Military Regime Has Failed To Revive Pakistan Economy
10 July 2001
When coup leader General Pervez Musharraf seized power in October 1999, he promised to revive the economy. Those dreams of revival lay shattered as an ashen-faced Finance Minister confessed that national growth fell to its lowest levels. Only the Musharraf regime was surprised by the dismal performance.
Political observers had predicted the economic fall when last year’s budget was announced. Those who fail to learn from history, repeat its mistakes. The second Federal Budget for 2001-2002 announced by the military regime will further deteriorate Pakistan’s economy.
The story of the budget is the story of a country where economic recession bites, the huge debt is a monstrous burden; there is low investment and an alarming rise in poverty. Just four years back in 1996, Pakistan’s economy was booming as the country economically stood at the cross roads of Central and South Asia.
The dismissal of the democratic government, and its replacement with one fascist after another, brought a precipitous economic fall in a country which has detonated nuclear devices and has 750,000 men in uniform. In four years, Pakistan went from enjoying GDP growth rate of 6.76 percent, the second highest growth rate in the developing world, to amongst the lowest at 2.8 percent.
The fall of the growth rate directly relates to poverty. As the growth rates falls, with it falls the purchasing power. The drop in purchasing power paralyses the economy further. Shops remain empty of shoppers and houses remain empty of tenants. Money stops circulating forcing a rise in poverty and misery. In 1996, total investment amounted to 19 percent of GNP. Now it stands at nearly half that figure. This amounts to a reduction of roughly Rs150 billion in investment. Given that investment is the fuel that propels the economy, the drop in its figure is alarming. Yet, Pakistan is a country that can attract investment.
Four years back, the average direct foreign investment was above $1 billion with promises of over 22 billion dollars in the short term. That massive inflow dried up as soon as democracy was derailed by presidential order. Even the medals on the Generals chest failed to dazzle investors as he spoke of order, transparency and stability in countries as far off as Vietnam, Baghdad and Tripoli and as near as Burma. Now foreign investment still trickling in from old MoUs have fallen to below $200 million. Domestic investors are choosing to invest in countries as near as the Gulf and as far as Canada. Their hard earned money is safe in countries where there is the rule of the law and honest government. Consequently, not a single new company was listed on Karachi Stock Exchange for three years in a row. This is a harsh indictment in the court of the people against the non-democratic values giving birth to a rising clerical movement across the breadth and length of the country.
An alarming decline in foreign exchange reserves forced Islamabad into a new financial arrangement with the IMF last November. Given that Pakistan’s Finance Minister [Shaukat Aziz] is a private banker with experience in public relations, it was unsurprising to see Islamabad choose an ill-suited, high-cost, short-term stand-by program. An experienced minister, versed in budgetary affairs, and the workings of international financial institutions, could have chosen a more attractive package. The IMF does offer a poverty facility program. The stand-by paved the way for a second re-scheduling of Islamabad’s debts with the Paris Club. This was paraded as a great accomplishment in ignorance. The Paris Club has several debt relief packages with different terms and conditions. Pakistan’s debt was rescheduled under the more modest Houston terms.
The second rescheduling of debt took place on the same terms as the earlier package negotiated by Premier Nawaz Sharif when Islamabad stood close to default. It indicated that the Paris Club saw little reason to treat the military regime any differently than its predecessor. All Islamabad achieved was a small, short term breathing space before a heavier burden landed in its lap in the form of even more difficult debt-service obligations. At the end of the stand-by period, the rescheduled debt will be added back with compound interest. Islamabad will actually be worse off than before, once again, facing the spectre of default.
The international financial agreements sent a clear message: the international community lacks confidence in the present dispensation. While Islamabad was kept afloat, the leash was tight. It looks unlikely that the leash can loosen unless Islamabad responds to the deafening calls for a return to democracy. The agreements with the international financial institutions are yet to translate into an improved balance of payments. The flight of capital continues as does the downward spiral of the Pakistani rupee. Foreign exchange reserves cover a fortnight of imports despite unconventional means to prop them.
The Generals promised to strengthen the institutions and restructure public enterprises. More than half way down their tenure, none of the institutions showed improvement. The induction of army officers in the police, education system, civil service and tax administration pleased the army officers, but demoralised the civil servants. The much touted privatisation program ran into controversies and allegations of corruption. Not a single entity is yet privatised despite potential Fortune Five Hundred companies in the telecommunication and gas sector going for peanuts.
First, the people lost their Constitution, then the judges lost their oaths and now the budget has taken away their right to hope. There is little in the budget than a repetition of last year’s over optimistic revenue figures and understated expenditures. A severe water shortage is threatening parts of the country with famine. The budget addresses the issue by declaring certain water projects. Yet, with ongoing projects starved for cash, its improbable that priorities can be changed drastically. Nor are we told where the finance is to come from for such projects. One can conclude that this is a public relations ploy.
Textile might get a breather because of the World Trade Organisation agreement where reduction in duties is envisaged. However, it is unlikely to boost production in a meaningful way. Agriculture, the mainstay of the Pakistani economy, failed to find mention. From a growth rate of over seven percent under democracy, it is now sliding towards a negative growth rate. Government employees were thrilled to learn about a 50 percent increase in wages. When they go to collect their pay checks, they will find this another public relations exercise. All past ad hoc relief over four years will be subtracted bringing the raise down by three-fourths.
Last year, the Generals involved the army in a massive survey and registration exercise promising to raise revenues. That exercise failed as revenues remained low. The crucial tax reforms promised last year are yet to be promulgated. That report was to be released to the public last December. Six months later, the public is still waiting. Then there is the claim of fiscal adjustment. The Generals targeted a budget deficit of 4.6 percent of GDP for the current fiscal year. The revised figures in the budget, indicate the actual deficit is 5.3 percent of GDP, 0.7 percent higher than the target deficit. That means a higher deficit next year too than announced. Market response to the budget was one of apathy and disappointment.
The economy is in shambles, the country on the verge of slipping into an abyss. Low growth, low revenue, low investment are adversely affecting Pakistan’s standing in the international community while rapidly increasing poverty levels at home. Yet, as Pakistan’s experiment with democracy showed in 1996, Pakistan can emerge from its low growth-high debt trap. But it seems unlikely that the Generals are in any mood to give up derailing democracy. At least until the plummeting economy bites into the army.