Government College University Faisalabad
Submitted By: Aliraza Khan
Submitted To: Mam Abida Shahzadi
Dep: BSCS (M.B) Semester 6th
Roll No: 321220
Economy Development in Pakistan (19902000 )
The Pakistan economy has been in a crisis for the last several years. Even the Supreme Court of
Pakistan chose to justify its approval of the military takeover by referring to the crisis in the
economy. Gen. Musharraf again cited the economic crisis to justify his support to the American
military intervention in Afghanistan.
The Pakistani economy had experienced high rates of growth in the 80s, when we in India were
stuck with our Hindu rate of growth. Pakistan’s per capita income in the early 1990s was about
25% higher than India (close to $500 per head compared to India’s $390). The average Pakistani
was and is better fed and clothed than an Indian. While 52% of India’s population in 1992 was
below $1 a day income only 11% of Pakistan's was below this poverty line. Pakistan has roughly 2
million migrant workers, roughly equal to the Indians working in the Middle East. What then is
the cause of this crisis which has forced Pakistan to crawl before the IMF, not once but thrice
during the last decade?
This paper looks at the evolution of Pakistan’s economic policies and growth record during the
last 25 years. As the highest growth was attained during the Zia era, a considerable part of our
analysis looks at the factors that lay behind this phenomenal growth record. The period after
Zia’s death is analysed to understand the eruption of the balance of payments and fiscal crisis.
The continuing crisis despite the better IMF medicine and its accentuation after the nuclear
explosion, lie behind Musharraf’s justification for intervention. The concluding part looks at the
possibility of mitigating the crisis after joining the American camp in the war against the Taliban.
Economic Management under Benazir Bhutto and Nawaz Sharif
The period after Zia’s death has been marked by a great deal of political instability, slow
economic growth and recurring foreign exchange crises. Pakistan had to go to the IMF for bailout packages thrice. The successive elections following the frequent dismissal of governments
did not provide for strong and clear mandate or stability. The elected governments were not
only politically weak but also dominated by strong vested interests.
Benazir Bhutto was elected in December, 1988 and dismissed by president Ghulam Ishaq Khan in
August, 1990. Nawaz Sharif became the prime minister after another election in 1990 and was
dismissed in April, 1993, but restored to his office by the supreme court ruling. Both Nawaz
Sharif and Ishaq Khan resigned in 1993 and after a weak caretaker government for three months
Benazir became the prime minister till she was dismissed by President Leghari in November,
1996. In 1997 Nawaz Sharif again won with a large majority till he was overthrown in the military
coup led by General Musharraf.
Under these circumstances, the serious economic and social problems inherited from the Zia
period have deepened. The period after 1988 witnessed a sharp decline in the growth rate of the
economy, acceleration in inflation, worsening income distribution and increasing poverty. The
most serious manifestation of this worsening situation were the crises of 1993 and 1996 in the
foreign exchange position and coincided with the problems between the president and the
prime minister. Frustration with the economic policies of the elected governments contributed
to the exercise of extraordinary constitutional powers by president Ishaq Khan. Unfortunately,
both Benazir and Nawaz were either unwilling or unable to halt the decline.
When Benazir Bhutto came to power, the macro-economic imbalances in the Pakistan economy
were large. The fiscal deficit had risen to a new peak of 8.5 per cent of GDP and the current
account deficit in balance of payments was growing. Investment rate had stagnated for more
than ten years and spending on social development had fallen. With growing interest payments,
the room for manoeuvre in public finance was limited. The agreement with the IMF negotiated
by the transitional government of president Ghulam Ishaq, and which had fiscal deficit reduction
as a key target were not seriously implemented by the elected government.
When Nawaz Sharif came to power in 1990 he set upon a fundamental liberalisation of the
foreign exchange regime, relaxation of investment controls, privatization of public assets and
increased incentives for domestic and foreign investment.
The latter half of the 1980s had seen a gradual decline in the workers’ remittances. In addition
interest payment on foreign debt continued to rise. In 1992 the government also allowed
Pakistani residents to hold foreign exchange in designated accounts if the funds were received
from overseas. An increasing part of monetary assets came to be held in the form of foreign
currency deposits. The exemption of these deposits from zakat and other taxes, attractive
interest rates compared to those available on foreign currency deposits abroad and above all
quick erosion in the value of domestic monetary assets through inflation encouraged the
dollarization of the economy.
