Note from the editorial team

Musharraf and a river in Pakistan

Denial is a river in Egypt. Your military dictators are not your saviours.

We need to talk about denial, Pakistan. And we need to talk about it in the context of the death of former military ruler Pervez Musharraf, who was buried last week in Pakistan with full honours.

By now, you would have read and watched more than your fair share of opinions and coverage of the former military strongman’s life and times. Many said he was the worst; few said he was the best. This is not so much about that as it is about what happened once he had died.

Musharraf’s body was flown into Pakistan on Monday, February 6th, a day after he died in a Dubai hospital. He was buried on Tuesday in his hometown, Karachi. It was not televised, barely acknowledged by state television, and save a short press release from the military, not many acknowledged their presence at the event.

The truth, however, is that he was buried with full military protocol, and his funeral attended by top former and serving military leaders, civilian leaders, businessmen, and even some foreign dignitaries. This was the funeral of a man that we in Pakistan say was disgraced, disowned, and pushed out. He broke the Constitution - twicestrong-armed his critics and crushed dissent, sometimes brutally.

And therein lies the denial. The fact of the matter is there are more in Pakistan than we care to admit that actually saw Musharraf in a positive light, and, at the very least, saw in him a hope for change. Those views may be misplaced, but reality is seldom good or bad. It’s just reality. Perhaps one of the biggest talking points for those that see Musharraf in a positive light are the ones saying his era was one that saw great economic prosperity.

This is what our cover story this week focuses on. Our findings are quite definitive

— the late General (R) Pervez Musharraf ruled over Pakistan at one of the easiest times to be an economic manager and still managed to leave the country a mess at the end of his reign.

We have been told, endlessly, that Musharraf was a dictator who deserved nothing but disgrace and criticism. But, the reality is that he wasn’t disgraced – no matter how much we try to tell ourselves that. Even a court verdict that ordered a rather macabre death penalty for his extra constitutional acts was overturned without much fuss. And we never spoke about it again.

The reality of the matter is that Musharraf’s coup happened in a certain context that afforded him sympathy despite his clear transgressions. Consider that, in 1999, when Musharraf took over, Pakistan had just been through its ‘decade of democracy’ that saw four government changes in 11 years, with Nawaz Sharif and Benazir both getting two shots at premiership that were cut short by praetorian designs.

It was chaotic and unstable. In fact, 1993 saw five (yes, five) prime ministers, three presidents and two army chiefs. Despite what we are told, the reality is that his takeover wasn’t exactly met with widespread protests. The criticism of later years, taken as an established and unchallengeable truth now, was nowhere to be seen back then. In fact, if they’re honest, most of his critics will admit they were supporters at one point – for his liberal reforms, for his economic stability, through the opening of the media, or just the fact that they didn’t have to put up with political bickering and frequent upheaval. Musharraf represented, for better or worse, a chance of stability. And he gave that for a bit – mostly through unsustainable means and often through patently illegal and dictatorial measures. How many reactions have there been from industry leaders who have been critical of Musharraf, only to be followed by a ‘but…’ That’s not because people can’t criticise him. That would be a lie. It’s because there is a level of sympathy for him.

He wasn’t an anomaly. Consider the reign of another military dictator, Ayub Khan. When he took over, there had been seven prime ministers in 11 years, each removed through petty political wrangling. He too is remembered in fond words despite his extra constitutional measures and dictatorial policies. And much of that fondness does also have to do with the perceived economic prosperity Ayub brought.

One of the famous stories about Ayub Khan is back from 1970. When Pakistan entered a war with India over East Pakistan, Ayub went to the military command and offered himself up for enlistment as a foot soldier. He was widely hailed for this. No mention was made of his time in power that he gained extra-constitutionally. With such acts of machismo and fawning looks back, the legacy of military dictators in this country has been regularly whitewashed.

If we don’t admit this, and choose to deny it – which we are – we do so at our own peril, and at a time that political wrangling is once again at a high. By elections, Punjab government changes, provincial dissolutions, provincial elections before general elections – all amidst a near-unprecedented economic crisis.

The bells are ringing. And we are standing with our fingers in our ears speaking about how he got what he deserved. He didn’t. Because all people want certainty, and will always have a soft spot for anyone who says they are trying to bring it – by any means necessary. That’s not good or bad. It ‘s just a reality that isn’t fashionable to admit. Denial is not just a river in Egypt. It’s a river in Pakistan, too.

