Failure of economic governance

January 16, 2023

In a book I put together two decades ago, the late Meekal Ahmed, one of Pakistan’s most distinguished economists, contributed a chapter titled ‘An economic crisis state’. He had this to say then: “Economic management in Pakistan has steadily deteriorated to the point where the economy has lurched from one financial crisis to the next. At the heart of the problem has been poor management of public finances and deep-seated unresolved structural issues in the economy that bad management and poor governance has exacerbated. The consequences are plain to see: macroeconomic instability, high inflation, poor public services, criminal neglect of the social sectors, widespread corruption, crippling power outages, growing unemployment, deepening poverty and a deteriorating debt profile.”

Meekal also wrote, “An IMF programme gets some reforms implemented as part of its conditionality but as soon as the programme is over or ended by the authorities’ themselves mid-way, all the reforms are rolled back.”

Twenty-three years later nothing has changed. This paragraph could well have been written today. Its summary of the outcome of poor economic governance is an apt description of the present economic disarray. For many decades successive governments, civilian and military, with few exceptions, pursued similar policies that contributed to or reinforced Pakistan’s structural economic problems. In fact, their foreign policy and economic management intersected to produce an outcome in which the country became increasingly dependent on external financial assistance, aid and borrowing rather than finding a viable development path by relying on itself and safeguarding its economic sovereignty.

The pattern of external overreach and internal underreach persists. This has got to a point where securing funds/loans from friendly countries and international financial institutions is now celebrated by government officials and even deemed by sections of the media as major policy successes. Such claims are blind to the ineluctable reality that living off other people’s money is hardly a national achievement. They provide false comfort to the ruling elite but do nothing to resolve the country’s economic problems.

The source of the country’s recurring economic crises is of course its fiscal deficit — a measure of governments constantly living beyond their means, unwilling to raise domestic resources and engaging in unrestrained spending. The fiscal deficit has been the source of persistent macroeconomic instability, high inflation and balance-of-payments crises. Over the decades, the twin deficits of the budget and balance-of-payments were managed by dysfunctional economic policies. Significantly the country’s external alignments fed into and facilitated this.

Living off other people’s money is hardly a national achievement.

In earlier decades Pakistan’s Cold War alliance with the West offered policymakers the means to finance deficits with soft loans. Successive governments — dominated by rural and urban elites — therefore found the way to avoid reforms, raise sufficient revenue or tax themselves or their support base. Dependence on external resources to finance both development and consumption was thus both encouraged and enabled by the availability of concessional assistance as a consequence of the country’s foreign alignments. Cold War assistance accompanied Pakistan’s close alliance with the US, then cemented by military pacts. Then in the 1980s, Western aid flowed as a strategic payback for Pakistan’s pivotal role in resisting and rolling back the Soviet occupation of Afghanistan. 9/11 again turned Pakistan into a front-line state and increased its strategic importance for Washington, which mobilised international efforts to provide financial resources and IMF financing for budgetary support as well as debt restructuring to ease Islamabad’s economic problems.

The result was aid-fuelled economic growth during much of the period of Gen Ziaul Haq’s and president Pervez Musharraf’s governments, which created an illusion of economic progress. ‘Borrowed growth’ may not have had such deleterious consequences if the fiscal space it provided was used to launch reforms to address Pakistan’s underlying structural problems: widen the tax base, document the economy, diversify exports, and boost savings to finance an investment level to sustain an economic growth rate higher than the rise in population. But this did not happen. The availability of external financial resources along with high remittance inflows from overseas Pakistanis simply enabled the country’s economic managers to postpone reforms, ignore the structural problems of the economy and pursue dysfunctional policies. Moreover, once concessional financing began to taper off, it was replaced by expensive foreign and domestic borrowing. This ‘borrowed growth’ was not only unsustainable but came at the enormous price of debt accumulation.

The mid-1980s marked a sharp break in Pakistan’s budgetary history, with revenue no longer matching even the government’s current expenditure. For the next decade and beyond successive governments borrowed heavily to finance not only development but also consumption. In the process, the country accumulated unsustainable debt both by borrowing abroad and at home. This burden continues to cripple the economy today.

In recent years, reliance on the West has been replaced by dependence on close strategic ally China, Saudi Arabia and the Gulf states, who have provided financial help to bail out the country from economic and liquidity crises. Rollover of debt and deposits in the central bank to shore up reserves have been among the ways this has been done. Announcements last week from the UAE and Saudi Arabia are the latest illustration of this. It again underlines the intersection of foreign alignments and financial help to overcome economic crisis. It also demonstrates how governments continue to look outside to rescue the country’s economy when it teeters on the brink of insolvency. That Pakistan is now in its 23rd IMF program is another testimony of this.

The habit of depending on others has become so deeply entrenched in the country’s political culture that there is little if any questioning of this among those in power or for that matter in the establishment whose leaders join in and often spearhead the effort to seek ‘lifeline’ funds from friendly countries. This reflects the failure of economic governance as it involves lurching from one crisis to another with no ability to avert the next one with outsiders seen as stopgap answers to the cash-strapped country’s perennial economic problems. Above all this approach reduces the country to the unfortunate status of a supplicant whose economic survival depends not on itself but on others.