It should be recalled that General Musharraf came to power promising a turn around of the Pakistan economy. Within days of taking charge, he convened a series of meetings to focus attention on economic policy and he laid the blame for Pakistans economic decline in the 1990s, especially vis-a-vis India, squarely on his two predecessors, Nawaz Sharif and Benazir Bhutto. Pakistan economy had performed better than India in the 1970s and 1980s, when military dictators ruled the country, and had declined precipitously during the tenure of corrupt politicians.
While Indias growth rate averages 5.5 per cent in the 1980s, Pakistans had averaged 6.5 per cent. However, during the 1990s while India sustained 5.8 per cent growth (for the decade as a whole), Pakistan slipped to 4.6 per cent. The General inherited a government facing a fiscal crisis, with tax collections said to be about 8 per cent of GDP and a fiscal deficit of 6.4 per cent of GDP, a huge external debt burden with official debt estimated at 120 per cent of GDP, and gross domestic investment down to less than 16 per cent of GDP. The low human development indicators of Pakistan, which had worsened during the 1990s increasing the distance between Pakistan and India, has also been widely reported. This negative statistical picture was made worse by the record of internal violence, social strife and Pakistans diabolical involvement in the internal affairs of two of its neighbours, Afghanistan and India.
While General Musharraf has tried to remain focussed on the economy, till September 2001 there was no evidence of any turn around and even western analysts had begun to turn sceptical about General Musharrafs ability to improve government finances and augment investment. The IMF had put Pakistan on a fiscal drip and tight leash. However, after September 11 and Pakistans volte face in turning the heat on jehadi terrorist groups, western bilateral aid and multilateral assistance began pouring in. More recently, there has been a lot of talking up of the economy, as exemplified by the statement of the director-general of the World Trade Organisation last week and of western and Japanese officials. According to a recent study of the Pakistan economy undertaken by the Washington DC based think tank, Center for Strategic and International Studies, Pakistan will receive external aid of $1.5 billion, equal to its forex reserves, in the current fiscal year. According to CSIS, estimates of the cost to Pakistan of the events of September 11 and the subsequent military campaign in Afghanistan range upto $2 billion, including the impact on remittances into Pakistan, the dramatic cut in exports occasioned partly by the slowdown in the industrialised countries and partly by the cancellation of orders by textile purchasers, and other directly measurable effects.
Given the heavy commitment the US is making in monetary and strategic terms in Pakistan, strategic policy analysts have suggested that the US government should maintain a close watch on how Pakistan spends the aid money and what economic policies it will pursue internally. The parallel with Boris Yeltsins Russia has been drawn wherein the US linked aid to specific policy changes. In Pakistan, the concerns have been magnified by the war against terrorism. The US will want to see Pakistan adhere to a clearly defined agenda of economic and political reform to secure every single tranche of assistance.
As the CSIS paper, Pakistans Future and US Policy Options, put it: A new form of strategic dialogue is needed, to provide the steel frame of conditionality without the patronising implications of the usual mechanisms. The model suggested follows what was tried with Egypt, wherein the US, perhaps together with donors, makes available a senior non-government adviser, (this) would have the added advantage of focusing the economic strategy dialogue strictly on the economic side. Since the political dialogue between Islamabad and Washington is likely to have more than its share of sensitive issues, this might be a more effective way of ensuring that the political part did not overwhelm the economic part of the dialogue.
Pakistans current problem is that while donor governments and agencies are all willing to help, private investors are not yet ready to risk their funds. The CSIS has come forward with suggestions to tackle this problem. It advises Pakistan to develop a stronger mechanism for political risk reinsurance by setting aside some of the aid money for this purpose. The premiums on existing investment insurance could fall to levels that would make the risk of a new investment in Pakistan more attractive to an understandably skittish business community.
Second, allow insurance, not just for individual investments, but also for investment funds. It says that the US Export Import Bank has developed a mechanism for providing institutional credits to local institutions that then lend to importers of US equipment. Eximbanks exposure is with the intermediary institution, which then takes on the burden of assessing individual projects that might be too much trouble for Eximbank to deal with individually. A comparable arrangement for investment insurance might open up the possibility of international financing for new investments, thus helping to close the resource gap. Finally, it suggests a review of the incentive structure of Pakistans tax regime.
What is interesting about the CSIS study is that a substantial part of the paper which is focussed on reviving the Pakistan economy is in fact devoted to a commentary on the political and social problems afflicting Pakistan. Law and order, legal reform, social empowerment and political democracy must form the foundation on which the economy is revived. Foreign aid and helpful talking up by supportive donors alone is not going to help.