MACROECONOMICS ISSUES IN PAKISTAN
Budget surplus (+) or deficit (-):-5.8 percent (of GDP) (2017 est.); compared with other countries in the world: 178. [Source: CIA World Factbook, 2020]
Public debt: 67 percent of GDP (2017 est.); 67.6 percent of GDP (2016 est.); compared with other countries in the world: 56
Reserves of foreign exchange and gold: US$18.4 6 billion (31 December 2017 est.); US$22.05 billion (31 December 2016 est.); compared with other countries in the world: 62
Debt — external: US$82.19 billion (31 December 2017 est.); US$70.45 billion (31 December 2016 est.); compared with other countries in the world: 55
Although Pakistan’s economy is more structurally sound than it used to be, it is still vulnerable to external and internal shocks, such as earthquakes and floods that devastated the country in 1992-93, 2005 and 2010. The Asian financial crisis in 1997-1998 and the global financial crisis in 2008-2009 seriously affected Pakistan's major markets, especially for its textile exports. Economic reforms have been affected by internal factors such leadership changes and external factors such as sanctions imposed after Pakistan's nuclear tests in May 1998. After that international default was only averted by the partial waiver of sanctions and IMF and World Bank help. Pakistan continues to struggle with debt and deficits. The World Bank has given loans to Pakistan to help it set up modern auditing procedures. [Source: Countries of the World and Their Leaders Yearbook 2009, Gale]
Problems with Pakistan’s Economy
Among the main forces that cause Pakistan’s economy to seemingly eternally verge on the state to collapse are power of moneyed elite and influence and social consquences of religious extremism. Atif Mian wrote in the New York Times: “If an airplane took off a dozen times only to come crashing down each time, the only logical conclusion would be that the aircraft requires a fundamental redesign. Pakistan’s economy, like the airplane, has crashed 13 times in the last 60 years, each time requiring an International Monetary Fund bailout. [Source:Atif Mian, New York Times, December 10, 2019, Mr. Mian is an economics professor at Princeton]
“It wasn’t always so. During the 1980s, in per capita terms Pakistan was richer than India, China and Bangladesh by 15, 38 and 46 percent. Today Pakistan is the poorest. Its most recent gross domestic product growth estimate was only 3.3 percent, barely sufficient to keep pace with population growth. Pakistan’s federal government is effectively bankrupt.” In 2018, the sum of interest payment due on the government’s debt obligations and pension payments owed to retired employees was more than the federal government’s net revenue. The entire government machinery, including the military, is running on borrowed money.
“The consequences of Pakistan’s crashing economy have been devastating for its over 200 million people. They are instinctively aware of how far they have fallen behind and there is a clamor for change for a future where their children can live in dignity and comfort. The fundamental challenge in bringing change is that those who are benefiting the most from the dysfunctional economy and stand to lose the most from change would fight every attempt at reform and attack the people trying to ensure reform.
“Pakistan’s leadership must muster the courage to take on two primary forces of the status quo that hold the country back. First, the moneyed elite who tip the scales of markets in their favor through unfair business practices, tax evasion and preferential access to power. They use their privilege to grab the fruits of other people’s labor rather than create something of value through their own enterprise.
“The second force inhibiting Pakistan’s progress is religious extremism. Decades of patronage by successive military and civilian governments for promoters of religious hate has created a culture of institutionalized intolerance. The result has been devastating for society. Thousands have been killed, communities have been ripped apart and hundreds of thousands of people have been displaced or forced to flee the country altogether. It is no wonder then that few want to invest in an environment afflicted with violence and intolerance. Many whose talents are sorely needed in Pakistan are forced to flee the country because of extremism.
“The combined effect of extremism and an unproductive rent-seeking elite is that Pakistan has one of the lowest investment rates in the world. Pakistan invests only 15 percent of its output compared with 30 percent for the rest of South Asia. This has led to diminished productivity. Pakistan’s total volume of exports has not risen since 2005. It has become a nation of consumers with limited capacity to produce and innovate. Last year, the country imported more than two times as much as it exported.