By Abdullah Niazi

In 1999, Pervez Musharraf commandeered control of a country that was in economic and political peril. By the time he was forced out of office in 2007, he was leaving the country at the beginning of another major crisis. In the years between, Pakistan saw an unprecedented boom and record levels of growth.

More than anything else, it is the dissonance between the prosperous middle years of the Musharraf era and the disastrous end that blurs the economic legacy of his administration. The reality is that between 2002-06 General Musharraf had the good fortune of being at the helm of a country that had found the favour of the United States and other western powers.

Pakistan’s role in the war on terror meant that the dollars were flowing freely and there was a rare opportunity to fix the structural ills that plagued our economy and build lasting institutions. With virtually no political opposition to his rule, this was a golden opportunity. And Musharraf fumbled it.

Off the back of an easy IMF programme, foreign aid to the tune of $10 billion, debt relief from the Paris Club, Pakistan’s economy grew and grew like never before. Musharraf’s time in power saw the establishment of some institutions and the implementation of certain policies that have been good for the economy in the long-run. The privatisation and liberalisation of the banking sector laid the foundation for financial inclusion in the country, the establishment of institutions like NADRA, and the development of the telecommunication sector and automobile industry are all hallmarks of this time.

Yet this growth was unsustainable. Rather than focus on any structural reforms, the Musharraf era oversaw Pakistan spending beyond its means and the economy growing chiefly through consumption. Imports continued to skyrocket, exports shrunk compared to the GDP, and by 2008 Pakistan was on the brink of a major economic collapse. At the same time, the energy policies of this era left Pakistan plagued with a serious load-shedding problem which eventually resulted in the decline of major industries such as textiles and agriculture. The legacy he leaves behind is of an overheated economy where hubris and short-sightedness meant the right decisions were not taken at the right time.

To understand better the shadow of the Musharraf years hanging over us today, Profit spoke to a number of people including former central bank governor Dr Ishrat Husain, journalist Khurram Husain, academic Dr Ali Hasnain, former commerce minister Humayun Akhtar Khan and others to try and understand the legacy of 1999-2007.

Where do we begin to measure the economic footprint of the military strongman that claimed to be the harbinger of enlightened moderation and democracy in Pakistan? At the beginning.

The macroeconomic management

The initial years (1999-2002)

Musharraf took over an ailing economy. After Pakistan’s successful nuclear tests the country had been blacklisted on the international stage and was stuck in a rut. Both the PPP and PML-N governments were seen as corrupt by foreign powers and by international NGOs such as Transparency International, which consistently ranked Pakistan among the top three most corrupt countries in the world during the 1990s.

Political instability following a military coup did not do any favours to the economy. When Husain took over, the economy was stagnant, external debt payment difficulties were pervasive, and financial indicators were concerning. Two thirds of the state’s revenues were going towards debt servicing. With exports worth $7 billion and debt servicing costs of around $5 billion, Pakistan was on the brink of default — much like it is today.

And in the first few years, the economy took time to pick up. Musharraf’s economic team consisted of a number of staunch bankers and development economists that believed strongly in industry and the free market. Husain was brought in from the World Bank to take over the SBP and Citi Banker Shaukat Aziz, who would eventually become prime minister, was Musharraf’s man in Q-block. At this point in Pakistan’s history, inflation was not really a major concern. However, this came at the cost of having low growth and high unemployment. The Musharraf administration’s policy was that the economy should be pumped with activity, and business should be promoted to stir it from its slumber. Because of this, a hardline approach was taken which involved a very loose monetary policy, and record low-interest rates.

Dizzying highs (2002-05)

In the initial years, things continued to be slow. But then came the boom post 9/11. Suddenly, Musharraf was a crucial ally to Bush’s war on terror in Afghanistan and Pakistan found itself on the receiving end of an avalanche of dollar inflows. “After the twin towers fell two things happened,” says Hasnain, a professor of economics at the Lahore University of Management Sciences

(LUMS). “There was an increase in inflows through the Paris Club and there was a massive increase in remittances, and secondly the US was starting to tighten its regulations.”

“Hundi markets that worked before to bring forex into the hands of individuals shrunk. Dollars started coming in through formal banking channels which meant that the money then comes into the SBP which then releases rupees to the market. Pakistan’s forex reserves went up by $4 billion in one year. Thinking about the size of the economy that would be around $12 billion in today’s money since the economy was much smaller back then.”

