A recent book on Pakistan calls it a hard country, which it is. However, a better characterization is that it is a hardy country, able to withstand massive shocks simultaneously without collapsing completely. Since 2006, Pakistan has experienced a series of serious simultaneous shocks that few countries have experienced: monumental governmental incompetence, biggest-ever floods, insurgency, terrorism and global recession. Weaker countries have withered in the face of fewer shocks, experiencing double-digit economic contraction, precipitous currency devaluation, astronomical inflation, huge famines and/or a complete breakdown of security. Pakistan has faced all these problems simultaneously without experiencing such serious ailments.

The recently released Economic Survey underscores the seriousness of Pakistan’s predicament but also provides a measure of its resilience in the face of multiple crises. The sole bright spot is a modest surplus of around $750 million on the current account, the first since 2003-04. While exports ($24 billion) lagged imports ($34 billion), the unprecedented $11 billion remitted by overseas Pakistanis generated an external surplus. This helped foreign reserves reach a record level of $17 billion and kept the rupee stable. However, this bright spot may be ephemeral as the threat of an increase in the prices of imported commodities and a fall in the price of the main exports (mostly low-value goods) looms large. Thus, the quantity and quality (more technologically advanced goods which have stable prices) of exports must be boosted.

On the negative side, the real economy grew only by 2.4%, falling short even of the modest official target of 4.5%. The growth in manufacturing and agriculture, both around a quarter each of GDP, was especially disappointing at 1.7% and 1.2% respectively. However, the marginally stronger performance (4.1%) of the service sector (almost half of the GDP) allowed economic growth to marginally outstrip population growth (around 2%). This produced a negligible per capita growth of around 0.4%, though Pakistan still made it into the World Bank’s roster of middle-income countries.

Insecurity, governmental incompetence, energy crisis, floods and global slowdown were the five main reasons for this dismal performance. These factors caused a precipitous fall in business investments– from a high of around 22% in 2006 to around 13% of the GDP. This depressed other GDP components: private consumption as job opportunities decreased, government expenditure as tax revenues shrunk, and exports as domestic production contracted.  The slowdown likely pushed 5 million people into poverty.

The survey also reflects a weak fiscal position. Inadequate taxes collections have made Pakistan’ tax-GDP ratios of around 9% one of the lowest globally. This tax shortfall forced the government to borrow heavily to meet expenditures and increased inflation to around 15%–medium-strength under cold economic logic but painful to bear for the poor. The heavy borrowing increased interest rates (and reduced investments) subsequently as the State Bank tightened money supply to counter the loose fiscal controls. The borrowing also pushed Pakistan’s total debt to around 130 billion dollars or around 60% of the GDP. While this ratio is lower than the debt-GDP ratios of Japan (almost 200%) and Zimbabwe (almost 300%), it still brings Pakistan close to the ranks of heavily-indebted countries.

What wisdom does the government display in the Federal Budget 2011-2012 for dealing with these daunting challenges? Unfortunately, political expediency continues to trump economic and political imperatives. No new sectors (e.g., agriculture) have been taxed and the main focus fiscally is on rationalizing existing tax/subsidy heads and improving the efficiency of the FBR. A resolve is also expressed to reduce the losses of public enterprises by improving their management, which, besides improving the fiscal balance, could also enhance economic growth. Admittedly, increasing taxes is neither easy nor advisable during economic downturns as this can further depress the economy and cause riots. Pakistan’s tax-GDP ratio deteriorated after 2001 after the implementation of the Uruguay round of global trade liberalization. It significantly reduced import taxes that provided a big chunk of Pakistan’s tax collections. That was the time to identify alternative tax sources, especially as Pakistan was then experiencing an economic upturn following the significant increase in external inflows after Pakistan joined the “War on Terror”. Unfortunately, the last government did little to expand the tax base despite being better positioned than the current one.

While several new energy projects are mentioned, many of them are of medium gestation and, as the relevant Minister has recently cautioned, the energy crisis will continue for several years. For enhancing economic growth, the budget mainly refers to the Growth Strategy recently developed by the Planning commission, which lacks teeth. A modest expansion of the Benazir Income Program and salary increases for government employees are the main poverty-reduction strategies. Few other direct measures are mentioned to reduce debt or expand exports.

Thus, while the budget includes several measures to deal with the critical problems, they seem modest compared with the problems. Moreover, their success requires a level of efficiency that this government has not displayed to-date. Nevertheless, these measures and the natural decrease in exogenous constraints could produce a somewhat better economic performance next year.

This picture represents a loud wake-up call for a napping government but also an antidote to the frequent predictions of Pakistan’s imminent collapse. Buffeted with multiple and enormous problems, Pakistan has still avoided complete economic and political meltdown and has in fact maintained positive growth rates and external balance and even slipped, somewhat dubiously, into middle-income status. Western scholars often brood over the consequences of Pakistan’s possible collapse. They should also brood over the consequences of the more likely eventuality of it finally getting its act together.

The writer is a Research Associate at the University of California, Berkeley with a focus on political economy issues. [email protected]

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