ECONOMIC HISTORY OF PAKISTAN
Pakistan had traditionally been rich in some natural resources and contained productive agricultural land — particularly in the Punjab — but most industries were in India. In the 1960s, Pakistan's economy was on par with South Korea's. Now, South Korea has a per capita income times higher and 10 times and more children attend university there is though South Korea has less than a quarter of the population of Pakistan. In the early 2000s, the per capita income in Pakistan was $460, compared to $340 in India, $2,740 in Thailand and $10,000 in South Korea.
According to the “Worldmark Encyclopedia of National Economies”: “Pakistan is a poor, heavily populated country on which internal political instability, phases of military dictatorship, and inefficient, corrupt governmental rule have taken a toll as much as the costly confrontation with neighboring India ever since partition in 1947. The economy is dominated by services, but agriculture still plays an important role. Pakistan's most important industry is textiles, which alone represents about 60 percent of the country's exports. [Source: “Worldmark Encyclopedia of National Economies”, The Gale Group Inc., 2002]
Since the 1960s, the economy of Pakistan has been dominated inefficient and often corrupt state-owned companies that relied on government subsidies that drained resources to stay alive. Low productivity exists in both the agricultural and industrial sectors
For much of its existence Pakistan "has usually managed to survive through by begging and borrowing — and forever promising to clean up its act.” On numerous occasions, Pakistan has staved off financial collapse by with the help of some 11th-hour debt juggling orchestrated by the IMF (International Monetary Fund) and World Bank. The Pakistan government always has promised to make reforms but somehow they do are not get made and the IMF doesn't push hard enough to make sure they are.
Pakistan’s Surprising Economic Growth After Independence in 1947
Pakistan attained nationhood under difficult circumstances. At the partition of British India in 1947 resulting in the creation of the independent nations of India and Pakistan, Pakistan was an agrarian economy in which a small number of powerful landowners with large holdings dominated the countryside. The majority of the population consisted of tenant farmers who cultivated small plots for a meager existence. Scant rainfall in West Pakistan (present-day Pakistan) forced farmers to rely on the extensive irrigation system developed by the British. The headwaters of the Indus River and its main tributaries, however, were under Indian control. Disputes arose between the two nations and were not settled until the Indus Waters Treaty of 1960 was signed. [Source: Peter Blood, Library of Congress, 1994 *]
Pakistan had almost no industry in 1947. Under British rule, the area that became Pakistan supplied agricultural products for processing to the territory that became the independent India. Energy sources were rudimentary, with wood and animal dung furnishing the bulk of the energy consumed. Ports, transportation, and other services, such as banking and government, were underdeveloped. More than 1,600 kilometers of Indian territory separated the East Wing and West Wing of Pakistan until the former became independent Bangladesh in 1971. In 1949 a dispute over exchange rates halted the flow of goods between Pakistan and India, disrupting the complementary nature of their economies that had developed under British colonial rule.*
Despite formidable problems, Pakistan achieved rapid economic expansion. From 1951 to 1986, the GDP growth rate measured at a constant 1960 factor averaged 5.2 percent. Rates of growth averaged 3.1 percent in the 1950s — when agriculture stagnated — but rose to 6.8 percent in the 1960s. They fell to 3.8 percent between 1971 and 1977 but rebounded to 6.8 percent between 1978 and 1986. From 1987 to 1991, growth averaged 5.8 percent, and a rate of 7.8 percent was achieved in 1992. Provisional data indicate that GDP grew only 2.6 percent in 1993. This decline is mainly a result of the floods in September 1992, which reduced agricultural output.*
Pakistan Takes a Leftist Turn
By the late 1960s, there was growing popular dissatisfaction with economic conditions and considerable debate about the inequitable distribution of income, wealth, and economic power — problems that had always plagued the country. Studies by economists in the 1960s indicated that the forty big industrial groups owned around 42 percent of the nation's industrial assets and more than 50 percent of private domestic assets. Eight of the nine major commercial banks were also controlled by these same industrial groups. [Source: Peter Blood, Library of Congress, 1994 *]
Concern over the concentration of wealth was dramatically articulated in a 1968 speech by Mahbubul Haq, then chief economist of the Planning Commission. Haq claimed that Pakistan's economic growth had done little to improve the standard of living of the common person and that the "trickle- down approach to development" had only concentrated wealth in the hands of "twenty-two industrial families." He argued that the government needed to intervene in the economy to correct the natural tendency of free markets to concentrate wealth in the hands of those who already possessed substantial assets.
