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Pakistan: A Nation Unwilling To Fully Let Go Of A Troubled Past

A view of I. I. Chundrigar Road of Karachi the Financial Capital of Pakistan

Pakistan this week has for the first time successfully test fired its surface to surface missile, that will be capable of carrying multiple nuclear warheads. The demonstration reminds neighboring countries and the world community at large, what a dangerous place South Asia remains. From the founding of the nation in the middle of the 20th century, an enormous amount of money has been spent on defense.

Pakistan is the second most populated country in the Muslim world, after Indonesia. It has grown into a nation of more than 200 million people. It is the 6th most populous state in the world. Pakistan remains a nation of great promise, where development has been stifled due to social instability, mismanagement and corruption, that permeates throughout the economy and government.

Another ongoing problem for Pakistan is terrorism. Some 60,000 citizens have been killed since 2006 alone. This chilling reality precludes many foreign firms, in considering the country for future investment.

Partition of India and the movement of refugees in 1947 and 1948.

Pakistan was founded as an Islamic state, when independence and partition arrived in 1947. The nation was borne in violence, as the hastily drawn border found countless Muslims in the region living in India and a similar number of Hindus living in Pakistan. As the population transfer preceded, civilian fighting broke out and numerous individuals on both sides, were injured and killed.

To make matters worse for the future relations between Pakistan and the far larger neighbor to the east, that would soon comprise independent India, was the fact that the former would be divided into two distinct parts. East Pakistan was geographically located over 1,000 miles through Indian territory.

This untenable situation would eventually be solved through a civil war, and the later appearance of the nation of Bangladesh in 1971. The only unifying feature of the two parts of the country had been religion. In the end, this failed to keep the country together.

In addition, as the British colonial period finally ended, there was a lack of clearly defined borders in the areas of Jammu and Kashmir. It has brought endless conflict between India and Pakistan, that continues to this day.

Pakistan’s incumbent Prime Minister Nawaz Sharif with his Indian counterpart Narendra Modi.

Tensions between the two countries over the last year, have escalated. Last September, terrorists from Pakistan attacked an Indian army base in Kashmir. The incident led to the death of 19 soldiers. As a result, the armies of both India and Pakistan are on high alert and exchange fire on a daily basis along the disputed border. Civilians and soldiers are being killed regularly on both sides.

These circumstances seem to be clearly on the minds of many politicians in Pakistan, as they consider the future of the country. The hostility towards India, has been a mainstay of their foreign policy for the last 70 years.

Prime Minister Nawaz Sharif has been in power since June of 2013. He has been in office twice before back in the 1990’s. His second term which ended in 1999, unfortunately witnessed rising unemployment and record foreign debt.

His tenure at that time, was exacerbated by his insistence in moving forward with Pakistan’s first nuclear tests. These were in supposed response, to the second round of such tests in India. It brought a suspension of foreign aid from Western countries and a capital flight by investors.

Nawaz Sharif meeting with conservative intellectuals of Pakistan in Sindh Province, c. 1990s.

The Prime Minister responded by freezing the country’s foreign exchange reserves, which only made the financial and economic situation in the country, far worse.

He would also battle with the judiciary and later the military as well. Sharif’s term in office would later be cut short, when the military leadership decided to oust him. He soon saw himself exiled to Saudi Arabia in short order.

Mr. Sharif’s third term as Prime Minister, has been more successful. He has become more of a centrist socially. There also has been more economic stability at the macro level. However, critics insist that it is due to extensive loans from the IMF (International Monetary Fund) and investment deals with China, that are worth billions of dollars. It has in turn, allowed the Chinese government substantial influence inside Pakistan.

Prime Minister Sharif is also facing increasing criticism, over rising sovereign debt. Future governments will have far less flexibility in spending, as a result of this liability.

Sharif with the Army Chief with Qamar Javed Bajwa.

Sharif has a strained relationship with the military. He originally opposed the armed offensive, to deal with extremist groups in the porous border area of northwestern Pakistan. The 2015 assault became necessary as it became increasingly clear, that the central government had lost any real authority in the region.

Terrorism and insurgency movements have made investors far less than enthusiastic about Pakistan. This is true on both the domestic and foreign level. This has prevented the economic boom, that the government has been planning for in years past.

The Sharif government has experienced some economic successes. Despite the recent fall in total exports, Pakistan has avoided a balance of payments crisis. However, a large part of this had more to do with lower oil prices, rather than new initiative. It did of course, create an environment for a smaller trade deficit.

On the domestic front, the government has also been successful in lowering the budget deficit. The shortfall has dropped from 6.4% in 2013 to 4.3% in 2016. The progress made in government spending has lead to an upgrade in Pakistan’s debt, at least in the short term.

