IMF Give
Pakistan an “A”
The
International Monetary Fund, the last hope of
spendthrift countries with collapsing currencies
and busted budgets, bid farewell to Pakistan
in December. After 20 years of violating every
IMF bailout agreement it signed, Pakistan actually
completed an IMF program and has “graduated”
out of the fiscal doghouse.
The IMF issued its final review of Pakistan’s
economy in December, and it can be downloaded
from the IMF website (IMF.org), but let me review
its highlights. According to the IMF economists,
Pakistan in 1999 “had virtually run out
of foreign exchange reserves and public debt
obligations were not being met.” Also,
“economic growth had slowed to an average
of below 3%” from fiscal 97 to fiscal
1999. Fortunately, new economic management rapidly
got Pakistan out of the severest depths of this
crisis by early 2000.The IMF looked at the issue
of whether Pakistan’s subsequent economic
recovery was “homegrown” or the
result of foreign assistance flowing from 9/11
policy change. They concluded that although
9/11 had some favorable effects, it also had
negative short-term effects on the economy,
and the overall upswing cannot be attributed
simply to that. In their phrasing “domestic
adjustment seems to have been the key to the
macroeconomic improvement, although external
factors played some role.”
The key change has been a rapid decline in the
size of the debt burden. Over the last four
years, debt as a percent of the GDP has dropped
from 90% to 63%. This has been coupled with
a rapid improvement in GDP growth, which over
the last three years has been even better than
India’s on average.
Economic reforms in the banking sector have
been very successful. The trade policy is now
the most liberal and open in South Asia, and
overall the “role of the state in the
economy has diminished and governance improved.”
Industrial expansion has been the leading engine
of this economic recovery. This reflects a fairly
open internal economy and vibrant demand for
manufactured products. There is a point of contrast
with India, whose growth has been led by the
service sector, while their industrial growth
over the last ten years has been sluggish. Pakistan’s
growth has been financed by rising investment,
which has climbed from 17% of GDP to 20% this
year.
A significant development has been the acceptance
of the IMF of the re-basing of Pakistan’s
economic statistics. This was carried out in
2003-2004 budget cycle, and revealed the economy
was 20% larger than the older statistics stated.
Based on the new numbers, Pakistan GDP this
year is 104.5 billion dollars and GDP per capita
is 690 dollars. This puts Pakistani GDP per
capita about 7% higher than India’s. My
view is that this gap is real, and that it will
expand over the next ten years significantly
as the Pakistani economy outperforms India by
1 to 2 percent per year. What is even more interesting
is that since Pakistan has a higher percentage
of children due to higher birthrates, its GDP
is being generated by (proportionately) fewer
actual workers. GDP per worker in Pakistan is
probably 15-20% higher than India.
Overall, the IMF found that Pakistan is “now
much better placed to cope with potential shocks
than at any time in the last decade.”
In addition, they cite a World Bank analysis
that found it is easier to enforce contracts
or start-up a new business in Pakistan than
anywhere else in South Asia. Time to start a
business is now down to 24 days.
The IMF notes the government plan to raise growth
to 8% per year. They characterize this as aggressive
but achievable. 8% per year is about the highest
rate of sustained g rowth that even the best
performing economies can achieve.
The IMF ran a medium growth (6% per year) and
high growth scenario (growth accelerating to
8% by 2007). Under the high growth scenario,
Pakistan reaches a per capita income of 1000
dollars in 2009. Even under the medium growth
scenario, Pakistan reaches 1000 dollars around
2010. In purchasing power (PPP) terms, that
would correspond to about 3500-4000 dollars
per person, and would make Pakistan a middle-income
country. The growth of the last three years
has allowed real spending per capita on education
to climb 12% per year, and on health at about
8% per year.
Musharraf and Aziz can be criticized on some
points, but hats off for giving Pakistan its
best economic policies in its history. Millions
will be lifted out of poverty as a result of
this growth. Comments can reach me at nali@socal.rr.com.
