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TheCurrentEconomicandPoliticalOutlookofPakistan:ChallengesandProspects

RESEARCH·APRIL2015

DOI:10.13140/RG.2.1.2108.8800

1AUTHOR:

KhalidAhmed

UniversityofCambridge

13PUBLICATIONS28CITATIONS

SEEPROFILE

Availablefrom:KhalidAhmed

Retrievedon:03September2015

The Current Economic and Political Outlook

of Pakistan:

Challenges and Prospects

Dr. Khalid Ahmed

Assistant Professor (Sukkur –IBA)

Research Fellow (KIEP)

2014. 04

Contents

1. Some Macroeconomic Indicators

2. Key Benchmarks

3. Business Environment

4. Business and Trade Reforms

5. 5-Reasons to Invest in Pakistan

6. Attractive Investment Policy

7. Key Challenges

Contents

8. Opportunities

9. Political Outlook

10. Sharif ‘s Govt. and Politico-Economic Agenda

11. Pak-China Strategic Relations and Future Trade Prospects

12. Pak-India Relations and Kashmir

13. Policy Challenges

14. Conclusions

Population 179.2 mn. (2012)

GDP $574.1 bn. (PPP 2013 est.)

-Agriculture 21.2%

-Industry 25.4%

-Services 53.4%

Inflation 7.93% (CPI, as of march 2014)

Unemployment 6.6 (2013 est.)

GDP per capita $3,100 (PPP 2013 est.)

21%

26% 53%

GDP by Sector (%)

Agri

Industry

Services

The Economy of Pakistan

1. Some Macroeconomic Indicators

Labor Force 60.38 mn. (2012 est.) by occupation:

-Agriculture 43.1%

-Industry 20.3%

-Services 36.6%

(7th largest pool of scientists & engineers in the world)

Main Industries

Textile and apparel Leather Food processing Pharmaceuticals

Chemicals Construction Cement

Mining Machinery Steel

Engineering Software Hardware

Motorcycle Auto parts Electronics

Paper Fertilizer Shrimp

The Economy of Pakistan

Exports 25.5 bn. (2013 est.) Main Export Commodities Textile (Garments, apparel, bed, linen, cotton, yarn, etc), Rice, Leather Goods, Sports Goods, Chemicals, Manufactures, Carpets & Rugs and Electrical equipments etc. Top 10 Export Destinations EU (18.2%), US (13.6%), China (11.1%), UAE (8.5%), Afghanistan (7.8%), South Korea (2.8%), Saudi Arabia (2.4%), India (2.1%), Turkey (2.0%), Iran (1.8%)

The Economy of Pakistan

Imports 33.27 bn. (2013 est.) Main Import Commodities Petroleum, Petroleum Products, Machinery, Transportation equipments, Iron & steel, Edible Oil Paper and paper products, Tea Electronics- -Products, Plastics Top 10 Import Destinations China (19.7%), Saudi Arabia (12.2%), UAE (12.1%), EU (10.4%), Kuwait (6.3%), Malaysia (3.9), India (3.7), Japan (3.6), Iran (3.4%), USA (3.2%)

The Economy of Pakistan

FDI Home $24.33 bn. (31.Dec.2013) FDI Abroad $1.57 bn. (31.Dec.2013) (in early 2014 Pakistan has become China’s largest FDI destinations in South Asia)

World’s largest natural gas consumer.

4th largest Cotton producer

4th largest Apricot producer

4th largest Sugarcane producer

5th largest Mango producer

5th largest Milk producer

6th largest date palm producer

8th largest Rice producer

10th largest Oranges producer

The Economy of Pakistan

2. Key Benchmarks

Source : W.T.O, Economic Survey of Pakistan, IMF etc Source World Bank

The Economy of Pakistan

World Bank’s Ease of Doing Business Ranking 2013 (South Asia)

Country World Rank Regional Rank

Sri Lanka 85 1

Maldives 95 2

Nepal 105 3

Pakistan* 110 4

Bangladesh 130 5

India 134 6

Bhutan 141 7

*In 2010, Pakistan was 85th in world and 1st in South Asia

Source :World Bank

3. Business Environment

The Economy of Pakistan

4. Business and Trade reforms

Pakistan is one of the most trade liberalized economy.

