Reviving a sick economy: facing the old challenges
For more than a decade, Pakistan’s economy has been in decline, reflecting a pattern of fiscal deficit which has led to heavy borrowing, a widening gap between imports and exports, and a slow-down in revenue. A number of domestic problems have compounded this downward spiral.
First, the internal security situation which began worsening in 2007 with the rise of terrorism. It raised the cost of internal security manifolds, forcing the country to train and invest in security resources in areas it had previously had no immediate interest in, like counter-terrorism. Foreign tourists, investors and companies stopped visiting Pakistan, let alone investing. The flow of foreign direct investment in Pakistan dried up, some companies operating in banking, oil and gas exploration and manufacturing pulled out entirely. In contrast, the economies of regional countries were thriving.
Second, the military regime between 1999-2008 did not launch any major power generation projects and continued to rely on imported fuel. Soon after, the country began to face a severe short-fall in power production. Domestic consumer demand outstripped supply and power shortages for industry and ordinary citizens began to hurt the economy. Factories closed down in the thousands, causing unemployment of skilled and unskilled workers. Even Pakistan’s export-earning textile industry was forced to take a big cut in power supply which was instead diverted into households to avoid political backlash from voters. In their economic choices, political parties made populist decisions with their eye keenly on the next elections.
Third, while Pakistan’s exports remained flat or declined in dollar terms, imports, particularly from friendly China, flooded Pakistani markets increasing from $2 billion in 2009 to nearly $20 billion in the financial year 2018. If it were not for foreign remittances sent in by Pakistani workers in Saudi Arabia, the Gulf States and developed industrial states, the country would have gone bankrupt.
Fourth, Pakistan has a heavy reliance on foreign remittances that have grown sharply from $9 billion in 2007-2008 to $19.3 billion in the 2017 financial year. In 2018, the volume of remittances at $23 billion was almost equal to the total exported goods and services of the country. Remittances however, are subject to trends in the global economy, and dependence on this source of foreign exchange to finance the current account deficit makes Pakistan vulnerable to its changes. As the oil revenues of Saudi Arabia and the Gulf States declined with lower crude prices in the global market, it forced them to rationalize their development programs, forcing tens of thousands of Pakistani workers to leave their jobs. Consequently, remittances from these countries in the past few years have seen a downward trend.
Political parties in power during the past decade have avoided taking difficult but necessary economic decisions. Their electoral political interests overweighed all rational and pragmatic economic policies.
Rasul Bakhsh Rais
Finally, political parties in power during the past decade have avoided taking difficult but necessary economic decisions. Their electoral political interests overweighed all rational and pragmatic economic policies. Public entities, like Pakistan International Airlines, Pakistan Steel Mills, Railways and power distribution companies create losses of about Rs. 600 billion annually. It is irrational not to privatize them, but the problem is the unions, the voters and the political stakes of the ruling class.
The question is, will the Pakistan Tehreek-e-Insaf government change the course where other parties have succumbed to political pressures? The new government, now in its ninth month, inherited an economic crisis magnified by an $18 billion current account deficit, massive debt servicing, a burgeoning import bill and flat export earnings.
As a short term measure to stabilize the economy, the government has secured bilateral loans from Saudi Arabia, the UAE and China to the tune of $8 billion. To reduce pressures on the external payment front, it has got a deferred payment facility for oil imports from Saudi Arabia. All this offers is temporary relief; these are not solutions until the government grapples with restructuring the economy.
Pakistan has no choice but to go to the International Monetary Fund to stabilize the economy. The structural adjustment programs of the Fund will force the government to free the foreign exchange market, reduce subsidies, increase taxes and privatize public entities. All these choices may generate resentment, which a confrontational opposition will no doubt exploit against the government.
The big question is whether the government will take difficult economic decisions or pursue the path of political expediency, as its predecessors did. The real challenge is growth, which has slowed down and expected to be around 3.5 and 4 percent at the end of the current financial year. Time is of the essence in retaining popular confidence, but the economic problems accumulated over a decade are such that even the best economic experts might not be able to produce positive gains as fast as the general population is impatient to see.
– Rasul Bakhsh Rais is Professor of Political Science in the Department of Humanities and Social Sciences, LUMS, Lahore. His latest book is “Islam, Ethnicity and Power Politics: Constructing Pakistan’s National Identity (Oxford University Press, 2017).