On the eve of May 11
Those who take office now will have to make a number of public policy choices to pull country back from edge of abyss.
The writer is a former caretaker finance minister and served as vice-president at the World Bank
In the first couple of months of 2013, Pakistan was already facing a number of crises, when it went deeper in to it. This happened on the eve of the elections on May 11. Undoubtedly, those who will take office now, following the people’s verdict, will have to make a number of serious public policy choices to pull the country back from the edge of the abyss. Let us begin with the situation of external finance.
The pace at which the country was losing its foreign exchange reserves signalled the arrival of yet another balance of payments crisis, only a few months down the road. These had become a regular feature of the Pakistani economy. The International Monetary Fund (IMF) did not show a great desire to come to the country’s rescue as it had done in 2008. When approached informally, in December 2012, by the about-to-retire PPP-led government in Islamabad at the time, the IMF made it clear that it will be prepared to assist if there was clear political support from most segments of the political establishment for putting in place what it called “prior actions”. This was an understandable caution on the IMF’s part since, on numerous occasions before, Islamabad was unable to complete the programme it had signed with the institution.
Pakistan’s external resource situation became precarious not only because of the difficulties with the IMF, but because our relations with the US soured to an all time low in 2011; so much so that the flow of desperately needed economic development assistance slowed to a mere trickle. This came at a time of declining domestic resource generation, which further reduced the already low rate of investment. Given the resource situation, it did not seem possible that Pakistan could approach a rate of growth anywhere close to seven per cent per year. This, as the IMF had pointed out in its “Title IV” consultations, was needed to productively employ two million people, who were being added to the workforce every year. With relatively low GDP growth rate, there will be a palpable increase in the rate of unemployment, which will only add to the stresses on political and social structures.
In its annual report, issued later than usual, the State Bank of Pakistan wrote candidly about the difficult condition of the Pakistani economy for the financial year 2011-12. It was concerned in particular with the sharp increase in fiscal deficit, which it estimated at 8.5 per cent of GDP, significantly higher than the government was prepared to concede. Wrote the Bank: “This outcome is not surprising with the settlement of the accumulated circular debt, losses stemming from public sector enterprises, higher interest payments, and floods in the last years which boosted public works and transfer payments. However, the size of the fiscal deficit is not sustainable as it is contributing to inflation; squeezing out private investment; impacting the balance sheets of commercial banks; and pushing the economy into a debt trap.” The central bank did not see a significant improvement in the immediate future unless a programme of deep structural change was adopted. Further: “The target of GDP growth of 4.3 per cent for financial year 2013 appears optimistic: we think Pakistan will grow at about the same rate as the rate last year.”
But economics was not the only area where the country faced difficulties. Although some impressive moves were made in stirring the country towards the establishment of a new political order — a series of improvements in the structure of politics were introduced by the government — there were several places where tensions continued to increase. Activities by several groups of extremists took hundreds of innocent lives, adversely affecting the already stressed state of the economy. Sectarianism raised its ugly head as extremist groups carried out planned attacks on several Shia communities around the country. The small Christian minority was also targeted both as a community and as individuals. Terrorism and sectarianism affected investor confidence and contributed to capital flight.
All these negative developments notwithstanding, there were some positive moves. Most of these were in the political arena. An elected government, for the first time in the country’s history, completed its full five-year term in office. A series of constitutional amendments were passed that changed the relationship between the federal administration and provincial governments. Constitutional processes were set in place for making appointments to the judiciary at the senior levels, as well as to the election commission. These two institutions were supposed to balance the enormous authority that remained with the executive branch of the government, with checks that could be exercised on its use by the Supreme Court and the provincial high courts. These provisions were tested when caretaker administrations were installed in Islamabad and the provincial capitals to prepare the country for the elections of May 11. There is little doubt that the five-member election commission, led by a highly respected retired judge of the Supreme Court, will ensure free and fair elections. This will give legitimacy to those who will be placed in power. But once in power, will they be able to move the country in the direction in which it should go?