Although Haq exaggerated the extent of the concentration of wealth, his speech struck a chord with public opinion. In response, the government enacted piecemeal measures between 1968 and 1971 to set minimum wages, promote collective bargaining for labor, reform the tax structure toward greater equity, and rationalize salary structures. However, implementation was weak or nonexistent.
Ineffective Leftist Economic Policy of Zulfiqar Ali Bhutto
It was only when the government of Zulfiqar Ali Bhutto (father of Benazir) came to power in 1971 that there was a major shift in government policy.Bhutto promised a new development strategy more equitable than previous policies. Yet he downplayed economic analysis and planning and relied instead on ad hoc decisions that created many inconsistencies. In May 1972, he promulgated a major act that devalued the rupee by 57 percent and abolished the multiple-exchange-rate system. This act greatly stimulated exports and indicated that the removal of price distortions could spur the economy. But devaluation also completely altered the cost and price structure for industry and affected the level and composition of industrial investment and the terms of trade between the industrial and agricultural sectors. Devaluation helped agriculture, particularly larger farms that had marketable surpluses. Mechanization increased but had the adverse side effect of displacing farm laborers and tenants, many of whom migrated to cities seeking industrial jobs. [Source: Peter Blood, Library of Congress, 1994 *]
In 1972 Bhutto's government nationalized thirty-two large manufacturing plants in eight major industries. The industries affected included iron and steel, basic metals, heavy engineering, motor vehicle and tractor assembly and manufacture, chemicals, petrochemicals, cement, and public utilities. Subsequently, domestically owned life insurance companies, privately owned banks, domestic shipping companies, and firms engaged in oil distribution, vegetable oil processing, grain milling, and cotton ginning were nationalized. The result was a drop of nearly 50 percent in private investment in large-scale manufacturing between 1970 and 1973. By 1978 such investments were little more than one-third (in constant prices) of those in 1970. Private capital fled the country or went into small-scale manufacturing and real estate. Between 1970 and 1977, industrial output slowed considerably.*
The public sector expanded greatly under the Bhutto government. In addition to the nationalization of companies, plants were built by the government and additional public companies were created for various functions, such as the export of cotton and rice. Able managers and technicians were scarce, a situation that became worse after 1974, when many persons left to seek higher salaries in Middle East oil-producing states. Labor legislation set high minimum wages and fringe benefits, which boosted payroll costs for both public and private firms. Efficiency and profits in public-sector enterprises fell. Public industrial investment rose, surpassing private industrial investment in 1976.*
Many of the other economic measures undertaken by the Bhutto government were largely ineffective because of the power of vested interests and the inefficiency of the civil administration. Ceilings on the size of landholdings were lowered, tenants were given greater security of tenure, and measures were enacted to tax farm income. Bhutto also supported large, but inadequately planned, long-term projects that tied up the country's development resources for long periods. The largest projects were an integrated iron and steel plant, a major highway on the west bank of the Indus River, and a highway tunnel in the mountainous north.*
Islamization of the Pakistan Economic Under General Zia
Mohammad Zia ul-Haq (1977-88) passed laws that banned the payment of interest. Banks were required to develop a variety of schemes to keep doing business. After 1977 the government under Zia began a policy of greater reliance on private enterprise to achieve economic goals, and successive governments continued this policy throughout the late 1980s and early 1990s. Soon after Zia came to power, the government instituted constitutional measures to assure private investors that nationalization would occur only under limited and exceptional circumstances and with fair compensation. A demarcation of exclusive public ownership was made that excluded the private sector from only a few activities. Yet government continued to play a large economic role in the 1980s. Public-sector enterprises accounted for a significant portion of large-scale manufacturing. In 1991, it was estimated that these enterprises produced about 40 percent of industrial output. [Source: Peter Blood, Library of Congress, 1994 *]
Islamization of the economy was another policy innovation of the Zia government. In 1977 Zia asked a group of Islamic scholars to recommend measures for an Islamic economic system. In June 1980, the Zakat and Ushr Ordinance was promulgated. Zakat is a traditional annual levy, usually 2.5 percent, on wealth to help the needy. Ushr is a 5 percent tax on the produce of land, allowing some deductions for the costs of production, to be paid in cash by the landowner or leaseholder. Ushr replaced the former land tax levied by the provinces. Self-assessment by farmers is checked by local groups if a farmer fails to file or makes a very low estimate. Proceeds of ushr go to zakat committees to help local needy people.*
Pakistan Becomes More Market-Oriented
According to the “Worldmark Encyclopedia of National Economies”: “After growing at an average rate of over 6 percent per year from 1980 to 1991, real gross domestic product (GDP) growth slowed during the 1990s and dropped to 1.3 percent in 1996-97 due to a poor cotton crop and related setbacks in the textile industry. In 1997-98, growth hit 4.3 percent against a governmental target of 6 percent. Real GDP grew only by 3.1 percent in 1998-99 but went up to 4.5 percent during 1999-2000. Pakistan's GDP per capita was US$450 in 1999, which puts it slightly above the South-Asian average of US$440 per capita. [Source: “Worldmark Encyclopedia of National Economies”, The Gale Group Inc., 2002]
“Since the late 1980s, Pakistan has pursued a program of market-oriented economic adjustment, reform, and development. With the support of international financial institutions — mainly the International Monetary Fund (IMF) and bilateral donors — this program has aimed at enhancing macroeconomic stability, promoting the private sector and export-led industrial development, and reversing past neglect of key social sectors such as health, education, and population planning. Specifically, the government has sought to reduce monetary and external imbalances, reduce trade barriers, modernize the financial sector, privatize state-owned industries, and offer specific incentives to attract foreign investment. Unfortunately, the implementation of this program has mostly lagged behind expectations.
