Assessing Shaukat Aziz's Economic Stewardship

Is Shaukat Aziz to Blame?
Former Prime Minister Shaukat Aziz is frequently blamed in Pakistani media and political and economic circles for the rapid decline of Pakistan's economy during the last six months. The critics say the economic boom under Mr. Aziz was short-lived because it was achieved by easy, plentiful consumer credit, massive borrowing and construction spending in public and private sectors. They further charge that Mr. Aziz promoted the service sector while ignoring large infrastructure projects to enhance Pakistan's agricultural and industrial sectors. They also claim that, if Mr. Aziz had done a good job, the economy would have continued to perform well in spite of all the changes that have transpired since he quit. Some go to the extent of claiming that there was no real economic boom and the whole boom story was a fabrication.

How Do Modern Economies Work?
To examine the validity of the charge sheet against Mr. Aziz, let us try and understand how modern economies work. Modern economies are all consumer driven and cyclical. To manage growth in modern economies, there are a number of tools and policy options deployed by economic leadership consisting of government and central bank officials. Controlling money supply is a key tool. When the economy is slowing, the governments resort to deficit spending, and central banks lower interest rates to encourage consumer borrowing. Government and consumer spending then produce increased demand for goods and services which encourage more investment in plant, equipment and real estate etc. These investments create jobs which further stimulate demand.

Can the Economy run on Autopilot?
There is no such thing as an economy on autopilot that continues to perform well by itself over long periods of time without competent human intervention. As the economy overheats, the inflation starts to become an issue which then requires the central banks to raise interest rates and tighten money supply to cool growth. The governments act in concert with the central banks to reduce spending and limit money supply in the economy. The monetary and fiscal policies must be coordinated. Pakistan's latest 2008-2009 budget should not have massive deficits with 30% increase in spending to cancel the effects of the central bank raising interest rates to tighten money supply.

Wise stewardship by country's economic leadership helps reduce the severity of the economic cycles. But it does require close monitoring and constant tweaking to keep the economy performing well.
The confidence of business and investor community in the economy also plays a significant role. If the businessmen and investors feel the government and central bankers are managing the economy well, they continue to play their role to maintain economic health. On the other hand, if they lose confidence in government's economic team, they begin to slow or even withdraw their investments which hits the economy hard.

How Did Shaukat Aziz Do?

Unlike many of his critics, Shaukat Aziz is a banker by training and extensive experience in New York. He is not an academic. His credentials are similar to those of the successful US treasury secretaries such as Bob Rubin and Nick Brady who did well under Clinton and Reagan administrations. He understands the role of banking, finance, investment and consumer credit in economic growth of a nation. He focused on building strong banking, investment and finance sectors in Pakistan to underpin its economy. He strengthened capital availability, an essential and increasingly important economic input, in addition to labor and land improvements. With higher education budget up 15-fold and overall education spending up 36% in two years, he focused on education to improve the availability of skilled labor to fill new jobs. He pushed land development and public and private construction spending to improve infrastructure and facilities to attract greater business investment. Mr. Aziz was largely successful in his efforts.

Taking a leaf from the US housing policy to stimulate the economy, Mr. Aziz introduced low-rate mortgages in 2003. This initiative led to a construction boom and expanded housing for the growing middle class in Pakistan, contributing significantly to the GDP growth.

Pakistan's tax base grew with rapid economic growth over the last 9 years. The Federal Board of Revenue's tax collection surpassed Rs 1 trillion in 2007 from Rs. 500 billion in 1999. This effort was essential in managing the current account deficit during Shaukat Aziz's term in office.

When Shaukat Aziz took over as finance minister and later as Prime Minister, Pakistani economy was in shambles. In 1999 Pakistan’s total debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998). Read more about it here.
Most recent figures in 2007 indicate that Pakistan's total debt stands at 56% of GDP, significantly lower than the 99% of GDP in 1999. It also compares favorably with India's debt-to-GDP ratio of 59% and Sri Lanka's 85% in 2007. From being the highest debtor nation in South Asia, Pakistan has, in fact, become the lowest debtor nation in its region and achieved economic growth rate of about 7% a year during the last 6 years.

The Economist magazine in its June 12, 2008 issue comments on Pakistan's current and past Economic Performance as follows:" (The current) macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October."
The turn-around engineered by Shaukat Aziz was applauded around the world. A 2005 Bloomberg headline, as reported by China's Peoples Daily, proclaimed as follows: "The world's second-fastest growing economy after China is no longer India. It's Pakistan."