How to Fix Pakistan’s Economy
Experts say the only way for Pakistan’s economy to stabilize and prosper on firm ground if or the country’s leaders to reign in the moneyed elite and religious extremism. Atif Mian wrote in the New York Times: ““Reversing those trends requires a courageous commitment to fight the entrenched elements and extremists. Consider the unproductive moneyed class which instead of investing in real businesses buys urban land and sits on it. This is an idle activity that adds nothing to the country’s output and contributes directly to Pakistan’s low investment rate. The value of land keeps rising, not because of any effort by the landowners but because of an urbanizing population.
“The correct policy response to discourage such activity would be to tax the value of land appropriately. This would dissuade the rich from hoarding land and instead incentivize them to invest in real businesses. Land would then be available for more productive uses and at cheaper prices. Moreover, the revenue generated from land taxes could fund much-needed urban infrastructure. [Source: Atif Mian, New York Times, December 10, 2019, Mr. Mian is an economics professor at Princeton]
“While instituting a land tax addresses multiple problems in a single strike, carrying through with the policy requires courage as a large percentage of urban land is held by the powerful elite. Pakistan’s leadership must develop the courage to put the interests of the collective above those of the privileged few.
“Similar challenges exist in other parts of the economy. For instance, sugar cane, which is one of the most water-intensive crops, is grown on nearly 2.5 million acres in Pakistan. This makes no economic sense for a country with a very serious water shortage. Rationalizing agriculture toward more efficient farming choices requires that the government take on the landed aristocracy by removing subsidies and charging for excessive water use.
“The government also continues to dole out large export subsidies without an iota of proof that these subsidies have helped increase exports. Will the government develop courage to say no to special interests and devise a performance-based assistance mechanism? The auto sector is another example that has not innovated in decades but continues to be protected heavily by the government. And the power sector is dominated by private producers who enjoy high government-guaranteed returns in dollars only to run grossly inefficient plants.
It is even harder to find courageous leadership when it comes to dealing with religious extremists. One would have hoped that decades of suffering at the hands of religious extremism would convince at least one government or major political party to roll back the purveyors of hate. But no one seems interested. Or perhaps no one has enough courage.
“All major political parties continue to fraternize with the merchants of hate whenever it politically suits them, thus empowering the extremists further. Last month, a cleric who specializes in spewing hate against minorities marched on Islamabad with his followers to put pressure on the government. As he rallied his crowd with dog whistles and extremist rhetoric, the leadership of Pakistan’s two main opposition parties, the Pakistan People’s Party and the Pakistan Muslim League-Nawaz, stood next to him in solidarity. The ruling political party, Pakistan Tehreek-e-Insaf, was no different when it was in the opposition. “This is Pakistan’s ultimate dilemma. It takes courage to put principles above petty political advantages, to stand firm against vested interests and to openly call out religious bigotry when you see it.
Pakistan’s Location: an Economic Boon
Pakistan is the second biggest market in South Asia, which in itself is a substantial and rapidly-growing market. Low competition and a rapidly growing economy are among the things that attract the interest of foreign investors. Neighboring countries include Iran, India, China, and Afghanistan, all of which present their own unique opportunities and challenges. Pakistan’s location near China — a key ally — and India — a traditional enemy — makes Pakistan a key player in regional development. Pakistan’s location on key sea routes is also important for the trading industry. Karachi is Pakistan’s main port lies on the Arabian Sea and the Indian Ocean and a key juncture between the Middle East and South Asia. The Chinese are helping Pakistan build a major port at Gwadar port to be a major link its Belt and Road Initiative.
