Pakistan’s Economy under Musharraf
In the era of General Pervez Musharraf, Pakistan’s economic performance was impressive in terms of income per capita, employment generation and poverty alleviation.
Economic achievements in most difficult circumstances during President Musharraf‘s regime are dismissed outright, because of abhorrence of the military rule, imposition of the emergency in 2007, his decision to join the US in Afghanistan war, open tussle with the judiciary, withdrawal of corruption cases against the politicians, and his quest to get elected in uniform. This article is an attempt to provide a first-hand data-driven account of the economic record of the period 2000-2008.
Pakistan suffered serious setbacks in the 1990s in terms of most economic and social indicators. Economic growth rates decelerated, inflation rose to peak rates, debt burden escalated substantially, macroeconomic imbalances widened and worst of all, the incidence of poverty almost doubled. Pakistan’s credibility in the international financial community was at its lowest ebb as successive agreements concluded with the International Financial Institutions (IFIs) were not implemented. Foreign investors were unhappy as all the power purchase agreements were being re-examined and criminal action was initiated against the Hub Power Company (HUBCO).
The situation exacerbated after the nuclear testing in 1998 when sanctions were imposed on Pakistan. External liquidity had dried up due to freezing of foreign currency deposits of $11 billion held by resident and non-resident Pakistanis. The loss of confidence evaporated workers’ remittances, foreign investment and foreign currency deposits. The assumption of power by the military government in October, 1999 led to fresh sanctions and bilateral and multilateral official flows were suspended. Credit rating agencies downgraded Sovereign Credit of Pakistan to Selective Default category and therefore the door for access to financial markets was shut down. The country faced a gap between external receipts and payments of $2.5 to 3 billion annually for the next five years. The new cabinet had to face this crisis, i.e. how to meet its current obligations such as imports of goods and service, its debt service obligations and other payments with almost no reserves. To fill in this gap and keep the wheels of the economy moving, Pakistan had to get its debt service obligations rescheduled for which it was imperative to have an agreement with the IMF.
Pakistan entered a stand-by arrangement with the IMF in 2000 for a nine-month period followed by a three-year Poverty Reduction and Growth Facility (PRGF). For the first time in the history of Pakistan, the IMF was able to complete all the reviews successfully and released all the tranches on time. The credibility of Pakistan vis-à-vis international financial institutions was restored setting the stage for the re-profiling of Pakistan’s external debt owed to Paris Club. This re-profiling of bilateral debt resulted in the reduction of external debt and liabilities as percentage of foreign exchange earnings from 224 percent to 125 percent and debt servicing from 26 percent to 9 percent saving $ 1 billion annually for an extended period of time.
Pakistan’s economic performance under Musharraf was impressive in terms of income per capita, employment generation and poverty alleviation. As a result of reasonably high GDP growth rate of about 6.3 percent a year, the per capita income in current dollar terms rose to about $1,000. Headcount Poverty ratio fell from 34 percent to 15 percent. Unemployment rate fell also from 8.4 percent to 6.5 percent and about 11.8 million new jobs were created. Gross and net enrolment at primary level improved and health indicators such as children immunization, incidence of diarrhoea and infant mortality showed favourable changes.
There are at least five strands of criticisms of economic policies pursued under the Musharraf era. It is, therefore, necessary to address each one of them with the aid of hard published data.
First and foremost, it is the post 2001 massive capital flows of official aid from the US, other bilateral and multilateral sources that is responsible for the exceptional growth recorded during this period. The annual gross flows from all official bilateral and multilateral sources received between 2002 and 2008 accounted for 8.5 percent of Pakistan’s total foreign exchange receipts (U.S. provided 4.5 percent of this total). The remaining 91.2 percent of foreign exchange receipts were generated by exports, remittances, and foreign direct investment. Thus the impact of these capital flows is highly exaggerated as the amounts received are no different from historical record of foreign assistance or subsequent acceleration of the US assistance under Kerry Lugar bill. The annual net official assistance between 2009-2014 was $2.8 billion, compared to $1.6 billion between 2002-2008. A British researcher found that “the statistical evidence failed to relate these US aid capital inflows with savings and investment, expenditure, imports, domestic and external debt, corporate profitability and boost in public investment. The episode of growth was better explained by a stronger government able to mobilize domestic resources, ensure that they were utilized productively and create institutions that were able to overcome the conflicts associated with economic development”.
The writer was Governor of the State Bank of Pakistan. He has also served as Dean of the IBA. Until recently, he held a cabinet position. He has also authored several books.
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