Historical Overview of Pakistan_s Economy During the 1990s

8/11/2019 Historical Overview of Pakistan_s Economy During the 1990s

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Economic Management in Pakistan (1999-2002)

by Dr. Ishrat Huain


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Macroeconomic Legacy of the 1990s After an impressive record of economic growth and poverty

alleviation during the 1980s, Pakistan suffered serioussetbacks in the 1990s in terms of most economic and socialindicators. These setbacks included the following;

i. Deceleration in economic growth ratesii. Increased inflation rates

iii. Increased debt burdeniv. Widening of macroeconomic imbalances

v. Doubling of incidence of povertyvi. Pakistans credibility with the IFIs at its lowest ebb

vii. Erosion of confidence of local investors and overseasPakistanis due to freezing of foreign currency accountsviii. Dissatisfaction among foreign investors due to re-

examination of power purchase agreements andinitiation of criminal action against HUBCO.


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Macroeconomic Legacy of the 1990s The investment ratio kept its downward slope since

1995 and reached 13.9 per cent in 1998-99.

The persistence of fiscal and external deficits led toaccumulation of large domestic and external debt

during the decade and total debt increased from $ 20billion in June 1990 to $ 43 billion in May 1998.Pakistans external debt reached 47.6 per cent of GDP,having grown at an average annual rate of 8.1 per cent

throughout the 1990s. The net present value of our external debt as

percentage of exportswas estimated at 230 per cent in1998, much higher than the safe limit of 150 per cent.


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Macroeconomic Legacy of the 1990s The ratio of debt service payment due to foreign

exchange earnings rose from 23.3 per cent to above 40per cent from 1990 to 1998.

The growth of domestic debt was more rapid duringthe 1990s i.e. 13.7 per cent per annum, which was

mainly due to liberalization of interest rate and theneed to finance growing fiscal deficit. Domesticdebtaccounted for 49.1 per cent of GDP.

Public debt grew from Rs.802 billion in 1990 to Rs.

2,971 billionin June 1999.As percentage of GDP, theincrease was 93.7 per cent to 102 per cent, while inproportion to revenue, the burden rose from 470 percent to 625 per cent.


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Macroeconomic Legacy of the 1990s A very high debt servicing led to a huge fiscal deficit of

above 7 per cent of GDP.

Tax to GDP ratio moved up to 14.4 per cent in 1994-95 butlater slid down to 12.8 per cent in 1999-2000.

The development expenditure took a major hit and reacheda low of 3 per cent of GDP in the 1990s from 8 per cent of

GDP in the first half of the 1980s. External sector deficit also increased from 2.6 per cent of

GDP in the 1980s to 4 per cent of GDP in the 1990s.

In the first half of the 1990s, merchandise exportsstagnated around $ 6.8 billion laterjumping to $ 8.1 billionin 1995.

Incidence of poverty also doubled during this decade, from18 per cent to 34 per cent primarily due to lower growth,higher inflation and limited access by the poor to basic

social services.


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Macroeconomic Legacy of the 1990sA Silver Lining:

An interesting paradox is that the economic policy stanceof both the major political parties (PML-N and PPP), whotook turns over power during the 1990s cannot be faulted.

Both parties were committed to deregulation, privatization,liberalization, greater reliance on market forces, improved

social services delivery, and other economic reforms. The sensible policy actions taken resulting in economicbuoyancy in 1991-92and then in 1994-95waswidely

welcomed by both local and foreign investors. It resulted in an impressive growth rate of 7.7 per cent in

1992 and 6.8 per cent in 1996, investment ratios jumpingconsiderablyand substantial increase in FDI. Mostindicators looked quite good for these two years.

The supporters of both the governments arguethat thedismissal of both the governments reversed these positivetrends.


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Macroeconomic Legacy of the 1990sThe Bottom Line: The stop-go cycle faced by the Pakistani economic managers

did impose enormous costs and it is quite possible that thesecosts have cumulatively caused great damage to theinvestment climate of the country.

The military governmentwhich came into office in October1999was faced with four main challenges: heavy external and

domestic indebtedness; high fiscal deficit and low revenuegeneration; rising poverty and unemployment;weak balanceof payments and stagnant exports.

In addition, Pakistanwas perceived as a highly corruptcountry with poor governance. Transparency Internationals

survey ranked Pakistan as the second most corrupt country in1996. The situation was exacerbated by the initial negative reaction

of the international community to military take-over of thegovernment as well as high expectations of the people to hold

those found guilty of corruption accountable.


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Macroeconomic Legacy of the 1990s The lingering dispute with the IPPs particularly HUBCO

during the preceding three years had damaged the investor-friendly imageof Pakistan.

The distrustengendered by the freezing of foreign currencydeposits of non-resident Pakistanisin May 1998 had not yet

been erased. The investor confidencewas at its lowest ebb.

Pakistans credibility was quite low with internationalfinancial institutionssince the track record of performance

on agreements reached with them, over the precedingdecade, was very poor.

Pakistan faced a serious external liquidity problem and itsreserves were barely sufficient to buy three weeks of imports,

and could not service its short-term debt obligations.


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Macroeconomic Legacy of the 1990s

Workers remittanceswere down by $ 500 million.

FDI dwindled by $ 600 million.

Pakistan had no access to private capital markets.

Due to a declining tax-GDP ratio and inflexible

expenditure structure, 80 percent of revenues were pre-empted to debt servicing and defence, constraininggovernments ability to increase public investment.

It was against this backdrop of imminent default on

external debt, and a heavy debt servicing burden in thebudget that the military government had to design astrategy for economic revivalin December 1999.

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Historical Overview of Pakistan_s Economy During the 1990s