61-Years of Pakistan: Economic Triumph or Failure

61-Years of Pakistan: Economic Triumph or Failure

Pakistanhas made commendable progress on economic front over the last 60 years. From an unviable economy at the time of partition to one of the fastest-growing economies in the Asian region today is certainly a great achievement. The success of the last 60 years of economic development must be viewed in the background of the initial conditions thatPakistaninherited at the time of independence in 1947. The sudden influx of refugees fromIndiacreated insurmountable problems for the new state ofPakistanwhich had practically no resources to meet this situation. It was only throughPakistanleadership’s ingenuity and steadfastness of the people ofPakistanthat she came out triumphant and successfully established itself as an economic force to reckon with. However, the history of economic policy, its implementation and its resultant outcome inPakistanover the past six decades has, at best, remained patchy with as many highs as lows. To facilitate this economic journey for readers, the growth experience of the economy has been divided into decades and for period after 2000 into years.

Real Sector

IslamicRepublicofPakistanstarted its journey in 1947 with barely enough to cover the costs of running a country without relying heavily on foreign assistance. At the time of independence, the average living standard inPakistan, as measured by the per capita income, was only $70 per annum which has during the last 60 years or so risen to an astonishing level of $1085 per annum – an increase of more than $1000. Similarly GDP rate except in the 90’s has shown a resilient spirit and has closed on 5.8% in 2007-08 after four years of 7% plus growth rate.

Agriculture

Historically agriculture remains the largest sector of the economy and has always been the mainstay ofPakistan’s economy. Nearly twenty percent of total output (GDP) and 43 percent of total employment is generated in agriculture. It also contributes substantially toPakistan’s exports. 43 percent of country’s work force is employed in agriculture, but 65.9 percent of country’s population living in rural areas is directly or indirectly linked with agriculture for their livelihood. Whatever happens to agriculture is bound to affect not only country’s growth performance, but a large segment of the country’s population as well. Therefore, higher the growth figures of this sector the better it is for the general populace of the country.Pakistanhas come a long, albeit hard, way since 1947. The share of agriculture in GDP was 60% in 1947. Today, it contributes 20.9% and 72% contribution comes from industry and services. Production of wheat was 4.0 million tons in 1947. TodayPakistanis producing over 23 million tons – almost 6 times more. Production of cotton (1.0 million bales in 1947 vs. over 13.0 million bales in 2007-08) and sugarcane (10 million tons in 1947 vs. over 55 million tons in 2007-08), major components of agro-output have also shown robust growth over the last 6 decades.

Decade-wise agricultural performance of the 50s was dismal. The sector registered a growth of only 1.6%, much below the population growth of 3% per annum. The virtual stagnation of agriculture was due to disruptive effects of partition: the shortage of water because of the canal water dispute with India, as well as low rainfall in 1950-51 and later in 1951-52 and flash flood of 1955-56. On the other hand, the performance of agriculture during the decade of the 60’s was remarkable as it grew at the rate of 5.1% per annum. Many factors contributed to the exceptional agro-performance of this decade. Firstly, the high growth rate in this period was partly due to the virtual stagnation of agriculture in the preceding decade of the 50’s i.e., it grew from a low base. Second, this was the period during which the Green Revolution technology was introduced. Much of the high growth was recorded in the later half of the decade as the effects of the Green Revolution became more widespread. During the 1970s the growth rate in agriculture again took a beating and fell to the level of the 1950s – i.e., around 2%. The key factor responsible for this dismal performance was once again the weather conditions – floods in 1972-73 and 1973-74, and later low rainfall. However, during the period 1980-89 agriculture recorded satisfactory growth (5.4%). The period of the 90s again spelled trouble for this intrinsic sector of the economy and due to this sector’s complete dependence on natural elements, weak growth figures of 4.4% were recorded for the decade. After the agro-growth debacle of the 70s, policy makers of the country realized that the future of Pakistan lied with progress and development in the manufacturing sector which is less prone to nature and can be jumped started easily and quickly to compensate for the losses incurred in the agro-sector. Thus, the government policy, from being agro-centric changed to being industry-centric. However, during the new millennium as well the agriculture sector has continued to grow at a modest pace and has posted a growth of 1.5% in FY08.

