Economic Development of Pakistan 1985-2012

7/28/2019 Economic Development of Pakistan 1985-2012

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INTRODUCTION

Pakistan officially the Islamic Republic of Pakistan is a sovereign country in South Asia. With a

population exceeding 180 million people, it is the sixth most populous country in the world. Located

at the crossroads of the strategically important regions of South Asia, Central Asia and Western Asia,

Pakistan has a 1,046-kilometre (650 mi) coastline along the Arabian Sea and the Gulf of Oman in thesouth and is bordered by India to the east, Afghanistan to the west and north, Iran to the southwest

and China in the far northeast. It is separated from Tajikistan by Afghanistan's narrow Wakhan

Corridor in the north, and also shares a marine border with Oman.

Pakistan's economic growth since its inception has been varied. It has been slow during

periods of civilian rule, but excellent during the three periods of military rule, although the

foundation for sustainable and equitable growth was not formed. The early to middle 2000s

was a period of rapid reform; the government raised development spending, which reduced

poverty levels by 10% and increased GDP by 3%. The economy cooled again from 2007.

Inflation reached 25% in 2008 and Pakistan had to depend on an aggressive fiscal policy

backed by the International Monetary Fund to avoid possible bankruptcy year later, the

Asian Development Bank reported that Pakistan's economic crisis was easing. The inflation

rate for the fiscal year 201011 was 14.1%.

Pakistan is one of the largest producers of natural commodities, and its labor market is the

10th largest in the world. The 7 million strong Pakistani diasporas, contributed US$11.2

billion to the economy in FY2011.The major source countries of remittances to Pakistan

include UAE, USA, Saudi Arabia, GCC countries (including Bahrain, Kuwait, Qatar and Oman),

Australia, Canada, Japan, UK and EU countries like Norway, Switzerland, etc. According to

the World Trade Organization Pakistan's share of overall world exports is declining; it

contributed only 0.128% in 2007.The trade deficit in the fiscal year 201011 was US$11.217

billion.

Pakistan has seen twenty-three governments in the past sixty years, including: fourteen

elected or appointed prime ministers, five interim governments and thirty-three years of

military rule under four different leaders.23 Excluding the military and interim governments,

the average life span of a politically elected government has been less than two years. If the

five-year period of Bhutto is excluded, then the average span falls to 1.6 years.

In Pakistan, transitions from one political regime to another have been quite difficult,

causing uncertainty and short-term reductions in the speed of economic growth. Thetransfer of power from the military to civilian regimes in 1971, 1988 and 2008 were marked

with macroeconomic instability, a slow down in economic activities, rising unemployment

and inflation and the adoption of a wait-and-see attitude by investors. But economic

recovery has also been resilient; short-term losses caused by political volatility have not

been large enough to offset the positive long-term secular economic movement.


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Chapter 01


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Development experience of Pakistan

(Period: 1985-1989)

The overthrow of the Bhutto government by a military coup in July 1977 and the

ascendancy of a right wing military leader, General Zia ul- Haq, halted the socialist

experiment. Political party activity was soon banned, thereby limiting political participation

to the local level only. Zia benefited from participating in the campaign to overthrow the

Soviet Union in Afghanistan, as large amounts of military and economic assistance from the

United States flowed into Pakistan. The long-term costs were, however, colossal.Economic conditions, however, did improve: GDP grew at 6.6 percent annually, with

agriculture at 4 percent and the manufacturing sector at 9 percent. Fiscal deficits, however,

widened to 8percent of GDP despite a decline in development expenditure. Domestic

borrowing to finance these deficits did not weaken growth immediately but had seriousrepercussions for public finances and macro-economic stability in the 1990s. As a

consequence, Pakistan had to approach the International Monetary Fund (IMF) for

assistance in 1988.

GDP growth

As a consequence of military ruling the GDP grew at 6.6 percent in 1987. We can relate this

growth to the participation in the campaign to overthrow the Soviet Union in Afghanistan.

This growth continues in 1988 despite of transfer of power from the military to civilian

regimes. But it saw fall in 1989.

0

2

4

6

8

1985 1986 1987 1988 1989

GDP growth (annual %)


Indicator Name 1985 1986 1987 1988 1989

GDP growth (annual %) 7.6 5.5 6.5 7.6 5.0


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External debt stocks

As a consequence of cold relation between military government and other countries

especially USA there was a stable flow of external debt.

Indicator Name 1985 1986 1987 1988 1989

External debt stocks (% of GNI) 38.3 41.74 42.04 39.04 41.15

Foreign Direct Investment

As the civilian government took control of the country from military one the foreign direct

investment has a significant rise in 1988 and onward.

Indicator 1985 1986 1987 1988 1989

FDI(US$)131,389,252.

