PRESENTATION ON

‘PAKISTAN'SECONOMY:
CHALLENGES & SOLUTIONS’
 Outline Of The Presentation
Why Economy Matters?

Pakistan’s Economy in Historical Perspective

Recent Development (Post 2007/08)

Why have we Landed in such a difficult situation?

Economy in the Current and the Next Year

What Needs to be Done?

 WHY ECONOMY MATTERS?
 Economy affects the lives of the people of Pakistan
 Two Pillars of the State
- Strong Economy
- Strong Defense
 A strong economy can ensure strong defense; it will enhance country’s
power and hence make the country’s defense even more stronger
 Economic Backwardness generates violence, social conflicts and
political turmoil.
 According to historian Paul Kennedy, “a nation’s military strength rests
on its economic strength”
 What is military strength? It is nothing but power. What is power? It is
the ability to influence the behaviour of others in accordance with one’s
aims and objectives
 Power can lead to prosperity and prosperity may generate more
power

 Former US Secretary of Defense Robert McNamara said that

“Security means development and without development there is no
security”.

 No nation can sustain strong defense and nuclear arsenal without a

strong economy

 A strong economy would ensure strong defense and not the other
way round
 EXAMPLE FROM SOVIET UNION
PERIOD REAL GDP GROWTH DEFENSE SPENDING
AS % OF GDP
1928-39 4.2 2.0*

1940-49 3.2 -

1950-59 7.1 9.0**

1960-69 4.3 14.5

1970-79 3.4 13.9

1980-89 2.7 15.4@

*1928 **1950 @ 1980-84
Source: William Easterly and Stanley Fisher, “The Soviet Economic Decline”, The World Bank
Economic Review, Vol. 9, No. 3, September 1995, pp 341-371
 One Pillar of the State (Economy) has been weakened
to the core in the last five years. Can the second pillar
(defense) remain strong and for how long?

 It is for this reason that economy needs greater

attention
PAKISTAN’ ECONOMY IN HISTORICAL PERSPECTIVES

 Not withstanding numerous challenges that we faced over the

last 65 yeas, Pakistan has done reasonably well on economic
front. Pakistan’s economy has grown at an average rate of 5.0%
per annum over the last 65 years.
 The influx of refugees from India created insurmountable
problems as the country had no resources to meet this
challenge
 The migration of Hindu and Sikh communities from Pakistan
nearly paralyzed the economic and administrative machinery.
 The head office of only One Pakistani owned bank was located
in Pakistani territory
 The Karachi Port was underdeveloped and most of Pakistan’s
trade routed through the Indian ports of Bombay and Calcutta

 India refused to release allotted share of cash balance of

undivided India to the tune of Rs 75 crore (Rs. 750 million) for
running the civil administration.

 After a long battle India released a much smaller amount than the
legitimate share of Pakistan
 The share of agriculture in GDP was 60% in 1947. Today,
it contributes 22% and 78% contribution comes from
industry and services
 Production of wheat was 4.0 million tons in 1947. Today
we are producing over 23-24 million tons - almost 6
times more
 Production of cotton was approximately 1.0 million bales
in 1947. Today we are producing close to 13.0 -14.0
million bales
 Production of sugarcane was 10 million tons in 1947.
Today we are producing over 55-60 million tons
• Out of 14,569 industrial establishments in British India in 1947,
only 1406 units (less than 10%) were located in the areas that
comprised Pakistan.

• At the time of independence, Pakistan had a narrow industrial

base with 34 units of textile, sugar mills and some cement
factory

• In 1947 there were 177,000 spindles in Pakistan. Today we

have 9.3 million spindles. There were 4800 looms in 1947;
today we have approximately 3.0 million power looms
• Pakistan used to produce 35,000 tons of sugar and today we are
producing more than 3.5-4.0 million tons of sugar

• At the time of independence Pakistan was producing 270,000

tons of cement. Today we are now producing over 28 million
tons of cement

• Pakistan inherited very weak infrastructure at the time of

independence. Pakistan inherited 22,000 km road and today we
have a road network of 258,350km

