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PAKISTAN


  
  



Key Economic Data 
 
  2004 2003 2002 Ranking(2004)
GDP
Millions of US $ 96,100 82,300 73,300 44
         
GNI per capita
 US $ 600 520 480 160
Ranking is given out of 208 nations - (data from the World Bank)

Books on Pakistan


Update No: 086 - (26/05/13)

Summary: the parliamentary election gave a strong plurality to Nawaz Sharif’s PML-N and he will ally with some small parties to form a coalition. The PPP got a drubbing and the PTI did less well than expected. The PML-N is now showing an intent to focus on the economy and wants to bring some experts into the cabinet, allegedly. But some ‘noise’ indicates a resumption of the PML-N’s confrontation with the army, which does not augur well.

A PPP debacle foretold
In the end the opinion polls which gave the PPP 20 or so percentage points behind the PML-N were quite right. The PML-N got almost a third of the vote and just under half the seats, while the PPP with less than 15% was actually overtaken by the PTI of Imran Khan in terms of the popular vote (16.7%). In terms of seats the PPP did marginally better thanks to the concentration of its votes in Sindh; it took 31 seats to PTI’s 28. The PTI did not do as well as some expected, but still had only one seat in the previous parliament; it took most of its seats in the KP region, where its campaign in favour of supporting jihad in Afghanistan stroke a chord. Given the very weak performance of the PPP government in the context of deep economic and political crisis, the punishment inflicted by the voters is hardly surprising. The PML-N will now probably form an alliance with some of the smaller parties as the PTI does not seem inclined to enter a coalition. The PML-F, a splinter faction of the PML which contested the elections separately, and the small National People’s Party have already agreed to join in. While people celebrate Pakistan’s first successful democratic transition, expectations of the forthcoming PML-N government are muted, given their past record in office.

Sharif’s prospects
To ease power shortages in the short term, the outgoing government just ordered government offices to switch air conditioners off and advised officials to stop wearing socks in order to make their life more tolerable in the soaring temperatures of late spring. Can the PML-N do better than this? Some of the first positions taken by the incoming PML-N have created some surprise and seem to augur a new season of friction with the armed forces. They have for example stated that they want the process of normalising relations with India to resume from where they left it in 1999 (when they were removed from power in a military coup). Nawaz Sharif, the forthcoming Prime Minister, has also promised an enquiry into the Kargil operation (1999), which started a border war with India and could easily have escalated further. Finally he seems also intentioned in keeping the defence ministry for himself, a sure sign that he has something in mind. Soon the chief of staff of the armed forces, Kayani, will be up for replacement and there is interest for what Sharif’s choice will be.

Otherwise Nawaz Sharif is for now enjoying a honeymoon with Pakistani middle class opinion – even the liberals are willing to give him a chance as the best hope the country has got, after the greatly disappointing PPP government. The honeymoon is not expected to last long, however. Sharif is unlikely to do much to extend the tax base of the country – as a billionaire with roots in the steel industry, he pays US$10 a year in tax himself. But some argue that Sharif, as an industrialist, should do better than Zardari and his team, at managing the economy. Sharif and the PML-N have said they will prioritise the resolution of the power shortage crisis and have already a team led by businessmen working on a plan to increase the productivity of the energy sector, which has in theory the capacity to produce enough energy for Pakistan. In general the PML-N has promised to appoint a number of technocrats to key ministries like energy, or at least people with a technical background. On the political front, Sharif has long had a record of appeasement with militants and terrorists, which his region (Punjab) produces and exports to the rest of Pakistan. From Sharif’s statement, he is likely to continue along his old line of appeasement.


Forecast 2013
Pakistan has not been a frequent source of good news in recent years, but January has been quite catastrophic for the country, to the point that some observers are beginning to think that what seemed unconceivable a few months ago, a new military takeover, is perhaps not so unrealistic anymore. Even some sections of the press are voicing their disappointment in democracy and their hope for a ‘benevolent dictator’ but the last one of that description General Musharraf is currently under arrest by order of ‘the judges’.

