Monday, January 24, 2022

Pakistan Cut Public Debt in Half On Musharraf's Watch in 1999-2008

In 1999, President Pervez Musharraf inherited a massive debt of over 100% of GDP run up by the Pakistan Peoples Party and the Pakistan Muslim League (Nawaz) governments in 1990s. Musharraf's policies not only revived the bankrupt economy but also brought down debt to 52% of GDP by 2007. 

Pakistan Debt to GDP 1995-2021. Source: IMF

PPP Government's 2008 Letter to IMF:

In a letter to the International Monetary Fund in 2008, the PPP government hailed Musharraf's economic record without mentioning his name in the following words:

"Pakistan's economy witnessed a major economic transformation in the last decade (2000-2008). The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07.....the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1).

Savings and Investments:

Domestic savings rate reached 18% of the GDP and foreign direct investment (FDI) hit a record level of $5.4 billion in 2007-8. This combination of domestic and foreign investments nearly tripled the size of the economy from $60 billion in 1999 to $170 billion in 2007, according to IMF. Exports nearly tripled from about $7 billion in 1999-2000 to $22 billion in 2007-2008, adding millions of more jobs. Pakistan was lifted from a poor, low-income country with per capita income of just $500 in 1999 to a middle-income country with per capita income exceeding $1000 in 2007.

FDI in Musharraf years came in many sectors, ranging from telecommunications to manufacturing.
Several mobile phone and Internet service operators built networks worth billions of dollars. Without this telecom infrastructure, there would be no tech industry, no freelancers and no fast-growing tech exports today.

New cement plants met growing demand that more than doubled cement consumption, FMCG (fast moving consumer goods) sector took off to meet demand from growing middle class and production of cars and motorcycles jumped. 

Human Capital Development: 

In addition to the economic revival, Musharraf focused on the social sector as well. Pakistan's Human Development Index (HDI) score grew an average rate of 2.7% per year under President Musharraf from 2000 to 2007, and then its pace slowed to 0.7% per year in 2008 to 2012 under elected politicians, according to the 2013 Human Development Report titled “The Rise of the South: Human Progress in a Diverse World”.

Primary Enrollment Source: Economic Survey of Pakistan

Youth Literacy Rate Source: Economic Survey of Pakistan

Overall, Pakistan's human development score rose by 18.9% during the Musharraf years and increased just 3.4% under elected leadership since 2008. The news on the human development front got even worse in the last three years, with HDI growth slowing down as low as 0.59% — a paltry average annual increase of under 0.20 per cent. Going further back to the  decade of 1990s when the civilian leadership of the country alternated between PML (N) and PPP,  the increase in Pakistan's HDI was 9.3% from 1990 to 2000, less than half of the HDI gain of 18.9% on Musharraf's watch from 2000 to 2007.

R&D Spending Jumped 7-fold as % of GDP 1999-2007 Source: World Bank

Acceleration of HDI growth during Musharraf years was not an accident.  Not only did Musharraf's policies accelerate economic growth, helped create 13 million new jobs, cut poverty in half and halved the country's total debt burden in the period from 2000 to 2007, his government also ensured significant investment and focus on education and health care. The annual budget for higher education increased from only Rs 500 million in 2000 to Rs 28 billion in 2008, to lay the foundations of the development of a strong knowledge economy, according to former education minister Dr. Ata ur Rehman. Student enrollment in universities increased from 270,000 to 900,000 and the number of universities and degree awarding institutions increased from 57 in 2000 to 137 by 2008. Government R&D spending jumped from 0.1% of GDP in 1999 to 0.7% of GDP in 2007. In 2011, a Pakistani government commission on education found that public funding for education has been cut from 2.5% of GDP in 2007 to just 1.5% - less than the annual subsidy given to the various PSUs including Pakistan Steel and PIA, both of which  continue to sustain huge losses due to patronage-based hiring.