Institute of Strategic Studies in Islamabad reported in a paper titled “Economic Connectivity: Pakistan, China, West Asia and Central Asia”: Pakistan is situated at the convergence of three geo-economically significant regions of South Asia, Central Asia and West Asia. It offers shortest route to the sea for all landlocked countries of Central Asia alongside the Western China and figures significantly, in this connectivity, due to Karachi port, Qasim port, and Gwadar port along the Arabian Sea. This is recognised by most of the Central Asian governments which consider Pakistan as a rapidly emerging connection for several corridors of cooperation among all the three regions in the fields of energy, trade, transportation and tourism. In addition to it, Pakistan’s largest province Balochistan, is very rich in natural resources particularly hydrocarbons. [Source: Institute of Strategic Studies in Islamabad]
Pakistan improved its relations with the Central Asian States when the charter of Economic Cooperation Organization (ECO) was signed on November 28, 1992 for the sustainable economic development of member states among the Central Asian states, Pakistan, Iran and Turkey. In this era of globalization, extensive developments and communication links are required to integrate the Central and South Asian regions. In this connection, Pakistan is located at the crossroads and can play an important role in the integration of the region. This paper will deal with two main questions i.e., What prospects are there for the ongoing projects of regional economic connectivity? How successful will they be to counter parochial political narratives on geopolitics and geostrategic issues, which have increasingly made the world a reservoir of arms and ammunitions?
Good Points About Pakistan’s Economy
Good Points About Pakistan’s Economy according to Emerhud: 1) Continuous GDP growth: Pakistan’s economy has seen a notable GDP growth. As a result, in 2017, the GDP of Pakistan increased by 5.28 percent, making it one of the fastest growing emerging markets in the world. Their major industries contributing to this growth are textiles, garments, agriculture and construction materials. Moreover, Pakistan is also part of the Next- Eleven (N-11) countries in the world. According to Goldman Sachs Inc., these countries have the potential to become world’s largest economies of the 21st century. [Source: Emerhud, July 10, 2018]
2) Rapidly growing population: Pakistan has a population of over 200 million people. It is the 6th most populous country in the world. Furthermore, Pakistan’s population is rapidly growing and is predicted to reach 300 million by 2050. Imagine the possibilities Pakistan’s economy unlocks in the future for business and employment opportunities.
3) Low labor cost: The minimum wage for the unskilled workers in Pakistan is currently around Rs. 15,000 (US$125) per month. These workers are those who lack technical training and expertise. Examples are maids, fast food or grocery workers, and janitors. High skilled workers, on the other hand, have the average monthly wage of Rs.4 1,100(US$339). These workers have specialized training and a skill- set to perform their duties. For example, technicians, electricians, specialists, etc. The minimum wage in China is even higher than the average wage a skilled worker earns in Pakistan. Compared to other neighboring countries, such as India and China, the wages in Pakistan remain relatively low.
Minimum wages in Pakistan, India, and China in 2017
Pakistan: US$125
China: US$348
India: US$160 [Source: Trading Economics]
4) Young and skilled workforce: The median age of the population is 22.7 which makes Pakistan’s workforce very young and the country to gain from demographic dividends for the next decades. This young workforce also includes top talents as there are several high-level technical schools in Pakistan, making good quality education attainable to some Pakistanis.
In fact, six universities of Pakistan are brought out in the QS World University Rankings and ten others in Asia’s Top University Rankings: World Rank in 2018:
National University of Sciences and Technology (NUST), 431- 440, Islamabad
Quaid-i-Azam University 651- 700, Islamabad
Lahore University of Management Sciences (LUMS), 701-750, Lahore
University of Engineering and Technology (UET), 801-1000, Lahore
University of Karachi, 801-1000, Karachi
The University of Lahore, 801-1000, Lahore
[Source: QS World University Rankings 2018]
5) Emerging middle class: Together with a growing economy, Pakistan’s middle- class is also emerging. Currently, Pakistan’s middle class is estimated to be over 80 million people — a large number considering that is already the population of Germany alone. On top of that, its middle class is expected to even surpass Italy and UK’s in a forecast period between 2016-2021. Additionally, Pakistan has become one of the world’s fastest growing retail markets. In fact, its retail stores are expected to grow up to 50 percent according to Euromonitor. One reason which attracts shoppers in spending is a better security environment. [Source: Bloomberg]
6) Low competition: There are challenges like political instability or poor quality of infrastructure which have also kept the competition in Pakistan low. However, Pakistan has a unique combination of a huge and rapidly growing population and economy and government’s active involvement in lowering entry barriers to foreign investors. This does not mean that building a successful company in Pakistan is easy, far from that. Now may just be the golden opportunity to get here before your competitors do.
