Pakistan in the grip of a major financial crisis

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: General Parvez Musharraf will not be able to come down to India to watch a cricket match anymore, having stepped down as the ruler of Pakistan recently. During the period of military regimes (32 years), Pakistan’s economy grew on an average, at 6.3% as compared to 4.7% under democratic rule.

Shahid Javed Burki, elaborating this in his book ‘Pakistan’s economy under Musharraf, 1999-2006,’ (Oxford University Press, 2007) contends that the military rulers were more successful in attracting large amounts of foreign capital, which poured in as the military was willing to work with the US in areas of strategic concern to the latter.

The author contends that it was the terrorist attacks on 9/11 that “returned the US to Pakistan”. Washington helped to reduce Pakistan’s external debt and provided both military and economic assistance as reward for this country’s role as a frontline state in its war against terrorism.

The resource flows induced no real and sustained progress, but instead fanned consumption and speculative bubbles in the stock and housing markets.

During the period 2002-06 Pakistan’s economy was truly buoyant with an average growth rate of around 7%. This high growth rate, however, needs to be underscored by the fact of economic downturn and low economic base during the first two years of Musharraf’s rule.

While it is true the military government of Musharraf had brought down the fiscal deficit as a percentage of GDP, by almost half the average level of the 1990s, the share of development and public investment in GDP had likewise been pruned. Thus, the burden of reduced public expenditure implied the axing of capital expenditure.

The other socio-economic indicators such as poverty, inequality and unemployment also deteriorated. In view of these trends, Burki had predicted that “economic theory has advanced enough to suggest that Pakistan in 2006 did not have the endogenous factors present in the economy to suggest that a high level of growth would be sustained well into the future”.

The State Bank of Pakistan, which released its third quarterly report in June 2008 covering the performance of the economy for the period July-March FY 2008, had brought down the projection of growth of Pakistan’s economy in the FY 2008 to 5.5-6.0%, well below the targeted 7.2%.

The report pointed out that the annual fiscal deficit, trade deficit, and current account deficit have been much higher than those of the previous fiscal year. The annual current account deficit as percent of GDP is projected to be at an all-time high of 7.8% as against a target of 5%.

The budgetary deficit would be 6-7% of GDP as against a target of 4%. Besides the weak performance of major crops-wheat and cotton may turn out substantially below the target. In large-scale manufacturing, growth declined by some 50% to 4.8% as compared to 9% during the same period in FY 07. Acute energy crisis, coupled with high international commodity prices and political unrest through most of the year proved harmful.

In particular, textiles and chemicals in the industrial sub-sector were most adversely affected. The impact of government borrowings has been particularly evident in FY 08, with such borrowings rising to a record of Rs 551 billion by May 2008 (compared to only Rs 45.7 billion in the corresponding period of fy 07), almost doubling the total outstanding stock of borrowings to Rs 941 billion.

A natural consequence of such heavy borrowings by the government has been the pressure on prices. The consumer price index increased by 17.2% year-on-year in April 2008, the highest level in a month since April 1995. In particular, CPI food inflation reached 25.5%.

Since the State Bank of Pakistan presented its third quarterly report, Pakistan’s macro-economic indicators have worsened even further during the last four-five months since the democratically-elected government has been functioning.

The trends in Pakistan’s external sector are particularly alarming. By August 13, 2008, the Pakistani Rupee depreciated by Rs 12.4 against the US dollar and crossed Rs 75, while foreign exchange reserves touched 9.66 billion dollars, barely sufficient to meet the country’s imports for two months.

Pakistan’s foreign currency reserves are falling fast and it forward liabilities are included, real reserves may go down to $3 billion, not adequate to cover even one month’s imports.

Pakistan’s gradual economic decline which started in 2007 and its present crisis proportion has alarmed the US and Britain as they feared that financial chaos and meltdown could allow terrorists such as Al Qaeda to deepen their roots in the country. In this context, the major powers have vowed to sustain economic support to Pakistan by forming a permanent forum, christened “Friends of Pakistan Group” on the margins of the United Nations General Assembly on September 26, 2008 with the mission to help Pakistan out of its economic crisis. It has been estimated that Pakistan would need around $10-15 billion to prevent its economy from collapsing.

The extent of their financial commitment will be revealed when the group meets in Abu Dhabi in early October. An early and firm commitment of a substantial financial package is what Pakistan desperately needs.