History behind the economic problems faced by Pakistan (1)

There is almost a consensus that the major economic challenges facing

Pakistan are rising poverty and unemployment, heavy external and domestic

indebtedness, high fiscal deficit and low investment. The debate has so therefore

focussed on the means to face these challenges and particularly on the ways to bring

about economic recovery.

The current debate about economic recovery in Pakistan has surprisingly

boiled down to a number of simplified observations. A group of commentators place

the blame squarely at the doors of the IMF and World Bank and this Government’s

sense of docility, submissiveness and helplessness against this powerful instrument

of Western (read: American) domination. Another group of ever dissatisfied and

perpetually critical writers who find every Government to be inept, attribute

malafide motives and lack of decisiveness in taking bold measures. A third group of

well-intentioned and economically literate observers, provide partial solutions

which make perfect sense if each is taken in isolation but can break the back of the

proverbial camel if they are lumped together. I would submit that there are no easy

solutions and the decisions made in choosing any one of the possible options involve

trade offs and choices, which in turn will create a different set of winners and losers.

I will like to focus today on a question which is uppermost on every body’s

mind: why have not things improved during the last 15 months according to First the decade of 1990s was a lost decade as far as Pakistan’s economic

development was concerned. Frequent political changes and lack of continuity in

policies, poor governance and the last May 1998 developments had together created

very difficult economic conditions in the country by October, 1999. Per Capita

economic growth rates had slided to 1 – 1.5 percent Investment rates had declined

from 20 to 15 percent of GDP, poverty had doubled from 17 to 34 percent, external

debt had doubled from $ 18 billion to $ 36 billion, debt servicing had risen to a level

where it claimed 56 percent of revenues, fiscal deficits were averaging about 6

percent of GDP, Development expenditures, particularly on education and health,

were curtailed by one half from 6 percent of GDP to 3 percent. In 1996 Pakistan

was declared the second most corrupt nation in the world. The challenge of

averting this slide and move the economy out of such critical conditions therefore

was extremely daunting. The task was made even more difficult by the initial

reaction of the international community to the change in the government and the

conflicting demands of various segments of population. Accountability, whereby all

those found guilty of corruption and malpractices in the past, was one of the major

demands articulated by the public at large and the media. But this created a

tension with the objective of economic revival as the businessmen and bankers felt

threatened by such moves.

The lingering dispute with Hubco had during the preceding three years,

damaged the investor friendly image of Pakistan. Foreign currency deposits of nonresident Pakistanis had been frozen in May, 1998 and had antagoni

popular expectations? important class of investor. Thus investor sentiment did not take a turn for better

and domestic and foreign investment which are key for economic revival did not

flow in to the levels we had expected.

Second, we have to decide as to whose expectations we are talking about.

Pakistan’s credibility was quite low both externally and particularly among the

International Financial Institutions and also domestically with the general public.

This Government had to make a policy decision whether it will seek assistance from

the International Financial Institutions or not. Until June 2000, the country was

able to manage its finances without any recourse to International Financial

Institutions. We serviced our debt and external obligations on time. We liberalized

our foreign exchange regime and restored the conditions prevailing before May

1998 without receiving any assistance from abroad. The exchange rate remained

stable without any major volatility. Interest rates were lowered by 4 percentage

points. Despite this, domestic investors remained shy, private sector demand for

credit was insignificant and the overall pace of economic activity did not pick up to

make any dent in unemployment which had risen during the last three to four years.

to be continued .