20

105,730,331.8

0

129,377,643.6

0

186,491,557.3

0

210,599,917.1

0

36

37

38

39

40

41

42

43

1985 1986 1987 1988 1989

External debt stocks (% of GNI)



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Budget Deficit/Surplus

The annual budget deficit in Pakistan has ranged continuously around 5 percent of GDP

since 1980-81. Until the mid-80s, the contribution of the primary budget deficit i.e. overall

budget deficit net of interest payments, was larger than interest payments and now, not

only the reverse holds, but the interest payments also claim the major share in the budget

deficit. Large fiscal deficits have considerable adverse implications for macroeconomic

balances. The government under many circumstances may be tempted to go for high fiscaldeficits. In fact, the level of fiscal deficit is related directly to the requirements of external

assistance and the rate of inflation. It appears that if the debt-GDP ratio is not maintained

and unless corrective measures are taken, the primary budget deficit in absolute terms is

expected to rise annually at about 18 percent, net external borrowing at around 15 percent

and internal borrowing at 16 percent. As such, Pakistans external debt position in the

absence of preventive policies is expected to become worse in the future and the position of

the internal debt is not likely to improve either. Consequently, the budget of servicing the

external debt will rise to more than 9 percent of GDP and budget deficit as percentage of

GDP will rise beyond tolerable limits. However, since high fiscal deficits are fraught with

unfavorable consequences, determining and keeping fiscal deficit within tolerable limits

becomes imperative. It is to this end that this paper has calculated the level of fiscal deficits

under different scenarios based on relevant macro variables.

Indicator 1985 1986 1987 1988 1989

Deficit(%of

GDP)7.6 8.2 8.5 7.4 6.5

0.00

50,000,000.00

100,000,000.00

150,000,000.00

200,000,000.00

250,000,000.00

1985 1986 1987 1988 1989

FDI(US$)

FDI(US$)


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Unemployment rate

Though the trend of unemployment rate was stable till 1987, but in 1988 it has seen a

sudden trend which we believe to be caused by the transfer of power from the military to

civilian regimes and it was marked with macroeconomic instability, a slowdown in economic

activities, rising unemployment and inflation.

0

2

4

6

8

10

1985 1986 1987 1988 1989

Deficit(%of GDP)

Deficit(%of GDP)

0

1

2

3

4

5

6

1985 1986 1987 1988 1989

Unemployment (% Annual)

Unemployment (% Annual)

Indicator Name 1985 1986 1987 1988 1989

Unemployment (% Annual) 3.6 3.6 3.1 5.3 3.1


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Domestic credit to private sector

The credit provided by domestic to private sector has seen a stable trend in these 5 years.

Indicator 1985 1986 1987 1988 1989

Domestic credit to private sector (%

of GDP)27.8 29.8 27.6 26.4 24.9

Human Development Index

From the table below we can see that Pakistan have very low level of HDI value. It does

mean that the composites of HDI; a long and healthy life, access to knowledge and a decent

standard of living are not up to the mark. The Human Development Index of the United

Nations Development Programme ranked Pakistan in one of its lowest development

categories.

YearLife expectancy

at birth

Expected

years of

schooling

Mean years

of schooling

GNI percapita

(2005

PPP$)

HDI

valuelevel

1985 59.4 4.2 2.1 1,543 0.367 Very low

1990 60.7 4.4 2.3 1,689 0.383 Very low

22

23

24

25

2627

28

29

30

31

1985 1986 1987 1988 1989

Domestic credit to private sector (% of GDP)

Domestic credit to private sector (% of GDP)


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Inflation

The available research evidence shows that large fiscal deficits on the one hand push up the

inflation and interest rates, and discourage saving and private investment, on the other. It is

the fiscal deficit that sets the basis of determining governments loan requirements. It alsoserves as an important determinant of the inflation rate. High fiscal deficits create higher

loan requirements and contribute positively to the prevailing rate of inflation.

Balance of Trade

Pakistan is one of those countries who are facing trade deficit from last many years.

Pakistan was facing trade deficit in financial year (FY) 1957-58. Foreign trade sector was

sensibly good during financial year 1953, 1954 & 1956. Its average exports were 161 million

US dollar more than its imports. Except these years Pakistan is facing the problem of trade

and current account deficit. This trade deficit is partly due to the strengthen foreign

currency against the home currency which results in imports of goods and services

becoming more expensive as compared to exports and cause for devaluing of the home

currency and a balance of payments deficit. Again, flow in trade deficit is due to costly

imports of oil, fertilizer, wheat and other necessities as well as fall in countrys textile

sectors exports, which is an addict of compensatory duty hitches, excessive incentives and

recently approved explore and evolution support benefits

0

2

4

6

8

10

12

1985 1986 1987 1988 1989

Inflation (annual %)

Inflation (annual %)

Indicator 1985 1986 1987 1988 1989

Inflation (annual %)4.5 3.3 4.5 9.6 8.6


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0

2

4

6

8

10

12

1985 1986 1987 1988 1989

Gross domestic savings (% of GDP)


Indicator 1985 1986 1987 1988 1989

Exports of goods and services (% of GDP) 10.4 11.9 13.2 13.6 13.9

Imports of goods and services (% of GDP) 22.8 22.7 21.0 21.7 21.7

Gross Domestic SavingsFrom our observation we have found that gross domestic savings has an upward trend over

the year from 1985 to 1987. But in 1988 it has seen a sudden downward trend which we

believe to be caused by the transfer of power from the military to civilian regimes and it was

marked with macroeconomic instability, a slowdown in economic activities, rising

unemployment and inflation and the adoption of a wait-and-see attitude by investors. As a

consequence the gross domestic savings has seen a fall.