And between 2002 to 2007, Pakistan also started receiving a lot of dollar inflows. At this point, the government’s policies of low interest rates also kicked in. The plan was simple. If interest rates were low, more people would borrow and spend on investment and business, which would mean employment for more people and the economy growing. At the time these decisions were being taken, money supply was high, global growth led to high fuel prices, and crop failure was leading to high prices of items such as palm oil — more eerily similar situations to today.

As a result of the low-interest rate and borrowing conditions being easier, the number of borrowers in the country went up from 1.1 million people to 5.5 million. The goal at this point was very much to increase purchasing power. As a result, private sector borrowers took up the unused capacity in the economy galvanising different industries. The outcomes were better agriculture, better production, better outputs, and better exports. As a result, the growth rate climbed to 8%.

This was one of the biggest booms Pakistan’s economy had ever seen. Pakistan’s tax base and government revenue collection more than doubled from about Rs 500 billion to over Rs 1 trillion. Pakistan’s GDP more than doubled to $144 billion since 1999. The strong consumer demand in Pakistan drove large investments in real estate, construction, communications, automobile manufacturing, banking and various consumer goods. The Karachi stock market surged tenfold from 2001 to 2007. Pakistan positioned itself as one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0% per year for most of this period. Yet this entire period of growth was dotted by the problem that it was all consumption based and not growth based.

“After the initial slowness, the growth rate did get to 8%”, says Hasnain. “This was actually one of the highest growth rates in the world at that time and the economy was well on its way up. However this increase was not because of productivity it was because of con- sumption, and that meant that the economy was fast overheating. What they were doing was financing consumption using monetary policy and allowing a large current account deficit. Inflation adjusted interest rates were negative.”

This was the painful reality of the boom from 2002-05. A significant share of the investment that financed growth spurts came from the influx of foreign capital that augmented the low level of domestic savings, most of it from the United States. External finance became available to compensate the country for the strategic help it provided America. Much like during the 1960s and then again during the 1980s, both eras of dictators (Ayub and Zia), Pakistan had done the same. The reward was much the same as Pakistan was recruited to join America’s war on terror and for its support was given an estimated $10 billion of assistance over the six-year period from 2001 to 2007. In other words, the country did little to generate high rates of economic growth by using its own resources. It also did not improve the quality of governance or ensure continuity in policymaking. These factors have been identified by economists as important contributors to growth.

Abysmal lows (2005-08)

The party naturally did not last. In around 2005, it was time for the chickens to come home to roost. “The monetary policy decisions of the SBP meant that inflation was knocking at the doors and was about to become the most talked about point in politics. The general consensus seemed to be that in 1999, the economy was in desperate need of a kickstart, however, it needed to be done so in a sustainable manner. Instead, we might have launched into a boomand-bust cycle”, says Khurram Husain, an economic journalist that closely followed the Musharraf era.

Over the same period, poverty levels increased again. There was some decline in the poverty rates from 1999-2005, but the unprecedented rise in food prices since 2004, along with the shortage of wheat flour and a slowing economy, eliminated any gains that had been made. Also, there was evidence that labour absorption was limited despite rapid economic growth in the 2002-07 timeframe. Structural problems constraining long-term growth came dramatically to the forefront in the first half of 2008 with major power shortages and large scale load shedding. In addition, the erosion of the competitiveness of the country’s dominant exports, textiles, and clothing, and a sharp slow down in export growth since 2006-07 led to a large increase in the trade imbalance and limited the prospects for growth in labour- intensive manufacturing.

Back then, economists such as the World Bank’s policy manager for South Asia, Ijaz Nabi, said that SBP may have overshot its mark. “It is very important to be very vigilant when you have that kind of expansion. It is very easy to go over the point where you’re just supplying enough credit given the supply of goods. It is very difficult to overshoot and we overshot. That is when inflationary pressures build up.”

“It was a policy choice. Low inflation with low growth and high unemployment is of no use to me,” he said in an interview back in 2007 after his term had ended and the inflation rate had continued to hike. “If they had wanted a different method to solve the problems of the economy we had back then, they should have chosen someone other than a development economist,” claims Hussain, who was the governor of the State Bank during the Musharraf era.