• Given its potential, Pakistan could have done better on

economic front
 UPS AND DOWNS IN PAKISTAN’S ECONOMY

Real GDP Growth (%)

1950s 2.5%
1960s 6.8%
1970s 4.8%
1980s 6.5%
1990s 4.6%
2000-01 2.0%
2001-02 3.1%
2002-03 4.7%
2003-04 7.5%
2004-05 9.0%
2005-06 5.8%
2006-07 6.8%
2007-08 5.0%
2008-09 0.4%
2009-10 2.6%
2010-11 3.7%
2011-12 4.4 %
2012-13 3.6%

Source: Pakistan Economic Survey

 Real GDP Growth (%)

10.00%

9.00%
GDP

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
RECENT DEVELOPMENTS (POST-2008)
- Food & Fuel Crisis (Common Challenges faced by every
economy)
- Intensification of War on Terror
- Political Instability
- Less than satisfactory security environment
- Energy Crisis
- Economy Remained out of Radar of the Government
- Instability in economic team
- Weak economic team
- Fiscal Indiscipline
- Weak governance
- Break down of public–private sector relations
CONSEQUENTLY
- Economic growth slowed to an average of 3.0% per annum
over the last five years from an average of 7.0 per annum
during the previous five years
- Investment is down to 50 years low at 12.5% of GDP from as
high as 22.5% of GDP only five years ago
- Domestic Saving Rate at 5.8% of GDP is the lowest in the
country’s history from an average of 15% of GDP during the
previous five years
- Large – scale manufacturing growth averaged 0.7% per
annum over the last five years from an average of 12.4% per
annum during the previous five years
 Real GDP Growth (percent)
Years China India Sri Lanka Bangladesh Pakistan

2005 11.3 9.0 6.2 6.3 9.0

2006 12.7 12.7% 9.5 9.5% 7.7 6.9% 6.5 6.4% 5.8 7.2%

2007 14.2 10.0 6.8 6.3 6.8

2008 9.6 6.7 6.0 6.2 5.0

2009 9.1 8.0 3.5 5.7 0.4

2010 10.4 8.4 8.0 6.1 2.6

9.0% 6.1%
6.8% 6.4% 3.3%
2011 9.2 6.2 8.0 6.7 3.7

2012 7.8 5.0 6.2 6.3 4.4

2013 8.0 6.4 6.5 6.0 3.6

P = projected Source: Annual Report 2010-11; State Bank of Pakistan

- Budget deficit averaged 7.0% of GDP, reaching as high as 8.8% in 2012-
13
- Public debt more than doubled in 5 years from Rs. 5 trillion in 2007 to
Rs. 13 trillion in 2012
- Over $20 billion external debt added in 5 years
- Foreign Investment has simply collapsed – down from $8.5 billion in
2007 to just $0.8 billion in 2012
- Inflation persisted in double digits for more than 50 months in a row
- Pak Rupee has lost 39% of its value
- Poverty and Unemployment have increased
- Foreign exchange reserves is at $10.0 billion, of which, $4.8 billion is the
SBP’s reserves and $5.2 billion is commercial banks reserves with SBP
on August 30, 2013
- PSEs are bleeding and consuming over Rs. 300 billion annually
- Power Sector has received Rs. 1500 billion in subsidy in the last five
years
REAL GDP GROWTH SLOWED TO LESS THAN
ONE HALF IN THE LAST 5 YEARS
Growth recovered during 2003-2007 to an average of 7.0% p.a.
10
9.0
9

8 7.7
7.5
6.8
7 6.6

6 5.8
5.6
5.1
4.7
5
4.4
4.2
3.9 3.7
4 3.7
3.5
3.1 3.1
2.3 3.0
3
1.7
1.8
2 1.7

2009-10

2010-11

2011-12
1990-91

1991-92

1992-93

1993-94

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
Source: Various Issues of Economic Survey
 INVESTMENT PICKED UP DURING 2000-07 BUT
REACHED TO A 50 YEARS LOW LAST YEAR
25
24
23 22.5
22.1
22 21.1
21 20.7
20.1
20 19.4 19.1
19.0 18.8
19 18.4 18.2
18 17.7 17.4 17.2
17.3
15.6 16.8 16.9 16.6
17
16 15.4
15
14 13.4
13 12.5
12
11
10

