Analysis of Musharraf's Era1999-2008

Athar Ishrat

Waseem Ishtiaq

Sana Mehmood

Salik Ansari

Ali Taha

Maaz Ismail

Background After an impressive record of economic growth

and poverty alleviation during the 1980s Pakistan suffered serious setbacks in the 1990s in terms of most economic and social indicators

Economic growth rates decelerated, inflation rose to peak rates, debt burden escalated substantially, macroeconomic imbalances widened and worst of all the incidence of poverty almost doubled.

Background Pakistan's credibility in the international financial

community was badly damaged

Confidence of the local investors was eroded when the hard earned foreign currency deposits were suddenly frozen

GDP Growth and Inflation

1960s 1970s 1980s 1990s0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

6.80%

4.80%

6.50%

4.60%

3.20%

12.50%

7.20%

9.70%

GDPCPI

Source: Economic Survey 2001

Debt Situation

Mid 1980 Mid 1990 Mid 1996 Mid 19990.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

700.00%

Public Debt as a % of GDP (mp) - LHS Public Debt as a % of total Revenue - RHS

Source: Economic Survey 2001

Debt Situation (External) Pakistan's external debt reached 47.6% of GDP,

having grown at an average annual rate of 8.1 per cent throughout the 1990s

Source: PAKISTAN’S ECONOMY – 1999/2000 –

2007/2008 by Ishrat Hussain

1990 1998

Series1 20 43

$5 $15 $25 $35 $45

Debt Situation-External (in billion)

Debt Situation (Domestic) Domestic debt growth was more rapid in the

1990s - 13.7% per annum

Source: PAKISTAN’S ECONOMY – 1999/2000 – 2007/2008 by Ishrat Hussain

1990 1998

Series1 802 2971

$250

$1,250

$2,250

$3,250

Chart Title

Deb

t (D

omse

tic)

Fiscal Deficit Low Tax-to-GDP ratio and Debt servicing was the

major cause of Fiscal deficit (G.D.P)

Development expenditure took a major hit and reached a low of 3% of GDP from 8% in the first half of the 1980s.

1991 1992 1993 1994 1995 1996 1997 1998 199911.50%

12.00%

12.50%

13.00%

13.50%

14.00%

14.50%

15.00%

12.7

0%

13.7

0%

13.4

0%

13.4

0%

13.8

0%

14.4

0%

13.4

0%

13.2

0%

13.2

0%

Tax-to-GDP

Source: Economic Survey 2003

1991 1992 1993 1994 1995 1996 1997 1998 19990.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%3.

50%

4.20

% 4.70

%

5.00

%

4.20

%

4.90

%

5.20

%

6.30

%

6.00

%

Interest Payment as a % of GDP (mp)

Source: Economic Survey 2003

1991 1992 1993 1994 1995 1996 1997 1998 19990.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%6.

40%

7.60

%

5.70

%

4.60

%

4.40

%

4.40

%

3.50

% 3.90

%

3.30

%

PSDP as % of GDP (mp)

Source: Economic Survey 2003

Poverty Incidence of poverty also increased during this decade:

Lost Decade The evidence presented above clearly shows that the

1990s was a lost decade in terms of stunted growth, increase in incidence of poverty, burden of debt, large fiscal and current account imbalances, poor social indicators, higher rate of inflation.

1991 1993 1997 1999Population (mn) 110.8 116.5 128.4 134.5Poverty Head Count (mn)

22.11 22.4 31 32.6

Incidence of Poverty

19.95% 19.23% 24.14% 24.24%

Challenges faced by Musharraf Macroeconomic Stability and the Restoration of

working relationship with Financial Institutions.

Poverty Alleviation

Stabilize the country’s debt situation

Improve quality of economic governance

Pakistan & the IMF Relationship between Pakistan and the IMF in the

early days of Musharraf regime was strained. Finally after a year, the Executive Board of IMF

approved a Stand-by Credit of USD 596mn; program was to run until September 2001.

Musharraf's Regime Sub-divided into three sub-periods

• Macro-economic stabilization

1999 - 2001

• Growth acceleration

2002 - 2007

• Economic regress

2007 - 2008

Macroeconomic Stabilization period 1999 – 2001 Military Government faced Several Challenges

External liquidity problem Lack of Foreign Exchange Reserves Country was facing a gap of $2.5-$3.0 billion

between external receipts and payments

Economic Performance(1999–2001) Fiscal deficit was reduced from 5.4% to 4.3% of GDP Trade gap narrowed from $1.6 billion to $1.2 billion Workers’ remittances jumped 2.5 times from

$1,060 million to about $2,400 million. FDI flows averaged $400 million annually Foreign exchange reserve rose from $991m to

$4.333b Pakistan’s exports increased from $7.8 billion to

$9.2 billion by June 2001

Growth Acceleration period 2002 -2007 GDP growth rose to 7% in 2006/07 Unemployment rate fell from 8.4% 6.4 % Foreign Exchange reserves rose to $14 billion Export of Goods went up from $13.6 billion to $21.2 billion Interest Rate touched as low as 4% to 5% that encouraged

investment and fuelled growth Manufacturing sector recorded an increase in its share of

GDP from 14.7% to 19.1% Investment rate grew to 23% in FY07 from 16.8 per cent in

FY02

Economic Regress 2007-2008 GDP growth rate was below the target, i.e. 5.8% Fiscal deficit widened to 7.4% of GDP Adverse impact of electricity and gas load shedding on

manufacturing and export sectors. Rupee Depreciated by 25 % against $ Inflation crossed 12%.

