The current macro economic situation needs to be analysed in its historical context. From 1950 to 1990 Pakistan was among the fastest growing economies in the developing world. This achievement was remarkable because Pakistan had inherited an economy without any industrial base; had to rehabilitate and absorb 8 million refugees - almost one fourth of the total population; had to fight a war with a much bigger and stronger neighbour in 1965; lost the Eastern Wing and suffered a trauma in 1971.
In the 1970s all major industries, banks, educational institutions were nationalized. In the 1980s the country participated in the Afghan war against the Soviet Union which created some harsh social and geo-political consequences. India in this same period was growing at 3 percent per annum - almost half of Pakistan's growth rate. Per Capita income in Pakistan was much higher than that of India and incidence of poverty was much lower than what was in India. It is obvious from this past experience that the economic potential of Pakistan for higher economic growth does exist.
Since 1990, the tables have turned and we have fallen off that established trajectory. India has surpassed Pakistan not only in per capita income, GDP growth, Human Development indicators but has become one of the fastest growing economies in the world. Bangladesh, which was way behind us in all economic and social indicators, has forged ahead of us and is recording 6 to 7 percent growth rate with impressive gains in social and human development. Pakistan has become a laggard in South Asia.
Why this reversal of fortune? A detailed answer can be found in the book 'Governing the Ungovernable' published by Oxford University Press. The main thesis of the book is that Pakistan's institutions of governance which brought about spectacular results in the first forty years have decayed and become dysfunctional. Patronage-based politics has weakened the civil services which formed the backbone of these institutions. A few examples would illustrate this point.
PIDC along with PICIC and IDBP brought about an industrial revolution from almost a scratch that led to Pakistan's manufactured exports exceeding that of Malaysia's, Indonesia's and the Philippine's.
Agriculture Development Corporation(ADC) pioneered the Green Revolution in the 1960s and a country which could not feed 30 million of its population is now self-sufficient meeting the requirements of 210 million people but also has exportable surplus.
WAPDA constructed the largest and highly complex Indus Basin Works including Mangla and Tarbela dams, in the 1960s and 1970s which increased the availability of irrigation water during the Rabi season.
Planning Commission was able to attract the best talent trained at the top universities abroad and its five-year plans were the benchmark and reference points for other developing countries.
PIA had established itself a leader in aviation industry and many successful airlines today such as Singapore Airline and Emirates were set up by the PIA staff.
Coming to the current economic situation where the economy has to be routed to an ICU at such frequent intervals the question that needs to be answered is: whether there has been an appetite for deep-rooted difficult reforms and political ownership of these reforms.
The answer is that there is an in-built asymmetry in the timing of gains and losses from these reforms. Those who are affected adversely by reforms whether by bringing them into tax net or documenting the economy or removing distortions in the valuation of real estate are all entrenched and want to defend their vested interests. As the losses take place immediately they organize themselves and protest going on strikes and disrupting economic activity.
The losers are supported in these activities by the political parties in opposition to the government and by the media who have also assumed the perpetual role of opposition.
The party in power either gets pressurized by its own rank and file or by the fear of a law and order situation and abandons the reforms and thus reverts to maintaining status quo which was responsible for the ill-health of the economy in the first place. The gainers from the reforms are not yet identifiable as it would take time for the gains to actualize.
Most of the gains are diffused and dispersed widely throughout the economy. The likely gainers would never be able to group or organize themselves in defence of the reforms because they do not yet exist.
This has been the main reason as to why we shun away from reforms which are generally unpopular and adopt adhoc short term palliative measures in order to provide some relief. But as the underlying structures remain unchanged the external and fiscal imbalances continue to worsen.
The country has no other option but to knock on the doors of the IMF or other external lenders to bail them out of the crises situation. This lack of political courage and inability to stick to reforms in the face of adverse sections is the main explanatory factor for the booms and busts of Pakistani economy in the last twenty-five years.
Pakistan economy had taken a turn for better in the 2000-2007 period - tax revenues had tripled, exports in dollar terms had doubled, FDI had reached $ 7-8 million dollars, current account and fiscal balances were under control, banks were privatized, telecom sector was opened up for competition, local governments were empowered to meet the last services at grassroots level, but these reforms did not survive beyond 2007 because either they were reversed or abandoned for sake of political expediency.