Here's an excerpt from a UN Economic Survey 2008 report: "Pakistan’s economy maintained its momentum in 2007, growing by 7%, slightly more than the 6.6% for 2006. Agricultural sector growth recovered sharply, from 1.6% in 2006 to 5% in 2007, while the manufacturing sector growth continued at 8.4% in 2007, slightly more moderate than the 10% for 2006. Services grew at 8% in 2007, down from 9.6% in 2006. But exports were sluggish in 2007, with economic growth largely driven by strong domestic demand. Investment overtook consumption, helped by a surge in domestic private investment and record foreign direct investment (FDI) flows. In 2007, investment in real terms increased by over 20%."

The strong consumer demand in Pakistan drove large investments in real estate, construction, communications, automobile manufacturing, banking and various consumer goods. Millions of new jobs were created. By all accounts, the ranks of the middle class swelled in Pakistan during Shaukat Aziz's term in office. According to Tara Vishwanath, the World Bank's lead economist for South Asia, about 5% of Pakistanis moved from the poor to the middle class in three years from 2001-2004, the most recent figures available.

The one sore spot that sticks out in Shaukat Aziz's record is his lack of attention to the rising energy needs of the country. Appropriate planning should have comprehended new power plants to support growth forecasts. There were other mistakes as well, such as the decision to export wheat in 2007 that created shortages and price hikes that helped bring down the PML (Q) government.

What Comes Next?

As the PPP and PML leaderships continue their political posturing, the larger story is the massive loss of confidence by business and investment communities in Pakistan. There is no one in charge of the economy at the moment.

It is worrying to see a sudden halt to foreign investments and the flight of capital by Pakistani investors to investments elsewhere in the world. Foreigners bought just $97m-worth of Pakistani stocks in the first ten months of this fiscal year, compared with over $1.5 billion in the same period a year earlier. No amount of blaming and escape-goating of Shaukat Aziz can be a substitute for real action by a competent economic team to stabilize the economy. Instead of shifting blame, Shaukat Aziz's critics should help fix the current mess Pakistan finds itself in. The first step toward fixing the economy is to put an experienced and competent leader in charge with a few smart technocrats on the team.

Here's a video clip of world leaders, including Shaukat Aziz, at the World Economic Forum in Kuala Lumpur talking about Global Food and Energy Crises:


Anonymous said…
Great article.
I just wish the Pakistani people will stop the blame game and support President Musharraf.

Lots of good has been done under his administration than any other.
That's a FACT.
Riaz Haq said…
Unfortunately, in a society like Pakistan, the truth is the first casualty. People are unable to sort out the facts from fiction because literacy in general, and political and economic literacy in particular, is lacking. Instead of helping people understand and make sound judgments, the newly independent media have been obfuscating the facts. They keep forgetting that Musharraf helped transform Pakistan's economy and how people work, eat, live, dress, communicate and get their information for the better. The Pakistan's new middle class and the media are like the little Frankensteins that Musharraf created. But, I think with time, the media and the people will mature and become smarter.
Anonymous said…
Our Leader - Musharraf!

Pakistan’s economy grew by 100% — to become $ 160 billion
Revenue grew by 100% — to become $ 11.4 billion
Per Capita Income grew by 100% — to become $ 925
Foreign Reserves grew by 500% — to become $ 17 billion
Exports grew by 100% — to become $ 18.5 billion
Textile exports grew by 100% — to become $ 11.2 billion
Karachi Stock Exchange grew by 500% — to become $ 75 billion
Foreign Direct Investment grew by 500% — to become $ 8 billion
Annual Debt servicing decreased by 35% — to become 26%
Poverty decreased by 10% — to become 24%
literacy rate grew by 10% — to become 54%
Public development Funds grew by 100% — to become Rs 520 billion
Riaz Haq said…
President Musharraf picked Shaukat Aziz and persuaded him to leave his lucrative job (he was considered a possible successor to CEO Sandy Weil at Citibank) to guide Pakistan's economy. So Musharraf deserves credit for bringing Sahukat on board and for giving him a free hand and backing him up. While disagreements on policy are understandable and can be debated in a serious manner, it is the attacks on Mr. Aziz's personal integrity and patriotism that are particularly deplorable. In a sea of mediocrity in Pakistani political leadership, military and bureaucracy, the need for smart expats like Shaukat Aziz is particularly acute. Such attacks are likely to have a chilling effect on any Pakistani expats in the West thinking about returning to Pakistan to serve their country.
Riaz Haq said…
Thanks to Shaukat Aziz's efforts, Pakistan has been ranked 34 out of 52 countries in the World Economic Forum's first Financial Development Report, which was released in Pakistan through the Competitiveness Support Fund (CSF) Thursday.

