The Minister of State for Revenue, Hammad Azhar’s article ‘The Economy in 2019’ is a brave attempt to justify many hard decisions of his government. Do his explanations of a consumption led growth, fiscal ill-discipline, domestic borrowing, exchange rate overvaluation, fiscal deficit and import export imbalance serve the ends of arresting the rot?  This is an over simplification like bringing down the fever with analgesics while not investigating the root causes of the sickness. 

This series of articles dissecting the entire fabric of economic manipulation is based on research. It will appraise inconsistencies that must be addressed. This is the only way forward else moths will continue to devour from within. Treating apparent symptoms without knowing the root causes will yield no results. This perception is exploited by the opposition, segments of media, desi liberals and ignorant for vested agendas. The people must know the truth. 

Since Pakistan Tehreek-e-Insaf was created to check these wrongs that began to surface in 1996, it is imperative that the party look back at its founding motivations and form visions for futures.  These were the wrongs party talked about till 2011. Like the game of cards, do not play the card that helps the opponent. Keep the trumps and control the game. 

The explanation that “growth was financed by short term debt instruments and stifling of investment climate” is partially correct. But the complete explanation runs much deeper into history. An objective appraisal will not only make governance smarter but also help identifying individuals and organisations, state and non-state actors that have brought Pakistan to this sorry state of affairs. 

Converting local growth to consumerism is an economic science that does not happen in a single tenure.  Therefore, a deeper dig at how the economy was manipulated is necessary. In case of Pakistan it began with Economic Reforms Act of 1992. This is when the dynamics were set. 

Growth patterns of Pakistan’s economy since 1992 indicate consistent low domestic growth whenever PMLN came to power. In each case, agriculture and small scale manufacturing sectors, the major contributor to GDP showed a sharp decline. Devaluation for export remained a common denominator without any positive results. 

Whenever PPP came to power, there was an improvement in the agriculture. Unlike past tenures, PPPP government led by Asif Ali Zardari a beneficiary of NRO prepared the grounds for the next PMLN government. 

Though successive PMLN governments and PPPP, continued to depress home led growth, it may be hard to digest, that the worst economic performance was witnessed in 2003-2008. This is despite the fact that during this period, Pakistan’s economy broke through the shackles but was conditioned to sink. The up and down effect is like a thriller. 

During the 13 year economic quarantine (1989-2002), the growth, inflation and poverty lines remained static while parallel economy grew and sustained the lower middle and poor class in terms of jobs and subsistence. Beginning 2000, the State Bank of Pakistan became very vigilant on monetary exchange markets in Pakistan. The Rupee-Dollar parity stabilised. 

Under the pricing mechanism of 1994, IPPs with tax exemptions recovered investments and begun remitting profits and outsourcing costs abroad. When sanctions were lifted and debt rescheduling came through, economy accelerated. By 2002, overseas worker’s remittances and balances in the banking system jumped from $ 900 million to $ 4 billion. Pakistan had over 13 Billion $ with the State Bank and 4 Billion in private Banks. The Rupee began to appreciate.

Pakistan was moving on very fast wheels. Something had to be done to arrest this steep ascent.

The basic economic theory states that any country in a trade deficit must regard unexpected and non-fundamental appreciation of domestic currency as a boon to be used for cheaper imports and resetting of import priorities. This meant reducing import inputs used for value added exports. If the trend continued, the deficit would be bridged and crossed. The government of Prime Minister Shaukat Aziz decided to make imports more expensive. 

Few in Pakistan realise Pakistan’s energy consumption is also import dependent. A strong rupee would have lowered the cost of fuels making energy cheaper. Also factorise that the IPPS that remit profits abroad do so in Dollars. Energy and mobile phone costs in Pakistan also figure in Pakistan’s import bill for inputs and remittances of profits abroad. A strong rupee meant lower imported energy costs and phone calls; but that wasn’t the priority. 

Surprisingly, rupee was apparently devalued from 57 to 65 to please exporters. The exports never rose. This was the apparent explanation not for the exporters but to tie strings and knots to the growing economy that could be manipulated later. 

By 2003, Pakistan had two different interest rates. The rupee shot as high as 17% while foreign currency accounts were static at 2%. Consequently, budgetary resources were to be strained to cough out the difference. This was a bad and treacherous practice. 

By 2003, the State Bank of Pakistan had run out of the mopping up and sterilization capacity. This was a deliberate surrender. Rupees one trillion were left in the banking system to restore the parity of rupee to dollar at 2%. The negative fallout of this floating 1 Trillion equalled the entire long term savings of Pakistan since 1965. This money floated around like a monster. The banks’ profits in a single year jumped from 30 billion to 100 billion because they could now lend retail at 14% while paying the depositors 2% slumping deposits. Consumer led growth had arrived. 

This situation led to the third fatal error of calling it ‘Trickledown Effect’. This model had already failed in ASEAN and led to crises. Most of the growth during this period was consumer led; a false notion of wellbeing. 

The collection of Sales Tax through a largely consumer cycle gave legitimacy to an otherwise regressive tax regime. It started as a VAT and was abandoned by FBR in 2000-2001. It scared the small time entrepreneurs in the manufacturing sector. Coupled with higher import costs, this backbone of Pakistan’s very strong unregulated economy was poised to close production and change tracks. Small scale production gradually closed making way for cheap Chinese imports. Indirect taxes out gunned the direct taxes. 

A situation was created in which any remittances into Pakistan could be grabbed back through the rising import bills and short term bubbles of consumer prosperity. 

Barring two short stints by PPP and one in 1999-2000, nothing has ever been done to improve agriculture since 1992. This is while the upstream agriculture industry has benefitted from exemptions, lower tariffs and subsidies. There is zero trickledown. As a result agriculture as part of GDP has consistently dropped. 

This manipulation continued till the economy suddenly sunk in 2007. It was the year of crises Pakistan survived. This included the judicial movement, assassination of Mohatarma Benazir Bhutto, Lal Masjid, defanging of President Musharraf and renegotiation of NRO not by President Musharraf but by his chosen military chief. This is also the year when gas, wheat, sugar and fertilizers suddenly disappeared. This was the first coordinated assault.

What PPPP and PMLN did from 2008-18 was continue the trends of 2007. It is no coincidence that statistics of circular debt, public debt and losses of Pakistan suddenly started ballooning and continue to do so. This was the second coordinated assault. 

Knowing that they had no chance in elections 2018, PMLN overvalued the rupee that has led to present devaluation crises. This was the third coordinated assault in concert with global geopolitics, Pulwama, FATF and 1267. 

The present government will make no headway till it identifies all culprits attempting to sink a ship since 1992. This includes important ministries, regulators, chairmen FBR, governors of State Bank and business cartels. This is when the actual riposte could be launched. 


–To be continued…..