Pakistan's High-Tech Exports Tripled as % of Manufactured Exports. Source: World Bank

Pakistan textile exports more than doubled from $5.2 billion to more than $11 billion during the Musharraf years. Exports soared 19.43% in 2001, 20% in 2004, 24.5% in 2005 and 11.23% in 2006, all on President Musharraf's watch, according to "The Rise and Fall of Pakistan's Textile Industry: An Analytical View" published by Javed Memon, Abdul Aziz and Muhammad Qayyum.     

Pakistan Textile Exports Growth. Source: Javed Memon

Pakistan experienced rapid economic and human capital growth in years 2000 to 2008 on President Pervez Musharraf's watch. Savings, investments and exports hit new records and the rate of increase in human development reached new highs not seen before or since this period.  Without this human capital, there would be no tech industry, no freelancers and no fast-growing tech exports today.

Employment Growth in South Asia. Source: World Bank

Pakistan's employment growth was the highest in South Asia region in 2000-2010, followed by Nepal, Bangladesh, India, and Sri Lanka in that order, according to a World Bank report titled "More and Better Jobs in South Asia".

Comparing Per Capita GDP Trajectory in South Asia. Source: The Economist

Until 2010, Bangladesh was a laggard in South Asia region. Its per capita income was about half of Pakistan's. Now Bangladesh's per capita GDP is higher than both India's and Pakistan's. What changed? The biggest change is Bangladeshi leader Shaikh Hasina's decision to stifle the unruly Opposition and the media to bring political and economic stability to the South Asian nation of 160 million people. It has eliminated a constant sense of crisis and assured investors and businesses of continuity of government policies. With development taking precedence over democracy, Shaikh Hasina followed the example of Asian Tigers  by focusing on export-led economic growth of her country. She incentivized the export-oriented garment industry and invested in human development. Bangladesh now outperforms India and Pakistan in a whole range of socioeconomic indicators: exports, economic growth, infant mortality rate, primary school enrollment, fertility rate and life expectancy.    

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Hyder said...

Musharraf got bag full of $$ aid after 9/11. Fixed dollar at rs60 artificially. By end of his rule Pakistan again had to beg to IMF.

Riaz Haq said...

Hyder: "Musharraf got bag full of $$ aid after 9/11. Fixed dollar at rs60 artificially. By end of his rule Pakistan again had to beg to IMF"

US aid to Pakistan increased after Musharraf left. And yet, the debt went up and GDP growth fell.

In 2008, Pakistan received $738 million. In 2012, US aid to Pakistan under Kerry Lugar was $2.1 billion. Yet,the debt went up and GDP growth fell.

All this talk about US aid to Pakistan is highly exaggerated.

US aid to Pakistan has been a tiny percentage (less than 2%) of Pakistan's GDP since the 1990s.

It makes very little difference to Pakistan's overall economic performance.

Akram said...

Lets hold our horses. What FDI are we talking about? Was it banking FDI, was it Dams or electrical - what FDI came in? Was CSF Funds being counted as FDI. Where did that investment go? In the military coffers? I would not jump to a conclusion on this. A few massive sales in Telecom through spectrum selling does not make for some structural improvements for FDI. I think Musharraf's era saw massive public enterprise selling, saw spectrum selling, and saw some Expat capital flowing back in. Those of us living in PK during those years know fully well where the "goodness" came from. It was a credit driven binge (we almost killed the Balance Sheets of our banking industry - when defaults began to happen). Every tom, dick and harry was getting credit cards and mortgages. Household goods like fridges, acs, tv etc, drove consumerism which to-date we are having to deal with. There was no material expansion of manufacturing minus the major export oriented textile industries getting cheap capital. Local manufacturing expanded given loose credit (in terms of motorcycles, cars etc). Yes those were the good old days, but we were setting ourselves by creating an artificial credit bubble, which eventually would have burst into what we have today. The PPP government that followed did pure and simple looting of everything they could find, and then we got caught into the Terror cycle which killed economic activity. NS gov was more or less of the same, slightly better, but still dealing with terror. They however rang massive deficits through borrowing, and were uninterested in balance of payments, while keeping the rupee/dollar parity, thereby creating as semblance of economic normalcy. However behind the scenes the the dollar/rupee stability, was causing huge impacts for the export industry, as inputs cost could not be rationalized with export pricing. They also allowed for free import structures, to allow for lavish expenditures and luxury goods. I might be wrong on the above but having lived through these years, the above is how I read it.

