Pakistan’s economy and politics are seemingly intertwined in a vicious cycle that has pushed the country into a dangerous downward spiral and left it staring at the abyss. Pakistan today is in a low equilibrium trap, characterised by low growth rates, high inflation, low rates of investment and high levels of foreign debt (relative to the size of foreign exchange reserves). Highly divisive and volatile national politics is making a bad situation worse. Pakistan’s recovery from the global economic downturn has been anaemic. Real GDP growth rates since 2007 have averaged slightly over 3 per cent, following four years of relatively solid growth. An investment rate of 17 per cent of GDP is well below what is needed to jumpstart the economy and is not helped by the reluctance of both domestic and foreign players to invest in Pakistan. An inflation rate of 15 per cent coupled with an official unemployment rate of 17 per cent is just the tinder needed to set off a conflagration that could soon turn unmanageable. A combination of high fiscal deficit (estimated at 50 per cent of GDP) and an external debt of $53 billion (four times the country’s foreign exchange holdings) leaves little headroom for manoeuvre. If the current account deficit is a manageable 2.2 per cent of GDP, Pakistan has lower oil prices and remittances from overseas Pakistanis to thank. A sharp depreciation in the Pakistani rupee since 2006 has adversely affected the trade deficit: Exports, mainly cotton textiles, have not increased significantly due to increasing global competition, while imports have become costlier.
A greater cause for anxiety is that sustainable recovery is nowhere in sight. The services sector, which accounts for 54 per cent of GDP, is growing steadily, but industrial growth is torpid, having actually declined by 2 per cent in 2009! The manufacturing sector is a one-horse show, with virtually no forward or backward linkages to the rest of the economy. Pakistan’s intelligentsia is fleeing the country in droves in search of safety and better opportunity, straining the already scarce pool of human capital. The importance of social and political stability in restoring confidence in Pakistan cannot be overstated. It would be unrealistic to expect investment and global interest in the country to proceed unhindered, given the prevailing turmoil. The return of stability would be a huge first step, given that the regulatory and investment regime in Pakistan is easily the most liberal and investor-friendly in South Asia. Pakistan can leverage its geographical position in a manner that promotes the economic integration of South and Central Asia, which, above all else, is restricted by the political tension that prevails between India and Pakistan. These benefits would extend beyond collecting “transit fees” for allowing the passage of oil and gas and would involve the setting up of an industrial corridor linking India and Central Asia, driven primarily by Indian investment. Pakistan can only stand to gain from such an arrangement, as well as by increasing the share of intra-regional trade which the South Asian Free Trade Agreement (Safta) was intended to boost. Economic growth is largely self-fulfilling once the enabling conditions are in place. Breaking the vicious cycle of despair and moving to a virtuous cycle of growth is an imperative for Pakistan.
