Missed Op­por­tu­ni­ties

Pak­istan has been left far be­hind in the ‘Next 11’ Gold­man Sachs’ list of emerg­ing mar­kets. Is there a way back?

Southasia - - COVER STORY - By Sayem Ali

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.

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