Flip Side Of The 'Success Story'
The DawnApril 7, 2006
By S. Akbar Zaidi
PAKISTAN’s economic indicators have not looked this good in over two decades. Following the GDP growth rate of 6.4 per cent two years ago, which was then the highest in a decade, the last fiscal year 2004-05, ended up with a growth rate of a phenomenal 8.4 per cent, the highest since 1985.
This year again, General Musharraf’s government has been claiming that the economy will grow by over 6.5 per cent, a very likely probability.
Consumer credit has expanded, exports may cross $18 billion, and the stock market creates new records every week. With such impressive economic indicators, no wonder the general and his team are beaming with confidence, especially when the western media has finally picked up on headline news — such as Newsweek’s recent story — which is not simply related to terrorism. Clearly, Pakistan’s economy is being talked about.
While accepting that the numbers are looking good, we must ask a set of questions to be able to assess whether we should start celebrating and claiming that the economy is on a sustainable high growth rate path for some years to come, or whether this is a mere flash in the pan, a moment of merry making for a select few, with the real problems being brushed under the carpet.
One needs to ask whether there are structural reasons for high growth, or whether fortuitous circumstances led to this festive season. This will help answer the question, whether growth will continue. Then, we need to examine the consequences of this high growth: who is it reaching and is it doing some damage to the economy as well? Finally, we need to identify some serious problems in the economy which cannot be wished away.
There is little disagreement over the fact that the economy has benefited immensely — as has General Musharraf’s political fortunes — as a consequence of 9/11. The single most important attribute of Pakistan’s economy right through the 1990s, was its severe debt burden. With having to repay large amounts of interest each year, little was left for domestic development. Soon after 9/11, a huge part of the country’s debt was written off and rescheduled, creating immense fiscal space which was a windfall which the government could not have anticipated in its wildest dreams.
Apart from this, aid flew back into Pakistan, a pattern that we have seen when the two previous military dictators ruled Pakistan, in the 1960s and 1980s. As Shahid Javed Burki has shown in these pages, external support to Pakistan grows when the military is in power. It has been this windfall gain after 9/11 which has driven this boom, and once this external support dries up, the economy is likely to slow down once again.
Moreover, while growth figures and those of the stock market look good for publicity reasons, they need not have an impact on the real economy, as events in India have shown a couple of years ago. The previous BJP government felt that with unprecedented growth rates India had begun to shine, but the voters on whom no light fell, felt otherwise. Growth is necessary, but certainly not sufficient to make an impact on the real economy. This is when distributive issues become even more important.
While the government claims that poverty and unemployment have fallen — although it has still to reveal how it came up with these numbers — it acknowledges that inequality has grown in Pakistan. This is evident even visually and anecdotally across Pakistan’s urban landmarks. There certainly has been a consumer boom, as there had been one in India, but again, just like India, there has been increasing inequality which has added to the frustration of those who have not been able to shine along with the few who have. Unfulfilled aspirations at a time when small sections of the population are making merry, is a dangerous political and social cocktail. In democracies such as India, people vote out governments; elsewhere, as in Indonesia, Eastern Europe, Iran and South Africa, they have used different tactics.
Along with high growth there has also been high inflation: 9.3 per cent (if the government is to be believed) last year, the highest since 1997. Few consumers would accept that inflation is as low as this, and most people believe that the quality of their life has deteriorated despite the ‘boom’. Inflation affects every single person in the country and while the stock and real estate markets may boom as much as they like, most people are finding it difficult to come to terms with the rising prices of petrol, gas and sugar.
An area which is being completely ignored by policymakers hoping that it will go away, a factor that is a consequence of the high growth, is that of the excessive trade deficit. Although exports have broken new records this year, so has the import bill which is likely to outpace the export receipts by between $5-7 billion. No one is asking the question: who will (and how will they) pay for this deficit? The government will have to either borrow from international financial institutions or the market, or will have to impose a curb on imports, or it might have to devalue the rupee. On all three counts, government action is highly constrained and will make matters worse.
It has sworn time and again that it will never go back to the IFIs, so if it does, there will be political backlash. Secondly, in these times of the WTO, it cannot impose import restrictions either. And devaluation will only make the import bill soar further. If the government has a strategy of dealing with this growing deficit — other than selling Pakistani public assets to foreigners, a strategy known in this country as ‘privatization’ — it hasn’t made it public.
Moreover, the stage where there will be no profitable public sector concerns left to sell, is fast approaching. What the government does then, is anyone’s guess. A factor which has also been overlooked, is that despite the rise in remittances, foreign receipts for privatization and aid, the foreign exchange reserves have actually fallen over the last two years. Clearly, a sign that something is amiss.
All is not well in the kingdom of High Growth Pakistan. Growing inequality, rising prices and growth which is not broad based, will have serious political consequences. The sad part of this story is, that the unprecedented fiscal space created by circumstances has been squandered away. Public expenditure on health and education put together is still, as it always has been, merely half of military expenditure. Pakistan’s ruling elite, in this case the military, has let yet another momentous opportunity pass the country by. The tragedy here, is that once the economy begins to lose steam and the military’s festive season draws to its close, it will be the politicians and civilians who are left with the cleaning up, and the bill that goes with it.