In February 2008, the proposals to increase the prices of petroleum products, food, fertilizers, utilities in light of international price hike were turned down by the interim Government on the grounds that the party in power would lose the elections. Consequently, the indecision of that time breached all the barriers and flooded the economic landscape costing huge subsidies that led to large fiscal imbalance and depletion of foreign exchange reserves. The new government had to approach the IMF, devalue the currency and take other harsh measures.
The other question that is frequently asked is: until September 2016 the Pakistani economy was doing well but why in the next 18-24 months did it suffer such serious setbacks in the form of unmanageable current account and fiscal imbalances? Discontinuity in economic management and consequential uncertainty created thereby was the main reason for such sharp downfall.
After the resignation of the Prime Minister, Nawaz Sharif and the cases filed against the then Finance Minister there was nobody minding the store till Miftah Ismail was appointed just before the formation of the Caretaker Government. The Caretaker Government adopted a hands-off approach because they interpreted their mandate of non-interference too literally. Then came the elections and formation of new government which also took some time to assess the situation and make up its mind.
The lesson that should be drawn from this episode is that it is in our larger national economic interests that we do away with the Caretaker Government as the costs of disruption to the economy far outweigh any benefit. For example, the last caretaker government stopped funding development projects in April 2018 and it took more than six months before work was resumed after the elections. There must have been cost overruns for this delay.
A strong fully empowered Election Commission with the Chief Election Commissioner experienced in administration should be allowed to conduct election and the sitting government should continue to manage the economy thus assuring continuity. After all, all political parties insist that neutral external observers should be allowed to watch the conduct of the elections. The role of a Caretaker Government in actual holding of election is minimal and this task can be transferred to the Election Commission.
The second reason we fell off the road was that we exceeded the maximum speed at which the economy could cruise. Given the huge gap between the domestic production capacity and aggregate demand any increase in purchasing power of the people spills over towards imported goods.
The country does not have sufficient capacity to produce petroleum or petroleum products, machinery and equipment, chemicals, raw material for industry not even vegetable ghee, pulses, milk powder - all of which had to be imported to meet the demand of a consumption led economy moving rapidly above its speed limit. As economic growth rate sped off its maximum limit the import bill became unsustainable and the balance of payment situation got worse. Excessive borrowing was resorted to meet the deficit raising the debt burden.
Tax net was so restricted that the government did not secure any gains from higher economic growth. Undocumented sectors such as real estate and flight of capital abroad were the conduit used by the beneficiaries of growth. Decisions to increase prices of electricity and gas were also postponed because of the 2018 elections and fiscal deficit got out of hand. Exports recorded negative growth and were able to finance less than half of imports.
Exchange rate was maintained at an untenable level that precipitated depletion of foreign exchange reserves. Once reserves are on a dwindling path the rupee dollar parity comes under attack and investor confidence is eroded. Thus, political inaction and hiatus along with an unsustainable growth path triggered the financial crises which ultimately led to going back for an IMF program.
The first review of the program has been successfully completed but it is true economic growth has slowed down and inflation has risen to 12-13 percent. Level of economic activity and aggregate demand had to be curtailed to bring the current account and fiscal balances under control.
The popular perception of discontent with the current economic situation has arisen due to this concerted effort of tightening monetary policy and raising interest rate, adjusting exchange rate, documenting the economy and widening the tax net all at the same time aimed at saving the country from becoming insolvent.
Under the stabilization program it was explicitly recognized that the poor would suffer the most through inflation and price hike. Efforts have been made to protect the poor by reinvigorating, consolidating and expanding the Social Protection Program called EHSAS which provides cash transfers to 5.2 million poor households. While overall austerity was observed in government expenditures the budgetary allocation for Ehsas was doubled to Rs.200 billion.
In addition to unconditional cash transfer and cash transfer for girls education new targeted programs have been started. Insaf Sehat Cards entitles free health services upto Rs 700,000 at public and private hospitals for the poor families. Premium for this insurance coverage is paid by the government.
Undergraduate scholarship program of 200,000 scholarships to finance higher education of talented boys and girls from poor families has taken off this year. Interventions for nutritious food and supplements are also at design stage. Subsidies have protected 75 percent of domestic electricity consumers from tariff increases.
Similarly, the lowest category of gas consumers has not been adversely affected by price adjustments. However, it is a fact that the middle class could not be protected from the onslaught of these price increases because of resource constraints. It must also be recognized that the poor do not have any voice but the middle class is quite vocal.