There have been ups and downs in the performance of the previous government. According to its claims, the economy was sailing through safe seas. There had been continuity in all major macroeconomic policies for the last five years. With the success of the first generation of financial reforms, the government had just initiated second generation financial reforms.
Financial bonds had been launched in international bond markets and GDRs were also been introduced in international equity markets. FDI (US$7 billion in 2007) and FPI were on the rise. It said the momentum for joint ventures was increasing day by day and many FTAs were in line, especially with China, Iran and Sri Lanka.
According to its claims, the poverty rate had been declining (according to the latest ILO human poverty index, Pakistan is at 68, a position lower than 58 for India among 103 developing countries). The price hike was curbed. Inflation was checked through different monetary and supply tools. Unemployment level was curtailed. The illiteracy rate was minimized. Export volumes were swelling ($17 billion). However, despite all high claims and projections of the previous government, independent experts do not agree. According to the IMF, medium-term prospects were very good and sustainable only due to heavy inflows of domestic and foreign investments.
Comparing the above claims with the SBP first quarterly report (quarter ending September 30, 2007), there was no major change in any indicator and in any targets for 2008. The government claimed huge FDI in the infrastructure sector, but initially economic managers failed miserably to attract foreign investment. The country needs Rs 400 billion more for infrastructure development. The recent power crisis tells the whole story. Not a single megawatt was added to electricity generation during the last seven years.
The main focus of the government was selling-off national assets to foreign companies at a throw-away price (in many cases) in order to meet current expenses and requirements. The government also failed to properly mobilize domestic savings which are still the lowest in the region. Domestic saving rates should be 25-30 per cent of GDP. According to the SBP annual report-2007, national savings were 20.8 percent of GDP in 2002-03. According to the Economic Survey (2007), domestic savings had further fallen to 16.4 percent in 2006-07, despite heavy remittances from abroad.
Lack of corporate governance, corruption and slack policies were damaging the credibility of the government. The wheat scandal, PSM privatization and annual audit reports of the Pakistan Accountant General showed a breach of national trust and plunder of national assets.
The Transparency International report (2007) clearly indicated the increase in corruption in the country. Lavish lifestyles and the viceregal mentality of the ruling junta had already played havoc with national assets and people's trust. A sum of Rs 1,800 million was spent on the import of 22 Mercedes Benz cars during the first two months of 2006. Earlier, 20 costly cars were also purchased. This was done despite the fact that the Cabinet Division already had a fleet of 45 costly cars, including 31 Mercedes Benz. No doubt, the NAB recovered NPLs, amounting to Rs90-100 billion but still there was space for improvement.
The writing-off of loans had been increased. According to the SBP annual report (2002-2003), NPLs stood at Rs 212.1 billion. The macroeconomic growth never percolated to alleviate poverty in Pakistan. The growth that has taken place benefited a handful, mostly in middle or upper-middle-income groups, increasing disparity between this layer and hundreds of millions of poor and low-income groups.
Due to a lax regulatory mechanism and ineffective consumer rights protection, the sugar millers' mafia and cement cartels made billions and the rest of the country suffered badly. Still no concrete steps have been taken to break the invisible hands of monopolistic elites.
High growth was achieved which, as measured by GDP, was 7 per cent average over five years. Growth in the last five years was led by the services sector. Manufacturing and agriculture grew, but at a rate much less than growth in the services sector. As the growth in the past five years was led by the service sector, jobs were created in transportation, telecommunication, financial and wholesale and retail sectors.
The manufacturing sector performed well when interest rates went down to 4-5 per cent in 2002. Over $5 billion were invested in plant and machinery. However, as interest rates started going up, as a result of monetary tightening, growth in the manufacturing sector came down considerably. This is a sector that should have been focused on for job creation. It is labour intensive and that is why we did not see the trickledown effect in the economy.
Coming to the agriculture and industrial sectors, yields of major crops and total cultivable land remained static. In fact, they have remained static for the last 60 years. Growth in the agriculture sector in the last five years was of a volatile nature, ranging from 1.5 per cent to 6.5 per cent (in 2004-2005). The government has failed to achieve desired goals in agriculture and industrial sectors due to many reasons.
* Shortage of water (although many small dams, like Bhasha dam, have been started, but no consensus could be evolved for building the Kalabagh dam. It was later abandoned)
* Absence of subsidy on essential items of cultivation
* High rates of inputs
* High levels of utility bills
* Unskilled labour
* Shortage of finances.
Exports increased from $9 billion in 2002, to around $19 billion in 2007. As the rupee was held stable despite high inflation exports kept on getting expensive and imports cheaper. As a result of an appreciating rupee, the rate of growth of exports declined whereas the rate of growth of imports increased, going from $12 billion in 2002-03 to $30 billion in 2006-07. The PML-Q government continued its liberal import policy, as it could fund its current account deficit through increasing foreign remittances, foreign direct and portfolio investment and increasing revenues generated through privatization.
During the five years of the PML-Q, oil prices went up, from $35 to $85 a barrel. However, the government managed to contain inflation which remained in the range of 3 per cent (2002-03) to 9 per cent (2004-05), reducing to 8 per cent (2006-07). Various indicators show the percentage living below poverty level went down from 2002-03 until 2006-07, but then as a result of sharp increases in food and oil prices and reduction in the growth rate, the declining trend was reversed.
Due to strong elements of centralization, bad governance, lack of political will, misconception about powers and, above all, denial of provincial autonomy, all federating units were facing tough times. There was a spirit of inter-provincial disharmony among all the provinces on the issue of royalty of gas and electricity. The main issues were:-
*Fair river water distribution (the water sharing formula is still unacceptable to Sindh to some extent).
*Equitable distribution of federally collected taxes among the provinces (Sindh and Balochistan are complaining against the unequal treatment of the centre). The sales tax is normally a provincial tax in most countries of the world, but the federal government is not prepared to accept it.
*The grant of financial autonomy to the provinces. The National Finance Commission (NFC) was and still is rather dysfunctional.
Many economic experts are of the view that 9/11 was the turning point in the revival of our national economy. Workers remittances moved from hundi/hawala system to banking channels and annual remittances now exceed $4.5 billion.
Workers' remittances can do wonders for the economy and the upward development of India, China and many Latin American countries economies verify it. But these massive inflows of workers' remittances have not been properly used.
Many irrelevant policies of the government encouraged trends of consumption rather than investment and savings, with the result that money went to unproductive sectors, like real estate and stock exchanges. Speculators made billions and produced a bubble economy in the country.
The sustainability of economic development is now necessary for the government. Several flaws need to be removed urgently. Despite political maneuvering and self-projection, solid and durable macro-economic policies should be initiated which should be pro-poor, pro-investors, and pro-business. Equal opportunity, fair play, merit, corporate governance, accountability, impartiality, strong regulatory mechanism, social justice and prudent macro-economic policies should be implemented.