Economy in 2009 and beyond
Source: DAWN.COM | Business | Economy in 2009 and beyond
THE Pakistan economy has gone through major upheavals during the last tow years. Everything seemed fine until that fateful morning of March 9, 2007.
All macroeconomic indicators were positive and Pakistan’s GDP growth was a very healthy eight per cent plus — one of the fastest growing economies in Asia. The stock market was booming, foreign exchange reserves and home remittances were at a record high and the exchange rate was stable. All major sectors such as banking, fertiliser, telecommunications, oil, etc were making record profits and investment was pouring into Pakistan from all corners of the world.
This was happening because investors around the globe viewed Pakistan as a very close ally of the US. Pakistan’s massive debt obligations were either being written off or rescheduled while new loans were being offered to the Pakistani leadership in return for its continued support in the war on terror.
So where did Pakistan go wrong after several years of economic growth until March 2007? First, the economic growth was achieved due to political stability in the country. Since the elections of 2002, Pakistan had returned to a quasi-democratic set-up with President Musharraf still retaining all the powers to govern the country, similar to the ones he had enjoyed during his first three years. On the one hand, he had silenced his domestic and international critics by returning to a democratic order — albeit an incomplete one. On the other, he was able to retain all his powers. This strategy worked wonders for President Musharraf and the Pakistan Army, which remained all-powerful although it took a backseat after the 2002 elections.
In spite of the positive economic growth during 2001–2007, there were serious issues confronting the economy. Economic growth was based on consumption rather than real income generation through a combination of higher exports and industrial or agricultural growth. People were encouraged to borrow from banks and leasing companies for their domestic consumption. In addition, massive amounts were spent on importing items such as mobile phones ($1bn in 2008) and luxury cars. There was an increase in imports but our exports were not increasing in line with the increase in growth. Hence, the trade and current account deficits.
As recent events have shown, such consumption-based growth is not sustainable. Eventually it did have a devastating effect on the economy. Non-performing loans especially in the consumer sector have started to mount and this trend will continue in the next few months. The actual increase in non-performing loans as well as the amount of provisioning done by the banks in their last financial statements is clear evidence of this.
After a major downward slide in 2008, we are now witnessing a positive upward trend in various sectors of the economy. Interest rates have started easing and it is expected that during 2009 we will see a major cut in interest rates of up to 400 BPS (basis points). With international commodity prices taking a plunge, the import bill has started going down, resulting in a major cut in trade and current account deficits. For the first time since June 2007, we have a current account surplus for February 2009. This trend, if continued, could bring Pakistan out of the serious cash crunch.
The IMF loan, which was taken as a last resort, has improved the reserves which now stand at more than $10bn. This has stabilised the rupee after we witnessed a decline of almost 30 per cent in its value during 2008. The other positives include a decrease in the inflation rate, although the goal is to achieve a single-digit inflation rate. The stock market has also grown about 29 per cent since hitting bottom in mid-December.
However, Pakistan is still far away from ensuring that this positive trend continues. There are serious concerns still affecting our economy and if immediate measures are not taken, we will continue to face serious economic issues as time goes by. These remedial measures should include steps to improve the massive shortfall in the energy sector. So far we have not seen any sign of improvement in the structural imbalance of the energy sector. Our social sector spending remains extremely poor, even in comparison with other countries in the region. Without a major change in our budgetary provision for education, health and other social sectors, we cannot hope to compete with the rest of the world in the long run.
The law and order situation which has deteriorated in the last year or so directly affects economic performance. The recent attack on the Sri Lankan cricket team has further eroded Pakistan’s credibility to fight terrorism. The impression created has been that even in cases where we were committed to providing presidential-level security, we failed. Then there is the instability and violence in the NWFP and Balochistan. If this continues chances of an economic recovery will diminish in the absence of the state’s writ.
The tax-to-GDP ratio continues to be abysmally low and has been hovering around 10 per cent during the last decade or so. This in spite of substantial growth in overall tax revenues. This ratio is again poor when compared to other countries in the region. Imagine if Pakistan were to achieve a 15 per cent tax-to-GDP ratio, we would have a significant amount available for improving the welfare of the people.
Most importantly, we need political stability as we grapple with a series of political crises. In the aftermath of last year’s elections, more so after the resignation of President Musharraf, a stable political climate was expected. However, this was not to be and we are now back to square one. This means that although Pakistan has returned to a democratic process in terms of rebuilding state institutions — vital to long-term democratic sustenance — nothing has yet been done. The president is all-powerful which should not be the case as per the original constitution.
The above list of issues is not in order of priority and is not exhaustive. Also these are all long-term measures but a sound beginning even at this late stage can ultimately bring Pakistan out of the economic crises that it is facing. The ultimate objective should be to make Pakistan a true welfare state. Is it too much to hope for?
The writer is a former CFO of IBM Pakistan and a political analyst.