The only problem was that the inflationary pressure did build up, and the SBP overshot its mark. “What should have happened at this time was that the government should have taken action to stop the overheating. But the budget that year was expansionary. The impact was that the SBP as usual failed to stop the economy from overheating,”explains Hasnain. “After this your vulnerabilities increased and there was an oil shock. The current account deficit increased and ultimately we went into the 2008 crisis.”

And that is the reality of how macroeconomic management took place during the Musharraf era. After a period of strong economic expansion, relative macroeconomic stability, and increased foreign investor confidence during the years 2003-06, Pakistan was once again at a critical juncture in 2008. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, 10 times the figure of 2000-01. The government’s debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion.

However, because the economy was overheating inflationary pressure managed to lay waste to the gains of the preceding years. Macroeconomic indicators deteriorated very sharply, inflation touched record levels in the first nine months of 2008 following three previous years of high single-digit increases in the level of prices. This is despite the fact that the sharp increases in international oil prices during most of 2008 were not fully passed on to consumers and the price of wheat for urban consumers was subsidised. The burden of high prices, especially of basic food items, became intolerable for poor households. One of the primary causes of inflation since 2004 may have been monetary in character, but in 2008 they acquired a structural nature, given the high dependence on imported energy.

“The way to judge this era is simple. By the time he left power the economy was in crisis. Very few structural issues were addressed and the growth was coming through aid based consumption” says Hasnain. “How do you judge the economic legacy of Pervez Musharraf? Just look at what he did”, says Khurram Husain. “There was a crisis when he took over and a worse crisis by the time he left. The years in between there was a boom but the final result was pretty bad. Make of that what you will.”

Real estate, telcos, energy, and Darnomics — the policies of the time

This has been the story of how the economy played out from 1999-2008. Very briefly put, Pakistan prospered after 9/11 due to an influx of money and a supportive geo-political situation, but the Musharraf administration failed to implement any structural reforms or make necessary decisions to halt the economy from overheating. As a result, by the time the next government came in, inflation was rife and an energy crisis was brewing. Despite this, there were attempts in this era to increase the tax base, to promote business, and end the energy crisis. But most of these policies were disastrous.

The dollar rate and fiscal policies

Perhaps one that haunts us to this day is that Musharraf continued to try and artificially maintain the rate of the rupee at Rs 60 against the dollar.

“Musharraf practised Daronomics before Dar, holding the dollar at 60. Just as with 2013-18 Dar, this would have disastrous effects on our trade. Exports (% of GDP) were never below 16.1% in 8 years preceding Musharraf’s takeover. They would never return to those levels,” says Hasnain. “Folks who defend his era point to the rapid growth in inflows after 9/11. It is for Macroeconomists to judge whether these inflows were dealt with properly, but what do the numbers show? It is worth thinking of the Musharraf era in two phases: 1999 to 2003, and 2004 to 2008.”

“Reserves, measured in months of import cover, went from critical levels to a reasonably healthy eight months by 2003, before collapsing again before his exit. The Current Account famously showed a surplus for three years, before crashing to levels worse than what he had inherited. And FDI blipped similarly briefly. This was consumption-led growth, and for a few years, imports were cheap and urban Pakistan partied. Musharraf managed to make ����’s debt substantially more manageable (as a % of GDP), but without improving the rate at which debt accrued (fiscal deficits remained steady).”

Privatisation of the banking sector

This, perhaps, was one of the bigger changes of the Musharraf era that may have been for the greater good. Banks had been nationalised and re- organised in the 1970s into five major banking organisations. In December 1999 public sector banks had more than 80% of the market share and almost all of them were on budgetary support. On top of that, their operations were hindered by bureaucratic inefficiencies since they were government owned.

“By the mid 1990s the banking sector was on its knees. The World Bank and IMF were both saying massive reforms were needed but the government was not catching on. When Dr Ishrat came in, many of the large national banks were insolvent. He took a fresh look at the entire picture and took a proactive approach in the reforms of the banking sector. He took up a full comprehensive review and addressed the issue really well,” says Zakir Mehmood, former CEO and President of Habib Bank Limited.

In Musharraf’s administration, Husain became the leading lightbearer for the denationalisation of the banking sector, after which the private sector got a great boost. But this too was one reform that had already been underway and was just helped along by Musharraf’s regime. “Denationalisation and deregulation were started back in the 1990s for the first time under Nawaz Sharif and Sartaj Aziz in his first stint as finance minister in 1993.