Indicator Name 1985 1986 1987 1988 1989

Gross domestic savings (% of GDP) 5.9293 8.0084 11.3655 9.93044 11.0476

0

5

10

15

20

25

1985 1986 1987 1988 1989

Exports of goods and services (% of GDP) Imports of goods and services (% of GDP)


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(Period: 1990-1995)

This period saw heightened political instability. Despite far-reaching reforms introduced in

1991, economic indicators once again fell sharply in contrast with the 1985s for several

reasons other than political instability.

The failure to implement successive agreements led to the loss of Pakistans credibility

among the international financial community. The confidence of local investors eroded

when the foreign currency deposits of Pakistanis were suddenly frozen. Foreign investors

were unhappy as all the power purchase agreements were re-opened and criminal action

was initiated against Hubco, Pakistans largest foreign-owned power generation company.

The GDP growth rate decelerated to 5 percent.

Indicator Name 1990 1991 1992 1993 1994 1995

GDP growth (annual %) 4.4585 5.0615 7.7058 1.757 3.7374 4.9626

0

1

2

3

4

5

6

7

8

9

1990 1991 1992 1993 1994 1995



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Indicator 1990 1991 1992 1993 1994 1995

FDI(US$) 245262

96

25841448

7

336479857.

1

348556957.

8

421024638.

5

722631560.

7

Indicator Name 1990 1991 1992 1993 1994 1995

Exports of goods and services

(annual % growth)

1.1249

7379

33.465

2299

13.820

9806

1.3173

5807

3.1106

629

-

3.07531

501

The persistence of fiscal (above 7 percent of GDP) and external deficits (4 to 5 percent of

GDP) led to the accumulation of large levels of domestic and external debt throughout the

decade. Development expenditures took a major hit and GDP dropped to 3 percent from 8

percent in the first half of the 1980s. Social sector expenditures were squeezed to

accommodate higher debt service and defense expenditures.

0

100000000

200000000

300000000

400000000

500000000

600000000

700000000

800000000

1990 1991 1992 1993 1994 1995

FDI(US$)

Export of goods and services

-5

0

5

10

15

20

25

30

35

40

1990 1991 1992 1993 1994 1995


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Indicator 1990 1991 1992 1993 1994 1995

Deficit(%of GDP) -2.4645 -5.5277 -5.8307 -6.5787 -5.3800 -5.2832

Indicator 1990 1991 1992 1993 1994 1995

Defense expense(%of GDP) 6.8462 6.9045 6.7706 6.7214 6.2840 6.0023

Total external debt levels became unsustainable, rising from $20 billion in 1990 to $43

billion (47.6 percent of GDP) in 1998. Exports stagnated and Pakistan lost its market share in

a buoyant world trade environment. The incidence of poverty nearly doubled from 18 to 34

percent, and the unemployment rate rose as well. Social indicators lagged behind other

countries in the region. The Human Development Index of the United Nations Development

Programme ranked Pakistan in one of its lowest development categories.

Indicator Name 1990 1991 1992 1993 1994 1995

External debt stocks (%

of GNI)

49.3330

933

50.0682

897

50.5699

14

47.1630

766

52.5176

094

49.3818

979

The rate of inflation is an important macroeconomic indicator by which the central banks

around the world analyze and set their monetary policy. Pakistan is among those countries,

which are still experiencing double digit inflation.

There has been an increasing trend of inflation from 12 percent in 1990 to almost 22

percent in 1995. Inflation is documented in the range of 3 percent to 22 percent during the

said period

44

45

46

47

48

49

50

51

52

53

1990 1991 1992 1993 1994 1995



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Indicator Name 1990 1991 1992 1993 1994 1995

Inflation (annual %) 9.052 11.7912 9.5090 9.973 12.3681 12.3435

The unemployment rate can be defined as the number of people actively looking for a job

divided by the labor force. Changes in unemployment depend mostly on inflows made up of

non-employed people starting to look for jobs, of employed people who lose their jobs and

look for new ones and of people who stop looking for employment.

Indicator 1990 1991 1992 1993 1994 1995

Unemployment rate 5.6 6.8 7.5 6.9 6.1 5.6

0

2

4

6

8

10

12

14

1 2 3 4 5 6

Inflation, consumer prices (annual %)

0

1

2

3

4

5

6

7

8

1990 1991 1992 1993 1994 1995

Unemployment Rate( %annual)


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Domestic credit to private sector refers to financial resources provided to the private sector,

such as through loans, purchases of non-equity securities, and trade credits and other

accounts receivable, that establish a claim for repayment. For some countries these claims

include credit to public enterprises.

Indicator 1990 1991 1992 1993 1994 1995

Domestic credit to private sector (% of GDP) 24.16 22.32 23.62 24.55 24.01 24.21

Human Development Index (HDI)

The HDI is a summary measure for assessing long-term progress in three basic dimensions ofhuman development: a long and healthy life, access to knowledge and a decent standard of

living. As in the 2011 HDR a long and healthy life is measured by life expectancy. Access to

knowledge is measured by: i) mean years of schooling for the adult population, which is the

average number of years of education received in a life-time by people aged 25 years and

older; and ii) expected years of schooling for children of school-entrance age, which is the

total number of years of schooling a child of school-entrance age can expect to receive if

prevailing patterns of age-specific enrolment rates stay the same throughout the child's life.

