Critical Review of Pakistan Economy

The economy of Pakistan is the 26th largest economy in the world in terms of purchasing power. Pakistan’s economy mainly encompasses textiles, chemicals, food processing, agriculture, and other industries.

In 2005, it was the third fastest-growing economy in Asia The economy has suffered in the past from decades of internal political disputes, a fast-growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment, and renewed access to global markets, have generated solid macroeconomic recovery in the last decade. Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy.

GDP growth increased by gains in the industrial and service sectors, remained in the 6-8% range in 2004-06. In 2005, the World Bank named Pakistan the top reformer in its region and in the top 10 reformers globally. Islamabad has steadily raised development spending in recent years, including a 52% real increase in the budget allocation for development in FY07, a necessary step toward reversing the broad underdevelopment of its social sector. The fiscal deficit – the result of chronically low tax collection and increased spending, including reconstruction costs from the devastating Kashmir earthquake in 2005 was manageable.

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 7. 9% in 2006. In 2008, following the surge in global petrol prices inflation in Pakistan has reached as high as 25. 0%. The central bank is pursuing a tighter monetary policy while trying to preserve growth. Foreign exchange reserves are bolstered by steady worker remittances, but a growing current account deficit – driven by a widening trade gap as import growth outstrips export expansion – could draw down reserves and dampen GDP growth in the medium term

Since the beginning of 2008, Pakistan’s economic outlook has taken a dramatic downturn. Security concerns stemming from the nation’s role in the War on Terror have created great instability and led to a decline in FDI from a height of approximately $8 bn to $3. 5bn for the current fiscal year. Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan’s economy, with gaping trade deficits, high inflation, and a crash in the value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a few months.

For the first time in years, it may have to seek external funding as Balance of Payments support. Consequently, S&P lowered Pakistan’s foreign currency debt rating to CCC-plus from B, just several notches above a level that would indicate default. Pakistan’s local currency debt rating was lowered to B-minus from BB-minus. Credit agency Moody’s Investors Service cut its outlook on Pakistan’s debt to negative from stable due to political uncertainty, though it maintained the country’s rating at B2.

The cost of protection against a default in Pakistan’s sovereign debt trades at 1,800 basis points, according to its five-year credit default swap, a level that indicates investors believe the country is already in or will soon be in default. The middle term however may be less turbulent, depending on the political environment. The EIU estimates that inflation should drop back to single digits in 2010 and that growth should pick up to over 5% per annum by 2011. Although less then the previous 5 year average of 7%, it would represent an overcoming of the present crisis wherein growth is a mere 3. -4%. Economic history This is a chart of the trend of the gross domestic product of Pakistan at market prices estimated by the International Monetary Fund with figures in millions of Pakistani Rupees.

Economic resilience Historically, Pakistan’s overall economic output (GDP) has grown every year since a 1951 recession. Despite this record of sustained growth, Pakistan’s economy had, until a few years ago, been characterized as unstable and highly vulnerable to external and internal shocks. However, the economy proved to be unexpectedly resilient in the face of multiple adverse events Macroeconomic reform and prospects According to many sources, the Pakistani government has made substantial economic reforms since 2000, and medium-term prospects for job creation and poverty reduction are the best in nearly a decade.

Government revenues have greatly improved in recent years, as a result of economic growth, tax reforms – with a broadening of the tax base, and more efficient tax collection as a result of self-assessment schemes and corruption controls in the Central Board of Revenue – and the privatization of public utilities and telecommunications. Pakistan is aggressively cutting tariffs and assisting exports by improving ports, roads, electricity supplies, and irrigation projects. Islamabad has doubled development spending from about 2% of GDP in the 1990s to 4% in 2003, a necessary step towards reversing the broad underdevelopment of its social sector. Liberalization in the international textile trade has already yielded benefits for Pakistan’s exports, and the country also expects to profit from freer trade in agriculture. As a large country, Pakistan hopes to take advantage of significant economies of scale and to replace China as the largest textile manufacturer as latter China moves up the value-added chain. These industries play to Pakistan’s relative strengths in low labor costs.

Growing stability in the nation’s monetary policies has contributed to a reduction in money-market interest rates, and a great expansion in the quantity of credit, changing consumption and investment patterns in the nation. Pakistan’s domestic natural gas production, and its significant use of CNG in automobiles, has cushioned the effect of the oil-price shock of 2004-2005. Pakistan is also moving away from the doctrine of import substitution which some developing countries (such as Iran) dogmatically pursued in the twentieth century.

