PAKISTAN'S RECENT ECONOMIC PROGRESS AND FUTURE OPPORTUNITIES
The majority of news about Pakistan in Western media is about terrorism, bombings, Islamic fundamentalism, nuclear nonproliferation, military control, and so on. Rarely does a favorable story about Pakistan's extraordinary economic recovery arise? Here we tried to highlight Pakistan's recent economic progress and future opportunities.
Nonetheless, despite its unfavorable image, Pakistan is one of the most popular places for foreign direct investment. FDI flows to our large neighbor increased by 95 percent from July to February 2007 and are forecast to reach $ 5 billion, or 3.5 percent of GDP - several times greater in relative terms than FDI flows to our large neighbor. Pakistan's international bond and equity floatations via GDRs have routinely been oversubscribed and priced on the low margin end of the market. Standard Chartered Bank has paid approximately $500 million for the acquisition of a domestic private bank. China Mobile, the world's largest mobile company by subscriber base, has purchased a majority stake in one of the local cellular phone companies for more than $400 million. Philip and Morris have agreed to purchase 50.2 percent of Pakistan's second-largest cigarette manufacturing company for the US $339 million. Several other similar mergers and acquisitions are in the works.
2. What is remarkable is that, despite such negative publicity, perceived security risk, and travel advisories, global investors, fund managers, and international financial institutions from the United States, Europe, East Asia, and the Middle East all regard Pakistan favorably and have a high level of confidence in the economy. Sophisticated investors from across the world are eager to buy billions of dollars in a sovereign paper issued by Pakistan for a 30-year term. There must be something right the country should be doing that is missing from the radar of the popular and extremely important western media.
3. As an international development economist, I can speculate on a number of explanations for this seemingly perplexing scenario. To begin with, Pakistan is a 160-million-person country that has grown at a 6-7 percent annual rate over the previous five years. Thirty million Pakistanis earning $10,000 to $15,000 a year (in PPP terms) provide a big and stable market for the purchase of products and services of all types. Except for China, India, and Indonesia, very few markets have the size and scale that Pakistan's rapidly increasing middle class provides. Projections show that if the current growth rates are attained for the next ten years, By 2020, Pakistan's per capita income will have more than doubled in real terms. At that point, the middle class will number 50 million people, with purchasing power incomes of $ 30,000 on average, comparable to those of certain European countries today. Goldman Sachs has ranked Pakistan as the eleventh-largest economy among emerging countries in its long-term forecast. These 50 million people's energy, infrastructure, products, and services needs must be addressed at world-class levels. Multinational corporations and holders of surplus money are reconsidering their strategies and repositioning themselves in response to these opportunities in emerging markets and the perception of saturation in advanced economies.
4. Second, the economy has performed well in terms of macroeconomic stability, growth, poverty reduction, and job creation. Economic growth rates have progressively increased from 1.8 percent in 2000/01 to an average of 6 -7 percent each year in the previous four years, making Pakistan one of the fastest-growing economies in Asia. These rates are hardly outstanding for Pakistan, but they constitute a regression to the mean. Pakistan's average GDP growth rate during the last 50 years has been 5.2 percent each year. Over the last five years, manufacturing production has increased by more than 15%, exports have doubled in US dollar terms, and an open trade system has allowed imports from all over the world to quadruple.
Tax Collections
Tax collections have increased by 14% each year, lowering the budget deficit from 7% per year in the 1990s to 4% now. For three years in a row, the current account moved from a chronic deficit to a surplus, owing mostly to sustained export growth and a recovery in worker remittances. Although it has been negative since 2005/06 due to a surge in machinery and equipment imports and a rise in global oil prices, it is entirely supported by foreign capital flows. During the first four years of the present government, inflation remained around 4%, but oil price pass-through and crop failures have resulted in an average of 8% since 2004-05.
The external debt load has been cut in half, from 52 percent to 26 percent of GDP, and is expected to fall further. The country's ability to service its debt has significantly improved, with the debt servicing ratio dropping from over 60 percent of public income to 28 percent. Poverty incidence has decreased from 34% to 24%, while the unemployment rate has decreased from 8.4% to 6.5 percent. These trends are encouraging, but they are insufficient because one in every four Pakistanis continues to live in poverty. Table I highlights the changes in important economic indices from October 1999 to June 2006.