2008-09

2009-10

2010-11

2011-12
1990-91

1991-92

1992-93

1993-94

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
Source: Various Issues of Economic Survey
 SIGNIFICANT REDUCTION IN UNEMPLOYMENT
2000-07 BUT RISING THEREAFTER

Unemployment declined …

8.5 8.3

8.0 7.8 7.7

7.5

7.0

6.5 6.2
6
6.0
5.5 5.6
5.5 5.3 5.2
5.0

4.5

4.0
1999-00 2001-02 2003-04 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Source: Economic Survey 2010-11

PERCENT OF PEOPLE LIVING BELOW THE POVERTY
LINE REDUCED TO ONE HALF
 INFLATION ACCELERATED AFTER 2007-08

Inflation (%)
22 20.8
20
18
16
13.9
14
12 11.7
12 11
10 9.3
7.9 7.8
8
6 4.4 4.6
3.6 3.5
4 3.1
2
0
 OVERALL FISCAL DEFICIT (% OF GDP)
CONTINUED TO REMAIN MANAGEABLE DURING
2000-07 BUT SURGED TO A NEW HEIGHT LAST
YEAR

2012-13*
2005-06

2006-07

2007-08
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2008-09

2009-10

2010-11

2011-12
Date

0.0
0.0

(1.0)

(2.0)

(2.4)
(3.0)

(3.3)
(4.0) (3.7)
(4.3) (4.3) (4.2) (4.3)
(5.0)
(5.2)
(5.4)
(6.0) (5.6)
(5.9)
(6.1)
(6.3)
(7.0) (6.5) (6.4) (6.6)

(7.4)
(8.0) (7.7) (7.4)
(8.0)

(9.0) (8.5)
(8.7) (8.8)

(10.0)

Source: Ministry of Finance

• Projected
 PUBLIC DEBT MORE THAN DOUBLE IN THE LAST
FIVE YEARS
Public Debt (Billion Rs)
15000
14000
14000
13000 12668
12000
11000 10709
10000
8921
9000
8000 7629
7000
6044
6000
4802
5000 4363
3789 4065
4000 3489 3510 3618
3018
3000
2000
1000
0
CURRENT ACCOUNT DEFICIT GROWING (% OF GDP)
SHRANK, TURNED SURPLUS AND THEN STARTED
WIDENING
Current Account Deficit remained high in the 1990s despite low economic growth.

3.8
4.0

2.0 1.4
0.1 0.2
0.0

-0.7
(2.0) -1.6 -1.6 -1.3
-2.0
-2.4
(4.0)
-4.1 -4.4
-4.8 -5.0
(6.0)
-5.7
-6.2
(8.0) -7.2
-8.3
(10.0)

2008-09

2009-10

2010-11

2011-12

2012-13
1990-91

1995-96

1996-97

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Source: SBP
 708 2011-12
1979 2010-11
DURING 2004-05 ONWARD BUT COLLAPSED IN THE

2086 2009-10
FOREIGN INVESTMENT (US $ MILLION) SURGED

2665 2008-09
5475 2007-08
8428 2006-07
3875 2005-06
1677 2004-05
922 2003-04
820 2002-03
475 2001-02
182 2000-01
543 1999-00
403 1998-99
823 1997-98
950 1996-97
Foreign Investment

1307 1995-96
LAST FIVE YEARS

1532 1994-95
643 1993-94
443 1992-93
554 1991-92

Source: SBP
237 1990-91

8500
8000
7500
7000
6500
6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
REMITTANCES ($ MILLION) CONTINUED TO RISE
16,000

13921
14,000
13186

12,000 11701

10,000
8906

7811
8,000

6450

6,000 5493

4600
4237 4169
3872
4,000 2389

1087
2,000
1060 984

0
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
 TRENDS IN EXTERNAL DEBT AND LIABILITIES

External Debt and Foreign Exchange Liabilities (Billion $)