Government officials were finally forced to cut consumer energy subsides, in an effort to rein in public expenditures. The move although necessary, has been widely unpopular with the citizenry.

Area controlled by Pakistan shown in dark green; claimed and controlled region shown in light green.

The push to expand the tax base is only beginning. It is estimated that only 0.6% of the populace, actually contributes in the form of income taxation. Previous governments for the most part have demurred, from putting additional levies on the wealthy. It can easily put a political leader in a vulnerable position, among the elites of the country.

Unfortunately for the political stability of Pakistan, the family of the Prime Minister is under investigation by the Supreme Court, for money laundering operations and a number of contradictory statements. The Panama Papers seem to indicate that his family hid wealth, in a number of overseas accounts. This was supposedly done, to avoid paying income taxes.

The aforementioned situation clearly demonstrates, the pervasive problem of corruption and the lack of transparency, among the most powerful in Pakistani society. Transparency International rates the country a dismal 117 out of 168 in overall corruption.

The nuclear armory of Pakistan is most likely somewhere around 100 missiles, that can be called on during a military crisis. They all have made India, as their target in the guidance system. To be fair, many of the corresponding Indian missiles are aimed at Pakistani targets. At this point that both sides have this destructive capability, probably prevents a full scale war between the two nations.

Signing of Pakistani Instrument of Surrender by Pakistan’s Lt.Gen. A. A. K. Niazi in the presence of Indian military officers in Dhaka Bangladesh on Dec 16, 1971.

Since independence, India and Pakistan have been involved in four wars with each other and one undeclared one. Each time, Pakistan came out of these conflicts on the losing side, despite government propaganda.

In the last war which occurred in 1999, there was at least an acknowledgment that Pakistan suffered over 4,000 casualties and had indeed lost. It would be Sharif himself at the time, that admitted the whole military operation had ended in failure.

In the subsequent years, there have numerous skirmishes and incidences, that have been largely confined to the border regions. However, a number of terrorist outbreaks in India proper, have been attributed to the support or at least acquiescence of the Pakistani government. This has been strongly denied by the latter.

Prime Minister Sharif continues to measure his success partly on the number of infrastructure projects that are funded and later built. He and his party believe that investment in these undertakings, remain an unfailing way of boosting the domestic economy and maintaining public approval.

National Highways, Motorways & Strategic Roads of Pakistan.

The problem with this approach apart from the massive cost involved, is that many of these monumental projects, add little to the productivity and growth of the overall economy.

The equivalent of tens of billions of dollars, have been spent over the past couple of decades on numerous infrastructure plans, that have provided rather poor returns.

The Prime Minister himself, often boasts about the construction of the country’s first motorway that was completed back in 1997. Put into service when he was in office, the $1.2 billion USD (United States Dollar) 233 mile road, links Islamabad with Lahore. The problem with the hugely underutilized highway is that it basically duplicates, a similar route known as the Grand Trunk Road, that is not only 55 miles shorter, but costs far less to travel on.

As part of his 2013 campaign, Sharif promised many more such projects, including a bullet train that would connect Karachi with Peshawar. At some 840 miles, the distance traversed would have allowed a traveler to go from the coast to the northern part of the country, in a fraction of the present 21 hours needed by car.

Artist depiction of the new Islamabad Airport.

Of course the question remained, was this extravagant expensive project even needed? The railway line currently servicing the two cities, allows one to make the trip in just over 32 hours.

It is only recently that the government finally announced, that the bullet train would not be constructed after all. Why? Because there is no real demand, for such a project. People who might wish to use the service, would not of been able to afford the fare.

The present government is rushing to complete a host of other projects before the next election, which is about 18 months away. These would include a metro line in Lahore and a new airport. The latter being built in the capital city of Islamabad, is likely to remain underused like many other airports across the country. There are just not enough passengers traveling by plane, to justify the expense incurred through construction at this time.

Sharif is now investing much political capital, for a huge new infrastructure project. It is known as the $46 billion USD China-Pakistan Economic Corridor (CPEC). A large portion of the undertaking is being financed through commercial loans which unfortunately, will saddle the country with even more debt.

On November 1st, 2016, Pakistan and China kicked off first trade activities under the China-Pakistan Economic Corridor project.

The CPEC is the answer to the idea, in making Pakistan part of a developing lucrative new trade route. It will connect the western regions of China, to the Arabian Sea. There will be new and upgraded roads, rail lines and a deep water port on the coast.

Again, the government of Pakistan is looking far into the future. Many of the new transportation facilities being planned, will be vastly under utilized in the short term. They will need to be operated and maintained, which will create another drain on government resources.

