The Boom & Bust Cycle


Pakistan Economy has had a checkered history. The country has followed a variety of models for economic management. There are several eras distinguished by their policies pursued and outcomes realized. For each of these eras, we would identify key characteristics defining them and listing their major achievements and failures. The space would not allow to go into significant details and therefore a very brief account is captured which would enable the reader to appreciate the nature of economic policy pursued during the period and what kind of failures and disadvantages suffered by the population.

Planned Economy (1947-1970)

Starting with a planned economy, a select group of capitalists were sponsored to lead the process of economic development. This was succeeded by a major wave of nationalisation and attempt to foist a socialistic model of economic management. Military intervention pushed back this model.

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This was the first phase of Pak economy and a number of governments came and left during this period. But the defining characteristic across the period was its planned nature. It’s most prominent and much talked about time was the so-called decade of development under Field Marshal Ayub Khan during 1958-1969. As a Cold War ally of the United States, the country received considerable military and economic assistance. The Harvard Advisory Group had set-up the Planning Commission of Pakistan, which at the time was the hub of all economic planning and allocation of development resources. The so-called five-year plan framework was evolved. There were widespread economic controls and licensing regimes prevailed across all key economic activities such as investment, imports and industrial locations. Based on a belief in trickle-down theory a select group of industrialists were patronized to be the winners.

Even a relatively stable government of President Musharraf succumbed to similar pressures of growth and voters appeasement. In its last fiscal year 2007-08, in the backdrop of three developments, namely judicial crisis, planned elections in January 2008 and the world financial crisis, the Government decided not to pass on the higher POL prices leading to emergence of PDCs and doubling of the fiscal deficit from 4% budgeted to about 8% actual

Major Achievements: There were many achievements during this period. First, Pakistan was one of the fastest growing economies with growth rates averaging more than 6%. With high production, inflation remained low. An industrial base was established. Second, the Green Revolution in agriculture led to productivity gains and high incomes for the farmers. Third, rapid industrialization resulted in a continuing rise in urbanization as migration increased from rural to urban centers leading to a consequent rise in urban population. Fourth, there emerged a well-defined capitalist class which enjoyed state patronage and dominated the labor class. The winners were selected through allocation of state patronage in the form of access to licenses and state controlled credit and finance.

Major Failures: Despite its glittering spectacle, there were serious imbalances in the distribution of benefits beneath the surface. Visibly, the West Pakistan saw significantly more development while the Eastern wing of the country lagged behind. The capitalist class was exceptionally rich and symbolized by 22 families which controlled a lion’s share of industry and commerce. Not surprisingly, income distribution worsened both in the Western part and across the two provinces. Import substitution was promoted at the expense of export promotion. The open alliance with the United States compromised Pakistan’s standing in the non-aligned world.

Nationalisation & Socialism (1970-1977)

The failures of the last economic regime eventually led to the break-up of the Eastern Wing of the country and adoption of socialist model of economic development and management. There was large scale nationalization of industry, trading, finance and banking. A gigantic public sector in the economy emerged in the country leading the process of economic development. The infamous 22 families were off the scene as much of their assets were nationalised.

The framework of the five-year plan was suspended. The non-planned development largely took place in the public sector as all the key areas of the economy were banned for the private sector. Economic values were transformed with capitalists held in low esteem and labor unions wielded considerable powers.

Major Achievements: One of the major policy initiatives was the correction of anti-export bias through a major devaluation of rupee leading to exports surplus after Korean War in 1951-52. Second, in the public sector, basic industries were promoted — necessary for a strong industrial base. Third, labor relations were protected though the capitalist class was marginalised. Fourth, a new direction was given to foreign affairs and external economic relations by following a “Look Middle East Policy” and their generous support helped remove the US label, finally, the country also moved toward establishing a nuclear programme against all odds.

Major Failures: The nationalisation led to an over-stretched public sector without adequate preparation and capacity to manage them. The private sector was marginalised which disrupted the pace of private sector-led industrial growth. The size and timing of devaluation was shocking and soon led to high inflation which created disaffection among people. Improved income distribution was mired by high inflation. Growth was also stalled as many of the major investments such as steel mills had a long gestation period. The combination of low growth and high inflation led to general discontent and the luster of the regime’s popularity was affected.

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Mixed Economy: Public-Private Sectors (1977-1988)

Opposition to nationalisation-socialism was also fierce. Initially, the martial law government vowed to undo the whole nationalisation but soon it realized that it was a huge vehicle for political patronage and would help it tighten its stranglehold on power. The government revived the five-year development framework and began to gradually open the economy for the private sector. As luck would have it, the Russian invasion of Afghanistan helped bring significant support from the US also.