The Pakistani government is now pursuing an export-driven model of economic growth successfully implemented by South East Asia and now highly successful in China. In 2005, the World Bank reported that “Pakistan was the top reformer in the region and the number 10 reformer globally — making it easier to start a business, reducing the cost to register property, increasing penalties for violating corporate governance rules, and replacing a requirement to license every shipment with two-year duration licenses for traders. ”

In addition, reduced tensions with India and the ongoing peace process raise new hopes for a prosperous and stable South Asia, with more intra-regional trade. However, due to the global economic crisis in the year 2007-2008 the economic progress has been adversely affected and unemployment has increased The economy today By October 2007, Pakistan raised back its Foreign Reserves to a handsome $16. 4 billion. Exceptional policies kept Pakistan’s trade deficit controlled at $13 billion, exports boomed to $18 billion, revenue generation increased to become $13 billion and attracted foreign investment of $8. billion.

Economic Comparison of Pakistan 1999-2008

In the first four years of the twenty-first century, Pakistan’s KSE 100 Index was the best-performing stock market index in the world as declared by the international magazine “Business Week”. [citation needed] The stock market capitalization of listed companies in Pakistan was valued at $5,937 million in 2005 by the World Bank.

But in 2008, after the General Elections, uncertain political environment, rising militancy along western borders of the country, and mounting inflation and current account deficits resulted in the steep decline of the Karachi Stock Exchange. As a result, the corporate sector of Pakistan has declined dramatically in significance in recent times. Manufacturing and finance Pakistan’s manufacturing sector has experienced double-digit growth in recent years, from 2000 to 2007, with Large-scale manufacturing growing from a minimal 1. 5% in 1999 to a RECORD 19. 9% in 2004-05 and averaged 8. % by end of 2007. The Federal Bureau of Statistics valued the finance and insurance sector at Rs. 311,741 million in 2005 thus registering over 166% growth since 2000. A reduction in the fiscal deficit has resulted in less government borrowing in the domestic money market, lower interest rates, and an expansion in private sector lending to businesses and consumers Growing middle class Measured by purchasing power, Pakistan has a 30 million-strong middle class, according to Dr. Ishrat Husain, Ex-Governor (2 December 1999 – 1 December 2005) of the State Bank of Pakistan.

It is a figure that correlates with research by Standard Chartered Bank which estimates that Pakistan possesses an “a middle class of 30 million people that Standard Chartered estimates now earn an average of about $10,000 a year. ” In addition, Pakistan has a growing upper class with relatively high per capita incomes. On measures of income inequality, the country ranks slightly better than the median. In late 2006, the Central Board of Revenue estimated that there were almost 2. 8 million income-tax payers in the country. Poverty levels have decreased by 10% since 2001.

Foreign Companies that provide for Pakistani middle classes have been very successful. For example, demand for Uniliver products has recently been so high that even after doubling production the Anglo-Dutch company struggled to meet demand and it’s Chairman stated “Pakistanis can’t seem to have enough”. Uniliver enjoys a virtual market monopoly in Pakistan Poverty alleviation expenditures Pakistan government spent over 1 trillion Rupees (about $16. 7 billion) on poverty alleviation programs during the past four years, cutting poverty from 35 percent in 2000-01 to 24 percent in 2006.

Rural poverty remains a pressing issue, as development, there has been far slower than in the major urban areas Demographics With a per capita GDP of over $3000 (PPP, 2006) compared with $2600 (PPP, 2005) in 2005 the World Bank considers Pakistan a medium-income country, it is also recorded as a “Medium Development Country” on the Human Development Index 2007. Pakistan has a large informal economy, which the government is trying to document and assess. Approximately 49% of adults are literate, and life expectancy is about 64 years. The population, about 168 million in 2007, is growing at about 1. 80%.

Relatively few resources in the past had been devoted to socio-economic development or infrastructure projects. Inadequate provision of social services, high birth rates, and immigration from nearby countries in the past have contributed to the persistence of poverty. An influential recent study[15] concluded that the fertility rate peaked in the 1980s, and has since fallen sharply. Pakistan has a family-income Gini index of 41, close to the world average of 39.

Employment

The high population growth in the past few decades has ensured that a very large number of young people are now entering the labor market.

