Pakistan has been left far behind in the ‘Next 11’ Goldman Sachs’ list of emerging markets. Is there a way back?
On many counts, the Musharraf era was a blessing for the economy. After the lost decade of PPP and PML-N governments in the 1990s – characterized by low growth and high inflation – the economy witnessed a strong turnaround under Musharraf. Real GDP posted a strong growth of over 6.7 percent between 2003-2008 on a record-high foreign direct investment and private-sector investment spending. This was a remarkable achievement considering that in the previous ten years the economy had grown at only 4 percent whereas unemployment and poverty had increased.
When Musharraf ruled the country, the economy reached escape velocity and Pakistan was included in the Goldman Sachs’ ‘Next 11’ list of emerging markets. Unemployment saw a decline as a growing economy created the demand for more jobs. The unemployment ratio declined from over 8 percent in the 1990s to 5 percent by 2008.
The decline in unemployment rate translated into a decrease in poverty as millions of households benefitted from a period of high growth and low inflation. According to the World Bank, the poverty headcount ratio – calculated at $1.25 a day on Purchasing Power Parity (PPP) – declined from 29.1 percent (% of total population) in 1999 to 20.1 percent by the end of 2008.
All of this was achieved without the government running sky-high deficits. The reckless spending by the PPP and the PML-N governments in the 1990s had increased government debt to 88 percent of GDP by 2001. Prudent fiscal management and the low cost of borrowing helped contain fiscal deficits. On the other hand, successful privatization of stateowned enterprises (SOEs), including banks, oil and gas companies and the telecom giant PTCL, also helped retire government debt. Public debt reduced to 52 percent by 2008, down from nearly 88 percent in 2001.
A strong economy, improved fundamentals and the deregulation of key sectors of the economy attracted record foreign direct investment in Pakistan that crossed over USD 5.8 billion in FY08 as new investment flowed into the banking, telecom and oil and gas sectors. This remains a landmark achievement if compared to FY13 when the FDI inflows were only USD 1.2 billion. Pakistan also re-entered the international credit markets under Gen. Musharraf after nearly a decade of isolation. Three different international bonds were floated, bringing nearly USD 2 billion investment into Pakistan.
Overseas Pakistanis sent recordhigh remittances, which helped reduce the country’s reliance on foreign aid. It also kept the rupee stable – a key source of inflation in Pakistan. Remittances grew to over USD 6.5 billion by FY08, from less than USD 1 billion in FY00 and became a major contributor to household consumption and savings, driving growth in the economy and reducing poverty.
Another key success of the economic policy adopted by the Musharraf government was the introduction of local governments. While local governments were used to serve political goals, the devolution of power to the district level improved service delivery to citizens. There was a marked improvement in education,
health, water sectors and in sanitation under the district governments. The impact was most visible in major urban centers, including Karachi and Lahore. These cities became centers of growth with new investments in roads, transport and water and sanitation services.
But it all started to go wrong by the end of 2007 when the economy began to stumble from one crisis to another. Political instability, the rise in terrorism and the global financial crisis further contributed to worsen the situation. A highly corrupt and incompetent political leadership did not help matters either.
However, the foundations of the economy were always hollow. The wonder years of Musharraf were built on weak foundations as neither tax reforms were implemented nor any adequate planning was put in place to deal with the energy crisis.
The Musharraf government enjoyed a complete hold on power and was in a strong position to initiate the much-needed tax reforms to increase government revenues and reduce the country’s reliance on aid. However, no such step was taken. Perhaps a victim of its own success, the government never seriously went ahead to broaden the tax base and reduce the exemptions enjoyed by powerful business lobbies. Instead, these powerful lobbies became key political allies of the government and continued to receive state patronage through SROs and other tax exemptions.
As a result, the fiscal position of the government remains weak even today. High fiscal deficits since 2007 have fuelled record inflation and crowded out private-sector investment spending, leading to weaker growth and rising unemployment.
Perhaps the single biggest issue that is a glaring Musharraf legacy is the crippling energy crisis. Despite repeated warnings and the growing demand for energy, the government never focused on improving Pakistan’s energy security. No power policy was drafted till 2007, when the energy shortage had already reached a crisis level. No incentives were provided to oil and gas companies to develop indigenous energy reserves. No new power projects were initiated and large hydel projects such as the Bhasha Dam and the Kalabagh Dam remained pipedreams.
The energy mix continued to worsen and Pakistan’s dependence on oil imports increased. This was a recipe for disaster. When international oil prices rose in 2008, the economy came crashing down. The cost of producing electricity skyrocketed, leading to widening fiscal and trade deficits. The reserves of the State Bank of Pakistan depleted while the rupee depreciated over 70 percent starting 2008.
The energy crisis has worsened with the power shortfall touching over 6,000 MWs during the peak summer months. Similarly, the supply of natural gas – the main fuel feedstock for the energy sector – has also started to decline. Today, the gas shortfall is at over 1.6bcfd (nearly one-third of the total demand). The energy crisis is costing the economy over $5 billion (2.5 percent of GDP) annually.
The Musharraf government’s economic policies produced stunning results with high growth, more jobs, rising incomes and declining poverty levels. But their biggest failure perhaps was their inability to strengthen the foundations of the economy so that it wouldn’t become vulnerable to external and domestic shocks.