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Economy of Pakistan

From Academic Kids

Pakistan is a developing country with the world's sixth-largest population, and an economic growth rate that has been consistently positive since a 1951 recession. ‹At purchasing power parity, Pakistan's GDP in 2005 was estimated at approximately $368 billion, larger than that of Saudi Arabia, but slightly smaller than the GDP of the Philippines (World Bank, PDF) (http://www.worldbank.org/data/databytopic/GDP_PPP.pdf).

Pakistan's economic outlook has brightened in recent years in conjunction with rapid economic growth and a dramatic improvement in its foreign exchange position as a result of its current account surplus and a consequent rapid growth in hard currency reserves.

The administration of President Pervez Musharraf has sought and received debt relief from international lenders, reducing its external debt from $32 billion to a discounted present value less than half of that. The government is using Pakistan's surplus to prepay expensive debt and replace it with commercial debt, which it has been able to obtain at low interest rates as a result of its improved credit rating.

Musharraf's economic agenda includes measures to widen the tax net, privatize public sector assets, and improve its balance of trade. Pakistan has made governance reforms, privatization, and deregulation the cornerstones of its economic revival.

Although it has received a positive endorsement from international financial institutions such as the World Bank, the IMF and the ADB, as well as improved credit ratings from S&P and Moody's, Pakistan is still experiencing a costly dearth of Foreign Direct Investment.

Pakistan's Finance Minister, Shaukat Aziz, who has been credited with Pakistan's economic turnaround, was elected to the office of Prime Minister on 28 August 2004.

Contents

Economy in greater depth

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The Finance and Trade Center, Karachi, Pakistan

Pakistan, a developing country, is the sixth most populous in the world and is faced with a number of challenges on the political and economic fronts.

Economy in context

During much of its history, Underdevelopment and poverty in parts of Pakistan - as well as fiscal mismanagement obscured the potential of a country with the resources and entrepreneurial skill to support rapid economic growth. However, the economy averaged an impressive growth rate of 6 percent per year during the 1980s and early 1990s. In the twentieth century overall, its economic growth rate was better than the world average, but imprudent policies led to a slowdown in the late 1990s. Since then, the Pakistani government has instituted wide-ranging reforms, and economic growth has accelerated in the current century. Pakistan's economic outlook has brightened and its manufacturing and financial services sectors have experienced rapid expansion. There has been a great improvement in its foreign exchange position and a rapid growth in hard currency reserves as a result of its current account surplus.

Macroeconomic reform and prospects

Since the early 1980s, the government has pursued market-based economic reform policies. Market-based reforms began to take hold in 1988, and since that time the government has removed barriers to foreign trade and investment, substantially reformed the financial system, eased foreign exchange controls, and privatized dozens of state-owned enterprises.

According to the CIA World Factbook, the government has made substantial inroads in macroeconomic reform since 2000, and medium-term prospects for job creation and poverty reduction are the best in nearly a decade. Islamabad has raised 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.

In recent years, Pakistan's GDP growth has exceeded its targets. In the twelve months to 30 June 2004, the GDP grew at 6.4%. Despite high oil prices, the next year's GDP is forecast to register growth figures between 7 and 8%.

Large middle class

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01_khi_dwntown.JPG
Looking towards Karachi downtown

Measured by purchasing power, Pakistan has a 30 million strong middle class enjoying per capita incomes of $8000-$10,000, according to Dr. Ishrat Husain, Governor of the State Bank of Pakistan. In addition, Pakistan has a growing upper class with relatively high per capita incomes. However, Pakistan has no (USD) billionaires, according to Forbes magazine, and has the distinction of being (by population) the largest nation to have none.

Economic resilience

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 concentrated into a four-year period: the Asian financial crisis, economic sanctions, global recession, a severe drought — the worst in Pakistan's history, lasting four years — and heightened perceptions of risk as a result of military tensions — with as many as a million troops on the border, and predictions of impending war — with India, and the post-9/11 military action in neighboring Afghanistan. Despite these adverse events, the Pakistani economy managed to maintain a positive annual growth rate, and economic growth accelerated towards the end of this period. This has led to a change in risk perceptions and expectations, with leading international institutions such as the IMF, World Bank, and ADB praising the economy's resilience and performance in the face of adversity.

Stock market

In the first four years of the current century, Pakistan's KSE-100 stock exchange index was the best-performing major market index in the world, driven in part by profit growth, high dividend yields and greater transparency in publicly traded companies as a result of reforms enacted by the Securities and Exchange Commission of Pakistan.

Manufacturing and finance

Pakistan's manufacturing sector has experienced double-digit growth in recent years, with large-scale manufacturing growing by 18% in 2003. 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. Foreign exchange reserves continued to reach new levels in 2003, supported by robust export growth and steady worker remittances.