PAKISTAN’s economic indicators have not looked this good in over two decades. Following the GDP growth rate of 6.4 per cent two years ago, which was then the highest in a decade, the last fiscal year 2004-05, ended up with a growth rate of a phenomenal 8.4 per cent, the highest since 1985.
This year again, General Musharraf’s government has been claiming that the economy will grow by over 6.5 per cent, a very likely probability.
Consumer credit has expanded, exports may cross $18 billion, and the stock market creates new records every week. With such impressive economic indicators, no wonder the general and his team are beaming with confidence, especially when the western media has finally picked up on headline news — such as Newsweek’s recent story — which is not simply related to terrorism. Clearly, Pakistan’s economy is being talked about.
While accepting that the numbers are looking good, we must ask a set of questions to be able to assess whether we should start celebrating and claiming that the economy is on a sustainable high growth rate path for some years to come, or whether this is a mere flash in the pan, a moment of merry making for a select few, with the real problems being brushed under the carpet.
One needs to ask whether there are structural reasons for high growth, or whether fortuitous circumstances led to this festive season. This will help answer the question, whether growth will continue. Then, we need to examine the consequences of this high growth: who is it reaching and is it doing some damage to the economy as well? Finally, we need to identify some serious problems in the economy which cannot be wished away.
There is little disagreement over the fact that the economy has benefited immensely — as has General Musharraf’s political fortunes — as a consequence of 9/11. The single most important attribute of Pakistan’s economy right through the 1990s, was its severe debt burden. With having to repay large amounts of interest each year, little was left for domestic development. Soon after 9/11, a huge part of the country’s debt was written off and rescheduled, creating immense fiscal space which was a windfall which the government could not have anticipated in its wildest dreams.
Apart from this, aid flew back into Pakistan, a pattern that we have seen when the two previous military dictators ruled Pakistan, in the 1960s and 1980s. As Shahid Javed Burki has shown in these pages, external support to Pakistan grows when the military is in power. It has been this windfall gain after 9/11 which has driven this boom, and once this external support dries up, the economy is likely to slow down once again.
Moreover, while growth figures and those of the stock market look good for publicity reasons, they need not have an impact on the real economy, as events in India have shown a couple of years ago. The previous BJP government felt that with unprecedented growth rates India had begun to shine, but the voters on whom no light fell, felt otherwise. Growth is necessary, but certainly not sufficient to make an impact on the real economy. This is when distributive issues become even more important.
While the government claims that poverty and unemployment have fallen — although it has still to reveal how it came up with these numbers — it acknowledges that inequality has grown in Pakistan. This is evident even visually and anecdotally across Pakistan’s urban landmarks. There certainly has been a consumer boom, as there had been one in India, but again, just like India, there has been increasing inequality which has added to the frustration of those who have not been able to shine along with the few who have. Unfulfilled aspirations at a time when small sections of the population are making merry, is a dangerous political and social cocktail. In democracies such as India, people vote out governments; elsewhere, as in Indonesia, Eastern Europe, Iran and South Africa, they have used different tactics.
Along with high growth there has also been high inflation: 9.3 per cent (if the government is to be believed) last year, the highest since 1997. Few consumers would accept that inflation is as low as this, and most people believe that the quality of their life has deteriorated despite the ‘boom’. Inflation affects every single person in the country and while the stock and real estate markets may boom as much as they like, most people are finding it difficult to come to terms with the rising prices of petrol, gas and sugar.
An area which is being completely ignored by policymakers hoping that it will go away, a factor that is a consequence of the high growth, is that of the excessive trade deficit. Although exports have broken new records this year, so has the import bill which is likely to outpace the export receipts by between $5-7 billion. No one is asking the question: who will (and how will they) pay for this deficit? The government will have to either borrow from international financial institutions or the market, or will have to impose a curb on imports, or it might have to devalue the rupee. On all three counts, government action is highly constrained and will make matters worse.
It has sworn time and again that it will never go back to the IFIs, so if it does, there will be political backlash. Secondly, in these times of the WTO, it cannot impose import restrictions either. And devaluation will only make the import bill soar further. If the government has a strategy of dealing with this growing deficit — other than selling Pakistani public assets to foreigners, a strategy known in this country as ‘privatization’ — it hasn’t made it public.
Moreover, the stage where there will be no profitable public sector concerns left to sell, is fast approaching. What the government does then, is anyone’s guess. A factor which has also been overlooked, is that despite the rise in remittances, foreign receipts for privatization and aid, the foreign exchange reserves have actually fallen over the last two years. Clearly, a sign that something is amiss.
All is not well in the kingdom of High Growth Pakistan. Growing inequality, rising prices and growth which is not broad based, will have serious political consequences. The sad part of this story is, that the unprecedented fiscal space created by circumstances has been squandered away. Public expenditure on health and education put together is still, as it always has been, merely half of military expenditure. Pakistan’s ruling elite, in this case the military, has let yet another momentous opportunity pass the country by. The tragedy here, is that once the economy begins to lose steam and the military’s festive season draws to its close, it will be the politicians and civilians who are left with the cleaning up, and the bill that goes with it.
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