Author: Salman Shah
Publication: Outlook
Date: July 23, 2001
The popular perception is that Pakistan's
economy is in dire straits, virtually on the edge of collapse. It is believed
the economy needs massive international support for survival and growth,
that the country has been living beyond its means and needs to greatly
tighten its belt. This impression is probably reinforced by the presence
of a stringent imf programme, which has been going on and off for almost
the last decade. Most civilian governments found it politically unviable
to meet the conditionalities of the imf programme. But the current government
has implemented some tough decisions with a degree of success.
In the short run, Pakistan's economic
problems stem from its relatively large external debt. In the longer run,
Pakistan faces the issues of implementing structural changes to put the
economy on a competitive and sustainable growth path and find a niche in
world economy. It is indeed placed well to benefit from globalisation provided
it can successfully put its debt overhang behind.
The World Development Report gives
Pakistan's gdp at around $64 billion (1999), which translates into a per
capita gdp of $470. The population living below $1 a day amounts to 31
per cent (1996). Agriculture contributes 26 per cent, industry 25 per cent
and services 49 per cent to gdp. Exports amount to 14 per cent of gdp and
84 per cent of exports comprise manufactured goods. Economic growth over
the last 10 years has averaged around 4 per cent, down from the average
6.3 per cent registered in the earlier decade. The central government finances
show an overall deficit of around 5.5 per cent, with the state governments
more or less in balance. The reduction of the fiscal deficit forms the
cornerstone of the imf programme, which would want the figure to go below
4 per cent-this reduction has induced a fall in the gdp growth rate.
These statistics do not portray
a collapsing economy. In fact, these are fairly robust figures and compare
very well with India's. The economy is more integrated with the world economy
than India's (its exports are 7 per cent of gdp), poverty levels here are
slightly lower and per capita income slightly higher. So what is the problem?
The problem is, of course, the large
external debt the country has accumulated over the last 20 years.
Whereas the current value of India's external debt is 20 per cent of gnp,
for Pakistan it is 41 per cent. In other words, Pakistan is almost twice
as indebted as India to external creditors. But this doesn't imply Pakistan
is a basket case. It is more externally indebted than, say, Egypt (29 per
cent) but less so than others like Algeria, Argentina, the Czech Republic,
Hungary, South Korea, Malaysia, Russia, Thailand, Turkey, etc.
Pakistan clearly needs to restructure
its economy to continue servicing this debt but it certainly doesn't mean
it is an impossible task. If international financial windows remain open
to Pakistan, it should be able to refinance the debt as it becomes due
and cut debt to more reasonable levels as the economy grows. Pakistan consequently
doesn't need exceptional help beyond what was provided to others in similar
situations.
The Achilles heel of the Pakistan
economy is its historically low savings rate. While India has managed a
healthy savings rate of over 20 per cent over the last two decades, Pakistan's
is only 11 per cent. This one difference means that whereas the Indian
fiscal deficit of over 10 per cent per year can be financed internally,
Pakistan's deficit has to be bankrolled externally, thus contributing to
its large external debt.With a low savings rate, Pakistan is saddled with
a low investment rate of less than 15 per cent. This explains the recent
low gdp growth rates of about 4 per cent a year. Thus, the main issue facing
Pakistan is to create an economic environment which will provide a fillip
to savings and investments in the country.
This will require very deft economic
management and a heavy dose of liberalisation. It's a task to be accomplished
by the Pakistanis themselves and does not need foreign assistance or largesse.
The fact that other less developed countries have been able to manage much
higher savings and investments shows the potential for improvement in Pakistan
and represents the possibility of generating far higher growth rates with
much lower external debt. In other words, Pakistanis have to learn to finance
their growth through their own efforts. Pakistanis tend to overspend and
this has to be change if the country has to exit the debt trap.
The country's real sector is a
mixed bag. At independence, Pakistan inherited a basically agrarian economy.
Agricultural yields are much lower than India for comparable crops. Pakistani
farmers would benefit considerably from Indian research and technology.
The industrial sector is more dynamic; the textile industry is relatively
modern and able to compete in the global economy, contributing over 60
per cent of exports. After the phase-out of the mfa (Multi-fibre Agreement)
under the wto, textile exports are projected to boom and lead the way for
Pakistan's growth in the next decade.
Pakistan's trade policies have traditionally
had an anti-export bias which stunted the growth of many export-oriented
industries. Pakistan lags in electronics and other hi-tech industries.
A big push is under way to promote IT as an export earner. But it will
take years for IT to make a meaningful contribution.
What is commendable is that Pakistan
has managed to position its power sector on a viable footing. Subsidies
have been largely eliminated and tariffs raised to sustainable levels.
The oil and gas sector has seen a spurt of activity with new gas finds
coming on line. Privatisation has been geared up and major public sector
enterprises have been made profitable or their losses have been curtailed.
The economy is being liberalised, the role of the government is being belatedly
reduced.
Pakistan has a large overseas population
with access to substantial hard currency, a dynamic private sector and
a cheap and competitive workforce that has the potential to propel Pakistan's
economy into the 21st century as a leading export-driven growth economy.
Like the rest of the subcontinent, Pakistan also awaits the long elusive
peace dividend for a fillip to these growth aspirations.
(Dr Salman Shah is a leading Lahore-based
economist.)
