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Pakistan's economy: Hard times

by Raza Rumi

Two years after the civilian government took office, there are few signs of economic recovery and this does not augur well for the fate of democratic governance in Pakistan. We are somehow doomed to bear the brunt of authoritarian regimes in social and economic terms. By the time a civilian government puts its house in order, the long and short marchers are ready to take over. The story this time has been no exception. Following the trends of the 1960s and the 1980s during the Musharrafian decade, unsustainable growth rates were touted as the raison d’etre for the apparent efficiency of a military regime. It is true that the Musharraf era inducted Pakistan into the globalized economic system, boosted domestic demand for consumer products and attracted huge doses of foreign assistance shortly after the military decided to ditch their erstwhile strategic allies, i.e. the Afghan Taliban. But it left the country in dire straits – bankrupt, politically polarised and mired in the worst inflation of our times.

The signs of economic fatigue and food inflation had appeared during Musharraf’s last year in power. An unprecedented energy crisis also plunged the nation into literal and metaphorical darkness and the global recession caused an economic slowdown all around. Consequently, from the high growth-rate of 6 percent, we were in the lowest growth category, even in the poor South Asia region. A 2.2 percent growth rate implies that our current population increase per annum is untenable. Similarly, the highest ever recorded inflation of nearly 25 percent in 2007-2008 also hit the fixed-income citizenry and the millions of poor, depriving them of basic sustenance.

In 2008, therefore, the newly-elected government had no choice but to espouse a stringent IMF stabilization package that many analysts believe has pernicious long-term effects. There is a political economy of resistance embedded within the state machinery, engineered by powerful economic oligarchies. However, the civilian government embarked on an ambitious agenda that increased the budget allocation for social spending from 0.1 percent of the GDP to 1.5 percent through the roll-out of the Benazir Income Support Programme (BISP). The government holds that 20 million households will benefit from the BISP this year, while detractors point to the leakages, malfeasance and nepotism by elected representatives as the key drawbacks. Unofficial estimates, though, suggest that nearly 60 percent of bona fide beneficiaries are receiving assistance under the BISP.

Desperate measures to protect the poor aside, the ruling party at the centre has faltered at introducing structural reforms. It has stumbled from one crisis to another. A bi-annual search for a credible Finance minister seems to plague a party that has rarely focused on policy deliberations when in opposition. In fact, the loss of its one-person think-tank, strategist and charismatic fountain-head was so severe in December 2007 that many believed the PPP would not survive as a viable political force with legitimate claims to power. The short honeymoon between the PPP and the PML-N was wrecked by the judges’ issue, and Mr Ishaque Dar, portrayed in the media as an economic wizard, was out of office even before he could set policy parameters. A loyalist PPP worker, Naveed Qamar, took charge of the Finance portfolio but was soon sacrificed at the altar of international and national expediency to be replaced by a banker. His successor, Mr Shaukat Tareen, with his impeccable banking-sector credentials was hailed by the corporate media and the international development partners of Pakistan as someone who would deliver the goods.

However in less then a year, Mr. Tareen has left the office in search of greener pastures. To his credit he appeared as a no-nonsense policy maker and made some candid confessions about his limitations in office and the political imperatives that impeded his work. But what can even the best of minds do if there is little political consensus on structural reforms, when less than 2 percent of the population pays taxes voluntarily and land owners and oligarchs dictate the formation of economic policy? In the face of such odds, the populist slogans of “roti, kapra aur makaan” have become a farce of yore and a tragedy of the present.

The crucial issue remains how policy is formulated and applied in Pakistan. A coterie of powerful men (and occasionally a woman) decide on what policies are to be introduced, often under the advice of external advisors and conditionalities that are served as a ready-to-eat meal for the apparatchiks at the Finance ministry. The role of domestic thinkers, analysts and experts is marginal, to say the least. The grandiose economic advisory groups and councils at the federal and provincial levels, despite the best of intentions, turn into elite groups which serve the process of providing legitimacy to the interests of a dysfunctional state. Little wonder that we are beset by vulnerabilities such as a perennial balance-of-payments crisis, as we have lost the comparative advantage, if any, making us an import-dependent economy. To top it all, public debt always remains high and currently stands at 55 percent of the GDP, with external debt comprising 27 percent of the GDP.

Future risks such as the slow increase in domestic productive capacity and the circular debt facing most institutions in the power and financial sectors require an expansion of the tax-base and enhancing productivity. This cannot be achieved without the political parties agreeing on transformational reforms. If there was any hope in the wake of a consensual Charter of Democracy, it is now history, as both the major political forces have reneged on the accord which was reached after serious thinking and sheer hard work.

