2009: When I was asked to write a piece on the economic way forward, I hesitated at first because I felt that with a new government in place it is better that we leave the way forward to the new economic managers, rather than play the role of back seat drivers and provide unsolicited advice. But the mountain of criticism of the previous government policies from all sorts of arm chair critics, ranging from retired bureaucrats and economists of the cold war era, who still believe in the supremacy of state management of the economy and for whom Venezuela and Bolivia are the new role models, to Islamists who feel that the entire western global economic system is doomed and we need to chalk out a new paradigm – convinced me that perhaps the time had come to analyze the past and set the record straight, assess the current situation and contribute to the debate on the way forward.
Now that we have the political parties of the nineties back in power it can be instructive to examine a few economic indicators of the nineties with the past eight years and draw inferences. Since the economic growth numbers have been challenged by the critics. I will use numbers that are not subject to disagreement. So for example, if the GDP growth numbers are being challenged, than other growth indicators that the public can understand can show the reality. The official GDP growth from around US $ 65 billion in 1999-2000 to US$ 165 billion in 2007-08 (a factor of 2.5 times) is challenged as being fudged, but growth of credit to the private sector over the same time period from Rs 1 trillion to Rs 2.5 trillion, again a factor of 2.5 times, cannot be challenged.
The data shows that while electricity consumption grew by 1300 Gwh per year in the decade of the nineties it grew by 3750 Gwh per year from 2000 to 2008 a factor of 2.8 times. Gas consumption grew by 20 billion cft per year in the nineties compared with 80 billion cft per year from 2000 to 2007 a factor of four times. The revenue collection by FBR increased from Rs 300 billion in 1999 to over one trillion in 2008. Foreign investment that averaged around $ 500 million per year in the nineties touched over $ 8 billion in 2008 alone. Remittances that were around one billion in 1999 have crossed six billion in 2008.
Development spending that was US$ 1.5 billion in 1999 touched $7.5 billion in 2007. Exports that were $7.5 billion in 1999 reached $18 billion in 2007. Foreign exchange reserves that were around a billion dollars in 1999 reached over 16 billion in 2007. Stock market index that was around 1300 in 1999 touched its highest level of 15700 in April 2008 a factor of 12 times that placed the KSE as one of the best performing stock markets of the world. The exchange rate showed remarkable stability over the past eight years. Credit rating improved from selective default in 1999 to B+ and B1 by 2007.
Since the February elections, and the advent of the new government economic indicators have sharply deteriorated. The Currency has fallen by 25 percent against the Dollar, the stock market index has fallen by 6700 points from its peak in April leading to an asset value loss of 43 percent amounting to loss of market capitalization of around US $ 40 billion; the largest loss in the history of Pakistan. This loss of confidence in the economy of Pakistan has been unprecedented. We can trace the loss of confidence by the foreign investor by examining the spread on the US dollar global bonds that we issued in May 2007. These bonds were issued at the start of the lawyers movement and its associated turmoil. The bond was a huge success with over subscription; of seven times amounting to $ 3.5 billion while we were seeking only $500 million. The spread was 180 basis points above US government ten year securities. As the lawyers movement continued to gain strength in mid 2007, the spread on the bonds jumped to 300 basis points in July and 400 basis points by November when the emergency was imposed.
In December when BB was assassinated the spread jumped to 600 basis points. However, after the elections, the investor community welcomed the peaceful transition by pushing the spread down to 500 points. The stock market also reacted favorably and reached its highest point of 15700 in our history in April, 2008. Since then our chaotic politics and lack of focus on economic issues has led to the collapse of the stock market to 9000 points and the spread has jumped to almost a 1000 points. So what events produced these results, between April and now.
In the previous government, we had been highly successful in crafting a very positive brand image of Pakistan as one of the fastest growing emerging economies in Asia. After our exit from the IMF program and successful reforms, investors favorably compared Pakistan to India, China and Vietnam. Every time we did a road show, we were highly successful in our endeavors whether it was the OGDC flotation or UBL GDR or Euro bonds or large privatizations, investors flocked to our offerings. We were a success story in the international financial markets and most of our issues became benchmark issues.
Unfortunately, this Government has not been able to maintain Pakistan Brand rather it has eroded considerably. In this erosion the first stone was foolishly cast by our erstwhile finance minister Mr. Ishaq Dar who displayed incredible irresponsibility and immaturity in lambasting the Pakistani economy in front of the global media; at a time when the global investment community was looking towards the new government for its economic vision and future strategy the new finance minister harangued them on how bad the Pakistan economy was. In spite of this onslaught, the rating agencies maintained their ratings until as in their words the new government comes up with its economic game plan. The new government was at this time caught up in utter confusion on the economic direction of the country with rapid changes in the finance setup and revolving finance ministers.
