Pakistan’s government is widely credited with having brought the country back from the wilderness of near-default and IMF bailout in 2000. The country’s economic growth rate peaked at 8.4% last year, compared to China’s 9.3%; tax revenue as a percentage of GDP jumped by 20% last year, thanks to rate cuts and improved collection; and the Karachi Stock Exchange has rallied since last year’s earthquake, as demand for reconstruction materials has risen.
But the figures hide a more disquieting picture: unless the government revives the country’s crumbling infrastructure, economic growth could grind to a halt. Local investors and policy-makers alike agree the government urgently needs to streamline and rationalize its own decision-making processes.
Sluggish procedures
Ali Siddiqui, a director at Jahangir Siddiqui & Co., one of the country’s largest financial services firms, recognizes the government’s “phenomenal” job of privatizing three of Pakistan’s five largest banks, and big companies in key sectors like telecoms and energy. But he bemoans the sluggish bureaucracy that he claims is constraining the economy.
The country’s massive power shortage, he says, is due in large part to the government’s slow decision-making on tariffs and construction of power plants. It is a similar story for roads and ports: “The economy can’t grow without these things,” he says.
His company, together with Azgard 9, bought state fertilizer firm Pak-American for $269 million in April.
“The private sector in Pakistan is very hard working ... all we need are decisions and approvals, but decision-making is slow.”
However, according to Siddiqui, greater efficiency and profitability are driving high earnings in financial services, telecoms, construction, and oil and gas, where new discoveries have been made recently. Liberalization of the banks, in particular, has driven annual growth of 20% to 25% in consumer finance, especially credit cards and car loans.
The government is set to maintain its privatization agenda this year, which began with the sale of Pakistan Telecommunications Company to UAE firm Etisalat, with the sale of companies such as Sui Northern Gas Pipelines (SNGPL), the Sui Southern Gas Company (SSGC), Pakistan Steel Mills, Pakistan State Oil, and National Investment Trust.
Energy woes
According to Mumtaz Syed, investment banker and chief executive of Crosby Asset Management, “The energy sector is both our biggest opportunity and our biggest problem.” Growth in demand for cars and motorbikes has sent energy requirements soaring, but: “We do not have a credible power plan in place,” he says.
The government has said that the country faces a shortage of 5,000 megawatts of power over the next three years, which will cost $6 million to make up.
The government is neglecting investment in hydropower projects, which have higher up-front costs, in favour of gas pipeline projects. One pipeline would pump gas from Turkmenistan via Afghanistan and the other, at a cost of $3 billion, from Iran and on to India.
But, says Syed, the cost of securing the pipelines, together with rising world oil and gas prices, will make them a much more expensive option in the long run. “We’re already vulnerable to international prices,” he says. “Textiles are our main export. They’re a big energy guzzler, and they’re going to become uncompetitive.”
Not so fast
Pakistan’s performance must be viewed in the context of recent history, says Ishrat Husain, governor of Pakistan’s central bank from 1999 to 2005. The country is entering the most difficult phase of development, following crisis, stabilization and most recently cutting poverty and unemployment. He agrees infrastructure is a major problem, pointing out that it takes a textile shipment three days to get from Faisalabad to Karachi, and then seven hours to get to Switzerland. But he points out that the poverty rate dropped from 32.1% in 2000 to 25.4% last year.
“What are the markets telling you?” he asks, rhetorically. Last month the government launched its largest international bond – a $500 million, 10-year security – and its longest dated – a $300 million, 30-year security – to strong investor demand. “The most important testimony is the objective one of the markets, together with the international financial institutions,” he adds.
In its most recent Article IV consultation, the IMF commended the State Bank of Pakistan for tightening interest rates when faced with double-digit inflation last year, and for “having passed on much of the increase in international oil prices to consumers to help contain fiscal pressures”.
The price of a gallon of petrol in Pakistan is higher than in the United States. “I give credit where it’s due,” says Bashir Ahmad Khan, professor of business at newly privatized FC College Lahore. “Over the last five years [President] Musharraf has brought economic stability, stability to the monetary sector, to foreign exchange. Pakistan’s credit rating has improved.”
Limited success
“However,” he continues, “all you have to do is step outside any large city to see that the growth is restricted to a very small section of the population. If you go 25km outside Lahore there is no electricity, no roads, no hospitals, no sewerage.”
The real problem, Ahmad Khan believes, is the poor quality of education. Pakistan’s adult literacy rate is 48.7% compared to India’s 61% according to the most recent UN Human Development Report. India has also developed world-class institutes of technology and management that enable its graduates to compete globally in high-tech sectors that sustain growth by attracting foreign direct investment, with its attendant positive spillover. Pakistan, he says, is nowhere near replicating this success.
To reverse the decline in Pakistan’s education, which began with the nationalizations of the 1970s, will require massive investment and “decision-making with a holistic view”, he says. “We just don’t have that.”