Industry

The areas comprisingPakistanpresented a dismal picture at the time of independence. There was little manufacturing industry inPakistan. Out of 14,569 industrial establishments in British India in 1947, only 1406 units (less than 10%) were located in the areas that comprisedPakistan. These industrial establishments comprised mainly such relatively unimportant units as flour and rice mills and cotton-ginning factories. Thus, Pakistan started from much humble beginnings.

The growth in the manufacturing sector was remarkably high during the first two decades of the creation of the country but disappointingly low during the decades of the 1970s and then again in 1990s. The high growth-rate of manufacturing sector during the first two decades was made possible by deliberately pursuing a set of policy measures which encouraged private industrial investment and through massive inflow of foreign aid. The momentum of industrialization was secured through import-substitution and excessive-protectionism. During the decade of the 1970s, the performance of the manufacturing sector was largely disappointing. Various factors contributed to the sluggish performance of the sector. One of the foremost factors that adversely affected the performance of this sector was the large-scale nationalization of manufacturing units. This policy shattered investor confidence and private investment was not forthcoming any more. Besides the nationalization policy a number of other factors also contributed to this lethargic performance such as the uncertainty in the initial years following the loss of East Pakistan and the shrinkage of the domestic-protected market after the secession of the Eastern Wing of the country. Pakistan’s manufacturing sector remained struggling, albeit diverse, for most of the 1990s. However, during the 1980s manufacturing grew at an average rate of 8.2% per annum, surpassing all the previous records due to the change of government in July, 1977 conveying a positive sign to private investors. This strong trend of the 1980s was carried into the new millennium. The new millennium saw prudent, far-reaching and innovative government policies take hold and the manufacturing sector, for the first time in the history of the country, became the star of the economy. From 2000-01, the large-scale manufacturing sector as a result of a fast-expanding economy, moved from one peak to another and reached its zenith at 19.9% in 2004-05. During the last three years the large-scale manufacturing sector is showing signs of moderating along with a subsequent slowing down of the economy and has registered a growth of 4.8% during the fiscal year 2007-08.

Today Pakistanhas several thousands industrial establishment consisting of large (steel mills, cement, sugar, textile, fertilizer, chemical, automobile, engineering, defense equipments, electronic items etc) industries. In 1947, there were 177,000 spindles in Pakistan. Today the country has 9.3 million spindles. There were 4,800 looms in 1947; today approximately 3.0 million power looms are working all over the country. Pakistan’s textile industry ranks among the top in the world. Pakistanis world’s 4^th largest producer of cotton and the third largest consumer of the same.Pakistan used to produce 35,000 tons of sugar and today the country is producing more than 3.5 million tons of sugar. At the time of independencePakistan was producing 270,000 tons of cement. Today over 20 million tons of cement is being produced. TodayPakistan is producing cars, buses, trucks, TV sets, refrigerators, air conditioners etc. It has chemicals and petrochemicals industries. It is producing all kinds of cooking oil and ghee, iron and steel, paper & paper boards, motorcycle, consumer durable and cosmetics, etc. In other words, during the last 60 years Pakistan has successfully managed to bring about a mini-industrial revolution in the country which has started to bear fruit for the last couple of years now.

Inflation

Pakistan experienced relative price stability during the 1960s. On average, prices rose at an average rate of 3% per annum. Conversely, during the decade of the 70s the price level rose at an average annul rate of 11.7%. The inflationary situation was even worse during 1973-74 (22.8%) and 1974-75 (25.3%) mainly because of the declining share of commodity producing sector in GDP and the high growth of money supply. However, due to different tactics employed by the State Bank of Pakistan (SBP) inflation never really become a problem for Pakistan, except during the 70s due to exceptional circumstances based upon domestic turmoil, until recently. After 2004-05, inflation has sky rocketed to an all-time high and during 2007-08 it had reached record levels. The basic inflationary trend has been observed in the sphere of food inflation – an expected outcome of acceleration in world commodity prices as well as spiraling oil prices. The year 2007-08 has concluded with 12% overall CPI-based inflation. It is a well-known fact that food inflation has emerged as a major source of concern for policy makers around the world, including Pakistan. Food inflation in Pakistan has been fueled by a combination of domestic demand-driven factors (rising per capita income), local supply shortage and global trends in the prices of essential commodities. Higher prices of edible oil (palm oil and soybean) and dependency on their imports transmitted higher international prices to domestic prices. Similarly, the domestic prices of wheat and rice also followed the global trend and witnessed sharp increases. It may be noted that there are only four essential food items such as wheat flour, rice, fresh milk and vegetable ghee which contributed 42.5 % to the overall increase in general price level. House rent alone contributed 18.3 %, thus these five items contributed 61 % to the rise in general price level in 2007-08.