Recently received GSP+ status from EU.

Signed Free Trade Agreement (FTA )with P.R CHINA.

Enhanced bilateral trade relations with neighboring countries

Proposed grant of MFN status to INDIA

Currently a the most Investment friendly environment

The Economy of Pakistan

5. 5-Reasons to Invest in Pakistan

5 Reasons

Geo-strategic Location

Population and Work

Force

Economic Outlook

Investment Policy

Special Economic

zone

Source: Board of Investment(BOI), Government of Pakistan. http://boi.gov.pk

The Economy of Pakistan

6. Attractive Investment Policy

Policy Parameters Manufacturing

Sector

Non-Manufacturing Sector

Agriculture Infrastructure and

social

Services including

IT & Telecom

Services

Govt. Permission Not required except 4

specified industries *

Not required except specific licenses from concerned agencies.

Remittances of profit,

dividends, etc.

Allowed Allowed

Upper Limit of foreign

equity allowed

100%

100%**

100%

100%

Customs duty on import of

PME

5%

0%

5%

0-5%

Tax relief (IDA, % of PME

cost)

25%

25%

Royalty & Technical Fee No restriction for payment of

royalty & technical fee.

Allowed as per guidelines - Initial lump-sum up to $100,000 - Max

Rate 5% of net sales - Initial period 5 years

*Arms and ammunitions ,High Explosives. Radioactive substances Security Printing, Currency and Mint. No new unit for the manufacturing of alcohol,

except, industrial alcohol ** Only for CAF (Corporate Agriculture Farming)

PME= Plant, Machinery and Equipment IDA= Initial Depreciation Allowance>

Source: Board of Investment(BOI), Government of Pakistan. http://boi.gov.pk

The Economy of Pakistan

7. Key Challenges

Challenges

Energy Shortage

Population Growth

Public & External

Debts Low Savings

Budget Deficit

Trade Deficit

The Economy of Pakistan

Energy shortage

0

5000

10000

15000

20000

25000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Meg

aw

att

s (M

W)

Demand and Supply Trend of Electricity (2003-12)

Demand

Supply

Note: In 2013 Pakistan had plant capacity of 19,588 MW but could only generate 10,000 to 15,000 MW.

Source: Private Power Infrastructure Board, www.ppib.gov.pk

The Economy of Pakistan

Population Growth

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Annual Population Growth in (1965-2012)

Population growth (annual %)

Note: Population in 1983, 88.5 mn. and in 2012 ,179.1 mn. (doubled in 30 years)

Source: Ministry of Finance, Government of Pakistan

The Economy of Pakistan

Public Debts

Source: Ministry of Finance, Government of Pakistan

Year / Billion (Rs.) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

a) Debt Payable (Rs) 1576 1728 1715 1852 1979 2152 2322 2601 3266 3852 4651 6014 7638 9521

Debt payable ($) 27.5 27.8 29.9 30.6 31.2 32.1 33.9 36.4 40.7 46.4 50.0 54.6 53.2 47.9

Exc. Rate (E.O.P) 52.5 63.4 60.1 57.7 57.9 59.7 60.2 60.4 68.3 81.4 85.5 86.0 94.5 99.1

b) Foreign Debt (Rs) 1442 1761 1795 1766 1810 1913 2041 2201 2778 3776 4270 4694 5030 4747

c) Total Debt (a + b) 3018 3489 3510 3618 3789 4065 4363 4802 6044 7629 8921 10709 12668 14268

GDP (mp) 3826 4163 4402 4823 5641 6500 7623 8673 10243 12724 14837 18063 20091 22909

Total Revenue 513 553 624 721 806 900 1095 1298 1499 1851 2078 2261 2566 2969

Total Debt as % of:

- GDP 78.9 83.8 79.8 75.0 67.2 62.5 57.2 55.4 59.0 60.0 68.1 59.3 63.0 62.3

- Revenue 588 631 563 502 470 452 398 370 403 412 429 474 494 481

The Economy of Pakistan

External Debt Trend US$ bn. (1980-2013)

