Pakistan's Lost Decade of 1990s

[Riaz Haq]

Pakistani economy grew at a fairly impressive rate of 6 percent per year through the first four decades of the nation's existence. In spite of rapid population growth during this period, per capita incomes doubled, inflation remained low and poverty declined from 46% down to 18% by late 1980s, according to eminent Pakistani economist Dr. Ishrat Husain. This healthy economic performance was maintained through several wars and successive civilian and military governments in 1950s, 60s, 70s and 80s until the decade of 1990s, now appropriately remembered as the lost decade.



In the 1990s, economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation was in double digits and the foreign debt mounted to nearly the entire GDP of Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical chairs. Before Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. In 1999 Pakistan’s total public debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998).



After a relatively peaceful but economically stagnant decade of the 1990s, the year 1999 brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan's urban middle class.

Pakistan became one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.

The above facts were acknowledged by the current PPP government in a Memorandum of Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing agreement with the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07". It further acknowledged that "the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1)

The decade also cast a huge shadow of the US "war on terror" on Pakistan, eventually turning the nation into a frontline state in the increasingly deadly conflict that shows no signs of abating. Along with the blood and gore and chaos on the streets, there are hopeful signs that rule of law and accountability is beginning to prevail in the country with the restoration of representative democracy and independent judiciary, largely in response to an increasingly assertive urban middle class, vibrant mass media and growing civil society.

The Zardari-Gilani government inherited a relatively sound economy on March 31, 2008. It inherited foreign exchange reserves of $13.3 billion, exchange rate at Rs62.76 per US dollar, the KSE index at 15,125 with market capitalization at $74 billion, inflation at 20.6 per cent and the country's debt burden on a declining path. The government itself acknowledged in the same document that "the macroeconomic situation deteriorated significantly in 2007/08 and the first four months of 2008/09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government". (Para 3 of the MEFP, November 20, 2008.



Here is how Pakistani economist and NUST Professor Ashfaque Husain Khan explains the current situation:

What went wrong? Why one of the fastest growing economies in the Asian region until two years ago has been totally forgotten in the region? Firstly, the speed and dimension of exogenous price shocks (oil and food) were of extraordinary proportions. Secondly, the present government found itself totally ill-prepared and clueless in addressing the challenges arising out of the shocks. While rest of the world was taking corrective measures and adjusting to higher food and fuel prices, Pakistan lurched from one crisis to another.



Despite peaceful election and a smooth transition to a new government, political instability persisted. For a protracted period there were no finance, commerce, petroleum and natural resources and health ministers in the country. The government lost six precious months in finding its feet. It gave the impression of having little sense of direction and purpose. A crisis of confidence intensified as investors and development partners started to walk away. The stock market nosedived, capital flight set in, foreign exchange reserves plummeted and the Pakistani rupee lost one-third of its value. In short, Pakistan's macroeconomic vulnerability had grown unbearable. It had no option but to return to the IMF for a bailout package. There were no Plan A, B and C. There was only one plan, that is, to return to the IMF.

While the country was moving rapidly towards the IMF, the ministry of finance had prepared the plan to bring $4 billion by June 30, 2008 through four transactions. A kick-off meeting was scheduled on April 23, 2008 at the ministry to give a final touch to the various roadshows. These transactions were canceled on April 20, 2008. Who ordered the cancellation of $4 billion transaction? This cancellation prompted balance of payment crisis and the rest became history.

The economy continues to remain in intensive care unit and is barely breathing thanks to the injection of funds from the IMF, World Bank and Asian Development Bank. The economy is not on the radar screen of the government and as such the economic managers have no relevance in the current political set up. The exit of Shaukat Tarin is a classic example. At least he tried his best to inject financial discipline but paid the price of teaching prudent financial management.

Since Tarin's departure, Abdul Hafeez Shaikh has assumed the position of finance minister. It is still early to judge him, as the economy has suffered yet another major jolt from the widespread devastation caused by recent floods. This has added to the already extreme challenge Pakistan's leadership faces in bringing political and economic stability to the nation.

Related Links:

Haq's Musings

Ishrat Husain: Structural Reforms in Pakistan's Economy

Pakistan's Economic Performance 2008-2010

Incompetence Worse Than Corruption in Pakistan

Pakistan's Circular Debt and Load Shedding

US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance

India Pakistan Contrasted 2010

Pakistan's Foreign Visitors Pleasantly Surprised

After Partition: India, Pakistan and Bangladesh

The "Poor" Neighbor by William Dalrymple

Pakistan's Modern Infrastructure

Video: Who Says Pakistan Is a Failed State?