Standard of living is measured by Gross National Income (GNI) per capita expressed in

constant 2005 international dollars converted using purchasing power parity (PPP) rates.

year Life expectancy

at birth

Expected

years of

schooling

Mean years

of schooling

GNI per

capita

(2005

PPP$)

HDI

value

level

1990 60.7 4.4 2.3 1,689 0.383 Very low

1995 62 4.4 2.8 1,795 0.403 Very low

21

22

23

24

25

1991 1992 1993 1994 1995

Domestic credit to private sector(%GDP)


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Financial reforms

Nawaz Sharif Government in 1991 introduced a major reform program through Economic

Reform order consisting of liberalization, privatization and deregulation. Foreign exchange

regime was liberalized, investment controls were relaxed, state owned-enterprises were

privatized, and incentives were provided for domestic and foreign private investment.

Reforms were introduced in a number of different dimensions; privatization of public

financial institutions, removal of restrictions to entry into banking, measures aimed at

spurring competition in financial markets, reduction of legal reserve requirements,

improving the capacity of financial institutions for domestic resource mobilization efforts,

enhancing the effectiveness of monetary policy instruments ,strengthening the supervisory

role of central bank, elimination of directed lending, prudential regulation measures,

measures aimed at securities markets development and openness of capital account etc

along with interest rate liberalization.

Indicator Name 1990 1991 1992 1993 1994 1995

Domestic credit provided bybanking sector (% of GDP)

50.8711658

51.1761146

55.9194943

54.8955604

51.6455396

51.0232327

First focus of the reform was gradual liberalization of control on banking activities. The

process of deregulation began with the denationalization of two commercial banks, govt

started to issues licenses to new commercial banks, investment banks and leasing

companies.

To liberalization the interest rate govt started to sell govt securities under auction system. In

1991 govt began to auctioning of the treasury bills and federal investments bond in the

open market.

CREDIT PROVIDED BY BANK(% GDP)

48

49

50

51

52

53

54

55

56

57

1990 1991 1992 1993 1994 1995

YEAR

%o

fGDP


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In 1991 external sector further opened up, exchange control was virtually abolished, new

debt instruments denominated in foreign currency were introduced and many incentives

are provided to foreigners.

Indicator Name 1990 1991 1992 1993 1994 1995

Official exchange rate (LCU per

US$, period average)

21.70

738

23.800

7667

25.082

7917

28.107

1833

30.566

5917

31.642

6833

In the equity market, exchange and payments reforms are introduced during early 1990s.

Islamabad Stock Exchange starts functioning in 1992. Foreigners are allowed to trade in

domestic stock markets and allowed to hold 100% of venture control.

To reduce the cost and improve efficiency, banks are allowed to close down any of their

existing branches provided that an alternative arrangement provision is there for local

community.

To deal with the NPLs, multi track strategy were adopted which included enacting of new

loans, creation of institutions to recovery bad loans. As a result new banking courts and

Tribunals are established to strengthen the recovery process and resolved the disputes.

To facilitate the depositors to make informed judgment, it has been made mandatory for all

banks, non- banks to get them rated by one of the approved rating agency.

Official exchange rate against US$

0

5

10

15

20

25

30

35

1990 1991 1992 1993 1994 1995


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Indicator Name 1990 1991 1992 1993 1994 1995

Gross domestic savings (%

of GDP)

11.1024

915

17.4656

052

17.0674

84

14.6838

694

16.7844

039

15.8327

09

Gross domestic savings

(current US$)

4442154

099

7938460

113

8300812

199

7559014

372

8710232

084

9600332

765

To promote SME, a small and medium bank was established to provide leadership in

developing new product loans, new credit appraisal and documentation techniques.

But it is argued that political instability and poor governance acted against these reform

efforts. Instead, the greater openness of the economy contributed to the financial crisis.

0

2

4

6

8

10

12

14

16

18

20

1990 1991 1992 1993 1994 1995



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(Period: 1995-2000)

The economic policies of both major political parties, the Pakistan Muslim League (PML) and the

Pakistan Peoples Party (PPP), who took turns ruling during the 1990s, were similar and could not be

faulted. Both parties were committed to deregulation, privatization, liberalization, greater reliance

on market forces and other economic reforms. The supporters of PML and PPP argued that the

dismissal of the Nawaz Sharif government in 1993 and of the Benazir government in 1996 did not

allow positive trends to persist.

Bhutto was re-elected for a second term, in 1993. But Bhutto's government was dismissed by

President Farooq Leghari in November 1996. Then Khalid was appointed as a caretaker Prime

Minister after the dismissal of Bhutto's government from 5 November, 1996 to 17 February, 1997.

Nawaj Sharif was re-elected as Prime Minister with an exclusive mandate from all over Pakistan for a

non-consecutive second term, in February 1997. His government was deposed by General PervezMusharrafin October 1999, and Martial law was imposed in the entire country.

It can only be speculated whether the economic output for the decade would have been better had

these governments completed their terms in office. Poor governance would have been largely offset

by the continuity in policies, programs and projects. The stop-and-go cycle faced by Pakistani

economic actors imposed enormous costs in terms of macroeconomic instability.