5. Third, the essential premise of the policy reform agenda was that macroeconomic stability would be short-lived unless it was supported by structural changes to eliminate microeconomic inefficiencies and strengthen economic governance. Pakistan has effectively executed the first phase of structural reforms, which have increased the economy's efficiency and resilience to unexpected external shocks. The primary goal of these changes was to give the private sector more freedom to own, manufacture, distribute, and exchange products and services while progressively removing the state sector from this arena. The development of public-private partnerships in big infrastructure projects as a policy effort is likely to address some of the challenges inherent in private infrastructure projects while also relieving the public sector's financial restrictions. Instead of actively overseeing and presiding over the commanding heights of the economy, the function of the state in Pakistan has been recast as a facilitator, enabler, protector, and regulator. State intervention is acceptable when there is a clear case of market inefficiency, such as externalities, a flawed financial market, or when there is a clear case of social protection for the poor.
6. Fourth, Pakistan is in a strategic location that connects India to Iran, Afghanistan, and the Central Asian States, provides access to the sea for landlocked Central Asian, Afghan, and Western Chinese countries, serves as an energy and transit corridor, and opens up to the oil-rich Gulf States next door. This strategic position, along with finished and planned investments in ports, roads, pipelines, and other infrastructure, will open up a plethora of new prospects that might be very appealing. The risk-return ratio in these projects is quite beneficial, and a number of international businesses are eager to take advantage of the first-mover advantage by placing their investment, notably in the Gawadar port area.
7. Leaving aside the current circumstances, I'd want to address two crucial concerns this afternoon that concern all potential investors and companies - domestic and foreign – in Pakistan. First, if the current levels of stability and development are transient in character or will be sustained over time. Second, there has been significant discussion over whether the September 11, 2001 events had much to do with Pakistan's economic resurgence or whether the changes were more fundamental. To investigate these two issues, we must consider the strength of economic policies, the depth of structural changes, and the quality of economic governance. Before clarifying these two issues, I'd like to make two wider comments to set the stage for our ensuing conversation.
8. SUSTAINABILITY OF GROWTH
It should be emphasized that the Nawaz Sharif Government launched significant economic reforms in Pakistan in 1991, which were maintained by the Benazir Bhutto Government and were further escalated and executed by the Musharraf Government. Thus, there is no doubt in anyone's mind that the primary direction of economic policies being followed in Pakistan currently has broad political consensus and support among all of Pakistan's prominent political parties. The basic notion that the government should not be in the business of operating enterprises, but rather of regulating markets and establishing the appropriate policy environment has been demonstrated by all previous governments. Deregulation, liberalization, privatization, and private sector-led development have been persistently pursued over the previous 16 years, and I have little doubt that they will continue to be the foundations of future economic policy in Pakistan, regardless of whatever political party is in power. Of course, there will be differences in approaches, tactics, and nuances, moments of point-scoring, distance from previous governments' specific transactions, and the development of new modalities, but the substance and flung of economic and social policies will remain the same and elevate partisan politics.
9. The second crucial element to remember is that Pakistan has a long and continuous history of having an open, non-discriminatory, and liberal foreign investment system. Mr. Z.A. Bhutto's government nationalized the local industrial industry, banks, and insurance businesses in the early 1970s but did not affect international investment. Not only are the threats of expropriation and transfer nearly non-existent, but the equal playing field provided to international investors is unsurpassed in the developing world. This is a deliberate policy decision because Pakistan is sandwiched between two economic behemoths – China and India – and we cannot afford to maintain the same barriers to international investment that our big neighbors have erected. We must be far more hospitable and keep the door open to foreign investors who can support our economy by contributing cash, management skills, technological transfer, and integration into global markets. This free foreign investment environment is firmly rooted in Pakistan's political ethos and economic imperatives.
10. Let me now discuss how a confluence of excellent economic policies, structural changes, economic governance, and good fortune has fundamentally altered Pakistan's economic environment.
8. Economic Policy Strength
Fiscal indiscipline for over a decade has been the plague of Pakistan's economic troubles, trapping the country im debt. This fundamental cause has to be surgically eliminated in order to reduce the risk of its recurrence in the future. The Parliament has enacted a Fiscal Responsibility Law, which limits future administrations' ability to borrow their way out of trouble. The debt/ GDP ratio must be decreased by 2.5 percentage points every year and cannot surpass 60 percent. Any variation must be explained to Parliament and approved by it. This measure should serve as a strong deterrent to future budgetary irresponsibility.