FISCAL POLICY Fiscal deficit was to be reduced by pursuing a

combination of four set of policy measures:1. Mobilizing additional tax revenues2. Reducing subsidies to public enterprises and

corporations3. Bringing about a significant decline in debt

servicing payments and;4. Containing defense expenditures.

Fiscal Measures - I Pakistan entered into a stand-by arrangement with the IMF

in 2000 for nine month period followed by a three year Poverty Reduction and Growth Facility (PRGF).

Some foreign debts have been written off. Others have been rescheduled. Accordingly, Pakistan enjoyed fiscal space and consequently the burden of debt servicing for 2003-04 reduced to 40%.

Defense Expenditure dropped from 6% of GDP in early 1990s to 3.8% of GDP by 2002-03.

TAX REFORMS: Tax reforms have attempted to widen the tax base, strengthen tax administration, promote self-assessment, reduce multiplicity of taxes and tackle the culture of tax evasion and corruption.

A new income tax Ordinance was introduced in 2001

Tax surveys and documentation drive resulted in 134,000 new income tax payers, 30,000 new sales tax payers and profiling of 600,000 tax payers to make assessment more efficient

Fiscal Measures - II

ECONOMIC INDICATOR-FISCAL POLICY

MONETARY POLICY Post FY 2004 witnessed a sharp decrease in the interest

rates accompanied by a large increase in the money supply.

This monetary expansion together with an increase in oil prices increased the inflation to around 10%.

The State Bank continued to believe that easy monetary policy was just one of the factors and that cost push factors like increase in the prices of food and oil are causing inflation.

It was as late as 11th April 2005 that the State Bank was awakened to the need for adjustment in the interest rate to tighten the liquidity in the economy.

The State Bank hesitated for a long time to tighten monetary policy which could be attributed to the Bank’s (and government’s) perception that cheap credit is one of the main reasons for strong growth.

Overall what was of growing concern was the emergence of a large trade deficit, the result of increase in oil imports and price of oil, imports of machinery and consumer durables (e.g. motor vehicles), which put pressures on the exchange rate.

MONETARY POLICY

MONETARY POLICY

Source: www.sbp.org.pk

MONETARY POLICY

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Currency in Circulation 287716 355677 375465 433816 494577 578116 665911 740391 840181 982325

100,000

300,000

500,000

700,000

900,000

1,100,000

Currency in Circulation

Exchange Rate Policy Pakistan has successfully shifted from a fixed and

managed exchange rate to a free floating regime.

Pakistani Currency Depreciated against major Currencies of the world

Demand for imported goods (Mobiles and cars ) was created

Imports were rising whereas exports were stagnant

With the absence of basic industry in Pakistan, imports were in critical situation. Pakistan faced all time high trade deficit.

Exchange Rate Policy

Pakistani Rs. Against $

Source: www.tradingeconomics.com

Pakistan’s rupee was artificially managed between the price band of Rs. 61- Rs. 62 during Pervez Musharraf’s regime.

Source: www.sbp.org.pk/

Trade Performance

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Exports 8569 9202 9135 11160 12313 14391 16451 16976 19052

Imports 10309 10729 10340 12220 15592 20598 28581 30540 39966

Deficit 1740 1527 1205 1060 3279 6207 12130 13564 20914

2,500

7,500

12,500

17,500

22,500

27,500

32,500

37,500

42,500

Trade Performance (in million $)

Unemployment Rate

Critical Analysis of Musharraf's Regime Foreign Direct Investment Since 1999, the Musharraf regime

had not invested in a single megawatt of power. In 2001, we had surplus power, today we are living with power shortage.

All the investment was made in either portfolio investment, which is the stock market, equity markets or soft investments like telecommunications while ignoring the basic infrastructure of the country

Manipulated official records (GDP)

Income inequality widened $20 billion Trade deficit Stabilization of Rupee Privatization of state owned

enterprises During the period FY2000-08

the Government sold off cumulatively almost $7 billion

Critical Analysis of Musharraf's Regime Musharraf’s regime was lack of vision and failed to

develop the foundation of a productive economy. The real productive sectors of the economy, both

industry and agriculture, were ignored. The infrastructure in Pakistan has not been

upgraded. The social sectors continue to be neglected with

expenditure for education and health sectors much lower than those of previous governments

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