In October 1999, the incoming military government was faced with four main challenges:

1. Heavy external and domestic indebtedness;

2. High fiscal deficit and low revenue generation capacity;

3. Rising poverty and unemployment; and

4. A weak balance of payments with stagnant exports.

The country faced a serious external liquidity problem as its reserves were barely sufficient to buy

three weeks of imports and could not possibly service its short-term debt obligations. Workers

remittances decreased by $500 million, foreign investment flows dwindled by $600 million, official

transfers turned negative and Pakistan had no access to private capital markets. In the domestic

sector, the declining tax-to-GDP ratio and inflexible expenditure structure constrained the

governments ability to increase the level of public investment. Total GDP also deteriorated heavily.

The graph below shows the scene.

Indicator Name 1995 1996 1997 1998 1999 2000

GDP growth (annual %) 4.962609

15

4.846581

28

1.01439

602

2.55023

429

3.6601

3274

4.26008

801
http://en.wikipedia.org/wiki/Farooq_Legharihttp://en.wikipedia.org/wiki/Exclusive_mandatehttp://en.wikipedia.org/wiki/General_officerhttp://en.wikipedia.org/wiki/Pervez_Musharrafhttp://en.wikipedia.org/wiki/Pervez_Musharrafhttp://en.wikipedia.org/wiki/1999_Pakistani_coup_d%27%C3%A9tathttp://en.wikipedia.org/wiki/1999_Pakistani_coup_d%27%C3%A9tathttp://en.wikipedia.org/wiki/Pervez_Musharrafhttp://en.wikipedia.org/wiki/Pervez_Musharrafhttp://en.wikipedia.org/wiki/General_officerhttp://en.wikipedia.org/wiki/Exclusive_mandatehttp://en.wikipedia.org/wiki/Farooq_Leghari


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0

1

2

3

4

5

6

1995 1996 1997 1998 1999 2000



0

200

400

600

800

1000

1995 1996 1997 1998 1999 2000

Millions

Foreign Direct Investment (US$)

FDI(US$)

Pakistan has been successful in attracting FDI. There are indications that FDI is tied to imports of

plants and machinery and other inputs from parent countries. Evidently, such tied imports put a

heavy burden on the countrys import bill. Foreign firms resist entering into export-oriented

production activities. Given the persistent balance of payments problems in Pakistan, it is therefore

suggested that in its future FDI policy the government should encourage foreign investment in

export-oriented industries. Likewise, FDI needs to be encouraged in industries where rise in import

bill is commensurate with export performance of the foreign firms.

Indicator Name 1995 1996 1997 1998 1999 2000

FDI(US$) 72263156

1

92197618

3

71625312

5

50600000

0

53200000

0

30800000

0


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-8

-7

-6

-5

-4

-3

-2

-1

0

1995 1996 1997 1998 1999 2000

Deficit (%of GDP)

Deficit(%of GDP)

The persistence of fiscal and external deficits led to the accumulation of large levels of domestic and

external debt throughout the decade. Development expenditures took a major hit and GDP growth

dropped to 1 percent. Social sector expenditures were squeezed to accommodate higher debt

service and defense expenditures. 80 percent of revenues were preempted to debt servicing and

defense.

Indicator Name 1995 1996 1997 1998 1999 2000

Deficit(%of GDP) -5.2832 -6.5987 -6.7332 -5.6388 -5.5396 -4.0864

Indicator Name 1995 1996 1997 1998 1999 2000

Defense expense(%of GDP) 6.0023 5.8485 5.4358 5.2284 5.0027 4.0249

During this period, Pakistans net external debt stocks remained high. In 1999, it rose to 54 percent.

Changes in the Govt. structure lead to rise in the inflation rate and as well as unemployed youths.

Exports stagnated and Pakistan lost its market share in a buoyant world trade environment. The

dismissal of the Nawaz Sharif government in 1993 and of the Benazir government in 1996 did notallow positive trends to persist. It can only be speculated whether the economic output for the

decade would have been better had these governments completed their terms in office. Poor

governance would have been largely offset by the continuity in policies, programs and projects. The

stop-and-go cycle faced by Pakistani economic actors imposed enormous costs in terms of

macroeconomic instability.

Indicator Name 1995 1996 1997 1998 1999 2000

External debt stocks (%

of GNI)

49.38189

79

47.17130

7

48.4579

506

52.2731

556

54.583

9867

45.1262

14


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0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000

Unemployment, youth total (% of

total labor force ages 15-24)

Unemployment, youth total (% of total labor force ages 15-24)

0

10

20

30

40

50

60

1995 1996 1997 1998 1999 2000



Indicator Name 1995 1996 1997 1998 1999 2000

Unemployment, youth

total (% of total labor

force ages 15-24)

8.899999

629 10 10.5 11.1

13.3000

002


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0

1020

30

40

50

60

1995 1996 1997 1998 1999 2000

Official exchange rate (LCU per US$,

period average)

Official exchange rate (LCU per US$, period average)

Pakistan follows the flexible exchange rate system since July 2000. Prior to this period it followed a

managed floating exchange rate since 1982 and a fixed rate prior to 1982. Due to controlled

exchange rate a little fluctuation in exchange rate was observed. It is empirical concluded that the

Pakistan's share of exports in world market did not indicate any significant change during fixed and

managed floating exchange rate regime. The volatility of exchange rate adversely affect on export

demand after adoption of flexible exchange rate system.

