WASHINGTON: What went wrong with Pakistan's economy that required it to scrape out the much-reviled "begging bowl" and seek direct assistance from the International Monetary Fund? Wasn't Pakistan one of the emerging market stars on the rise, attracting investments from Gulf funds, and whispered in the same breath as Brazil and Russia, and even India? A newly released letter from two senior Pakistani officials to the head of the IMF contains several answers.
Shaukat Tarin, adviser to the prime minister on finance and economic affairs, and Shamshad Akhtar, governor of the State Bank of Pakistan, wrote to IMF head Dominique Strauss Kahn on Nov. 20, 2008, a letter that outlined Pakistan's fall from economic grace in the last year and its plans for the future. The IMF released the letter, in agreement with the government of Pakistan, on Tuesday. On Nov. 24, the IMF announced a $7.6 billion loan to Pakistan to help it meet its mounting debt obligations and stabilize its faltering economy.
The letter submitted on Nov. 20 began by noting the considerable successes of Pakistan's economy over the past eight years, noting a more than three-fold rise in real GDP from $60 billion in 2000-01 to $170 billion in 2007-08, and a doubling in per capita income during that same period, from $500 to $1,000. "For most of this period, real GDP grew at more than 7 percent a year with relative price stability," Turin and Akhtar wrote.
"The improved macroeconomic performance enabled Pakistan to reenter the international capital markets in the mid-2000. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion (3.8 months of imports) at end-June 2007. Buoyant output growth, low inflation and the government's social policies contributed to a reduction in poverty and an improvement in many social indicators," the two officials stated.
They went on to praise "important structural reforms" that took place during this period with financial support from international financial institutions as the "government expanded the role of markets in the economy, privatized a number of large state-owned enterprises, established market-based regulatory bodies and took steps to reduce the cost of doing business in Pakistan."
The trouble came, however, during a perfect storm of "adverse security developments, large exogenous price shocks (oil and food), global financial turmoil and policy inaction during the political transition to the new government." The two men stated that real GDP slowed to 5.8 percent in 2007-08, reflecting a weaker performance of the agricultural and manufacturing sectors. Meanwhile, inflation soared to 25 percent in October 2008 and the trade deficit widened to about $14 billion or 81 percent of GDP in 2007-08.
The letter, released on the IMF website, is likely to spark debate within Pakistan, particularly among supporters of Pervez Musharraf, who might feel vindicated by the economic success the two senior officials outlined under his term.
The two officials noted that the government's main goals for 2008-09 and 2009-10 are aimed at "stabilizing the macroeconomic situation and restoring investor confidence." It intends to achieve these goals through "significant fiscal consolidation and the SBP will tighten monetary policy to lower inflation and strengthen the international reserves."
They predicted the 12-month inflation rate to decline to 20 percent at end-June 2009, even after taking into account the impact of significant increases in administered energy prices. "Real GDP growth would slow further to 3-3.5 percent in 2008-09 in response to the tightening of macroeconomic policies and a deceleration of growth in Pakistan's trading partners," they wrote.
Tarin and Akhtar said, "The government's medium-term strategy seeks to achieve high sustained growth and significantly reduce poverty, while ensuring external and fiscal sustainability."
IMF officials have been quick to point out that Pakistani officials like Tarin and Akhtar will need to maintain the highest standards of governance and management skill to ride out the storm. They also say that the IMF funds wont be enough on their own.
It is important for the donor community to assist Pakistan during this period," Juan Carlos di Tata, IMF senior adviser on Pakistan, told reporters in a conference call last week, "especially by funding the expanded social safety net and higher spending on development programs. And the IMF stands ready to participate in any donor meeting to provide the economic and financial analysis that could underpin expanded support."
Di Tata said: "In terms of financial assistance, for the FY2008-09 (the fiscal year starts July 1), the gross external financing requirement will be on the order of $13.4 billion. This is a two-year program, so this is only for the first year of the program.
"For the second year of the program, that is for FY2009/10, we are talking about a gross external financing requirement on the order of $12.2 billion. These amounts that I have mentioned are needed to cover the current account deficit for both fiscal years and the maturing short-term debt and the amortization on long and medium-term debt."
