ECONOMY OF PAKISTAN:What Went Wrong & Why?

PAKISTAN’S ECONOMYHistorical PerformanceBased on Key Economic Indicators

Macroeconomic Performance in Pakistan:Historical Perspective

Growth (%) 1960's1970'

s1980'

s1990'

s

GDP 6.8 4.8 6.5 4.6

- Agriculture 5.1 2.4 5.4 4.4

- Manufacturing 9.9 5.5 8.2 4.8

- Services 6.7 6.3 6.7 4.6

Share (%) in GDP

Total Investment - 17.1 18.7 18.3

National Savings - 11.2 14.8 13.8

Total Revenue 13.1 16.8 17.3 16.9

Total Expenditure 11.6 21.5 24.9 24.1

Budget Deficit 2.1 5.3 7.1 6.9

Macroeconomic Performance in Pakistan:Historical Perspective

Share (%) in GDP 1960's 1970's 1980's 1990's

Total Exports - - 9.8 13.0

Total Imports - - 18.7 17.4

Trade Deficit - - 8.9 4.4

Current Account Deficit - - 3.9 4.5

Human Resources/ Social Development

Un-employment Rate - - 1.4 5.7

Literacy Rate - - 29.5 40.7

Male - - 39.0 51.6

Female - - 18.7 28.6

Expenditure on Education - - 0.8 2.3

Expenditure on Health - 0.6 0.8 0.7

Relatively RecentMacroeconomic Performance

Growth of GDP and Components (%)

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08

GDP - Agriculture - Manufacturing - Services

Relatively Recent Macroeconomic Performance

Macro Imbalances relative to GDP

0.01.02.03.04.05.06.07.08.0

00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08

Budget Deficit Trade Deficit Current Account Deficit

Relatively Recent Macroeconomic Performance

Key Variables relative to GDP

0.0

5.0

10.0

15.0

20.0

25.0

00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08

Total Investment National SavingsTotal Revenue Total ExpenditureTotal Exports Total Imports

Economy of Pakistan: Relatively Recent Performance

Human Resources/ Social Development

00-01 01-02 02-03 03-04 04-05 05-06 06-07

07-08

Un-employment Rate 6.0 7.8 7.8 8.3 7.7 7.6 6.2 5.2

Literacy Rate 49.0 50.5 51.6 53.0 53.0 54.0 55.0 0.0

Male 58.0 0.0 0.0 0.0 65.0 65.0 67.0 0.0

Female 32.0 0.0 0.0 0.0 40.0 42.0 42.0 0.0

Expenditure on Education/ GNP

1.6 1.9 1.7 2.1 1.0 1.9 2.4 2.3

Expenditure on Health/ GNP 0.7 0.7 0.7 0.6 0.6 0.5 0.6 0.6

Pressing Macroeconomic Issues

• Four major concerns that haunted the economy in 2008 were:– Spiraling Inflation –High (and widening) Fiscal Deficit• Re-emergence of Primary Deficit

–High Trade Deficit and Rising CAD– Pressure on Currency and Foreign

Exchange Reserves

Pressing Macroeconomic Issues

• Soaring Inflation– Possible Causes

• Monetary Phenomenon (accommodating to generate growth thru reduced cost of borrowing)

• Supply Constraints (sugar, wheat etc)• Imported (POL, edible oil, other primary products)• Adverse Expectations

– Possible Remedies• Adopt Tight Monetary Stance – it may retard Growth• Improve Supply Shortages; Better Storage Capacity• Reduce Reliance on Imports – self-sufficiency,

conservation• Transmit ‘right’ signals

Pressing Macroeconomic Issues

• High Fiscal Deficit due to fiscal indiscipline– Expenditure over-runs leading to

abnormally high borrowings from SBP• Huge subsidy payments for oil, power,

wheat, and fertilizer;• Substantial increase in interest

payment on domestic debt – sheer callousness and bad sequencing;

• Conscious policy inaction

– Shortfall in Revenue Collection

Pressing Macroeconomic Issues

• High Trade Deficit and Rising CAD– Poor export performance, paying price for

heavy reliance on textile;– The export to import ratio declined from 56%

to 48%;– Seven items -- POL, Edible Oil, Wheat,

Cotton, Fertilizer, Iron & Steel, and oil rigs had additional cost of Rs. 477.4 Billion in the overall imports of Rs. 2242.3 B till May over last year. The rest of the import bill was just a routine matter. Thus, the real concern and policy action should have revolved around these items only.

Pressing Macroeconomic Issues

• Currency Depreciation and Depletion of Foreign Exchange Reserves

• Inability to generate external financing due to deteriorating rating

• Inability of SBP to intervene• Speculators had a field day

Pressing Macroeconomic Issues

• Serious Law and Order situation on the domestic front

• Political unrest and transitional phase of the government

• Serious energy crisis having adverse impact on growth of manufacturing sector

• Falling external demand due to onset of recession in the west

Corrective Measures:Natural or Otherwise

• Move towards fiscal discipline– Reduction in Expenditure– Withdrawal of Subsidies– Policy Reversal in Taxation Policy

• Further tightening of Monetary Policy• IMF Program once again• Falling petroleum prices, Falling

prices of edible oil, other primary products

• Lots of PDL

Future Prospects• Difficult period to continue for some time

to come• Fiscal and Monetary Policies are

contractionary in nature, Growth retarding.

• Manufacturing sector still facing high cost of borrowing, reduced domestic and foreign demand

• Slowdown in services sector• Stabilization Program is mostly painful

with severe conditionalities*** End of Lec 2

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