Pakistan’s Impending Economic Crisis

One of the biggest achievements of Musharraf’s rule, according to him, was that he turned around a tottering economy. Rescuing it from the verge of default, he brought it to a state where it was declared a success story by the International Financial Institutions. GDP was growing at a healthy rate of 6.5 to 7.5 per cent and even touched nine per cent in 2005. ADB projected a 6.5 per cent GDP growth for 2008 in its report released in December 2007. Even the IMF Executive Board opined that Pakistan had experienced a remarkable turnaround in its economic performance since 2001/02 and that the economy had shown considerable resilience to domestic and international turbulence. It stated that sound macro-economic management and wide-ranging structural reforms had contributed to high GDP growth, reduction in debt burden and an improved business climate. Musharraf, accordingly, took full credit for appointing an economist, a World Bank nominee, as the Prime Minister and giving him a free hand. But to any expert it was quite clear that although the figures seemed attractive, growth was not based on solid foundations and was propelled by Western aid and external remittances, which increased more than four-fold from 2001 to 2006. Exports were mainly dependent on a single commodity, namely, textiles, which accounted for nearly two thirds of Pakistani exports.

Consequently, as soon as the elections were announced there were allegations that considerable window dressing of the key economic parameters had taken place. By the time the caretaker administration took over the reins of government, it was faced with an acute shortage of essential food items and a severe power crisis. The caretaker government refused to accept the previous government’s figures on GDP growth, agricultural production, industrial production, inflation and poverty. It claimed that the figures did not match the ground reality and instituted a high-powered committee headed by Dr. Akram Sheikh, the Deputy Chairman of Planning Commission to ascertain the accuracy, reliability and credibility of these figures.

Even after the elections and before the new government could take over, there were clear warning signs on the horizon. Trade deficit during the first eight months of the current fiscal year (July 2007 – February 2008) shot up by nearly 40 per cent on account of rising oil prices and decline in Pakistan’s textile and clothing exports. To add to its woes on account of rising food prices, the government was forced to ban the export of several food commodities. By end-March, the State Bank of Pakistan in its second quarterly report had scaled down its projection of GDP growth from 7.2 to 6 per cent for the fiscal year 2007-08. It also warned that the fiscal deficit was becoming menacing and could have been underestimated by the previous government, as it had not taken into account government guarantees to oil companies. Certainly the principal reasons for the slowing down of economic growth were the poor performance of large-scale manufacturing units and the Kharif harvest (mainly cotton and rice). The livestock sector, which was affected by the bird-flu virus, also contributed to the slow down. The report blamed the bourgeoning fiscal deficit, rise in international commodity prices, domestic energy woes and sluggish global demand for textiles as the contributing factors for the slow down. The foreign exchange reserves of Pakistan fell from US $15.6 billion to $14 billion during the first eight months of the fiscal year and led to the weakening of the Pakistani rupee, which depreciated by 3.5 per cent vis a vis the US dollar.

After the new government took over, it was thus faced with a critical situation. Finance minister Ishaq Dar has forewarned the people on the need to take some unpalatable actions to prevent the economy from derailing completely. He admitted that the government will be forced to raise oil prices as well as taxes to put the economy on the right track. He stated that the budgetary expenditure had already overshot by Rs. 522 billion, and the government needed to bring down the fiscal deficit to six per cent as against the targeted four per cent. He also highlighted the need to seek $2.5 billion from various sources to raise the depleting foreign exchange reserves to a respectable figure of $15 billion. He warned that if these measures were not taken, the fiscal deficit would rise to 9.5 per cent and become unmanageable.

The major component of the budget overrun has been the Rs. 138 billion subsidy on petroleum products and Rs. 70 billion on account of non-payment to WAPDA by the previous government, which failed to make any budgetary provisions for these two major items. In addition, the acute food shortages have forced the government to incur an additional expenditure of Rs. 45 billion to import, which had also not been budgeted for. This precarious economic situation will take its toll and affect the numerous developmental programmes that had been initiated by the previous government. As it is, the Finance Minister has conceded that the Public Sector Development Programme will have to be cut due to financial problems.

Although the new government has managed to get a $300 million oil facility from Saudi Arabia, it may not mitigate the problems caused by rising oil prices, which are showing no signs of coming down. This, coupled with the international trend of rising food prices and drying up of direct foreign investment, portend a grave economic crisis. International investors are waiting and watching as they are apprehensive about the results of an imminent showdown between the president and the parliament, the judicial imbroglio and the army’s future course of action, etc. Despite a decisive mandate the government’s future is fraught with uncertainty. Pakistan is losing its competitiveness in the field of textiles, power shortages have aggravated the situation, and many industries have closed down. With the sops given for its support in the ‘War against Terror’ drying up, Pakistan’s export growth is likely to peter off, whereas imports will continue to rise mainly on account of rising oil and food prices. Democratic governments will find it extremely difficult to take unpopular actions to bring the economy back on track, but at the same time any significant economic down turn will give the army a fresh ground to stage a comeback.