What Ails Pakistan’s Economy – Way forward

By Asif Haroon Raja
Pakistan economy has most of the time been at the brink of collapse and was repeatedly bailed out by world financial institutions. Whenever the economy showed signs of progress and climbed up to reach the stage of take-off, it crashed mysteriously. Our economic managers had to make a fresh start from a scratch. They have been playing snake and ladder game and never bothered to carry out an appraisal as to who pulls the ladder from beneath their feet.
One of the major reason why Pakistan economy didn’t progress in accordance with available resources and potential was the security threats posed by India which didn’t reconcile to the existence of Pakistan. Afghanistan making false claims on Pashtun inhabited Pak territories was another irritant. Both were tilted towards the Soviet bloc. Consequently Pakistan abandoned its nonaligned policy and fell into the lap of USA. Thereon, it accorded higher priority to defence over economic development.
Field Marshal Ayub Khan focused on boosting agriculture, industry defence capacity and achieved pleasing results. However, the 1965 war followed by politics of agitation pursued by ZA Bhutto and Sheikh Mujibur Rehman caused a set back to his second 5-year development program. Bhutto’s nationalization policy washed away the gains of Ayub Khan. Gen Ziaul Haq once again lifted the GDP to 7%, but the economy nosedived in the 1990s due to the US sanctions, after effects of Afghan war which gave birth to drug and Kalashnikov cultures, extremism and sectarianism. The third democratic era made Pakistan dependent upon IMF and World Bank and it started piling up heavy external debt. This period also saw extreme political polarization, weak governance, rise in corrupt practices and moral degradation. Black money which had surfaced during Junejo regime (1985 to mid-1988) gained strength and became a parallel economy. Mafias influenced the socio-economic life of Pakistan.
Gen Musharraf revived the economy but his achievements were reversed by the lawyers’ movement and his failure to build Kalabagh dam. The economy being consumer driven crashed when Zardari led PPP regime took over power in 2008. Thereon it was a downhill journey. Apart from worst energy crisis, Pakistan’s economy touched the lowest ebb. Some positives took place during PML-N regime in the form of stabilization of macro-economic indicators, overcoming energy crisis and defeating rural and urban terrorism. However the cultures of corruption, nepotism and borrowings continued. By the time the reins of power came into the hands of PTI, the debt burden had crossed $ 94 billion and the overall economic situation was bleak.
Current Situation
Pakistan’s economic situation at present is worrying. Almost all financial indicators are on the down slide. GDP is at 2.3%, which is lowest in last ten years. Inflation is above 13% which is also reaching 10-year high. Investment rate is lowest in the world. It invests only 15% of its output which has led to diminished productivity. Pakistan has become a nation of consumers with limited capacity to produce and innovate. Food inflation has reached record breaking 25%, and there is price hike. External debt has climbed to $110 billion, which eats up 30% of the budget each year. Loans are taken to repay past borrowings and for debt servicing. Monster of circular debt haunt the policy makers. Public sector entities are in dismal state. There are plans to privatize six of them. The incumbent regime including the military is running on borrowed money.
The economic position has become so dismal and debt burden is so heavy that the incumbent government has so far been unable to fulfil any of its promises. The economy is in the tight grip of IMF and the sword of FATF hangs over the head of Pakistan. Whatever little improvements made in the macro-economic have brought no relief to the people.
Life has been made more difficult for the poor due to ever rising prices of daily commodities. Governance is as weak as before if not worse, corruption is rampant, feudalism and dishonest practices by the elites are going on as heretofore, rulers are involved in nepotism and favoritism, gap between rich and poor is as wide as before, rather more people have fallen below poverty line, unemployment has increased, homeless are still without a shelter.
Expectations of making Pakistan corruption-free and an Islamic welfare state have faded and given way to hopelessness and despair. Having seen the performance for over 17 months patiently, the people are finding no change in the so-called Naya Pakistan. PTI’s heavy dependence upon shady allies has spoilt the pudding. Not only the finance team is weak, so far no viable road map has been made to take the crumbling economy out of the woods. Focus is on returning international loans, on debt servicing and in saving the country from getting blacklisted by FATF.
So far, it is a sorry tale of broken promises, U-turns, soaring inflation, price spiral and weak governance. With every passing day, the burden of debt, fiscal deficit, circular debt and inflation are increasing.
Geo-strategic Environment
Hopes of better 2020 are dampening due to obtaining tense geo-strategic environment surrounding Pakistan. In the East, India after integrating Indian Occupied Kashmir is now threatening to annex Azad Kashmir within 10 days and has kept the Line of Control explosive. Introduction of highly controversial Citizenship law by Modi regime has made the lives of Indian Muslims insecure. The western front is hostile due to cross border terrorism sponsored by RAW-NDS. The southern backyard has also become stressed due to military standoff between USA and Iran. Above all, coronavirus in China is likely to impact Pakistan’s manufacturing industry since China’s raw material import prices surged overnight. Import/export with China, and CPEC in which thousands of Chinese are working and private companies are engaged would also get affected.
Challenges of Pakistan’s Economy
The government spends more than it earns through exports, revenues and remittances. Consequently, fiscal deficit keep increasing.
Despite the economic crunch, wastefulness continue unabated.
Saving rate is only 25%, which is less than most regional countries.
We import more and export less. This imbalance intensified after 2008. In 2019, Pakistan imported over two times as much as it exported.
