Pakistan's economy in for a jolt

Print edition : June 06, 1998

THE spate of nuclear testing by the Government of Pakistan could not have come at a worse time for the economy of that country. In fact, in both India and Pakistan, what is striking is the fact that the current nuclear militarisation has taken place during an economic recession, and it is likely to worsen the material problems. It is hard not to suspect that both governments find appealing to aggressive jingoistic sentiments easier than taking positive action to resolve the difficult economic situation, and have therefore chosen to divert public attention to the most fruitless and dangerous activity of finding threats in each other.

The basic economic problems in Pakistan are quite similar to those in India; however, they are even more acute and are exacerbated by greater external vulnerability. Pakistan's economic growth has been decelerating since 1995, and there are no signs of a recovery on the horizon.

Growth of real gross domestic product (GDP) was only 3.1 per cent in 1997, and the earlier projections of more than 4 per cent for this year are now accepted as unrealistic. Agriculture hardly grew in 1996-97, and was not much better, at around 2.3 per cent growth, in the subsequent year. Pest attacks have badly affected the cotton crop. Industrial growth has been low at 3.4 per cent for the past two years. Manufacturing performed especially poorly, showing increases of less than 2 per cent. The low levels of private credit growth and investment, along with the contraction of capital goods imports in the past fiscal year, suggest that industrial activity is likely to remain depressed.

Poor growth has also affected the Government's fiscal position, just as in India. The target of a fiscal dificit 5 per cent of GDP could not be met because of major shortfalls in revenue collection. Meanwhile, inflation has been around 11 per cent in the past two years; in the last few months it has fallen below double digits only because consumer demand has sagged owing to recession.

The trade deficit continues to grow, because exports have shown almost no growth in dollar terms since 1996. The current account deficit is dangerously large, at nearly $4 billion, and because of the large external debt, which is more than 70 per cent of GDP, debt service ratios have also been very high at around 25 per cent. This matters because Pakistan's foreign reserves are at a dangerously low level at present, at only $1.1 billion (equivalent to less than one month's imports), and until the state of emergency was imposed on May 28 the Pakistani rupee was fully convertible.

Since October last year, Pakistan has been subject to an agreement with the International Monetary Fund (IMF) for three years, amounting to a loan of $1.5 billion. This money, along with World Bank aid, which amounted to $800 million in the past year, is significant for Pakistan which receives very little in the form of foreign private investment or credit. Total multilateral loans into Pakistan account for 1.4 per cent of its GDP. Already the IMF has been complaining that several policy commitments made by the Government have been unduly delayed - ranging from retrenchment of workers in the public sector and accelerated privatisation of public assets to the proposed revision of power tariffs and the imposition of sales tax at 2 per cent on retail trade. It is quite likely that these will now be insisted upon if the IMF does agree to provide the next tranche.

The impact of economic sanctions on an economy that is already so weak could well be devastating. The postponement of foreign aid and loans is critical in Pakistan's case because the central bank simply does not have enough hard currency to prevent a speculative slide of the Pakistani rupee.

The Pakistani currency had already depreciated by around 12 per cent in recent months, and capital flight was obviously anticipated by the Government when it announced a freeze on all foreign currency transactions and closed banks to prevent a run on the rupee on May 28. It is possible that even this action was imbued by the clientelism that has marked so much of the country's official policy moves. A report published in Dawn newspaper on May 29 suggests that Punjab's big businessmen in the Lahore Chamber of Commerce and Industry, who had close ties with the Nawaz Sharif Government, had advance information about the nuclear blasts. As a result, millions of dollars left Pakistan in the three days preceding the explosions, and so by the time the controls were imposed, at least some birds had already flown. While the favoured few were thus protected as usual, the mass of Pakistani citizens now face dramatically worse economic conditions as well as a loss of democratic rights after the imposition of the state of emergency.

It is clear that the price for these economically expensive explosions will be paid by the ordinary people of Pakistan, who are being offered illusory and perilous symbols of aggressive nationalism and are being told to exult and put up with the consequences. In this, as in so much else, the citizens of Pakistan have much in common with their Indian counterparts.

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