Thursday, 20 November 2008

Pakistan Economy in Meltdown

I haven't really got any time to write a proper blog this evening, so I hope readers don't mind if I bring this article to the notice of those who don't regularly frequent the website of the CWI. This is by Khald Bhatti of the Socialist Movement of Pakistan. In it the comrade looks at what the economic crisis spells out for Pakistan.

The Pakistani economy is facing its worst crisis in a decade, with massive trade and budget deficits, plunging foreign currency reserves and investments, a severe energy crisis, super inflation and capital flight. According to senior economist Qaisar Bengali, “we are on the verge of default and economic collapse. It is a financial crisis and it is very serious. If we are unable to meet our debt repayments, if we are unable to pay for imports, then the wheels of agriculture and industry will certainly come to a stop”. He is not the only economist portraying such a catastrophic scenario; another leading economist, Yousaf Nazar, put it this way; “we should prepare ourselves for the coming economic tsunami. Pakistan’s economic outlook for the next year or two is negative, even if it manages to get the planned three billion dollars in external financial assistance in the next few months”. This is generally the pessimistic mood among the leading independent economists in the country. Some economists are even saying that present economic crisis is the worst in the history of the country.

The Pakistani currency has lost 30% against the US dollar in a year without a single devaluation of the currency taking place. The trade deficit has widened to an unsustainable level of $20 billion. Foreign exchange reserves have fallen from 17 billion dollars to 6.7 billion dollars. This is not enough to pay for imports for even four weeks. The current account deficit has now exceeded 10% of GDP. GDP growth is likely to drop sharply to around 3%, which will imply a drop in the real per capita income of around for 80% of Pakistanis. It was more than 7% in 2007 and 8.9% in 2006. Inflation has risen to 26% (official figures), and food inflation is around 36%. The stock market fell 35% in the last few months – falling from 15,800 to 9,240 points. Foreign investment continues to fall. In 2007 it was $8.7 billion in and has now dropped to $5.19billion in 2008. Foreign portfolio investment declined from $3.28 billion to $41 million dollars in the same period. Overall investment dropped by 9% in one year. In last few months, capital outflow and flight out of the country has increased significantly, as millions of dollars are leaving the country every day. Finance ministry officials put capital flight figures at between 6 and 10 billion dollars in last few months. Both the agriculture and industrial output have dropped.

The textile industry is in crisis and factory closures resulted in the loss of 300,000 jobs in this sector. Textile exports have fallen around 23% in the last year. The suicide attack on the Marriot hotel in Islamabad hit the textile industry and exports badly, as many foreign business delegates canceled their visit to Pakistan.

Based on the latest available key economic indicators in the 25 largest ‘developing’ countries (excluding the Middle Eastern oil producers) in Asia, Africa and Latin America, Pakistan has had the worst fiscal and current account deficit (measured as a percentage of GDP), the second highest inflation rate and the second worst performing currency, when measured in terms of its depreciation against the US dollar, since the beginning of the year. The rapid deterioration of macro economic indicators has exposed the fragility of the Pakistani economy. It has undermined the myth of its “economic progress”.

Amongst all the major ‘developing’ countries, Pakistan’s economy is the weakest and most vulnerable. It needs at least $10 billion to stop its journey into the economic abyss.

Top government officials, including the President, Asif Ali Zardari (pictured) and Prime Minister, Yusuf Raza Gillani, are touring one country one after another to get much needed financial assistance. All these efforts have so far failed. There was big enthusiasm in government circles when the US and Britain announced the formation of a group called “friends of Pakistan” to help the ailing economy. But nothing has happened so far, and now the government has decided to go to the IMF for a bailout package.

It is most likely that international imperialist financial institutions like IMF, World Bank and Asian Development Bank will provide some financial assistance to country to save it from defaulting and going into total collapse. The IMF and World Bank are negotiating a financial assistance package with the PPP-led government. It is most likely that this package will lead to harsher conditions being implemented. This means more attacks on the already impoverished working masses and poor. The government has already abolished the subsidy on food, electricity and other items, as dictated by the IMF, which hit the poor very hard. The prime minister of the PPP government admitted this in a televised press conference. For ordinary people, life has become a struggle for survival with very little hope of relief. Further attacks on living conditions will make the situation even worse for the working class and poor families. The results and experiences of past IMF and World Bank interventions since 1988 clearly show that they may stop the total collapse of the economy in the short term. However, the cost, as always, will be more misery and suffering for the working masses. These interventions in the past have increased poverty, unemployment and hunger and made basic and essential services less effective, but more expensive.

