Fourteen people died in a stampede in Karachi on September 13 as they lined up to get free flour. That this took place in the affluent Karachi highlights the worsening economic situation.
The Pakistan Finance Ministry’s 2008–2009 Economic Survey shows GDP growth falling from an average of 6 per cent over the past five years to 2 per cent in 2009. This was less than half of the government’s initial target and the lowest GDP growth rate in south Asia. Because of a weak tax administration, an exemptions-ridden tax system, and a sequencing scheme based on self-assessment, estimates suggest that fewer than 1.5 million Pakistanis pay taxes. Pakistan’s tax-to-GDP ratio of 9 per cent is one of the lowest in the world.
In 2009, large-scale manufacturing decreased by 50.4 per cent, its lowest growth rate in 10 years. Political upsets and the war on terror have led to a loss of working hours, energy shortages and power breakdowns. The cement industry was one of the few to do well this year: Cement exports increased by 48.8 per cent. Most cement in Pakistan is exported to Afghanistan, so the success of Pakistan’s manufacturing is closely tied to stability and economic growth in Afghanistan.
At an average of 22.3 per cent during July 2008-April 2009, inflation rose substantially to become one of the highest in the world.
BOP pressure
Because one-third of Pakistan’s remittances come from the US and more than 60 per cent of its exports go to advanced economies like the US and Europe, the global recession devastated Pakistan’s balance of payments (BOP), and a year of high oil prices accentuated the damage. The current account deficit is $462 million, a vast improvement from the $4.3 billion deficit a year ago. Remittances, a major source of foreign exchange, have been volatile. Exports fell by 25.9 per cent in March 2009 compared with what they were in March 2008.
Slow investment
For the past several years, Pakistan’s investment as a share of GDP has stagnated at around 15 per cent. Overall, foreign investment during the first 10 months (July-April) of the fiscal year 2009 stood at $2.2 billion, down 42.7 per cent from the previous year.
In September 2008, Pakistan received pledges of $5.7 billion from the Friends of Democratic Pakistan, a group that included Pakistan’s Western and Islamic donors. About $2 billion of this, equal to 1.1 percent of Pakistan’s GDP, was expected to be disbursed in 2009.
In November 2008, the IMF approved a $7.6-billion programme with strict requirements for deficit reduction and financial management, which made it very difficult for Pakistan to avoid deflationary job losses. The major US contribution to Pakistan’s economic lifeline took the form of the Kerry-Lugar Bill, a new legislation that would roughly triple economic assistance to $1.5 billion in each of the next five years. The idea behind the Bill was that Pakistan’s development is in US’ national security interest. The legislation included a number of requirements for the US government to report to the Congress on Pakistan’s anti-terrorism performance and governance, including civilian control of the military. Against the background of Pakistani resentment of US high-handedness, these conditions triggered a political firestorm, appearing as yet another instance of US interference in Pakistan’s internal affairs.
On September 13, 2009, 14 women and children died and several more were injured during a food stampede in Karachi. Hundreds of people had come from all over Karachi to wait in line and receive free bags of flour. An argument broke out and dozens of people were trampled. Food insecurity is not a new phenomenon in Pakistan. According to a 2008 World Food Program report, 77 million Pakistanis — nearly half the country’s total population — are food-insecure, while 95 of Pakistan’s 121 districts face problems such as hunger and malnutrition-related disease. The fact that the food stampede took place in the relatively affluent city of Karachi highlights the worsening economic situation.
Because of the sharp increase in international oil prices in 2008, Pakistan was not able to import enough fuel to sustain its manufacturing and services sectors. The resulting power crisis caused a loss of electricity of two to 12 hours a day in different parts of the country, and this crisis continues to affect Pakistan. Power shortages cost the economy 7 per cent of industrial output and 2 per cent of GDP in fiscal 2009.
Adding to these stresses are the costs of supporting the millions of people who have been displaced by the fighting in the Swat Valley and Waziristan. In early 2009, more than two million people were displaced in the Swat Valley. Many of them have returned home, but Swat itself has not returned to normal life. The military offensive currently under way in Waziristan affects fewer people, but is taking place in an area that has far less infrastructure to support refugees than Swat did.
For Pakistan, the road ahead will be tough and will need to include both short-term relief and longer-term investment and institution building. The government’s preoccupation with its political rivals will complicate that task enormously.
For the US, the economy is one of the essential foundations of policy toward Pakistan. Defusing the controversy over the Kerry-Lugar Bill presents a challenge, but should be feasible. US policy-makers are trying to make the US aid contribution both more visible and more responsive to Pakistan’s immediate needs. These are good ideas, but Washington must not lose sight of the long-term problems of underinvestment in both economic assets and people. And in the scramble to encourage sound economic policies in Pakistan, international donors need to keep their eye on Pakistan’s need for jobs.
(Ashley Pandya is a research intern with the South Asia Program at the Center for Strategic and International Studies (CSIS) in Washington; Teresita Schaffer is director of the South Asia Program at the CSIS and a former US ambassador to Sri Lanka. Views, positions, and conclusions expressed are solely those of the authors. Extracted from Nov 1 issue of CSIS’ South Asia Monitor)
