Showcasing success

The visit of Pakistan?s prime minister, Shaukat Aziz, to New Delhi shall provide an opportunity for the two economic technocrats of south Asia to meet. Like the Indian prime minister, Manmohan Singh, Shaukat Aziz?s claim to the prime minister?s office rests on his handling of the Pakistan economy and its improved performance in recent months. It may be recalled that General Pervez Musharraf justified his coup in 1999 by pointing to the economic crisis facing Pakistan. He now claims the economic turn-around as his biggest achievement. Shaukat Aziz had been working with Citibank (since 1969) and was handpicked by Musharraf in 1999 to become the finance minister and tackle the crisis. But what was the crisis in the Pakistan economy and how was it turned around?

The Nineties had been a cruel decade for Pakistan. The economy had experienced falling growth rates and recurrent balance of payments crisis, with the gross domestic product growing marginally above the population growth. Exports were stagnant at about $ 7 to 8 billion and current account deficits were above 4 per cent of the GDP, requiring Pakistan to rely increasingly on foreign savings to finance its investment. By the late Nineties, fiscal deficit rose to 8.5 per cent of the GDP, with acceleration in inflation worsening income distribution and escalating the absolute poor to 33 per cent from 17 per cent of the population in 1988. Workers? remittances, which provided important support to BoP, began to decline. During the period, Pakistan was forced to approach the International Monetary Fund thrice for support and failed to meet the targets agreed upon.

Aziz?s main challenge was to confront this crisis, which was a reflection of the changing situation in the region and the political crisis within Pakistan. The civilian governments ? alternatively led by Benazir Bhutto and Nawaz Sharif ? were dismissed before their term. In all, there were five governments in 10 years, the last being the coup that brought Musharraf to power. All these changes resulted in instability and policy vacuum.

The civilian governments of the Nineties found it difficult to sustain growth. The fiscal situation was in doldrums due to high interest payments and military expenditure, which meant that development expenditures were minuscule. As fiscal and trade deficits widened, the government encouraged remittances and investments by non-resident Pakistanis by allowing them (and residents) to maintain dollar accounts. About $ 11 billion were received in these foreign currency accounts, and became an important source of foreign exchange for the economy to meet debt and import obligations.

The decade of civilian governments had followed a decade of exceptionally high rates of growth (above 6 per cent) in the Eighties under the regime of Zia-ul-Haq. This high growth rate was based on rapid expansion of the irrigation and agricultural output due to the completion of two large dams and the consequent expansion of irrigation and agricultural output. The commissioning of large industrial projects conceived during the Bhutto era simultaneously boosted the industrial output, and the alliance with the United States of America helped exports of textiles and garments. The BoP was thus manageable.

As the Soviets withdrew and Zia was killed, the succession of civilian governments found that they had little leverage with Western patrons. The agricultural sector had exhausted its growth potential and industrial growth and exports were limping. Financing the increasing BoP deficit was not easy as workers? remittances too began to decline.

When Pakistan carried out its nuclear tests in 1998, its trade and BoP were in disarray. Exports were stagnant at around $ 8 billion for about a decade and the current account deficit was large at $ 2.5 billion. With the imposition of sanctions on Pakistan by the US and the European Union, and shutting out of the IMF assistance, the BoP crisis deepened. The withdrawal from foreign currency accounts accelerated and in panic, the State Bank of Pakistan froze the foreign exchange accounts in May 1998. This single act of the government undermined its credibility and accentuated the flight of capital from the country.

Musharraf?s regime in 1999, with Shaukat Aziz as the finance minister, faced difficult choices. Of the total budgetary resources that were 15 per cent of the GDP, 5 per cent went to civil admin-istration, 4 per cent to defence and the rest to debt-servicing, leaving little for development expenditure. Drought and poor harvest further accentuated the crisis.

As a conservative banker, Shaukat Aziz applied a severe squeeze on public expenditure to reduce the fiscal deficit in an economy already gasping for growth stimulus. His efforts at debt rescheduling met with little success. He tried hard to check capital flight by reassuring depositors in foreign currency accounts and facilitating remittances through official banking channels. Despite all this, there was little to show in terms of growth or poverty reduction. The GDP growth rates in the first three years of his tenure were a mere 3 per cent, even lower than those witnessed under the civilian governments. Exports and large manufacturing industry continued to languish, and Pakistan found it difficult to meet its debt obligations.

The attack on the World Trade Center came to its rescue and Pakistan?s fortunes saw an unprecedented revival. Suddenly aid from the West and the IMF began to flow. Past debts were rescheduled, leading to a sharp decline in debt-serving burden. Project aid commitments by donors, which was below $200 million in the first two years of Musharraf regime, rose six times to $1.2 billion per year in 2001-04, while non-project aid commitments rose three-fold. Actual disbursements of non-project aid rose more than 10 times during the years after 9/11 and, for the first time since the coup, the net aid (aid minus repayments) became positive and substantial.

However, the biggest bonanza for Pakistan was not the generous foreign aid but the crackdown on the hawala channels after 9/11. As the US forced Middle East regimes to crack down on these illegal flows, an increasing proportion of workers? remittances moved to official banking channels. Workers? remittances, which were below $ 90 million per month, rose sharply; increasing five times by September 2002. This was a great relief to Pakistan?s economy, as remittances from Pakistani workers rose from about $1 billion in the years before the attack on World Trade Center to about $ 4 billion last year.

Changing international scenario and the West?s war on terror have been a god-sent lifeline to Shaukat Aziz. Thanks to remittances, current account turned into a surplus and the foreign exchange reserves in Pakistan rose from $ 4 billion in 2002 to more than $ 12 billion this month. Exports rose to $ 11 billion as the EU and the US gave special textile quotas to the new regime as a reward for its alliance. Public outlay could be expanded and special funds made available by the World Bank could be used for the social sector. Due to these fortuitous circumstances, Shaukat Aziz has been able to revive economic growth, which registered a high 6.4 per cent last year. Aziz suddenly donned the mantle of the saviour of Pakistan and the chair of the prime minister.

Is this shine in the Pakistan economy sustainable? Or is the Shining Pakistan as good a mirage as India Shining that consigned Vajpayee to the dustbin?

The main challenge before Aziz remains to be tackled. Pakistan?s economy is still heavily dependent on foreign remittances and its industry is yet to face the challenge of modernization and restructuring. Textile exports, that ac-count for two-thirds of the total, will face the challenge of the dismantling of multi-fibre arrangement. And the long-term crisis in agriculture mirrors the crisis in Indian Punjab, with declining yields and ecological crisis. Only time will tell whether the messiah has a magic wand.