Major Achievements: After a hiatus of more than seven years, the economic growth was revived and inflation was kept low through an improvement in supply logistics (National Logistics Cell) and by promoting a network of weekly Bazars which continue to this day. Private sector was gradually inducted back into economic development. Industrial sector was also revived primarily through private sector participation. A process of gradual deregulation of price controls was initiated that led to improved pricing for the agriculture sector thus bringing more incomes to farmers. Significant reforms were introduced in the forex regime and labyrinth controls were removed. As part of this reform, a policy of creeping devaluation was initiated.

Major Failures: The initial promise to return and denationalsie the industries and financial and banking assets was not honored, rather a more organised and strengthened system of public enterprises was established. This eventually resulted in loss of efficiency and corruption in public sector enterprises. The gigantic public sector was used as a source of political power and patronage rather than an engine of economic growth. They became a source of distortion and their divestment or privatisation was immediately warranted but no serious effort was expended in this direction.

Revival of Democracy, Market Economy and Political Instability (1988-1999)

The departure of President General Ziaul Haq coincided with the introduction of Symington/Pressler Amendments which brought an end to the US financial support to Pakistan. Soon the fall of Berlin War heralded a new era of globalisation and the  traditional model of financing through the forum of Aid to Pakistan Consortium was dismantled in favor of newly spurred private capital for which hitherto restricted areas such as power and telecommunication were opened up. However, the decade was defined by political instability as governments changed in quick succession and the average tenure of four governments was about 2.5 years. The most distinguishing feature of this period was the start of IMF’s adjustments programmes in the country which later became a regular feature of economic management.

Major Achievements: Space was created for the private sector as its role was expanded. The process of privatisation was initiated and a number of industries and public sector banks were divested. Broad-based reforms were implemented to create an enabling environment for encouraging private investment. A large number of controls on pricing and supplies were removed such as investment licensing and import permits. High walls of tariffs were removed and trade taxes common to local production and imports were gradually introduced; the IMF programs required a market based transformation. Forex controls were nearly abolished so much so that a distortion was introduced. Full convertibility of current account was allowed. But because of extraordinary facilities extended to residents to maintain foreign currency accounts (FCAs) with full permission to remit funds outside Pakistan effectively amounted to convertibility of capital account also. The Board of Investment was established to promote investment. Tax regime was transformed with income and sales taxes becoming more important revenue spinners overtaking by a significant margin excise and customs duties.

Major Failures: Inconsistent policies, political instability fueled by rapid changes in governments failed to inspire investors’ confidence. Economic growth suffered and inflationary pressures mounted. The IMF programmes were pursued half-heartedly and frequently abandoned mid-stream. Pakistan earned the infamous reputation of a single-tranche country. Macroeconomic instability became a norm, discouraging investors to take long term decisions. Freezing of Foreign Currency Accounts on the eve of nuclear tests and subsequent decision to open IPPs’ agreements damaged the prospects of foreign investment in Pakistan.

It is a bit puzzling that all governments since 1988 have followed the same path of running the economy into the same macroeconomic stability which required a request to the IMF for help

Market Economy & Military Rule, Economic Stability (1999-2008)

Political instability led to another military intervention. Under President General Pervez Musharraf, economic governance improved significantly and after 9/11, resource availability became easy and sizable. The period also witnessed high growth with remarkable price stability. Key reforms were implemented by following two IMF programmes which were nearly completed. War on terror soon started shaping the economic and political discourse, imposing a very high cost on the economy.

Major Achievements: Political stability and private sector friendly policies spurred domestic and foreign investments. Economic growth was high and inflation was low. Foreign reserves, aided by American support and Paris Club rescheduling, were highest at the time. Banks were privatised and performance improved markedly. Partial debt retirement of expensive debt was also undertaken.

Major Failures: Toward the end of its tenure, the military government became complacent and its focus on economy was distracted after the judicial crisis erupted in which the chief justice of Pakistan was made dysfunctional. More importantly, it coincided with the global financial crisis where commodity prices rose historically high and oil prices touched $150/barrel. The fragility of the economic model was visible in the face of the global financial crisis and exceptional increase in oil prices. The budget discipline was compromised as the government decided not to pass on the prices to consumers which doubled the fiscal deficit relative to the budget and current account deficit was highest. Around the time of its departure, much of the reserves were depleted and there were even rumors of lockers’ seizures and freezing of FCAs. The stock market had to be suspended for more than three months.

Market Economy & Crony Capitalism-III Democratic Revival (2008-2018)

Judicial crisis and Benazir Bhutto’s tragic death led to the fall of the military government. Democracy was revived and the next coalition government of the Pakistan People’s Party (PPP) completed its five-year term. After the 2013 elections, PML-N formed the new government and it also completed its term.

Major Achievements: Gilani-Ashraf Governments

Transition to democracy after Benazir Bhutto’s death. New NFC Award was given and the 18th Constitutional Amendment was enacted. The IMF programme and other inflows helped build higher reserves compared to the military rule.

Major Achievements: Nawaz-Abbasi Governments

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Successful implementation of a three-Year IMF programme. Revival of economic growth and low inflation. Launching of the CPEC which was a transformational concept. LNG terminals and import of large quantities of LNG to meet the industrial and power generation demands. Huge investments and additions to power, highways and other infrastructure projects.

Major Failures: Gilani-Ashraf Governments

The two democratic governments had entirely different economic performance. The Gilani government had to seek an IMF programme at the outset and in the wake of the global crisis and oil price hike. The programme was abandoned mid-stream as the government failed to implement a key reform on taxation. Growth was lowest averaging less than 3% in five years and inflation was at an average of 12%. Although reliable estimates are missing, poverty was reduced (BISP). Power sector arrears became a major issue and liquidity shortages led to acute power shortages. Around the close of its term, the government squandered much of the external resources obtained through a front-loaded Fund programme and other development partners.

Major Failures: Nawaz-Abbasi Government

The government had to seek a fund programme as reserves had nearly depleted and a situation of default was imminent. It attracted significant investment through the CPEC. During the programme period, the government adhered to reforms diligently but thereafter it unfastened the guards and went on for a spending spree while revenue collections were slackened (fiscal deficit 6.6%; reserves $10 billion). The problem of power sector arrears resurfaced and outstanding circular debt remerged and reached the same level as it was in 2013.

Market Economy Democratic Revival (2018-Present)

In 2018, a new political party – the Pakistan Tehreek-e-Insaf (PTI) came to power through a coalition of small parties. It was led by Imran Khan. In the last two years of the PML-N, the macroeconomic framework was weakened with both budget deficit and current account deficit (CAD) running very high. The circumstances the new government inherited warranted an immediate request to the IMF for a new programme. However, in its wisdom, the government resisted to follow this course. Nearly one year was lost before the decision was made. In the process, even before the programme, significant devaluation and interest rate was increased. As part of the programme, more devaluation, increase in interest rate and heavy taxation was done. This led to a major decline in economic activity. During 2019-20, the country was hit by Covid-19 which led to economic disruption. The second year therefore saw a negative growth. It was in the third year when economic revival started with a 5.6% growth followed by 6% in 2021-22.

It is paradoxical that the PTI’s performance of 2021-22 which witnessed high economic growth, high exports and remittances and significant growth in both agriculture and industry, eventually led to the same external account imbalance which the PTI government had inherited.

Inconsistent policies, political instability fueled by rapid changes in governments failed to inspire investors’ confidence. Economic growth suffered and inflationary pressures mounted

Concluding Remarks

It is a bit puzzling that all governments since 1988 have followed the same path of running the economy into the same macroeconomic stability which required a request to the IMF for help. In a recent article in Business Recorder (dated:20-7-2022), I had made the following observation on the PTI’s last year and contrasted it with what other governments had faced and concluded it as follows:

“While it is sad to see such an end of a hopeful year, in many ways it has ended in a characteristic fashion of many such years in the recent history of Pakistan. The PML-N had successfully completed an IMF programme during 2013-2016. But the gains were soon sacrificed on the altar of pushing the growth beyond the capacity of the economy. There was also the issuance of Panama Papers which turned into a major crisis for the government and eventually led to the disqualification of Prime Minister Nawaz Sharif. The succeeding economic team was indifferent to gains made under the Fund programme and also an election was looming in July 2018. The fiscal deficit of 4.6% in FY16 shot up to 6.6% in FY18 while a modest CAD of $5.0 billion in FY2016 rose to a record level of nearly $20 billion. All this was done to achieve a high growth rate of 5.8% which was subsequently revised to 6.3% after rebasing of GDP.

A similar situation happened during the last year of the PPP government in which no growth was witnessed but it happened in the backdrop of failure to resurrect the stalled IMF programme and running down most of the reserves, built while under the IMF programme, to a dismal level toward the end of its term in FY2013.

Even a relatively stable government of President Musharraf succumbed to similar pressures of growth and voters appeasement. In its last fiscal year 2007-08, in the backdrop of three developments, namely judicial crisis, planned elections in January 2008 and the world financial crisis, the government decided not to pass on the higher POL prices leading to emergence of PDCs and doubling of the fiscal deficit from 4% budgeted to about 8% actual. CAD was at an all-time high 8% of GDP. The government of PPP was forced to approach the IMF in October 2008. Thus, the relatively good performance of that era ended on a whimper.”

Dr Waqar Masood Khan
Dr Waqar Masood Khan
This author is a former finance secretary who served as Advisor to Prime Minister Imran Khan on Revenue and Finance in the capacity of a Minister of State

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