The headlines were hit first and foremost by the news that the Supreme Court has ordered the arrest of yet another Prime Minister, this one being Raja Pervaiz Ashraf and 14 others, on the ground of corruption. This is the third Prime Minister in a row lost by the ruling PPP and the first one to be effectively arrested. Some PPP faithful will see a conspiracy against their party in this (of course, not without some justification), but many Pakistanis see instead the demonstration that the political elite cannot find a prime minister clean enough to keep his job. Although these incidents might strengthen the opposition PML-N, in reality many Pakistanis are perfectly aware that that party too in terms of corruption, is hardly better than the PPP, probably on their record, worse.

The crisis of the political establishment is offering opportunities to political entrepreneurs who had been on the margins until now. One is Imran Khan, who is expected to do well in the forthcoming May polls, but whose popularity already seems to be peaking out. Another is Tahir Al Qadri, a moderate cleric who has been trying to kick-start a grass-roots anti-corruption government and advocates a government of technicians and professionals; he led the occupation by thousands of protesters of Islamabad’s centre, asking for the government to quit straight away. The fact that the armed forces leadership remained silent during the demonstrations suggests some sympathy for Qadri and his aims; perhaps rather than taking power directly, the army would find it more convenient to support a non-political ‘civilian expert’s’ government. Qadri’s mobilisation effort was well funded and he openly praised the judiciary and the army, while bashing politicians. Qadri had also backed Musharraf’s coup in 1999. The malaise is felt at all levels of Pakistani society. Despite Pakistan’s massive investment in the security sector, Pakistanis feel more and more insecure. There are now hundreds of private security companies in Pakistan, employing 300,000 armed guards! It is another post-retirement career for army officers. Most of these companies are owned by former generals.

There seems to be very little chance of the PPP hanging on to power in May. The question is whether the PML-N will be able to rule alone or with some minor allies, or will instead have to form a coalition with Imran Khan. In the latter case, coalition politics would become significantly more complicated. The new government will probably enjoy a short honeymoon, until it will somehow remind everybody how corrupt and incompetent it is too. For the first time a Pakistani civilian government has been able to complete its mandate. This piece of good news does not change the fact that the PPP-led government is quite unpopular. President Zardari is rated at 14% in the popularity polls and some elections polls place the main opposition party, the PML-N at 37%, with the PPP at just 16%, the same level of the emergent PTI of former cricket star Khan. Some observers however note that the PPP has been doing much better than expected in by elections in recent months and that the level of actual support might well be significantly higher. In fact the IRI polls place the PPP at almost 29%, ahead of the PML-N at 25% and of the PTI at 20%. Although the PPP would then lose some seats, it might still be able to form a new government thanks to the help of some key allies, such as the mainly Karachi-based MQM. Particularly in the rural areas the PPP may retain much support thanks to some programmes to help the rural poor, which have been implemented in the past 5 years. The rise of the PTI is agreed upon by all observers, but it is not clear how that will translate in seats because of the first past-the post electoral system. While president Zardari is often reviled, he has at least demonstrated to possess considerable political negotiating skills, constantly renovating the coalition which was keeping the PPP in power despite never ending challenges.

The Zardari government is also under fire because of the terrorist attack in Quetta, targeting the Hazara minority, which caused a slaughter. There are allegations that the intelligence services had some information about the forthcoming attack, but did not manage to pre-empt it. In reality, these indiscriminate terrorist attacks are difficult to prevent, but in an electoral campaign everything is licit to gain some ground with the voters, so the opposition is lambasting the government. The PPP does not appear to have given up fighting the elections, knowing that much of the vote is bought anyway and that its generous expenditure in the last year or so might bring some reward in the villages. In particular, the PPP hope to gain ground in Punjab, where the provincial government is run by the opposition PML-N and there the PPP can try to present itself as the opposition; the gap between the two main parties in terms of popular vote in the previous elections had been very modest, but the distribution of the vote was such that the PML-N won many more seats in Punjab than the PPP. The political pundits however seem certain that the PPP will lose, as illustrated by a wave of defections of members of parliament and provincial assemblies to the PML-N.