12. Monetary policy is currently managed by an independent central bank with the goals of price stability, financial stability, and economic growth in mind. Despite the fact that it is a delicate balancing act, and that inflationary pressures have emerged in the previous two years, the Central Bank is committed to pursuing a monetary policy that keeps inflation under control. Credit limits, deposit and lending rate limitations, preferential treatment for the government, and credit allocation to key sectors have all been replaced with market-based policy instruments. Individual banks make credit distribution decisions based on objective criteria but guided by prudential laws, and interest rates and currency rates are market-driven.
13. External debt
management policy was focused on (a) reprofiling the stock of official
bilateral debt, (b) substituting concessional loans for non-concessional from
international financial institutions, and (c) pre-paying expensive loans, and (d)
liquidating short term liabilities. The debt ratio has thus been reduced from 100 percent of GDP to 56 percent in five years'
time. This restructuring of debt has put
14. Trade policy
in
15.
STRUCTURAL REFORMS
16. It was realized by the policymakers that
stability will remain elusive and short-lived if it was not accompanied by
structural reforms to remove microeconomic distortions and by bringing about
improvement in economic governance. Concurrently with the debt restructuring,
the country embarked on fiscal policy reforms and consolidation by raising
tax revenues, reducing expenditures, cutting down subsidies of all kinds, and
containing the losses of public enterprises. Tax reforms were undertaken to
widen the tax base, remove direct contact between taxpayers and tax collectors,
introduce value-added tax as the major source of revenue, simplify tax
administration and strengthen the capacity of the Central Board of Revenue.
Although these reforms are still underway, the adoption of universal self-assessment followed by a random audit of selected tax returns, automation, and
reorganization of the tax machinery have begun to help improve tax collection. Tax-GDP
ratio in
17. As one of the sources of fiscal problems
was the losses and inefficiencies of public enterprises the Musharraf
Government actively pursued an aggressive privatization plan whose thrust was the sale of assets in the oil and gas industry as well as in the banking,
telecommunications, and energy sectors, to strategic investors, with foreign
investors encouraged to participate in the privatization process.
18. As
19. Foreign
Portfolio Investors (FPI) can also enter and exit the market freely without any
restrictions or prior approvals. In the Karachi Stock Exchange with a market
capitalization of US$50 billion and over 650 listed companies, corporate
earnings were on average in the 20-25 percent range much higher than those in most emerging
countries. This makes
20. Financial sector reforms in
21. Agriculture credit, SME financing,
consumer loans, and microcredit have become mainstream products of the banking
industry, and the borrower base of the banking system has multiplied from 1
million to 4 million households. The middle and lower-middle-class which had
been completely shut off from access to banking services are now enjoying car
loans, mortgages, credit cards, and consumer durables. Small farmers are using bank
credit for buying chemical fertilizers, certified seeds, insecticides, small
implements, and hiring tractor services. Small and medium entrepreneurs are
expanding their fabrication and manufacturing capacities and upgrading
technology. Landless labor and poor women in the rural areas are receiving
loans for poultry, small livestock, sewing machines, etc. The main
beneficiaries of these reforms are the customers of financial services although
it must be recognized that market-determined deposit rates have also declined
significantly. But as the lending rates are surging upwards, deposit rates are
also going to depict an upward movement with a time lag. The outreach of the banking
sector is still very sparse outside the urban areas and has to be extended to
cover at least 50 percent of rural households if any meaningful results are to
be achieved in poverty reduction and urban-rural income inequalities.