We can, perhaps, develop some understanding of the policy preferences of the main political parties from the detailed manifestos they have issued. Although most of them cover the same ground and make similar promises, there are many subtle differences in what they say about governance. Starting next week, I will look at the policy content of manifestos issued by the country’s largest parties.
Published in The Express Tribune, March 30th, 2013.
The pace at which the country was losing its foreign exchange reserves signalled the arrival of yet another balance of payments crisis, only a few months down the road. These had become a regular feature of the Pakistani economy. The International Monetary Fund (IMF) did not show a great desire to come to the country’s rescue as it had done in 2008. When approached informally, in December 2012, by the about-to-retire PPP-led government in Islamabad at the time, the IMF made it clear that it will be prepared to assist if there was clear political support from most segments of the political establishment for putting in place what it called “prior actions”. This was an understandable caution on the IMF’s part since, on numerous occasions before, Islamabad was unable to complete the programme it had signed with the institution.
Pakistan’s external resource situation became precarious not only because of the difficulties with the IMF, but because our relations with the US soured to an all time low in 2011; so much so that the flow of desperately needed economic development assistance slowed to a mere trickle. This came at a time of declining domestic resource generation, which further reduced the already low rate of investment. Given the resource situation, it did not seem possible that Pakistan could approach a rate of growth anywhere close to seven per cent per year. This, as the IMF had pointed out in its “Title IV” consultations, was needed to productively employ two million people, who were being added to the workforce every year. With relatively low GDP growth rate, there will be a palpable increase in the rate of unemployment, which will only add to the stresses on political and social structures.
In its annual report, issued later than usual, the State Bank of Pakistan wrote candidly about the difficult condition of the Pakistani economy for the financial year 2011-12. It was concerned in particular with the sharp increase in fiscal deficit, which it estimated at 8.5 per cent of GDP, significantly higher than the government was prepared to concede. Wrote the Bank: “This outcome is not surprising with the settlement of the accumulated circular debt, losses stemming from public sector enterprises, higher interest payments, and floods in the last years which boosted public works and transfer payments. However, the size of the fiscal deficit is not sustainable as it is contributing to inflation; squeezing out private investment; impacting the balance sheets of commercial banks; and pushing the economy into a debt trap.” The central bank did not see a significant improvement in the immediate future unless a programme of deep structural change was adopted. Further: “The target of GDP growth of 4.3 per cent for financial year 2013 appears optimistic: we think Pakistan will grow at about the same rate as the rate last year.”
But economics was not the only area where the country faced difficulties. Although some impressive moves were made in stirring the country towards the establishment of a new political order — a series of improvements in the structure of politics were introduced by the government — there were several places where tensions continued to increase. Activities by several groups of extremists took hundreds of innocent lives, adversely affecting the already stressed state of the economy. Sectarianism raised its ugly head as extremist groups carried out planned attacks on several Shia communities around the country. The small Christian minority was also targeted both as a community and as individuals. Terrorism and sectarianism affected investor confidence and contributed to capital flight.
All these negative developments notwithstanding, there were some positive moves. Most of these were in the political arena. An elected government, for the first time in the country’s history, completed its full five-year term in office. A series of constitutional amendments were passed that changed the relationship between the federal administration and provincial governments. Constitutional processes were set in place for making appointments to the judiciary at the senior levels, as well as to the election commission. These two institutions were supposed to balance the enormous authority that remained with the executive branch of the government, with checks that could be exercised on its use by the Supreme Court and the provincial high courts. These provisions were tested when caretaker administrations were installed in Islamabad and the provincial capitals to prepare the country for the elections of May 11. There is little doubt that the five-member election commission, led by a highly respected retired judge of the Supreme Court, will ensure free and fair elections. This will give legitimacy to those who will be placed in power. But once in power, will they be able to move the country in the direction in which it should go?
We can, perhaps, develop some understanding of the policy preferences of the main political parties from the detailed manifestos they have issued. Although most of them cover the same ground and make similar promises, there are many subtle differences in what they say about governance. Starting next week, I will look at the policy content of manifestos issued by the country’s largest parties.
Published in The Express Tribune, March 30th, 2013.