The resignation of president Pervez Musharraf, who presided over seven years of steady growth, looks like bad news for Pakistan’s economy. The new government quarrels internally and is increasing taxes and handouts. Inflation has trebled since
Musharraf lost effective control last year, and foreign exchange reserves have fallen 40% since October. Seven years of stable growth may be at an end.
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In 2000, the year after Musharraf seized power, Pakistan’s economy began a period of steady growth at 6% annually, or 4% net of the country’s population growth.
Musharraf’s policies of privatization and low taxes, together with an influx of foreign aid after the 9/11 attacks, appear largely responsible for this. The main economic negative was corruption. Despite this, markets liked Musharrafonomics; Pakistan’s stock market rose tenfold in 2001-07.
Since last year, though, Pakistan’s economy has deteriorated. Inflation, around 8% a year ago, is now 24%, the highest in Pakistan’s history. The stock market is down 33% since April and Pakistan’s international credit spreads have widened from 4.1% to 7.4%.
Gloomy days: Stockbrokers at the Karachi Stock Exchange in Pakistan. The stock market in the country has fallen 33% since April. Photograph: Fareed Khan / AP
Economic growth is slowing sharply, while the balance of payments deficit in the fiscal year to June was 9% of gross domestic product, double the previous year’s shortfall.
That’s not surprising. The new government, a coalition led by the Pakistan Peoples Party, still reveres the memory of Zulfiqar Ali Bhutto, hard-line socialist and nationalising president from the 1970s. Its budget speech in June contained several favourable references to his policies.
The budget reduced food and fuel subsidies modestly, but increased both direct and indirect taxes and introduced a new “Benazir Card” programme of transfer payments.
With both budget and payments balances heavily in deficit, that economic direction seems unlikely to prove fruitful. In addition, the other “pro-government” party, led by Nawaz Sharif — whom Musharraf deposed in 1999 — resigned from the coalition in May.
It only supported the government in hopes of impeaching Musharraf. Now, with that political theatre out of the way, the government must quickly turn its attention to addressing Pakistan’s deteriorating economic situation.