Opinion

4.1% GDP Growth: Is Pakistan Facing Another Lost Decade Like the 1990s?
By Riaz Haq
CA

Meager 4.1% GDP growth reported by Pakistan for 2013-14 caps the sixth consecutive year of disappointing economic performance under "democratic" governments in the country. This slow growth brings back bitter memories of the last lost decade of 1990s when economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation was in double digits and the foreign debt climbed to nearly the entire GDP of Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PMLN) played musical chairs.

Economy in 1990s: Before the current Prime Minister Nawaz Sharif was ousted by General Pervez Musharraf in 1999, Pakistan's two main political parties had presided over a decade of corruption and mismanagement. In 1999 Pakistan’s economy was the slowest in South Asia while its total public debt as percentage of GDP was the highest in the region – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% and 528.3% respectively in 1998) and India (47.2% and 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% and 264.8% respectively in 1998) and India (44.0% and 358.4% respectively in 1998).

Musharraf Era: Under President Musharraf's leadership , Pakistan became one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging over 6 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and, most importantly, taking Pakistan out of the IMF Program.
The above facts were acknowledged by the PPP government in a Memorandum of Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing an agreement with the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07" elevating Pakistan from a low-income to middle-income country.

IMF MOU of 2008 further acknowledged that Pakistan's "volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1 )

Pakistan experienced rapid economic and human capital growth in years 2000 to 2008 on President Pervez Musharraf's watch . Savings, investments and exports hit new records and the rate of increase in human development reached new highs not seen before or since that period.

Savings and Investments: The d omestic savings rate reached 18% of the GDP and foreign direct investment (FDI) hit a record level of $5.4 billion in 2007-8. This combination of domestic and foreign investments nearly tripled the size of the economy from $60 billion in 1999 to $170 billion in 2007, according to the IMF . Exports nearly tripled from about $7 billion in 1999-2000 to $22 billion in 2007-2008, adding millions of more jobs. Pakistan was lifted from a poor, low-income country with per capita income of just $500 in 1999 to a middle-income country with per capita income exceeding $1000 in 2007.

The PPP government summed up General Musharraf's accomplishments well when it signed a 2008 Memorandum of Understanding with the International Monetary Fund which said: "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07" to elevate Pakistan from low-income to middle-income group. It further acknowledged that "the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (See MEFP , November 20, 2008, Para 1)
Human Capital Development: Besides economic revival, Musharraf focused on the social sector as well. Pakistan's HDI grew at an average rate of 2.7% per year under President Musharraf from 2000 to 2007, and then its pace declined to 0.7% per year in 2008 to 2012 under elected politicians, according to the 2013 Human Development Report entitled “The Rise of the South: Human Progress in a Diverse World”.

Overall, Pakistan's human development score rose by 18.9% during Musharraf rule and increased by just 3.4% under elected leadership since 2008. The news on the human development front got even worse in the last three years, with HDI growth slowing down and being as low as 0.59% — a paltry average annual increase of under 0.20 per cent. Going further back to the decade of 1990s when the civilian leadership of the country alternated between PML (N) and PPP, the increase in Pakistan's HDI was 9.3% from 1990 to 2000, less than half of the HDI gain of 18.9% on Musharraf's watch from 2000 to 2007 .

An acceleration of HDI growth during Musharraf years was no mere accident. Not only did Musharraf's policies attract significant new domestic and foreign investments to accelerate economic growth, they also helped create 13 million new jobs, cut poverty in half and halved the country's total debt burden in the period from 2000 to 2007; his government also ensured significant investment and focus on education and health care . The annual budget for higher education increased from Rs 500 million in 2000 to Rs 28 billion in 2008, to lay the foundations of the development of a strong knowledge economy, according to former education minister Dr Ata ur Rehman .
Student enrollment in universities grew from 270,000 to 900,000 and the number of universities and degree-awarding institutions rose from 57 in 2000 to 137 by 2008. Government R&D spending jumped from 0.1% of GDP in 1999 to 0.7% of GDP in 2007. In 2011, a Pakistani government commission on education found that public funding for education had been cut from 2.5% of GDP in 2007 to 1.5% - less than the annual subsidy given to the various PSUs including Pakistan Steel and PIA, both of which continue to sustain huge losses due to patronage-based hiring .