On the political front the most widely noted development in April was the judiciary’s move against the renascent Musharraf. The former dictator and Army Chief Of Staff returned to Pakistan to run in the parliamentary elections, (not normally the behaviour of a dictator), but anyway the judiciary issued an arrest warrant against him and banned him from running. The move is widely seen as a sign of defiance of the judiciary vis-à-vis the army, these being the two most powerful sectors in the state, way ahead of the elected politicians.

The budget deficit reached, according to the International Monetary Fund 8.5% of gross domestic product in the last fiscal year, more than double the official target. The IMF also projects GDP growth at 3.5% for the current year, versus 4.3% forecast by Islamabad. Foreign currency reserves, one the most closely watched indicators of Pakistani economic trends, are declining. The IMF estimates that they reached US$10.8 billion in the last fiscal year. This grim economic picture is not what the government wants to hear in an election year, the more so since the main problem (insufficient power generation) is also in part the fault of the corruption of PPP politicians, who pocketed the money instead of making sure that efficient power plants were being installed.

The IMF expects the budget deficit to reach 7-7.5% of GDP this year, a much higher figure than the Pakistani government estimates. The new government is unlikely to change much in that regard unless it is that of Imran Khan; Nawaz Sharif of the PML-N is no keener on raising taxes on the wealthy, for the same reasons than the PPP has been. The new government however might afford to spend less, once the elections are out of the way. Foreign currency reserves will drop further to US$7.4 billion in the current year, ending in June. The key problem, which constrains economic growth no matter how cheap Pakistani labour might be, is power shortages. These cannot be resolved quickly, even if the plans approved by the current and future governments were implemented in a flawless way - and that would be a ‘first’! Hence the IMF’s pessimism is justified.

By mid-February Pakistan’s foreign exchange reserves were down to just over US$13 billion, down US$350 million in just a week. The downward trend in foreign currency reserves therefore continues, worsened by a rare decline in the remittances of Pakistani workers abroad, which in January declined to US$1.089 billion from US$1.11 billion in January 2012. This rapid erosion of foreign exchange reserves seems to promise a major crisis for just after the forthcoming parliamentary elections.

Foreign direct investment continues to decline, down 9.7% during the first 8 months of the fiscal year. That makes minus 85% over 2008. External commentators say that Pakistan is reaching a critical balance of payments situation and that a new International Monetary Fund rescue package might be necessary after the elections. It makes little relief that the Karachi stock exchange is doing well, up 33% since 2008, because the Karachi exchange is tiny and not very representative of the economy as a whole. Foreign currency reserves are down to US$8.1 billion, the equivalent of about two months’ worth of imports and there are US$2.7 billion worth of debt repayments scheduled between now and end June. So far this year foreign exchange reserves have been eroding at the rate of about US$500 million a month. The risk is that of a crisis of confidence and a run on the Pakistani rupee. In this context it is easy to understand why, despite clear indications of the country shifting closer and closer to China in its long term economic planning, in the short term Islamabad has to warm up to Washington in order to secure new loans. Efforts to expand Pakistan’s tax base are not achieving much in part because more and more of the economy is going under cover. The informal share of the economy seems to be growing, with even relatively large companies disconnecting from the state. New estimates place the size of the informal economy at 74% to 91% of the formal economy.

Despite clear indications of the country shifting closer and closer to China in its long term economic planning, in the short term Islamabad has to cosy up to Washington in order to secure new loans. Efforts to expand Pakistan’s tax base are not achieving much in part because more and more of the economy is going under cover. The informal share of the economy seems to be growing, with even relatively large companies disconnecting from the state. New estimates place the size of the informal economy at 74% to 91% of the formal economy.

The other chronic illness of the Pakistani economy, power shortages, also promise to get worse soon, as Pakistan State Oil is on the verge of bankruptcy because of a liquidity crisis, and will be forced to cut sales on credit to Pakistan state agencies, a development which will in turn lead to a reduction in power supply and more blackouts. Pakistan State oil is owed by electricity companies US$1.5 billion, while having debts to suppliers for US$1.23 billion.