“Despite the availability of cheap labor, a large domestic market, and access to regional markets, foreign investors have shied away from investing their money in Pakistan because of its widespread corruption, lack of skilled labor, law and order problems (especially in Karachi, the industrial hub), and an outdated infrastructure . Domestic investment has also slowed in recent years. According to official figures, total investment has declined from an average of 17.1 percent of GDP a year between 1984 and 1994 to 7.9 percent between 1994 and 2000. One reason is that manufacturers, who are traditionally served by the domestic banking system (particularly yarn spinners and sugar refiners), have often failed to honor their debts, contributing to a banking crisis.
BCCI Scandal
Bank Credit and Commerce International (BCCI) was one of the most important banks in the 1980s not only in Pakistan but also in the Middle East and South Asia. The United States and Saudi Arabia used to funnel money to the Afghan mujahadeen fighting against the Soviet Union. It was also popular with intelligence agencies, heroin traffickers and money launderers.
BCCI collapsed in July, 1991 with more $1 billion losses after being charged with massive fraud and connections to organized crime. It was 77 percent owned by the United Arab Emirates. The U.A.E. offered $1.8 billion in compensation.
BCCI In the 1970s and 1980s had many close links with the Pakistani political and commercial elite. It was founded in 1972 by Agha Hasan Abedi, a leading Pakistani banker. Prime Minister Nawaz Sharif's family company, Ittefaq Industries, was a major borrower. BCCI's international operations were run from London, but there were three important branches in Pakistan. Abedi resigned as president of BCCI in 1990, when the ruling Al Nuhayyan family of Abu Dhabi obtained a majority share in the company. [Source: Peter Blood, Library of Congress, 1994 *]
BCCI collapsed in July 1991 when the Bank of England closed BCCI's operations amid allegations of massive losses, fraud, racketeering, and laundering of drug money. The Pakistani branches continued to operate for some time after BCCI had been closed elsewhere, and there were many allegations that Pakistani businessmen and politicians had profited from the bank's illegal activities. Abedi was later indicted in the United States for fraud and racketeering. In 1992 Pakistani operations of BCCI were amalgamated with Habib Bank.*
In 1991 four Punjab-based financial cooperatives, together known as the Pakistan Cooperative Societies, failed amidst allegations of misappropriation of public funds. Estimates of money lost by depositors ranged from Rs10 billion to Rs23 billion, with up to 2.6 million accounts affected. Two of the four cooperatives were owned by relatives of then Prime Minister Nawaz Sharif, but an official inquiry cleared him and his family of any wrongdoing.*
Economic Reforms and Sanctions
According to “Countries of the World and Their Leaders” “The government started pursuing market-based economic reform policies in the early 1980s. These reforms began to take hold in 1988, when the government launched an ambitious IMF-assisted structural adjustment program in response to chronic and unsustainable fiscal and external account deficits. The government began to remove barriers to foreign trade and investment, reform the financial system, ease foreign exchange controls, and privatize dozens of state-owned enterprises. [Source: Countries of the World and Their Leaders Yearbook 2009, Gale]
Efforts to stimulate growth in the late 1980s early 1990s included major tax breaks, privatization, and tariff cuts. Pakistan launched its privatization campaign in 1988. It sold off half of its state-owned enterprises between 1990 and 1996. By 2002, it sold 108, mostly small, companies, for $1.5 billion. The economy of Pakistan grew at 6 percent in the 1980s and early 1990s, one of the highest rates in the region.