The elected government of Pakistan inherited an economy in deep fiscal crisis. The fiscal deficit
was as large as 8.5 per cent of the GNP. In addition, the decline of remittances and widening
trade deficit had worsened the balance of payments position. Pakistan approached the IMF for
the structural adjustment facility in 1988 and accepted the target of reducing the fiscal deficit to
4.8 per cent by 1990-91. However, the deficit continued and reached a new peak of 8.7 per cent
in 1990-91 despite the disbursement of $900 million by the IMF. Pakistan negotiated a new
agreement with IMF and agreed to reduce the fiscal deficit to 4 per cent in 1994-95 and 3 per
cent in 1995-96. However, Pakistan could achieve a deficit of 5.8 per cent in 1994-95.
Under pressure from the IMF the elected governments made serious efforts to raise the tax
revenue. Heavy taxes were imposed during the 1991 to 1998 period. The level of additional
taxation ranged from a high of 2.4 per cent of GDP in 1994-95 to a low of 0.6 per cent in 199596. Altogether, the additional taxation proposed amounted to an extraordinary 8.2 per cent of
GDP in a relatively brief period of six years. The increasing tax burden and declining social
spending added greatly to the unpopularity of the governments. The continuing pressure from
the IMF and the rising debt forced the governments to accept such expropriatory taxation as a
lesser evil than reducing non-development spending or military expenditure. Despite this heavy
taxation, the tax revenue did not increase and undermined the credibility of the government.
There are few parallels where additional taxation of this magnitude has been successfully
introduced year after year under a democratic regime. As the fiscal crises grew, the defence
spending declined from 7 per cent of GDP in 1988 to 5.5 per cent in 1996, but development
expenditure drifted even more sharply from 7 per cent to 4.3 per cent of GDP. The civilian
governments were thus unable to restore the balance between military and development
seriously upset during the Zia years.
However, the liberalisation of the foreign exchange regime and opening of foreign currency
accounts changed the balance of payments position. Foreign ‘aid’ declined, as the governments
continuously failed to meet the targets set by IMF.
Table 1: Resident Foreign Currency Accounts
Period
Workers'
Remittances
Balances ($
million)
30 June 1991
1848.3
389.5
30 June 1992
1467.5
1707.1
30 June 1993
1562.2
2250.4
30 June 1994
1445.6
3002.4
30 June 1995
1866.1
3383.8
30 June 1996
1461.2
4146.9
30 June 1997
1409.5
5491.3
30 June 1998
1489.6
7174.9
Source: Pakistan, Economic Survey, 1997-98 & 1988-89.
The situation was partly mitigated by the increasing deposits in the foreign currency deposits.
The workers’ remittances were diverted to these foreign exchange accounts with the total
deposit rising to $4 billion by 1996 and to $7 billion by 1998.
The rates of GDP growth declined sharply in 1990s as political instability and declining public
expenditure on development eroded the stimulus to growth, resistance to new irrigation project
put a limit to the expansion of agriculture. Despite varying weather condition, agricultural output
still expanded by 4 per cent per annum during the 1990s, a remarkable rate of growth. However,
the industrial growth declined from 8.2 per cent in 1980s to 4.6 per cent in 1990s with the largescale manufacturing showing a more acute decline in growth rates. Overall the entire GDP
growth rate declined from 6.5 per cent achieved in 1980s to 4.5 per cent in 1990s.
Table 2: Head Count Ratio of Poverty in Pakistan
Year
Total
Rural
Urban
1963-64
40.24
38.94
44.53
1966-67
44.50
45.62
40.96
1969-70
46.53
49.11
38.76
1979
30.68
32.51
25.94
1984-85
24.47
25.87
21.17
1987-88
17.32
18.32
14.99
1990-91
22.10
23.59
18.64
1992-93
22.40
23.35
15.50
1996-97
31.00
32.00
27.00
1998-99
32.60
34.80
25.90
Source: Amjad and Kemal (1997)
What is even more alarming, there was a sharp increase in the incidence of poverty in Pakistan.
