A dysfunctional economy
27 December, 2011
By Dr Ashfaque H Khan
Since its inception, Pakistan's economy has never experienced such dire straits as the one it finds itself in today. Four years of misgovernance and a weak and frivolous economic team have transformed a robust economy into a dysfunctional one. Pakistan's economic fundamentals have been weakened to the core. Physical infrastructure has collapsed, the quality of human capital is on the decline, and most importantly, governance, especially economic governance, has been non-existent over the last four years.
The dysfunctional economy has not only brought pain and miseries for the common man but it has also threatened the country's national security. Economic managers appear least bothered and are in fact misguiding the country's political leadership by hiding the truth. Is this a service to the nation or to oneself?
Where do we stand today in terms of economic health? The SBP's Annual Report has done a wonderful job by putting together the growth performance of the regional countries from 2005-11. According to the SBP, Pakistan's economy grew at an average rate of 7.2 percent during 2005-2007. Its growth performance was only slower than China (12.7 percent) and India (9.5 percent) but it was better than Sri Lanka (6.9 percent) and Bangladesh (6.4 percent).
It has generally been argued that the food and fuel price hike of 2008 and the collapse of the world economy adversely affected Pakistan's economy during the post-2008. The economies of Sri Lanka, India, Bangladesh and China also faced the same external shocks and yet performed far better than Pakistan. For example, Bangladesh's economy grew at an average rate of 6.2 percent, Sri Lanka grew by 6.1 percent and India and China registered a growth of 7.7 percent and 9.7 percent, respectively as against an average growth of 2.9 percent in Pakistan.
Why was Pakistan's growth performance not in the same league as its regional partners? The answer is simple. While economy was at the fore-front of policymaking in other countries of the region, it was never on the radar of our government. Stability and quality of the economic team in the region were responsible for their superior performance. The government in Pakistan lacked the capacity to effectively formulate and implement sound economic policies because of the weak economic team.
Investment at 13.4 percent of the GDP is the lowest since 1973-74 (37 years), writes the SBP. While the economy is not on the radar, the business environment is deteriorating, power shortages are aggravating, the government is not talking to the private sector, inappropriate monetary policies are being pursued and most importantly, a large budget deficit continues to persist with large chunks being financed by the banking system including the SBP. Hence, the sharp decline in investment was a natural outcome causing growth to decelerate, and unemployment and poverty to rise.
Another gift from the four years of economic misgovernance has been the persistence of double-digit inflation. Never in the country's history has inflation in double digits persisted for 50 months in a row. High inflation for such a long period of time has badly affected the poor and fixed income groups. Criminal increase in support price of wheat, excessive borrowing from the SBP to finance budget deficit, sharp depreciation of exchange rate, supply disruption due to natural disaster and poor governance are responsible for the persistence of high inflation in Pakistan.
Inflation of late has slowed a bit, not because of the monetary policy but because of the reduction in weight of food items (from 40.3 percent to 34 percent) in the CPI basket.
Another hallmark performance of the economy over the last four years has been the persistence of large fiscal deficit, averaging 6.5 percent GDP. Persistence of a large deficit is reflective of the inability of the government to mobilise more resources and, at the same time, reduce or rationalise expenditure. The SBP has rightly blamed 'the government's inability to implement fiscal reforms, and in some cases, not even being able to secure the required legislation".
The SBP further castigates the government by stating that "the implementation of the reformed general sales tax; the broadening of the income tax net to include agriculture and services; and the restructuring of loss-making public sector enterprises – were either delayed or not implemented". These issues have already been highlighted in many of my columns, and the economic team of the government has probably thought that perhaps I was the only one criticising government policies. The SBP has now stated the same facts. Hence, my position has been justified.
Persistence of large budget deficit along with sharp depreciation of the exchange rate has caused public debt to reach an unsustainable level with attendant rise in interest payment. Increase in interest payment has constrained the government to use fiscal policy to revive economic growth.
Pakistan's balance of payments remained in a comfortable zone in 2010-11 owing to a three-fold increase in cotton prices in the international markets. With cotton prices returning to normal, Pakistan's current account deficit has already widened to $2.1 billion in the first five months of the fiscal year and is likely to reach $6.0 billion (2.6 percent of the GDP) by year-end. The gap is not large but the financing of this gap would be difficult given the developments on political and economic fronts within and outside the country. Pakistan will face difficulties in the current fiscal year but more so in 2012-13 and 2013-14 when it has to repay $3.094 billion and $3.439 billion, respectively to the IMF alone.
Four years of misgovernance has brought the economy to a standstill. The Railways, PIA, Pakistan Steel and OGDC have been destroyed, and there are widespread shortages of gas and electricity badly affecting industrial and commercial activities in the country. In short, Pakistan's economy has become a dysfunctional economy with a severe threat to growth and development as well as to the national security.