The government of Prime Minister Nawaz Sharif (1990-93) introduced a program of privatization, deregulation, and economic reform aimed at reducing structural impediments to sound economic development. Top priority was given to denationalizing some 115 public industrial enterprises, abolishing the government's monopoly in the financial sector, and selling utilities to private interests. Despite resistance from officials and labor unions and criticism that the government was moving too quickly, by March 1992 control of twenty industrial units and two banks had been sold to private investors, and plans were under way to begin denationalizing several utilities. [Source: Peter Blood, Library of Congress, 1994 *]
As of early 1994, proposals to end state monopolies in insurance, telecommunications, shipping, port operations, airlines, power generation, and road construction were also in various stages of implementation. Private investment no longer requires government authorization, except in sensitive industries. Investment reforms eliminated government sanction requirements, eased restrictions on repatriable direct and portfolio investment from abroad, enabled foreign firms to issue shares in enterprises in Pakistan, and authorized foreign banks to underwrite securities on the same basis as Pakistani banks.*
Although the Nawaz Sharif government made considerable progress in liberalizing the economy, it failed to address the problem of a growing budget deficit, which in turn led to a loss of confidence in the government on the part of foreign aid donors. The caretaker government of July-October 1993 led by Moeen Qureshi, a former World Bank vice president, asserted that the nation was near insolvency and would require a number of measures to impose fiscal discipline. The government thus included sharp increases in utility prices, new taxes, stiffer enforcement of existing taxes, and reductions in government spending. In early 1994, the government of Benazir Bhutto, elected in October 1993, announced its intention to continue the policies of both deregulation and liberalization carried out by Nawaz Sharif and the tighter fiscal policies put in place by Qureshi. The government also said it intended to devote a greater proportion of the nation's resources to health and education, especially for women.*
IMF Steps in to Prop Up Pakistan’s Economy
Severe floods in late 1992 weakened exports during 1992 to 1993. In 1995 the government failed to follow recommendations by the International Monetary Fund (IMF) to pursue a more market-oriented economy, so the IMF suspended a US$1.5 billion loan. By 1996 the economy was in the worst recession in 25 years. Tax receipts and export income were down, [Source: Junior Worldmark Encyclopedia of the Nations, Thomson Gale, 2007]
According to the “Worldmark Encyclopedia of Nations”: “The government pursued policies aimed at private sector-led development, macro economic stability, and structural reforms. Overall growth indicators remained promising with the reform measures, as GDP increased by 5.5 percent in 1990/91 and 7.8 percent in 1991/92, and export growth averaged a robust 14 percent between 1989 and 1992. These improvements notwithstanding, reform efforts secured less than expected reductions in the country's balance of payment deficits, due in part to deteriorating terms of trade in the wake of rising oil prices during the 1991 Gulf War. Severe floods in the Sindh and Punjab provinces in late 1992 and a contraction in international commodity markets weakened Pakistan's export sector during 1992/93, further exacerbating the country's trade and current account deficits and helping to reduce GDP growth to only 3 percent in 1993. [Source: “Worldmark Encyclopedia of Nations”, Thomson Gale, 2007]
“In March of 1994 the government received IMF approval of a three-year Enhanced Structural Adjustment Facility (ESAF) to support reforms. The IMF wanted austerity measures aimed at reducing the government deficit to 4 percent of GDP, a reduction in the maximum tariff rate from 70 percent to 45 percent, increased privatization of large state-owned enterprises, and a tax on agricultural income. However, the government's failure to follow the IMF recommendations and liberalize the economy caused the IMF to suspend the $1.5 billion loan in mid-1995. The suspension of the loan worried investors and damaged Pakistan's debt ratings. The trade deficit grew, foreign exchange reserves dwindled, and inflation remained high.
“After the government recommitted itself to reform, the IMF approved a new $600 million standby arrangement in September 1995. Still, by 1996 the economy was in its worst recession in 25 years. Tax receipts were falling well below their targets and export earnings had declined, leaving the government with a deepening foreign-exchange crisis as reserves fell to only $500 million by the end of the year. By mid-1997, the government owed $1.6 billion in interest on $30 billion owed to foreign creditors, putting the country perilously close to default. Growth in GDP was only 1.2 percent in 1997, down from 6.1 percent in 1996. Growth rebounded to 4.2 percent in 1998/99 as per capita income reached $434, up from $400 in 1990.