Fiscal Sector

Tax revenue (FBR tax collection + provincial tax collection) as percentage of GDP has remained in the range of 10-13% since the 80s, with the highest percentage being observed during the 80s (13.8%) and then in a single year 2003-04 (11%). Although the FBR tax collection figure has been steadily on the increase, especially since 2000, the provincial tax collection has left much to be desired thus resulting in less than anticipated tax revenue figures. Another reason might be the accelerated pace of GDP growth compared to the somewhat lethargic growth of tax revenues. Therefore, tax revenues even though increasing, become quite sedate when viewed as a percentage of overall GDP.

Pakistan has always suffered form chronic fiscal deficit due to unjustified extravagant expenditures, reliance on conventional sources of revenue, lack of importance attached to this facet of the economy, free mealing on borrowing from SBP etc. Fiscal deficit in absolute terms does not carry any economic weightage; rather it is fiscal deficit as percentage of GDP which determines whether a country’s financial house is in order or not. The decade of the 60s was the only decade when fiscal deficit even though present, was well within a manageable range of 2.1%. This omni-present deficit started accelerating in the 70s and till the era of the 90s there was no looking back. It grew from a meager 2.1% in the 60s to a crippling 7.1% in the 80s. However, the proportion of its increase lessened a bit after the 90s but till then Pakistan was in the firm grip of foreign financial organizations such as the World Bank and the IMF.  Under the guidance of these financial institutions the leaders of the country woke up to the fact that financial discipline must be maintained by the country in order to free itself from the now popular phenomenon “Twin Deficits” i.e., fiscal and current account deficits. In order to facilitate the economic managers of the country the “Fiscal Responsibility and Debt Limitation Act” was passed in 2005 so that economic managers responsible for creating economic mess could be put to task. Subsequently, fiscal deficit was brought down to a low of 2.45% of GDP during 2003-04 and this reduced trend of fiscal deficit was maintained successfully for a period of three years till 2006-07. During this golden period of fiscal rationalityPakistan gained further strength on fiscal side. Revenues were buoyant, expenditure was rationalized, fiscal deficit was at a sustainable level and revenue deficit had almost been eliminated. Resultantly, public debt was fast moving towards a sustainable level. Much progress had been made towards total fiscal consolidation. The wide-ranging tax and tariff reforms as well as reforms in tax administration had started paying dividends. Tax collection by the Federal Board of Revenue (FBR) had picked up. As a result of prudent fiscal management, the burden of interest payment in domestic budget had declined sharply, thereby, releasing resources for development and social sector program. The hard-earned macroeconomic stability underpinned by fiscal discipline, however, during 2007-08, was shattered and just one year of financial irresponsibility cranked up the fiscal deficit figure to 6.5% of GDP. Political tensions, soaring global oil prices, overall food inflation, delayed critical government decisions and worsening law and order scenario of the country contributed to this slippage of fiscal deficit from an estimated 4% of GDP to the year end 6.5% of GDP for FY08.

External Sector

Both the external and domestic environments play an important role in shaping the country’s trade with the rest of the world. The overall external sector except for remittances remained somewhat depressed during 2007-08 but this has not always been the case. Pakistan started with next to nothing at the time of its inception but gradually built on its strengths and can be now ranked among the most credible exporter of world class products. Nonetheless, its inability to manage its current account deficit still persists.

A critical problem area forPakistanhas always remained the current account, a deficit, except for 2001-04, through out the economic history ofPakistan. A stagnant trade scenario, undiversified exports, lack of quality control on Pakistan manufactured products, reliance on conventional marketing as well as manufacturing methods, power intensive techniques, low-skilled labour, lax attitude of manufacturers, numerous power outages, last couple of years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending, have led to a massive surge in imports, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost, and growth in personal travel due to the rising level of income of middle and high income groups, have all contributed to the widening of the current account gap. Even during the 90s when all other economic indicators for Pakistan were at its lowest ebb, current account deficit was never this high. It has breached the 7% limit for the first time in the history of the country and has settled at 7.1% of GDP for 2007-08 accompanied with a crippling trade deficit of $20.7 billion (again the highest ever). Workers remittances – a major component of the current account has always shown resilience and given much needed boost to the economy as well as provide the country with a very dependable foreign exchange source. The remittances have increased from $0.03 billion during the 60s to more than $6 billion at the close of 2007-08. The destinations of choice during the early decades i.e., till 80ss remained the Middle Eastern oil-rich countries. However, this trend changed and now the highest amount of remittances received are fromUSAandUKalong with UAE and other GCC countries.