Tax incentives for IT industry

The Government of Pakistan has, over the last few years, granted numerous incentives to technology companies wishing to do business in Pakistan. A combination of decade-plus tax holidays, zero duties on computer imports, government incentives for venture capital and a variety of programs for subsidizing technical education, have lent great impetus to the fledgling Information Technology industry. Many of Pakistan's technology companies supply software and services to the world's largest corporations.

Trade, current account, and fiscal balance

While the country has a current account surplus and both imports and exports have grown rapidly in recent years, it still has a large merchandise-trade deficit. The budget deficit in fiscal year 1996-97 was 6.4% of GDP. The budget deficit in fiscal year 2003-04 is expected to be around 4% of GDP.

Recent economic history

Since the turn of the century, Pakistan's current account surplus has put upward pressure on the Pakistani rupee, which rose from 64 rupees per dollar to 57 rupees per dollar. The State Bank of Pakistan (the central bank) stabilized the rise by lowering interest rates and buying dollars.

After short-term Pakistani T-bond rates fell below 2%, with government borrowing having declined, banks greatly expanded their lending to businesses and consumers. Construction activity, sales of durable goods such as trucks and automobiles, and housing purchases have all jumped to record levels. Private sector credit expanded by 28.5% in 2003.

Despite rapid growth in domestic automobile manufacturing, imports have also risen to meet the increased demand. Major automakers, such as BMW, Toyota, and Honda have invested in manufacturing facilities in the country.

Financial recovery

Pakistan's nuclear tests in May 1998 triggered the imposition of economic sanctions by the G-7. International default was narrowly averted by the partial waiver of sanctions and the subsequent reinstatement of Pakistan's IMF ESAF/EFF in early 1999, followed by Paris Club and London Club reschedulings. The Sharif government had difficulty meeting the conditionality of the IMF program, which was suspended in July 1999, and resumed later during Pervez Musharraf's administration. Having improved its finances, the government stated in 2004 that it would no longer require IMF assistance, and the assistance program ended in that year.

Demographics

With a per capita GDP of about $2080 (PPP, 2003) the World Bank considers Pakistan a low-income country. Pakistan has a large informal economy, which the government is trying to document and assess. Approximately 50 percent of adults are literate, and life expectancy is about 64 years or less. The population, about 155 million in 2004, is growing at about 1.96%.

Relatively few resources have been devoted to socio-economic development or infrastructure projects. Inadequate provision of social services and very high birth rates in the past have contributed to a persistence of poverty. An influential recent study (Feeney and Alam, 2003) (http://www.gfeeney.com/pubs/2003-pakistan-fertility-2/2003-pakistan-fertility-2.pdf) 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.

Structure of economy

In 1947, when Pakistan became independent, agriculture accounted for about 53% of its GDP. 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.)

Services

Pakistan's service sector accounts for about 51% of GDP. Transport, storage, communications, finance, and insurance account for 24% of this sector, and wholesale and retail trade about 30%. Pakistan is trying to promote the information industry and other modern service industries through incentives such as long-term tax holidays.

Agriculture and natural resources

Agriculture

Pakistan's principal natural resources are arable land and water. About 25% of Pakistan's total land area is under cultivation and is watered by one of the largest irrigation systems in the world. Agriculture accounts for about 23% of GDP and employs about 44% of the labor force. The most important crops are wheat, sugarcane, cotton, and rice, which together account for more than 75% of the value of total crop output. Pakistan is a net food exporter, except in occasional years when its harvest is adversely affected by droughts. Pakistan exports rice, cotton, fish, fruits, and vegetables and imports vegetable oil, wheat, cotton, pulses and consumer foods.

The economic importance of agriculture has declined since independence, when its share of GDP was around 53%. Following the poor harvest of 1993, the government introduced agriculture assistance policies, including increased support prices for many agricultural commodities and expanded availability of agricultural credit. From 1993 to 1997, real growth in the agricultural sector averaged 5.7% but has since declined to about 4%. Agricultural reforms, including increased wheat and oilseed production, play a central role in the government's economic reform package.

Energy and minerals

Pakistan has extensive energy resources, including fairly sizable natural gas reserves, some proven oil reserves, coal, and a large hydropower potential. However, the exploitation of energy resources has been slow due to a shortage of capital and domestic political constraints. Domestic petroleum production totals only about half the country's oil needs, and the need to import oil has contributed to Pakistan's trade deficits and past shortages of foreign exchange. The current government has announced that privatization in the oil and gas sector is a priority, as is the substitution of indigenous gas for imported oil, especially in the production of power. Pakistan is a world leader in the use of compressed natural gas (CNG) for personal automobiles.

Industry

Pakistan's industrial sector accounts for about 24% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 64% of total exports. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery, and food processing.

The government is privatizing large-scale parastatal units, and the public sector accounts for a shrinking proportion of industrial output, while growth in overall industrial output (including the private sector) has accelerated. Government policies aim to diversify the country's industrial base and bolster export industries.

