Economic Management in Pakistan (1999-2002)

by Dr. Ishrat Huain

Macroeconomic Legacy of the 1990s
After an impressive record of economic growth and poverty
alleviation during the 1980s, Pakistan suffered serious
setbacks in the 1990s in terms of most economic and social
indicators. These setbacks included the following;
i. Deceleration in economic growth rates
ii. Increased inflation rates
iii. Increased debt burden
iv. Widening of macroeconomic imbalances
v. Doubling of incidence of poverty
vi. Pakistans credibility with the IFIs at its lowest ebb
vii. Erosion of confidence of local investors and overseas
Pakistanis due to freezing of foreign currency accounts
viii. Dissatisfaction among foreign investors due to re-
examination of power purchase agreements and
initiation of criminal action against HUBCO.



Macroeconomic Legacy of the 1990s
Comparative Macroeconomic Analysis:
As compared to the annual growth rate of 6.3 during the
1980s, it decelerated to 4.9 per cent during the first half of
the 1990s, and further down to 4 per cent during the second
half.
Agricultural sector recorded a higher growth rate during the
1990s as compared to the previous decade.
The manufacturing sector witnessed a sharp fall in its annual
growth rate from 8.2 per cent in the 1980s to almost 4 per
cent during the 1990s.
The services sector also witnessed a relatively lower growth
rate during the 1990s as compared to the 1980s. Since the
services sector is a major source of employment generation,
its lower growth rate also adversely affected the overall
employment rate.

Macroeconomic Legacy of the 1990s
The investment ratio kept its downward slope since
1995 and reached 13.9 per cent in 1998-99.
The persistence of fiscal and external deficits led to
accumulation of large domestic and external debt
during the decade and total debt increased from $ 20
billion in June 1990 to $ 43 billion in May 1998.
Pakistans external debt reached 47.6 per cent of GDP,
having grown at an average annual rate of 8.1 per cent
throughout the 1990s.
The net present value of our external debt as
percentage of exports was estimated at 230 per cent in
1998, much higher than the safe limit of 150 per cent.


Macroeconomic Legacy of the 1990s
The ratio of debt service payment due to foreign
exchange earnings rose from 23.3 per cent to above 40
per cent from 1990 to 1998.
The growth of domestic debt was more rapid during
the 1990s i.e. 13.7 per cent per annum, which was
mainly due to liberalization of interest rate and the
need to finance growing fiscal deficit. Domestic debt
accounted for 49.1 per cent of GDP.
Public debt grew from Rs. 802 billion in 1990 to Rs.
2,971 billion in June 1999. As percentage of GDP, the
increase was 93.7 per cent to 102 per cent, while in
proportion to revenue, the burden rose from 470 per
cent to 625 per cent.

Macroeconomic Legacy of the 1990s
A very high debt servicing led to a huge fiscal deficit of
above 7 per cent of GDP.
Tax to GDP ratio moved up to 14.4 per cent in 1994-95 but
later slid down to 12.8 per cent in 1999-2000.
The development expenditure took a major hit and reached
a low of 3 per cent of GDP in the 1990s from 8 per cent of
GDP in the first half of the 1980s.
External sector deficit also increased from 2.6 per cent of
GDP in the 1980s to 4 per cent of GDP in the 1990s.
In the first half of the 1990s, merchandise exports
stagnated around $ 6.8 billion later jumping to $ 8.1 billion
in 1995.
Incidence of poverty also doubled during this decade, from
18 per cent to 34 per cent primarily due to lower growth,
higher inflation and limited access by the poor to basic
social services.



Macroeconomic Legacy of the 1990s
A Silver Lining:
An interesting paradox is that the economic policy stance
of both the major political parties (PML-N and PPP), who
took turns over power during the 1990s cannot be faulted.
Both parties were committed to deregulation, privatization,
liberalization, greater reliance on market forces, improved
social services delivery, and other economic reforms.
The sensible policy actions taken resulting in economic
buoyancy in 1991-92 and then in 1994-95 was widely
welcomed by both local and foreign investors.
It resulted in an impressive growth rate of 7.7 per cent in
1992 and 6.8 per cent in 1996, investment ratios jumping
considerably and substantial increase in FDI. Most
indicators looked quite good for these two years.
The supporters of both the governments argue that the
dismissal of both the governments reversed these positive
trends.

Macroeconomic Legacy of the 1990s
The Bottom Line:
The stop-go cycle faced by the Pakistani economic managers
did impose enormous costs and it is quite possible that these
costs have cumulatively caused great damage to the
investment climate of the country.
The military government which came into office in October
1999 was faced with four main challenges: heavy external and
domestic indebtedness; high fiscal deficit and low revenue
generation; rising poverty and unemployment; weak balance
of payments and stagnant exports.
In addition, Pakistan was perceived as a highly corrupt
country with poor governance. Transparency Internationals
survey ranked Pakistan as the second most corrupt country in
1996.
The situation was exacerbated by the initial negative reaction
of the international community to military take-over of the
government as well as high expectations of the people to hold
those found guilty of corruption accountable.




Macroeconomic Legacy of the 1990s
The lingering dispute with the IPPs particularly HUBCO
during the preceding three years had damaged the investor-
friendly image of Pakistan.
The distrust engendered by the freezing of foreign currency
deposits of non-resident Pakistanis in May 1998 had not yet
been erased.
The investor confidence was at its lowest ebb.
Pakistans credibility was quite low with international
financial institutions since the track record of performance
on agreements reached with them, over the preceding
decade, was very poor.
Pakistan faced a serious external liquidity problem and its
reserves were barely sufficient to buy three weeks of imports,
and could not service its short-term debt obligations.
Macroeconomic Legacy of the 1990s
Workers remittances were down by $ 500 million.
FDI dwindled by $ 600 million.
Pakistan had no access to private capital markets.
Due to a declining tax-GDP ratio and inflexible
expenditure structure, 80 percent of revenues were pre-
empted to debt servicing and defence, constraining
governments ability to increase public investment.
It was against this backdrop of imminent default on
external debt, and a heavy debt servicing burden in the
budget that the military government had to design a
strategy for economic revival in December 1999.