Indicator Name 1995 1996 1997 1998 1999 2000

Official exchange rate

(LCU per US$, period

average)

31.6426 36.0786 41.1115 45.0466 49.500 53.6481

Financial reforms

In Pakistan, transitions from one political regime to another have been quite difficult, causinguncertainty and short-term reductions in the speed of economic growth. The transfers of power

from the military to civilian regimes were marked with macroeconomic instability, a slowdown in

economic activities, rising unemployment and inflation and the adoption of a wait-and-see attitude

by investors. There has been a broad consensus among all major political parties on the general

principles that should underpin Pakistans economic direction, namely:

Central planning and bureaucratic judgment are poor substitutes for the markets judgmentin the allocation of scarce resources.


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Gross Domestic Savings

0

2

4

6

8

10

12

14

16

18

1995 1996 1997 1998 1999 2000

Licensing to open, operate, expand and close business by government functionaries shouldbe discouraged.

Public sector ownership and management of business, production, distribution and tradeleads to inefficiency, waste and corruption.

Over-regulation controls and restrictions of all kinds on the private sector hike up the cost ofdoing business.

High tax rates on individuals and corporations are counterproductive as they discourageeffort and initiative.

Banks and financial institutions owned and managed by the public sector offering cheapcredit and/or directed credit have a pernicious effect on economic growth.

Administered prices of key commodities are the worst possible means of insulating the poorsegment of the population from the onslaught of market forces.

Subsidies on inputs such as fertilizers, seeds, water, etc., incur heavy budgetary costs andbenefit the well-to-do classes rather than the poor.

Foreign investment and multinational corporations are to be encouraged as they areimportant conduits for the transfer of technology, managerial skills and organizational

innovation.

While the governments implementation of policies, programs and projects has seen uneven and

mixed results, the initiative in driving the economy can be credited to the private sector.

Indicator Name 1995 1996 1997 1998 1999 2000

Gross domestic savings

(% of GDP)15.8327 14.4727 13.2308 16.6690 13.951 15.9796

Gross domestic savings(current US$)

9600332765

9164159826

8260453445

10366812450

8786098675

11817347185

Graph: Gross Domestic Savings


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(Period: 2000-2005)

In October 1999, the then military government was faced with four main challenges: heavy

external and domestic indebtedness; high fiscal deficit and low revenue generation capacity;

rising poverty and unemployment; and a weak balance of payments with stagnant exports.

The most difficult challenge faced by the Military Government in October, 1999 was

external liquidity problem i.e. its ability to meet its current obligations such as imports of

goods and service, its debt service obligations and other payments at the same time.

After May 1998, the country had lost an important source of external liquidity i.e. foreign

currency deposits. Workers remittances through official channels were down to $1 billion.

Foreign investment inflows were less than $ 400 million oil import prices had shot up from $

14- $ 15 per barrel to $ 28- $ 30 per barrel and the oil import bill had Foreign investment

inflows were less than $ 400 million oil import prices hadshot up from $ 14- $ 15 per barrel

to $ 28- $ 30 per barrel and the oil import bill had doubled from $1.3 billion to $ 2.6 billion

in first one year. Despite increase in the volume of textile exports, the unit value of exports

were down by 7-10 percent on average. There was thus a gap between external receipts

and external payments of about $2.5 billion to $ 3 billion annually for the next few years.

To meet this gap and keep the wheels of the economy moving Pakistan had to get its debt

service obligations reschedule and find ways to obtain external debt rescheduling or relief

was to have an agreement with the IMF that was in good standing.Pakistan therefore had to

enter into a stand-by arrangement with the IMF in 2000for nine month period followed by athree year Poverty Reduction and Growth Facility (PRGF). The Executive Board of the

International Monetary Fund (IMF) had approved a three-year arrangement for Pakistan

under the Poverty Reduction and Growth Facility (PRGF)totaling SDR 1.034 billion (about

US$1.322 billion).

Under the PRGF-supported program and in line with the objectives stated in the I-PRSP, the

government was required to implement an ambitious reform agenda aimed at raising

growth and reducing poverty, while consolidating macroeconomic stability and external

viability. The strategy centered on sustained fiscal adjustment supported by a major reform

of tax administration and a widening of the tax net. It also aimed at increasing publicspending for poverty alleviation. Program also required to undertake a cautious monetary

policy under the floating exchange regime which aimed at keeping inflation below 5 percent

and raising official reserves to three months of imports by the end of the three-year

program.

For the first time in the history of Pakistan the IMF was able to complete all the reviews

successfully and released all the tranches on time. Pakistan successfully met all the

performance criteria under the Stand-by program and the Poverty Reduction and Growth

Facility (PRGF) negotiated with the IMF. The major areas of successful reforms were Trade

and Tariff, Financial Sector including the privatization of nationalized commercial banks,

breaking up the monopoly of Pakistan Telecommunication Corporation and opening up thesector to the private sector and Promotion of Higher Education. The credibility of Pakistan


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vis-a-vis international financial institutions was restored setting the stage for the re-profiling

of Pakistans external debt owed to Paris Club.