Economic Troubles After Sanctions for Pakistan’s Nuclear Tests in 1998
International economic sanctions were imposed Pakistan following its six nuclear bomb tests in May 1998, and then again after the elected government was overthrown in a military coup in 1999 led by General Pervez Musharraf. Corruption under the Bhutto and Sharif governments didn’t help matters. Much of the money stolen by the Bhutto and Sharif governments was deposited in foreign accounts. By some counts $30 billion was smuggled out of the political during democratic rule in the 1990s.
The economy of Pakistan was hit hard by the sanctions. The growth rate was near zero, there were virtually no foreign reserves, investors were scared off by the murder of Americans. The treasury contain less than $1 billion, but the government owed $30 billion to international financial institutions and $30 billion to domestic creditors. The national treasury is so low that Prime Minister Nawaz Sharif has solicited personal donations and deposits from Pakistanis both home and abroad to the help the government from defaulting on loans. Sharif told ordinary Pakistanis to drink two cups of tea instead of three and cook with one spoonful of oil instead of two. In November 1998, the IMF agreed to supply Pakistan with a $5.5 billion bailout package. In the late 1990s, the Pakistani economy was is a basket case. After visiting Pakistan one World Bank official said, "It was worse than anything I had expected. Pakistan has no reserves, no economic teams to advise it, no friends ready to come in with cash."
The Pakistani government’s debt increased close to the point of default. Growth was only 1.2 percent in 1997, but rebounded in 1999 to 4 percent. and then dropped to 2.5 percent in 2001. GDP growth rose slightly to 3.6 percent in 2002.
Pakistan’s Huge Debt
Pakistan had a debt of around $50 billion in 1998, more than the $43 billion debt in India, which is five times Pakistan’s size. Pakistan's debt at that time was roughly equal to its GDP.
At its peak in the late 1990s, debt ate up 64 percent of the national budget. In 1999, three quarters of the aid received from the IMF went to pay debts to the IMF. Debt payments of $5.5 billion (1998) ate up about half of Pakistan's $10.3 billion budget. At that time the military consumed $3 billion (29 percent) of the budget, leaving about $515 million (about half the budget for school system in a large U.S. county) for law enforcement, education, health care, housing and other things.
Pakistan’s debt in 2000 was $38 billion. Interest payments ate up half the budget. Large government expenditures on public enterprises, low tax revenues, and high levels of defense spending all contributed to serious financial deficits during the late 1980s. In response, the government began a major economic reform program with the World Bank and support from the International Monetary Fund (IMF). . [Source: Junior Worldmark Encyclopedia of the Nations, Thomson Gale, 2007]
According to “Countries of the World and Their Leaders”: “Although the economy became more structurally sound, it remained vulnerable to external and internal shocks, such as in 1992-93, when devastating floods and political uncertainty combined to depress economic growth sharply. The Asian financia crisis seriously affected Pakistan's major markets for its textile exports. For example, average real GDP growth from 1992 to 1998 dipped to 4.1 percent annually. Economic reform also was set back by Pakistan's nuclear tests in May 1998, and the subsequent economic sanctions imposed by the G-7. International default was narrowly averted by the partial waiver of sanctions and the subsequent reinstatement of Pakistan's IMF enhanced structural adjustment facility/extended fund facility in early 1999, followed by Paris Club and London Club re-scheduling. After taking power in late 1999, President Musharraf instituted policies to stabilize Pakistan's macroeconomic situation. Pakistan continues to struggle with these reforms, having mixed success, especially in reducing its budget and current account deficits. [Source: Countries of the World and Their Leaders Yearbook 2009, Gale]
Economy Under Musharraf: 1999 to 2008
Pervez Musharraf, who took power in 1999 and led Pakistan until 2008, went after tax dodgers, cut energy subsidies, accelerated the privatization effort, trimmed the inefficient bureaucracy, and reduced the debt of nationalized banks. Rather that tax the wealthy to try to get back looted wealth, Musharraf chose instead to introduce strict Islamic banking laws.
According to “Countries of the World and Their Leaders”: In 2000, the government made significant macroeconomic reforms: Privatizing Pakistan's state-subsidized utilities, reforming the banking sector, instituting a world-class anti-money laundering law, cracking down on piracy of intellectual property, and moving to quickly resolving investor disputes. [Source: Countries of the World and Their Leaders Yearbook 2009, Gale]
Pakistan won praise form the World Bank and International Monetary Fund. The IMF was impressed enough by Musharraf's efforts to allow the flow of IMF money to continue. Otherwise Pakistan's economic woes — chronic budget deficits, huge debts, low foreign reserves — continued.
