Pakistan's Finance Minister: Playing a Losing Hand

Last week I headed into town to see Pakistan's Finance Minister Abdul Hafeez Shaikh discuss the challenges facing his country.  The complete video and audio of his appearance as well as a good summary of the event are available on the website of the host, the Carnegie Endowment for International Peace.

The Minister was two important skills, he is a charming, engaging figure and he is a capable technocrat.  Pakistan has a mature banking system and some very capable people.  Shaikh argued that the civilian government inherited a disastrous situation of high inflation and deficits in 2008.  Before these had been adequately dealt with Pakistan was hit with the devastating floods of 2010.  Despite this, the Minister argued that the government had managed to take important steps in restructuring the economy included reducing subsidies, increasing regulation and tax collection, and increasing revenue sharing between the federal and provincial governments.  Pakistan's government has also been innovative in using technology to deliver aid to those in need and worked hard to comply with money-laundering provisions.

The eminent South Asia expert Marvin Weinbaum asked the Minister a tough question, noting that the IMF disputes his rosy numbers and argues that while Pakistan has made some progress, it is not nearly enough: 

Real GDP growth over the past four years has averaged only about 3 percent annually, and is projected to be about 3¼ percent in 2012/13,² insufficient to achieve significant improvement in living standards and to absorb the rising labor force. A key structural impediment to growth is the problems in the energy sector, which have resulted in widespread and unpredictable power outages. Headline inflation has decelerated recently, but is likely to return to low double digits by the end of 2012/13. The external position has weakened substantially, as export growth turned negative in 2011/12 while imports grew....

The Minister's response was that these were technical differences between experts over measurement and data.  But that doesn't really cover the scale of the differences.

In short, the Pakistani technocrats have probably played their hand about as well as possible, given the political limitations they face.  They can't cut spending because the enormous military establishment won't permit it and they can't raise taxes because the wealthy elites won't allow (no jokes about the US here - Pakistan would love to collect as much from their super-rich as we do from ours.)

But these problems aren't going away.  As I've written elsewhere, Pakistan is on an unsustainable path.   Without dramatic measures, the nation will be unable to support its population.  Pakistan's leaders are playing a losing hand well - but it is still a losing hand and bluffs won't be enough.