Maaz Ismail Waseem Ishtiaq

Athar Ishrat

Sana Mehmood

Analysis of Musharraf's Era

1999-2008
Salik Ansari Ali Taha

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

Confidence

GDP Growth and Inflation

14.00%

12.00%
10.00% 8.00% 6.80% 6.00%

12.50%

9.70%

7.20% 6.50%

GDP CPI 4.60%

4.80%
4.00% 3.20% 2.00% 0.00% 1960s 1970s 1980s

1990s

Source: Economic Survey 2001

Debt Situation
Public Debt as a % of GDP (mp) - LHS 120.00% Public Debt as a % of total Revenue - RHS 700.00% 600.00% 500.00% 80.00% 400.00% 60.00% 300.00% 40.00% 200.00% 20.00% 100.00% 0.00% Mid 1980 Mid 1990 Mid 1996 Mid 1999 100.00%

0.00%

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
Debt Situation-External (in billion)
$50 $40 $30 $20 $10 $0 Series1
Source: PAKISTANS ECONOMY 1999/2000 2007/2008 by Ishrat Hussain

1990 $20

1998 $43

Debt Situation (Domestic)

Domestic debt growth was more rapid in the

1990s - 13.7% per annum

Debt (Domsetic) $4,000 $3,000 $2,000 $1,000 $0 1990 $802 1998 $2,971
Source: PAKISTANS ECONOMY 1999/2000 2007/2008 by Ishrat Hussain

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.

Tax-to-GDP
15.00% 14.40% 13.70% 13.40% 13.80% 14.50%

14.00%

13.40%

13.40%

13.20%

13.50% 12.70%

13.00%

12.50%

12.00%

11.50% 1991 1992 1993 1994 1995 1996 1997 1998 1999

Source: Economic Survey 2003

13.20%

Interest Payment as a % of GDP (mp)

6.30% 7.00% 5.20% 6.00% 4.70% 4.90% 5% 6.00% 1999

4.20%

4.00%

3.00%

2.00%

1.00%

0.00% 1991 1992 1993 1994 1995 1996 1997 1998

Source: Economic Survey 2003

3.50%

4.20%

5.00%

8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1991 6.40%

7.60%

PSDP as % of GDP (mp)

5.70%

4.60%

4.40%

4.40%

3.50%

3.90%

1992

1993

1994

1995

1996

1997

1998

1999

Source: Economic Survey 2003

3.30%

Poverty

Incidence of poverty also increased during this decade:

1991 1993
116.5 22.4 19.23%

1997
128.4 31 24.14%

1999
134.5 32.6 24.24%

Population (mn) 110.8 Poverty Head Count (mn) Incidence of Poverty 22.11 19.95%

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.

Challenges faced by Musharraf

Macroeconomic Stability and the Restoration of

working relationship with Financial Institutions.

Poverty

Alleviation

Stabilize the countrys 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

1999 - 2001 Macro-economic stabilization
2002 - 2007

Growth acceleration
2007 - 2008 Economic regress

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(19992001)

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 Pakistans 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. 2.

3.
4.

Mobilizing additional tax revenues Reducing subsidies to public enterprises and corporations Bringing about a significant decline in debt servicing payments and; 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.

Fiscal Measures - II

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

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.

MONETARY POLICY

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 Banks (and governments) 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
Currency in Circulation
1,200,000 1,000,000

800,000
600,000 400,000 200,000 0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Currency in Circulation 287,716 355,677 375,465 433,816 494,577 578,116 665,911 740,391 840,181 982,325

Source: www.sbp.org.pk

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

Exchange Rate Policy

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.

Pakistani Rs. Against $

Pakistans rupee was artificially managed between the price band of Rs. 61- Rs. 62 during Pervez Musharrafs regime.

Source: www.tradingeconomics.com

Trade Performance
Trade Performance (in million $)
45,000

40,000
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Exports 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 8,569 10,309 1,740 9,202 10,729 1,527 9,135 10,340 1,205 11,160 12,220 1,060 12,313 15,592 3,279 14,391 20,598 6,207 16,451 28,581 12,130 16,976 30,540 13,564 19,052 39,966 20,914

Imports
Deficit

Source: www.sbp.org.pk/

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 FY200008 the Government sold off cumulatively almost $7 billion

Critical Analysis of Musharraf's Regime

Musharrafs 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

Thank you