Insights and Analysis

In Pakistan: The Economic Dilemma

July 2, 2008

By Shahnawaz Mahmood

Roti, Kapra, aur Makan — or Bread, Clothing, and Shelter — this has been the Pakistan Peoples Party (PPP)’s slogan to woo the electorate since the 1970’s. While the PPP emerged from February’s elections with the largest majority, it did not win sufficient seats to claim control of the government and was forced to form a coalition, mainly with the Pakistan Muslim League-Nawaz (PML-N). Given the still unresolved question of the restoration of the judiciary, including the Chief Justice of Pakistan and other judges who were dismissed by President Musharraf last year, the PML-N could withdraw from the coalition and the government’s center could collapse — unless the Musharraf-backed Pakistan Muslim League-Quaid-e-Azam (PML-Q) were to intercede. This political uncertainty surrounding the new government, combined with the worsening security situation, has inflicted a great toll on economic growth as investors are becoming wary. This will make providing such essentials as bread, clothing, and shelter increasingly difficult.

Record oil prices and high food prices are creating universal economic hardships. The Food and Agriculture Organization and International Monetary Fund have even warned of food shortages being catalysts for war in developing countries. Pakistan is no exception to such economic hardships; economic indicators in the country are worsening. Fiscal and current account deficits are both expanding, and inflationary pressures — particularly food inflation — are escalating at an unprecedented rate. According to the government’s Pakistan Economic Survey, food inflation reached more than 25% in April, the highest since 1980. In addition, Pakistan is experiencing a massive shortfall in the supply of electrical power, leading to power cuts which have not only affected industrial output but have also sparked riots in many parts of the country.

Pakistani policymakers’ current challenge is whether or not to provide subsidies on oil and food prices to keep them under control. During the last year of the Musharraf government, increases in oil prices were not passed on to consumers. The responsibility to adjust domestic oil prices to international market rates was passed on to the present government. Therefore, in the coming days, greater inflation is expected. The new government has recently increased the wheat support price, which will benefit farmers but, for urban consumers, lead to increased prices.

Compounding the situation is the fact that the high economic growth (an average of 7% per year) of the last five years did not have a trickle down effect. According to government estimates, almost one-fourth of Pakistan’s population is living below the poverty line; independent sources, however, contest these figures and claim that poverty is much higher. Given that a majority of Pakistanis are barely above the poverty line, inflationary pressures in the economy will push more people into poverty.

The impasse surrounding the restoration of the judiciary has blocked the government’s ability to formulate the careful policies that are required for economic recovery. This is clearly reflected in the first budget presented by the incumbent government. There is a risk that the government, in order to gain short-term political benefits, will tend to depend more on relief through subsidies, as the latest budget also provides cash subsidies. This would contribute to a further increase in the fiscal deficit, which in the medium to long-term, will be unmanageable given that the government has already borrowed heavily to meet the existing deficit. The consequences of failing to address these economic issues are worrying ” and could include a further destabilization of the government, and a loss of confidence in the political parties.

As consumption expenditures decrease due to inflation and inflationary expectations, the demand side will adjust ” but the supply side of the economy must be increased. This means boosting Small and Medium Enterprises (SMEs) and industrial and agricultural production by reducing the cost of doing business and by providing incentives through an appropriate mix of monetary and fiscal policies as well as energy supplies. This will raise employment, generate revenues, and increase exports, which will help improve the economic situation. However, this will depend mainly on relative political certainty in Pakistan. If the political issues are not resolved quickly enough, it will become difficult to improve economic conditions. At the same time, the worsening economic situation will further aggravate the political environment.

Shahnawaz Mahmood is a Senior Program Officer for The Asia Foundation in Pakistan.

Related locations: Pakistan
Related programs: Inclusive Economic Growth


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