ECONOMIC CHALLENGES FACING PAKISTAN
DR. ISHRAT HUSAIN
There is almost a consensus that the major economic challenges facing
Pakistan are rising poverty and unemployment, heavy external and domestic
indebtedness, high fiscal deficit and low investment. The debate has so therefore
focussed on the means to face these challenges and particularly on the ways to bring
about economic recovery.
The current debate about economic recovery in Pakistan has surprisingly
boiled down to a number of simplified observations. A group of commentators place
the blame squarely at the doors of the IMF and World Bank and this Government’s
sense of docility, submissiveness and helplessness against this powerful instrument
of Western (read: American) domination. Another group of ever dissatisfied and
perpetually critical writers who find every Government to be inept, attribute
malafide motives and lack of decisiveness in taking bold measures. A third group of
well-intentioned and economically literate observers, provide partial solutions
which make perfect sense if each is taken in isolation but can break the back of the
proverbial camel if they are lumped together. I would submit that there are no easy
solutions and the decisions made in choosing any one of the possible options involve
trade offs and choices, which in turn will create a different set of winners and losers.
I will like to focus today on a question which is uppermost on every body’s
mind: why have not things improved during the last 15 months according to
popular expectations?
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First the decade of 1990s was a lost decade as far as Pakistan’s economic
development was concerned. Frequent political changes and lack of continuity in
policies, poor governance and the last May 1998 developments had together created
very difficult economic conditions in the country by October, 1999. Per Capita
economic growth rates had slided to 1 – 1.5 percent Investment rates had declined
from 20 to 15 percent of GDP, poverty had doubled from 17 to 34 percent, external
debt had doubled from $ 18 billion to $ 36 billion, debt servicing had risen to a level
where it claimed 56 percent of revenues, fiscal deficits were averaging about 6
percent of GDP, Development expenditures, particularly on education and health,
were curtailed by one half from 6 percent of GDP to 3 percent. In 1996 Pakistan
was declared the second most corrupt nation in the world. The challenge of
averting this slide and move the economy out of such critical conditions therefore
was extremely daunting. The task was made even more difficult by the initial
reaction of the international community to the change in the government and the
conflicting demands of various segments of population. Accountability, whereby all
those found guilty of corruption and malpractices in the past, was one of the major
demands articulated by the public at large and the media. But this created a
tension with the objective of economic revival as the businessmen and bankers felt
threatened by such moves.
The lingering dispute with Hubco had during the preceding three years,
damaged the investor friendly image of Pakistan. Foreign currency deposits of nonresident
Pakistanis had been frozen in May, 1998 and had antagonized this
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important class of investor. Thus investor sentiment did not take a turn for better
and domestic and foreign investment which are key for economic revival did not
flow in to the levels we had expected.
Second, we have to decide as to whose expectations we are talking about.
Pakistan’s credibility was quite low both externally and particularly among the
International Financial Institutions and also domestically with the general public.
This Government had to make a policy decision whether it will seek assistance from
the International Financial Institutions or not. Until June 2000, the country was
able to manage its finances without any recourse to International Financial
Institutions. We serviced our debt and external obligations on time. We liberalized
our foreign exchange regime and restored the conditions prevailing before May
1998 without receiving any assistance from abroad. The exchange rate remained
stable without any major volatility. Interest rates were lowered by 4 percentage
points. Despite this, domestic investors remained shy, private sector demand for
credit was insignificant and the overall pace of economic activity did not pick up to
make any dent in unemployment which had risen during the last three to four years.
The most difficult challenge faced by the country today in the short term is
external liquidity problem i.e., the ability to meet its current obligations such as
imports of goods and services and meet all debt service obligations at the same time.
There is a gap between external receipts and external payments of about $ 2.5-3
billion annually for the next few years. To meet this gap Pakistan has to reschedule
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its debt service obligations and find ways to obtain new concessional loans after
curtailing its expenditures and maximizing its revenues.
Those who accuse the present economic managers of toeing the lines of the
IMF, being totally submissive to their dictates and (in the eyes of some) acting as
agents of these institutions forget a simple fact : Pakistan has had more than half-a
dozen economic managers during the past 10 years, and some of them were
popularly elected politicians, others were technocrats or former bureaucrats who
had no past relationship whatsoever with the IMF or the World Bank.