Structure of Pakistan’s Economy
Rapid growth after Pakistan became independent substantially altered the structure of the economy. Agriculture's share (including forestry and fishing) declined from 53 percent of GDP in 1950 to 25 percent in 1993. A substantial industrial base was added as industry (including mining, manufacturing, and utilities) became the fastest growing sector of the economy. Industry's share of GDP rose from 8 percent in 1950 to 21.7 percent in 1993. Various services (including construction, trade, transportation and communications, and other services) accounted for the rest of GDP. [Source: Peter Blood, Library of Congress, 1994 *]
Pakistan has an important "parallel," or "alternative," economic sector, but it is not well documented in official reports or most academic studies. This sector includes a thriving black market, a large illicit drug industry, and illegal payments to politicians and government officials to ensure state contracts. Corruption rose in the 1980s, partly as a result of the massive infusion of United States aid, some of which went to the Pakistani government to pay the cost of supporting Afghan refugees fleeing after the 1979 Soviet invasion and to enhance Pakistani military capability, and some of which was funneled directly to Afghan resistance movements based in Pakistan. Much of this money reportedly was diverted illegally and invested in arms and drug enterprises.*
General allegations of corruption are routinely made in the Pakistani press, and politicians often accuse their opponents of corrupt practices. Asif Ali Zardari, the husband of Prime Minister Benazir Bhutto, was accused of corruption after the fall of Benazir's first government in 1990, and former President Ghulam Ishaq Khan accused the government of former Prime Minister Mian Nawaz Sharif and especially its privatization program of corruption when dismissing his government in April 1993. In 1994 allegations of corruption were routinely traded between Benazir's government and the opposition headed by Nawaz Sharif. Political maneuvering aside, corruption has an altogether real and pervasive effect on Pakistani society. Industrialists consider bribery and other handouts a routine cost of production, and contractors and businessmen interviewed on television openly state that a significant percentage of their revenue is paid to government officers who allocate their contracts. Corruption is alleged to be prevalent in almost all official institutions, including the police, the judiciary, the revenue department, the passport office, customs and excise offices, telecommunication organizations, and electricity and gas boards. In each of these departments, the personnel involved range from low-level employees to top management. Some scholars believe that the low salaries of civil servants, compared with earnings from jobs of similar status in business and industry, explain the magnitude of corruption. In the mid-1980s, Mahbubul Haq, a former minister of finance, estimated that illegal payments to government officials were equivalent to about 60 percent of the total taxes collected by the government.*
Role of Government in Pakistan’s Economic Policy
Since 1947 Pakistani officials have sought a high rate of economic growth in an effort to lift the population out of poverty. Rapid industrialization was viewed as a basic necessity and as a vehicle for economic growth. For more than two decades, economic expansion was substantial, and growth of industrial output was striking. In the 1960s, the country was considered a model for other developing countries. Rapid expansion of the economy, however, did not alleviate widespread poverty. In the 1970s and 1980s, although a high rate of growth was sought, greater attention was given to income distribution. In the early 1990s, a more equitable distribution of income remained an important but elusive goal of government policy. [Source: Peter Blood, Library of Congress, 1994 *]
At partition in 1947, the new government lacked the personnel, institutions, and resources to play a large role in developing the economy. Exclusive public ownership was reserved only for military armaments, generation of hydroelectric power, and manufacture and operation of railroad, telephone, telegraph, and wireless equipment — fields that were unattractive, at least in the early years of independence, to private investors. The rest of the economy was open to private-sector development, although the government used many direct and indirect measures to stimulate, guide, or retard private-sector activities.*
The disruptions caused by partition, the cessation of trade with India, the strict control of imports, and the overvalued exchange rate necessitated the stimulation of private industry. Government policies afforded liberal incentives to industrialization, while public development of the infrastructure complemented private investment. Some public manufacturing plants were established by government holding companies. Manufacturing proved highly profitable, attracting increasing private investments and reinvestment of profits. Except for large government investments in the Indus irrigation system, agriculture was left largely alone, and output stagnated in the 1950s. The broad outline of government policy in the 1950s and early 1960s involved squeezing the peasants and workers to finance industrial development.*
Much of the economy, and particularly industry, was eventually dominated by a small group of people, the muhajirs, who were largely traders who migrated to Pakistan's cities, especially Karachi, at partition. These refugees brought modest capital, which they initially used to start trading firms. Many of these firms moved into industry in the 1950s as a response to government policies. Largely using their own resources, they accounted for the major part of investment and ownership in manufacturing during the first two decades after independence.*
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.