In 2002, in the midst of rising tensions with India and fighting in Afghanistan, Pakistan launched an aggressive privatization drive in which some of the biggest state-owned enterprises, including banks, and oil and gas companies, were offered for sale to domestic and international investors. At this time many foreigners were leaving Pakistan and the people expected to profit the most were the feudals (the rich elite and large land owners).
Musharraf’s Tax Reform Effort
Musharraf attempted to tackle Pakistan's economic woes by going after people who didn't pay their taxes, which is practically everyone one in Pakistan, people who defaulted on loans. Front page ads were placed in newspaper that read: "ATTENTION ALL LOAN DEFAULTERS! Last Chance — Pay Up of Face the Consequences." The ad was aimed at cronies of the Sharif government that were given large loans and hadn't paid them back.
Musharraf went after large landowner who are notorious for not paying taxes and extended the sales tax to cover retail shop keepers. He had hoped to collect an additional $12 billion in taxes annually.
Musharraf wanted to levy a general sales tax of 15 percent and install the mechanism to collect: tax survey forms. Newspaper headlines read: "WARNING!! All taxpayers are warned that a comprehensive tax survey is being launched in which your concealed income and assets will be unearthed." [Source: Barry Bearak, New York Times, May 30, 2000]
The Musharraf government launched a tax amnesty plan in which deadbeats were given an opportunity to pay taxes on earnings before June 30, 1999 at rate of only 10 percent. Those that didn't take advantage of the offer were threatened with having to pay a 30 percent rate and face a prison sentence of up to 5 years. The amnesty program was largely a failure, collecting the equivalent of only a few million dollars.
Musharraf government tried to tax cross-border smuggling. Around 1,000 of the "most corrupt" bureaucrats in the revenue office were fired. Tax revenues increased by 40 percent between 1999 and 2003 in part because before that time the tax collection rates were so dismally low.
In June 2000, teams of soldiers and revenue offices fanned out across Karachi, Islamabad, Lahore and other cities, delivering tax survey forms to businesses and homes. The surveys asked for inventories of purchases, rents, utility and employees. The punishment for ignoring the survey was three months in jail. Shopowners closed their stores when the tax survey teams appeared in their neighborhood. In Islamabad, shopowners even carried out a strike to protest the survey.
Shopowners claimed that the government’s should crackdown on corruption and bribe taking in the tax offices and bureaucracy. They also complain that little of the tax money ends up paying for public services such as health and education.
Impact of 9-11 and the Invasion of Afghanistan on the Pakistan Economy
The September 11th attack in New York and the war on Afghanistan were a boost for the Pakistani economy as U.S. money and economic activity poured into the region in association with war in Afghanistan and win Pakistan’s support for what to pay for the U.S. was dooing in Afghanistan.
Before September 11th Pakistan’s economy had grown but had difficulty keeping pace with population growth. After September 11th, the economy was boosted by American aid and debt relief, a surge remittances from Pakistanis living abroad, an influx of foreign aid and a deferment of oil cost by friendly nations in the Middle East. At that time the Musharraf government was given credit for not wasting the largesse it received.
According to “Countries of the World and Their Leaders”: After September 11, 2001, and Pakistan's proclaimed commitment to fighting terror, many international sanctions, particularly those imposed by the United States, were lifted. Pakistan's economic prospects began to increase significantly due to unprecedented inflows of foreign assistance at the end of 2001. Foreign exchange reserves and exports grew to record levels after a sharp decline. The International Monetary Fund lauded Pakistan for its commitment in meeting lender requirements for a $1.3 billion IMF Poverty Reduction and Growth Facility loan, which it completed in 2004, forgoing the final permitted tranche. The Government of Pakistan has been successful in issuing sovereign bonds, and has issued $600 million in Islamic bonds, putting Pakistan back on the investment map. Pakistan's search for additional foreign direct investment has been hampered by concerns about the security situation, domestic and regional political uncertainties, and questions about judicial transparency. [Source: Countries of the World and Their Leaders Yearbook 2009, Gale]
“U.S. assistance has played a key role in moving Pakistan's economy from the brink of collapse to setting record high levels of foreign reserves and exports, dramatically lowering levels of solid debt. Also, despite the earthquake in 2005, GDP growth remained strong at 6.6 percent in fiscal year 2005/ 2006. In 2002, the United States led Paris Club efforts to reschedule Pakistan's debt on generous terms, and in April 2003 the United States reduced Pakistan's bilateral official debt by $1 billion. In 2004, approximately $500 million more in bilateral debt was granted. Consumer price inflation eased slightly to an average of 8 percent in 2005/2006 from 9.3 percent in 2004/2005.
