By Shahid Javed Burki
Pakistan's economy has never been fully free of crises. But those that must be dealt with at this time are both deeper and wider in scope. They have touched all the features of the economic landscape.
What makes the situation worse is the absence of political will on the part of those who have governed since the return of partial democracy to the country in early 2008. The economy is in a bad shape largely because the country is poorly governed.
One can never be fully sure of statistics put out by the government in Pakistan. The country has invested little in improving the statistical base for managing the economy. With that as the caveat some of the numbers provided by Islamabad or developed by independent researchers are revealing and don't paint a pretty picture. In 2011, Pakistan's GDP increased by 2.4%.
5 mn Became Poor
This came on top of the slow increases in the three previous years. This made the 2008-11 the longest downturn in Pakistan's torrid economic history. At that rate, income per head of the population increased by only 0.4%. Given the sharp deterioration in income and wealth distribution, a good part of the increase was captured by the well-to-do, leaving the poor poorer.
Some one-third of the population is absolutely poor. With the low rate of GDP growth, the pool of poverty is expanding at the rate of 10% a year. In 2011, Pakistan added 5 to 6 million people to those who are living in abject poverty.
What should be especially worrying for the political establishment is the way the poor and the additions to the poverty pool are distributed across the country. Since there was a marked improvement in the terms of trade for the agricultural sector, the poor in the countryside have done better than those in the urban areas, particularly in the large cities. The sharp increase in urban poverty has added to the turbulence in the country's major urban centres. Karachi in 2011 was one of the world's most violent megacities.
Poor management of the economy showed up in a number of areas. The government is spending much more than what it is able to collect by way of taxes. In 2011, the tax-to-GDP ratio dropped to 8.6%, the lowest among all large developing countries. But this decline was not matched by reduction in all overall government expenditures. Islamabad became more profligate; spending huge amounts on non-development activities.
Spending on Whom?
The share of public sector development expenditure declined to a bit more than 2%, the lowest in history. In real terms, expenditure per capita on such basic services as primary education and health care declined to the point where only a quarter of the population was reached by the public sector.
The other area of concern is external finance. Having pursued an import substitution strategy of economic growth for decades, Pakistan never made a serious effort to develop its export industry. Exports remain focused on cotton-based products. Much of the government's energy has been spent on increasing market shares for textiles in Europe and the United States. There it has run into competition from other poor countries.
Some of these nations are designated as "less developed countries" and, therefore, have preferential access to the markets of rich nations. With exports not increasing as fast as the increase in international trade, Pakistan's share in world commerce has declined.
With a growing trade deficit, Pakistan is now faced with a difficult external accounts situation. After a significant improvement in balance of payments on account of large disbursements, about $8 billion in 2009 and 2010 from the International Monetary Fund (IMF), external deficits have moved into the danger zone. Pakistan has terminated its programme with the IMF.
Another Downturn
Would 2012 be different from 2011, an exceptionally difficult year? Looking at the developing situation, it appears that the downturn of the past four years will persist. The rate of increase in GDP will not be much more than 2% and another 6-7 million people will join the ranks of the poor. This year will also distract the policymakers from paying much attention to economics.
The government in Islamabad, led by the Pakistan People's Party, is embroiled in disputes with the powerful military and with senior levels of an increasingly assertive judiciary. Relations with the United States have frayed and economic aid that was promised to be maintained at a level of $1.5 billion a year over the five year period between 2009 and 2014 has been stopped. Washington is unhappy that the Pakistani military has not moved against the insurgents operating out of its tribal areas neighbouring Afghanistan.
Pakistan, in other words, is faced with a perfect storm, buffeted from many different sides. To steer the ship of state out of this turbulence will need the quality of leadership the country does not have. The year 2012 poses an existential threat to the Pakistani nation and the Pakistani state.
