July 01, 2011
Pakistan’s Weak Economy
The fiscal year ending this week came in with very weak growth of only 2.4%, barely ahead of population growth, and far behind the 9% growth in India.
This follows 3.8% in the prior year and less than 2% in the year before. Ever since this government has come to power, the economy has been moribund. It is in sharp contrast to the rapid growth seen under Shaukat Aziz from 2002 to 2008, when all sectors were growing briskly, and the government could fund a major increase in development spending. Investment, which was running at 22% of GDP in the last three years of Aziz, climbed down to 13% of GDP this year. The country cannot have any real growth when no one wants to invest.
The one strong sector last year has been trade. Exports surged to 25 billion dollars, an increase of over 25%. Meanwhile, very strong remittance flows of over 10 billion dollars helped maintain the value of the rupee against the dollar despite the high inflation of over 10%. Debt as a share of GDP has declined to 58%, better than 10 years ago, but worse than 2008, when it reached a low of 50%. Interest payments on the debt are down to 3.9% of GDP, and defense spending is 2.4%.
The number of vehicles on the road rose to 10.4 million, double of what it was 10 years ago. Mobile phone numbers were up a bit to 104 million. The infant mortality rate is down to 63 per thousand births, from 85 ten years ago, and literacy is now up to 58%, with female literacy up to 45% compared to 35% in 1999. The under age 5 mortality rate is 8.9%, and life expectancy is 67 years, compared with 64 in India.
Education remains under-funded, with the government spending only 2% of GDP on education, rather than a more appropriate 4% for a young developing country. Despite that, primary school enrollment increased 300,000 students to 19 million. University enrollment over the last ten years has soared from 250,000 to 850,000 students.
Internet use continues to rise, with broadband subscribers up to 1.2 million, from 900,000 last year, and only 400,000 two years ago. In fact, total Internet user rates are 11% of the population in Pakistan compared with 5% in India.
The energy sector remains a major problem with continued heavy load-shedding as electricity demand far exceeds supply. Much of the supply problem is not lack of generating capacity, but inability of power companies to get paid. Actually there is a huge problem of “circular debt” where major Pakistani energy companies are owed large sums and owe large sums to each other. The lack of liquidity for these firms causes financial headaches for all of them, and retards growth and investment. Despite that the total quantity of electricity produced in Pakistan has soared from 50 gigawatts hours ten years ago, to over 75 now. Installed generating capacity is 21 gigawatts, with plans to add 14 gigawatts in the next five years, and another 75 gigawatts in the 15 years after that. By 2030, Pakistan is supposed to have 5 times as much electricity as it does today. Over 10,000 villages have been electrified in the past year, raising the total to 160,000 villages, up from 100,000 villages five years ago.
In population terms, a census is to be conducted in the next year. Total population is currently estimated at 166 million with a growth rate of 2.1%. Total fertility rate (births per woman on average) is still high at 4.0, but has been declining steadily. One factor that handicaps Pakistan when compared to India is its much larger percentage of children in the population. The dependency ratio in India is 57%, but Pakistan is much higher at 69%, and China in comparison is only 39%. 38% of Pakistan’s children are underweight, compared with 48% in India. Malaria is less prevalent but TB is worse than in India.
In the next year the government is hoping that growth accelerates to 4.5%. That would be the best performance so far of the PPP government, but that is still way too slow to absorb the expanding workforce, and to substantially reduce poverty. Growth needs to accelerate to 8%. Investment needs to rise toward 25% of GDP, spending on health needs to double to 1% of GDP and education to double to 4% of GDP. The country needs to focus on human development and economic growth. A prosperous Pakistan is the most effective way to create a nation that can defend itself and its interests, regardless of the intentions of its neighbors.
The Army needs to support a domestic environment that allows for business expansion, which means we must have domestic peace. The terrorist groups that have wreaked havoc on Pakistan need to be stamped out, and the double-game of supporting some fanatics who will fight in Afghanistan or Kashmir while opposing others is not tenable. They are all interlinked and need to be stopped.
The massive flood of 2010 disrupted the economy and caused a burst of inflation due to loss of crops and food shortages. Assuming no new natural disaster this coming year should be much better. But Pakistan still has a long way to go before it gets back on a path of self-sustaining rapid economic growth. All attention should be focused on reaching that goal as soon as possible.