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Is the Pakistan economy turning around?

Is the Pakistan economy turning around?

By Dr Asad Sayeed

Also published on Spectator.co.nz…

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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.

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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