It is not very clear what led to this sharp increase in the incidence of poverty from a low 17 per
cent in 1988 to a doubling of the head count ratio to 33 per cent in 1999. Declining public
expenditure, IMF-prompted fiscal adjustment as well as poor harvests and declining remittances,
all played a part.
A most serious problem was developing on the export front. Pakistan’s exports were stagnant
during the 1990-95 period at about $6.5 billion and rose to $8.2 billion in 1995-96 and again
declined to $6.4 billion by 1999-2000. Similarly, imports rose from $7.6 billion in 1990 to about
$12 billion in 1996-97 to decline to $8 billion in 2000.
The Bomb and After
When Pakistan exploded a nuclear bomb in 1998, its trade and balance of payments were in
disarray. Workers’ remittances have stagnated around the $1 billion mark and the current
account deficit was $2.5 billion. As the Western countries imposed sanctions on Pakistan and the
IMF cut off its assistance, the crises in the balance of payments deepened. The government of
Nawaz Sharif faced difficult choices. As depositors tried to withdraw deposits from the foreign
currency accounts, the government hit the panic bottom and froze these accounts. This single
act of the government undermined its credibility and accentuated the capital flight from
Pakistan.
The official statistics of Pakistan show the declining level of foreign trade and workers’
remittances which fell to as low as $700 million in 1999-2000. It is likely that many of the
transactions moved to unofficial channels. Indeed, the current finance minister of Pakistan Mr.
Shaukat Aziz estimates that the total remittances of workers to Pakistan are approximately $6.5
billion of which only $1.5 billion move through official banking network.
The military government that seized power tried to grapple with the worsening economic
situation. The economy has been plagued by imbalances in the balance of payments and in the
fiscal situation. Pakistan’s total budgetary resources were 15 per cent of the GDP. Out of this, 5
per cent goes into civil administration, 4 per cent to defence and the rest to debt servicing. And
therefore nothing is left for development purposes. A poor harvest due to a severe drought in
2000-01 led to a decline in agricultural production by 2.5 % and brought the GDP growth down
to 2.2 per cent, the lowest in 25 years. The exports of Pakistan are stagnant for a decade and
today less than the peak of 1995 by $2 billion. The fiscal correction promised by the military
regime is yet to be realised.
General Musharraf has justified joining the American campaign in Afghanistan on these
economic crises confronting the country. He had promised the people that liberal ‘aid’ from
international agencies like the World Bank and IMF as well as from other western governments
will help to turn around the Pak economy. Like his predecessors he has made efforts to impose
the general sales tax and used military courts to speed up collection and check evasion. As
promised by the western countries ‘aid’ has once again begun to flow into Pakistan. IMF has
sanctioned a short-term facility of $300 million while the ‘aid’ Pakistan consortium has
rescheduled Pakistan’s debt of $28 billion. In addition, ‘aid’ from the Asian Development Bank,
World Bank and the governments of Japan and United States have been resumed. It is likely that
in the current year Pakistan will be able to ease its balance of payments and resume imports to
speed up growth.
However, serious problems still remain to be tackled. With IMF-induced trade liberalization the
large-scale manufacturing industry is in doldrums. The dispute with the Hub Power Company and
the worsening climate for foreign investment has led to a reduction in portfolio investments. The
fiscal deficit continued to be large and despite the use of force the government has failed to
meet its target of tax collection. Without more radical changes in the structure of the economy
and resumption of export growth Pakistan is unlikely to be able to stablise its economy.
Will the military regime succeed in putting an end to this prolonged crisis, where the elected
regimes have failed? Will Musharraf and his team of technocrats be able to restore stability and
confidence? It is very unlikely. The coming elections are likely to be held against the background
of a worsening social situation and a polarized social divide.
A lot depends on the restoration of confidence in the government to bring forth private
investment, both indigenous and foreign, as well as check capital flight. The military regime has
tried to pass a law to make future seizure of foreign currency accounts illegal. But then, past
governments have not hesitated to ignore such restraints. It is unlikely that without the full
restoration of parliamentary democracy, an end to the militarisation of society and a cut in
military expenditure, Pakistan can hope to resolve the economic crisis let alone halt and reverse
the growing impoverishment of the masses.