Political change in Pakistan and challenge of economic growth and development

By M. Sharif

In case one goes along with the popular perception that after departure of former president Pervez Musharraf from political scene, an era of all caring real democratic dispensation is about to commence, then that should be taken as naivety of the highest standard. The political unrest and serious economic situation are there to stay for sometime and may still get worse. The coalition government faces real big challenges in both the areas but nothing positive is being done to change the deteriorating situation.

It is ironic that focus of the government during past five months has remained on political issues and still continues to be in that direction with no respite in sight.

Is the government in a position to face economic challenges squarely with the objective of providing relief to the people by reducing inflation and improving supply side of the economy on one hand and by taking measures to boost economy on other hand? It seems, at least at the present that the government is becoming helpless in tackling these problems.

 Legacy of the past era

What exactly is the legacy of the past era that existed for around nine years in the chequered economic history of the country, of which former president was not and could not be the author and yet he is to be responsible for either leaving behind an enviable or a controversial legacy? The authors and actors of economic legacy were the former finance minister and later former PM Shaukat Aziz and his team that also included former governor of the SBP. They had full backing of multilateral institutions to give impetus to economic growth according to the demands of free market economy. It meant three things quite explicitly: privatisation of national assets to enable private sector to play its role in economic development and to roll back high public debt, reduced tariffs for liberal imports and least restricted trade regime and observing fiscal discipline that is reducing fiscal deficit to around 4.0 per cent of GDP and maintaining it to this level.

In order to get a dispassionate answer to above stated important question, one has to appreciate that on 12 October 1999, day one when the past era had started, state of the economy was in a ‘breakdown’ situation and nearly all economic indicators were at alarming levels, rolling fast downhill. The government had to work with the IMF to rehabilitate the economy and it succeeded within around three years. Macroeconomic indicators such as fiscal deficit, inflation, forex reserves had improved substantially and monetary policy also kept pace with fiscal policies to ensure that economy was put on sound footing.

The economic managers were fully convinced of a trickle-down effect to alleviate poverty to some extant and the economic benefits to reach down to poor to low income group. This did not happen to the extent it was envisaged. This was somewhat disturbing factor for managers of the national economy who were convinced of IMF dictates.

The economy registered an average growth of 7.0 per cent after 2004 but because of increase in inflation and cost of living there was quite a bit of scepticism among independent economists and analysts if poverty had reduced by 10.0 per cent within 2-3 years after 2004 as was claimed by the previous government.

The government took a well thought decision to pursue economic growth strategy based on consumption, expansion of services and financial sectors and utilising external financial sector that included remittances, financial assistance provided by the US and credit given by the multilateral institutions, to meet fiscal needs of the economy. Agriculture and industrial sectors were given least and second priority respectively with the result that job opportunities could not be created to the satisfaction of new work force entering into market. According to an analysis during past eight years agriculture sector grew by 2.8 per cent, industrial sector including SMEs grew by around 4.9 per cent, services sector grew by 6.2 per cent and finance and insurance sector registered the highest growth of 14.4 per cent.

The government also borrowed liberally from international financial market and earned substantial amount through privatisation to do better fiscal management. The economic development strategy pursued by the government initially worked well and macroeconomic indicators showed substantial improvement till the end of FY2006. Forex reserves, stocks, real estate, FDI and domestic investment went up and government was confident that economy would become self-reliant sooner than was being anticipated.

But, some decline of the economy had started creeping-in in 2007.

The economic decline accelerated when the country was pushed to political uncertainty in second quarter of 2007 primarily because of the judge’s issue where a small political minority was creating a great deal of fuss and the retired chief justice took to street with opposition politicians turning the whole thing into ‘politics’ rather than ‘issue’.

The economic decline during last fiscal year took turn for the worst because of increase in prices of oil, agriculture and other commercial commodities in international market and political uncertainty that converged on removing the president by the coalition government after the general elections held on 18 Feb 2008. By the end of last fiscal, deficit, inflation, public debt, trade and current account deficits touched new heights and forex reserves declined by around $6 billion from around $16 billion at the start of FY2007-08.

There were positive trends in the economy that helped improving revenue collection to more than Rs1.0 trillion, attracting investment in stocks, telecommunication, FDI, oil and gas exploration sectors and increase in remittances that have reached to $627 million mark during the first month of current fiscal year. Export target of $19.2 billion, a modest one, was met but real problem was indiscrete imports that did not relent substantially despite tight monetary policy. SBP asserts that its tight monetary policy curtailed imports and high trade deficit of $14.0 billion was primarily because of increase in oil prices and prices of other commodities.

Notwithstanding decline in the economy because of multiple domestic and international factors, it has the resilience to stage a come back provided the challenge of its rehabilitation is addressed with pro-people development strategy and industrial, agriculture sectors are given the right place in development strategy. The economy is also to be made least external financial sector-dependent contrary to its overwhelming/ full dependence on it.

A lot of investment, domestic as well as foreign, is needed to run the economy in accordance with the demands of free market economy. It is imperative to restructure development strategy with emphasis on those sectors of the economy that can give impetus to exports, industrial and commodity production. But, it is equally imperative that the government should be prompt to settle political issues because more than enough time has been spent on addressing them. Around five months of neglect of the economy and lack of direction simply shows that the coalition government is lacking the vision to handle economic issues.

To start with, it should reduce public expenditure. Unless the government and state learn to live within available means, no amount of effort can really compensate high public expenditure that ends up in high fiscal deficit and in accumulating high public debt as the situation is at present. Domestic public debt has crossed Rs3.0 trillion mark and foreign debt has increased to more than $45 billion. Debt serving at such a huge level is unmanageable in an economic environment that is plagued with political uncertainty that deters FDI and domestic investment.

Issues related to social sector also need greater attention. Privatisation of education and health care has resulted in crowding out middle class to avail these facilities. They are highly expensive and are instrumental to creating societies within a society with the result that social fabric of the society is faced with multiple problems. Educational and healthcare institutions in public sector need to be streamlined through effective monitoring, good governance and accountability of officials at the helm of affairs. There might be shortage of funds in managing social sector but real issues are related to delivering results in return of huge funds that have already been spent under public sector at the provincial and federal government levels.

Many distortions exist in the market to manipulate high prices through cartels, artificial scarcity, smuggling and charging high prices at will by the traders. Direct focus on them and prudent fiscal and monetary policies should a long way to bring economy back on track. The good news is that prices of oil and other commodities have started decreasing. It should help in reducing trade deficit and inflation.


Economic growth and development strategy pursued during past around nine years had its strengths as well as some weaknesses. Presently, the main concern of the government should be poverty, unemployment, inflation and public dissatisfaction which are at their peak. The coalition government is well advised to pull out itself from political morass in which it has landed itself because of inner conflict of interests and indecisiveness. The economy has more than enough resilience to bounce back if handled with care and according to the aspirations of the people.

Source: The News, 1/9/2008

Leave a Reply