Thus, Pakistan will continue to be an economy led by national-security imperatives, aspiring to be an even better client-state, taking pride in being a rentier entity, just as it has been for the past six decades. Political stability and continued civilian governance is the only way out in the short- and medium-terms. The core issues of redistribution, inclusive economic growth and a focus on the poor across the federation will only be addressed if the legislatures over time start to play their role under public pressure. Until then, we shall be a closed-door policy-making polity, with little engagement of an burgeoning, disenchanted and disenfranchised citizenry.

First published in The Friday Times – this piece was written before the appointment of Mr Hafeez Pasha as the Adviser, Finance.

Raza Rumi is a public policy expert and writer based in Lahore. He blogs at www.razarumi.com

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14 Responses to "Pakistan's economy: Hard times"

  1. Mustafa Shaban United Arab Emirates Unknow Browser Unknow Os says:

    The PPP is curropt and incompetent. They are not able to produce independant policy on different issues unless it is to strengthen the elite class. It does not take advice from independant analysts and technocrats. That is why they will not be able to pull Pakistan out of its economic crises.

  2. Midfield Dynamo United States Unknow Browser Unknow Os says:

    What impeccable banking record, what goes on behind closed doors in the banking sector is not a secret, insider trading, money laundering is normal daily activity. This was not the case when donor agencies were breathing down his neck and that of the ministry to ensure that every cent was accounted for. There was nobody left to scam, no money in this for the scammers. It was either debt servicing or sustaining the viability of the economy, both were insurmountable for someone with expertise in banking only, with interests limited to money making, there was no desire or the knowhow of economic development. If there was any love for the country, he should have stayed on like AZ and served the people who were responsible for his ill begotten riches. But now as you say he has gone in search of greener pastures, deserted his team that needed his business acumen, albeit shrouded in mystery.
    Access to the monarchial funds, that could have been the life blood of Pakistan’s economy were obviously not forthcoming because they need profits in the near term, no one was interested in long term development projects, given the political situation in the country. Maybe Tareen should have stayed on, and like Ghulam Ishaq Khan, or Manmohan Singh tried to get the top post, but perhaps he did not foresee adequate money making opportunities there. He has learnt a lesson and would certainly not venture again under a PPP regime, where hungry sharks swim in murkier waters.
    If India were to think out of the box, it would be Pakistan’s major benefactor, for a stable Pakistan would more to its advantage then a nuclear armed perilous neighbor. Instead of promoting unrest and dissention through overt diplomatic international hysteria and covert operations, it should consider assistance to Pakistan both politically and economically. It seems that AZ was quite inclined to make such overtures towards India, or at least keep doors open for such an initiative from India, but he had to acquiesce to the army’s thinking which still has its sights on the US a ‘dead elephant’s ivory’.

  3. PM United States Unknow Browser Unknow Os says:

    MS
    I have slightly different take on PPP behavior. They are very competent in corruption. Their behavior is consistent with make quick money and run.

    Rumi
    If you write about economics, why don’t you tell us the impact of “value added tax” on demand for labor,
    and income distribution? It is worst thing to do at this point in time.

  4. Luq India Unknow Browser Unknow Os says:

    @PM
    How is VAT linked to labor demand ?

    Luq

  5. Raza Rumi Reserved Unknow Browser Unknow Os says:

    Well, the point about IMF conditions has been made in the piece. VAT is just another dimension of the structural ‘reform’ for stabilisation.
    Good to see there is a discussion: so little has been reported about our mammoth economic crisis!

  6. PM United States Unknow Browser Unknow Os says:

    Rumi
    VAT is a tax on labor. Econ 101 would tell you that if you tax any input, then less of it would used. It would make sense to apply such a tax only when there is shortage of labor. IMF’s goal is to increase the need and profitability of capital. Period.
    In my reading there is less of economic crisis but a massive financial crisis born out of corruption, cheating and non-enforcement of laws by government agencies. Who in his right mind would take risk in business investment when these Mafias are first in line to collect their share ahead of everybody.

  7. Luq India Unknow Browser Unknow Os says:

    @PM
    Value added tax (VAT) avoids the cascade effect of sales tax by taxing only the value added at each stage of production.

    Also, taxes on sales, (actually) collected from the buyer is remitted to the govt, after deducing the tax he paid on purchases made (inputs) to manufacture the product.

    The manufacturer would like to show (in his account books at least :-) ) more and more inputs so that he can deduct more and more from what is to be paid to the govt.

    Luq

  8. PM United States Unknow Browser Unknow Os says:

    Luq,
    Raw material and services are excluded from taxes leaving labor to be taxed at each stage. This would also be an accounting nightmare.
    It is hard to collect income tax, how do manage this monster.

