Economy of Pakistan: 2008-2012/13

Admittedly, the last government was faced with difficult challenges which undermined its economic performance. The world was experiencing the worst recession since the Great Depression, the US’s war in Afghanistan was worsening the security situation in Pakistan, and the energy crisis was bleeding the economy of potential income every day. But just as accusing Pakistan Peoples Party (PPP) for every wrong thing that happened during its tenure is flawed, so is vindicating it for what was a below-average economic performance. Let us see if the key economic indicators have a story to tell.

When the PPP assumed office, the economic fundamentals spoke explicitly of the tough times ahead. The global recession had directly hit Pakistan’s exports’ demand while the food and oil price hikes internationally had made imports pricier. Thus, in fiscal year 2008 (FY2008), trade deficit was growing, reserves were falling, the fiscal deficit was looming at 7.6% of GDP, inflation was hovering around 12% and economic growth had fallen by 3.1 percentage points to 3.7%.

The circumstances made borrowing from IMF inevitable and a 23-month Stand-by Arrangement was entered in 2008. As is a norm with any country under IMF-programme, the growth rate for the immediately following year fell further down to 1.7%, making output growth for that year one of the lowest in country’s history. But even without the programme, growth hovered around 3-3.5%.

The average growth rate in 2008-12 period was 3%. Sub-Saharan Africa grew at 4.6% and South Asia grew at 6.4% during the same period.

What about welfare, which remains among PPP’s key areas? For this the government initiated its flagship poverty relief programme, the Benazir Income Support Programme (BISP). According to former World Bank President, Robert B. Zoellick, the Secretary General of United Nations, Ban Ki-moon, and the Asian Development Bank, the performance of BISP has been first-rate.

On the other hand, various poverty estimates show poverty to have worsened in the past few years. The two seemingly contradictory claims may be reconciled by hypothesising that the beneficiaries of BISP may have actually become better off, yet more and more people could have been falling below the poverty line due to lack of opportunities and economic stagnation.

Other policies  may have made farmers better off in some way but sadly did not translate into significant agricultural growth. Agricultural output grew by a modest 2% a year in 2008-11 period, compared to 4.4% in Bangladesh and 3.1% in India.

Similarly, industrial output registered a negligible growth of 2% a year, compared to 7% in Bangladesh and 6.6% in India, in 2008-11 period.

Agriculture and especially industry, both were affected by the energy crisis, which was not an overnight happening, but an outcome of previous governments’ criminal negligence. It may be said that PPP just ended up at the wrong place at the wrong time. Yet the onus for not being able to improve the situation lies on PPP’s shoulders. Ironically, less than a week before dissolution of the assembly, Mr Zardari inaugurated the Iran-Pakistan gas pipeline – which has meagre chances of becoming operational anyway, given the security situation in Balochistan.

Finally, consolation could have been found had the government not ransacked the fundamentals. But it did not happen.

Inflation skyrocketed in 2008 to 20.3% but was brought down to 11.9 by 2011. The year-on-year inflation fell to 5.8% in April 2013. Though, some are of the view that it is merely the changes in methodology and artificially low prices of utilities – which are being heavily subsidised and will soon become expensive – that are mirroring in the low CPI inflation figures. Also, the effect of government borrowing will fully come to effect in 1.5 to 2 years, and may affect inflation adversely.

The fiscal deficit for FY2013 is estimated to be around 7.5% of GDP by the IMF. If this is considered correct, average deficit for fiscal years 2009-13 turns out to be 6.7%. Troubling is the fact that more recent guesses put the deficit for FY2013 at 8.5% to 10%. Reflecting this, public debt to GDP ratio reached 62.5% in FY2012, significantly higher than Asian Development Bank’s recommended 30-40%.

Lack of exports growth and rise in import prices did not let the external account improve either. Trade deficit rose from 4.1% during FY2000-07 to 8.9% in FY2009-11 in percentage GDP terms. Adding figures for FY2012-13 to the average would paint a grimmer picture.

Capital and Financial accounts worsened year-on-year primarily on account of net outflows of direct investment. The level of reserves remained much lower than international norms throughout the PPP tenure. What is worse, they have now fallen to a level where not even two months imports may be covered. It has been predicted that if inflows from the coalition support fund or IMF do not come soon, the State Bank’s reserves would fall to a zero.

But investors do not wait for a country to go default on its obligations. They can panic on any given day at any time, pulling their money out of the economy. This may cause exchange rate of rupee to plunge, dollar debts to substantially rise, cost of further debt to skyrocket, imports to become very expensive, and conditionality over loans to become draconic.

So this is where the PPP left us. Arguably, chalking the state of economy with a few economic indicators risks oversimplification. But if all indicators narrate the same story, faith should serve us better than scepticism. It is now up to the Nawaz Sharif government to take the challenge of bringing the economy back on the right track.

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