April 25, 2008
The State of Pakistan
By Dr Nayyer Ali
The new government takes over an economy that is in remarkably good shape. Growth remains very robust by global standards. Industrial production is up sharply over the last eight years. Metrics of debt burden are in excellent shape, and reforms of the banking sector and economic policy have placed the economy on solid long-term footing.
There are some serious short-term challenges, but there are always short-term challenges of varying types. Let us note the basic facts so we can assess what happens over the next few years.
GDP per capita 1000 dollars
GDP per capita in PPP terms 2400 (in 2005, probably about 2800 now)
Car production 200k per year (less than 30k in 2000)
Motorcycles 900k per year (was 100k in 2000)
Poverty rate 24% of population (compared with 34% in 2000)
Literacy 53% (was 45% in 1999)
Exports 19 billion dollars
Foreign investment 5 billion
Remittances 6 billion
Debt to GDP Ratio 50% (was 100% in 2000)
Inflation rate 9%
Current Account Deficit 6% GDP
Rupee/dollar rate 63 (stable over last 8 years)
Stock market index 15000 (was 1500 in 2000)
Cell phones in use 80 million (less than 1 million in 2000)
Cement production and exports at all-time record highs
Forex reserves 16 billion (less than 1 billion in 1999).
The short-term challenges are several, starting with commodity inflation, particularly wheat, rice, and oil. All these products have more than tripled in world markets over the last few years. In Pakistan, wheat was priced at 450 rupees per 40kg bag, the new govt. raised the support price to 600, but the international market price is 1300. This is a huge incentive to smuggle for export purposes, thereby creating domestic shortages. There is no easy fix, other than letting prices rise to market levels, which would get rid of smuggling and ensure ample supplies, but double the cost of flour to population.
The second issue is the power problem. Clearly there needs to be major investment in new capacity, but there are several gigawatts in the pipeline. New contracts will take 18 months at least to yield new capacity. And there remains the issue of who will build it and how much can private power companies get for their power. When the PPP signed contracts with the IPP’s in the 90’s, major problems arose when weak economic growth left demand shortfalls, but the IPP’s demanded full payment regardless of whether WAPDA needed the power or not.
The final major issue is the current account deficit and trade deficit. It is not clear if this is really a problem or not. Current account deficits by themselves are not bad, but if the currency is overvalued, or the deficit is being financed by hot money flows that can change their minds rapidly, the currency can collapse suddenly. This happened to East Asia in the late 90’s, and to Russia and Latin America. As a result of that, many Third World nations have built vast forex reserves to prevent such a scenario in the future. Pak forex reserves, while ample compared with 1999, are relatively paltry still. There is a real risk of a sharp rupee devaluation in the next 12-24 months unless the current account deficit can be narrowed or forex reserves substantially increased.
Hopefully, the new government actually follows intelligent economic policies, and does not go for cheap populist budget busting gimmicks. Their initial acts are already cause for worry. In addition, Ishaq Dar is again finance minister. He was up to his neck in the misdeeds of the 90’s, and his return does not bode well. I would recommend anyone seriously interested in these issues to read his budget speech of 1999. It could have been written better by a high school economics student, and left me shaking my head in dismay. On the other hand, there is a sharp incentive to not ruin what has been achieved, and perhaps this will keep Dar and the rest of them in line.
