The more things change…

22 May 2017


“History doesn’t repeat itself, but it often rhymes.”

ATTRIBUTED to Mark Twain, this quote sums up cycles of boom and bust that Pakistan’s economy has endured for decades. Flush with foreign capital — whether in the form of aid, loans, or investment — growth returns, the stock market sets records, and property prices peak. Politicians reach for the bullhorn and take credit for yet another new era of development and growth. And then the music stops.

The economy is growing north of 4.5 per cent. Exports have doubled since the start of the century and crossed the $20 billion mark. Foreign direct investment is at record highs and reserves have quadrupled from a meagre $4bn to almost $16bn. The stock market is hitting record highs with every passing day.

This was the Musharraf boom at its peak.

Two IMF statements show that very little has changed in almost 10 years.

A press release by the IMF echoes the exuberance many in Pakistan are experiencing. On Sept 25, 2007, the IMF said that the economy “continued to perform well” and that “prudent macroeconomic management and structural reforms” were leading to an uptick in both growth and investment in the economy. The IMF did note that export growth was plateauing and that “the external current account deficit had increased to 4.9pc of GDP in 2006/07”, a clear cause of concern. What was needed to sustain this growth? Well, according to the IMF, Pakistan needed to rein in its current account deficit, increase its revenue generation capabilities, and reduce its fiscal deficit in the medium term.

Then came 2008 and the party was definitely over. Everything is a mess and like a host gaining consciousness after blacking out at their party, Pakistanis are trying to make sense of what has just happened. The country is facing an imminent balance of payments crisis as reserves have fallen below $10bn and can barely cover two months of imports. Inflation is at 20pc and economic growth is under 2pc.

The newly elected government of PPP sends Asif Ali Zardari to China seeking a bailout. After the United States and Saudi Arabia, the Chinese also say no. Pakistan has one last option: the IMF. They oblige, giving a $7.6bn loan to the Pakistani government in November 2008. It is time to clean up the mess — and the hangover, coupled with the gross incompetence of the government gives the nation much pain.

Then came the Sharif boom and the party is back on.

The economy is now growing north of 5pc. Inflation has been tamed to under 3pc. Reserves have hit record highs and Pakistan has almost five months of import cover. Exports and remittances are weak but that’s due to a weak global economy, or so we are told. But worry not: our needs will be more than met by $50bn of Chinese investments in the China-Pakistan Economic Corridor. The stock market has just crossed the 50,000 mark. Pakistan has re-entered the international bond market. Outlets like the Wall Street Journal are finally recognising that Pakistan is back. We are the next Asian tiger. The party is back on.

A press release by the IMF on April 5, 2017, echoes the positive sentiment in Pakistan. The country has “strengthened its macroeconomic resilient and economic outlook” and the economy is “on a higher growth path”. Growth is going to further accelerate to “5pc in FY2016/17” due to “recent progress with structural reforms”. But the IMF notes that challenges remain and Pakistan must “improve export sector productivity” and that “stronger fiscal consolidation efforts” are needed.

Look at the two IMF statements once again. So little has changed in almost 10 years and the IMF is warning against issues similar to the ones Pakistan faced in 2007.

The latest set of data is enough to make one recall the height of the Musharraf-era boom and feel nauseous at the thought of what could come next. Pakistan’s trade deficit has increased by 40pc in the first 10 months of this fiscal year to $26.55bn. This is already almost $5bn over the target the finance ministry had set for 2017. The current account deficit has widened by over 200pc in the first 10 months of this year to $7.25bn.

Vision 2025, released in 2014, envisaged Pakistan’s exports rising from $25bn to $150bn by 2025. Exports, however, are not recovering, falling by 1.3pc to $17.91bn, compared to the same period last year.

Foreign exchange reserves have fallen to $20.7bn in May of this year; down almost $4bn in seven months. Inflation is ticking up, with April 2017 data showing a 4.8pc rate. According to the State Bank of Pakistan, Pakistan’s current account deficit in the first half of FY17 was “almost twice the level recorded in the first half of FY16” and “such increase in the current account deficit does not bode well”.

The increase in imports is driven by capital-intensive machinery goods and energy imports which will increase as the economy approaches a higher growth trajectory. Minus structural reforms that boost exports, a critical source of financing imports, Pakistan’s external sector will face strains. The strain on finances will be further compounded by CPEC repayment obligations, which are expected to peak at $5.5bn by 2022.

History is not repeating itself, but it is surely rhyming again.

Tailpiece: Nadeem Javaid’s (chief economist, Planning Commission) comments to Reuters that 4pc of global trade will pass through CPEC by 2020 is beyond the realm of reality. This amount translates to over $700bn using 2015 global trade data and represents almost 20pc of total imports and exports of Pakistan, China, Afghanistan, and the rest of the Central Asian Republics.

The writer is a South Asia analyst at Albright Stonebridge Group in Washington D.C.

Published in Dawn, May 22nd, 2017