ISAS Working Papers

This Working Paper, the second of a three-part series, examines the performance of Pakistan's economy since 2008. In February of that year, elections were held that brought to power in Islamabad a political party -- the Pakistan People’s Party (PPP) -- which was resolutely opposed to the rule by the military. Its main preoccupation in the first few months of its rule, therefore, was to force General Pervez Musharraf to give up the presidency. This goal was achieved in August when the president resigned. A month later Asif Ali Zardari, the PPP’s co-chairman, was elected to the office vacated by Musharraf. Once in full political power, the party governed poorly. It allowed the country’s economy to slip into a recession that has lasted for five years, the longest in history. The paper suggests that, while some external factors and natural disasters damaged the economy, bad management was the main reason for the economic downturn. Poor governance not only resulted in increased corruption but also in allowing serious electricity and natural gas shortages to take a heavy economic toll. With corruption increasing the cost of doing business and with severe shortages of some vital inputs, there was a significant decline in investment by the private sector. At the same time the country’s relations with the United States deteriorated to the extent that there were calls in America for suspending all aid to Pakistan. The result was a sharp decline in the badly-needed external capital. The country failed to make the adjustments needed in its fiscal policy to compensate for the decline in external flows by increasing domestic resource mobilisation. This meant that public sector investment also declined. The two combined – declines in private and public investments – means that slowdown in the rate of economic growth is likely to persist for some time. In sum, the paper suggests that the economy has been driven to the edge of an abyss from which it needs to be pulled back. That will require concerted action on a number of fronts