Pakistan’s Political Economy Is Changing – And India Must Take Note

Such is the dominance of geopolitical narratives in South Asia that any positive news from the neighbourhood does not reach us. While thinking about our neighbours, especially Pakistan, images of a country whose economy is in shambles and polity unstable strike us.

Not that these images have changed completely, nor has Pakistan moved on to become a developed economy overnight, but the changes in the neighbourhood are significant. The country now has the potential to transform itself into a stable polity and healthy economy pending a good deal of caution.

The positive signs

In 2013, Pakistan’s economy was on the verge of a collapse. The foreign exchange reserves were drying up, and fiscal deficit was mounting even as the rate of economic growth was slowing down. It was during this turbulent time that International Monetary Fund (IMF) extended a loan of $7.6 billion to help the country stabilise its economy and protect the vulnerable sections of its population. This three-year IMF-supported programme not only helped the country stave off a foreign exchange crisis, it also laid the foundation for macroeconomic and financial stability in the country.

Pakistan, according to experts, can now be classified as a stable economy in view of its comparatively strong macroeconomic indicators. The economy witnessed a 4.7 per cent real gross domestic product (GDP) growth rate in 2016, the country’s highest in the last eight years. Fiscal deficit has also come down to 4.6 per cent from 8.8 per cent. Another sign of revitalised economic activity is the stock market that rose by almost 50 per cent in 2016. These figures might indicate a positive turnaround in Pakistan’s economy, but in comparison to other South Asian countries such as India, Bangladesh, Bhutan and Nepal, Pakistan’s growth rate is still miniscule. If the country maintains its fiscal prudence and executes reforms as suggested by IMF fairly, there is still light at the end of the tunnel.

Promising sectors

The construction industry has emerged as one of the sweet spots for Pakistan’s economy. Government of Pakistan considers it an important driver of economic growth, where a spurt in economic activity has the potential to positively impact growth in allied sectors as well. The boom in the industry is a result of increased infrastructural activities as well as various residential projects that have been initiated to deliver housing solutions to the people. This boom is aided by favourable fuel prices including oil, electricity and coal. The government has also given tax relief to builders to facilitate growth in the real estate sector.

Along with construction, the Information Technology (IT) sector has emerged as a promising sector for the Pakistani economy. In 2015, Pakistan’s IT sector accounted for $2.8 billion, of which services worth $1.6 billion were exported abroad. This is an almost negligible share of a $3.2 trillion global IT market, but the commitment of the Pakistani government to the IT sector signals that this share may increase exponentially.

The model followed by the Pakistani IT industry has helped it cut through problems like corruption, bureaucratic red tape and security challenges. The software professionals in the country seek clients through popular freelance hiring sites such as Elance, Upwork and Fivver. The freelance software professional community from Pakistan is now the third largest in the world. Various estimates put the number of registered IT companies in the country at 1,500.

Technology companies founded in Pakistan now boast of a global profile and presence. An noteworthy example is i2c, a popular payment processing solutions provider founded by Amir Waheed Wain in 2001 and now operating in more than 200 countries. Similarly, another company, NetSol, founded by a Pakistani native Najeeb Ghauri, has a revenue of more than $51 million and clients such as Mercedes-Benz, Volkswagen, BMW, Nissan and Hyundai in its kitty. In an interview, Ghauri admitted that Pakistani youth is not known for their IT skills, unlike the Indian youth. However, they are actually a hidden source of immense IT potential. Government of Pakistan has also taken cognizance of this strategic pool of talent. These efforts have also led to an interest of outside players in Pakistani IT industry as South Korea has extended a loan of Rs 9.2 billion to Pakistan to build its first state-of-the-art multipurpose IT park.

While there are sweet spots in the Pakistani economy such as construction and IT, there are also challenges such as chronic energy issues that hamper growth in all the sectors equally. According to the Asian Development Bank, Pakistan needs to address the energy deficit issue to stay the course of macroeconomic stability and growth.

The CPEC factor

Plenty of hope in Pakistan is riding on the China-led China-Pakistan Economic Corridor (CPEC) initiative. As part of the project, China has invested $40 billion in Pakistan’s economy. Of this amount, $35 billion have been committed exclusively to energy projects and the remaining to roads, railroads and other related infrastructure. Still, a cautious view needs to be taken of the infrastructure projects in the country as, due to a lack of requisite economic activity, the existing infrastructure also lies unused. A notable example is the 20-year-old, 375km-long, $1.2 billion Islamabad and Lahore motorway, which figures as a proud achievement of the Nawaz Sharif government but is hardly used today.