Pakistan is going through a severe energy crisis. Long power failures have disrupted normal daily life for ordinary working people. Power failures, which are known as load shedding, are compounding the economic crisis. They are crippling industries and businesses. People are spending 12 to 14 hours a day without electricity in the cities and 16 to 18 hours in the rural areas. The prices of generators and UPS (uninterrupted power supply systems) have already been doubled. This puts them out of the reach of working class and middle class people. Thousands of workers have been made unemployed because of power failures. The energy crisis has already cost the economy more than $8 billion in 2008.

The present state of the economy has not developed overnight. It is the direct result of the economic policies pursued by previous governments and continued by the present PPP led government and compounded by the current international crisis. The Musharaf-led military regime created many bubbles during its 9 year reign. All these bubbles have started to burst, one after the other. General Musharaf, and his economic team, was headed by the blue-eyed boy of IMF and World Bank, Shaukat Aziz. He was appointed finance minister by Musharaf and then promoted to the post of Prime Minster. The Musharaf regime achieved high growth rates through money- pumping policies. The first bubble was created through the stock market which first burst in 2005 and then again in 2007-8. The regime poured billions of rupees into the stock market and share values started to climb. The big investors and speculators also started to invest and the market index reached an historic high.

The second bubble was created around the real estate business which burst in 2007. Through the speculation, the price of lands and houses rose to unsustainable levels. In some cities the prices went up to 400% and even middle class people were finding it hard to buy a home, or piece of land. In 2007, property prices dropped almost 50% which led to a major crisis in the real estate business that still continues today. The third bubble was created around consumer spending. The regime encouraged the banks to start different schemes to offer cheap loans to the middle class and public sector workers to purchase cars, houses, TVs, refrigerators, air conditioners and other household items. This consumer boom helped the auto and electronic industries to flourish. This spending-fueled bubble started to burst in 2007. Rising food prices, the energy crisis and falling incomes triggered a crisis in consumer financing, as people were finding it difficult to repay loans. Many new supermarkets and retail stores were established during the consumer boom. Now many of these big supermarkets find themselves in a very different situation. According to one local supermarket chain, their sales have dropped by almost 50%. The general manager of this super market chain said “I have never experienced this situation before. Even well off customers who used to buy things in big quantities are now buying according to their budgets and buy less”.

The high growth rate was mainly based on these bubbles and on foreign aid. The US alone provided aid and assistance to the tune of 12 billion dollars since 2002. The IMF, World Bank and ADB (Asian Development Bank) all provided generous loans to Pakistan. Pakistani immigrants in the US also sent billions of dollars in remittances, which were also used to simulate the economy. The regime also used privatisation as a means of collecting more money and attracting foreign investment from the Middle East to boost the economy for a short period of time. The neo-liberal economic agenda and free market economic policies were implemented with full force and vigor. The present economic collapse and severe crisis is the result of these policies.
Super inflation and poverty

According to the official figures, overall inflation stands around 26% and food inflation 36%. But independent economists are saying that actual figures are a bit higher than official ones. This is the highest rate of inflation in the last 3 decades, and has hit millions of working people and the poor very hard. The prices of food items have been doubled within one year. The price of wheat flour has risen from 15 rupees per kg to 36 rupees per kg. The price of one egg has gone up from 3 rupees to 6 rupees. The price of a chicken has risen from 80 to 145 rupees. The same applies to the prices of fruit and vegetables. An average working class family used to spend around 60 rupees to cook vegetable curry. Now it will cost around 120 to140 rupees. Household expenditure surveys indicate that the sharp rise in food prices have had a devastating effect on the poor. According to the Asian Development Bank (ADB), food expenditure makes up for an average of about sixty percent (60%) of the household expenditure for an ordinary family in Pakistan. The ADB also pointed out that a 10% increase in food prices would drive an additional seven million into poverty; a 20% increase. A 30% increase would drive 14.7 million more into poverty. According to this analysis, 27 million Pakistanis have fallen below the poverty line in one year because of the increase in food prices. Nearly 87 million people, out of the total population of 160 million, live below the poverty line. 88% population earns less than 2 dollars a day. On the one hand, more people are falling below the poverty line but at the same time the people already living in poverty are being driven deeper into destitution. According to the World Bank report, 77% of Pakistanis are exposed to food insecurity and the quality of life is falling rapidly. This means that more than two thirds of the population vulnerable.