Even though it is among the seven most populous Asian nations, Pakistan has a lower population density than Bangladesh, Japan, India, and the Philippines. In the past, excessive red tape made firing from jobs and consequently hiring, difficult. Significant progress in taxation and business reforms has ensured that many firms now are not compelled to operate in the underground economy. In late 2006, the government launched an ambitious nationwide service employment scheme aimed at disbursing almost $2 billion over five years.

Tourism

Tourism in Pakistan is a growing industry.

Major attractions include ruins of Indus valley civilization and mountain resorts in the Himalayas. Himalayan and Karakoram range (which includes K2, the second-highest mountain peak in the world, attracts adventurers and mountaineers from around the world. Revenue The Board of Revenue has collected nearly one trillion Rupees($14. 1 billion) in taxes in the 2007-2008 financial year. Currency system Rupee The basic unit of currency is the Rupee, which is divided into 100 paisas. Currently, the newly printed 5,000 rupee note is the largest denomination in circulation. Recently the SBP has introduced all-new design notes of Rs. , 10, 20, 100, 500, 1000, 5000 denomination, while the work of Rs. 10,000 note is in progress which will help the banking industry in keeping few notes in saving accounts. The new notes have been designed using euro technology and are made in good bright colors. Foreign exchange reserves By October 2007, at the end of Prime Minister Shaukat Aziz’s tenure, Pakistan raised back its Foreign Reserves to $16. 4 billion. Pakistan’s trade deficit was at $13 billion, exports grew to $18 billion, revenue generation increased to become $13 billion, and the country attracted foreign investment of $8. billion. On October 11, 2008 State Bank of Pakistan reported that country’s foreign exchange reserves had gone down by $571. 9 Million to $7749. 7 Million. [18]The foreign exchange reserves had declined more by $400 Million to an alarming rate of $6590 Million Structure of economy The economy of the Islamic Republic of Pakistan is suffering from high inflation rates well above 26%. Over 1,081 patent applications were filed by non-resident Pakistanis in 2004 revealing a new-found confidence Agriculture accounted for about 53% of GDP in 1947.

While per-capita agricultural output has grown since then, it has been outpaced by the growth of the non-agricultural sectors, and the share of agriculture has dropped to roughly one-fifth of Pakistan’s economy In recent years, the country has seen rapid growth in industries (such as apparel, textiles, and cement) and services (such as telecommunications, transportation, advertising, and finance). Basically the economy of Pakistan depends upon the following sectors:

• Agriculture
• Industry
• Services
• Economic aid

Pakistan receives economic aid from several sources as loans and grants.

The International Monetary Fund (IMF), World Bank (WB), Asian Development Bank (ADB), etc provides long term loans to Pakistan. Pakistan also receives bilateral aid from developed and oil-rich countries The Asian Development Bank will provide close to $6 billion development assistance to Pakistan during 2006-9. The World Bank unveiled a lending program of up to $6. 5 billion for Pakistan under a new four-year, 2006-2009, aid strategy showing a significant increase in funding aimed largely at beefing up the country’s infrastructure. [31] Japan will provide $500 million annual economic aid to Pakistan.

In November 2008, The International Monetary Fund(IMF) has approved a loan of 7. 6 Billion to Pakistan, to help Stabilize and rebuild the country’s economy. Also, it is very expensive Remittance The remittance of Pakistanis living abroad has played important role in Pakistan’s economy and foreign exchange reserves. The Pakistanis settled in Western Europe and North America are important sources of remittance to Pakistan. Since 1973 the Pakistani workers in the oil-rich Arab states have been sources of billions of dollars of remittance Pakistan received $5. 493 billion as workers’ remittances during the last fiscal year 2006-07 up by 19. 2 Percent against over $4. 6 billion in 2005-06. An IMF research paper has revealed that workers’ remittances contribute 4% to the GDP of Pakistan and are equivalent to about 22 percent of annual exports of goods and services Investment Foreign direct investment (FDI) in Pakistan soared by 180. 6 percent year-on-year to US$2. 22 billion and portfolio investment by 276 percent to $407. 4 million during the first nine months of the fiscal year 2006, the State Bank of Pakistan (SBP) reported on April 24. During July-March 2005-06, FDI year-on-year increased to $2. 224 billion from only $792. million and portfolio investment to $407. 4 million, whereas it was $108. 1 million in the corresponding period last year, according to the latest statistics released by the State Bank. [36] Pakistan has achieved FDI of almost $7 billion in the financial year 06/07, surpassing the government target of $4 billion. Pakistan is now the most investment-friendly nation in South Asia. Business regulations have been profoundly overhauled along liberal lines, especially since 1999. Most barriers to the flow of capital and international direct investment have been removed.