The reservations with CPEC as a game-changer for Pakistani economy are similarly many. According to a section of analysts, CPEC debt-servicing payments might rise to unmanageable proportions for the country, where the current account deficit may become 4 per cent of GDP as against 1 per cent in pre-CPEC year 2015. This might require Pakistan to seek additional support from IMF by 2019. Those defending CPEC as a game-changer are betting their hopes on the returns from the projects once executed.

Foreign investments in Pakistan

The recent economic performance of Pakistan, along with China’s investment through the CPEC initiative, has encouraged investors to look at the country in a new light. Terror attacks, law-and-order problems, power crisis and a fragile political stability still deter overseas companies from choosing Pakistan as a destination for their investments. However, investors have started taking Pakistan’s credentials seriously because its prime backer China has a reputation of committing in the long term. This also reflects in the sovereign credit ratings given to Pakistan by rating agencies such as S&P and Moody’s. Both have upgraded Pakistan’s rating from B- to B and B3 respectively. Besides China, Netherlands, Turkey, the United States and United Arab Emirates are other significant investors in Pakistan.

The interest of foreign companies has also increased in Pakistan’s growing market as they are undertaking mergers and acquisitions. Recently, a Dutch company, FrieslandCampina, acquired a food subsidiary of Pakistani company Engro Corporation. Similarly, Turkey-based home appliances major Arcelik A S has acquired Dawlance, Pakistan’s leading home-appliance brand. The key factor that is working in Pakistan’s favour is the size of its consumer market powered by a rising middle class. As a result, the political economy of the country is also undergoing significant changes.

The changing political economy

Consumer spending in Pakistan has increased by 83.4 per cent as compared to 48.7 per cent in the Asia-Pacific region. This is notable for a country that is otherwise dismissed as a state nearly on the verge of collapse. The rising middle class in the country is driving the consumption spending in the country. Estimates based on income and consumption peg the middle class and upper class in Pakistan to be 84-million strong. This is even larger than the total population size of Germany and Turkey.

The majority of the Pakistani population lives in urban areas, and even 60 per cent of those living in the rural areas draw income from non-agricultural sources such as remittances and services. This middle class is brand-conscious, upwardly-mobile and aware of developments in other parts of the world. A strong middle class might lead us to think of Pakistan’s future as a flourishing democracy with strong institutions. However, caution is the word.

The year 2013 marked the first successful democratic transition from one elected government to another. Experts opine that this rising middle class will pressurise the subsequent governments to deliver public goods, check graft and keep the economy in order. The rise of the middle class might sound like a welcome development, but the country’s polity still remains fragile.

The civil-military divide in the country is fraught with tensions. The action plan to eradicate terrorism, which would have obvious benefits for the economy, has given the military a lot of unaccounted control. The size of the middle class won’t matter if the mullah-military nexus remains strong.

Political economist S Akbar Zaidi notes that the middle class might be a strong consumer base, but the Islamisation of the society has rendered them socially conservative. It seems that military can still co-opt the middle class to seek control. However, let’s remain hopeful of the young Pakistanis’ admiration of democratic values in a rising economy.

Challenges

Amidst all the positive signs, key challenges still remain. One of the major challenges is education. Roughly 77 million people in Pakistan are illiterate. Around 1.5 million young people will enter Pakistan’s job market every year till 2040. The equation between economy and education requires this workforce to be skilled and the economy to create enough job avenues for them.

The irony of the demographic dividend that Pakistan will go through is that youth would emerge as a key driver of economic development; at the same time, economic growth must also translate into jobs for them. Certain other challenges include the country’s international debt, which might rise to a staggering figure of $110 billion. This would eat into the country’s budget by raising the debt-servicing cost.

A healthy GDP growth rate can ensure that this debt-servicing does not cost Pakistan much, but it will again require prudent policies. What is also worrying are the falling exports and external remittances. The external market for South Asian exports and sources of external remittances are anyway drying up.

There is an urgent need for the South Asian economies, especially Pakistan, to reconsider its strategic priorities. This assumes greater significance in view of its main benefactor, China, perfecting the practice of ‘debt-trap diplomacy’. This style of diplomacy involves extending huge loans to developing countries such as Pakistan, which later opens the country to Chinese influence.

While a mix of positives and negatives surround our neighbour, we must remain hopeful of a huge transformation that can alter the political economy of the country in a favourable manner.