Pakistan on the path to slow economic recovery

Much has been written about the economy during PPP government’s five years in office. Some of that needs repeating.

By the time this appears in print, the government headed by Prime Minister Nawaz Sharif would have been in office for a bit more than a hundred days. The first hundred days for a new administration have become a traditional landmark for assessing its performance. It is, therefore, fair to ask the question: How it has performed? There are several ways of providing answers. We could measure its performance by comparing it with that of the administration it replaced. We could judge it by the promises it made in the manifesto it used to contest the election that handed it the reins of power. We could assess its days in office by projecting into the future, using the various policies it has adopted since it took office.

Some analysts have already concluded that Nawaz Sharif and his administration have fallen short of what was expected of them. That would be an unfair assessment since those who are of that view should examine what the current government inherited from the one that preceded it. Before turning to economics, it will be appropriate to say a few words about the development of the political order in the period after 2008, when a free and fair election brought two parties to power that had both opposed rule by the military. The PPP and PML-N’s view of the military’s role in politics was enshrined in the Charter of Democracy signed by Benazir Bhutto and Mian Nawaz Sharif in London, in 2006.

That document promised returning the country to parliamentary democracy and creating the conditions that will keep the military out of politics. When the PPP took command of the government in Islamabad, it did not fulfil all the promises it had made in the Charter. For instance, the president continued to exercise the powers that were not in his domain after the passage of the Eighteenth Amendment to the Constitution. He was also slow in restoring, to their respective benches, the dozens of senior judges President Pervez Musharraf had removed on purely political grounds. That said, President Zardari did sign the amendment into law, granted full autonomy to the judiciary once the dismissed judges were back in their courts and created an Election Commission that acted independently of the government’s executive branch. It would be fair to claim that with all the political turmoil in the Muslim world, only two countries have made progress in moving towards the establishment of viable and durable political order. Economists now recognise that there is close interface between their discipline and politics. In fact, it is only when a workable political system has been established that sustained and inclusive economic development becomes possible. That brings us to the subject of the economic performance of the Sharif government, in the few months it has been in office. But for that we must begin with what the government inherited.

Much has been written about the performance of the economy during the PPP-led government’s five years in office. Some of that needs repeating. The Zardari government was utterly indifferent towards developing the economy to promote common good, to sustain or create institutions of government that would serve the people, to manage the large number of enterprises that controlled the state, to manage with responsibility government finance and to develop the country’s relations with the world outside to help the national economy. It will take time and effort before the extent of the damage that was done to the economy is fully known. But some indications are there to develop some understanding of the depth to which the economy fell during the PPP’s five years in office.

Pakistan’s economic performance touched a number of new lows during this five-year period. At this time, the economy is in deep recession. For the last six years, the rate of GDP growth has averaged three per cent, not high enough to provide productive employment to the workforce that is growing at more than three per cent a year. The International Monetary Fund has estimated that the economy must expand by at least seven per cent a year to fully absorb the new entrants into the workforce. The tax-to-GDP ratio has fallen to a record low; at less than nine per cent of GDP. It is one of the lowest among emerging nations. With such a low rate the government is unable to invest in creating the needed infrastructure and improving the state of human development. Most worrying is the sharp decline in both public and private investment. At about 11 per cent of GDP and with the incremental capital ratio of about four — the proportion of GDP that needs to be invested to produce a one percentage point increase in national output — Pakistan can’t have a GDP increase by more than 2.5 to three per cent. Also troubling is the continuous decline in the country’s share in international trade. In other words Pakistan faces a grim economic future unless the many structural problems the country faces are addressed with some seriousness by the makers of public policy. It is from this perspective that the performance of the Sharif government needs to be viewed.

The manifesto issued by the PML-N for the electoral contest of May 2013, promised to set the economy on a growth trajectory that would match that of the more rapidly growing Asian economies. It set its sight on a rate of growth of six to seven per cent, to be reached by the year 2018, when its term in office will be over. To achieve that target the party promised to deal with both the short-term problems faced by the economy and also to address the long-enduring structural problems. Both were well known to the students of the Pakistani economy, including some of the people who were assigned senior positions in the new Sharif Administration. Energy shortages, of both electricity and natural gas, were taking a heavy toll on the economy. Continual activity by the forces of extremism had foreign capital leave the country. Persistent low rates of domestic savings had increased the country’s dependence on external capital. The government turned to the International Monetary Fund and quickly concluded an agreement that would provide $6.5 billion of capital along with another $5.5 billion to be received from other donors. The total amount of $12 billion would be disbursed over a three-year period, provided Islamabad adopted a whole host of issues that would help not only to pull the country out of the recession it was in but will also make it possible for the country to climb on a higher growth trajectory. For the long-term, the government requisitioned a development programme to cover all sectors of the economy and also, the relationship between the public and the private sector. This would be prepared by the Planning Commission in the form of what it called ‘Vision 2030’.

Published in The Express Tribune, September 23^rd,  2013.

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