Riaz Haq said...

Akram: "Lets hold our horses. What FDI are we talking about? Was it banking FDI, was it Dams or electrical - what FDI came in?"

FDI in Musharraf years came in a lot of sectors, ranging from telecommunications to manufacturing.

Several mobile phone service operators built networks worth billions of dollars,, new cement plants met growing demand that doubled per capita cement consumption, FMCG sector took off to meet demand from growing middle class, car and motorcycle production jumped several fold

Textile exports more than doubled


The government has identified telecoms as a key sector for attracting overseas investment. Mobilink, owned by Egypt’s Orascom, has uncovered a vast pool of mobile phone users, with the number of customers soaring from one million to 3.7 million in the past 18 months.

“We will have invested $775m in Pakistan by the end of the year and we now control 64% of the market,” says Mobilink’s chairman Zouhair Khaliq. “We are now in the process of raising $200m from export agencies to help fund our $400m investment programme for next year. Our network now covers 350 towns across the country, some without running water or metalled roads.”

This is one business sector in which foreign operators have been piling into the market. Norway’s Telenor and UAE-owned Warid Telecom were recently awarded GSM licences and two Luxembourg-based groups, Instafone and Paktel, are competing along with state-owned Ufone, which holds a 25% market share.

Akram said...

I am sorry to go back and forth on this. The foreign investment in telco and wireless brought FDI. But do you realize how much money goes out from those very entities. Each of these investors as do FMCGs build into their investments guarantees that they are allowed to expatriate profits to their parent countries. I am sure you know of that. So whenever there is investment we must see what the material impact is. I agree deregulation of telco helped drive internet penetration. That was a good thing, but that did bring with it expatriation of foreign exchange. The way to limit that is to make capital easy for local investors. That is where our banking groups suck. They have historically been slush funds for the political class. Instead these banks should have provided capital to local conglomerates under rates that make sense. Lack of that limits our ability to grow locally.

Riaz Haq said...

Akram: "I am sorry to go back and forth on this. The foreign investment in telco and wireless brought FDI. But do you realize how much money goes out from those very entities"

There would be no FDI anywhere in the world without the right to repatriate profits.

Overall, FDI is a good thing, especially in a country like Pakistan where savings and investments rates are very low.

FDI build necessary infrastructure. Without the telecom infrastructure, there would be no tech industry, no freelancers and no tech exports.

With expanding Internet infrastructure and rapidly growing user base, Pakistan is now seeing robust growth in venture money pouring into technology startups. Pakistani startups have already attracted more than $278 million in funding in 2021, more funds than all the money raised by Pakistani startups in their entire history. A recent example is Kleiner Perkins, a top Silicon Valley venture capital investment firm, that led a series A round of $17 million investment into Pakistani start-up Tajir. The startup operates an online marketplace for small store merchants in Pakistan. The announcement came via a tweet by Mamoon Hamid, a Pakistani-American Managing Partner at Kleiner Perkins who led the investment. Last year, Tajir raised a $1.8 million seed round. The company's revenue has increased by 10x since its seed round.

Pakistan's technology exports are experiencing rapid growth in double digits over the last decade. Total technology exports jumped 47% to $2.1 billion in fiscal year 2020-21.

The foundation for Pakistan's digital transformation was laid with the higher education reform and telecommunications deregulation and investments starting in the year 2001 on President Musharraf's watch. With a huge increase in higher education funding, Higher Education Commission Chairman Dr. Ata ur Rehman succeeded in establishing 51 new universities during 2002-2008. As a result, university enrollment (which had reached only 275,000 from 1947 to 2003) soared to about 800,000 in 2008. This helped build a significant human capital that drove the IT revolution in Pakistan.

