Can Pakistan’s economy afford political instability?

It's our collective responsibility not to get derailed from track,especially when elections are due in next 10 months

Back in the 1960s, Pakistan was one of the fastest growing economies in the developing world and it was destined to rise up the economic ladder. In 1965, GDP per capita of Pakistan was $116, whereas China’s and South Korea’s GDP per capita were only $98 and $109, respectively. Unfortunately, Pakistan as an economic nation could not materialise the promise it had. The countries which were lagging behind us in the 1960s have overtaken us a long ago. Today Pakistan’s GDP per capita is around $1,600, whereas, GDP per capita of China and South Korea are around $8,123 and $27,538, respectively. This staggering contrast of fortunes begs us to ask the following: what did we do wrong as a country?

Given the benefit of hindsight, there are two major mistakes that we made but were avoided by these countries. One, Pakistan got too much involved in regional and global geo-political games instead of prioritising economic development. Second, Pakistan did not have sustainable political stability. The biggest casualty of these mistakes was the economy of Pakistan. As a result, we could not become an economic nation. Just tune into any news channel and you will see it. We love to discuss only one thing ‘political games’. Economic development is the least favourite of all topics on the screens of news channels.

Vision 2025 precisely aims to undo this so that Pakistan can be transformed into an economic nation. Instead of geo-politics, Pakistan should become a player in geo-economics. And our domestic politics should revolve around economic and development issues rather than petty personal attacks on political opponents.

I am very pleased to note that the China-Pakistan Economic Corridor (CPEC) has rightly placed Pakistan into geo-economics of the region. But on the front of political stability, the ship is still not steady and continues to face one storm after another. In Pakistan’s history, not a single elected civilian prime minister has completed his/her full constitutional term, so far. This historical fact speaks volume about the level of political instability we have been encountering.

Political instability adversely affects economic growth. There is a plethora of empirical evidence which reports this relationship. Aisen and Veiga (2011) paper published by the IMF empirically showed that “an additional cabinet change (a new premier is named and/or 50 per cent of cabinet posts are occupied by new ministers) reduces the annual real GDP per capita growth rate by 2.39 percentage points.”

This massive negative impact on GDP growth is explained via reduction in total factor productivity. Moreover, political instability produces uncertain economic environment which generates higher risks and that translates into low investments. It is also observed that political instability generates higher inflation.

This is a matter of concern as Pakistan cannot afford another episode of political instability, especially when all macroeconomic indicators are showing positive trajectory.

I am personally a witness to huge economic losses due to political instability in Pakistan. Under the first government of Prime Minister Nawaz Sharif in 1990, Peshawar to Karachi motorway project was initiated. It would have been completed in a few years given the PM Sharif government was not toppled. Similarly, the Gwadar Port project was initiated in 1992 and in a decade it was expected to become fully functional. But again due to political instability (change of regimes) this project got delayed for decades.

Today, we are again trying to finish these projects but already the cost of completing these projects has increased at least three folds as compared to early 1990s. Similarly, the new Islamabad airport project was initiated in late 1980s but due to frequent regime changes, the project halted. The same is true for Lowari tunnel project and Kachhi canal project and list can go on and on. Today, all these projects cost much more to the exchequer vis-à-vis when they were first conceived. In other words, Pakistan would have been a different country if we would have avoided political saga of musical chairs in 1990s. The real victim of political instability is not individual X or Y, but it is Pakistan’s economy.

The PML-N, the PPP and other political parties have admitted and learned from their mistakes of the past and signed the Charter of Democracy. But some new entrants refuse to learn from the past and they continue to play on political games which produce political instability in the country.

In our more recent past, the political uncertainty created by the PTI’s dharna in 2014 negatively impacted the country’s financial markets. The signing of CPEC MoU was delayed as the Chinese premier could not visit Pakistan due to sit-ins. The rupee lost its value. For example, exchange rate of the US dollar to rupee was Rs98.82 on August 5^th, 2014 and by August 25^th it touched Rs103.19 — a depreciation of 4.4 per cent. As a result of currency depreciation, Pakistan’s import bill and foreign liabilities increased and the economy suffered a loss of Rs228 billion due to increase in external public debt. Similarly, economy experienced delayed inflows of $2.4 billion and could not meet its foreign exchange reserve target on time.

The Karachi stock exchange lost 2,000 points in only a few days due to political uncertainty created by dharna politics of the PTI at the time. Prior to the sit-ins, market capitalisation was at Rs7.2 trillion and after a few days of the dharna it went down to Rs6.7 trillion. Similarly, FDI declined from $114 million to $92 million from July 2014 to August 2014. This is the macro-level cost of political instability. At micro level, many businesses were affected due to the sit-in politics of the PTI. Did our media and judiciary hold the PTI accountable for all these economic losses to Pakistan?

Currently, in the so-called Panamagate the whole nation is made hostage on a matter of private transactions of the family businesses of PM Sharif. Consequently, the Pakistan Stock Exchange which saw a record high by crossing 54,000 points lost more than 10,000 points in the last few weeks. This is a loss of billions of rupees to the economy. Not to mention, investor confidence gets eroded due to this political uncertainty.

The PML-N government and all state institutions worked day and night to stabilise Pakistan’s economy. It is our collective responsibility not to get derailed from our track, especially when elections are due in the next 10 months.

It is tantamount to state the obvious but yet it looks like some elements don’t seem to get this basic fact. A seed will not germinate no matter how good is the quality of the seed if you keep ploughing the soil. On the contrary, if you sow an average seed but provide stability to the soil, it will yield an output. Stability and continuity of economic policies are prerequisite for progress.

The choice is very clear for us as a country. Do we want to continue the mistakes of our past by perpetuating the game of political musical chairs that can only lead us to the path of self-destruction? Or we want to chart the path of political stability, peace and new opportunities that would help us climb up the economic ladder.

At the end of the day I am an optimist — Ho Chi Minh’s following words instill positivity even amidst political uncertainty: “the storm is a good opportunity for the pine and cypress to show their strength and stability.”

Published in The Express Tribune, July 27^th, 2017.

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