Economic Growth After the 9-11 and the Invasion of Afghanistan
Growth was 3.1 percent in 1999, 2.7 percent in 2000, about enough to keep pace with 2.6 percent population growth. Growth in 2001 was 2 percent. In 2002 it was 3.2 percent A long drought in the late 1990s and early 2000s finally broke in 2003. Growth in 2003 was 5.1 percent. Exports rose to $8.1 billion that year. The value of the Karachi stock market increased by 66 percent in 2003. Real estate values soared. Some Pakistan emigrants returned home to start businesses.
GDP growth averaged 5 percent over the 2001–05 period. Inflation averaged 5.2 percent over the same period. Growth in 2004 was 6.4 percent. Only China and Thailand had higher growth rates The deficit was reduced to 4.5 percent of GDP compared to 7 percent in the late 1990s. In 2004, debt payments dropped to 35.4 percent of the budget, compared to 64 percent in the 1990s. At the same time spending on education and health rose 20 percent. Sales of cars, houses and electronic goods was also booming. Foreign reserves in 2005 wee $12.7 billion compared to $1 billion in 2001.
Export earnings doubled between 2000 and 2005, mainly from textiles. The stock market continued soaring. Capitalization in 2005 was $40 billion compared to $5 billion in 1998. Most of the benefit were enjoyed by the well off, Not much trickled down to the poor. According to one study 34 percent of the benefit of growth went to the richest 10 percent and only 3 percent went to the poorest 10 percent.
According to “Countries of the World and Their Leaders”: “Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. The trends of resources being devoted to socioeconomic development and infrastructure projects have been improving since 2002, although expenditures remain below global averages. Pakistan's extreme poverty and underdevelopment are key concerns, especially in rural areas. The government has reined in the fiscal mismanagement that produced massive foreign debt, and officials have committed to using international assistance — including a major part of the $3 billion five-year U.S. assistance package — to address Pakistan's long-term needs in the health and education sectors. [Source: Countries of the World and Their Leaders Yearbook 2009, Gale]
Pakistan’s Economy in the Late 2000s
A devastating earthquake in northern Pakistan and Kashmir in n October 2005 killed about 80,000 people. More than 3 million people were left homeless, mostly in Pakistan, and they struggled through a rough winter. Foreign donors pledged over US$6 billion to support reconstruction after the quake. Despite this the economic perform reasonably well in 2006 and 2007. GDP growth had become less dependent on agriculture; industrial production was increasing. [Source: Junior Worldmark Encyclopedia of the Nations, Thomson Gale, 2007]
According to the “Worldmark Encyclopedia of Nations”: “Although substantial progress had been made on macroeconomic reforms, by 2006 progress on more politically-sensitive reforms had slowed. For example, in the 2006 fiscal year budget, the government did not impose taxes on the agriculture or real estate sectors, despite Pakistan's severely-low tax-to-GDP ratio. Despite Pakistan's low level of development, prospects for job creation and poverty reduction were good in the medium term. GDP growth, prodded by double-digit gains in industrial production over 2005, has become less dependent on agriculture, and stood at 8.4 percent in 2005. Foreign exchange reserves continued to reach new levels in 2005, spurred on by steady workers' remittances. [Source: “Worldmark Encyclopedia of Nations”, Thomson Gale, 2007]
2008-2009 Global Financial Crisis and Pakistan
The ouster of Musharraf in 2008 coincided with the beginning of the 2008-2009 global financial crisis. Musgarraf was replaced by Asif Ali Zardari, the husband of Benazir Bhutto. According to the Los Angeles Times: He “took over an economy reeling from the worldwide financial crisis and on the verge of default. A $7.6-billion bailout loan issued in November 2008 by the International Monetary Fund was later ramped up to $11.3 billion. That loan came with strings attached, including a condition that the government institute tax changes in a country where most people do not pay income taxes. The government has yet to make any inroads in improving its tax base, a failure that experts say has hampered the country’s ability to cope with the recovery tasks ahead. [Source: Alex Rodriguez, Los Angeles Times, September 19, 2010]
At the time the 2008-2009 global financial crisis began, Laura King wrote in the Los Angeles Times: Take a restive, nuclear-armed nation with an untested new government, an escalating Islamic insurgency, long-standing tensions with its neighbors and an economy in free fall for months. Then add in a global financial crisis. Some analysts and diplomats fear Pakistan could come to exemplify a perilous new phenomenon: a strategic but unstable state at risk of being pushed to the breaking point by external economic factors. [Source: Laura King, Los Angeles Times, October 14, 2008]
“Government officials insist that Pakistan’s economic fundamentals, while weakened, are holding steady. But this politically volatile country can ill afford more upheaval. Pakistan’s creditworthiness rating is the second worst among nations ranked by Standard and Poor’s, superior only to that of the Seychelles. The country’s new president, Asif Ali Zardari, felt compelled to offer assurances that “Pakistan is not going bankrupt.” Around the same time :armed police surrounded the Karachi stock exchange to prevent a recurrence of the stone-throwing rioting by investors that occurred in July. “The global crisis has really added fuel to the fire,” said market analyst Muhammad Suhail. “There was a time window earlier this year to address all this, and we missed it.”