India Worse Than Pakistan, Bangladesh on Nutrition

UNDP Reports Pakistan Poverty Declined to 17 Percent

Pakistan's Choice: Talibanization or Globalization

Pakistan's Financial Services Sector

Pakistan's Decade 1999-2009

South Asia Slipping in Human Development

Asia Gains in Top Asian Universities

BSE-Key Statistics

Pakistan's Multi-Billion Dollar IT Industry

India-Pakistan Military Comparison

Food, Clothing and Shelter in India and Pakistan

Pakistan Energy Crisis

IMF-Pakistan Memorandum of Economic and Financial Policies

[Riaz Haq]

Here's an ET piece on history of economic growth under various leaders since 1947: The Express Tribune took the trouble to go through Pakistan’s historical GDP growth rates and compared various governments. We used GDP growth numbers from the Pakistan Bureau of Statistics records, which go all the way back to fiscal year 1952. We then calculated the geometric average (which calculates the compound average growth rate) rather than the simple arithmetic average to calculate the growth rates during the entire tenure of a government and then we ranked them. The results were somewhat surprising.

For instance, former President Ayub Khan – widely regarded as Pakistan’s best ruler when it comes to economic growth – is actually in second place. The number one spot is held by former President Ziaul Haq, who averaged 5.88% growth during his 11 years in office.

For fans of President Ayub who insist that his record before the 1965 war was better, we checked: it is not true. Pakistan’s growth rate during that period averaged 5.73% per year, which is actually lower than President Ayub’s own overall average of 5.82%. Having said that, industrial growth from the 1958 coup to the 1965 war averaged 9.21%, higher than any Pakistani ruler’s record, including Ayub’s own overall average of 8.51%.

Another surprising insight: if one ranks the ten rulers Pakistan has had since 1952 according to the average economic growth rate during their tenure, both the top five and the bottom five include three dictators and two democrats.

Yes, the top three slots are undoubtedly all taken up by the usual suspects: former Presidents Ziaul Haq, Ayub Khan and Pervez Musharraf, in that order. The next two are somewhat surprising: Benazir Bhutto comes in at fourth place and her father Zulfikar Ali Bhutto is not far behind. The supposedly pro-markets Nawaz Sharif comes in at seventh place.

Yet another surprise: Benazir Bhutto’s average was 5.08%, not far off from Pervez Musharraf’s 5.14%. She beat her rival Nawaz Sharif by a full percentage point: Pakistan’s economic growth averaged 4.06% during Nawaz Sharif’s both terms as prime minister.

Length of time in office appears to matter far more than whether the ruler was a dictator or a democrat. The top three were all in office for at least nine years, with the top two each in office for eleven years. Yahya Khan, Iskandar Mirza and Ghulam Muhammad – none of whom was democratically elected or subject to a popular mandate – all come in close to the bottom of the rankings. None of them had longer than four years in office.

But the more intriguing question to ask is why both the Bhuttos vastly outperform Nawaz Sharif.

The answer lies in the breakup of the GDP number: while Nawaz beat both Bhuttos on industrial growth, he was abysmal when it comes to agriculture. Benazir Bhutto was the best in Pakistani history for agriculture, which grew at an average of 6.65% during her five years in office.

Zulfikar Ali Bhutto, meanwhile, had blowout growth in services, averaging 10.63% during his only term in office, the highest of any Pakistani ruler. (Oddly enough, the elder Bhutto had a poor track record on agriculture, despite his family background. Agriculture grew at a paltry 2.12% per year during his tenure, worse even than Nawaz.)

For those who are currently pessimistic about Pakistan’s economic prospects, you may find some comfort in knowing that the numbers back you up: President Asif Ali Zardari ranks dead last in terms of economic growth, averaging a paltry 2.62% during his term in office so far.

http://tribune.com.pk/story/381450/setting-the-record-straight-not-...

[Riaz Haq]

Here's a Dawn report on avg 2.9% gdp growth rate in last 5 years since Musharraf's departure:

The economy grew at an average rate of 2.9 percent per annum during the last five years though GDP growth witnessed growth in financial year 2012-13 to stand at 3.6% against the target fixed was 4.3%, the yearly report published by Federal Board of Revenue (FBR) said.
The performance by the important sectors of economy like agriculture, manufacturing and services remained below their capacity. However, the recent EU approval of duty waiver in the form of awarding GSP PLUS status (Generalized System of Preferences Plus) has created much wanted space for the economy.
Duty free access to Pakistan’s exports to the bloc of 27 member countries of European Union has offered much attention for the domestic and Chinese investors. The Chinese investors have started entering into joint ventures with local manufacturers to take advantage of trade concessions. Due to these developments, the ambitious growth of textile and clothing sector has become possible. One may hope that a prudent use of EU duty concessions avoiding any caveat therein will lead towards improvement of business environment and to the desired destination of economic stability.
The economy of Pakistan continued facing various shocks since beginning of FY: 2012-13. The energy crises got complex and worsened. The security hazards vastly affected the economic and social environment. The fight against terrorism got another additional front of sectarian extremism. The extensive financial constraints, economic mismanagement and less than capacity electricity generation despite its acute shortage have been the major weaknesses in the economy. An estimate indicated that around 2% of the GDP has been washed away due to power shortage. Moreover, the challenging scheduled payments due, to the international donor agencies added further difficulties for the economic management.
However, the positive aspects of the economy included comparatively lower trade deficit, strong remittances and above 33% decline in inflation rates i.e., reduced from 11.0% in 2011-12 to 7.4% in FY: 2012-13. Some prudent measures have been taken for improvement of economy (most important step was the settlement of circular debt to the tune of Rs 480 billion which paved the way of 1700 megawatts additional electricity generation). Similarly, easy monetary policy with low interest rate during the FY: 2012-13 increased the cheap credit borrowing by the corporate sector. Resultantly, improved performance by the large scale manufacturing sector became possible and observed.
Despite unfavorable economic conditions, the FBR has been able to collect Rs 1,946 billion at the end of the fiscal year 2012-13. A growth of 3.4 percent over last year’s collection has been recorded. The FBR revenue target for the FY: 2012-13 was fixed at Rs 2,381 billion with an envisaged growth of 26.5% over last year’s collection of Rs 1,883 billion. Keeping in view the broad based challenges faced by the economy, the revenue target was revised downward to Rs 2,007 billion and expected a growth of 6.6%. The important indicators considered for assigning of revenue targets includes expected growth in GDP, the rate of inflation, level of ease in monetary policy, growth in the Large Scale Manufacturing sector, tax buoyancy, budgetary measures and imports.

http://www.dailytimes.com.pk/business/27-Feb-2014/pakistan-s-gdp-gr...

[Riaz Haq]

Some questions about public policymaking in Pakistan
By Shahid Javed Burki

https://tribune.com.pk/story/1998843/6-questions-public-policymakin...

Serious public policy work was put on track by president Ayub Khan soon after he took over the country in October 1958. He developed the Planning Commission into a well-endowed policymaking institution. Told that Pakistan did not have the skills that were needed to staff such an institution, he turned to the United States for help. That came in the form of advisers mostly from the Harvard Development Service who were appointed in the Planning Commission in Karachi and in the Planning and Development Departments in East and West Pakistan.

When Ayub Khan surrendered his office in 1969, the Planning Commission began to wither. A series of blows were delivered to the planning process by the government headed by Zulfikar Ali Bhutto, who ably led Pakistan to recover from the loss of East Pakistan in December 1971 but destroyed much of what Ayub Khan had done for the country. Bhutto, an arrogant man, had much greater confidence in his ability to develop the country on his own and bring about social change than base his moves on institutional advice. He had no use for the Planning Commission.

-----------------

What follows is a brief discussions relating to some of the questions asked above. Taking all of them in detail would take up a more than one newspaper article.

One, our leaders must recognise that a negative narrative prevails about Pakistan in the foreign press. Whenever a story appears about Pakistan in the western media, its content and tone are negative. This situation can only be remedied if the current leadership comes forward and presents to the world a believable plan of action that would restore people’s confidence in their future as well the future of their country. As economists emphasise all the time, confidence is an important driver of growth, confidence leads to increase in domestic and as well as foreign investment.

Two, there is an urgent need to strength the Federal Board of Revenue. Those who don’t pay taxes or pay only nominal amounts must be made to fear the revenue collector. It is that fear that has made the Internal Revenue Service the most feared part of the United States government. In America, April 15, the day taxes are due, is by far the most important day on the calendar.

Third, we need to focus on three sectors as the future determinants of economic growth and social change: they are high value-added agriculture, small- and medium-scale industries and modern services. Development of the human resource would be an important part of this strategy. CPEC could play an important part in this endeavour.

Fourth, our policymakers need to recognise that Pakistan is no longer a rural place but an urban country. No single urban policy would serve the purpose. We will need separate policies for the metropolitan areas, peripheral areas of large cites, medium-sized cities and small towns.

Fifth, the government must get closer to the people and this requires the formation of a multi-tiered system of local government on the lines of Ayub Khan’s system of ‘basic democracies’.

And sixth, working with Afghanistan, we should use the local system of government to bring economic and social development to these areas. It is only then that we will be able to prevent the tribal youth from being attracted to extremist causes.