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ECONOMY OF PAKISTAN:
What Went Wrong & Why?
PAKISTAN’S ECONOMY
Historical Performance
Based on Key Economic Indicators
Macroeconomic Performance in Pakistan:
        Historical Perspective
                            1960' 1970' 1980' 1990'
        Growth (%)
                               s     s     s     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
                                    -      -     0.8    2.3
          Education
        Expenditure on Health       -     0.6    0.8    0.7
Relatively Recent
  Macroeconomic Performance
         Growth of GDP and Components (%)
18.0

16.0

14.0

12.0

10.0

 8.0

 6.0

 4.0

 2.0

 0.0
       00-01    01-02    02-03     03-04    04-05    05-06   06-07   07-08
-2.0

-4.0



               GDP      - Agriculture      - Manufacturing     - Services
Relatively Recent Macroeconomic
           Performance

           Macro Imbalances relative to GDP
 8.0
 7.0
 6.0
 5.0
 4.0
 3.0
 2.0
 1.0
 0.0
       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
    25.0

    20.0

    15.0

    10.0

     5.0

     0.0
           00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08

                    Total Investment   National Savings
                    Total Revenue      Total Expenditure
                    Total Exports      Total Imports
Economy of Pakistan: Relatively Recent Performance
Human Resources/ Social     00-01 01-02   02-03   03-04   04-05   05-06   06-   07-08
Development                                                               07


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/   1.6   1.9     1.7     2.1     1.0     1.9     2.4   2.3
GNP
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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Economy of Pakistan what went wrong

  • 1. ECONOMY OF PAKISTAN: What Went Wrong & Why?
  • 3. Macroeconomic Performance in Pakistan: Historical Perspective 1960' 1970' 1980' 1990' Growth (%) s s s 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
  • 4. 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 - - 0.8 2.3 Education Expenditure on Health - 0.6 0.8 0.7
  • 5. Relatively Recent Macroeconomic Performance Growth of GDP and Components (%) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 -2.0 -4.0 GDP - Agriculture - Manufacturing - Services
  • 6. Relatively Recent Macroeconomic Performance Macro Imbalances relative to GDP 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Budget Deficit Trade Deficit Current Account Deficit
  • 7. Relatively Recent Macroeconomic Performance Key Variables relative to GDP 25.0 20.0 15.0 10.0 5.0 0.0 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Total Investment National Savings Total Revenue Total Expenditure Total Exports Total Imports
  • 8. Economy of Pakistan: Relatively Recent Performance Human Resources/ Social 00-01 01-02 02-03 03-04 04-05 05-06 06- 07-08 Development 07 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/ 1.6 1.9 1.7 2.1 1.0 1.9 2.4 2.3 GNP Expenditure on Health/ GNP 0.7 0.7 0.7 0.6 0.6 0.5 0.6 0.6
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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.
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. 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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