aking Stock: PPPs Five-year Rule Down the drain 8 1 2 1 By Dr Ashfaque H.

Khan The Pakistan Peoples Party-led coalition government completed its five-year term on March 16, 2013. Within and outside Pakistan, it is generally agreed that the countrys economy has been weakened to the core during the PPP tenure. Poor macroeconomic policies, fiscal indiscipline, a weak and frivolous economic team and bad governance have been the contributory factors in the destruction of the economy. This article reviews the performance of the economy during the last five years. Prior to PPPs ascension to power in March 2008, Pakistans economic performance was robust. International financial institutions and global investors were upbeat on growing economic fundamentals. Pakistans economy was regarded as one of the fastest growing economies in the Asian region and Goldman Sachs, a global investment bank, included Pakistan in the elite group of emerging economies. Fiscal year 2007-08 was a defining year in Pakistans economic history. The descent into political instability in mid-2007, followed by large exogenous shocks such as skyrocketing oil and food prices, adverse security developments and global financial turmoil buffeted the economy of Pakistan. These shocks, combined with policy inaction during the political transition to a new government in March 2008, sent the economy reeling. The government that took charge in March 2008 inherited four major challenges that included slowing economic growth, rising inflation (particularly food inflation), a growing fiscal deficit and the widening of trade and current account deficits. Amongst these, fiscal, trade and current account deficits were largely the outcomes of external shocks of extraordinary proportions accompanied by policy inaction during most of the fiscal year. Consequently, the strong economic performance and the hard-earned macroeconomic stability underpinned by fiscal discipline of the preceding five years came under threat.

The food and fuel price shocks affected almost every country around the world and Pakistan was no exception. While other countries undertook corrective measures and overcame the crisis, the government in Pakistan continued to lurch from one crisis to another and gave the impression of having little sense of direction or purpose. The government was inept at addressing economic challenges in general and external shocks in particular. Frequent changes in the economic team characterized the governments modus operandi. As the economy was never on the radar of the government throughout its tenure, the outcomes on economic front could not have been different. The last five years have seen economic growth slowing to an average of three percent per annum as compared to the almost seven percent per annum during the previous five years; industrial growth stagnating at near zero percent as against the 12.4 percent per annum in the preceding five years and agriculture growing at 2.2 percent per annum close to the countrys population growth as compared to the 4.7 percent per annum during the previous five years. Most disturbing was the fact that the investment rate continued to decelerate over the last five years and declined to a 50-year low at 12.5 percent of GDP from as high as 22.5 percent five years ago (2006-07). Investment is a key determinant of economic growth. Decline in investment to such a low level is a bad omen for the countrys growth prospects in the mediumterm. It is well known that approximately 2.5-3 million people are entering the job market every year and to provide them gainful employment, the economy must grow by seven to eight percent per annum. As it has grown at the rate of three percent per annum over the last five years, by definition, the economy must have failed all new jobseekers entering the market. The pool of unemployed must have grown over the last five years with more and more people slipping below the poverty line. Therefore, the greatest challenge for the new government will be to restore investor confidence, revive investment and economic growth, and provide gainful employment to new entrants on the one hand and reduce the pool of unemployed on the other. Fiscal indiscipline has been the hallmark of the outgoing regime. Never in the history of this country has the nation seen such a fiscally irresponsible government. The fiscal deficit averaged almost seven percent of GDP over the last five years but reached as high as 8.5 percent last year. In view of fiscal developments in the current year in general and the financial tsunami in last three weeks in particular, there are indications that the budget deficit in the current fiscal year may reach a level not seen before in Pakistan with severe macroeconomic

consequences for the economy. The persistence of a large fiscal deficit over the last five years along with sharp depreciation of exchange rate has more than doubled the countrys public debt. The stock of public debt stood at Rs. 4.8 trillion in June 2007 and reached over Rs.13 trillion by December 2012 an addition of over Rs. 8 trillion in five years. A child was born with Rs. 30,000 debt five years ago but newborns now inherit debt of Rs. 80,000. The other debacles of the last five years include the addition of over $20 billion in external debt, the vanishing of foreign direct investment, 36 percent depreciation in the value of the rupee, foreign exchange reserves dipping to dangerously low levels ($7.6 billion) and sufficient to provide import cover of two months only and inflation persisting at high double digit levels for more than 50 months in a row, creating enormous hardship for the poor and even middle class households. In the meantime, public sector enterprises (PSEs) have continued to bleed profusely, consuming over Rs. 300 billion annually of taxpayer money. Pakistans important institutions such as Railways, PIA, Pakistan Steel, WAPDA and OGDC have been systematically destroyed as the government has treated them as employment bureaus. The financial health of these institutions was weak even earlier but the induction of hundreds of thousands of workers on political consideration in the last five years has demolished all hopes of their revival as viable institutions. The central bank is considered the most important economic and financial institution of countries around the world. Through frequent changes in its leadership, this institution has also been weakened and reduced to functioning as the monetary wing of the ministry of finance. The Board of Directors of the SBP has been weakened to the core by the appointment of unqualified people. In short, five years of economic mismanagement by the outgoing regime have shattered the economy beyond recognition. What is in store for the current fiscal year (2012-13)? Under the most likely business-as-usual scenario, Pakistans economic difficulties are likely to be exacerbated as we move closer to the end of the current fiscal year. This is because, firstly, the current fiscal year will see three governments at the helm of affairs the incumbent, the caretaker, and a post-election new government. The incumbent has indulged in financial harakari and has generated a financial tsunami in the last few days of its tenure; the caretaker as well as the new government will have little time to stabilize the economy. Therefore, the remaining

period of the current fiscal year will mostly see policy inaction. Accordingly, the haemorrhaging of the economy will continue at an accelerated pace. Secondly, in the absence of significant capital inflows, foreign exchange reserves will dwindle further and huge debt repayments in the current calendar year are likely to take the country closer to global default the Governor SBPs misplaced optimism notwithstanding. Thirdly, there is a general consensus that no single party is likely to win the election; hence, most likely a coalition government will be installed. Past experience shows that coalition governments rarely show adequate fiscal discipline. What will be the state of economy the new government will inherit? It will inherit a slowing economy, investment plummeting to the lowest in 50 years, rising unemployment and poverty, inflation still hurting the poor and fixed income groups and large fiscal deficit and unsustainable public debt. It will also be confronted with foreign investment drying up, foreign exchange reserves plummeting rapidly to a dangerously low level, looming debt repayment crisis, bleeding PSEs, persisting energy crisis, crumbling infrastructure, and a nervous private sector. A financially starved education sector, dwindling state authority and most importantly a crippled state, which has been governed badly will further compound its woes. Indeed, the challenges are daunting but still surmountable provided the new government avoids a business-as-usual policy. It must get rid of the apna admi culture, bring in a good economic team, follow the strategy of appointing the right people in right places and, above all, put the economy on its radar and economic revival as its top most policy goal. I will end on an optimistic note by saying that I have faith in the countrys political leadership. I hope that they will rise to the occasion and pull the country back from the brink of economic disaster. The writer is Principal and