The report is a comprehensive analysis of financial systems and capital markets in 52 countries that explores key drivers of financial system development and economic growth in developing and developed countries and serves as a tool by which countries can benchmark themselves and establish priorities for financial system improvement.

Arthur Bayhan, Chief Executive of the Competitiveness Support, said: "I am very happy to see that financial system in Pakistan is well reformed and competitive vis-à-vis Asia and Europe. Pakistan is ranked ahead of the Russian Federation (35), Indonesia (38), Turkey (39), Poland (41), Brazil (40), Philippines (48) and Kazakhstan (45)."

The United States narrowly edged the United Kingdom to take the top position in the Financial Development Index. The United Kingdom was second while China ranked 24 and India 31.

The rankings are based on over 120 variables spanning institutional and business environments, financial stability, and size and depth of capital markets, among other factors, in assessing the complex financial systems of the 52 countries studied.

An important and unique measure captured by the Index includes the degree to which businesses feel they can easily access capital. The Financial Development Index is based on three main pillars - Factors, Policies and Institutions, Financial Intermediation and Capital Availability and Access. These are further divided into sub - pillars.

Pakistan ranks 49th in institutional environment, 50th in business environment and 37th in Financial Stability. In the Financial Intermediation Pillar Pakistan ranks 25th in banks, 42nd in non-banks and 17th in financial markets. Under Capital Availability and Access, Pakistan ranks 33.

Indicators showed that in business environment Pakistan had development advantage in cost to export, ranking 6th. In Financial Stability Change in Real Effective Exchange rate Pakistan is at 20th, External debt to GDP 10th, Frequency of banking crises 1st, stability index 15th. In corporate governance Pakistan ranked at the very top in shareholder rights index, 14th in strength of investor protection. In the Non-banks pillar, Pakistan ranked 9th in the real growth of direct insurance premiums. In equity market movement Pakistan ranked at the top again.
Riaz Haq said…
Here's a News report of losses at sta6e-owned Pakistan Steel Mills:

The Federal Cabinet that met here on Wednesday with Prime Minister Yousaf Raza Gilani in the chair turned down the loss making Pakistan Steel Mills’ (PSM) request for Rs9 billion to bail it out of financial crisis.

PSM, a few days ago, had moved a summary to the federal cabinet through the Ministry of Production to seek a Rs9 billion bailout package from the government as it was in severe financial crisis; and the Mills was running below 20 percent of its capacity. The cabinet deferred the Mills request until the next meeting of the cabinet.

It is worth mentioning that PSM remained a profit-making entity for seven years, from 2000 to 2007, but as the PPP-led coalition government came into office, the entity started accumulating billions of rupees losses and continues to nosedive. The Mills is spending about Rs1.2 billion a month under different heads, whether it is making profit or raking up losses. The giant holds a constant burden of 21,000 employees despite suffering from low productivity.

The Ministry of Production is also now distancing itself from this politically sensitive entity and believes that the Mills is more in control of the Cabinet Committee on Restructuring of State-Owned Enterprises, headed by the Finance Minister Dr Hafeez Sheikh, well-placed sources told The News.

Interestingly, last year in November, the federal minister for production Chaudhry Anwar Ali Cheema also gave a blatant statement by calling the Mills “nothing but a burden on the economy of the country” and had advised the government that it is better to get rid of it rather than feeding it with billions of rupees every year.

Official sources, while giving a blue print of the Mills performance, said that during 2007-08, PSM production attainment stood at 82 percent of its capacity utilisation and after that, it took a declining course to 64 percent in 2008-09, 40 percent in 2009-10 and 35 percent in 2010-11.

This year too, due to shortage of raw material including iron ore and coal, the Mills is running on less than 20 percent of its capacity.

As far as the sale of PSM products is concerned, it was recorded at Rs42.938 billion in 2007-08 and has been on the decline since then, with Rs34.340 billion in 2008-09, Rs23.832 billion in 2009-10 and Rs27.379 billion in 2010-11.

The last time PSM had fetched Rs2.38 billion in profit was in 2007-08, while after that it continuously racked up losses. In 2008-09, its losses were 26.53 billion in 2009-10 it was Rs11.52 billion and in 2010-11 it was Rs11.49 billion.

According to PSM data, during the first quarter (July-September 2011-12) it accumulated losses of about Rs4.3 billion.

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