I have used “the perfect storm” metaphor before to describe the economic, political and international crises Pakistan faces today. Developments in several areas interacted with one another in the year 2008 to produce a situation Pakistan has never encountered before.

Government’s fiscal and monetary policies, energy shortages, a sharp rise in the price of commodities, increased terrorist activities in an around Pakistan, and global economic downturn sent the country’s economy into a free fall. I would be surprised if Pakistan manages a rate of growth of three per cent in 2008-09, the current financial year. The rate of growth could be even lower than that. Were that to happen, the incidence of poverty will increase, there will be a large increase in urban unemployment that could produce serious political and social discontent, and there will be further increase in the income gap between the rich and the poor.

The first contributing factor was the decision by the Pervez Musharraf government to curry favour with the voters as it began to prepare for the elections of 2008. This was done by pumping money into the economy. Interest rates were lowered and government expenditure was increased. These actions produced unsustainable fiscal and balance of payments deficits. Inflation was the direct result which touched unprecedented levels. The economy also suffered because of the growing supply-demand gap in the power sector which resulted in load shedding that lasted for several hours in all the major cities.

While all this was happening, commodity prices began to increase, climbing to new heights every day in the summer of 2008. At one point, the price of oil almost touched $150 a barrel. Since Pakistan is a large oil importing country, this worsened the already serious balance of payments situation. The prices of several other commodities that figure prominently in Pakistan’s imports also climbed putting the country’s external account under great pressure.

Growing insurgency in Pakistan’s border areas with Afghanistan spilled over into the country. Terrorist attacks in Karachi, Lahore and Islamabad scared both domestic and foreign investors. Foreign flows – including foreign direct investment in the go-go years in the early 2000s – had created the impression that the country could finance a large trade deficit. The attack on the Marriott Hotel in Islamabad on September 20 delivered another blow to the economy as foreign capital left the country and the Karachi Stock Exchange began to see a collapse in share prices. The erosion of valuation in the market could be prevented only with the introduction of a floor under the prices of traded stocks.

Then the terrorists struck Mumbai. For three days between November 26 and 29 ten young men held the city’s tourist and financial districts in their bloody grip. Nine of them were killed; the tenth, arrested by India’s security forces, seemed to have told his interrogators that he and his associates were all Pakistanis and that they had come by sea from Karachi to Mumbai. The hope that the Zardari government may move aggressively to build strong economic ties with India suddenly vanished. The Mumbai incident once again brought relations between the two nuclear nations of South Asia close to a breaking point.

Other external developments also put pressure on the Pakistani economy. By the end of 2008, most developed countries were in recession or were standing on its edge. There is now consensus among economic forecasters that the anticipated contraction will be the most severe since the Great Depression of the 1930s. What is even more worrying is the absence of agreement among policymakers about which instruments should be used to stop the global economy from plunging into an economic abyss from where it would take years – if not decades – to climb out of.

According to the World Bank’s Global Economic Prospects report released in Washington on December 9, global growth will slow down to 0.9 per cent in 2009. The combined GDP of the industrial world will decline by close to a percentage point while the developing countries will continue to grow but at a considerably slower pace. In fact, their growth rate will plunge from 7.9 per cent in 2007 to only 4.5 per cent in 2009. Within the developing world, growth in output will be centered in China and India. However, even these two countries will see large declines in their rates of growth.

The World Bank expects that China’s GDP growth rate in 2009 will decline to 7.5 per cent from double digit rates the country experienced on average in the last three decades. The increase in the China national product would have been even lower had Beijing not decided to stimulate the economy with a package of investments amounting to $586 billion. If the China plan materialises what the world will see is the largest infrastructure building programme ever undertaken in human history.

The Indian economy is also likely to do poorly in 2009. The country’s economy will slow down to 5.8 per cent, two percentage points lower than the average for the last decade. Excluding these two large Asian economies from the estimates for the developing world, the average growth rate for this part of the world is expected to be only 2.9 per cent, barely more than the rate of increase in population. This means that the developing world will most definitely see an increase in the incidence of poverty.

The elected government that took office in Pakistan earlier in the year has concentrated its attention on finding external resources to avoid default on external obligations. After attempting to raise money from some of the friendly governments Islamabad chose to return to the IMF for support. The return to the Fund was initially resisted since it could have meant the adoption of fairly contractionary policies in both fiscal and monetary areas. However, when it became clear that several other donors who might have provided help indicated that they would step forward only if there was a Fund supported programme, Islamabad had no option left other than to sign up with the IMF.

This was done and just the promise of support from the IMF stabilsed the rupee which had been losing in value for several months. Some other silver linings also appeared on the horizon. The rapidly accelerating financial crisis in the West brought about a significant reduction in the price of commodities, including oil. By mid-December, the price of oil fell to about $40 a barrel. This fall was replicated in other commodities and the pressure on the country’s balance of payments eased further.

This is where the situation stands as 2008 gets ready to yield to 2009. What is in store for Pakistan in 2009? Many things will have to be factored in to provide an answer to this question. In 2008 Pakistan’s economy was buffeted by a perfect storm. How will the policy makers steer the country out of this difficult situation? A great deal needs to be done on the policy side in order to ensure that 2009 is a better year than 2008.