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Tuesday, November 24, 2009

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A turnaround can happen

Dr Ashfaque H Khan Pakistan's economy has maintained a solid pace of expansion during the first seven years (2000-07) of the current decade. The economy grew at an average rate of 5.6 per cent and 7 per cent per annum during 2000-2007 and 2002-2007 respectively and thus positioned itself as one of the four fastest growing economies in the Asian region along with China, India and Vietnam. Such achievements must be viewed at the backdrop of many epoch-making events that took place on the national and international economic scene during the period. These include: an unprecedented draught causing serious damage to agriculture; 9/11 changing the world altogether; the events of December 13, 2001 leading to the amassing of troops by India on Pakistan's borders; the war in Iraq and subsequent developments thereafter causing oil prices to rise from $30 to $147 per barrel; the earthquake on October 8, 2005 causing extensive damage to infrastructure and loss of lives; and the sacking of the chief justice of the Supreme Court (SC) on March 9, 2007, thus sowing the seeds of political instability. Despite all this, Pakistan's economy continued to gain traction and its economic fundamentals improved during the period. Strong economic growth resulted in a decline in unemployment; the country's debt burden was reduced by one-half; double-digit growth in exports and imports achieved; foreign exchange reserves crossed $16 billion; stability in exchange rate maintained; and foreign investment reached over $8 billion. The present government took charge of the state of affairs on March 31, 2008 after the February 18 elections last year. It inherited a foreign exchange reserve of $13.3 billion; exchange rate at Rs62.76 per US dollar; stock market index at 15,125 and market capitalisation of Rs4,623 billion or $73.7 billion; and inflation at 14.1 per cent. While the government inherited a reasonably sound economy, it also inherited serious challenges that include oil price at over $100 per barrel and massive deterioration in both budget and current account deficits caused by policy inaction of the previous governments on one hand, and rising oil and commodity prices on the other. The challenges required prudent handling of the economy. On the contrary, the government was clueless in addressing economic challenges and started lurching from one crisis to another. For a fair span of time, there were no ministers of finance, commerce, and petroleum. While there was no full-time finance minister, the government continued to change finance secretaries in almost every quarter, showing its flippant attitude towards addressing economic challenges. The ministry of finance was ready with $4 billion transactions for which the kick-off meeting was scheduled to be held on April 23, 2008. The transactions were to be completed and money transferred to Pakistan by June 30, 2008. These transactions were cancelled on April 20, 2008. Who ordered the cancellation? Imprudent or lack of economic management along with the cancellation of $4 billion transactions caused a serious crisis of confidence. The development partners lost confidence in the government's economic management ability. The market reacted to these developments adversely and the country started losing foreign exchange reserves, rupee came under severe pressure, stock market nose-dived and flight of capital set in. Pakistan had no option but to return to the IMF to save itself from default.

With political instability and weak governance already damaging the government, the KerryLugar Bill (KLB) and National Reconciliation Ordinance (NRO) have further added fuel to the fire. All kinds of speculations about the future of the government are floating. Is economic turn-around still possible? The answer is yes provided that the current state of uncertainty is resolved at the earliest. A rejuvenated prime minister must be seen as taking charge of the state of affairs and bringing the economy on the radar screen. He must exhibit commitment to reform and pursue sound economic policies. He must devote substantial quality time to economic matters. He must have confidence in his economic team that must have the capacity to prepare, implement, monitor and prioritise its home-grown economic reform agenda, and align the country's macroeconomic policies with poverty reduction strategy. The government must strengthen the social safety net programme to protect the poor and vulnerable sections of the society from adjustment costs. The prime minister must get briefings on various aspects of the economy on weekly basis, take notes from the presentation and compare them with subsequent presentations. He must take note of the lack of progress and reprimand the ministry. In subsequent meetings with other ministries, everyone will then make it a point to show some progress and by the end of the year, we may see some real progress. The prime minister must meet the leadership of the private sector every two months and make an effort to resolve their issues. Such meetings would revive investors' confidence. Turning around the economy requires strong, sincere and visionary leadership, committed to make a change. The right policies and right people for the job are required for an economic turnaround. If we keep Pakistan's interest supreme and stay the course, I am positive that we can turn around the economy.

The writer is dean and professor at NUST Business School, Islamabad. Email: ahkhan@ nims.edu.pk

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