Islamization of Pakistan’s Economy 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.*
Privatization Campaign of Nawaz Sharif
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.*
Development Planning of the Pakistan Government
Pakistan's economic development planning began in 1948. By 1950 a six-year plan had been drafted to guide government investment in developing the infrastructure. But the initial effort was unsystematic, partly because of inadequate staffing. More formal planning — incorporating overall targets, assessing resource availability, and assigning priorities — started in 1953 with the drafting of the First Five-Year Plan (1955-60). In practice, this plan was not implemented, however, mainly because political instability led to a neglect of economic policy, but in 1958 the government renewed its commitment to planning by establishing the Planning Commission. [Source: Peter Blood, Library of Congress, 1994 *]
The Second Five-Year Plan (1960-65) surpassed its major goals when all sectors showed substantial growth. The plan encouraged private entrepreneurs to participate in those activities in which a great deal of profit could be made, while the government acted in those sectors of the economy where private business was reluctant to operate. This mix of private enterprise and social responsibility was hailed as a model that other developing countries could follow. Pakistan's success, however, partially depended on generous infusions of foreign aid, particularly from the United States. After the 1965 Indo-Pakistani War over Kashmir, the level of foreign assistance declined. More resources than had been intended also were diverted to defense. As a result, the Third Five-Year Plan (1965-70), designed along the lines of its immediate predecessor, produced only modest growth.*
When the government of Zulfiqar Ali Bhutto came to power in 1971, planning was virtually bypassed. The Fourth Five-Year Plan (1970-75) was abandoned as East Pakistan became independent Bangladesh. Under Bhutto, only annual plans were prepared, and they were largely ignored.*
Five Year Plans of the Late 1970s and 80s
The Zia government accorded more importance to planning. The Fifth Five-Year Plan (1978-83) was an attempt to stabilize the economy and improve the standard of living of the poorest segment of the population. Increased defense expenditures and a flood of refugees to Pakistan after the Soviet invasion of Afghanistan in December 1979, as well as the sharp increase in international oil prices in 1979-80, drew resources away from planned investments. Nevertheless, some of the plan's goals were attained. Many of the controls on industry were liberalized or abolished, the balance of payments deficit was kept under control, and Pakistan became self-sufficient in all basic foodstuffs with the exception of edible oils. Yet the plan failed to stimulate substantial private industrial investment and to raise significantly the expenditure on rural infrastructure development. [Source: Peter Blood, Library of Congress, 1994 *]
The Sixth Five-Year Plan (1983-88) represented a significant shift toward the private sector. It was designed to tackle some of the major problems of the economy: low investment and savings ratios; low agricultural productivity; heavy reliance on imported energy; and low spending on health and education. The economy grew at the targeted average of 6.5 percent during the plan period and would have exceeded the target if it had not been for severe droughts in 1986 and 1987.*
The Seventh Five-Year Plan (1988-93) provided for total public-sector spending of Rs350 billion. Of this total, 38 percent was designated for energy, 18 percent for transportation and communications, 9 percent for water, 8 percent for physical infrastructure and housing, 7 percent for education, 5 percent for industry and minerals, 4 percent for health, and 11 percent for other sectors. The plan gave much greater emphasis than before to private investment in all sectors of the economy. Total planned private investment was Rs292 billion, and the private-to- public ratio of investment was expected to rise from 42:58 in 1988 to 48:52 in 1993. It was also intended that public-sector corporations finance most of their own investment programs through profits and borrowing.*
