Lately, economic performance under various regimes based on certain indicators is the current focus of debate in the community of analysts. However, economic indicators cannot be seen in isolation. Economy does not operate in a vacuum in a global ecosystem.
There are both external and internal factors at play. The key is to look at the internal policymaking under any given external environment.
The current broad economic cycle of Pakistan started in early 2000s after the successful debt restructuring, as public debt (especially the external debt) became unsustainable in late 1990s, and the country received a fresh start in early 2000s.
As far as economic performance is concerned, the best period was 2002-2006, but solely based on primary macro indicators. The fiscal deficit was below 4 percent of GDP at that time, and the country was running a primary surplus in three out of five years.
The current account was in surplus for three straight years (FY02-04) while the GDP growth averaged at 6.0 percent, and the headline inflation averaged at 5.8 percent. No other period, thereafter, has shown such an economic glory. Does that mean that economic performance was better under Gen Musharraf’s martial law compared to all civilian governments? The answer would be a resounding ‘no’.
By the same token, one cannot say that low inflation in 2014-2017 (averaged at 5.0 percent), controlled current account deficit (average at 1.8 percent of GDP), relatively low fiscal deficit (averaged at 4.7 percent of GDP) and decent GDP growth of 4.3 percent, makes that period any better than others.
The global economy operates in cycles, and it’s imperative for smaller import-driven economies such as Pakistan’s to build buffers while the sun is shining. The policy one government frames has implications for the other. Unfortunately, the economic policy-making in Pakistan has been set based on election cycles with no regard to the adverse implications for the next government.
The so-called landmines were laid by Musharraf’s regime in its last year (FY08), the PML-N (Pakistan Muslim League-Nawaz) government during FY17-18, and the worst decision-making in 2022 (before and after the vote of no-confidence against the then prime minister Imran Khan).
And now the chickens are coming home to roost with government debt again becoming unsustainable amid historic high inflation.
That is the brief history in isolation.
The supposedly golden era of Musharraf was blessed with a flurry of foreign inflows, which were driven due to Pakistan’s assistance to the US in the Afghan War and a global financial boom. However, some sane decisions were taken during 2002-04 – such as deregulation of banking, telecom, and oil & gas sectors. The cumulative foreign direct investment (FDI) was $17.8 billion in FY02-08 (averaging at $2.5 billion annually –1.6 percent of GDP). The debt levels were falling (till FY07) in terms of GDP. However, the situation reversed after FY08.
In Musharraf’s time, global oil prices were low (averaged at $42/barrel during FY02-07) and the global environment was favorable for Pakistan’s economy. Thereafter, global factors were adverse for Pakistan (during PPP’s tenure of FY08-13). First, the global financial crisis had stopped the flurry of FDI; and, secondly, the oil prices averaged at $92/barrel during FY08-13.
Then power shortages and rising terrorism in the aftermath of Pakistan’s support to the US in the Afghan War) did not give PPP any leg to stand on. However, the policy-making was not at all conducive at that time, and the federal fiscal deficit became unsustainable after the half-cooked 7th NFC award and 18th constitutional amendment.
Then, the global dynamics turned in Pakistan’s favor during FY14-18. The oil prices collapsed in FY15 – averaging at $52/barrel during FY16-18. The then government received unconditional fiscal support of $1.5 billion from Saudi Arabia and the IMF gave around two dozen waivers during FY13-16 programme.
The CPEC (China Pakistan Economic Corridor) was signed in 2015, although efforts were in place for the past several years.
However, most of the benefits were wasted in two years (FY17 and FY18), coinciding with emergence of some new political challenges to the ruling PML-N. The Musharraf government in 2008, and the governments of Pakistan Tehreek-e-Insaf (PTI) and Pakistan Democratic Movement (PDM) in 2022 faced more or less identical situations.
The SBP (State Bank of Pakistan) kept the interest rates low at 6 percent while the current account deficit was growing. Too many power projects at expensive rates were initiated in too little time, and several economically questionable projects were added under the CPEC. The unsustainable energy circular debt stems from that time as well. The government refused to increase the power prices despite growing costs. And today, the prices are unaffordable for many.
The economy was set to grow on consumption-led parameters –consumption to GDP was 84 percent during Musharraf’s era, which increased to 92 percent under PML-N rule. On the flipside, investment to GDP ratio further declined.
The seed of unsustainable debt were sown, and the next government (PTI) was stuck to the same consumption-led model, although its handling of the Covid crisis was better than many other countries. Then the IMF (International Monetary Fund) and overall external environment were not supportive, which made the situation even worse.
Worst external factors (globally commodity super cycle in the aftermath of Covid and the Ukraine war) coincided with worst domestic political crisis of this century under the PDM government. The sad part is – just like 2016-18— the internal economic policy choices were based on the same principles of controlling currency and attempt of hiding debt under the carpet. However, this time that did not work, even in the short term.
The young population of the country has seen this all, and it’s not easy to sell the myth of better performance in isolation. The country demands reform in its true spirit. However, politics is still being played under the old rules. This will not work anymore.
Copyright Business Recorder, 2023