Power is one thing, growth quite another

Author: Abheek Barman
Publication: The Economic Times
Date: June 23, 2001
 
Late last month, investment bank Merrill Lynch observed that the Karachi Stock Exchange index, KSE 100, had slipped nearly 4 per cent in a month, but concluded that this made a recovery of Pakistan's battered markets likely - things couldn't get worse. The KSE 100 has slipped more than 11 per cent in five-and-a-half months since December, a steeper fall than the sensex's near-10 per cent tumble in the same time. Analysts at Merrill cited four factors that could change investor confidence in Pakistan for the better - good news from the budget, successful debt restructuring with the international Monetary Fund (IMF), a 'positive surprise' on the Kashmir front, or a move towards a civilian government.

Less than a month later, debt restructuring has come with stringent conditionalities, the budget's defence spending cuts have some symbolic value but little else, few expect any surprises on Kashmir and - to the dismay of all governments apart from India - military chief and CEO Pervez Musharraf has promoted himself to president. But the KSE 100 dosed Friday at 1,351 points, up from mid-May lows but above April valuations. Are things looking up? Since Pakistan's May '98 tit-for-tat nuclear blasts, its economy has been teetering near crisis. But a comparison of broad macroeconomic numbers with India shows many similarities between the two neighbours. For example, Pakistan's fiscal deficit, at 5.3 per cent of gross domestic product (GDP), is dose to India's 5.1 per cent figure. The structure of its economy seems to mirror India's, with a little more than a quarter of its GDP coming from farming, about half from services and the remainder from manufacturing and industry. So is there a problem?

For starters, growth is expected to be less than 5 per cent this year - low compared to India's 6 per cent. More alarmingly, over the past 10 years, Pakistan has underperformed India by a large margin. Through '91 to '99, India's average annual growth rate was 6.1 per cent. Pakistan, growing at an average of 4 per cent a year, trailed significantly behind. The starkest indicator that Pakistan is in trouble comes on the foreign exchange front. Reserves bottomed out at $1.5bn in '99 after investors and domestic residents shipped money out in the aftershock of the explosions at Chagai. At the time, India's foreign exchange kitty was bulging at $33.7bn. Two years later, India's already-big reserves have grown by about a third to about $43bn. Pakistan's reserves have also grown - to $2.8bn. President Musharraf can congratulate himself for a nearly 100 per cent growth in reserves, but he certainly can't afford to get smug - if all exports and transfers were to stop tomorrow, his reserves will fund imports for a little over two months.

Today, Pakistan looks like a failing economy trying to claw back up from the brink. President Musharraf's defence spending cut of Rs 2bn in his June 18 budget is a step in the right direction. But that's about it. In real terms, it amounts to a cut of less than 5 per cent in an already bloated budget for weapons. The real challenge is to, boost revenues, pump in investments and restore investors' confidence. An early return to democracy could have had a positive impact. The general botched that up by proclaiming himself president, eroding the credibility of a promised return to electoral democracy by '02. Consolidating personal power is one thing. Boosting growth, as President Musharraf is likely to discover, is quite another.
 

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