Please watch the following video presentation for more details on Pakistan's technology startup ecosystem:

samir sardana said...

For nations with a large pop and low cost labour - the only model,is export driven growth.An army general of Pakistan got it,very fast.

In addition,for equity and justice,the export growth has to be in labour intensive industries - which can only be in the textiles sector.There is none else.

Dhaka attained salvation late - but better than never.dindooohindoo

To achieve the export growth,Musharraf invested in education and digi infra.That is what has led to the IT boom in Pakistan today and a surfeit of engineers !

People do NOT realise the MANAGEMENT TALENT POOL resident in the Pakistan Military - especially,when they retire (besides Military ordnance factories)

Like I said in "" on October 4, 2020 at 4:56 PM

The Pakistani Military skills of Strategic and Operational Planning,and the integration of varied technologies/platforms/thought processes,as well as,identification of synergies in operations - can yield exponential gains,to the Pakistan Industry,and the Pakistan Government.

In addition,since the Pakistani Military,is at the cutting edge of AI,Nano,Robotics and Technology - the Way Forward for Pakistan,in identifying the economic,industrial,service sector,Education and agri strategy and policies,to be made by the Pakistani state,for the future - CAN BE CONCEPTUALISED AND EXECUTED THE BEST, ONLY BY THE PAKISTANI MILITARY


samir sardana said...

People complain about Musharraf,causing a credit binge

His consumer credit thrust via banks,made the Pakistani people dream big,and placed them on the path,to achieving their dreams.Cell Phones,Digitisation, Online education etc.,has empowered the Pakistani people.

Consumer credit is a way,to make people realise their dreams - which then,spurs initiative, drive,ambition and enterprise.

While some loans have turned bad - Millions of Pakistanis,have made a huge incremental contribution,to the nations GDP - as they are employed , in gainful economic opportunities - which is due to the stepping stone,of the Mush Credit Binge.

What is the issue with FDI - repatriating dividend and capital ? Capital is subject to a lock in,and dividend is paid out of profits - so how can anyone,have an objection,to FDI or FDI Terms ? If the FDI is in a import substitution or export project,the dividend is paid out from NFE - so what is the issue ?

Besides FDI brings in.large scale dissemination of management best practices,across the Pakistan economy,and starts a domino reaction.

In a nation,where the PKR is depreciating,investors have to be allowed to repatriate dividend,to minimise the impact of FX depreciation,on the principal invested,in the FDI option.

Riaz Haq said...

Pakistan's employment growth was the highest in South Asia region in 2000-2010, followed by Nepal, Bangladesh, India, and Sri Lanka in that order, according to a World Bank report titled "More and Better Jobs in South Asia".

Total employment in South Asia (excluding Afghanistan and Bhutan) rose from 473 million in 2000 to 568 million in 2010, creating an average of just under 800,000 new jobs a month. In all countries except Maldives and Sri Lanka, the largest share of the employed are the low‐end self-employed.

The report says that nearly a third of workers in India and a fifth of workers in Bangladesh and Pakistan are casual laborers. Regular wage and salaried workers represent a fifth or less of total employment.

Analysis of the labor productivity data indicates that growth in TFP (total factor productivity) made a larger relative contribution to the growth of aggregate labor productivity in South Asia during 1980–2008 than did physical and human capital accumulation. In fact, the contribution of TFP growth was higher than in the high‐performing East Asian economies excluding China.

The report argues that South Asia region needs to create a million jobs a month just to keep up with the growth of the workforce. In addition to corruption, conflicts and political instability, the report specifically mentions electricity shortage as a key factor inhibiting job growth in the region. Power sector financial losses across the region are large, resulting from the misalignment of tariffs, the high cost of power procurement, and high transmission and distribution losses. In India the combined cash loss of state-owned distribution companies is more than $20 billion a year, compared with $300 billion of investment needs in 2010–15. The sector deficit in Pakistan is estimated at about $2 billion a year, compared with $32 billion of investment needs in 2010–20.

