Pakistan economy liberalized in early 2000s when the financial sector was deregulated and trade related tariffs were rationalized. The growth started from trade activities, financial and telecommunication sector liberalization and followed by upbeat consumerism.
There were flurry of external flows - initially it was mostly aid from bilateral and multilaterals help. Later, the Middle East boom opened conduit for inward remittances. The GDP expanded in the process and the role of private sector and public sector management became the key for sustainable growth.
The last eighteen years is divided into two main eras - FY00-08 where economy was managed by technocrats with little intervention from political giants. In that time, the policy framework was to facilitate private sector and to lower the role of government in the economy.
In FY00, public debt was 80 percent of GDP while adding PSE debt (2% of GDP) and commodity financing (3% of GDP), overall public debt and liabilities were 85 percent of GDP. By FY08, public debt was reduced to 58 percent of GDP and overall public debt and liabilities thinned to 62 percent of GDP.
The reduction of toll by 23 percent of GDP was commendable and that was the time when the talks were that the country is finally exiting from the vicious cycle of IMF bailouts. The economy was boosted by private credit which peaked at 27 percent of GDP in FY08; with both SME and consumer finance growing.
Yes, the crisis of 2008 was ill-managed by the technocrat government in quest of its created political entity (PMLQ) to win 2008 elections. That strategy miserably failed as not only PMLQ dominance was over thereafter, but the country could never come back on its feet after the crisis.
But it is not fair to pass the onus of unsustainable macroeconomic model on to the Musharraf era. The increased fiscal foot prints and its mismanagement by following two political regimes cascaded the woes.
The PPP government inherited the public debt of 58 percent of GDP and left the regime at 65 percent of GDP. That was a difficult time and the requirement of prudent and robust fiscal management was of utmost importance. However, what happened was exactly the opposite of it.
In days of high oil prices, energy sector was used for political gains. In case of electricity, the gap between electricity produced and the payment from consumers widened and it started eating bulk of fiscal resources - theft and non-recovery are adverse consequence of poor governance and corruption.
The PPP government with its rural base was pro-farmer; but the policies were in support of big land lords, such as introduction of wheat support price. The commodity operations which are primarily for agri commodities finance increased from 1 percent to 2 percent of GDP in PPP time.
The PSE debt remained unchanged at 2 percent of GDP in PPP’s time; but the performance of key companies started deteriorating and the white elephants relied on fiscal injections. The political patronage was the priority and institutional performance started heading south.
In 2013, the PML-N came with an agenda of economic revival; but instead of paving way for private sector by so-called business friendly government, the foot print of PSEs were expanded by taking the responsibility of infrastructure expansions; especially in the energy sector -the PSE debt increased from 2 percent of GDP in FY13 to 4 percent of GDP in FY18.
The oil prices were low when CPEC came into play to take the economy back to 5 percent plus growth in FY17 and FY18. However, private sector, especially exporting sector, was neglected and the high growth is accompanied with public debt accumulation.
The public debt increased from 65 percent of GDP in FY13 to whopping 73 percent of GDP in FY18. The overall public debt and liabilities increased from 70 percent of GDP to 80 percent of GDP.
How can this be termed as economic turnaround? Debt is growing faster than the GDP. The time was good in early 2000s when economic growth surpassed the GDP growth and that has reversed in the past ten years. The overall public debt and liabilities which were at 85 percent of GDP in FY00 are now back at 80 percent of GDP after lowering down to 62 percent of GDP in FY08.
The private sector robustness compromised in the process which thinned from 27 percent of GDP in FY08 to 17 percent of GDP in FY18.
The mantra of change is the tag line for election campaigns by political parties for upcoming elections. The key to economic change should be to lower the fiscal foot print with an idea to have private sector lead growth with reduction in public debt.
The idea is simple - growth of nominal GDP should be higher than public debt growth to bring down the public debt to GDP ratio. It’s easier said than done. The fundamental change that took place in FY11, after NFC award, resulted in federal government running huge deficits even when federating units were asked to ensure cash surpluses by the CCI.
The inefficiencies in public management are worse at provincial levels, and that has resulted in higher pilferages. The need is to correct these. The expenditure share, especially on energy losses has to be moved to provinces. The federal government should remove redundant departments where the responsibilities are passed on to provinces after 18th amendment. And the energy prices need to be deregulated to provincial levels.
Apart from that role of PSEs, especially the losses ought to be converted into profits by turning around these companies or by selling them to private sector.
In a nutshell, macroeconomic sustainability is hinged upon lowering the pace of public debt growth relative to nominal GDP. However, this agenda is yet to be seen by any political party for FY19-23 term.
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