Critical Review of Pakistan Economy Essay Example
Critical Review of Pakistan Economy Essay Example

Critical Review of Pakistan Economy Essay Example

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  • Pages: 12 (3107 words)
  • Published: March 23, 2018
  • Type: Research Paper
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Pakistan's economy ranks 26th globally in terms of purchasing power. Its main industries encompass textiles, chemicals, food processing, agriculture, and more. In 2005, it achieved the third highest growth rate among Asian economies. However, the economy encounters challenges due to prolonged political disputes, rapid population growth, fluctuating foreign investment levels, and an ongoing costly conflict with neighboring India.

Pakistan has undergone a strong economic recovery in recent years, thanks to government policies approved by the IMF, foreign investments, and increased access to global markets. This recovery has been supported by significant reforms, particularly in privatizing the banking sector. As a result, Pakistan's GDP growth ranged from 6-8% between 2004 and 2006. The World Bank recognized Pakistan as the top reformer in its region and one of the top 10 globally in 2005.

The capital city of Pakistan, Islamab

...

ad, has consistently increased development spending to address social sector underdevelopment. In FY07 alone, there was a real increase of 52% in development spending. However, despite these positive developments, Pakistan still faces challenges such as low tax collection and increased spending on reconstruction efforts after the devastating Kashmir earthquake in 2005.

Despite easing to 7.9% in 2006, inflation in Pakistan remained a major concern, reaching over 9% in 2005. Additionally, due to a surge in global petrol prices in 2008, inflation escalated to an alarming 25.0%. The central bank is currently implementing a more stringent monetary policy in an effort to maintain growth.

Worker remittances are crucial for supporting foreign exchange reserves, but there is a concern that the reserves could be depleted due to a widening trade gap. Imports are growing faster than exports, which could hinder Pakistan's medium-term GDP growth.

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The country's economic prospects have significantly worsened since 2008 when it became involved in the War on Terror, leading to security concerns. This instability has also caused a decline in foreign direct investment (FDI), with FDI dropping from approximately $8 billion to $3.5 billion for the current fiscal year. Additionally, Pakistan has experienced significant capital outflow to the Gulf region due to insurgency issues.

Pakistan's economy has been severely impacted by several factors, such as high global commodity prices, significant trade deficits, high inflation, and a sharp decline in the value of the Rupee. In a short period of time, the Rupee has drastically dropped from 60-1 USD to over 80-1 USD. As a consequence, Pakistan may need to seek external funding as Balance of Payments support for the first time in years.

S;P has downgraded Pakistan's foreign currency debt rating from B to CCC-plus, which is slightly above a level indicating default. Similarly, the country's local currency debt rating has decreased from BB-minus to B-minus. Moody's Investors Service also changed its outlook on Pakistan's debt from stable to negative due to political uncertainty while maintaining its B2 rating.

Investors are expressing concerns about Pakistan's risk of default through the cost of protection against a default in its sovereign debt. The five-year credit default swap for Pakistan's debt is being traded at 1,800 basis points, indicating that investors already believe that the country is currently or will soon be in default.

According to the EIU, the middle term is potentially less turbulent depending on the political environment. Inflation is predicted to decrease to single digits in 2010 and economic growth is expected to exceed 5% annually by 2011. Although

this growth rate is lower than the previous average of 7% over five years, it still represents an improvement from the current crisis where growth is only at around 3% to 4%. The chart shows Pakistan's GDP trend over time in millions of Pakistani Rupees as estimated by the International Monetary Fund. Since the recession in 1951, Pakistan has consistently increased its overall GDP each year, demonstrating economic resilience.

Despite previous instability and vulnerability to shocks, Pakistan's economy has demonstrated unexpected resilience. The government has implemented significant economic reforms since 2000 that have improved prospects for job creation and poverty reduction in the medium term. Notably, there has been an increase in government revenues due to economic growth, tax reforms (including expanding the tax base), and more effective tax collection through self-assessment schemes and controls on corruption within the Central Board of Revenue.

Privatization of public utilities and telecommunications has also contributed to this progress. Furthermore, Pakistan is actively reducing tariffs and investing in infrastructure such as ports, roads, electricity supplies, and irrigation projects to enhance exports. Development spending has doubled from around 2% of GDP in the 1990s to 4% in 2003 with the aim of addressing overall underdevelopment in the social sector.

Additionally, liberalization of international textile trade has already benefited Pakistan's exports, while further gains are expected through freer agricultural trade.