This lack of focus was disastrous for us as against this back ground our financing plan included a number of financial market transactions totaling around $ 4 billion that were ready for the road shows. These included the National Bank, Habib Bank, and KAPCO. The exchangeable bond issue of OGDC, and the strategic sale of PSO shares along with management control. With the stock market at an all time high the transactions would have been a great success and the road shows would have generated tremendous good will for the new government and would have highlighted the smooth transition that happened in Pakistan. It would have been a great opportunity to showcase Pakistan in front of the international investment community. Instead, in an inexplicable move the Government cancelled all the transactions. Pakistan directly lost desperately needed inflows of $ 4 billion and with the rising oil import bill, this loss placed a huge pressure on the reserves and the currency. Indirectly the loss was probably twice as much as foreign investors withdrew to the sidelines and domestic investors moved their investments overseas. It might be mentioned that while the government failed to take advantage of the window of opportunity, The MCB bank taking advantage of the great valuations on the stock market in April 2008 privately placed some 20% of their equity with a Malaysian bank for a cool sum of $ 850 million.
If the Government had acted similarly, it could have generated sufficient flows to prevent the meltdown which ensued. Reserves drawdown would have been avoided, the spread on our international bonds would have narrowed down to May 2007 levels, borrowing from the State Bank would have been halved and the government would have had a stable environment for tackling the oil import bill and food inflation. Our current predicament is clearly a creation of our current economic miss-management. A few heads should have rolled because of this incredible lapse.
What could have been done in April/May 2008 with the market at 15700 points cannot be done in September/ October 2008 with the market at 9100 points. The international markets are closed to us. We have to wait until our markets get back to their historical levels and investor confidence is restored. How will this be achieved? The biggest challenge for President Zardari is to restore the eroded Pakistan Brand; back to its original luster and in the process revive the investment flows that can sustain our growth going forward.
First, while we should be on the right side of the world in the war on terror, the world should seriously help us in our endeavor to build a better economic & future for our people. The new president has to focus on the economic issues facing the country. His international trips to China, Saudi Arabia, Gulf, USA, UK, should promote Pakistan economic interests as a pivotal objective. He should not only promote government to government economic cooperation but also promote private sector to private sector interaction with these countries. We need strong, immediate and implement able commitments of around $5 billion balance of payment support from these countries. In addition, their leadership at the highest levels should support international moves to promote our economic growth and stability. Better and preferential access to EU and USA markets, greater quotas for labor and deferred payments for oil in Saudi Arabia and Gulf region. A full calendar of investment conferences and single country exhibitions need to be carried out under the direction of the president. The promotion of exports and investments has to be the major focus and objective of the President. If we can generate foreign investments greater than last year level of $ 8 billion and export growth is revived to healthy double digit levels we would start coming out of the current malaise.
Second, it is clear that Pakistan growing trade and current account deficit is being driven by ever escalating oil prices. With the oil bill crossing $12 billion a year there is no option other than passing the full prices to the consumers and eliminate the burden on the budget. This will also help in promoting conservation and improving energy efficiency. Unfortunately, the transition to a new government took place at a time of unprecedented increase in global fuel prices.
For example at the time of elections, oil prices were around $80 a bbl whereas by July 2008 it had reached $140 a bbl. While we had planned to limit the fiscal deficit to be under 6 percent and largely financing it from non state bank sources, including commercial bank borrowing and non debt sources. The new government ended up with a much higher deficit level and financed it totally from the state bank. We have now reached a stage where the issue is no longer energy availability rather it is energy affordability. We have almost 20000 MW of power generation capacity but we are only using 12000 MW because the Furnace oil used for thermal generation has become extremely expensive and beyond the ability of Pepco to pay for. As a result, available capacity is not being used leading to load shedding.
The exorbitant power price increase can only be avoided in the short run if transmission and distribution losses are dramatically curtailed and in the medium term we substitute imported fuel with domestic sources. Thermal power based on imported oil costs around Rs 16 per unit (Kwh) whereas hydel power from Kalabagh would cost Rs 2 per unit. The power from Thar coal will cost around Rs 8 per unit. While Kalabagh can be completed in five years, Technical problems with Thar coal can delay its availability indefinitely. If the mega Kalabagh Dam is launched in 2008 it will not only jump start the economy; it will also be seen as President Zardari’s gift of Hydel Power to Pakistan just like PM Zulfiqar Ali Bhutto Gift of Nuclear Power to Pakistan thirty five years ago.
Third, as far as inflation is concerned it will start coming under control as global oil and food prices filter through the economy. Our Inflation index is heavily weighted in favor of food energy and commodity prices. So it is highly sensitive to these prices. Since global energy and food prices are easing the same should be felt in Pakistan in the days to come. Pakistan’s inflation is a supply side and cost push phenomenon and further monetary tightening would not help. Instead, a tighter fiscal policy with a lower deficit target and phasing out of borrowing from the state bank will help. At the same time in this period of great change we should ensure that the poor of the poorest are able to cope with the changes particularly higher food prices and social safety nets are made fool proof so that nobody in Pakistan stays hungry.
