Pakistan Economy Hobbled by Underinvestment
In a wide-ranging presentation to the Pakistan Club at the University of Chicago Booth School of Business, Mr. Chandna, an alumnus of the university, listed the following major issues facing Pakistani economy:
1. Pressure on capital account
2. Declining FDI
3. Declining tax to GDP ratio
4. Over reliance on monetary policy
5. Excessive domestic borrowing
6. Extremely volatile internal and external geo-political environment
7. Energy shortages
8. Increase in poverty and unemployment rates
To make up for the shortfall in investments and tax revenues, the Pakistani government is forced to borrow heavily from commercial banks and international financial institutions such as the World Bank, the Asian Development Bank and the IMF, in addition to recent floating of $2 billion worth of bonds on international debt market. These debts add to the debt-to-GDP ratio and put further pressure on the cost of debt service.
Many of the problems highlighted by Mr. Chandna did not exist during President Musharraf's rule when foreign and domestic investments climbed to new highs and debt-to-gdp rartio declined.
|Pakistan Domestic Savings Rate Source: World Bank|
Domestic savings rate was about 18% and foreign direct investment reached $5.2 billion, or 3.5% of Pakistan's GDP. These investments fueled economic growth from 2000-2008. In my view, the activist judges led by former chief justice Iftikhar Mohammad Chaudhry have contributed significantly to the sharp decline in FDI and domestic investments in the country.
|Gross Fixed Capital Formation in Pakistan. Source: ADB|
Foreign Direct Investment (FDI):
World Bank's data shows that foreign direct investment (FDI) in Pakistan reached a peak of over $5 billion (3.6% of GDP) in 2007 and then fell sharply in the wake of Justice Chaudhry's reversal of the privatization of Pakistan Steel Mills. FDI has essentially dried up and the Pakistan Steel Mills Corporation has accumulated losses over Rs. 100 billion in spite of multiple bailouts at taxpayers expense. It is currently operating at just 3% of capacity and its monthly payroll adds up to Rs. 500 million, according to Dawn.
|FDI as % of GDP in Pakistan Source: World Bank|
Canceled Privatization Deals:
Huge subsidies are being given at taxpayers' expense to Pakistan Steel Mills and several other state-owned enterprises which take resources away from more pressing needs for spending on education, health care and infrastructure. In fact, Pakistan Education Task Force Report 2011 reported that "under 1.5% of GDP [is] going to public schools that are on the front line of Pakistan's education emergency, or less than the subsidy for PIA, Pakistan Steel, and Pepco."
Speaking at a recent international judicial conference in Islamabad, Dr. Ishrat Hussain, current dean of the Institute of Business Administration and former governor of The State Bank of Pakistan, said there has not been a single privatization deal in Pakistan since the Supreme Court's 2006 decision voiding the steel mill transaction.
Dr Hussain said that despite fulfilling the legal requirements, the fear that the country’s courts may take suo motu notice of the transaction, and subsequently issue a stay order, deters businesses from investing in Pakistan, according to a report in The Express Tribune. “A large number of frivolous petitions are filed every year that have dire economic consequences. While the cost of such filings is insignificant the economy suffers enormously,” he added.
Crucial Projects Delayed:
Among other projects, Dr. Hussain particularly cited Reko Diq and LNG projects which could not proceed because of judicial activism of Pakistan Supreme Court judges.
The lack of progress on liquefied natural gas (LNG) deal has exacerbated Pakistan's energy crisis. It would have brought in 400 million cubic feet of gas per day to bridge the growing supply-demand gap now crippling Pakistan's economy.
The invalidation of Reko Diq license to Tethyan, joint venture of Canada's Barrick and Chile's Antofagasta, has turned away Pakistan's single largest foreign investment deal to date. The deposit in Balochistan was expected to produce about 200,000 tons of copper and 250,000 ounces of gold annually. Under the deal Baluchistan province would hold a 25 percent stake in the project, with Tethyan holding the remaining 75 percent.
In addition to activist judges intervention in economic matters, there have also been many instance in which hundreds of known militants have been released by Pakistani courts. Those released have then committed acts of terror which have also scared away investors, both foreign and local.
Mohsin Mushtaq Chandna's presentation of the data and facts is quite comprehensive. A combination of poor governance and activist judges have significantly contributed to the major issues highlighted in the presentation. I hope Prime Minister Nawaz Sharif's government is up to the tough challenges faced by Pakistan. Failure to confront these challenges would produced yet another lost decade like the decade of 1990s when Pakistan's economic growth was just 3-4%.
You can find a pdf version of Mr. Chandna's presentation on PakAlumni.com website: