Squandered Opportunities

By: Dr. Ashfaque H. Khan
Published: August 1, 2017
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The past decade has been one of the worst for Pakistan’s economy because the weak and unprofessional economic teams of the two successive governments have led to a dramatic slide in almost all key economic indicators.

The governments of the Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N) have not only damaged the economy beyond repair, but also weakened the country’s institutions, particularly the regulators.

To make matters worse, the international financial institutions (IFIs) also stood by as silent spectators and kept pouring resources into a leaking bucket that drowned the country under massive debt. The PML-N government, in its past four-year rule, squandered many opportunities to strengthen the economy simply because of its highly flawed policies and poor economic management.


In June 2013, when the PML-N took charge, the economy was extremely fragile. It inherited a nervous private sector, declining investment – both domestic and foreign – low economic growth (averaging 3.2 percent per annum), rising unemployment and poverty and rapidly growing income inequality.

It also inherited a large fiscal deficit (8.4 percent of the GDP in 2012-13 with circular debt payment) owing to a faltering resource mobilisation effort and reckless spending. The consequential rising debt burden, a looming debt payment crisis, rapidly declining foreign exchange reserves, rising circular debt and a severe power sector crisis, all compounded Pakistan’s economic woes.

In addition, the PML-N government received as a gift from the outgoing PPP government, thoroughly weakened key economic institutions like the Ministry of Finance, the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan, the Planning Commission, and regulatory bodies like Ogra and Nepra.

These were formidable challenges and required extraordinary courage and sagacity on the part of the political leadership to take tough and even unpopular decisions.

Prior to taking charge, the PML-N claimed that its “competent economic team” had the ability to address these challenges, raising expectations of the people.

Ishaq Dar relied on spin-doctoring, large-scale data manipulation and media management in an attempt to paint a rosy, but false picture

But having been at the helm of affairs for over four years, this government has proven itself to simply be a continuation of the previous one. In fact, economic mismanagement and the process of weakening institutions has intensified.

Under the leadership of Nawaz Sharif and his financial czar, Ishaq Dar, economic institutions were systematically destroyed not only by the appointment of cronies at strategic positions, but also by changing laws.

While most important economic indicators moved southward, the government, particularly Ishaq Dar – who has again returned to the coveted position of finance minister in Prime Minister Shahid Khaqan Abbasi’s cabinet – relied on spin-doctoring, large-scale data manipulation and media management in an attempt to paint a rosy, but false picture.

Independent economists, who talked about the true state of the economy, were branded as pseudo-intellectuals and accused of doing a disservice to the nation, misguiding the people and destabilising the government. But time has proved the stance of these independent-minded economists correct.

Important question

Where do we stand today?

Our economic growth is ticking in the range of 3-4 percent, industrial growth is deteriorating and the performance of agriculture remains at its worst in decades. The investment rate has stagnated and the private sector investment continues to exhibit a declining trend. Foreign direct investment appears to have been monopolised by China.

Pakistan is also witnessing rising unemployment. The budget deficit – sans manipulation – averages at around 8.0 percent of the GDP against the backdrop of soaring public debt, including the external debt burden, which is becoming unsustainable.

This is not all; falling exports and rising imports make the economic scene grimmer as the trade deficit worsens and the current account deficit widens to a dangerous level.

The PML-N government has also grossly distorted revenue and expenditure numbers and mobilised resources mainly by raising taxes, exploiting the petroleum sector and resorting to extensive borrowing in a bid to buy time. The expenditure priorities focused mainly towards populist and ribbon-cutting projects – at the cost of human capital. In a nutshell, the country’s economy stands in great peril.


This downturn in Pakistan’s economy occurred amidst unprecedented God-gifted opportunities, but Finance Minister Dar and his team squandered them all.

Over the past few years, the country’s security environment significantly improved because of the two back-to-back military operations – Zarb-e-Azb and Radd-ul-Fasaad – against terrorists. The huge sacrifices rendered by the Pakistan armed forces also helped improve the business environment.

In Karachi, the Rangers-led operation curbed crime and terrorism, restoring confidence of industrialists, businessmen, traders, bankers, and most importantly citizens of this mega-city. Now the country’s commercial and financial hub is again in a position to lead its economic revival, provided the government creates a conducive environment for businesses.

The China-Pakistan Economic Corridor (CPEC) dramatically changed the perception about the country abroad, sending a strong message to global investors that Pakistan is open for business.

If China can enter Pakistan with projects worth over $62 billion, others can come as well. What the country needed after this was prudent policies and reform and appointment of honest and talented people at important positions. But unfortunately, the regime popularised the concept of cronyism, or ‘Apna Admi culture’, and squandered this golden opportunity.

The collapse of international oil and commodities prices also proved a bonanza for Pakistan, relieving the pressure on the balance of payments. Oil prices fell by half compared to prices in mid-2014.

As compared with the benchmark year of 2013-14, Pakistan saved over $13 billion in the last three years owing to the decline in oil prices. This reduced our import bill, kept current account deficit at the minimal, helped build foreign exchange reserves, kept inflation at the lowest level and provided room to the State Bank of Pakistan to cut the discount rate to its lowest level in decades.

These developments should have encouraged the private sector to invest more to revive the economy. But instead of rising, private sector investment continues to decline owing to the absence of private sector development policies.

The extraordinarily benign International Monetary Fund (IMF) kept rolling out billions of dollars to Pakistan, though the PML-N government failed to implement most of the major promised reforms.

The IMF gave Pakistan a record 15 waivers in a three-year programme. Perhaps never in the IMF’s history, has the world witnessed such benefaction from an otherwise highly professional institution. Instead of conducting on-site reviews, the IMF conducted 12 long-distance political reviews of the programme based on manipulated numbers provided by none other than Dar.

This downturn in Pakistan’s economy occurred amidst unprecedented God-gifted opportunities, but Finance Minister Dar and his team squandered them all

A docile parliament and a friendly opposition ensured all the necessary support to the government to mismanage the economy.

Although independent economists provided a lot of ammunition through their writings, the opposition failed to discharge its responsibility and in a way became a partner in crime.

No government in Pakistan’s history received such a huge bonanza in such a short period of time. Had the government been serious on the economic front, it could have done wonders in the past four years. But these opportunities were wasted.

What happened to the economy in the last four years? In a nutshell; it has been weakened to the core. The key economic institutions have been destroyed.

And now rebuilding the economy and these institutions will require time, credible manpower, and a leadership which is intelligent, visionary, fiercely independent and brutally honest. There is no dearth of talented and honest people in Pakistan, but the political leaders have yet to show courage and determination to make the best use of them and change the country.

Personalised decision-making

Finance Minister Dar, despite all his tall claims, has little understanding of the economy. Being a chartered accountant, he relied heavily on accounting tricks and gimmickries.

He manipulated the budgetary numbers, forced the tax authority to present inflated revenue figures, forced the statistical authority to concoct growth numbers to his liking, changed the definition of variables to present a rosy picture, brought the country’s central bank under his thumb and most importantly, appointed weak staff at all the important economic positions.

Rather than taking matters to the cabinet and empowering the institutions, the decision-making process of the PML-N leaders remained too personalised.

Cronyism and favoritism have never been as pervasive in Pakistan as under PML-N rule. Personal interest overtook national interest.

The economic team was undoubtedly weak and all the economic decision-making revolved around one individual — the finance minister.

Because of the weak team, economic policy-making shifted to the IFIs, primarily to the IMF. The regime simply talked about reforms, but did not implement any.

The IMF, for its own political motives, always stated in its review document that Pakistan’s reform programme was “broadly on track.” The leadership never interacted with the private sector to listen to their views. While exports continued to slide, the leadership never bothered to listen to the grievances of exporters in general and textile exporters in particular.

During the last four years, economic growth, according to official statistics, accelerated from 3.7 percent in 2012-13 to 5.3 percent in 2016-17. But these growth numbers are highly contested; the actual growth number calculated by independent economists suggests that it averaged 3.6 percent per annum – more or less in line with the previous five-year average.

How can growth accelerate amidst declining private sector investment and production and consumption of electricity? Human capital has worsened as both the literacy rate and the gross enrollment rate in primary education have declined.

Performance of agriculture also remained lackluster over the last decade and has grown at an average rate of 2.3 percent per annum since 2007-08 to-date. Large-scale manufacturing numbers were grossly overstated.

In fact, the bulk (67 percent) of the contribution to economic growth over the last four years, has come from the services sector and within the services sector, overwhelming contribution came from ‘general government services’ and ‘other private services’. Investment as a percentage of the GDP has virtually remained stagnant at 15.5 percent over the last almost one decade (2008-17) and yet we are told that growth accelerated during the last four years.

Manipulating numbers

The budget deficit numbers have remained controversial over the last four years. Never before have we witnessed such a large-scale manipulation of statistics. The manipulation ranges from changing the definition of the revenue, expenditure, and the fiscal deficit to accounting gimmickries. Holding refund/rebate of exporters and forcing the commercial entities to pay taxes in advance to inflate revenue collection numbers have been the usual practice.

The estimated amount, held by the tax authorities, is approximately Rs. 300 billion.

The federal government did not release resources to the provinces under the NFC Award on time, forcing provinces not to spend money. This has been an important trick to show lower spending and hence lower fiscal deficit. Perverse incentives were given to provinces to avoid spending money, again to show a lower fiscal deficit.

Privatisation proceeds and foreign grants, instead of being treated as financing items, were treated as non-tax revenue which accordingly raised the overall revenue to show a lower budget deficit.

Most importantly, the regime and its finance minister took circular debt off the budget to understate expenditure and lower the fiscal deficit. Circular debt has been a part of expenditures since 2010-11. Hence the fiscal deficit numbers since 2013-14 onwards are not at all comparable with prior years. The outstanding stock of circular debt is estimated at over Rs. 800 billion.

The government also blatantly used “statistical discrepancy” to show lower expenditures and slash the budget deficit. With an apple to apple comparison, the budget deficit averaged 8.1 percent during the last four years as against an average of 7.2 percent during the previous five years (2008-13).

Is this the success of the IMF programme? I leave it to the IMF to respond.

Persistence of large fiscal deficit resulted in the accumulation of public debt. The PML-N government so far added Rs. 7.0 trillion in public debt in four years. Public debt increased from 64 percent to almost 69 percent during this period. This too underlines the fact that the budget deficit numbers are not at all consistent with the rise in public debt. How come public debt surges in the midst of a sharp decline in the budget deficit? Isn’t it a repeat of the 1999 episode?

External debt

External debt and liabilities have surged over the last nine years (2008-17). The two successive governments added $40 billion to the external debt in just nine years as opposed to $40 billion during the previous 60 years.

What a great performance! The PPP government added $21 billion in five years in the midst of extra-ordinary high prices of international oil, while the PML-N added $19 billion in just four years when oil prices are at a record low.

In fact, the PML-N government borrowed over $35 billion in four years. This record borrowing was carried out inspite of having saved $13 billion due to the decline in international oil prices.

The two successive governments added $40 billion to the external debt in just nine years as opposed to $40 billion during the previous 60 years

Had the international price of oil remained at mid-2014 level ($108-$110 per barrel), Pakistan would have borrowed almost $50 billion in four years. This level of borrowing is unprecedented in Pakistan’s history and has serious implications to national security.

The rising debt means tougher times for Pakistan in the current fiscal year 2017-18 and beyond. I foresee that Pakistan will again be forced to go to the IMF for yet another bailout programme sometime before May/June 2018.

Finally; foreign exchange reserves. Pakistan’s foreign exchange reserves went as low as $6 billion in June 2013. The PML-N government added $12 billion to the reserves, raising them to $18.1 billion by June 2016. During the fiscal year 2016-17, these reserves declined to $16.1 billion.

In other words, the country has lost $2 billion in reserves in one year. Is this the correct number? The answer is ‘no’.

The SBP is short by $3.9 billion as of May 31, 2017. In other words, the SBP, in order to prevent forex reserves falling sharply, with adverse consequences for the exchange rate, borrowed $3.9 billion from commercial banks for a period of 1-month, 2-months, and 3-months in the forward market.

Therefore, foreign exchange reserves stood at $12.2 billion as of June 30, 2017 and not $16.1 billion as reported by the SBP. In other words, Pakistan has lost $6 billion in forex reserves during 2016-17. Foreign exchange reserve is likely to come under further pressure during the current fiscal year.


For Pakistan, difficult and challenging times are in store. Pakistan’s balance of payment has come under tremendous pressure during 2016-17 owing to an extra-ordinary surge in imports, decline in exports and external flows such as remittances and the Coalition Support Fund (CSF). Resultantly, the current account deficit has surged to $12.1 billion in 2016-17 as against $4.9 billion in 2015-16.

The budget 2017-18, if implemented in letter and spirit along with the inappropriate exchange rate policy, would further fuel aggregate demand which will be translated into further acceleration in imports.

The prospects of increase in exports to the desired level is not likely to be achieved in 2017-18. Remittances stagnating at the current level of $19 billion and with no prospects of the resumption of the CSF in the near future, Pakistan’s current account deficit is likely to widen further to $16.0-16.5 billion.

With $7.0-7.5 billion debt servicing, the financing requirement will jump to $23-$24 billion in 2017-18. The likely availability of external financing from various traditional sources, China and the FDI, would at best be in the range of $12-12.5 billion. This leaves a financing gap of $10.5-11.5 billion in 2017-18.

Who will fill this gap? Finance Minister Dar must answer.

The bottom line; Pakistan’s economy is again at the brink. Has it been done deliberately? I would reserve my comments. Institutions, particularly dealing with the economy, stand damaged. Who will take the responsibility of pulling Pakistan out of this quicksand?

All those who matter should take my analysis seriously. I don’t see a stable government until the next elections. Political uncertainty will persist. With a weak economic team, an unstable government and an increasingly hostile external environment, Pakistan faces an extremely difficult situation. The country is like a rudderless ship and there appears to be no light at the end of the tunnel. May God save Pakistan!

 Author’s note: I am grateful to Dr. Hafiz A. Pasha and Hammad Mushtaq for their valuable comments

About the Author
Dr. Ashfaque H. Khan
is the principal and dean at NUST School of Social Sciences and Humanities, Islamabad.