Out of Pakistans total external debt and foreign exchange liabilities of $ 37.8 billion at the

end of the fiscal year 2001-01, Pakistans bilateral debt to Paris Club was $12.5 billion. On

December 13, 2001 Pakistan was able to re-profile this stock of bilateral debt by reaching anagreement with Paris Club for repayment of ODA component debt over a thirty eight years

period with a grace period of 15 years and non-ODA component of debt over twenty three

years with a five year grace period. In addition, the US cancelled its bilateral debt by $ 1

billion after September 11, 2001.The debt relief provided some fiscal space, allowed the

government to reduce its and stabilize the economy. In addition, Pakistan started receiving

new concessional loans from the IMF, World Bank and Asian Development Bank which

helped in financing the current account and fiscal deficits. There are some positive outcome

those had been observed during this period.

Gross Domestic Product

Structural policy reforms combined with an improvement in economic governance laid the

foundations for accelerated growth from 2000 to 2006. Pakistans economic performance in

this sub-period was impressive in terms of income per capita, employment generation and

poverty reduction. As a result of reasonably high GDP growth rate of about 6.3 percent a

year for five years the per capita income in current dollar terms has risen to about $ 1000.

GDP growth that was 1.98 percent in 2000/01 rose to 8.96 percent in 2005/06.

Indicator Name 2000 2001 2002 2003 2004 2005GDP growth (annual %) 3.91 1.96 3.11 4.73 7.48 8.96


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Inflation

Inflation rose from 4.14% in the year 2000 to 9.06% in the year 2005.But it does represent

complete picture. The inflation rate, which was at 4.14% percent in 1999-2000, was further

reduced to 2.91% percent by 2002-03 (the lowest in the last three decades). This was

because as per condition of IMF PRGF program State Bank of Pakistan was required toundertake a cautious monetary policy under the floating exchange regime which aimed at

keeping inflation below 5 percent. This low level of inflation was supported by strict fiscal

discipline, the lower monetization of the budget deficit, an output recovery, a reduction in

duties and taxes, and appreciation of exchange rate. During this time period, the country

had very low levels of food inflation, as domestic supply was plentiful as were international

stockpiles. Inflation began to pick upafter the first quarter of 2003-04, reaching as high as

9.06% percent in June 2005 (i.e. at the end offiscal year 2004-05) for a variety of reasons

including arise in the support price of wheat, shortages ofwheat, and a rise in international

prices includingthe oil prices.

Indicator

Name

2000 2001 2002 2003 2004 2005

Inflation 4.14 4.36 3.15 2.91 7.74 9.06

Unemployment

Pakistan's employment growth has been the highest in South Asia region since 2000.There

was change in Unemployment rate in both direction during the period .First the overall

unemployment rate increased from 6 percent in 2000/01 to 7.8 percent in

2002/03.However, it declined during the next two years to 7.4 percent in2004-2005. It

further declined to 5.2 percent in 2006-2007. During the period unemployment rates

dropped considerably among females and in urban areas compared to the male and rural

areas, respectively. Youth unemployment levels are higher than the overall unemployment

rate. Among the youth, female and rural inhabitants have faced the unemployment level

higher than their counterparts .During this period, the economy witnessed comparatively

high growth and poverty reduced sharply.About 11.8 million new jobs were created in


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FY2005-2006 period. At that period 3566 thousand persons of labor force were

unemployed.

Balance of Trade

Pakistan successfully met all the performance criteria under the Stand-by program and the

Poverty Reduction and Growth Facility (PRGF) negotiated with the IMF which includes

successful reforms of Trade and Tariff. Pakistan had been able to increase their export to

foreign countries during these periods.Pakistan main exports are: cotton and knitwear (28

percent of total exports); bed wear, carpets and rugs (8 percent) and rice (8 percent). Others

include: leather, fish, sports goods and fruits and vegetables. Main export partners are:

United States (15 percent of total exports), United Arab Emirates (10 percent), Afghanistan

(9.5 percent), China (9 percent), United Kingdom (3 percent) and Germany (2 percent).

Pakistans exports increased from 15000 PKR million to more than 88000n PKR million by

June 2001.The factual improvement in balance of payment can be seen after the event of

September 11 I FY-2001.As a result during 2003-2004 pakistan had surplus of balance of

trade.


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On the other hand imports by Pakistan also huge primarily due to high imports of energy

which resulted in huge regular trade deficits. Main imports are: fuel (40 percent of total

imports); machinery and transport equipment (18 percent) and chemicals (16 percent).

Budget Deficit/Surplus

Pakistan had surplus budget for the fiscal year 2000-2001 which was about 5.4 percent of

GDP. But as the condition of IMF supported PRGF program Pakistan government had to

increase government spending which lead to reduction in budget surplus to 3.33 as

percentage of GDP in 2005-2006 and led to budget deficit thereafter.


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Gross Domestic Savings

In this period overall growth of Pakistan accelerated. Successful Implementation of PRGF

program supported by IFM led to liberalization in Financial Sector which resulted in the

privatization of nationalized commercial banks. Competition among the bank ensured. GNI

per capita also increased during this period. This period experienced stable growth in savingas percentage of GDP as people tendency to save increased.

Indicator 2000 2001 2002 2003 2004 2005

Gross

Domestic

Savings (%

of GDP)

15.98 15.94 16.49 17.35 17.61 15.2

Human Development Index

The HDI is a summary measure for assessing long-term progress in three basic dimensions of

human development: a long and healthy life, access to knowledge and a decent standard of

living. HDR a long and healthy life is measured by life expectancy. Access to knowledge is

measured by: i) mean years of schooling for the adult population, which is the average

number of years of education received in a life-time by people aged 25 years and older; and

ii) expected years of schooling for children of school-entrance age, which is the total number

of years of schooling a child of school-entrance age can expect to receive if prevailing

patterns of age-specific enrolment rates stay the same throughout the child's life. Standard

of living is measured by Gross National Income (GNI) per capita expressed in constant 2005

international dollars converted using purchasing power parity (PPP) rates.

