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Poised for take-off?

Pakistan’s equity market has been performing very well in recent years. Forbes, the US business magazine, in its recent issue, says that Pakistani share market has done better than those of China and India. It adds that the news may come as a surprise to many, as Pakistan has been suffering all kinds of terrorist attacks. Writer Panos Mourdoukoutas explains that terrorist attacks do not usually affect financial markets unless they are disruptive to trade which has not been the case in Pakistan. The World Bank has been supportive of Pakistani economic reforms and has given $1 billion to complete the reform agenda.

Ruchir Sharma, who works for Morgan Stanley, is also considered as one of the influential international investors. In his recent book, Sharma terms the next five year outlook for the Pakistani economy as “very good”. This assessment stands out as the outlook for the entire South Asian region is plain “good”. He says that Pakistani debt is still within safe limits and inflation rate is very low. The rate of annual economic growth at 4.5 per cent is higher than population growth rate of 2.1 per cent. He gives high premium to the growing and young Pakistan labour force. He thinks that even half of the total $46 billion Chinese investment in CPEC projects could take Pakistan from a low income to middle income level.

When I read these two reports, I was overjoyed as a Pakistani. But as a realistic and objective columnist, I think it would be worth its while to highlight certain negative indicators of the economy as well. Pakistan’s total debt is 65 per cent of its national income today. In 2005, Pakistani parliament had passed an act which set a ceiling of 60 per cent on national debt as compared to the GDP. That ceiling should have been treated as sacrosanct, but unfortunately has been breached. The major reason is that the government has failed to raise the tax to GDP ratio. One estimate is that only one third of all potential taxes go to the government kitty. More worrying than the external debt is huge internal borrowing from the commercial banks. Internal debt is almost twice the size of external loans.

Second negative indicator is falling level of exports. Pakistani exports which had crossed $25 billion in recent years are now hovering around $20 billion. Government circles argue that global trade volume has shrunk in the last couple of years. All Asian countries’ export volumes, except Vietnam and Bangladesh, have gone down. But my worry is that Pakistan scores low in competitiveness index. Similarly Pakistani industry is partly energy starved which reduces its exportable surplus. However, the energy shortages are likely to ease considerably by the end of next year.

Third negative indicator of Pakistani economy is low level of foreign direct investment. And this is directly related to the past terrorist activities in and against Pakistan. They say foreign investment is like birds which flock gradually to the places which afford opportunities for food. But if one gun shot is fired, all the birds fly away together. And it becomes very difficult to bring those birds back. This indicates that foreign investors are super sensitive to the security environment and other enabling conditions. These conditions include good infrastructure, energy availability, rule of law and safe surroundings.

A successful military operation against the terrorists is on for almost two years now. Karachi, Lahore and other cities are now perfectly safe places to live and invest. National Action Plan is a comprehensive document that seeks to block funding, recruitment and training of potential terrorists. Pakistan is tackling this threat in a holistic manner. When Chinese investment starts coming in, others will follow suit. Shanghai Electric Power Co. has acquired a big stake in Karachi Electric Supply Co.

I recall, way back in 1960’s, Pakistan was cited as a model developing nation. But then the 1965 war and departure of Ayub Khan changed the whole scenario. But Pakistani polity and industrial base has matured a lot since then. I think several Pakistanis who are now abroad, lured by the right investment conditions at home, will soon return with capital and skills to transform their homeland. Ruchir Sharma’s projection will then come true.