We added $2.6 billion in in 7 years (2000-07) but added $24 billion in 6 years (2007-12)
Source: Ministry of Finance
 Why Have we Landed in Such a Difficult Situation?
 Economy Never Received Due Attention by the Outgoing Government
 Political Instability continued since March 2007
 Intensification of War on Terror
 Deteriorating Security Environment
 Frequent Changes in Economic Team
 Absence of Key Ministers for six months
 Weak Economic Team
 Food & Fuel Price Shocks
 Fiscal Indiscipline
- New NFC Award
- Reckless Spending
  Bleeding PSEs Consuming over Rs. 300 billion annually
 Energy Mismanagement Resulting in “Crisis”
 Weak Governance
 Weakening of Key Economic Institutions
- Ministry of Finance
- State Bank of Pakistan
- Planning Commission
 No Interaction of Government with Private Sector
 Deliberate or Incompetence?
 New Government has inherited
- A slowing economy
- Investment plummeting to the lowest rising unemployment and
poverty
- Large fiscal deficit
- Unsustainable Debt
- Foreign investment drying up
- Foreign Exchange reserves declining rapidly to a dangerously low
level
- Looming debt crisis
- Bleeding PSEs
- Persisting energy crisis
- Crumbling infrastructure
- A nervous private sector
- Dwindling state authority
• Debt Repayment Crisis forced the government to seek a new
IMF Program.

• Pakistan’s Medium-term (3 to 5 years) economic prospects

will hinge how we deliver on IMF Program.
 DEBT REPAYMENT CRISIS IN 2012-13 AND 2013-14
Period External Debt & Public Debt (Billion Rs)
Liabilities (Million $)

1947-48 0.0 -
1949-50 0.0 -
1959-60 145.0 -
1969-70 2959.0 -
1979-80 9458.0 155.4
1989-90 19207 801.2
1999-2000 37860 3018
2006-07 40500 4814
2009-10 57600 8911
2012 (Dec.) 61000 13904
Source: State Bank of Pakistan and Debt Office, Ministry of Finance
 CHANGES IN DEBT PROFILE
Period External Debt & Public Debt (Billion) Rs)
Liabilities (million $)

1948-60 145 -

1960-70 2814 -

1970-80 6499 155.4

1980-90 9749 646

1990-2000 18653 2217

2000-2007 2640 1796

2007-2012 Dec 20500 9090

 WHAT NEEDS TO BE DONE?
 Newly Elected Government must bring a strong economic team
 Political Leadership must provide full support to the team
 No Room for Business-as-usual Policy
 Extraordinary situation Demand Extraordinary Measures
 Financial Discipline is the key to success
 Bring Budget Deficit down to 3.0 – 3.5 percent of GDP in the
next 3-5 years

•
 Undertake wide-ranging structural reforms
- Taxation side
- Expenditure side
- Accelerating Privatization
- Power Sector Reform
- Circular Debt Issues
- Correcting the Manufacturing defects of the NFC Award
- Strengthening of Infrastructure
- Strong Linkages with Private Sector
- Road show in major capital markets
 Challenging Time Ahead but Surmountable
• New government appears to be the continuation of the previous
regime
• Weak Economic Team
• Same old Economic Team
• Why should we Expect Different Result?
• New Government has thus far borrowed from the SBP Rs. 15.3
billion per day as compared with Rs. 1.3 billion per day by the
previous regime
• Implementation of the IMF conditionalities will be extremely
painful for the people
• The new program of the IMF is not likely to be completed
• The general perception is that IMF wishes to keep Pakistani
economy hanging in balance during the US withdrawal out of
Afghanistan
 CONCLUDING REMARKS

 Serious Challenges for the economy in the next two years

 Issues are not insurmountable
 Theses challenges can be addressed in a three year framework
 We need a strong economic team
 There is no dearth of good people in the country
 What is required is honest, competent and patriotic leadership providing
full support to economic team
 We have the capacity to turnaround the economy in three years
 The country has faced serious challenges in the past but we recovered
 We have the capacity to recover from the ground zero once again,
Inshallah