Riaz Haq said...

#Pakistan #forex #reserves increase by $1.6 billion to $17,336.8 in the week ending Feb 4. Pak received $1 billion from #IMF and $1 billion raised in Pakistan International #Sukuk #Bond issuance. #economy

KARACHI, Pakistan, Feb 10 (Reuters) - Pakistan's foreign exchange reserves increase by $1,609 million to $17,336.8 million in the week ending February 4, compared to $15,727.6 in the previous week, the central bank said on Thursday.

($ billions)
Week ending Feb 4
Previous Week
Held by the State Bank of Pakistan
$17,336.8 mln
$15,727.6 mln
Held by commercial banks
$6,384.1 mln
$6,356.9 mln
$23,720.9 mln
$22,084.5 mln
During the week ended February 4, State Bank of Pakistan received $1,053 million from International Monetary Fund (IMF) under Extended Fund Facility (EFF) program.

Proceeds against Pakistan International Sukuk Bond issuance of $1,000 million were also received in the week.

Pakistan's central bank reserves increased by $1,609 million, after accounting for external debt payments, the State Bank said on Thursday.

Riaz Haq said...

Arab News Pakistan
#OPINION: Over the last three years, #Pakistan’s savings rate has improved from a low of 5.4 percent to 19.9 percent since 2020-- all helped by a robust growth in remittances and a deepening financial system, writes

Riaz Haq
Nearly 4X increase in #Pakistan’s #savings rate in past 3 years is very welcome news for the country’s #economic growth! Savings are extremely important for increased #investment to spur #gdp growth in any country, including Pakistan.

Over the last two decades, Pakistan has not only experienced a chronically low gross domestic savings rate but has also seen the savings rate decline until recently. According to data from the World Bank, the gross domestic saving rates fell from 16.4 percent in 2000 to just 5.4 percent in 2019. Pakistan’s savings rate compares unfavorably with East Asian countries and South Asian peers. Bangladesh and India have seen their savings rates increase over the same period, which in 2019 stood at 25 percent and 28.2 percent respectively.

Several studies show the relationship between the savings rate and economic growth, especially in developing countries. Economist Robert Solow first argued that larger savings result in higher investments and increased production (Quarterly Journal of Economics, 1956). Other economists such as McKinnon (Money and capital in economic development, 1973) and Shaw (Financial deepening in economic development, 1973) further emphasized the causative relationship between savings and economic development. Empirical evidence shows that as income increases with higher economic growth, it tends to also boost capital accumulation. Such favorable conditions help create a virtuous cycle of further investment and accelerating economic growth.
However, it is not always easy to identify the determinants of a society’s savings propensity. The collective spending behavior of households and public and private entities is subject to several interdependent social and economic factors. Literature suggests that a major factor of savings rates is the level of financial deepening in a society, that is, inter alia, the percentage of the population holding bank accounts, the development of financial markets and the diversity in financial instruments available.

Other factors influencing the savings propensity include culture, religion, and demographic factors such as the labour force participation rate and dependency ratio. Pakistan’s high fertility rate and burgeoning dependent youth population does not encourage household savings. The interplay of disparate factors is not always obvious, and yet often converge to affect the direction of the national savings rate. There is a consensus that people with high levels of income have a greater propensity to save and vice versa. However, for this to be sustainable, the growth should be through productivity gains and not consumption driven that is fuelled by external borrowings. If higher incomes do not result in investments in productive capacity, then the long-term savings rate is unlikely to improve and may even decline.

That has been the case with Pakistan where the economy expanded despite relatively low and declining domestic savings rates between 2000 and 2019. Such a growth model was unsustainable because the savings-investment gap was filled by foreign funding, primarily in the form of borrowings. More perversely, the economic growth was largely consumption-driven and masked the structural issue of low savings rate. It has led the country closer than ever to a foreign debt trap where the bulk of new external funding is not deployed in productive capacity but rather to service old foreign debts.