Pakistan’s economy, the hidden threat

By Sanjeev Miglani
As one academic put it, you were likely to see more buyers in the lobby of a Dhaka hotel on any given day than in a Pakistani hotel for the whole year. It has gotten worse in recent years.  In the year ending June 2009, foreign direct investment [3]and foreign portfolio investment was $2.64 billion, the following year it dropped to $2.08 billion and by this year it had slumped to $650 million.
Militant violence, chronic political instability, and the  poor state of government finances with the fiscal deficit running at over 5 percent of the GDP  have turned off investors. And because the deficit is so high and tax revenues so low, the government has ended up cutting back on funding in infrastructure and health in order to pay off its interest payments and subsidies. So while it is  buying time in the short-term, it is  effectively condemning the economy to years of low growth since sustained expansion requires  high infrastructure spending.
The crisis over energy, which has become such a pressing need that Pakistan is knocking on every door including India’s, is the result of decades of neglect.  The Asian Development Bank estimated  earlier this year that power and gas shortages were crimping GDP growth by between 3 and 4 percentage points each year.  The low long-term growth in turn depresses government revenues and creates budget deficits which again lead to less spending to resolve the country’s energy problems.
One glimmer of hope is the giant leap the country has quietly taken to normalise trade ties with India. Overland trade through the divided region of Punjab is set to expand significantly as Islamabad moves to prune a negative list of items for trade and implement Most Favoured Nations status to India despite opposition from  religious parties and militant groups. Until the Partition of 1947 the Punjab was a single economic space and as foreign affairs analyst C. Raja Mohan writes here, [4] linked the subcontinent to broadly what is today’s Central Asia. The chief ministers of the two provinces are driving the change and if it takes off, we are likely to see a similar opening of old trade routes further down the border between the provinces of Sindh on the Pakistan side and Gujarat on the Indian side.
Trade is at the moment a paltry $2.7 billion, not counting the shipments routed through Dubai, but the two governments are targeting to raise the volume to $6 billion within the year. Businessmen think it can hit $10 billion if the restrictions were lifted.     (End)
Courtesy of Column The Daily Star