There were four factors which contributed to the high growth during the Zia period, none of which can be located in Zia’s economic policy. The oil price shock hit the world in 1973 but it was 1975-77 when the first emigrants from Pakistan began to leave for Saudi Arabia and it was 1978 when the remittance inflow began and it peaked in 1982onwards. So the price of the oil price shock was borne by the Bhutto regime but the benefits were accrued by the Zia regime. This rate of remittance inflow gave the govt sufficient fiscal space.
Second, there were very large investments made during the Bhutto period that had long gestation periods. The Pakistan Steel Mills construction started in 1974, and it started commercial production in1982. Similarly there were Heavy Mechanical Complex, Indus Highway, Heavy Electrical Complex, Port Qasim and Ittehad Chemicals (chemical lindustry’s foundation was laid in 1970s and chemicals are a major input in a large number of consumer industries). So this investment in the 1970s began to fruit in the 1980s leading to large chunk of output increases.Third, because of Afghan war Pakistan received enormous amount of foreign funding, almost unlimited.
And fourth, Zia resorted very heavily on borrowing and deficit financing. When he took over the debt-GDP ratio of the country was 24%and in 1988 when Zia left the scene, it was 48%. So if you get manna form heaven your performance will be good. However, the poor performance of Zia regime became apparent in the 1990s and till later.
So, if you say 1990 were not an era of good economic performance, it was there were no resources. I once asked somebody very senior in Nawaz Sharif government as to why the ninth five year plan was not being prepared. His reply was that whenever the economic team met, all they discussed was when was the next installment due and where would the money come from. He said there was no point in discussing any thing else.
The banking sector growth rate was high because the government, or the State Bank rather, allowed consumer financing from 2002 onwards. The monetary was you could get a loan for a house, car, fridge, camera, if for nothing else, a vacation or a personal loan. Banks made enormous profits out of consumer credit and profits are a component of GDP. A lot of this credit was going in for buying cars so automobile production went up by 40-45%.
So basically it was a one legged growth and that one leg is consumer financing. You remove consumer financing, everything else collapses. You are only managing an economy for your numbers to look good, for headlines.
Another things that has happened is that a lot of demand has been created for imported products. W are importing billion dollars worth of mobile phones. We are importing cars, because we only assemble cars here. And with cars come petroleum imports as well.
So we have created two problems: inflation that is out of control and a trade imbalance. Our imports have risen sharply while the exports are stagnant. And this is what the coming government is going to inherit. Just as Zia gave a debt mountain to the incoming government, the Musharraf regime is going to give the next government a massive foreign exchange crisis.
In 1999 total profit remittance outflow, which in monetary language is called reverse remittance, was 97 million dollars a year. Today it is close to a billion dollars and rising.
KB: There was no real policy or principle involved. This is a neo-liberal government which believes it is not the business of the government to be in business. What they have done is that that have sold PTCL to a company which is a state enterprise. So de facto their policy was that is not the business of the Pakistani state to be in business in Pakistan but it can be the business of a foreign state to be in business in Pakistan.
Since 1999, the Musharraf regime has not invested n a single megawatt of power. In 2001, we had surplus power, today we are living with power shortage. When Benazir’s govt. contracted to buy power at 6cents per hour, there was excessive criticism. Today, for one project they are contracting at 11.5 cents per hour. Today, the world knows that we have a power crisis, it will increase its power knowing that Pakistan has no choice but to buy.
So it is mismanagement of the highest order of the economy. All the investment that they talk about is either portfolio investment, which is the stock market, equity markets or soft investments like telecommunications. These are all investments which do not require these companies to build any brick and mortar and steel structures. So if they have to leave at 24 hours notice, they don’t lose much. What do banks lose, furniture?
When you are investing in infrastructure, and by that I also mean cities which are totally chaotic where no foreigners wants to come, and physical and human infrastructure, the results are going to come after a while. So you are not going to get any output and the GDP is going to be low. Ten years later when you have infrastructure in place then you can target double digit growth rates. That growth will be based on real sectors - on agriculture and manufacturing outputs, not an hot air balloon sectors like mobile phones. By doing so, you will have a massive boost in employment, income generation and poverty reduction.
As for inflation it will be controlled by switching expenditures from current heads to development heads - by abolishing concurrent list ministries and reducing defense expenditure.
It’s a value judgement. When Shaukat Aziz went out for all out privatization, he made a value judgement. The welfare of the people of Pakistan didn’t matter, what mattered was the corporate profits and he made that decision accordingly. As a state we need to determine what are our values. Are we prepared to have a few people who can enjoy summer holidays in Switzerland and the rest of the people virtually starving? If that is acceptable, then fine. We should follow that policy.
There was something else that was suspect here. The estimate for the wheat crop is made after the rains, but this time they made an announcement of a bumper crop before the winter rains and, based on that announcement, allowed certain part to export wheat to India, apparently half a million tones. After that transaction was complete, the rains came and news began to come in that we are going to have a normal crop. A normal crop means that you import two million tones of wheat which is a routine
Because they had earlier announced a bumper crop, they took time to admit that they were wrong. So the LC for import of wheat was also delayed. One wheat had been exported and we had a normal crop, the wheat market knew there was to be a shortage. Now stockists every wherein the world will behave like that that when they know there is a shortage and prices can go up, they withhold their stocks. They are not evil people. This is normal behavior and this is what a market economy will do if there is a shortage.
They made another mistake. Instead of placing an order for 2 million tonnes of wheat, they placed an order of 1.5 million tonnes of wheat first. Then they realised this mistake and placed another order for half a million tonnes of wheat. After their first order, the signal had already gone out in the market that shortage will remain. So they continued to withhold stocks. If they knew that wheat was arriving and prices will fall, they would have released stocks and that would have taken care of the shortage.
There is another reason for increasing food prices. Our agricultural yield per acre is constant on declining for most crops because we are not investing in our land, in supporting agriculture. The government’s adhocism is causing problems. When the government suddenly imported tomatoes and prices crash. As a result the farmer will not grow tomato next year, shifting the crisis to the next year.
For eight years Shaukat Aziz has mismanaged the economy like no other finance minister. Because Shaukat Aziz knew he does not has to go back and ask people for votes, he couldn’t care less about what he did to the economy. All he had to show for was the stock market performance which is only hot air.