The State of the Economy: from Survival to Revival
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IPP’s Sixth Annual Report 2013 The State of the Economy: From Survival to Revival Institute of Public Policy Beaconhouse National University Copyright© by Institute of Public Policy Beaconhouse National University No part of this report may be published without permission Published by Institute of Public Policy Beaconhouse National University Cover Photograph: Saleem R. Khan Printed by Cross Media [email protected] | www.crossmedia9.com +92 (42) 3661 0240 | +92 (333) 450 1684 III Institute of Public Policy Beaconhouse National University nstitutional backing is absolutely essential to policy makers of today, to guide their actions in Ipromoting development and peace. These are times of change and challenge. There is a need for policy makers to base their policies on sound analytical work. Therefore, the Beaconhouse National University established the Institute of Public Policy (IPP) as an independent, private sector think tank for research on economic, social, political and foreign policy issues. IPP's mission is to "work in the areas of importance for improving the welfare of the citizenry. Its work will focus in particular on public policies in areas of economics, social and political development, as well as on foreign policy". Key activities of the Institute include: independent and objective analysis of the economy; strategic analysis of the concepts and doctrines in selected areas of public policy; research in the areas that are important for regional cooperation; seminars and workshops to bring together policy makers, experts and other members; funded research projects and dissemination of research findings with the view to enhance public awareness and contribute to debate on issues of public policy. The IPP Executive Council consists of eminent personalities devoted to the improvement of public policy in Pakistan. The members are: Mr. Shahid Javed Burki Chairman Mr. Shahid Hamid Co-Chairman Dr. Hafiz Ahmed Pasha Vice-Chairman Dr. Parvez Hasan Executive Member General (R) Jehangir Karamat Member Dr. Akmal Hussain Member Dr. Kamal Mannoo Member Mr. Tasneem Noorani Member Mrs. Nasreen Kasuri Ex-officio Member, Chairperson, BNUF Mr. Sartaj Aziz Ex-officio Member, Vice Chancellor, BNU Dr. Aisha Ghaus-Pasha is the Director of the Institute. The State of the Economy: From Survival to Revival V PREFACE l and complex challenges with resolve, his, the sixth annual report in the series the Institute of Public Policy launched in 2008, Tcomes out at a very difficult time for Pakistan. The country has been in this kind of situation ever since we began this series. To underscore that point I will quote a couple of sentences from the Foreword I wrote last year. “Pakistan has been called a fragile state, a country facing an existential threat, and the world’s most dangerous place. Its standing in various measures of social and economic development continues to slide. In the domestic political discourse, the negatives about the country’s situation are emphasized more than the positives.” The country’s many problems have increased in their scope and depth since I wrote those sentences this time last year. The 2013 report details the circumstances that have enveloped the country now for several years but, as would be expected of development economists, it also presents some ideas on how Pakistan could be saved, how it could survive as an economy as well as a state, and how its fortunes could revive. We expect that what we have said here would be found useful by the new set of leaders who will take office after the elections in May. Policymakers in Islamabad as well as in the provincial capitals will have to work with considerable diligence to set the country on the right course. The eighteenth amendment to the Constitution – a subject we analyzed in an earlier report – has brought provincial leaders to the center stage of politics as well as economics. They must carry the burden as well. This short Preface, the sixth I have written for the IPP reports, is also my last. I have decided to leave the institution Sartaj Aziz and I founded in 2006. Beginning with the launch of this report the IPP will be in the care of another pair of hands. Why I have decided to step aside is a subject to which I will return before concluding this short piece. For the moment I will remind my readers that I have been writing extensively on Pakistan for the last five decades. I have contributed thousands of articles to various domestic and foreign publications. I have written about twenty books on a variety of subjects, but mostly on Pakistan. As I have explained to those who have sometimes charged me with being excessively optimistic, that you can’t practice the discipline – development economics – that has without being hopeful. I have studied the crises Pakistan has faced since its founding in 1947. It has always managed to deal with them in a way that assured its survival. At times it came out stronger after a particular crisis was successfully dealt with. This could happen once again and that is the main message of this report. The State of the Economy: From Survival to Revival VI When Aziz and I started the IPP we wanted to create an institution in the private sphere that would analyze the state of the Pakistani economy without a political bias. I was asked to take up the task of steering the institution during its formative phase even though I lived thousands of miles away in the United States. This has meant spending months away from my family and many hours on the plane. It is a burden I am not able to carry anymore. At one point I had also offered to give the equivalent of $250,000 from the Burki Family Foundation that my wife and I established after I retired from the World Bank. That disbursement could not be made since it required legal work to satisfy the Internal Revenue Service in the United States that the purpose for which the Foundation was set was met by that intended contribution. It is my regret that that contribution could not strengthen the intended mission of the IPP. I have enormously enjoyed my almost eight years of association with the IPP. My greatest reward was the close relationship I developed with Hafiz Pasha and Aisha Ghaus-Pasha. Without Aisha’s diligence and dedication these reports would not have become public. The Pashas are two professionals of exceptional ability and dedication. The two of them are able to put in extraordinarily long hours working on a variety of subjects. Their only motive for this hard labour is love for their country. Their only reward is to see that some of what they have done – and they have done an immense amount – will better the lives of the almost 200 million citizens of Pakistan. I wish them and the institution well. Shahid Javed Burki Potomac, Maryland, USA Chairman 21st April, 2013 Institute of Public Policy The Institute of Public Policy is grateful to the Asia Foundation for its financial support for the preparation, publication and dissemination of this Report. The State of the Economy: From Survival to Revival VII FOREWORD he state of the economy is grim today. The external balance of payments has deteriorated Tbecause of cessation of capital inflows, although the current account remains manageable, especially in the presence of large home remittances. Low net foreign aid and foreign direct investment and large debt repayments to the IMF have led to a steep decline in foreign exchange reserves, which now stand at $6.4 billion, barely enough to finance one and a half months of imports. Further haemorrhaging of reserves could precipitate a crisis of the type we saw in 2008. The fiscal situation visibly worsened over the course of the last year, and continues to deteriorate this year, with the budget deficit likely to exceed 8 percent of the GDP in both years. Revenue growth has been sluggish, and debt service payments have acquired an explosive character due to heavy dependence on relatively high cost domestic borrowing. On top of this, the subsidies to the power sector have been vastly in excess of the budget estimates. But there are some positive developments which need to be built on. The last government successfully completed its full term and the process leading up to the elections has proceeded as planned. The manifestos of the political parties show the same concern for solving the energy problem, improving the quality of basic services like education and health, strengthening governance and institutions for greater accountability, although specific proposals may differ. While the economy has shown persistently low growth, the impact has been limited by the large inflow of remittances, a buoyant informal economy and a big jump in private consumption expenditure. But the large and growing macroeconomic imbalances, the plummeting of investment, rising militancy and terrorism indicate that the country is presently not on a sustainable path of development. The basic recommendation of the report is that the newly inducted government will need to focus initially on the stabilization of the economy, by making major reforms in fiscal, monetary and trade policies, in the Budget of 2013-14. Beyond this, the emphasis can gradually shift to the process of revival of the economy, with industry acting as the leading sector. The report comprises seven chapters. It presents the details of a short-term survival strategy and the contours of a medium- to long-term strategy for sustainable revival of the economy. In addition, an attempt is made to quantify the cost of loadshedding and a series of proposals The State of the Economy: From Survival to Revival VIII presented for tackling this problem, which has become one of the biggest impediments to growth today.