22. Deregulation of oil and gas,
telecommunication, and civil aviation sectors has also brought about
significant positive results. Oil and gas exploration activity has stepped up
in recent years and constant discovery and production from new gas fields
operated by private sector companies have added new capacity to meet the
growing energy needs of the country. Independent power producers - both
domestic and foreign private companies - have played a critical role in filling
in the electricity generation requirements of
Economic
Governance
23. The most significant
shift introduced by the military government is in promoting good economic
governance although we have still a long way to go. The reforms in some of the
most important federal institutions - the Central Board of Revenue (CBR),
Securities and Exchange Commission (SECP), the State Bank of Pakistan (SBP), and
Pakistan Railways - initiated some years ago - are already beginning to take
some hold and making a difference as far as governance is concerned. Discretionary
powers have been significantly curtailed but corruption at lower echelons of
the Government is still widely rampant. Freedom of press and access to
information has had a salutary effect on the behavior of decision-makers but
this has not trickled down to the lower bureaucracy yet where implementation of
the policies takes place. The post-2003 period has witnessed some decline in
the Transparency International ratings of
24. The cornerstone of the governance agenda
is the devolution plan which transfers powers and responsibilities, including
those related to social services from the federal and provincial governments to
local levels. This plan was put into effect in 2001. The main premise of the
devolution plan is the belief that development effort at the local level should
be driven by priorities set by elected local representatives, as opposed to
bureaucrats sitting in provincial and federal capitals. Devolution of power
will thus strengthen governance by increasing decentralization, de-concentration,
accountability, and people's participation in their local affairs. However, in
the meanwhile, the transition has created its own set of dislocations and
disruptions in the delivery of services that need to be addressed.
25. Other essential ingredients for improving
economic governance are the separation of policy and regulatory functions which
were earlier combined within the ministry. Regulatory agencies have been set up
for economic activities such as banking, finance, aviation, telecommunications,
power, oil, gas, etc. The regulatory structures are now independent of the
ministry and enjoy quasi-judicial powers. The Chairman and Board members enjoy the security of tenure and cannot be arbitrarily removed. They are not answerable
to any executive authority and hold public hearings and consultations with
stakeholders.
26. The
National Accountability Bureau (NAB) has been functioning quite effectively for
the last five years as the main anti-corruption agency. A large number of high
government officials, politicians, and businessmen were sentenced to prison,
subjected to heavy fines, and disqualified from holding public office for
twenty-one years on charges of corruption after conviction in the courts of
law. Major loan and tax defaulters were also investigated, prosecuted, and
forced to repay their overdue loans and taxes.
27. Civil service reforms aimed at improving
recruitment, training, performance management, career progression, right-sizing
of ministries and attached departments, and improving compensation for
government employees are part of the second generation reforms of the
government for building strong institutions in the country. Proposals have been
developed to depoliticize recruitment,
promotions, and career development, enhance the independence and responsibilities of the Federal Public Service Commission
(FPSC) and systematically introduce merit-based recruitment and promotions. The
Civil Service Act has to be amended to
reflect performance-based career progression enabling the government to reward efficient and competent civil servants. The public sector educational
training infrastructure is also being restructured to strengthen skill-based
training of civil servants at all levels. These are highly demanding reforms
and a consensus has to be built among the stakeholders before they can be accepted
and implemented.
28. Reforms in access to justice, under
implementation since 2001 will deal with delays in the provision of justice,
case management, automation, and court formation systems. In addition, human
resources, management information systems, and the infrastructure supporting the judicial system are being revamped and upgraded. Small Causes Courts have been
established to provide relief to the poor who have small claims. Alternate
Dispute Resolution mechanisms have proved to be successful in bringing
expeditious disposal of commercial and tax disputes and are being replicated
for wider application.
IMPACT OF SEPTEMBER 11 EVENTS.
29. A large number of observers and casual
empiricists both within and outside
30. The data presented in Table-II shows that
even if we assume the extreme case that all official transfers, debt relief, and
all foreign loans/ credits represent the “gift” of September 11 to
31. It should be recognized that any external
financial relief such as provided in the aftermath of Sept 11 would dissipate
quickly and thus remain temporary and transitory in nature until it is
accompanied by fundamental structural reforms that clean up the economic
landscape, unshackle the entrepreneurial energies of private economic actors,
lay the foundations for competitive markets under the vigilant eyes of
regulators and expand the productive and foreign exchange earning capacity of
the country. As pointed out earlier unless the reforms of the financial sector,
liberalization of trade and tariff regime, improvement in tax policy and
administration, deregulation of oil and gas and telecom sectors, and privatization
of state-owned enterprises were put in place it would not have been possible to
take advantage of the situation offered by Sept. 11 for its contribution to the
dynamism of the economy and sustained growth during the last four years.