While money is lavishly poured on these aforementioned projects, government support for education, healthcare, sanitation, water supplies and other sectors, are totally inadequate. More investment in these areas, would vastly improve living standards for everyday citizens. It would also move the country further towards more even development, rather than huge redundant construction projects.

The difficulty is that these more mundane expenditures, cannot be measured as easily. They do not make news. There is no opportunity for a public ceremony, to emphasize the role of the leading politician to take credit, when they go into operation or make improvements.

Main industries by region in Pakistan.

In addition to basic necessities, investors both domestic and foreign, are more interested in the enforcement in what is described as the rule of law. This matters far more, than a new road to the interior or upgraded rail lines across desolate areas of the country.

Included in CPEC investment, will be money for a number of power plants. These are indeed needed, since Pakistan does have a chronic short fall in the supply of electricity.

The new $21 billion USD Chinese backed investment in developing and upgrading the electric grid throughout the country, is infrastructure improvement that has indeed become quite necessary. The endless brown outs and blackouts throughout the country have not only become an inconvenience, but have negatively impacted businesses dramatically.

It has been estimated that there has been a loss of 2% of annual growth, as a result of power shortages.

The goal is to raise the electrical output by some 60%, within two years. A new nuclear power plant is coming on line and a new gas pipeline, will soon be fully operational. The latter will provide more gas to the interior and in the north.

Of course, delivery of the added coal and natural gas that will be needed for these generators of power, is an additional issue that has still not really been totally solved.

Tarbela Dam in Pakistan, the largest earth filled dam in the world, was constructed in 1968

The present Chinese construction, is set to end the electricity deficit in 2018. However, these are commercial projects. The Chinese will expect a return, on their original investment. The Pakistani government for its part, has pledged a generous profit. These guarantees may be difficult to fulfill, in future years.

The question again remains, how will all these operations become profitable? The ongoing consumer energy subsidies although popular, makes solvency in the sector more problematic.

Economic growth for Pakistan is nearing a rate of 5% and if the electrical issue is solved, may well surge to a rate of 6% or higher. The government has bullishly set a goal of 7%.

Prime Minister Sharif knows that faster GDP growth, is the best way to deal with the stubborn problem of underemployment, especially among the youth. It will help move the country away from the call of more extremism.

If Mr. Sharif is re-elected in 2018, he will be the first Prime Minister to remain in office by a popular vote. Previously, the military has actively intervened in the politics of the country, almost since its founding.

Surface mining in Sindh, Pakistan has been termed as the ‘Saudi Arabia of Coal’ by Forbes

The political fortunes of the Prime Minister, rely heavily on continued Chinese investment. The growing influence of Chinese business and government, can scarcely not be recognized. The strategic alliance, is now developing into an economic one as well. There are a number of more nationalist politicians that are already worried, that China has far too much influence in Pakistan.

The involvement of at least 10,000 additional Chinese workers, for the more recent individual projects, is quite telling for the growing influence of China inside Pakistan.

Pakistan has the potential, to become one of the largest world economies in the 21st century. As a semi-industrialized economy, the challenge will be to modernize rapidly enough, in the face of declining exports. The resulting current account deficit is growing, as the demand for imports continues to increase.

Near the end of 2016, the IMF (International Monetary Fund) announced their assessment, that the Pakistani economy is now out of crisis. The World Bank is even predicting growth of at least 5.4% by 2018. This will be the supposed result, of an increase in foreign investment. Much of that growth, is being attributed to the new Chinese-Pakistani economic cooperation.

Pakistan Stock Exchange is one of the best performing market in the world. According to Forbes, PSX delivered a return of 400% between 2010 and 2015.

Furthermore, the World Bank has also estimated that poverty in Pakistan has dropped from 64.3% in 2002 to 29.5% in 2014. This is a major achievement for the country at large.

Continued growth will depend on an increase in domestic manufacturing and exports. Greater accountability and constraint in government spending, must be balanced by additional investment in critical sectors of the economy.

The process of economic liberalization is likely to proceed. However, the further dismantling of government owned businesses and corporations, will be met with increasing political resistance.

Ongoing economic reform and strict compliance to the rule of law, is the only way to bring in the needed foreign investment. Pakistan needs access to these funds, in order to fully modernize.

The present leadership will need to resist the siren calls of nationalism and more traditional ways of dealing with crises. Improving diplomatic relations with India, are also of paramount importance. The military must at all costs, stay in the barracks. A future take-over of the civilian government by the armed forces, will derail much of the progress already made, in providing Pakistan political stability.

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