Unfortunately they had to enter into as many as 11 agreements with IMF during
past 10 years, had to follow the same course of action and the same policy
prescriptions, even at the time when we did not have the urgent need to reschedule
Pakistan’s external debt. These managers also had the luxury of using foreign
currency deposits of residents and non-residents to finance the external deficit. They
borrowed short-term commercial loans to build up reserves. I am not trying to be
defensive but am laying out the facts that since May, 1998, the country has lost one
important source of external liquidity i.e., foreign currency deposits. This
Government has decided not to borrow short-term commercial debt for building up
reserves. Home remittances through official channels are down by $ 500 million
annually compared to the pre-May 1998 period. Foreign investment flows are down
to less than $ 400 million compared to average flows of $ 1 billion. Oil import prices
have shot up from $ 14-15 barrel to $ 28-$ 30 barrel and the oil import bill has
doubled from $ 1.3 billion to $ 2.6 billion in just one year. During the first half of
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the current fiscal year, we have already imported oil worth $ 1.7 billion. Despite the
15-20 per cent increase in volume of our textile exports, the unit value of our
exports are down by 7-10 per cent on average. In this scenario, how can any one
keep the wheel of the economy moving in an orderly manner without recourse to
relief or injection by the International Financial Institutions. Japan and other
bilateral donors have also not come to our help as they had before May 1998.
No economic manager worth his grain will like to have his hands tied down
by external agencies, while he has to deliver according to the expectations of
domestic constituents. The sooner we are able to ween ourselves off the IMF
programmes the more liberated will be the economic managers of this country in
pursuing an independent course of action, which balances the interests of the
common man, the requirements of the global economy and, at the same time,
follow a prudent growth – oriented set of policies. It is not that we are not
committed to macro economic stabilization or removal of distortions from the
economy. But we need the flexibility to do so. I can assure this audience that the
present global environment in which we are expected to produce instantaneous
results is highly constrained and does not allow much room for maneuver.
As the debt rescheduling period was coming to an end in December 2000,
and the Government’s capacity to fully service its external debt had not improved
during the last 2 1/2 years period there were two options available – unilateral
moratorium or further rescheduling. The option of unilateral repudiation or
moratorium would have caused such enormous hardships for the country that it
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would have been simply unbearable. How many of us could have tolerated the
prospect of PIA planes being seized at international airports, the requirement that
all our imports must be paid for in cash and the inflation rates running at 30-40
percent with scarcities and rationing all around. I do not think any Government
would like its citizens to go through this scenario. We therefore rejected this option
as we came to the conclusion that the situation would have been far worse and the
overall suffering to the population would have been more severe.
The second option of approaching the IMF has been severely criticised.
Many learned commentators have questioned why the economic team had to yield
to all the conditionalities imposed by the IMF. Why did not the country negotiate
softer conditions? As I mentioned our only motivation for entering into an
agreement with the IMF was to secure rescheduling of Pakistan’s external debt.
To retain its reputation as a vigilant watch dog, the IMF insisted, before
reaching an agreement, on tougher measures and upfront actions from the
government as we had displayed a poor track record in the past. Their management
was of the view that Pakistan had very low credibility as successive governments
had agreed on a number of conditions but these were either not fulfilled or partially
fulfilled. They wanted the present government to implement all those conditions as
prior actions before they could take the loan proposal to their Board. These prior
actions consisted of the free float of rupee, (without intervention by the State Bank
of Pakistan), agriculture income tax, GST on retail trade, GST on services,
deregulation of petroleum imports, linking domestic POL prices to international
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prices, increase in consumer prices of gas, adjustment in electricity prices, widening
of the tax base, removal of the subsidies. Naturally the Government had little
choice – if it did not take these actions an agreement with the IMF could not be
reached and thus rescheduling would not have been possible. In other words, we
had to make up for our past lapses – all in one go. There are many on-going time
bound conditions that have to be met during the next 9 months, which are structural
in nature such as privatisation, restructuring of public corporations, financial
sector reforms and civil service reforms. While the fulfilment of these prior
conditions and conclusion of agreement with the IMF has restored the credibility of
Pakistan vis-a-vis International Financial Institutions, Paris Club and G-7
Governments and improved the market sentiment among credit rating agencies and
fund managers abroad, I must confess that it has not been widely welcomed
domestically.