Pakistan has been a relative economic success story for much of the 2000s but at the time of 2008-2009 global financial crisis was “undergoing a punishing reversal of fortune. In the last six months, its main stock exchange has lost more than half its value. The national currency, the rupee, stands at historic lows, even with propping up last week by the state bank, which also intervened to improve market liquidity. Foreign-exchange reserves are depleted, the budget deficit is at a 10-year high, inflation is running about 24 percent annually, and debt obligations are looming large.
“From the poorest of the poor to the wealthy elite, Pakistanis are frightened. Some say the wretched state of the economy scares them more than the threat of terrorist attacks. “You know, I can wake up any morning and say to myself, ‘OK, God willing, I don’t think a suicide bomber is going to find me or my family today,’ ” said Zeeshan Qadir, a merchant. “But I know for certain it is going to get harder that day to pay my bills.”
“In a country with a tradition of educating many of its best and brightest in the West, an Islamabad society matron — who did not want her name used because she feared her remarks would reflect badly on her husband’s quietly beleaguered construction firm — bemoaned the now-ruinous cost of overseas tuition for her college-age sons. “I really dread telling them they may have to come home,” she said, distractedly twisting the rings adorning her delicate fingers. “But I don’t see how we can continue to afford it.”
“Those at the lowest economic rung, meanwhile, say they can no longer count on the balm of charity to see to their basic needs. “Before, the people who saw me every day would give me enough rupees to buy bread,” said a crippled beggar named Mangal, who seeks alms from motorists in the city of Rawalpindi. “Now they only give the smallest kind of coin and say, ‘Sorry, brother, I don’t have much to spare.’ ”
“In attempting to weather the storm, Pakistan has some significant advantages, including a fairly well diversified economy. Three million citizens working abroad send home about $6.5 billion in annual remittances. Few bank assets are tied up in mortgages. The government has begun to move away from subsidies that are a drag on the economy. Some help is already on the way. Pakistani officials have said the World Bank will provide $1.4 billion this year, mainly earmarked for paying down the budget deficit, and the Asian Development Bank last month approved a $500-million loan. In some respects, Pakistani financial officials see themselves as having been ahead of the regulatory curve. For example, they had banned “short selling” before the global market turmoil broke out. “The rest of the world is discovering it will have to remake its financial systems,” said Karachi-based economic analyst Haris Gazdar. “Here, we have already realized that.”
In 2010, the government’s debt had ballooned to $55 billion. The tax base was s anemic, and a third of the population was below the poverty line. That year Pakistan was hit by devasting floods that ravaged some of the country’s key agricultural areas. In 2013, the country faced a balance of payments crisis and had only enough cash for one month’s worth of imports before the International Monetary Fund approved a loan package of $6.7 billion. In 2014 Pakistan is struggling to deal with a massive energy crisis, high unemployment and a shortfall in tax revenue. It has borrowed heavily to pay to cover government expenditure and received $12 billion from the World Bank.
Image Sources: Wikimedia Commons
Text Sources: New York Times, Washington Post, Los Angeles Times, Lonely Planet Guides, Library of Congress, Pakistan Tourism Development Corporation (tourism.gov.pk), Official Gateway to the Government of Pakistan (pakistan.gov.pk), The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Reuters, Associated Press, AFP, Wikipedia and various books, websites and other publications.
Last updated February 2022