  9. AZW Canada Unknow Browser Unknow Os says:

    Raza:

    Good article. A few points about the national economic policy:

    1) Economy cannot exist in isolation with the national security situation. Capital flees insecurity. Pakistani economy grew in the early 2000 due to a combination of increased liquidity, a favourable economic policy from Musharraf’s government and the generally better global economic conditions from 2002 to 2006. The security situation was deteriorating all that time but not until it really blew up in early 2007 that the foreign capital started fleeing from the country

    2) To fix the economy on a long term basis, Pakistan has to fix its political structure. Otherwise it will have an on/off, relatively better/clueless economic agenda in the coming decades. The strengthening of the political structure would reinforce better governance, and more clarity on the property and business rights protection by law for the investors. It is a self perpetuating cycle, where increased capital investments lead to relative prosperity that in turn sustains the democratic based structure that is usually associated with better rights protection and further encouragement of foreign investments. Unfortunately, Pakistan has been in the reverse of this cycle, where weakening economy sparks further unrest and makes the whole democratic economic system more vulnerable

    3) I am all for social safety nets that look for unemployment protection, free health care and guarantee of high school education. But Pakistan must realize that beyond that, the only way to eradicate poverty is to allow free market enterprise to flourish in the economy. Roti, Kapra aur Makaan sounds good on paper, and may verve up the poor masses. But it is employment based on efficient industries that propels consumption and growth generation. Free market, of course is not carte blanche free. It cannot exist without the strict rules and regulations, otherwise investors really won’t be free to make a free decision. A nation rife with corruption may attract greedy capital in the short run; but will scare away the genuine investors in the long run.

    4) Pakistan for all of its problems, still offers a burgeoning market for foreign investors who can see a semblance of a middle class that runs into more than tens of millions. It is just a matter of government understanding that allowing foreign investment to operate in Pakistan creates prosperity for Pakistanis themselves and helps the government generate revenue for much needed public infrastructure projects , healthcare and education.

    5) I also believe that Pakistan being at a geo political hotspot needs a well maintained army. While military takes almost 5% of the GDP (and it does seem a bit too high), it is not the military expenditure that drains the national coffers. It is the political instability created by the Pakistan Army that causes more economic damages. I also humbly believe that governments may, and should run budget deficits at times. Yet we cannot lament that Pakistan has a huge budget deficit year after year, and that it is the budget deficit that is the main problem. It is the short sighted programs that add no value, and the massive inefficiency and corruption in the state owned enterprises that cause wasteful expenditures. See my drift; to fix the economy, we have to fix the law and order situation in Pakistan. And law is what I am referring to here.

  10. PM United States Unknow Browser Unknow Os says:

    AZW
    Good exposition of issues. However, I suggest that govt should tilt towards employment generating sectors, the middle income group will take care of itself.

  11. Ammar Pakistan Unknow Browser Unknow Os says:

    The reasons behind the decay of Pakistan’s economy are quite a few. However the primary being the lack of foreign direct investment and the energy crisis. The FDI is lacking as the investors are hesitant to come to Pakistan due to security concerns, these concerns needs to be addressed as we are fighting an insurgency but the war is active in few areas on the whole many parts of the country are peaceful and this needs to be told. Pakistan needs an elaborate PR exercise!

    The energy crisis needs to be given priority as the recent 125 million USD assistance should be used to increase the power generation capacity and in the same time we should look for sustainable sources of energy.

  12. Rashid Saleem Pakistan Unknow Browser Unknow Os says:

    Pakistan’s fragile economy has been hard hit by the terrorism that spread. When this democratic setup came in power, the economy was facing a lot of issues. But with the help of US and other countries, finally our economy is showing some signs of revival. The hard work of Pakistani think tanks is finally working for Pakistan. We must keep working on these lines and support the democratic setup to continue. Another dictatorship will send us back to square one.

  13. Hira Mir Pakistan Unknow Browser Unknow Os says:

    Hard times for Pakistan. Terrorism has struck the economic ties of Pakistan with many countries and has discouraged the buyer and investment as well. The Turkish president visiti even was a positive one however as they hope to boost the trade to US $5 billion.

  14. Luq India Unknow Browser Unknow Os says:

    >Raw material and services are excluded from taxes
    >leaving labor to be taxed at each stage. This would
    >also be an accounting nightmare.

    We are living under both excise and VAT regime.
    Not just that, we interact with both excise and VAT admins on daily basis.

    Are we on different wavelengths? I don’t seem to understand the point you are making.

    >It is hard to collect income tax, how do
    >manage this monster.

    Probably much easier than you think it is?
    Where are you based and what is your specific crib about VAT system being brought in?

    Luq

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