Economy of Pakistan

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 GDP in 2005 was estimated at approximately $368 billion, larger than that of Saudi Arabia, but slightly smaller than the GDP of the Philippines.

Economic history - an overview
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 throughout its history.

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% 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.[1] 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 it’s 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.

In the fiscal year that ended June 30, 2005, Pakistan's GDP growth rate was 8.4% which is (after China) the second-highest among the ten most populous countries in the world. [7]


Economic history

First five decades
Economically, Pakistan was a very poor and predominantly agricultural country at the time of its independence in 1947 from British South Asia. During its first four decades, Pakistan's economic growth rate was better than the global average.

In fact Current GDP per capita grew 112% in the Sixties and 81% in the Seventies but this proved unsustainable and growth fell sharply to 22% in the Eighties and 18% in the Nineties.

Industrial-sector growth, including manufacturing, was also above average. In the early 1960s, Pakistan was seen as a model of economic development around the world, and there was much praise for the way its economy was progressing. Later, economic mismanagement in general, and fiscally imprudent economic policies in particular, caused a large increase in the country's public debt and led to slower growth in the 1990s.

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 concentrated into a four-year period —

the Asian financial crisis;
economic sanctions — according to Colin Powell, Pakistan was "sanctioned to the eyeballs";
global recession;
a severe drought — the worst in Pakistan's history, lasting four years;
heightened perceptions of risk as a result of military tensions with South Asia — with as many as a million troops on the border, and predictions of impending (potentially nuclear) war; and
the post-9/11 military action in neighboring Afghanistan, with a massive influx of refugees from that country.
Despite these adverse events, Pakistan's economy kept growing, and economic growth accelerated towards the end of this period. This resilience has led to a change in perceptions of the economy, with leading international institutions such as the IMF, World Bank, and the ADB praising Pakistan's performance in the face of adversity.


Recent economic history
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. 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 rescheduling. The Sharif government had difficulty meeting the conditionality of the IMF program, which was suspended in July 1999, and resumed later during 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. [3]

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 supranational financial institutions such as the World Bank, the International Monetary Fund and the Asian Development Bank, as well as improved credit ratings from Standard & Poor's 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.

Pakistan's current account surplus 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.

The economy today

Stock market
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.

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.


Growing middle class
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 [4]. In addition, Pakistan has a growing upper class with relatively high per capita incomes. However, Pakistan has no individual with as much as a billion US dollars, according to Forbes magazine [4] and has the distinction of being (by population) the largest nation to have no billionaires. On measures of income inequality, the country ranks slightly better than the median.


Demographics
For main article : Demographics of Pakistan
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% 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 [2] 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.

The Indian government will also have to deal with the significant momentum that has been built into the population growth. 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. Pakistan has a lower population density than other populous Asian nations such as Japan or India. In the past, excessive red tape made firing, and consequently hiring, difficult. Significant progress in taxation and business reform has ensured that many firms now are not compelled to operate in the underground economy. The nations of Iran, Germany, France and previously Pakistan had one thing in common; high costs of entry into the market for firms and excessive restriction on labor. The result: high unemployment. In recent years, employment rates in Pakistan have been unexceptional compared to other countries [8]

Rupee
The basic unit of currency is the Rupee, which is divided into 100 paisas. Since the turn of the century, a strengthening economy and large current-account surplus has caused the rupee's exchange rate to rise in value. In response, Pakistan's central bank has prevented the rupee from rising too much, by lowering interest rates and buying dollars, in order to preserve the country's export competitiveness. As of 2005, one US dollar is approximately equal to 60 rupees.

Foreign exchange rate
Currency: 1 Pakistani rupee (PKR) = 100 paisa

The Pakistani rupee depreciated against the US dollar until the turn of the century, when Pakistan's large current-account surplus pushed the value of the rupee up versus the dollar. Pakistan's central bank then stabilized by lowering interest rates and buying dollars, in order to preserve the country's export competitiveness

Exchange rates: Pakistani rupee (PKR) per US$1
58 (2004)
57.752 (2003)
59.7238 (2002)
61.9272 (2001)
53.6482 (2000)
51.90 (1999)
44.550 (1998}
40.185 (1997)
35.266 (1996)
30.930 (1995)

Foreign trade
Pakistan is a member of the World Trade Organization, and has bilateral and multilateral trade agreements with many nations and international organizations.