In August 1991, the government established a working group on private investment for the Eighth Five-Year Plan (1993-98). This group, which included leading industrialists, presidents of chambers of commerce, and senior civil servants, submitted its report in late 1992. However, in early 1994, the eighth plan had not yet been announced, mainly because the successive changes of government in 1993 forced ministers to focus on short-term issues. Instead, economic policy for 1994 was being guided by an annual plan.*
Debt in Pakistan
Pakistan had a total external debt of $110.7 billion in 2019, according to the State Bank of Pakistan (SBP), about half of its GDP (gross domestic product). It 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]
Government tax and nontax receipts fell far short of total expenditures in the 1980s and early 1990s. Many economists believe that the increasing government debt is a growing threat to Pakistan's future economic growth. The overall deficit, as a percentage of GDP, was around 5.3 percent in the early 1980s and averaged 7.5 percent between 1984 and 1990. It reached 8.8 percent in 1991, but the provisional figure for 1992 was 6.5 percent. The 1993 budget forecast a deficit of 4.8 percent of GDP, but spending was higher and revenues lower than anticipated, and provisional data indicate that the deficit exceeded 9 percent. The continued gap between government revenues and spending is a major concern to potential donors of foreign aid, and in 1993 Qureshi's caretaker government raised taxes and cut spending. In 1994 the Benazir Bhutto government aimed to reduce the budget deficit to 4.5 percent of GDP by 1996. The government relies on bond sales and on borrowing from the banking system to finance its deficit. Internal public debt was estimated at 49.9 percent of GDP in 1992. By contrast, in 1981 internal public debt had constituted 20.9 percent of GDP. [Source: Peter Blood, Library of Congress, 1994 *]
22 Loans in 61 Years: Pakistan’s Addiction to the IMF
Sarfraz Abbasi wrote in the Express Tribune: “If we take a look at Pakistan’s history of borrowing from the International Monetary Fund (IMF), some interesting facts come to light. Pakistan’s history of knocking upon the IMF’s door started back in 1958, when General Ayub Khan first took the country to the IMF route and signed an agreement to secure special drawing rights (SDR) 25 million under a Standby Agreement. The money was never withdrawn.
Not too long after, Ayub’s finance team pursued two back-to-back IMF programs in 1965 and 1968 respectively. This time, however, they ended up withdrawing around SDR 112 million, the entire agreed upon amount. This is where Pakistan officially became a new client for the IMF. After Ayub, it was Zulfikar Ali Bhutto — once the blue-eyed boy of the military dictators — who took the state to the doors of the IMF yet again on May 18, 1972. It would appear that Zulfikar liked the IMF very much, for he became almost unstoppable in how many times he approached it. During his tenure, Pakistan went to the IMF three times consecutively from 1972 to 1974 and then again in 1977, and withdrew about SDR 314 million against the agreed SDR 330 million. [Source: Sarfraz Abbasi, Express Tribune, April 29, 2019]
Then the terrible part of our history begins, after Zulfikar was succeeded by General Ziaul Haq. He may have had his differences with Zulfikar, but one thing they could both agree on was developing an obsession with the IMF. Zia kept the ball rolling during his tenure, as from 1980 to 1981, Pakistan went to the IMF twice and secured loans of SDR 2.187 billion, from which only SDR 1.079 billion was utilised. Zia may have died in a plane crash in 1988, but his legacy pertaining to the IMF did not. As democracy returned to the country, Pakistan discovered the two gems of our times: Nawaz Sharif and Benazir Bhutto.
“During the Benazir-Nawaz model of democracy from 1988 to 1997, Pakistan went into IMF programs about eight times under the experienced and dynamic governments of the Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N). In this period, Pakistan withdrew about SDR 1.64 billion. Out of these eight programs, five were during the PPP government while three were under the PML-N rule. Democracy was once again put on hold in 1999 when General Pervez Musharraf toppled Nawaz’s government and took over, but IMF loan-seeking was not. Even Musharraf did not hesitate in reaching out to the IMF, and secured SDR 1.33 billion in two attempts in nine years, though on massively low interest rates.