Source: Ministry of Finance, Government of Pakistan

8.8

12.9

20.5 21.2

30.132 32.6 33.6

38.9 37.9 37.1 36.535.4 35.3 35.8

37.6

40.5

46.3

52.4

61.1

66.4 65.863.9

5

10

15

20

25

30

35

40

45

50

55

60

65

70

1980-81

1987-88

1989-90

1990-91

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

External Debt

The Economy of Pakistan

Low Savings

0

5

10

15

20

25

%

GDS as % of GDP compared with Inflation

Savings

Inflation

Note: Population in 1983, 88.5 mn. and in 2012 ,179.1 mn. (doubled in 30 years)

Source: World Bank

The Economy of Pakistan

Budget Deficit (as % 0f GDP (1990-2013))

Source: Ministry of Finance, Government of Pakistan

0.0

(8.7)

(7.4)

(8.0)

(5.9)(5.6)

(6.5) (6.4)

(7.7)

(6.1)

(5.4)

(4.3) (4.3)

(3.7)

(2.4)

(3.3)

(4.2) (4.3)

(7.4)

(5.4)

(6.3)(6.6)

(8.5)(8.8)

(10.0)

(9.0)

(8.0)

(7.0)

(6.0)

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

0.0

Dat

e

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

The Economy of Pakistan

Trade Deficit

Source: World Bank

-15

-10

-5

0

5

10

15

20

25

30

1967 71 75 79 83 87 91 95 99 03 07 2012

% o

f G

DP

Pakistan's Trade Deficit 1967-12

Exports %

Imports %

Net %

The Economy of Pakistan

Net Bilateral Aid Flow in Pakistan

Source: World Bank

-500

0

500

1000

1500

2000

2500

3000

3500

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Mil

lion

US

$

Net Total and US bilateral Aid Flow in Pakistan 1960-2011

Total Aid Flow

US aid Flow

The Economy of Pakistan

Policy Challenges

Fiscal Policy Challenge (Least tax payer nation, 8.4% tax-to-GDP-ratio 2013*, only 0.4% * of

population pay taxes, high Govt. expenditures)

Monetary Policy Challenge (Mostly IMF dictated monetary policy is adopted , however, Current account BoP is mainly maintained by personal remittances received ,which is avg. 5~6% of GDP and YOY grows at 10 % and foreign aid and FDI.

Weak Disaster Management System (One of the major reasons of economic slow down in Pakistan from 2009~2012 was financial crisis of 2008 followed by two devastating floods in 2010, and 2011 respectively. Agriculture production collapsed, infrastructure heavily damaged and 1.5 million Internally Displaced People (IDP’s) borne by the economy).

-Poverty (In 2008 there were 17.3% people living below poverty line in Pakistan but in 2012 this ratio rise to 22.4%. Poverty is a common issues of whole region and it needs to be resolved collectively as a quick remedy)

Population (The population growth has been very high which has been a major concern for lower growth and higher unemployment rate.

Infrastructure (Pakistan needs to have very strong infrastructure of roads, transportation, buildings, I.T

and communication in order to compete with other developing and emerging economies and for the attainment of sustained growth rate.

The Economy of Pakistan

8. Opportunities

Pakistan has 4th largest Coal reservoirs and also posses unexplored huge oil and gas reservoirs

in Sindh and Balochistan provinces.

It has 1046 KM Coast line having fast enough winds and sunlight throughout the year , that are

the potential renewable energy sources, which are yet unutilized.

Being an agricultural country the bio-fuels can be exploited at large.

Although the agriculture productivity has declined during last two decades but country is self

sufficient in food crops, however the productivity can be increased in both cash and food crops

that can boost the GDP growth.

Pakistan has world’s 7th largest scientist and engineers pool and 60 million young labor force.

Pakistan neighbors with world’s most populous and giant economies i.e. China and India. There

are many bilateral comparative advantages that can enhance trade potential.

Pakistan lies nearest to world’s 2/3 of oil producing countries (gulf).

The Economy of Pakistan

9. Political Outlook

Political interests dominate economic interests in Pakistan even in current and

future outlook……Why?