Pakistan, a large country, aims to surpass China as the leading textile producer by leveraging economies of scale and excelling in low labor cost industries. Its competitive advantage lies in its advantageous monetary policies that have led to reduced interest rates and increased credit availability, resulting in shifts in consumption and investment patterns. Furthermore,

Pakistan's domestic natural gas production and widespread use of CNG in vehicles helped mitigate the effects of the oil price shock during 2004-2005.

Pakistan is moving away from the import substitution doctrine, which was followed strictly by some developing countries like Iran in the 20th century. Instead, they are adopting an export-driven economic growth model that has been successfully implemented by South East Asia and China. The World Bank recognized Pakistan as the top reformer in the region and globally ranked them 10th in 2005. This recognition was a result of their efforts to ease business start-up processes, lower property registration costs, strengthen penalties for violating corporate governance rules, and replace traders' need for shipment licenses with two-year duration licenses. Additionally, improved relations with India and ongoing peace talks bring hope for a prosperous and stable South Asia, promoting more intra-regional trade.

The global economic crisis in 2007-2008 had a detrimental effect on the economy and employment rates. In October 2007, Pakistan's Foreign Reserves grew to $16.4 billion but after the General Elections in 2008, factors such as uncertain politics, rising militancy, inflation, and current account deficits caused a steep decline in the Karachi Stock Exchange. Consequently, Pakistan's corporate sector has witnessed a significant decline in recent years.

Pakistan's manufacturing sector has experienced significant growth in recent years. From 2000 to 2007, there was double-digit growth in large-scale manufacturing, rising from 1.5% in 1999 to a peak of 19.9% in the year 2004-05. By the end of 2007, the average growth rate had reached 8%.

According to the Federal Bureau of Statistics, the finance and insurance sector had a value of Rs. 311,741 million in 2005, reflecting a growth

rate exceeding 166% since 2000. This increase can be attributed to a reduction in the fiscal deficit, resulting in decreased government borrowing within the domestic money market and subsequently lower interest rates.

Consequently, there has been an upsurge in private sector lending to both businesses and consumers. Dr. Ishrat Husain, former Governor of the State Bank of Pakistan, noted that Pakistan possesses a middle class with substantial purchasing power consisting of approximately 30 million individuals.

According to research conducted by Standard Chartered Bank, Pakistan has a middle class of around 30 million individuals with an average annual income of about $10,000. The country is also seeing the rise of a wealthy upper class with high per capita incomes. In terms of income inequality, Pakistan ranks slightly above the median position. A report from late 2006 by the Central Board of Revenue stated that approximately 2 million people lived in the country.

The country currently has 8 million income-tax payers and poverty levels have decreased by 10% since 2001. Foreign companies, such as Uniliver, that cater to Pakistan's middle classes, have experienced significant success. Despite doubling production, Uniliver faced challenges in meeting the high demand for its products. The Chairman of Uniliver commented that "Pakistanis can't seem to have enough." Uniliver is the dominant market player in Pakistan. Over the past four years, the Pakistani government has invested more than 1 trillion Rupees (about $16.7 billion) in poverty alleviation programs, resulting in a decrease in poverty from 35 percent in 2000-01 to 24 percent in 2006.

Despite Pakistan being classified as a "Medium Development Country" on the Human Development Index 2007 and having a per capita GDP of over $3000

(PPP, 2006), rural poverty remains an urgent issue due to slower development compared to major urban areas. The government is actively working towards documenting and evaluating its extensive informal economy in order to address these challenges. In 2007, Pakistan had a population of approximately 168 million, with an adult literacy rate of around 49% and a life expectancy of about 64 years. Throughout history, there has been limited allocation of resources for socio-economic development and infrastructure projects.

The persistence of poverty in Pakistan can be attributed to inadequate social services, high birth rates, and immigration from nearby countries. A recent influential study [15] discovered that the fertility rate reached its highest point in the 1980s and has since greatly decreased. The family-income Gini index in Pakistan is close to the global average of 39, with a value of 41. Rapid population growth in recent decades resulted in a substantial influx of young individuals entering the job market. Despite being one of Asia's seven most populous nations, Pakistan's population density is relatively lower compared to Bangladesh, Japan, India, and the Philippines. Previously, terminating or hiring employees proved challenging due to strict bureaucracy; however, significant progress in taxation and business reforms has enabled numerous companies to operate legally rather than within the underground economy.

