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Pakistan’s Economic Woes A Discourse on the Economic Policies of Nawaz Sharif’s Previous Stints

All the indicators regarding Pakistan’s current state of economic affairs vividly delineate the unprecedented economic crisis Pakistan is experiencing nowadays.

The lowest investment by the private sector; a drastic decline in flow of foreign direct investment (FDI) into the country; a shrinking formal economy and a ballooning informal sector; a near-collapse of the energy sector and the near-complete destruction of public sector enterprises mainly due to large-scale loot by the previous regime are some fundamental reasons behind this debacle.

A study of the measures that Mr Sharif introduced in his previous stints can lead us to estimate their success this time. Here is a brief discourse on his policies and the results obtained thereof:

1. Budgetary Deficit
The key challenge today is the reduction of the fiscal deficit that has been estimated at 6-7% in the federal budget 2013-14. For the last 5 years, we have witnessed an average budget deficit of nearly 5.9%.

A line, spoken by the Finance Minister, shows what Sharif government did to reduce the budget deficit in both the previous tenures. He said:
‘In the process of privatization, in 1999, we widened the budget deficit’.

This is the manifestation of the fact that the performance of Sharif government in this regard was poor and unsatisfactory and to run the country, debt was to be acquired from various institutions including the IMF and the World Bank. Consequently, the deficit surged to almost 7% of the GDP in 1992. The situation didn’t improve in his second term where the average budget deficit stood at 6.4% of the GDP.

2. GDP Growth Rate
GDP growth rate also doesn’t show encouraging signs. It stood at 3.7% in 2011-12 that is meagre when compared to other countries in the region i.e. India (5.4%), China (7.8%), Bangladesh (6.1%) and Sri Lanka (6.8%). For 2012-13, it has been recorded at 3.6% and it is going to be another economic challenge in the near future.

SBP Handbook of Statistics 2010 shows that the Sharif’s economic performance was the worst amongst all the civilian or military governments as far as the GDP growth rate is concerned. Average growth during his first tenure was only 4.1%, that is significantly lower than Zia-ul-Haq (5.9%), Musharraf (5.1%) and Benazir Bhutto’s two terms (5%). The situation was even worse during his second term where the economy grew at only 3.1%. It is much alike the performance of the PPPP previous regime where the average growth stood at 3.0% according to the economic survey of Pakistan 2012-13.

3. Heavy Borrowing
The most confounding aspect of our dire economic situation is the ever-growing public debt, which is about 70% of GDP today. The public debt of the country almost doubled to that of FY 2011-12 to reach Rs.12.024 trillion.

At the end of Sharif’s first term, the loan totalled $32 billion. In the late 90s, Pakistan received an average of $2.5 billion per year from international financial institutions and international donors in form of grants, loans or assistance. Total debt, consequently, rose from $20 billion in June 1990 to a peak of $43 billion in May 1998 and the external debt reached 47.6% of GDP. The loan kept on swelling and no appreciable efforts were made in this regard too.

4. Drooping Public Sector Enterprises
To bring the PSEs, including PIA, Pakistan Railways and Pakistan Steel, out of multifarious crises is another Herculean task before the newly-installed government.

The track record of Nawaz Sharif shows that he was inclined, mainly, towards privatization of the PSEs. The Privatization Commission, set up in March 1991, privatized over 50 of the 115 PSE units. Mr Sharif launched a similar policy in 1997 when he appointed commercial bankers to run three large public sector banks. All three became profitable and later on Habib Bank and United Bank were privatized.

5. Economic Repercussions of Terrorism
According to the IMF, the anti-terrorism campaign that followed the 9/11 attacks, strained Pakistan’s budget, as more allocations for law enforcement agencies became inevitable. Besides human sufferings and resettlement costs, development projects have been in doldrums which ultimately resulted in large cost overruns. The omnipresent uncertainty resulted in capital flight and slowed down domestic economic activity. Massive unemployment has been seen in the war-torn regions.
Frequent bombings and worsening law and order situation have been telling on the country’s socioeconomic fabric. According to government estimates, the war on terror drains US$8 billion per annum from Pakistan’s economy.

Nawaz Sharif took some initiatives to curb the terrorism menace by getting promulgated the Anti-Terrorist Act on 17 August 1997 which allowed the establishment of Anti-Terrorism Courts. The Act was later rendered unconstitutional by the Supreme Court, however, with some amendments he received the permission of Supreme Court to establish these courts. In the wake of recent spree of terrorism, his initiatives may prove a pinch of salt only.

6. Looming Energy Crisis
The fiscal year 2012-13 started with chronic energy crisis and the problem of power and gas shortages had crippled the country. But, while the generation capacity is 20,000 MW, actual generation is not enough to meet the demands resulting in nationwide power breaks. The circular debt kept on swelling despite intermittent injections by the government. The actual amount of the circular debt lies between $480 and $500 million. Furthermore, The Economic Survey revealed that energy cost  2% to the total GDP.

