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Musharraf’s mirage

The Pakistan, general is back, and this time not on horseback. Since he has offered to take us back to the Pakistan that he left behind, perhaps it’s a good idea to recall what the country looked like back when he made his unceremonious exit.

The Economic Survey of Pakistan for fiscal year 2007 and 2008 made mention of the “large fiscal slippages” in that year, noting that the budget deficit was likely to come in at 6.5 per cent of GDP, against a target of 4.5 per cent.

The reason was “subsidies rising to an unsustainable level” with power tariffs and fuel as the main culprits and an “extraordinary increase in development spending”.

Continuing, the survey lays out the consequences of policy failures in that year: “Government borrowing from the State Bank of Pakistan has reached an all time high, leading to excessive monetary expansion and thus becoming one of the principal sources of inflationary build-up in the country. In other words, financial indiscipline during the year, mainly on account of political expediency, has already caused severe macroeconomic imbalances, for which Pakistan is likely to pay a heavy price in terms of deceleration in growth and investment, and the associated rise in poverty; the widening of current account deficit and the attendant rise in public and external debt; a loss of foreign exchange reserves and the associated pressure on the exchange rate, and most importantly, higher inflation and the accompanying rise in interest rates.”

So in the final year of his reign, the general’s government succumbed to “political expediency” and abandoned all semblance of fiscal responsibility, commissioning enormous increases in “development expenditures” which in an election year basically means racketeering to buy votes, and record high printing of currency notes. It laid the foundation for the double digit inflation that hit us in 2008, as well as the rapid decline in our foreign exchange reserves which sent the country back to the IMF by November of 2008.

How could it all come crashing down so fast? After all, hadn’t the general’s government presided over some of the highest growth rates that Pakistan had ever seen?

There were two important narratives about the general’s growth rates. One was the official narrative, peddled by his government in its public pronouncements. This narrative went something like this:

“We inherited a government ruined by a decade of mismanagement from civilian rule. We implemented the right policies, brought the fiscal house back in order, restored the country’s creditworthiness and thereby laid the foundation for growth. Once investor confidence was restored, through continuity of policy and clean governance, investment poured forth and Pakistan experienced its highest ever growth rates.”

In a time when incomes rose rapidly, the stock market spiralled upwards creating a wealth effect of its own, when the streets were cluttered with billboards enticing everyone to spend on lavish new imported goodies, when the banks were chasing you with money to lend against little more than a signature, when dinner conversations reminisced about the 1960s, when every week brought new rumours of another powerful global brand that was interested in setting up an assembly line in Pakistan — remember when Porsche and Mercedes were rumoured to be in talks to set up facilities here? — the giddy optimism of that era swept all before it.

But it wasn’t to last. Amidst the merrymaking and partying and mushrooming “event management” companies that hosted massive raves in country farmhouses with imported bartenders and DJs, there walked a grim bunch of naysayers.

“It won’t last,” went the other story. “It’s all cosmetic, fuelled by cheap liquidity, itself the product of American largesse and excessively accommodative monetary policy.” The naysayers built their case thus:

“Pakistan is receiving record levels of inflows from the international community in return for its support in the ‘war on terror’, and this money is fuelling a bubble economy. The whole thing will end in a terrible hangover: high inflation and a balance of payments crisis, as the monetary build-up works its way through prices and the growing current account deficit eats up your reserves once the concessionary inflows inevitable dry up.”

The speed with which the entire growth miracle of the general unravelled is the clearest vindication of the naysayers’ version. In the final weeks of the general’s reign, as the curtain dropped on the mirage with which he had kept the country distracted, his minions took to the practice of repeating a few lines over and over again on the air to salvage the ever diminishing kernel of credibility from the whole affair.

“Pakistan attracted $9 billion in foreign investment last year,” declared Salman Shah, caretaker finance minister who had mirages of his own to pursue. He cited the case of a domestic bank that had found an equity partner from Malaysia which had pumped in a little less than a billion dollars as an example of the government’s success. He gave the example of Merrill Lynch, which had released a comically bullish report on the prospects of Pakistan’s economy, arguing that Wall Street firms were famous for being thorough in their research, and this report was a vote of confidence by Wall Street in the government’s policies.

Of course the equity partner in the domestic bank lived to see the value of his investment plummet when the stock market unravelled, and found himself holding the disempowered end of the bargain when he was kept out of important decisions such as senior staff appointments.

And of course Merrill Lynch went bankrupt shortly afterwards, largely on account of foolish investments made in worthless assets, and was sold for a pittance to the Bank of America. So much for Wall Street’s vote of confidence, so much for the famous foreign investor from Malaysia.

Today the general is promising to take us back to this time of mirages. The only thing one can say in response is: thank goodness he’s asking for the privilege to do so, and not snatching it!

The writer is a Karachi-based journalist covering business and economic policy.


Khurram Husain, "Musharraf’s mirage," Dawn. 2013-03-28.