“When Musharraf was replaced by the PPP in 2008, as soon as he was sent home, the first thing the PPP did was go to the IMF and secure the biggest IMF bailout package in our history, amounting to SDR 4.94 billion. As per the IMF, Pakistan was to implement some reforms, including improvements in tax administration, removal of some tax exemptions as well as the introduction of an interest rate corridor. However, the macroeconomic policies were overly expansionary and fundamental reforms to resolve the economy’s structural problems were not being tackled well. There was a broad concurrence between the authorities and the mission on policy priorities: a tighter fiscal policy, a less accommodating monetary policy stance, and structural reforms. The PPP government then recognised that the economy performed well below its potential and required a gross domestic product (GDP) annual rate of 7 percent on average to absorb youth labour growth.
“The PML-N then came back in power in 2013, and keeping with tradition went to the IMF as soon as possible, securing the second largest loan that amounted to SDR 4.399 billion. As per the IMF’s review, this three-year program (completed in September 2016) strengthened macroeconomic resilience. The IMF suggests in its conclusive statement that due to this program, growth increased, fiscal deficit was reduced, and foreign currency reserves recovered. Structural reforms were also set in motion.
“They further highlighted that the long-standing fiscal and energy sector constraints began to be tackled and social safety nets were strengthened. Following the completion of the program, there was some progress in implementing policy recommendations, although policy implementation was weakened and macroeconomic vulnerabilities have begun to re-emerge, such as fiscal consolidation slowing down, the current account deficit widening, and foreign exchange reserves declining. On the structural front, the accumulation of arrears in the power sector has resumed, while financial losses of ailing public sector enterprises continue to weigh on scarce fiscal resources and exports remain low as well.
All in all, till today, Pakistan has borrowed around SDR 13.79 billion from the IMF, out of which 47 percent of the loans were secured by PPP, followed by PML-N at 35 percent, while the military dictatorships lag behind with a mere 18 percent.”
State Bank of Pakistan
The State Bank of Pakistan was established in 1948 and remains the country's central bank and financial adviser to the government. It is the sole bank of issue, holder of gold and currency reserves, banker to the government, lender of last resort to other banks, supervisor of other banks, and overseer of national credit policy. In October 1993, legislation reduced government control of the bank, but without giving it complete autonomy. [Source: Peter Blood, Library of Congress, 1994 *]
According to the “Worldmark Encyclopedia of National Economies”: “The State Bank of Pakistan (SBP), the central bank, controls the money supply and credit, supervises the operations of banks, administers the country's international reserves, and acts as banker to the federal and provincial governments. The government of Pakistan has followed a liberal monetary policy from 1999 to 2000 in order to provide cheap credit to the industrial sector. [Source: “Worldmark Encyclopedia of National Economies”, The Gale Group Inc., 2002]
The demand for credit, however, has not come forth from the private sector. Although domestic credit expansion was higher this year due to large borrowing by the government sector, conversion of non-resident foreign currency accounts into rupees, and an increase in liquid reserves, actual growth in money supply has remained stagnant due to low credit demand from the private sector. The government and the SBP are attempting structural reforms in an effort to move toward more indirect, market-based methods of monetary control along with greater autonomy for the SBP. The central bank's autonomy was considerably strengthened with the passage of new banking laws in the State Bank Act in May 1997.