In FY 2002-03, real growth in manufacturing was 7.7%. In the twelve months ending 30 June 2004, large-scale manufacturing grew by more than 18% compared to the previous twelve-month period.

Foreign trade and aid

Fluctuating world demand for its exports, domestic political uncertainty, and the impact of occasional droughts on its agricultural production have all contributed to variability in Pakistan's trade deficit.

In the six months to December 2003, Pakistan recorded a current account surplus of $1.761 billion, roughly 5% of GDP. Pakistan's exports continue to be dominated by cotton textiles and apparel, despite government diversification efforts. Exports grew by 19.1% in FY 2002-03. Major imports include petroleum and petroleum products, edible oil, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products.

Past external imbalances left Pakistan with a large foreign debt burden. Principal and interest payments in FY 1998-99 totaled $2.6 billion, more than double the amount paid in FY 1989-90. Annual debt service peaked at over 34% of export earnings before declining. With a current account surplus in recent years, Pakistan's hard currency reserves have grown rapidly. Improved fiscal management, greater transparency and other governance reforms have led to upgrades in Pakistan's credit rating. Together with lower global interest rates, these factors have enabled Pakistan to prepay, refinance and reschedule its debts to its advantage.

Despite the country's current account surplus and increased exports in recent years, Pakistan still has a large merchandise-trade deficit. The budget deficit in fiscal year 1996-97 was 6.4% of GDP. The budget deficit in fiscal year 2003-04 is expected to be around 4% of GDP.

Pakistan has recently received about $2.5 billion per year in loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank) and bilateral donors.

Increasingly, the composition of assistance to Pakistan has shifted away from grants toward loans repayable in foreign exchange. All new U.S. economic assistance to Pakistan was suspended after October 1990, and additional sanctions were imposed after Pakistan's May 1998 nuclear weapons tests. The sanctions were lifted by president George W. Bush after Pakistani president Musharraf allied Pakistan with the U.S in its war on terror.

Having improved its finances, the government announced in 2004 that IMF assistance was no longer needed. The IMF program is consequently being ended. (Pakistan ends 15-year ties with IMF; Daily Times, 7 September 2004) (http://www.dailytimes.com.pk/print.asp?page=story_7-9-2004_pg7_9)

Economic statistics

Gross domestic product

  • GDP at purchasing power parity: $347.3 billion (2004 est.)
  • Real growth rate: 8.3% (2005 est.)
  • Per capita GDP at purchasing power parity - $2,200 (2004 est.)
  • Composition by sector: (2004 est.)
    • agriculture: 22.6%
    • industry: 24.1%
    • services: 53.3%

Poverty and income distribution

Poverty

  • Population below poverty line: 22% (2005 est.)

Income distribution

  • Gini Index: 41
  • Household income or consumption by percentage share:
    • lowest 10%: 4.1%
    • highest 10%: 27.7% (1996)

Money

Inflation and monetary statistics

Inflation rate (consumer prices): 6% (1999 est.)

Currency and foreign exchange

  • Currency: 1 Pakistani rupee (PRe) = 100 paisa
  • Exchange rates: Pakistani rupees (PRs) per US$1 - 58 (2004), 57.752 (2003), 59.7238 (2002), 61.9272 (2001), 53.6482 (2000), 51.90 (December 1999), 44.550 (1998), 40.185 (1997), 35.266 (1996), 30.930 (1995)

Labor and unemployment

  • Labor force: 45.43 million

note: extensive export of labor, mostly to the Middle East, and use of child labor (2004 est.)

  • Labor force - by occupation: (2004 est.)
    • agriculture 42%
    • industry 20%
    • services 38%
  • Unemployment rate: 8% (2004 est.)

Fiscal

  • Budget:
  • Revenues: $12.3 billion
  • Expenditures: $11.7 billion, including capital expenditures of $NA (FY98/99)
  • Debt - external: $32 billion (1999 est.)
  • Economic aid - recipient: $2 billion (FY97/98)
  • Fiscal year: 1 July - 30 June

Industrial sector

  • Industries: textiles, food processing, beverages, construction materials, clothing, paper products, shrimp
  • Industrial production growth rate: 7.7% (2003)
  • Large-scale manufacturing growth rate: 18% (2003)

Electricity

Electricity production

  • Electricity - production: 59,262 GWh (1998)
  • Electricity - production by source (1998)
    • fossil fuel: 63.05%
    • hydro: 36.31%
    • nuclear: 0.64%

Electricity consumption

  • Electricity - consumption: 55,114 GWh (1998)
  • Electricity - exports: None
  • Electricity - imports: None

Agriculture

Trade

Exports

  • Exports: $15.07 billion f.o.b. (2004 est.)
  • Exports - commodities: cotton, fabrics, and yarn, rice, other agricultural products
  • Exports - partners: US 23.1%, Hong Kong 7.1%, UK 7.1%, Germany 5.1%, Hong Kong 4.6% (FY98/99)

Imports

See also

External links

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