Pakistan Economic Crisis Explained (1947 to 2023)

Overview

Just like its politics, Pakistan’s economic crisis is far from being solved. Despite its critical geostrategic location, America’s allyship, and friendship with rising China, Pakistan’s economic situation continues to deteriorate. Since 1947, the common people, or what Karl Marx calls the proletariat, have been reeling from an economic slump, and Pakistan remains a low-income nation.

From roughly 30 million people in 1947 to more than 220 million in 2020, Pakistan’s population has increased quickly. At the same time, Pakistan has had greater average economic growth since independence than the global economy as a whole did in the same time span.

Steady GDP Growth

In the 1960s, the average annual real GDP growth rate was 6.8%; in the 1970s, it was 4.8%; and in the 1980s, it was 6.5%. In the 1990s, average annual growth decreased to 4.6%. From 2000 to 2023, the average GDP growth remained at 4.6%.

Overall, Pakistan had a fast-growing economy until late 1972. Pakistan’s exports were more than Indonesia, Malaysia, and Thailand combined in late 1969. In 1992, Pakistan and Vietnam had equal exports, but today, Vietnam’s exports are nearly $330 billion, while Pakistan’s total exports are only $32 billion.

Three Blunders that Ruined Pakistan’s Economy

Pakistan’s political elite made some blunders that proved disastrous.

• The first slip that seriously dented Pakistan’s economy was the flawed nationalization scheme of Z.A. Butto.
• Secondly, Benazir Bhutto and Nawaz Sharif started heavily relying on the IMF programs, which made it a loan-dependant economy.
• Thirdly, instead of building the local industry as China was doing, Pakistan would rely on easy money coming either from the United States or other political players. Since its independence, Pakistan sells its geostrategic importance to local and international powers. Therefore, it has not been able to develop any major industry or compete in business and technology.

Today, Pakistan’s economy is facing the worst-ever recession in its history. It has only $3 billion in reserves, and it needs over $40 billion a year to service its debt. Its fiscal deficit is around $50 billion, while exports are largely stagnant.

Pakistan’s economy from 1947 to 1958

The initial years of Pakistan were highly turbulent, both economically and politically. Monsoon floods in 1951–52 and then in 1952–53 destroyed the crops and caused massive losses to the GDP. Its GDP growth fluctuated from a record low of -1.80 percent in 1952 to reach an all-time high of 10.22 percent in 1954. In the 1950s, the economy grew by an average of 3.1% per year.

The slow growth was mainly due to the political parties’ game of musical chairs in the early days of Pakistan. The first 11 years saw seven different prime ministers. In the seven years that followed Liaquat Ali Khan’s murder in 1951, the position of prime minister was held by six different people. Mohammad Ali Bogra held the job for the longest time, two years and 117 days, during the troubled 1950s.

Pakistan’s Economy under Ayub Khan (1958 to 1969)

The change in the country’s economy came after 1958 when General Aayub took charge. During his over ten-year dictatorship, he put an end to political instability, restoring investor confidence. Pakistan’s second five-year plan ended in 1965, and it was a huge success. At that time, the Pakistani economy was a model for developing countries.

According to the World Bank, Pakistan was one of the countries that could achieve first-world (developed country) status at the time.

1965 War Slowed Down the Growth

The most significant effect of the war was Pakistan’s general economic slump. The tremendous economic progress Pakistan had seen in the early 1960s came to a halt as a result of the expenses of the 1965 war.

Between 1964 and 1966, Pakistan’s economy was under a lot of stress because defense spending went from 4.82 percent of GDP to 9.86 percent of GDP. By 1971, defense spending had skyrocketed to a staggering 55.66% of total government spending.

Further, many large industrialists in Pakistan had to leave the country. The war also slowed down the growth of industries in the country and also hurt overall productivity of the country. Inflation increased due to the devaluation of the rupee.

However, many people had the opportunity to go to the Middle East. Thus, artificial prosperity started to appear in the country. In simple words, the economy suffered after the Indo-Pak war of 1965 but was soon brought under control, and by 1968 the growth rate was again above 7%.

Pakistan’s Economy under Z.A. Bhutto (1971-1977)

The industry was booming in Pakistan until the 1960s. Names like Isfahani, Adamji, Sehgal, Jafar Brothers, Rangoonwala, and Afrikawala Brothers put Pakistan on the path of sustainable industrialization. The world used to call Pakistan an industrial paradise. Some economists even predicted Pakistan to become the Asian Tiger.