Banks in Pakistan
From 1974, when all Pakistani banks were nationalized, until 1991, all local banks were in the state sector. In 1991, as part of the government's general program of economic liberalization and the privatization of state enterprises, two small banks — the Muslim Commercial Bank and the Allied Bank — were privatized. In 1991 the government also instructed the State Bank of Pakistan to approve proposals for new private commercial banks. In early 1994, there were twenty-four commercial banks, including ten private banks that had opened since 1991, two privatized banks, and twelve banks that remained in the state sector. One of the new private banks, Mehran Bank, was closed down in early 1994 amidst allegations of massive fraud. The number of new private banks was expected to increase in 1994. In March 1993, the total assets of all Pakistani banks amounted to Rs1,090 billion. Pakistani banks had 119 foreign branches and operated joint banking ventures in Malaysia, Oman, Saudi Arabia, and the United Arab Emirates.*
Twenty-one foreign banks operated in Pakistan in 1994. They had sixty-one branches, most of which were located in Karachi. United States banks with branches in Pakistan included Citibank, Chase Manhattan Bank, American Express Bank, and Bank of America.*
From independence until the mid-1970s, the commercial banks were poor providers of long-term capital because the interest rate structure favored short-term over long-term financing and long-term deposits over long-term loans. As a result, the government encouraged the growth of nonbanking financial institutions to act as sources of long-term credit and equity finance. These institutions continued to play an important role in the early 1990s.*
The Industrial Development Bank, established in 1961, provides medium- and long-term credit primarily to smalland medium-sized firms in the private sector, while the Pakistan Industrial Credit and Investment Corporation provides long-term assistance in local or foreign currency to private companies in the industrial sector, arranging foreign loans for large projects. The National Development Finance Corporation, founded in 1973, provides similar services for the public sector and in the early 1990s also began to provide financing for the private sector. The Agricultural Development Bank gives credit to agriculture and to cottage industries, while the House Building Finance Corporation provides interest-free housing finance, taking a percentage of the property's rental income. Other specialized financial institutions include the Investment Corporation of Pakistan, the Small Business Finance Corporation, the National Investment Trust, and Bankers Equity. All these organizations, with the exception of the Pakistan Industrial Credit Corporation, which is 35 percent foreign owned, are government owned, although they often act as channels for foreign aid.*
In the 1980s, three new financing corporations — Pakistan-Libya Holding, Pakistan-Kuwait Investment, and Saudi-Pak Industrial and Agricultural Investment — were established. These three institutions are jointly owned by the Pakistan government and the respective foreign governments; most of their funding comes from the foreign governments.*
Islamization of Pakistan’s Banks
The adoption of Zia's policy of Islamization led to changes in the practices of financial institutions because of the Islamic prohibition against usury. In July 1979, the Investment Corporation of Pakistan, the National Investment Trust, and the House Building Finance Corporation opened interest-free accounts that operate on a profit-and-loss-sharing basis. In 1981 the commercial banks followed suit. Under this system, profits and losses on projects financed with deposit sums are shared in an agreed-on proportion between lender and borrower. In 1985 regulations prohibited new interest-bearing loans and interest-bearing rupee deposits. These regulations cover rupee deposits in foreign banks but not deposits made in foreign currencies. In 1990 more than 63 percent of funds on deposit were held in profit-and-loss-sharing schemes.*
In addition to the profit-and-loss-sharing system, lending takes two other forms: interest-free loans on which banks make service charges at rates determined by the State Bank of Pakistan, and approving finance for purchasing goods or real estate under which the bank purchases the item and agrees to resell it to the client at an increased price. All these modes of finance are subject to criticism by some advocates of Islamization on the grounds that they contain a provision for a guaranteed rate of return that can be construed as the equivalent of interest.*
In November 1991, the Federal Shariat Court declared all laws pertaining to the payment or receipt of interest and markup contrary to Islam. It also ruled against the indexation of financial assets for inflation. The federal and provincial governments were ordered to amend all relevant laws by June 30, 1992, but appeals by banks and the central government rendered the deadline inoperative. As of early 1994, no higher court decision had been announced (see Politicized Islam).*
The National Credit Consultative Council formulates annual credit plans. The council includes members from government, financial institutions, and the private sector. The credit plan sets a limit on the expansion of the money supply, taking into account the targets of the development plan and the government's fiscal objectives, as well as prevailing rates of growth and projections for GDP. In the late 1980s and early 1990s, money growth tended to run well ahead of plan targets. (OTR; EIU 1992-93, 41)
Rapid expansion of the money supply, coupled with the impact of the 1991 Persian Gulf War on domestic energy prices, pushed up the consumer price index by 13 percent during 1991. Although energy prices fell in 1992, heavy government borrowing from the central bank kept inflation relatively high in 1992 and 1993, at around 9 percent. Some independent observers, including the World Bank, believed that the official inflation statistics understated the real rate in 1993, which they put at about 13 percent.*
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