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.

In the late 1990s, Pakistan 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[6]. Increasingly, the composition of assistance to Pakistan 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 refused further IMF assistance, and consequently the IMF program was ended[3]. The government is also reducing tariff barriers with bilateral and multilateral agreements.

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 2004-2005 was 3.4% of GDP. The budget deficit in fiscal year 2005-06 is expected to be over 7% of GDP. Economists believe that the soaring trade deficit would have an adverse impact on Pakistani rupee by depreciating its value against dollar (1 US $ = 60 Rupees (March 2006) ) and other currencies.

One of the main reasons that contributed to the increase in trade deficit is the increased imports of earthquake relief related items, especially tents, tarpaulin and plastic sheets to provide temporary shelter to the survivors of earthquake of October 8th, 2005 in Azad Jammu and Kashmir and parts of the NWFP, an official said. The rise in the trade gap was also fuelled by high oil import prices, food items, machinery and automobiles.

Pakistan's trade deficit is $8.62 billion, almost 8.2 percent of Gross Domestic Product (GDP), due to its high import bill and the rise in prices during the past nine months of the current fiscal year (July 2005 to March 2006).

Pakistan's total imports in first nine month of current fiscal year stood at $20.693 billion, up 18.56 percent, and exports at $12.073 billion, with 43.24 percent increase over the corresponding period of the last fiscal year, the Federal Bureau of Statistics (FBS) said April 14th, 2006.


Exports
Pakistan exports rice, furniture, cotton fiber, cement, tiles, marble, textiles, clothing, leather goods, sports goods (renowned for footballs/soccer balls), surgical instruments, electrical appliances, software, carpets, and rugs, ice cream, livestock meat, chicken, powdered milk, wheat, seafood (especially shrimp/prawns), vegetables, processed food items, Pakistani assembled Suzukis (to Afghanistan and other countries), defense equipment (submarines, tanks, radars), salt, marble, onyx, engineering goods, and many other items. Exports are projected to be $17 billion in current financial year.

The exports in the first nine months of 2006 financial year (July 2005 to June 2006) were $12.073 billion showing an increase of 43.24% compared to corresponding period last fiscal year.

Imports
Pakistan's single largest import category is petroleum and petroleum products. Other imports include: industrial machinery, construction machinery, trucks, automobiles, computers, computer parts, medicines, pharmaceutical products, food items, civilian aircrafts, defense equipment, iron, steel, toys, electronics, and other consumer items.

Due to bad harvest of sugarcane crop Pakistan is importing sugar from India in current fiscal year. The consumption of meat in Pakistan has outstriped the supply causing shortage of and high prices has resulted into import of 5,000 animals (cows, buffoes, goats, sheeps) daily from India in current fiscal year. Imports are projected to be over $25 billion in current financial year.

The imports in the first nine months of 2006 financial year (July 2005 to June 2006) amounted to $20.693 billion showing an increase of 18.56% compared to corresponding period last fiscal year.


Deficit
Pakistan's trade deficit is $8.62 billion, almost 8.2 percent of Gross Domestic Product (GDP), due to its high import bill and the rise in prices during the first nine months of the current fiscal year (July 2005 to March 2006).

Economists believe that the soaring trade deficit would depreciate the Pakistani rupee against dollar and other currencies. The demand by local importers for dollars in the coming months would increase to finance their surplus imports. Independent economic experts say that the trade deficit would cross $10 billion current fiscal year. The rise in the trade gap has been attributed to high oil import bill, and rise in the prices of food items, machinery and automobiles.


Bonds
Pakistan is expected to sell a dual-tranche sovereign bond worth $750 million on March 23, 2006 that analysts said should ensure a favorable reception in the bond market. The 10-year tranche would be $500 million and the 30-year portion $250 million. Pricing is expected during New York trading hours on March 23, 2006. The sources said that the 10-year tranche was expected to be priced at around 7.125 percent, while the longer-dated tranche was expected to be sold at around 7.875 percent, the top end of the indicative yield range of 7.75 to 7.875 percent.

The bonds, comprising 10-year and 30-year tranches, had generated $1.5 billion in orders and a total size of as much as $1.25 billion had been anticipated for what is Pakistan’s third foray into the international debt market since 2004

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