In late 2006, the government introduced a nationwide service employment scheme to distribute approximately $2 billion over a span of five years. Tourism is an expanding industry in Pakistan, with prominent attractions comprising the ruins of the Indus Valley civilization and mountain resorts in the Himalayas. The Himalayan and Karakoram range, including K2, the world's second highest peak, attracts adventurers and mountaineers globally. The

Board of Revenue has gathered nearly one trillion Rupees ($14).

In the 2007-2008 financial year, the country's economy generated a revenue of 1 billion in taxes. The currency system is based on the Rupee, with 1 Rupee divided into 100 paisas. Currently, the largest denomination in circulation is the 5,000 rupee note. Recently, the State Bank of Pakistan (SBP) introduced new design notes of various denominations including Rs. 10, 20, 100, 500, and 1000. The banking industry will benefit from the introduction of a Rs. 10,000 note as it will reduce the number of notes held in saving accounts.

The new notes were made with euro technology and come in vibrant colors. By October 2007, when Prime Minister Shaukat Aziz's term ended, Pakistan's Foreign Reserves reached $16.4 billion, the trade deficit was $13 billion, exports rose to $18 billion, revenue generation hit $13 billion, and foreign investment totaled $8.

The State Bank of Pakistan announced on October 11, 2008, that the country's foreign exchange reserves declined by $571.9 million. As a result, the total reserves amounted to $7749.7 million with a cumulative drop of $6590 million including previous losses of $400 million.

Currently, Pakistan's economy is experiencing high inflation rates surpassing 26%. In 2004, non-resident Pakistanis exhibited increased confidence by submitting over 1,081 patent applications. Agriculture constituted around 53% of the country's GDP in 1947.

Despite the increase in per-capita agricultural output in Pakistan, its growth has been overshadowed by non-agricultural sectors. Consequently, agriculture now represents approximately one-fifth of the country's economy. Nonetheless, industries like apparel, textiles, and cement, as well as services such as telecommunications, transportation, advertising, and finance have experienced rapid growth in Pakistan. These sectors play

a crucial role in shaping the country's economy.

  • Agriculture
  • Industry
  • Services

Pakistan receives economic aid through loans and grants from various sources. The International Monetary Fund (IMF), World Bank (WB), Asian Development Bank (ADB), among others provide long-term loans to support Pakistan's development. Additionally, developed and oil-rich countries offer bilateral aid to Pakistan. For example, during 2006-9, the Asian Development Bank will provide around $6 billion in development assistance to Pakistan. Furthermore,
under a new four-year aid strategy spanning from 2006 to 2009,
the World Bank has announced a lending program of up to $6.5 billion for Pakistan.
This demonstrates a significant increase in funding primarily aimed at improving infrastructure within the country.

Japan has pledged to give Pakistan $500 million in yearly economic aid. In November 2008, the International Monetary Fund (IMF) sanctioned a $7.6 billion loan to assist in stabilizing and reconstructing Pakistan's economy. Furthermore, despite their cost, remittances from overseas Pakistani individuals have greatly contributed to the nation's economy and foreign exchange reserves.

The Pakistani diaspora in Western Europe and North America is vital for sending remittances to Pakistan. For years, Pakistani workers in oil-rich Arab states have played a key role in sending billions of dollars back home. In the fiscal year 2006-07, Pakistan received $5.493 billion in remittances from these workers, showing a substantial 19.2% increase compared to the previous amount of over $4 billion.

According to an IMF research paper, workers' remittances in Pakistan contributed 4% to the GDP and were equal to approximately 22% of annual exports of goods and services in the fiscal year 2005-06. During the first nine months of fiscal year 2006, foreign direct investment (FDI)

in Pakistan increased by 180.6% to US$2.22 billion, and portfolio investment rose by 276% to $407.4 million, as reported by the State Bank of Pakistan (SBP) on April 24.

According to the latest statistics released by the State Bank, FDI increased to $2.224 billion during July-March 2005-06, a significant rise from only $792 million the previous year. Portfolio investment also saw growth, reaching $407.4 million compared to $108.1 million in the corresponding period last year.

[36] Pakistan has exceeded its goal of $4 billion in foreign direct investment (FDI) for the 2006/2007 fiscal year, with a total FDI of almost $7 billion. This accomplishment has positioned Pakistan as the most investment-friendly country in South Asia. Business regulations have undergone significant changes towards a more liberal approach, particularly since 1999. Most barriers to the movement of capital and international direct investment have been eliminated. Foreign investors are not subject to any restrictions on capital inflows, and they are permitted to invest up to 100% of equity participation in most industries (although local partners must be introduced within 5 years, contributing up to 40% of the equity in services and agriculture sectors).