Fourth, for the first time after 2nd world war agriculture commodity prices have moved in favor of the farmers. We have to ensure that we pass on this benefit of higher global prices to our farmers by deregulating agriculture prices. The only other incentive our farmers need is predictable water supply. This can be ensured by building more water reservoirs and better water management so that farmers can move from unpredictable subsistence agriculture to commercial agriculture. Study after study in the sub-continent has shown that large multi-purpose dams are the quickest way out of poverty. With oil prices at $100 per barrel and destined to double over the next decade there is no way, other than developing our full hydel potential quickly to usher in a new green revolution and providing sustainable global advantage to our economy of cheap hydel power.
Fifth, we should stop cribbing about the Consumer economy. Pakistan is a large country with 160 million people and 100 million under the age of 25. With dependency, ratios going down we can reap a demographic dividend over the next several decades. While these youngster have to be prepared for the work force they are already becoming a huge engine of growth for our markets that are growing at fabulous rates to meet the demands of these Pakistani baby boomers, Just like in Europe and South Korea after the 2nd world war, our baby boomers will be the back bone of our middle class and will determine the growth of our economy over the next 40 years until they start to retire. This gives our businesses an historic opportunity to grow and produce the goods and services the population needs. In an era when world is facing a crisis of aging populations we are blessed with opportunities of a young and dynamic population. In this regard consumer financing which has become a butt of criticism has just scratched the surface.
In our country, consumer finance is around 5 % of GDP whereas in the developed world it is over 100% of GDP. Consumer financing has a long way to go and along the way it will continue to be one of the engines of growth for us. Any ill founded moves to curtail the consumer economy will hamper the growth of our businesses. We are now going beyond textiles into engineering, electronics, chemicals, food processing, construction materials, real estate and many other sectors based on our domestic markets as these markets continue to expand we will reach economies of scale that will make our producers and the large associated vendor industry competitive on a global scale and the same producers will be the base for diversifying our exports into more sophisticated and fast growing sectors of the world. Ultimately, if our law and order permits and our national psyche adopts rules of globalization, and globalization as our road to prosperity we will become one of the workshops of the world along with India and China.
Sixth, there are hundreds of infrastructure projects at various stages of implementation including the National trade corridor, Neelum Jhelum hydro power project, KKH upgradation, Urban renewal in Karachi and Lahore, mass transport projects, airports, Baluchistan road network, Gawadar port, industrial parks etc., these projects have to be completed on time and scope. The last government also created an Infrastructure project development facility (IPDF) that needs to be fully utilized so that we can bump up (almost double ) our expenditure on infrastructure particularly hydel projects through public private partnerships.
Seventh, the FBR has to continue generating revenues for the government to carry out the nation building programs. Last year a target of over 4 trillion rupees was set for FBR within the next ten years, four times the current levels reaching about 16 % of GDP. Along with a target of 4 percent of GDP for education expenditures with 1.5 % allocated to university education. The education strategy was based on providing universal access to primary education, retaining enrollments into secondary education and technical and vocational training and improving standards at the college and university levels. Nine new engineering universities in collaboration with European, Korean and Chinese universities were in the pipeline. Going forward we should focus on quality improvement through a big push forward in teacher training, curriculum development and public private partnerships at the primary and secondary schools level and continued efforts to upgrade the universities and hopefully achieving the setup of the new engineering schools. The national vocational and technical education commission (NAVTEC), has gone through its learning curve, and can now be used to upscale its programs to give technical and vocational training a quantum jump.
Eighth, in the financial sector we have created a world class banking system with our banks featuring amongst the leaders in Asia. The Quality of our bankers is second to none and can work in any global setting. The challenge is to further increase the reach and competitiveness of the financial sector with Microfinance playing a much greater role. Our microfinance frameworks are the best in the world and a strong base has been established which can grow manifold to bring financial services to the masses. The growth of the financial sector will continue at a sizzling rate as the financial sector expands into consumer and housing finance, rural and agriculture finance and development of debt and bond markets, growth of mutual funds, pension funds and other savings instruments.
Ninth, in the competitiveness area we must continue to deregulate and privatize the economy to create a vibrant and competitive economy. Second generation reforms in economic management have to be continued. An essential pillar of a private sector led market economy, the Competition Commission has to be given financial independence and allowed to work unhindered. The competitiveness support fund, business support fund, agriculture support fund, Khushal Pakistan fund, smeda etc. have to be used to implement reforms that help the market economy become more productive and competitive from the grass roots level up to the corporate level.
Finally, Pakistan needs to continue to grow at 7 to 8 percent to create the 3 to 4 million new jobs per year needed to accommodate our youth and create a dent in poverty in our lifetime. We cannot embrace isolationism, jihadism or any other form of global confrontationist movements. Instead, we have to build on our successes, unleash the potential of our people, exploit our competitive advantages, take advantage of global finance, integrate with global markets, and continue building a dynamic market economy with world class infrastructure to achieve our growth objectives. This is the recipe for the future and the way forward for Pakistan.