 

Foreign Direct Investment (FDI) has become an important source of private external finance for developing countries. It is different from other major types of external private capital flows in that it is motivated largely by the investors’ long-term prospects for making profits in production activities in the host countries. Given the size of the country and population,Pakistanis attracting far more foreign investment than its regional peers. During 2007-08 Pakistan attracted $5.1 billion or 3.3 % of GDP, foreign investment.Pakistanstarted with a meager $1.2 million at the time of its independence and but has since grown from strength to strength. We can safely say that the confidence of the international community on Pakistan as a country in general and Pakistan’s economy in particular has become much stronger than was ever imagined by the respective economic managers of the country. Sectors such as financial businesses, oil & gas, power, construction and services (especially telecommunication) have attracted the bulk of FDI inPakistan. The decade of the 90s corresponds to the highest increase in FDI as compared to the past four decades. However, a massive increase of 131% took place from 2004-05 to 2005-06 – a period when Pakistan’s economy was booming with above 7% growth rate and the government had made successful forays into the international capital market on the back of a clean bill of financial health. During the newly concluded financial year 2007-08 although the FDI registered an increase of 0.3% as against 2006-07 the pace of inflows to the country showed hesitation from foreign investors. This hesitation to investment in Pakistan can stem from a number of factors such as the sub-prime mortgage issue that created excessive volatility in financial markets globally and forced investors to reduce their exposure in emerging markets, including Pakistan, the disturbed law and order situation and political instability and uncertainty to name a few.

 

Pakistan’s External Debt & Liabilities (EDL) is comprised of all Government debt denominated in foreign currency, loans contracted by enterprises with Government ownership of more than 50.0%, as well as the external debt of the private sector which is registered with the State Bank of Pakistan (SBP) and finally benefits from a foreign exchange convertibility guarantee from theSBP.Pakistan’s total stock of external debt and foreign exchange liabilities grew at a compound average rate of just 1.2 percent per annum during 2001-07 – rising from $ 37.2 billion in 2001 to $ 40.5 billion by end June 2007. However, in the first nine months of fiscal year 2007-08, the stock of external debt and liabilities grew by 13.3 percent. The EDLs have once again started to rise at a much faster pace, firstly on account of additional borrowing for the earthquake-related spending. Secondly, the growing external imbalances particularly, over the last two years have also necessitated large borrowing. Finally, and most importantly, the weakening of the dollar with respect to leading currencies like the Euro and Japanese Yen have contributed to the surge in EDL, particularly over the last two years but more so in 2007-08. The EDL grew by 5.0 % in 2005-06, 7.7 % in 2006-07 and 13.3 % during July-March FY08. Since end-June 1999, the EDL stood at $38.9 billion but the stock in absolute terms started declining in 2003-04. The stock of debt started rising but thereafter grew at a much faster pace in the last two years. The current year witnessed even higher levels of stock at $45.9 billion by end March FY08. Notwithstanding, the rise in EDL in absolute number, the burden of the debt has declined on account of faster growth in nominal GDP. However, EDLs as percentage ofGDPhave declined from 51.7 % in FY00 to 28.1 percent in FY07 and further to 26.9 % of theGDPby end-March 2008.