Unrestricted transfer of profits, dividends, service fees, or capital is now standard practice in Pakistan. The country has implemented business regulations that are considered to be some of the most lenient in the region. This information was confirmed in a World Bank report released in late 2006, where Pakistan ranked 74th in ease of doing business, surpassing neighboring countries such as China (93rd) and India (134th). As a result, Pakistan has become an attractive destination for private equity investments and is currently listed as the 20th top country

globally in terms of private equity inflows.

Pakistan has attracted a significant share of global private equity investments due to economic reforms implemented in 2003, which have given foreign investors greater confidence in the stability of the country and their ability to withdraw investments in the future. Tariffs have been lowered to an average rate of 16%, with a maximum of 25% (except for the automobile industry). Privatization efforts, initiated in the 1990s, have gained momentum, leading to most of the banking system being privately owned and plans to privatize the oil sector in the near future. The recent improvements in the economy and business environment have been acknowledged by international rating agencies such as Moody's and Standard and Poor's, as evidenced by a country risk upgrade at the end of 2003.

The current account deficit for 2006-7 increased by 41 percent compared to the previous year, reaching $7.016 billion, while the deficit for the previous year was $4.490 billion. However, since the beginning of 2008, Pakistan's economic outlook has drastically deteriorated due to security concerns arising from its involvement in the War on Terror. This instability has resulted in a decline in foreign direct investment (FDI) from around $8 billion to $3 billion.

5 billion dollars has been allocated for the current fiscal year, but at the same time, the insurgency in Pakistan has led to a significant amount of money being moved from Pakistan to the Gulf. This, along with the already high global commodity prices, has had a severe impact on Pakistan's economy. The country is now facing large trade deficits, high levels of inflation, and the value of the Rupee has plummeted from 60-1

USD to over 80-1 USD in just a few months. As a result, Pakistan may need to seek external funding in order to receive Balance of Payments support, which is something it hasn't had to do for many years.

As a result, S;P has downgraded Pakistan’s foreign currency debt rating to CCC-plus from B, which is just a few steps away from indicating default. Similarly, Pakistan’s local currency debt rating has been lowered to B-minus from BB-minus. Moody’s Investors Service has also changed its outlook on Pakistan’s debt from stable to negative due to political uncertainty, although it has maintained the country’s rating at B2. The cost of protection against a default in Pakistan’s sovereign debt is currently 1,800 basis points, as indicated by its five year credit default swap. This level suggests that investors believe that the country is already or will soon be in default. However, the medium term may be less turbulent depending on the political climate.

The EIU predicts that inflation is expected to decrease to single digits in 2010 and that there will be a growth rate of over 5% annually by 2011. This growth rate, although lower than the previous 5-year average of 7%, would still be significant in overcoming the current crisis where growth is only at a mere 3.5-4%. The corporate sector of Pakistan is attracting foreign investors due to the rapid growth of the country's economy.

In recent years, multinational groups have acquired majority stakes in several corporations. Some notable examples include PICIC, which was acquired by Singapore-based Tamasek holdings for $339 million, Union Bank, which was acquired by Standard Chartered bank for $487 million, Prime commercial bank, which

was acquired by ABN Amro for $228 million, PakTel ltd, which was acquired by China Mobile Ltd for $460 million, PTCL, which was acquired by Etisalat for $1.8 billion, and additional 57.6 percent shares of Lakson Tobacco company, which were acquired by Philip Morris international for $382 million.

Bibliography:
Links:

  1. CIA - The World Factbook - Rank Order - GDP - real growth rate
  2. Economic Data - Trend in Price Inflation (State Bank of Pakistan)
  3. DAWN - Annual Budget 2007;June 9, 2007
  4. Statistics Division, Government of Pakistan
  5. Ministry of Finance, Government of Pakistan
  6. Board of Investment, Government of Pakistan
  7. Economic Comparison 1999 to 2008
  8. State Bank of Pakistan
  9. www.forexpk.com
  10. Macroeconomic Stability of Pakistan: The Role of the IMF and World Bank (1997–2003) Faisal Cheema, University of Illinois at Urbana-Champaign, May 2004
  11. Current account deficit up by 41pc -DAWN - Business;July 22, 2007
  12. GDP Estimate Books
  13. Issuses in pakistan economy
  14. Economic Survey of Pakistan 2007-08
  15. Economy of Pakistan by Dr Ishrat Husnain
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