February 7, 2013

Seeds of Unrest in Pakistan’s Economy

A growing economic crisis is likely to ratchet up the country’s political, security and social tensions and complicate relations with India

By Bruce Stokes, Director of Global Economic Attitudes, Pew Research Center

Special to Business Standard

The news out of Pakistan is unrelentingly bad. Terrorist bombings have become a regular occurrence. Friction is mounting between the military, the judiciary and the civilian government. Recent confrontations with India on the Line of Control in Kashmir have ratcheted up tensions.

These headline-grabbing events obscure a more insidious problem: the profound economic challenges facing Pakistani society. These conditions both nurture and aggravate the country’s security, political and social troubles. And this economic malaise is worsening, thus complicating India’s relationship with its neighbour.

The Pakistani people are deeply troubled by the plight of their economy and their own economic prospects. With the Islamabad government widely expected to ask the International Monetary Fund (IMF) for a new aid package this year, the nation’s economic challenges may soon become topic number one in the global discussion about Pakistan’s future and the implications of its future for its neighbours.

Delhi has long recognised this situation and attempted what it could to cope with it. But Pakistan’s economic troubles may be entering a new phase, with profound social and political implications. Even as the Indian government attempts to revive domestic growth, it faces economic dislocation on its border that may demand more and more attention.

Pakistan’s economy is troubled. “Deep-seated structural problems and weak macroeconomic policies have continued to sap the economy’s vigour,” the IMF’s executive board concluded in late November 2012. Economic growth over the past four years, after adjustment for inflation, averaged 2.9 per cent annually, and is projected to be 3.2 per cent in 2012-13. That is insufficient, says the IMF, to achieve significant improvement in living standards and to absorb the rising labour force.

In addition, prices are rising about 11 per cent per year. The government deficit was 8.5 per cent in the last fiscal year and Islamabad may miss its Budget deficit target this year by a significant amount. The IMF expects foreign reserves this fiscal year to be half of what they were just two years ago, a warning sign of waning investor confidence and a deteriorating international economic situation.

How the IMF will react to a Pakistani request for help is unknown. But key IMF officials are privately dubious of Islamabad’s ability to make necessary reforms. They worry about throwing good money after bad. They acknowledge, however, that ultimately a loan could be driven by geopolitical, and not economic concerns.

India may actually be able to help. A new study by the Indian Council for Research on International Economic Relations estimates that freer trade between India and Pakistan could increase cross-border commerce tenfold to $19.8 billion.

Until aid from the IMF or greater trade with India arrives, the people of Pakistan remain extremely downbeat about their economic plight. Roughly nine in 10 say the economy is bad, including a majority (64 per cent) that thinks it is very bad, according to the 2012 Pew Global Attitudes survey. Just nine per cent rate the economy positively.

There has been a sharp decline in economic ratings in Pakistan since the beginning of the global economic recession. In 2007, 59 per cent said the economy was doing well; by 2008, this percentage had dropped to 41 and has continued to fall since then. In fact, the 32 percentage points decline in those who rated the economy as good since 2008 was one of the greatest among the 15 nations for which the Pew Research Center has comparable data.

Moreover, a plurality (43 per cent) in Pakistan believes the economy will only worsen. This includes nearly a quarter (23 per cent) of the population who think it will worsen a lot.

Most Pakistanis feel this economic pain personally. Their assessment of their own economic situation is down 19 percentage points since 2008. Only 38 per cent say they are better off than their parents. More than half (57 per cent) say they are worse off than five years ago. And 65 per cent say it will be very difficult for young people today to advance economically.

People in the Punjab are particularly downbeat.

About three in four (74 per cent) Punjabis think Pakistan’s economic situation is very bad, far more than in Sindh, Baluchistan or Khyber Pakhtunkhwa. Moreover, 64 per cent say they are worse off than they were five years ago. And about a quarter (26 per cent) believe that the country’s economic situation will worsen a lot in the year ahead.

Men and people in urban areas are also dispirited.

Men (49 per cent) are more likely than women (36 per cent) to say the economy will worsen. They are also more likely to believe that it will be difficult for a young person to do better than their parents (91 per cent for men, 80 per cent for women). And men (62 per cent) complain more than women (52 per cent) that they are worse off financially than five years ago.

Gender gaps of such magnitude are rare in many economic surveys and may be one source of male frustration and radicalism in Pakistan.

Moreover, people living in Pakistani cities (51 per cent) are more likely than those living in the countryside to say the economy will worsen (38 per cent).

Economic attitudes also divide somewhat along party lines. Members of the Opposition, Pakistan Muslim League-Nawaz and Tehreek-e-Insaf, are more likely than Pakistan People’s Party members to believe that the economy is in very bad shape. They are also more likely to believe that their conditions are worse than they were five years ago.

Unemployment is one of the public’s major concerns. Nine in 10 say a lack of jobs is a very big problem, more than say the same about corrupt political leaders (78 per cent) or unrest in Kashmir (68 per cent), although a lot has happened since the survey was fielded in Spring 2012.

Issues of life and death, war and peace will always trump economic news emanating from Pakistan. But as the dire nature of Pakistan’s economic problems becomes more apparent and the level of public frustration grows – feeding political and social unrest, especially among men and people living in urban areas – the economy may take centre stage in the global discussion about what to do about the troubled Pakistani state. The people of Pakistan would say this refocusing is long overdue. And Indians may well want to pay more attention.