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General Pervez Musharraf
has set himself up for election as president through the
forthcoming referendum. He frequently mentions the success
of his economic policies as one important reason for him to
remain at the helm.
Needless to say the health of the
economy influences the decisions of the electorate anywhere
in the world. It is thus important to assess the fruits that
the general's reforms have yielded in the first thirty
months of his administration. If the assessment shows
that the reforms have moved in the right direction, then the
general's claim for a positive vote in the referendum will
have economic validity. The benchmark for assessment will be
whether an improvement or otherwise in an economic indicator
is due to the policy framework adopted by the military
regime or is it due to one-off, unforeseen external
developments. General Musharraf and his economic
mandarins generally highlight what can be termed as
intermediate indicators as signs of economic progress. These
indicators influence the health of the macro-economy and
impact on people's lives and livelihoods only indirectly and
in the medium to long run. The military regime has been able
to reduce the fiscal deficit to 5.6% of the GDP compared to
the average of 6.1% in the 1990s. As much as 41% of this
reduction in the deficit was achieved through slashing
public investment.
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The increase in foreign exchange
reserves and reduction in debt servicing liabilities are the
most frequently flagged economic indicators in the
referendum campaign. It is pertinent to note that since July
2000, the State Bank has included foreign exchange holdings
with commercial banks as part of official reserves. A visit
to the State Bank website shows that the surge in reserves
from the usual US $ 1-1.5 billion mark to $ 3-3.5 billion
happened as a result of this change in methodology.
The increase in reserves to the present level of $ 5
billion plus has happened after September 11. Three factors
have been instrumental in this. First, remittances into
Pakistan increased substantially because those who kept
money abroad were fearful of their accounts being frozen in
the wake of the American anti-terrorist campaign. The second
element was one-off budgetary grant inflows from the US,
Japan and the EU. Thirdly, due to debt restructuring
agreed in December 2001, the outflows on account of debt
servicing have reduced perhaps to the order of $ 1 billion
for the current fiscal year. It is apparent that the
reserves were not 'earned' as such and thus had little to do
with the policy posture of the government. Rather it was the
midnight phone call from President Bush to the general after
the September 11 attacks in the US which has resulted in
this manna from heaven. Another set of economic
indicators demonstrate a more or less direct impact on
people's lives. Growth in GDP is one such benchmark
indicator. Growth in the economy impacts the lives of people
primarily through the quantity and quality of employment
generated, which in turn has an impact on the level of
poverty. The link between growth, unemployment and poverty
is particularly strong in developing countries where
state-induced redistributive transfers are weak. For
the first two years of this regime, growth in the GDP has
averaged 3.2%. Projections for the current year is in the
same ball park, i.e. 3.5%. In contrast, the GDP growth
averaged 4.9% in the 1988-99 period when elected governments
ruled the roost. It is important to note that the elected
governments also presided over a general deceleration in the
economy's growth compared to the trend of the previous three
decades. What is striking is that the growth during the
incumbency of the present regime has in fact been even
worse. According to the Labour Force Survey, the rate
of unemployment in 1998 was 6.1% and increased to 7.8% in
2000. In the tenure of this regime more than 800,000
individuals have been added to the army of the unemployed in
Pakistan. Even if the efficacy of employment generation
initiatives of the regime are accepted at face value, it is
evident that they are no substitute for generating high
level of GDP growth for employment creation. In the
first two years of this regime, the proportion of the poor
has increased to 40.1% of the population. By June 2001,
therefore, 56.3 million Pakistanis were eking out a living
below the poverty line. It is also critical to note that
since the military government took over, roughly 15.4
million more individuals have been pushed below the poverty
line. It is all very well for the general's heart to bleed
for the poor, but the fact of the matter is that rather than
alleviating poverty his regime has presided over further
poverty creation in Pakistan. It has been argued
elsewhere that deterioration in those economic indicators
that affect the lives of the poor more directly are the
result of the single-minded pursuit of the government's
economic managers to achieve stabilization targets ala the
IMF at the cost of growth and poverty alleviation. The gap
between rhetoric and reality, it appears, is wide.
The deceleration in GDP growth that this government
has presided over is predicated upon historically low levels
of investment in Pakistan. Again according to official
statistics the investment-GDP ratio in the year 2000-01 was
13.3%. This was the lowest level of investment in the
economy since 1966. Although there has been a severe
slowdown in investment since the nuclear tests in 1998, the
situation has in fact further worsened during the tenure of
this government. One important reason for this investment
drought is that the government itself is unwilling to invest
in the economy. There is now enough literature on Pakistan
which demonstrates that public investment is critical in
crowding in private investment. As mentioned above, public
investment has borne the brunt of budget deficit reduction
in Pakistan. In the first two years of the military
regime the public investment to GDP ratio averaged 5.9%
whereas the average for the 1988-99 period was 8.8%.
Although we see a perceptible decline in public investment
since the mid 1990s, the low priority given to public
investment by the military government is exemplified by the
fact that in the first two completed years of this regime
the shortfalls between budgeted and actual allocation for
investment was 17.8% and 20.5% respectively.
Deceleration in private sector investment has
likewise been at a historic low. The military government has
not been able to turn around the lack of confidence amongst
private investors precipitated by the nuclear tests. In the
year 2000-01 the private investment-GDP ratio was at its
lowest since 1975. According to the quarterly report
of the State Bank in the first six months of the present
fiscal year, private sector credit off-take - an important
indicator of investor sentiment - has been almost half of
that in the previous year. The fact that in the previous 30
months there have been 22 de-listings from the Karachi Stock
exchange compared to only six new listings further
illustrate the depth of the investment drought in the
country. The low level of public investment, high
real interest rates and a precarious law and order situation
in the country are some of the major reasons for the
investment drought. All these factors are reflective of
policy and administrative governance failures of the regime.
General Musharraf claims that through the referendum
political uncertainty will be removed and the fence sitting
investors will jump into the fray. This is one way of
reading investor perceptions and the future political
landscape. Another is that the referendum will further
destabilize the political environment. One indicator
that has shown improvement is inflation. In the first 30
months of this government inflation has averaged less than
5% per annum. After a high dose of inflation in the
mid-1990s, inflation has been low in Pakistan since 1997.
Has the policy framework contributed in keeping prices in
check? First, there is consensus among economists that the
present low levels of overall inflation in the economy is
due to recessionary conditions. The level of demand in the
economy is so low that the prices of goods and services are
not being bid up. Second, God has favoured the military
government as since it has come into power there have been
bumper wheat crops, which in turn has helped keep food
prices low. However, once the consumer price index is
disaggregated, one observes that administered prices have
increased at a much higher rate. Gas prices have increased
at 24% per annum and the price of high speed diesel has
increased at 25% per annum during the tenure of this
government. It may be stated that the latter price increase
was due to a surge in international oil prices. That may
have been so, but for the time that oil prices were falling
internationally, the price of petroleum products in Pakistan
was being increased to extract a larger surcharge by the
government. This assessment of Pakistan's economy -
based for the most part on official data - shows that
economic indicators pertaining to the lives and livelihoods
of the Pakistanis have performed dismally in the last few
years. In fact, some of them are even worse than those in
the 'lost decade' of the 1990s. More importantly this
deterioration in the economy apart from the drought - is in
large part due to the policy framework adopted by the
government. Conversely, improvements in intermediate
economic indicators - responsible for restoring the
credibility of the government amongst donor agencies - are
for the most part due to Pakistan's role in the anti-terror
war waged by the Americans. On economic grounds, therefore,
the average Pakistani has little reason to vote
affirmatively in the referendum.
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