32. The data presented in Table II clearly
demonstrates that
33. In order to further evaluate the veracity
of the assertions of the theory of the dependence of our economy on the US, four
key indicators are selected (a) US
assistance as a percent of Pakistan’s total budgetary expenditure and (b) US
assistance as a percent of Pakistan’s total foreign exchange receipts (c) US
assistance as a percent of total current account receipts of Pakistan and (d) US
assistance as percent of the total value of imports of Pakistan. These indicators
have been carefully chosen to see as to how much damage will accrue to our
balance of payments and fiscal accounts if the
34. The results of this analysis shown in
Table III indicate that even under the worst-case scenario of zero aid flows
and no reimbursements for logistics services rendered to the
35. There is no doubt that the Government of
Pakistan and the people of Pakistan do very much appreciate the financial and
moral support demonstrated by the U. S Government at the critical moment in
Pakistan’s economy. Several other collateral benefits accrued to the economy as
a result of the U.S bilateral debt forgiveness, strict scrutiny of remittances
through informal channels, the US EXIM Bank and OPIC’s highly positive
initiatives towards Pakistan, and the withdrawal of all different types of economic
sanctions. U.S Administration played a helpful role in ensuring a larger volume
of concessional assistance to
36. The US is an important trading and investment
partner of
37. Despite
these reforms,
TABLE- I
CHANGES IN KEY MACROECONOMIC INDICATORS
|
|
October 1999 |
June 2006 |
Change in the Indicator |
|
GDP
Growth Rate |
4.2% |
6.7% |
Positive |
|
Inflation
|
5.7% |
7.9% |
Negative |
|
Fiscal
Deficit /GDP |
-6.1% |
4.2% |
Positive |
|
Current
Account /GDP |
-4.1% |
3.9% |
Positive |
|
Public
Debt / GDP |
100% |
57% |
Positive |
|
External
Debt/GDP |
52% |
28% |
Positive |
|
Interest
Payments/ Govt. Revenues |
50% |
22% |
Positive |
|
Remittances
|
US$ 88 million
per month |
-US$ 385 million
per month |
Positive |
|
Exports
|
US$ 7.8 billion |
US$ 16.5 billion |
Positive |
|
Tax
Revenues |
Rs. 391 billion |
Rs. 712 billion |
Positive |
|
Rupees-
Dollar Parity |
Depreciating |
Stable |
Positive |
|
Foreign
Direct Investment |
US$ 1.6 million |
US$ 3.5 billion |
Positive |
|
Foreign
Exchange Reserves |
US$ 1.6 billion |
US $ 13.3 billion |
Positive |
|
Poverty
Incidence |
33% |
24% |
Positive |
|
Unemployment
|
6% |
6.5% |
Negative |
Note: All indicators
in Column 1 pertain to 1998-99 or October 1999.
All indicators in Column 2 pertain to 2005-06 or June 2006.
TABLE - II
Sources of Foreign Exchange Earnings
FY 00 – FY 06
$ Million
|
|
FY 00 |
FY 01 |
FY 02 |
FY 03 |
FY 04 |
FY 05 |
FY 06 |
|
A. Exports of Goods & Services |
9,574 |
10,284 |
11,056 |
13,686 |
15,103 |
17,801 |
20,254 |
|
B. Workers’ Remittances |
983 |
3,087 |
2,390 |
4,237 |
2,871 |
4,168 |
4,600 |
|
C. Other Private Transfers |
2111 |
2,853 |
1,899 |
1,559 |
2,293 |
4,202 |
5,345 |
|
D. Official Transfers |
940 |
842 |
1,500 |
1,051 |
634 |
398 |
679 |
|
E. Debt Relief |
- |
- |
- |
1,000 |
- |
- |
- |
|
F. Foreign Direct Investment |
472 |
323 |
485 |
798 |
951 |
1,096 |
1,981 |
|
G. Privatization Proceeds |
- |
- |
- |
- |
- |
363 |
1,540 |
|
H. Euro / Sukuk Bonds |
|
|
|
|
500 |
600 |
800 |
|
I. Foreign Loans / Credits |
1589 |
2812 |
2,910 |
2,293 |
1,726 |
2,431 |
2,728 |
|
J. Others |
158 |
175 |
164 |
271 |
199 |
1,642 |
2,527 |
|
TOTAL: |
15,827 |
18,377 |
20,404 |
24,895 |
25,253 |
32,106 |
40,508 |
Table – III
Key indicators of
|
|
2006-07 |
|
1. Annual
|
7.2% |
|
2. Annual
|
4.5% |
|
3. Annual
|
6.4% |
|
4. Annual
|
5.8% |
If you have any concern or doubt please let me know.
Thanks