Thursday, February 10, 2011

Performance of Economy

This post briefly reviews two years of economic performance of the present government. What it inherited, what it informed the IMF and the people of Pakistan, why it went to the IMF, and where we stand now - are the subject matter of this article.

Pakistan positioned itself as one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.

These facts were acknowledged by the present government in a Memorandum of Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing agreement with the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07". It further acknowledged that "the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1)

Per Capita PPP GDP

A cursory look at the above stated acknowledgment is sufficient to see that the government deliberately misguided the people of Pakistan by presenting a totally distorted picture of the economy. While it could misguide the people of Pakistan for domestic political consumption, it had no option but to tell the truth to the international financial institutions as these facts were known to them.

Even the government did not inform the people of Pakistan that it obtained the IMF Program on the basis of past performance. Pakistan received the extra-ordinary funding from the IMF under the fast-track Emergency Financing Mechanism which was meant for the countries "that have a strong track record of sound policies, access to capital markets and sustainable debt burdens but need rapid help to overcome financial crisis". (IMF Survey, October 29, 2008) Thus, a government which starts its inning on distortion can never bring stability in the economy. Most of its time and energy would be consumed for covering up of its failure.

The present government inherited a relatively sound economy on March 31, 2008. It inherited foreign exchange reserves of $13.3 billion, exchange rate at Rs62.76 per US dollar, the KSE index at 15,125 with market capitalization at $74 billion, inflation at 20.6 per cent and the country's debt burden on a declining path. The government itself acknowledged in the same document that "the macroeconomic situation deteriorated significantly in 2007/08 and the first four months of 2008/09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government". (Para 3 of the MEFP, November 20, 2008)

What went wrong? Why one of the fastest growing economies in the Asian region until two years ago has been totally forgotten in the region? Firstly, the speed and dimension of exogenous price shocks (oil and food) were of extraordinary proportions. Secondly, the present government found itself totally ill-prepared and clueless in addressing the challenges arising out of the shocks. While rest of the world was taking corrective measures and adjusting to higher food and fuel prices, Pakistan lurched from one crisis to another.

Despite peaceful election and a smooth transition to a new government, political instability persisted. For a protracted period there were no finance, commerce, petroleum and natural resources and health ministers in the country. The government lost six precious months in finding its feet. It gave the impression of having little sense of direction and purpose. A crisis of confidence intensified as investors and development partners started to walk away. The stock market nosedived, capital flight set in, foreign exchange reserves plummeted and the Pakistani rupee lost one-third of its value. In short, Pakistan's macroeconomic vulnerability had grown unbearable. It had no option but to return to the IMF for a bailout package. There were no Plan A, B and C. There was only one plan, that is, to return to the IMF.

While the country was moving rapidly towards the IMF, the ministry of finance had prepared the plan to bring $4 billion by June 30, 2008 through four transactions. A kick-off meeting was scheduled on April 23, 2008 at the ministry to give a final touch to the various roadshows. These transactions were canceled on April 20, 2008. Who ordered the cancellation of $4 billion transaction? This cancellation prompted balance of payment crisis and the rest became history.

The economy continues to remain in intensive care unit and is breathing thanks to the injections from the IMF, World Bank and Asian Development Bank. The economy is not on the radar screen of the government and as such the economic managers have no relevance in the current political set up. The exit of Shaukat Tarin is a classic example. At least he tried his level best to inject financial discipline but paid the price of teaching prudent financial management. No matter who replaces Shaukat Tarin, the economy would continue to lurch from one crisis to another until and unless the government brings the economy at the center stage.

Dr. Ashfaque Hasan Khan is the Dean of Business School at the National University of Science and Technology in Islamabad, Pakistan.

Riaz Haq's Comments: In rural Pakistan where about 60% of Pakistanis live, people spend 55% of their income on food, according to a World Resources Institute (WRI) report.

The bottom two BOP (Base of Income Pyramid) groups alone account for more than 50% of national food spending in Pakistan. Average annual food spending per household in the BOP in Pakistan is $2,643. While BOP3000 households have 6 times as much income on average, they outspend BOP500 households in the food market by a ratio of only 2:1 in Cameroon, 2.3:1 in South Africa and Pakistan, 2.4:1 in Kazakhstan, 1.9:1 in Uzbekistan, and 3:1 in Peru.

Currently, food inflation in Pakistan is running at 15.49 percent, hitting the poor the hardest.

Here's a video clip of British Writer William Dalrymple speaking about Pakistan at a recent Intelligence Squared debate:

Here is a recent video clip of former President Muharraf talking about the power crisis in Pakistan:

Wednesday, February 9, 2011

Another economic crisis?