The frequent change of regimes (democratic and military)

Geo strategic location

Unresolved Kashmir issue

Post cold war syndrome

War on terror and current policy shift

Talibanization (Internal security)

The Economy of Pakistan

10. Sharif ‘s Govt. and Politico-Economic Agenda

The swift power shift of democratic Govt. portray a sound and stabilizing political environment.

First time in the history, the military institution has shown great support for strengthening of

democratic process.

Sharif’s Govt. has always been business friendly during its past tenures and at present as well.

The recent bilateral relations with India has been the most friendly as compare to last decade.

The Govt. has taken drastic measures for investor’s security by providing fool proof security

measures with help of army and other law enforcing agencies.

The ongoing process of peace talks with Taliban has further ease to conduct business activities.

The Govt. is seeking national consensus on all the political and economic issues which is also a good

sign.

The Economy of Pakistan

11.Pak-China Strategic Relations and Future Trade Prospects

Straight of Hormuz

The Future Energy Hub

12. Pak-India Relations and Kashmir

The Economy of Pakistan

Bone of contention b/w Pak-India

Increasing water disputes

If include N.A only route to connect

with P.R China

Major drawback to economic well

being of region (i.e., SAARC)

Major hindrance to economic well

being of both countries

Root cause of overall socio-politico-

-economic disputes between two nations

13. Policy Challenges

The Economy of Pakistan

10 million Afghan refugees who never went

back

Drugs dealing

Weapon and arms spread

Illegal cross border trade

Terrorism

Extremism

Talibanization

Pakistan’s growth has been deteriorated

majorly because of the change of regime

from military to democracy and vice versa.

Every time the shift has reinitiated the

process of development and never

remained consistent.

The consistent political process and regime

is imperative for sustained growth and

economy’s development

Again this time the pleasant Civil-Military

relationships is a challenge for sustainable

political situation

Post-Cold War Syndrome Civil-Military relations

The Economy of Pakistan

14. Conclusion

The main challenges, Pakistan economy is facing are energy shortage, high population growth rate, low saving rate

, high government expenditures, consistent budget deficit, trade deficit and internal and external debts.

The main indicators which positively contribute to reduce current account deficit are inward home remittances and f

oreign aid. However, there is need of higher FDI inflow and exports volume which is still under potential.

Although Pakistan is facing severe energy and security issues but yet it possesses strong potential to overcome both

the major hurdles.

The deterioration of economic growth during 2009~12 was mainly because of global financial crisis and two consec

utive worst natural disasters of country's history.

But Pakistan still managed to secure its 4th position in world bank’s ease of doing business in South Asia, which wa

s 1st in 2010 report.

Owing to Government’s pro-active economic policies, the economy hit 5% growth rate for 1Q-FY 14, compare to o

nly 2.9% 1Q-FY 13, although the target set for FY-14 is 4.4%.

Pakistan lacks in basic and IT infrastructure i.e. Buildings, roads, communication, transportation, e-government etc.

Due to weak disaster management system, country is fragile to natural calamities and disasters.

The Economy of Pakistan

Conclusion

The deteriorated macro-economic indicators are improved within first quarter of FY14 which is good sign and it

also shows that the Pakistan economy is highly dynamic.

The new government’s economic policies are highly friendly for private sector investment and trade. As a result

Pakistan could get GSP+ status but EU, and attracted substantial FDI from China, Turkey and EU recently.

The attractive sectors for foreign investors in Pakistan are: Energy, infrastructure and construction, automotive,

agriculture, mining, retail and pharmaceuticals.

After the completion of Gwadar port and its related projects to connect it with P.R China and Central Asian states

with open new corridors of trade and business.

The political set up of Pakistan has been frequently changed and resulted inconsistency in policies. This trend

always pushed economy backward and could not finished recovery phases even.

The current political set up is quite strong and has started to reflect positive signs.

The Pak-India relations have been very pleasant recently and Pakistan has decided to grant MFN status to India

after the elections are held, however the Kashmir issues will be still core issue and until its resolution the relations

may not be sustainable.