the choice to reduce expenditure in the development sector through the Annual Development Programme (7.4 per cent in 70’s to 3.5 per cent in 2000) as part of the Structural Adjustment Programme (SAP) of the IMF.
10
Another major setback was the sequencing of the financial sector, i.e. increase of interest rates before attempting to reduce deficit leading to a never ending cycle of debt payments. The payment burden increased from Rs 33.2 billion, i.e. 4.9 per cent of GDP (1987-88) to Rs 243.3 billion, i.e. 7.7 per cent of GDP (2000), thus pushing the country deeper into a trap that it is yet to recover. By 1999 Foreign Direct Investment decreased from $1.1 billion to $540 million and exchange reserves fell even further to $150 million. The occurrence of severe drought
11 resulted in a highly stressed economy.
General Pervez Musharraf’s regime (1999-2008) witnessed the return of capital flow and workers’ remittances that were earlier absorbed into the black market. After 9/11 people feared using back channels to transfer money and preferred to go through the official line. The U.S. invasion of Afghanistan and the country’s support to the war led to huge inflow of foreign assistance and in a matter of a year the exchange reserves hit $4 billion thereby stabilising the economy. The growth rate hit close to 8 per cent in 2005, however, this moment of rejoicing was short-lived as reasons behind the ’success’ was consumption and imports (leading to ’overheat’ of the economy) rather than the safer route of investments and exports. In fact, after an initial pick up the Total Factor Productivity growth stunted.
Adding on to an overheated economy were the rise in global price of oil and the global financial crisis which brought the GDP growth to just 1.6 per cent in 2008. Therefore, economic growth hit another low and inflation touched 26 per cent pressing Pakistan once again to turn to the IMF for rescue.
The PPP led government (2008-present) therefore inherited an economy in shambles owing to bad policy decisions of the past and the global financial crisis.
Spending on development, i.e. fixed investment took a back seat. The investment rate was 13.4 percent in 2011, supposedly the lowest the country had witnessed in 37 years, impeding a sustainable growth. The Foreign Direct Investment also declined due to the fear of an ’imminent collapse’ triggered by a highly unstable political environment.
The government’s failure to implement the Value Added Tax or the subsequent Reformed General Sales tax due to strong opposition from the provinces and the business community only added to the problem. The 2010 floods and the recurrence of it last year multiplied the government’s balance sheet, further constricting the economy by at least 1.5 per cent.
Conclusion
The present economic scenario reflects a phase where the government, instead of focusing on long term policies, is compelled to make do with fire-fighting measures to rescue itself and the country. The recent attempts to reach out to India and Iran to tide over the energy crisis are pointers to the government thinking on how to stem the economic downslide. Will the Gillani-Zardari government, as weak and unstable it is, be able to make a valiant effort to pull their country out of the crisis remains a big question? But till a final set of answers can be found, the thesis of economic failure must wait.
Aarya Venugopal is Research Assistant, ORF.
1 Owing to the success of two major crops, i.e. wheat and sugarcane.
2 Repayment to IMF- $7.9 billion between 2012 and 2015.
3 It was also characterised as one of the best example of ’aid effectiveness’
4 As a result of foreign support to rebuild the agricultural infrastructure under the Indus Waters Treaty 1960
5 Instead of the target savings rate of 25 per cent, the savings rate was only 12 per cent in this period)
6 Grants reduced from 73 per cent in the 50’s to 9 per cent in 60’s
7 However, a slow and constant decrease in private investments was observed after the 1965 war with India.
8 from $0.5 billion in 1978 to $3.2 billion in loans
9 This was mainly due to the increase in private investor’s confidence. (4.79 to 7.1 per cent)
10 The SAP was tied to the IMF loan and under the programme the government was required to cut down on expenditures.
11 recorded as the worst that Pakistan has experienced till date
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