In the past, Mr Sharif inaugurated several large-scale projects to stimulate the economy but no sizeable addition was made to the capacity of the power sector. A survey conducted by Hydrocarbon Development Institute of Pakistan shows that the generation capacity increased to the extent of 840MW in 1997-98 and 4MW in 1998-99. In the wake of current energy crisis, these efforts prove extremely lacklustre.

7. Foreign Direct Investment (FDI)
Owing to the security concerns that emanate from the country’s role in War on Terror, foreign investment has declined significantly, dropping by 54.6% from a height of $8 billion to $3.5 billion in FY2012-13

Mr Sharif adopted an efficient policy to attract investment. A number of measures were introduced to create a business-friendly atmosphere including the permission of foreign equity participation up to 100%, liberalizing foreign exchange regime, liberalizing import policy, convertibility of rupee on current account and offering a number of fiscal incentives. In addition, agriculture, services, infrastructure and social sector were also opened to foreign investors. Moreover, a new investment board was launched. The Premier’s visits to Japan, Germany and other developed countries were also arranged to woo investors.

The policies had some positive effects and FDI increased by 26% in 1990-1992 even though the bulk of it was portfolio investment. However these investments failed to make some impact on increase in employment.

8. Foreign Exchange Reserves
‘Foreign exchange reserves of the country will suffice for only 2 months of the import bill payments; wherein reserves held by the State Bank amount to $6.697 billion and reserves held by commercial banks stood at $5.061 billion’, says a recent report. It clearly reveals that even the foreign reserves of the country are not in an appreciable state.

At the end of Sharif’s first tenure, the national exchequer had only $1billion reserves. At the dismissal of Benazir government in 1996, the forex reserves had sunk to below than $630 million. This was in contrast to debt repayment of just over $600 million due in December 1997. To overcome this mighty challenge, Sharif made a direct plea to overseas Pakistanis to make foreign exchange deposits to help their country meet its obligations. But, surprisingly, the reserves kept on declining.

9. Taxation Issues
In the ambit of taxation, low tax-to-GDP ratio, tax evasion and narrow tax base are three major problems. Other problems include unnecessary tax exemptions, corruption; focus on indirect taxes, weak enforcement mechanism and undocumented economy. Three main reasons are analysed as under:

(a) Low Tax-to-GDP Ratio: The current tax-to-GDP ratio is far below than other countries in our region such as India (15%) and Sri Lanka (18%).  It has decreased from 9.8% (FY 2007-08) to 9.1% (FY 2011-12).

(b) Tax Evasion: According to NAB estimates, Pakistanis evade tax amounting to 7 billion daily.

(c) Narrow Tax Base: By 2013, the number of taxpayers has reduced drastically to just 768,000 out of a total population of more than 180 million, meaning that only 0.57% Pakistanis are taxpayers.

Considering all the above-mentioned problems, efficient revenue collection makes another daunting task for the nascent government.

Nawaz Sharif is known for giving heavy tax relief to the business community. The tax exemptions to large-scale businesses and wealthy individuals led to a serious decline in tax collection.

10. Unemployment
One of the biggest challenges before the newly-installed government is the ever-increasing unemployment. Mr Sharif has made contributions by adopting thoughtful approach to deal with unemployment. He did not use government employment as an unemployment insurance scheme, rather he started various schemes whereby people could be motivated to earn their livelihood by self-employment. “Prime Minister’s public transport scheme” is the best sought example in this regard.

11. Other Challenges
Massive capital flight from Pakistan to the Gulf region
Rampant corruption
Alleviating poverty
High illiteracy rate
International competition
Current account deficit
Double digit inflation
Increasing trade deficit

12. Few Other Steps
To encourage private investors, Nawaz Sharif removed the precondition of government approval. Several other restrictions on the private sector were removed such as the need to register technical and foreign loan agreements.

Several important steps were taken to promote a better-functioning financial market. The most important of these was the development of competition in the financial markets. The government allowed ten private commercial banks to enter the market and several additional investment banks including some foreign banks to enter the domestic financial market.

In early 1991, another important step towards increasing economic efficiency was taken with the liberalization of foreign exchange controls. Restrictions on the free movement of foreign currency were removed and resident Pakistanis, including firms and companies, were allowed to maintain foreign currency accounts in Pakistan on the same basis as non-residents. This was followed up by the opening of the green channel which allowed personal baggage to be brought into the country free of customs declaration or search. The impact of the reforms has been positive as foreign inflows and the country’s reserve position have both increased since the implementation of these reforms.

Nawaz Sharif may well be remembered for his strong resolve in rushing through a package on the development of communications network especially roads of the country. The most important project in this connection is the Lahore-Islamabad motorway.

Conclusion
Mr Nawaz Sharif has hit some of the right chords. However he, having claimed to bring about economic development, lacked the vision to develop a comprehensive economic programme that could have achieved his desired end. In order to stand on a strong ground now, he needs to revisit his failures and successes in the past and learn from them. Only then he will be a true hero.

By: Maham Asif Malik

 

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