(The author is former Finance Minister, Pakistan)
Is Pakistan's economy heading for another downturn? - Page2 - The Economic Times
Pakistan's economy has never been fully free of crises. But those that must be dealt with at this time are both deeper and wider in scope. They have touched all the features of the economic landscape.
What makes the situation worse is the absence of political will on the part of those who have governed since the return of partial democracy to the country in early 2008. The economy is in a bad shape largely because the country is poorly governed.
One can never be fully sure of statistics put out by the government in Pakistan. The country has invested little in improving the statistical base for managing the economy. With that as the caveat some of the numbers provided by Islamabad or developed by independent researchers are revealing and don't paint a pretty picture. In 2011, Pakistan's GDP increased by 2.4%.
5 mn Became Poor
This came on top of the slow increases in the three previous years. This made the 2008-11 the longest downturn in Pakistan's torrid economic history. At that rate, income per head of the population increased by only 0.4%. Given the sharp deterioration in income and wealth distribution, a good part of the increase was captured by the well-to-do, leaving the poor poorer.
Some one-third of the population is absolutely poor. With the low rate of GDP growth, the pool of poverty is expanding at the rate of 10% a year. In 2011, Pakistan added 5 to 6 million people to those who are living in abject poverty.
What should be especially worrying for the political establishment is the way the poor and the additions to the poverty pool are distributed across the country. Since there was a marked improvement in the terms of trade for the agricultural sector, the poor in the countryside have done better than those in the urban areas, particularly in the large cities. The sharp increase in urban poverty has added to the turbulence in the country's major urban centres. Karachi in 2011 was one of the world's most violent megacities.
Poor management of the economy showed up in a number of areas. The government is spending much more than what it is able to collect by way of taxes. In 2011, the tax-to-GDP ratio dropped to 8.6%, the lowest among all large developing countries. But this decline was not matched by reduction in all overall government expenditures. Islamabad became more profligate; spending huge amounts on non-development activities.
Spending on Whom?
The share of public sector development expenditure declined to a bit more than 2%, the lowest in history. In real terms, expenditure per capita on such basic services as primary education and health care declined to the point where only a quarter of the population was reached by the public sector.
The other area of concern is external finance. Having pursued an import substitution strategy of economic growth for decades, Pakistan never made a serious effort to develop its export industry. Exports remain focused on cotton-based products. Much of the government's energy has been spent on increasing market shares for textiles in Europe and the United States. There it has run into competition from other poor countries.
Some of these nations are designated as "less developed countries" and, therefore, have preferential access to the markets of rich nations. With exports not increasing as fast as the increase in international trade, Pakistan's share in world commerce has declined.
With a growing trade deficit, Pakistan is now faced with a difficult external accounts situation. After a significant improvement in balance of payments on account of large disbursements, about $8 billion in 2009 and 2010 from the International Monetary Fund (IMF), external deficits have moved into the danger zone. Pakistan has terminated its programme with the IMF.
Another Downturn
Would 2012 be different from 2011, an exceptionally difficult year? Looking at the developing situation, it appears that the downturn of the past four years will persist. The rate of increase in GDP will not be much more than 2% and another 6-7 million people will join the ranks of the poor. This year will also distract the policymakers from paying much attention to economics.
The government in Islamabad, led by the Pakistan People's Party, is embroiled in disputes with the powerful military and with senior levels of an increasingly assertive judiciary. Relations with the United States have frayed and economic aid that was promised to be maintained at a level of $1.5 billion a year over the five year period between 2009 and 2014 has been stopped. Washington is unhappy that the Pakistani military has not moved against the insurgents operating out of its tribal areas neighbouring Afghanistan.
Pakistan, in other words, is faced with a perfect storm, buffeted from many different sides. To steer the ship of state out of this turbulence will need the quality of leadership the country does not have. The year 2012 poses an existential threat to the Pakistani nation and the Pakistani state.
(The author is former Finance Minister, Pakistan)
Is Pakistan's economy heading for another downturn? - Page2 - The Economic Times