Foreign investors do not face any restrictions on the inflow of capital, and investment of up to 100% of equity participation is allowed in most sectors (local partners must be brought in within 5 years and contribute up to 40% of the equity in the services and agriculture sectors). Unlimited remittance of profits, dividends, service fees or capital is now the rule. Business regulations are now among the most liberal in the region. This was confirmed by a World Bank report published in late 2006 ranking Pakistan (at 74th) well ahead of neighbors like China (at 93rd) and India (at 134th) based on ease of doing business. [31] [32] Pakistan is attracting an increasingly large amount of private equity and was ranked as number 20 in the world based on the amount of private equity entering the nation. Pakistan has been able to attract a large portion of the global private equity investments because of economic reforms initiated in 2003 that have provided foreign investors with greater assurances for the stability of the nation and their ability to repatriate invested funds in the future. [39] Tariffs have been reduced to an average rate of 16%, with a maximum of 25% (except for the car industry).

The privatization process, which started in the early 1990s, has gained momentum, with most of the banking system privately owned, and the oil sector targeted to be the next big privatization operation. The recent improvements in the economy and the business environment have been recognized by international rating agencies such as Moody’s and Standard and Poor’s (country risk upgrade at the end of 2003). Current account deficit – Current account deficit for 2006-7 reached $7. 016 billion up by 41 percent over the previous year’s $4. 490 billion. Since the beginning of 2008, Pakistan’s economic outlook has taken a dramatic downturn.

Security concerns stemming from the nation’s role in the War on Terror have created great instability and led to a decline in FDI from a height of approximately $8 bn to $3. 5bn for the current fiscal year. Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan’s economy, with gaping trade deficits, high inflation, and a crash in the value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a few months. For the first time in years, it may have to seek external funding as Balance of Payments support.

Consequently, S&P lowered Pakistan’s foreign currency debt rating to CCC-plus from B, just several notches above a level that would indicate default. Pakistan’s local currency debt rating was lowered to B-minus from BB-minus. Credit agency Moody’s Investors Service cut its outlook on Pakistan’s debt to negative from stable due to political uncertainty, though it maintained the country’s rating at B2. The cost of protection against a default in Pakistan’s sovereign debt trades at 1,800 basis points, according to its five-year credit default swap, a level that indicates investors believe the country is already in or will soon be in default

The middle term however may be less turbulent, depending on the political environment. The EIU estimates that inflation should drop back to single digits in 2010 and that growth should pick up to over 5% per annum by 2011. Although less then the previous 5 year average of 7%, it would represent an overcoming of the present crisis wherein growth is a mere 3. 5-4%.

Foreign Acquisitions and Mergers

With the rapid growth in Pakistan’s economy, foreign investors are taking a keen interest in the corporate sector of Pakistan. In recent years, the majority of stakes in many corporations have been acquired by multinational groups.

PICIC by Singapore based Temasek Holdings for $339 million Union Bank by Standard Chartered Bank for $487 million Prime commercial banks by ABN Amro for $228 million PakTel ltd by China Mobile Ltd for $460 million PTCL by Etisalat for $1. 8 billion Additional 57. 6 percent shares of Lakson Tobacco company acquired by Philip Morris International for $382 million

Bibiliography

1. CIA – The World Factbook – Rank Order – GDP – real growth rate
2. Economic Data – Trend in Price Inflation (State Bank of Pakistan)
3. DAWN – Annual Budget 2007; June 9, 2007.
4. Statistics Division, Government of Pakistan
5. Ministry of Finance, Government of Pakistan
6. Board of Investment, Government of Pakistan
7. Economic Comparison 1999 to 2008
8. State Bank of Pakistan
9. www.forexpk.com
10. Macroeconomic Stability of Pakistan: The Role of the IMF and World Bank (1997–2003) Faisal Cheema, the University of Illinois at Urbana-Champaign, May 2004
11. Current account deficit up by 41pc -DAWN – Business; July 22, 2007
12. GDP Estimate Books
13. Issuses in Pakistan economy
14. Economic Survey of Pakistan 2007-08
15. The Economy of Pakistan by Dr Ishrat Husnain