On January 2, 1972, Zulfikar Ali Bhutto started nationalizing large industries as per the manifesto.

• In the first phase, steel, heavy engineering, electrical engineering, motor tractor, power generation, transmission, and distribution, and gas and oil refinery industries were nationalized.
• In the second phase, on January 1, 1974, Parliament approved the nationalization of banks and financial institutions. In this phase, 13 major banks, 12 insurance companies, 2 petroleum companies, and 10 shipping companies were taken into government custody.

The then Finance Minister Dr. Mubasher Hasan said:

“Until yesterday, the banks were in the possession of a few private groups that provided capital to industries at will. Today, we have ended their monopoly and put them under national ownership because the previous government gave most of the power in the industry to a few thieves.”

Dr. Mubasher Hasan

• In the third phase, cotton ginning, rice husking, and flour mills were nationalized around 2000. A nationwide backlash followed, leading to a period of opposition. Among the victims of nationalization were the Sharif family and the Chaudhary brothers.

Z.A. Bhutto’s Privatization was a Big Blunder

Overall, Bhutto nationalized 31 industrial units, 13 banks, 14 insurance companies, 10 shipping companies, and 2 petroleum companies such as Ittefaq Foundry, Pakistan Steels, Habib Bank Limited, United Bank Limited, Muslim Commercial Bank, Bank of Bahawalpur, Lahore Commercial Bank, Commerce Bank Limited, Adamji Insurance, Habib Insurance, New Jubilee, Pakistan Shipbag, Gulf Steel Shipping, Central Iron and others.

Addressing the Lahore Chamber of Commerce and Industry, Zulfiqar Ali Bhutto presented the position that the purpose of nationalizing large industries was to prevent the concentration of capital in a few hands and to encourage small and medium-sized capitalists.

In reality, his decision to privatization was a blunder with far-reaching repercussions. The investors and industrialists started shifting businesses from Pakistan to other business-friendly places such as Europe and the United States.

Rafiq Sehgal, in an interview with the BBC, said, “An investor is the mother of a nation; if the mother dies, the children will cry.” His words proved to be true, and this policy failed miserably. On July 5, 1977, Zia-ul-Haq overthrew the government of Zulfikar Ali Bhutto, and with that, the process of taking more institutions into national custody stopped.

Prosperity Bubble under General Zia

In the 1980s, the country’s government was stable, so the rate of growth started to go up again. The Afghan crisis made Pakistan the most allied ally of the U.S. once again. Pakistan became a cat’s paw of Capitalist America and played crucial in the balkanization of the Union of Soviet Socialist Republics (USSR). The USA and its allies increased the inflow of dollars, which created a prosperity bubble.

Although the GDP steadily grew Zia did not focus on building local small and medium-scale industries. The political and military elite started relying on easy money such as aid rather than improving exports and becoming competitive. The powerful echelons formed a belief that Pakistan had an all-important strategic location and would make the most of it at all times.

Overestimation of Strategic Importance

This overestimation of strategic importance proved a potential mistake and the country failed to increase and diversify its exports, develop local industry (tourism, agriculture, apparel, textiles, sports goods, etc.), build infrastructure, make trade agreements, explore untapped markets, or even increase foreign direct investment. For instance, in 1992, Pakistan and Vietnam had equal exports but in 2023, Pakistan’s exports are $32 billion while Vietnam’s exports are around $330 billion.

The political and military Establishment of Pakistan became disillusioned when the U.S. imposed sanctions in the wake of the Pressler Amendments in 1985. The amendments were a sign that the American establishment had already achieved its strategic purpose in Afghanistan and it had decided to leave Pakistan in the lurch. The flow of dollars dried up and the economy started to tumble within months.

On August 17, 1988, the C-130 crashed claiming the lives of Gen. Zia along with  Chairman Joint Chiefs of Staff Committee Gen Akhtar Abdur Rahman, Chief of General Staff Mohammed Afzaal, the American ambassador to Pakistan Arnold Raphel and senior US military attaché Brig Gen Herbert M. Wassom. It was the end of the 12 years of Zia’s dictatorship as well as the end of artificial prosperity under his rule.