Pakistan’s total liquid foreign exchange reserves stood at $ 11.2 billion at the end of June, 2008 – a decline of $4.5 billion from end-June 2007.Pakistan’s foreign exchange reserves have taken a beating due to massive outflows from portfolio investment (98%) and a steep rise in the current account deficit (7.1% of GDP) during the year. The depreciation of Pak Rs. from a steady Rs 60-62 per dollar range earlier this year to a staggering downfall in the tune of Rs. 70-73 per dollar can be attributed to the above factors including a ballooning imports bill. The average exchange rate for 2007-08 has been determined at Rs 67.9 per dollar. This unexpected down gradation of Pakistani currency can be attributed to skyrocketing global petroleum and commodity prices, emergency wheat imports payments etc. All of these reasons and more exerted pressure on the rupee, thus depreciating its value on the one hand and dwindling the reserves of the country on the other. In 1947,Pakistanstarted with just $0.15 billion foreign exchange reserves which gradually swelled to $1.7 billion during the 80’s on the back of a pro-Pakistan American policy and Russian invasion ofAfghanistan. However, the most recent surges in reserves were also the most prominent in Pakistan’s reserves history, with the reserves reaching an all time high of $15.7 billion during 2006-07.

Monetary & Capital Market

The migration of Hindu and Sikh communities fromPakistan, who controlled nearly all trade, banking and industry and held most of the senior posts in the administration, nearly paralyzed the economic and administrative machinery. There was only one Pakistan-owned bank with its head office in the territories that comprised Pakistan. There was shifting of bank’s head offices fromPakistan. Within 4 months of partition 418 out of 631 bank offices had closed down and in another six months the number declined to only 195. Pakistan, therefore, started with 195 branches in banking sector however it now has more than 50 different types of banks, with multiple branches spread all over the country, operating in the country.

It has been proven empirically that the growth of monetary assets (M2) is closely linked to inflation prevailing in the economy. Therefore, higher the inflation the lower the SBP wants the growth of monetary assets to be. The highest growth of monetary assets was recorded after 2001-02. State Bank’s easy and accommodative monetary policy stance along with a thriving economy increased consumption of the people thus giving rise to insatiable demand for money. However, this increase in money supply was also feeding the demon of inflation. To curb inflation, SBP has recently adopted a more aggressive stance, switching from a broadly accommodative to aggressive tightening in the second half of 2005. The same tight monetary policy stance continued during the fiscal year 2007-08. This tight monetary policy stance is likely to continue until inflationary pressures are significantly eased off.

 

Market capitalization, in Pakistan, even though expanding considerable since the 60s (Rs. 0.32 billion) is still in its infancy as compared to most of its regional competitors. Capitalization has breached the range of Rs. 3000 billion during 2007-08. The expansionary euphoria in the stock market has been spurred by a number of favorable factors including continuation of the present policies on banking sector by the SBP, renewed interest of large number of buyers of shares, bright prospect of reaping dividends, good capital gains and presence of institutional investors in the market.

Social Sector

The social sector has always been relegated to the back bench since development of economic policy making inPakistan. At the time of independence in 1947, 32.5 million people lived inPakistan. By 2007-08, the population is estimated to have reached 160.9 million. Thus in roughly three generations,Pakistan’s population has increased by 128.4 million or has grown at an average rate of 2.7 percent per annum. This massive population needs immense resources to fulfill their basic human needs such as health and education. In the past meager resources were allocated for these crucial social sectors from the country’s already stretched resources. However, the current trend of granting more importance to these neglected sectors linked to accomplishment of Millennium Development Goals (MDGs), of whichPakistanis also a signatory, has accorded more significance to these sectors and the government has also allocated almost double the budgetary allocation under these heads. Historically, the literacy level in Pakistan was around 29% in the 80s which has due to the persistent efforts of the government risen to a respectable 55% in 2006-07. Similarly, infant mortality rate per 1000 persons has also been on the decline and has fallen from a very high 127 per 1000 persons in the 60s to a reasonable 76.7 per 1000 persons in 2007-08.

Conclusion

In moving forward consistency and continuity in economic policies is essential. A lot still remains to be done both on the external and the domestic front. For the forthcoming years numerous economic reforms, with the blessing of the international community, are on the cards and it can be safely said that the future will bring about more economic prosperity for the people ofPakistan.

Nothing in life can be strictly segregated into black and white and this task becomes even more difficult in case of analyzing the economic history of a country which has seen as many ups and downs asPakistan. If it has been judged as one of the best emerging economies of Asia it has also come close to being declared bankrupt and labeled a financial delinquent. At the end of the first 60-years of Pakistan’s creation the need of the hour is not to judge whether Pakistan’s economic endeavors have been successful or have failed, rather the need is to learn from our past mistakes and believe in a bright and prosperous future for the country and ultimately to strive towards that dream of making Pakistan’s economy the best, not only in Asia but in rest of the world as well.