Our moneyed class is infatuated with foreign goods and have distaste for local products. Instead of investing in real business, they buy urban land and sit on it.
After 1990, we became dependent upon IMF, World Bank and State Bank which increased inflation and tax burden on the poor.
Debt servicing consume 7-8% of GDP and about 40% of government expenditure.
Great majority of well-heeled are tax evaders. Only 1% pay taxes and our tax to GDP ratio is among lowest in the world. Tax burden fall upon the poor, one third of which live below poverty line.
Pakistan has a very small share in global trade since it has few markets. We are now exploring Africa.
We have a narrow export base, supposed to be the pillar of growth.
Illiteracy and lack of technical skills have a lot to do with depressed social indicators and deprivations of smaller provinces.
Pakistan suffer from water shortages since we ignored developing our hydro power and introduced expensive thermal power to meet the shortfalls in electric power. After Tarbela dam in 1974, no major dam was built.
Water scarcity has become the biggest threat to agriculture which accounts for 19.5% of GDP.
After the untimely demise of Quaid-e-Azam, we suffer from leadership crisis, weak governance and weak implementation.
Our Anglo Saxon laws and Westminster democracy are pro rich and not in sync with the aspirations of the people.
Nepotism, corruption, money laundering, smuggling and hoarding are rampant.
These together with lack of justice, rule of law, political polarization, divisions in society, hydra-headed Mafias and parallel black economy are a drag on economy.
The parasites enrich themselves but make the national kitty impoverished.
Lack of continuity and security, uncertainty and unpredictability have given rise to sense of insecurity, which in turn discourages trade, business and investments.
Population which has grown from 30 million in 1947 to over 22 crore is another factor which comes in the way of provision of social services.
Irrespective of 1971 debacle and nationalization policy which devastated the industrial growth, Pak economy was ahead of other economies in the region.
In 1960s, South Korea emulated Pakistan in its 5-year planning. Till mid-1990s, India was way behind Pakistan. In 1969, Pakistan exports of manufactured goods were higher than combined exports of Indonesia, Malaysia, Philippines and Thailand. Pak economy plunged in the 1990s and after a brief recovery once again dunked.
Meddlesome roles of India, Afghanistan and USA in internal affairs of Pakistan have kept the country politically destabilized and economically weak.
Essential Parameters of Healthy Economy
To maintain robust economy, a country needs to have secured frontiers, political stability, stable law & order and security of life & properties.
Pakistan military defended the borders and provided security against foreign backed terrorism at a very heavy cost. However, successive governments failed to doctor multiple social diseases through good governance and financial management.
How to Improve Economy
There are no short cuts. First, each one in Pakistan have to change their mindset from negative to positive. We should holistically see what Pakistan has achieved in last 72 years.
Creation of Pakistan was a miracle and its existence despite heavy odds is another miracle. We should adopt positive mentality by saying “we can do irrespective of adversities”.
Instead of focusing only on tangibles, we should not neglect our human capital. ‘It is the man behind the gun who matters and not the gun itself’.
To enhance our national output, we should boost our agriculture, technical skills and use technology to reduce poverty.
Japan, Europe and USA are beset with aging population. We are fortunate to have over 60% of population young, which if imparted higher education and specialized skills, and utilized properly, can turn around our economy.
Three tiered education system to be replaced with single unified system to provide equal social growth opportunities to all, and thus achieve national integration.
Tax culture should be built to broaden tax base and to improve revenue generation.
Merit based system must be evolved.
Simplicity and austerity should replace pomposity.
Sick state-owned enterprises to be made profitable.
Critical reforms in education, politics, bureaucracy, judiciary, police, NAB and FBR to be undertaken without which no headway can be made.
To rid the society of social diseases, there is a need for moral re-armament.
All out efforts must be made to reinvigorate agriculture, and the CPEC, which is economic lifeline of Pakistan.
Until and unless we free ourselves from magic spell of USA, which will never let Pakistan become economically strong, replace alien systems with systems matching our Islamic heritage, and charter independent foreign and economic policies, hope for revival of economy and making Pakistan self-reliant will remain a pipedream.
Point to Ponder
In the 1980s, Pakistan was richer than India, China, and Bangladesh in per capita income by 15%, 38% and 46% respectively. Indian economy lagged behind Pakistan till mid-1990s. Today we lag bend all the three. Pakistan economy crashed 13 times and each time it was bailed out by the IMF. There seem to be something drastically wrong in our systems, in our attitudes, ethics and morals.
We need to ponder why all the South Asian and Far Eastern countries that were economically much behind Pakistan in the past and viewed Pakistan as a role model of economic growth have surged forward and achieved economic prosperity.
Bangladesh was regarded as a liability and a load on our economy when it was part of Pakistan. Today, all its economic indicators are in positive. It has excelled in garment production and their exports are higher than India and Pakistan. This feat has been achieved despite being non-cotton growing country. It has also made a quantum jump in green production, population explosion has been controlled, and judiciary reformed. These big changes have come about during the rule of Hasina Wajid who is in power since 2010. Two factors have helped her in achieving tangle results; continuity of rule thereby ensuring completion of projects in hand, and dealing with opposition parties and religious extremism with an iron hand.
Our problem is, we make high sounding plans but are very weak in implementation of plans and give in to political expediencies.
The writer is retired Brig Gen, war veteran, defence & security analyst, columnist, author of five books, Chairman Thinkers Forum Pakistan, Director Measakh Research Center, Member CWC & Think Tank PESS. asifharoonraja@gmail com