HE problem with making arguments and stating opinions which go against the grain of what passes as current conventional wisdom is that this comes with a huge baggage of issues.
Often, contrary views are misconstrued, sometimes deliberately, because they suit someone`s interests. More often, they are simply misunderstood and people find it difficult to accommodate diverse arguments and are made uncomfortable with ideas that question their settled, often uninformed, opinions. Questioning well-established beliefs, to say the least, is unsettling. Critique is fundamental to a better understanding of issues and settled facts.
An article I wrote in these pages many months ago, which questioned the then held view about the economy, resulted in my receiving laudatory text messages and phone calls from leading members of the ruling party, saying that I had presented a `balanced` view and had `defended` the government`s economic policy.
I would be the last person to defend this government`s economic policies, for I believe it has shown the least seriousness about economic policies and issues, and I have always wondered what its vision or programme actually is. I have found none.
This long preamble is made necessary to ensure that when I critique conventional views which fill the pages of newspapers these days, I do not come across as someone who in any way whatsoever is seen to hold this government`s brief. I do not.
In the last few weeks, every single newspaper has carried dozens of articles and editorials about the state of Pakistan`s economy. The economy is seen to be in a `severe crisis`, is `collapsing`, `catastrophic`, `plummeting`, and `economic meltdown being on the cards`, and so on. Some economists have even gone to the extent of saying that, `the country is passing through its gravest economic crisis since 1971 and there is a generalised breakdown of economic order`.
Even former ambassadors and security analysts have been giving their expert opinions on the economy. The finance minister has been reported as saying that the economy was `on the verge of collapse`.
This din of collective conventional wisdom, from prominent and well-known economists, suggests that this might be the worst economic crisis which Pakistan has faced in four decades. However, conventional wisdom can also be very wrong.
There is no doubt that there are numerous serious unresolved and chronic problems with Pakistan`s economy which most writers have pointed out. The fiscal deficit is higher than it should be and might reach seven or eight per cent of GDP by the end of the fiscal year. Inflation has been persistently high and in double digits for almost the full tenure of this government.
There has been speculation about unemployment and poverty, both of which have probably increased since growth and investment are lower than in the recent past. Economists are not completely wrong in making these inferences based on a few facts and are quite justified in doing so. The excessive use of terms like `crisis`, `collapsing`, `plummeting`, `meltdown`, and the like, undermines the urgency and importance of identifying problems.
For an economist to state that the economy is facing its worst crisis in four decades only underscores the fact that many economists are not even aware of recent economic history. There have been so many real and imagined political and economic crises since 1971 that it becomes difficult to continue using the term.
For instance, after the nuclear tests in May 1998, there was far greater agreement that Pakistan was at rock bottom with no foreign assistance, and the economy had still not recovered from Gen Zia`s profligate decade and stringent IMF straitjacketing, with foreign exchange reserves non-existent. One would have been quite justified to call that time one of a severe crises.
Compared to 1998 and 1999, foreign reserves are higher today than they have ever been, and despite the energy sector on the `brink of complete collapse`, exports, surprisingly, continue to rise, quite markedly. The rural economy too, seems to be doing much better than it has in many years, despite the floods whose adverse impact was falsely and purposely overstated.
Although the problem of donor assistance is highly problematic, foreign donors are supporting Pakistan`s economy like never before. While this has caused other problems, this so-called crisis is less problematic than many earlier ones. An economy dependent on donor funding and remittances is not much to speak of, but `crisis` is altogether a different beast, and these are not indications of a meltdown, as yet.
In fact, if one wants, one could argue, that Pakistan`s economy is in a perpetual state of crisis, hence the current indicators do not necessarily suggest anything particular or extraordinary. There are chronic, serious and deep-seated problems and flaws, for sure, but a crisis of the economy, probably not. Pakistan`s economy is nowhere near collapse or plummeting. An economy projected to grow at three per cent, as announced by the State Bank on Wednesday, is not one in crisis.
If serious economists want to do serious research and analysis and make responsible statements about Pakistan`s economy, they need to understand precisely why the economy has not plummeted, collapsed or melted down. East Asia in 1997 was a clear and visible crisis, as was 2009-10 for many developed western countries. Pakistan since 2008 has been in a constant state of under-performance and an economy with numerous chronic structural problems. By no means is the economy passing through its gravest crisis since 1971. For that one probably needs to wait a bit longer.

Friday, February 4, 2011

For the past three decades the influence of United States on Pakistan has only deepened. Programs like war on terror and other militant operations where on one hand has weakened the economic as well as social infrastructure of the country, on the other it also has provided tremendous opportunities to capitalize on the weaknesses by asking financial aid from US. Albeit every time Pakistan has to offer more and more to the US in lieu of the financial assistance that seldom is seen on the economic development of the country. Most often it is siphoned off with corruption.

Over time many a catastrophic operations that take place every few days along side the border of Pakistan in the form of missiles and bombings predict an uncertainty for Pakistan, especially when it is evident how every time US goes on complaining of ‘noncooperation'.

This probably will decrease in 2011, as Pakistan will be able to get hold to some extent on terrorism. This might be because of the reason that US already has many opponents around. The manner in which Latin America along with Iran, Iraq and Afghanistan hold a staunch antipathy towards the US, despite the fact that this block sells oil at a cheaper rate to the US and itself is dependant upon her on many aspects of assistance, makes US realize that it no longer could afford another war.

China, which most of the time Pakistan has least bothered about might increase its assistance in many areas of economic development. Despite the fact that China is more concerned about dealing with India, it still will help Pakistan to seek meaningful assistance. India will not be troublesome anymore as it has many a personal problems of its own, and getting into a contentious issue with Pakistan is only going to make matters worse, that both countries no longer afford.
Many opportunities that in the past years never have showed up will arise. On the average Pakistan will not be a looser in 2011 and would have plenty of options ahead to prove it worthy of developmen