Aid-dependent Economy Became a Debt-based Economy in 1990s

After the imposition of the Pressler Amendments, the aid-dependent economy of Pakistan was starved of dollars. The reserves began to nosedive and the fiscal deficit soared. To tackle this situation, Benazir Bhutto and Nawaz Sharif, instead reduced elite privileges, cutting military spending, and reforming taxation, went to IMF which was easy money.

The aid-dependent economy became a debt-based economy. From 1988 to 1997, Pakistan got 8 IMF bailout packages. Five of these eight programs took place during the PPP administration, while three of them came during the PML-N administration. The fragile governments tried to keep the people happy with temporary measures instead of sustainable development.

But the fact is that the Pakistani economy could never stabilize after that. The rupee continued to depreciate against the dollar. Dams were not built in the country, and cheap electricity was not available. The country was caught in the clutches of IPPs, due to which not only energy became expensive but the circular debt also kept pulling up. A significant portion of GDP would go to debt servicing.

Musharaf Era Brought another Artificial Prosperity

On 14 October 1999 Pervez Musharaf imposed Martial Law and dismissed the Nawaz government. His 9 years of dictatorship did provide some socio-economic stability which gave investors some confidence.

After 9/11, Pakistan’s strategic location again became the center of American interests. International sanctions on Pakistan ended, and the growth rate increased during this period. In 2006, GDP growth was recorded at 8.5%. Musharaf, like Ayub and Zia, did not build a sustainable economy but instead created artificial prosperity as a result of increased inflows of dollars from the US and IMF.

When the PPP government came into power, it berated Musharaf for destroying Pakistan’s economy. Zardari’s PPP continued its legacy and went to the IMF for a bailout package of over $7 billion.

Failed Economic Policies of Zardari-Nawaz-Imran

In 2013, the Nawaz-led PML-N government requested more than $6 billion from the IMF. PML-N did start projects to overcome the power shortage issue, but they were way too expensive. Today, the government has to subsidize electricity, which hangs heavy on the national exchequer. The fiscal deficit also increased as exports remained stagnant at around $22 while imports went up to $66.

In 2013, our exports were 25 billion dollars, which was reduced to $21 billion in 2017. Thus, instead of increasing exports, they decreased. If our exports grew only at 15% per annum. The issue of circular debt also became a potential challenge.

When Imran Khan-led PTI formed a government in 2018, it again went to IMF for another $6 billion program. His economic policies were mainly flawed. He breached IMF commitments only for his political gains, which worsened things.

Now, the PDM government is trying to revive the package, but the public is paying through the nose. The inflation rate has crossed 28%, which is alarmingly high. The IMF is still demanding the government levy more taxes and cut public spending.

Pakistan, on the verge of Bankruptcy

Today, Pakistan’s total budget is 9500 billion Pakistani rupees. It includes Rs 6.755 trillion in taxes and Rs 1280 billion in nontax revenue. Debt servicing swallows over 4000 billion rupees: the circular debt of 2500 billion rupees in the power sector, the 1600 billion rupee deficit in gas, and the 2500 billion rupees of defense spending.

Notable economists like Shabbar Zaidi think Pakistan has already gone bankrupt. Others, such as Akbar S. Zaidi, predict Pakistan’s collapse in the near future if no outstanding reforms are implemented. Even if Pakistan gets an IMF tranche of $1 billion, the issue is far from being solved. Pakistan needs over $40 billion in the fiscal year 2023-2024.

Does Pakistan have the Plan to Overcome the Economic Crisis?

No, Pakistan has no sustainable economic plan. Pakistan still wants to sell its geostrategic location to China, Russia, and the United States. If Pakistan does not develop its local industry, it will become a colony of China.

Explicit conditions may not always be linked to help from donors like China and Saudi Arabia, but there will always be some. For advantageous economic opportunities, like the energy corridor connecting the Arabian Sea to China’s western provinces and the strategically significant port of Gwadar, China will look to Pakistan.

On geopolitical concerns ranging from the Taiwan Strait to Afghanistan and Ukraine, China will also look to Pakistan for assistance.

Pakistan is important to Saudi Arabia both as a source of migrant labor and as a buyer of oil, as well as a Sunni majority ally against Iran. Riyadh will look to Pakistan to assist Saudi efforts in the Persian Gulf and Saudi leadership resulting from its stewardship of Mecca and Medina’s holy sites.

Pakistan may avoid economic collapse in the future, but it is not going to become an economic power in the future.

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