 The Pakistani economy is destined to succeed if it can be turned around in the short-to-medium term. The first seven years (2000-2007) of the current decade witnessed Pakistan's economy growing robustly and its economic fundamentals gaining traction. In particular, economic growth averaged 7.0 percent during the most part of the decade, with unemployment and poverty declining, both exports and imports growing strongly, the country's debt burden declining sharply, foreign exchange reserves gaining new heights, foreign investment surging and exhibiting greater confidence of foreign and domestic investors on Pakistan's economic management; doubling of per capita income and volume of trade; maintaining price and exchange rate stability; and exiting the IMF program ahead of time. As a result of these developments, Pakistan's credit rating improved several notches over the period.
Pakistan's journey towards economic prosperity was derailed on account of cataclysmic events that unfolded on the domestic and external fronts unexpectedly during the last two-and-a-half years. These events include: rising political tension; deteriorating security environment; unprecedented surge in oil and commodity prices; softening of external demand; collapse of global financial system leading to great recession; shortages of power, hurting industries and production; lack of understanding and capacity to address economic challenges on the part of the new government; political expediency preventing successive governments to take corrective actions; and, most importantly, bad governance not only hurting the economy but also causing enormous difficulties for the common man.
All these events have badly affected the economy and weakened the country's macroeconomic fundamentals. Economic growth has decelerated; unemployment and poverty have increased; the country's debt burden has risen sharply; industrial growth has turned negative; foreign exchange reserves have plummeted to a dangerously low level; exchange rate has depreciated and lost one-third of its value; the stock market index has nose-dived; foreign investment has declined; government has not talked to the private sector and failed to appoint a spokesperson on economy; both foreign and domestic investors have shied away; flight of capital has set in; and the most damaging outcome has been the return of the country to the IMF after a gap of almost four years, thus compromising the financial sovereignty of the nation. Such developments are not only injurious to the economy and welfare of the nation, but also detrimental to national security.
Pakistan's economy is likely to lurch from one crisis to another and its economic fundamental will continue to lose traction in 2009-10. If certain fundamental issues pertaining to the economy are not addressed prudently, chances are that the economy in 2010-11 and beyond would be further weakened with its deleterious impact on people and national security.
Pakistan's economy is currently facing several challenges some of which will continue to afflict it with differing intensities going forward. These challenges include:
(i) political instability and poor governance;
(ii) rising debt burden;
(iii) energy shortages and implications for the economy;
(iv) investment in physical and human infrastructure; and
(v) Corruption.
Let me dwell upon each of the challenges briefly:
Political instability and economic performance are inversely related. Unstable political environment reduces investment, slows economic growth and gives rise to unemployment and poverty. Poor economic performance can lead to political unrest and collapse of the government. Political instability is poisonous for the economy because it weakens governance as the government continues to strive for its survival and economy remains out of focus. Slower economic growth leads to lower tax collection and forces the government to resort to additional taxation during the fiscal year, commonly known as ‘mini budget'.
Lower tax collection also undermines the ability of the government to invest on people and infrastructure. It encourages the politically weak government, constantly under the threat of losing office, to borrow extensively to undertake unnecessarily large expenditures to please pressure groups. Such policies lead to the accumulation of debt, with adverse consequences for future generations. In short, economic governance is the major victim of political instability with all its adverse consequences for the economy and the people.
Rising debt and its macroeconomic consequences have emerged as a major challenge for Pakistan going forward. The way Pakistan has borrowed over the last two-and-a-half years is unprecedented and has injected significant risk to the economy. Pakistan has added over Rs.3.0 trillion in public debt and over $12 billion in external debt during the period. The IMF has emerged as the single largest source of external financing with total exposure amounting to $12 billion by December 2010. Although the IMF has projected Pakistan's external debt rising to $72 billion by 2014-15 under the assumption that it maintains strict financial discipline, but given the current state of governance, external debt is likely to touch $90 billion by 2014-15.
Pakistan will start repaying the IMF loan from 2011-12 and in four years (i.e. until 2014-15) it will have to repay $12 billion to the IMF alone. Pakistan will not be in a position to repay such a large amount in such a short period of time and therefore will have to negotiate yet another program with the IMF in January 2011.
Rising debt burden is a serious threat to development and a major source of macroeconomic instability. If the issue of rising debt burden is not addressed prudently in 2010 and beyond, Pakistan will continue to experience low growth, rising unemployment and poverty. Solutions require sharp reduction in fiscal deficit by rationalizing expenditure on the one hand and raising tax revenue on the other.
Some degree of corruption has always been there in Pakistani society but the pace at which it has increased over the last two years is of serious concern for the economy. How to minimize corruption has emerged as yet another challenge for Pakistan in 2010 and beyond. Corruption erodes effectiveness of government spending, contributes to tax evasion and discourages both domestic and foreign investors to undertake long-term investment decisions. More corrupt economies are also seen as more prone to financial crises. In short, a highly corrupt country can never achieve growth and prosperity on a sustained basis. If the level of corruption is not minimized in Pakistan, economic prosperity will remain a distant dream in 2010 and beyond.
Balancing the demand and supply of electric power has emerged as a serious challenge for Pakistan in 2010. As a key factor of production, shortage of power will remain a binding constraint for industrial growth. The previous government had launched some 50 power projects totaling 12,141 MW during February 2004 to August 2007. These projects were to come into operation from October 2008 to December 2015. Of them, Attock Power, Atlas Power and Nishat Power have already come into operation. Five more projects are likely to come into operation shortly provided the government ensures their timely completion. The remaining projects are at various stages of completion and every effort should be made to complete these projects by December 2015. The resolution of circular debt will also play an important role in bridging the demand-supply gap in power in 2010.
Investment in physical and human infrastructure for supporting growth momentum is yet another challenge for the country in 2010 and beyond. Adequate resources will be required for strengthening the country's infrastructure, for which, enough resources must be generated going forward. At the time of independence in 1947, Pakistan's population was merely 32.5 million, but by 2008-09 it has reached 164 million. Thus, in roughly two generations, the country has added almost 132 million people. While Pakistan has more mouths to feed, more families to house, more children to educate, and more people looking for gainful employment, this large population also represents a big opportunity for the country to benefit from demographic dividend. This benefit would not come automatically. What will be required is large investment on people to educate them, to train them and to make them productive members of the society.
Pakistan is at a crossroads. On the one hand, if political instability continues, economic governance continues to deteriorate and the economy remains off the radar screen, Pakistan will continue to lurch from one crisis to another with serious implications for economic well-being of the nation. On the other hand, if we bring our house in order, we have a strong, sincere and visionary leadership, committed to making a change and keeping Pakistan's interest supreme, Pakistan has all the potential to emerge as an economic powerhouse of Asia. The choice is obvious. We, as a nation, are destined to succeed. Failure is no option. We are confident that we can turn around the economy in short-to-medium term.
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