It is raining in Karachi, and the city is practically at a standstill. Roads are flooded, there are power shortages, and traffic jams build across many parts of town. For businesses, it is a difficult time to operate in Pakistan’s financial hub. There is a growing sense of frustration at how easily infrastructure has been affected, how difficult it is to do business.
But the most frustration comes from the country’s economists, albeit for different reasons. Many feel that the Pakistani government has missed the boat and thrown away excellent opportunities to build on the economic boom of the last few years. They argue that Pakistan’s growth cannot continue into the future.
“My biggest disappointment and anger has been that we have had such a good opportunity in the fiscal space to do a lot of things, but that has not happened. We can talk about a dozen missed opportunities to reform government, to put the economy on a longer-term horizon,” argues Akbar Zaidi, a leading independent economist.
Unsurprisingly, the criticism irks in government circles. “We now have a market economy in Pakistan, and we are further trying to develop the institutions of a market economy, with market-driven investments and savings, and very little government involvement. Overall, I think the reforms we have already implemented will ensure continuity,” insists Salman Shah, adviser to the prime minister on finance.
In the last five years, Pakistan has been one of the strongest growing economies in the world. GDP growth rate between 2003 and 2006 has been over 7.5%, according to the Pakistan Economic Survey 2005-2006. Per capital income also saw a rise of $265 in just four years. Exports have almost doubled in five years, as have foreign exchange reserves.
9/11 factor
But economists argue that the growth had less to do with government reform, and everything to do with the events surrounding September 11, 2001, after which Pakistan became a staunch ally of the United States, and benefited from the relationship. “Everybody acknowledges that if it hadn’t been for 9/11, Pakistan would not have been able to get out of its economic problems,” says Zaidi.
Mushtaq Khan, a former State Bank of Pakistan adviser and economist, agrees. “Everything seemed to be going well, but after 9/11 everything became comfortable. My main gripe with the policy-makers is that discipline in policy-making has melted,” he says.
Zaidi argues that a total debt right-off of $1.7 billion and the rescheduling of $12.5 billion after 9/11 gave Pakistan a huge amount of fiscal breathing space. Meanwhile, $18 billion of remittances over five years from overseas Muslim accounts led to the stock exchange and property boom. Now, however, economists argue that government strategy for growth hinges on getting foreign investment in, which will not prove to be easy.
For his part, Shah insists that economists “in opposition” to the government would not want to give it any credit for the transformation of the economy, and that 9/11 had very little to do with Pakistan’s successes. “There may be some remittances which might be linked to 9/11, but we also lost a lot of business due to 9/11, and some other flows were negative.” He projects that foreign direct investment figures, which were $3.5 billion this year, will grow to $4-5 billion in the next 12 months. “The potential exists for achieving even $7 billion. We have a very friendly investment environment.”
FDI funding
But critics say the government needs FDI of $7 billion just to fund the external gap. One economist, who declines to comment on the record, argues: “$7 billion is not achievable. And they are counting on their privatization programme to make that happen, but privatization will not keep up pace.”
In fact, the vast majority of FDI growth comes from privatization, and Shah projects that it will continue to account for $2 billion a year in the future. But privatization has not always gone the way the government wants it to. The Supreme Court recently struck down the sale of Pakistan Steel, for example, amid cries of corruption over the deal. The country has been rocked by many scandals in the past months, ranging from market manipulation which caused the stock market crash in March 2005, to the manipulation of sugar prices. And Zaidi points out that inflation remains close to 8%. He also argues that government poverty figures showing a decrease of 10% are simply wrong. In fact, he argues, government data shows that the income inequality has actually increased, with consumption faster for the top 20% of the population compared to the growth rate of the bottom fifth.
Economists also point out that political instability in Pakistan may scare potential investors away, as fighting continues in Waziristan on the border with Afghanistan, and in Balochistan. There are also strong rumours that Standard & Poor’s, the rating agency, will lower Pakistan’s rating from “positive outlook” to “stable”, which would be a blow to the government.
Shah dismisses the rumours. “We have been in very close touch with the rating agencies and they feel very comfortable with us at the moment. Because of the earthquake, we had higher fiscal deficit than projected, but it is well under control.” He also points out that the no confidence vote brought against prime minister Shaukat Aziz by opposition parties accusing him of corruption last month (August) was rejected, demonstrating faith in the government.
Critics say the vote, the second such move in the country’s history, has shown just how much pressure the government is facing. “There is increased criticism of Musharraf’s dual role as president and army chief, and even more criticism of Shaukat Aziz’s dual role as prime minister and finance minister,” comments one economist.
The government will have its hands full reassuring investors. Ayesha Haq, a journalist and lawyer in Karachi, believes more has to be done. “What is needed is a functioning democracy where institutions are independent, and policy is not based on the whim of individuals.”
The government is arguing that it is achieving exactly that, but many observers believe the party is over for Pakistan.