HBL was the major denationalisation project that took place in the Musharaff era, otherwise these were policies that we had introduced before. India had also begun the deregulation process in the 90s but the difference was that they stuck with it and we haven’t managed to do the same,” says Khan, the former commerce minister, in a conversation with Profit.

“The initiatives soon came to fruition. Public sector banks were restructured, privatised, and built into competitive institutions, which provided quality services. Lending rates came down to 3-4% from 16-17% which led to a boost in private credit. Non-performing loans were reduced from 26% to 11% and the financial sector became a major contributor to the revival of the economy,” he adds.

Real estate, telcos, and energy

This is also one of those elements on which Musharraf has a mixed legacy. On the one hand, Musharraf’s era sowed the seeds for some of the worst crises Pakistan is still dealing with to this day. Take for example, real estate. There was an explosion of housing societies in this era. Bahria Town was launched in this era as well. You see, taxes were not raised on property during this time because of which a lot of money started flowing into real estate. As a result, investment was drawn away from other avenues and money was parked in real estate. The resultant over-expansion of the sector has nearly crippled the country. On the telcos front, there were some serious strides made. Take for example the policy introduced where the person calling was the one who would be billed. Today, calls and messaging in Pakistan are next to free.

However, on other fronts things were significantly worse. In the 1980s, the government began setting up oil-fired power plants, but the vast majority of Pakistan’s electricity came from water until at least the early 1990s. At that point, with international financing difficult to procure owing to Pakistan’s poor relations with the United States, the government instituted a policy that allowed for more private sector players to set up independent power plants (IPPs) that were reliant mainly on oil. Over the next decade, this increased Pakistan’s reliance on imported oil as a fuel for its electricity generation.

In the early 2000s, the Musharraf Administration decided to convert at least some of that thermal power generation capacity from imported oil to domestic natural gas, under the assumption that Pakistan had abundant domestic reserves. (This, as has been pointed out in this publication on many previous occasions, was a very faulty assumption.)

As of 2005, the height of the Musharrafera economic boom, Pakistan derived more than 84% of its electricity generation from entirely domestic fuel sources, according to Profit’s analysis of data from the National Electric Power Regulatory Authority (NEPRA).

That meant that even as the Iraq War of 2003 drove up global oil prices, Pakistani consumers of electricity remained largely unaffected. Unfortunately, there was a limit to just how much natural gas was available in Pakistan and around the end of the Musharraf years, Pakistan went from being a gas-surplus country to having a shortage. That shortage, in turn, meant that the thermal power plants that could run on either natural gas or furnace oil ended up having to run on oil almost all of the time as the government scrambled – and failed – to keep the lights on.

The sharp rise in reliance on oil coincid-

at the Lahore University of Management Sciences

ed with a dramatic rise in oil prices themselves (late 2007 and again in early 2009). Oh, and the rupee’s value collapsed at the same time, which created a perfect storm for the incoming Pakistan Peoples Party (PPP) led government, which tried to keep consumers insulated by increasing government subsidies, but the government did not have the money to do so.

The whole energy industry entered a massive financial crunch as the government’s failure to pay subsidies meant that power companies could not pay the oil importing companies which in turn could not pay their international suppliers, which meant that the country frequently ran out of enough oil to keep the power plants running. The PPP-led government was utterly inept at trying to resolve the problem that resulted in 12-hour daily power outages even in major cities, and longer in rural areas.

Confusing times

This is what it all comes down to. In his near decade in power, the late General oversaw, perhaps, what was the easiest time for economic governance in Pakistan. In some senses, his administration made valuable contributions to the economy. But these were the anomalies. Largely, it was an era of excessive money and short-term thinking. Most economists agree on this. The state he left the country in was one of excessive inflation, political turmoil, and wasted opportunities.

In the middle of this, of course, there were a few years (2002-05) where the economy saw major growth. Off the back of this, urban Pakistan thrived. That is where the romanticised memories of those days come from. In the long-term, Musharraf practised Darnomics before Dar did from 2013-18. The results are clear as day for all to see. In addition to this, as a military dictator with no political opposition, the Musharraf administration has no excuse for how they left the economy in a shambles at the end of their time. That is what the legacy of Pervez Musharraf is in Pakistan’s economic history, questions of democracy and constitutional abrogation not considered. n