According to the consumer price index (CPI) which covers the retail prices of 374 items in 35 major cities, in September 2008, transport and communication charges shot up by 40%, food and beverages by 30.9%, fuel by 21.48%, laundry by 20%, textiles and footwear by 17%, education and house rent by16%. House hold furniture and equipment rose by 14% and medical expenses by a staggering 135%. These increases, in just one month, tell the whole story of what has happened in the last year. The prices of basic items have left working class families struggling to make ends meet and they have been forced to cut their expenditure on health and children’ s education. Pensioners, the poor and low income working class families have been forced to spend less on food, clothes, medicines, transport, education, rent and utilities.

The main reason for this rampant inflation is that the government gives a free hand to the cartels of different industries. The big traders and dealers increase the prices according to their wishes. The free market economy runs unchecked over the lives of millions of working class people and poor without any hurdles. The privatisation of state owned industries, services and businesses in last two decades have allowed the private sector to develop monopolies and cartels to take advantage and to maximize their profits. Capitalist greed has pushed millions into poverty, hunger and misery. Capitalism as an economic system bases itself on profits and exploitation. Production under capitalism is not done to meet the needs of the people but to make the maximum profit. It is necessary to end this system of greed, profit and exploitation and to replace it with a system which produces goods to meet the needs of the people. The overthrow of capitalism and the transformation of society along socialist lines will create the conditions in which everyone can have access to enough decent food, decent housing, education, health care, transport and other utilities and services. The nationalization of industries, banks, insurance companies, services, natural resources and other sectors of the economy under the democratic control of the workers would provide the basis for the provision of basic services and utilities to everyone. Humanity would be free from hunger, poverty, exploitation, war, repression and all sorts of discrimination. Neo-liberalism and free market economics have failed to solve the basic problems faced by the working masses, instead they has aggravated the already existing problems. Free market economics has failed because it works only in the interests of the handful of rich fat cats and big business and ignores the needs of millions of people. The problems of the working masses can only be solved on basis of socialism.
The Socialist Movement demands:

* Reduce the prices of food, energy, fuel and transport by at least 50%.
* Stop privatization. Nationalize industry, banks, services, insurance companies and other key
sectors of the economy under the democratic control of workers. No to neo-liberalism and the
free market, for a democratic, socialist, planned economy.
* Abolish feudalism, for progressive land reforms and voluntary collective farming, reduce the
prices of fertilizer, diesel, seeds and tractors by at least 50%.
* For a 12,000 rupee minimum wage, linked with inflation and a 35-hour working week.
* For a government of workers and peasants.


Vancouver realtor said...

I don't like to read such bad news. I have always considered Pakistan being a bright spot on this side of world. Worsening economic conditions are an excellent soil for radicals, which have already grown strong enough. On the other hand, it's also chance for a strong leader, who can make crucial reforms and finally chose the right way for Pakistan...
Wish you good luck!

Phil BC said...

Well I was luck enough to attend the session on Pakistan at Socialism 2008, and it was truly excellent. It dealt more with the problems socialists face in the country and the kind of strategy the comrades of the Socialist Movement have been following.

I do plan to write about it for this blog at some point, but it probably won't be until my next branch lead off, which mercifully lies on the other side of Christmas :)

Robert said...

Well sadly once these countries think back to the money wasted on nukes and think what they could have done for the poor, the leaders will say yes but we needed Nukes we do not need the poor. While India sends Rockets to the moon, the UK paid £825 million in aid to help the poorest, something smells.