The outflow of foreign direct investment is becoming more and more worrying for Pakistan. It is now badly affecting even the telecommunications sector, which had dominated the foreign investment flow in the past. In the last eight months of the current fiscal year the sector lost US$320 million, the net result of flow limited to just US$136 million and outflows of US$456 million. Telecommunications is not the only sector from which divestment is going on. The chemical industry is also suffering heavily, with an outflow of US$89 million. The only sectors which keep attracting large foreign direct investments is the oil and gas one, with a net inflow of almost US$340 million, and the financial sector, with a net inflow of US$202 million. The critical power sector, where investment is dramatically needed, saw a net inflow of less than US$16 million. Overall, net inflow was just around US$0.5 billion. The fiscal deficit stood at 2.6% last year only because of US$1.8 billion of US ‘Coalition’ support. The trade deficit was reduced thanks to falling imports and cheaper commodity prices.

The release of an ADB report on the Pakistan economy caused a stir because of its extremely negative assessment. Calling the Pakistani economy ‘directionless’ was a direct attack on the management of the PPP government. Indeed the current Prime Minister, Khoso, has long struggled to appoint a finance minister and the government is perceived as showing little interest in seriously addressing the problem of economic sluggishness. Eventually in April a respected economist, Dr Shahid Amjad Chaudhary, Rector of Lahore School of Economics, was appointed as finance minister, probably to lay the ground for a new loan agreement with the IMF.

The fact that the modest growth that Pakistan is still experiencing is driven by private consumption is also telling; private consumption expenditure grew by 11.6% in the latest fiscal year, while fixed investment is falling. It stood at 10.9% of GDP in the latest financial year, one of the lowest levels in all Asia. Car sales, for example, are growing at the rate of 14% a year, while new shopping malls are opening all the time. The growth in private consumption is in turn driven by the remittances of the almost 10 million Pakistanis who work abroad. In four years the level of remittances has almost doubled to US$13 billion a year. Many Pakistanis who benefit from them invest in the construction sector, which is also doing well.

Criticism of the government for its handling of the power crisis is mounting. A bipartisan report highlighted how the minister of water and power did not even attend any of the meetings of the committee dealing with energy shortages. The subsidies system discourages power generation and the government has also been unable to bill all consumers, or to get them to pay their bills. The room of manoeuvre for finding additional resources to invest in power generation is limited, as long as 3% of GDP is pent on the armed forces (in a country where the state collects less than 10% in tax revenue).

Pakistan is also trapped in a foreign policy environment, which it must be said, it has designed itself. The obvious avenue to faster economic growth is better relations with India, a huge potential market for Pakistani goods, and they are willing, but the various Islamist and jihadist lobbies nurtured for so many years by the Pakistani army, would not buy better relations with India; the army itself, oversized for a country like Pakistan, has no interest in peace with India, as that would remove the justification for a quarter (at least) of the budget going to the armed forces. So it is not clear, who, what and how, is going to drag Pakistan out of its state of permanent crisis. Sadly, it has all the hallmarks of a ‘failing state’.

On the diplomatic front, a major step has been taken by Islamabad in formally giving China the contract for operating the Gwadar port; this is a major concession to China, as Bejing has long sought control of this port to facilitate its trading operations. Reportedly, President Musharraf had decided not to give control of Gwadar to a Chinese state company in order not to upset Washington, despite the major role played by the Chinese in funding the construction of Gwadar. Although for the moment there is no plan to open a Chinese naval base in Gwadar, the Indian government is expressing concern that this might eventually happen.

Perhaps the Gwadar move can be seen as a sign of Pakistan’s economic despair; another sign is Islamabad’s determination to move forward with the deal over the construction of a US$1.5 billion gas pipeline with Iran. Aside the fact that Washington is very displeased at this development too, it is also a risky investment as nobody knows how the nuclear crisis with Iran will end. Observers believe that the deal is an expedient of the PPP-led government to reassure voters that something is being done about resolving the energy crisis, while there is little appetite in Pakistan for any action which would alienate Washington, whose cash is needed now more than ever.


 

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