Pakistans HDI value for 2005 is 0.485in the low human development category

positioning the country at 146 out of 187 countries and territories. In the 2005 HDR,

Pakistan was ranked 145 out of 187 countries.

14

15

16

17

18

2000 2001 2002 2003 2004 2005

Gross domestic savings (% of

GDP)


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Period Life

expectancy

at birth

Expected

years of

schooling

Mean years

of schooling

GNI per

capita (2005

PPP$)

HDI value

1995 62 4.4 2.8 1,795 0.403

2000 63.1 4.4 3.3 1,826 0.419

2005 64.1 6.5 4.5 2,190 0.485

Figure: HDI Value of Pakistan

Government External Debt Stocks (% of GNI)

Government had been able to reduce it external debt throughout this period. The credibility

of Pakistan vis-a-vis international financial institutions was restored setting the stage for the

re-profiling of Pakistans external debt owed to Paris Club. On December 13, 2001 Pakistan

was able to re-profile this stock of bilateral debt by reaching an agreement with Paris Club

for repayment of ODA component debt over a thirty eight years period with a grace periodof 15 years and non-ODA component of debt over twenty three years with a five year grace

period. In addition, the US cancelled its bilateral debt by $ 1 billion after September 11,

2001. The debt relief provided some fiscal space, allowed the government to reduce its and

stabilize the economy. In addition, Pakistan started receiving new concessional loans from

the IMF, World Bank and Asian Development Bank which helped in financing the current

account and fiscal deficit. Government external debt stocks was about 45 percent of GNI in

the year reduced to approximate 30 percent of GNI by the end of the year 2005.

Poverty headcount ratio at national poverty line (% of population):

Pakistan government had been able to alleviate poverty at this period to some extent.

Government increased public spending during this period for for poverty alleviation as per

PRGF program. Unemployment reduced in this period by a great extent also contributed to

reduction of level of poverty. Poverty headcount ratio at national poverty line (% of

population) in the following shows that it reduced from 34.5 percent in 2002 to 23.9 in the

year 2005.

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005



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The Gross Domestic Product (GDP) in Pakistan expanded 4.99 percent in 2008 from the

previous year. GDP Annual Growth Rate in Pakistan is reported by the Pakistan Bureau of

Statistics. Historically, from 1952 until 2013, Pakistan GDP Growth Rate averaged 4.94

Percent reaching an all time high of 10.22 Percent in June of 1954 and a record low of -1.80

Percent in June of 1952. Pakistan is one of the poorest and least developed countries in

Asia. Pakistan has a growing semi-industrialized economy that relies on manufacturing,agriculture and remittances. Although since 2005 the GDP has been growing an average 5

percent a year, it is not enough to keep up with fast population growth. To make things

even worst, political instability, widespread corruption and lack of law enforcement hamper

private investment and foreign aid.A chart with historical data for Pakistan GDP Growth

Rate is given here

Inflation Rate

The inflation rate in Pakistan was recorded at 20 percent in May of 2009. Inflation Rate in

Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1957 until 2013,

Pakistan Inflation Rate averaged 8.03 Percent reaching an all time high of 37.81 Percent in

December of 1973 and a record low of -10.32 Percent in February of 1959.but in 2008

inflation rate was 25 percent. This page includes a chart with historical data for Pakistan

Inflation Rate.


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Unemployment Rate

Unemployment Rate in Pakistan increased to 5.3 percent in the first quarter of 2010 from 5

percent in the third quarter of 2009. Unemployment Rate in Pakistan is reported by the

Pakistan Bureau of Statistics. Historically, from 1985 until 2012, Pakistan Unemployment

Rate averaged 5.38 Percent reaching an all time high of 7.80 Percent in June of 2002 and a

record low of 3.10 Percent in December of 1987. In Pakistan, the unemployment ratemeasures the number of people actively looking for a job as a percentage of the labour

force. This page includes a chart with historical data for Pakistan Unemployment Rate.

Pakistan Interest Rate

The benchmark interest rate in Pakistan was last recorded at 9.50 percent. Interest Rate in

Pakistan is reported by the State Bank of Pakistan. Historically, from 1992 until 2013,

Pakistan Interest Rate averaged 12.70 Percent reaching an all time high of 20 Percent in

June of 1997 and a record low of 7.50 Percent in November of 2002. In Pakistan, interest

rates decisions are taken by the State Bank of Pakistan. The official interest rate is the

discount rate. This page includes a chart with historical data for Pakistan Interest Rate.

External Debt

External Debt in Pakistan decreased to 50737 USD Million in the first quarter of 2009 from

45388 USD Million in the fourth quarter of 2008.The global crisis has impacted Pakistansexternal debt through the depreciation of the US dollar against major international


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currencies leading to significant translational losses. A receptive debt policy is currently

being formulated in order to monitor, assess, and take steps to mitigate this currency risks.

On the other hand, the current low interest rate environment amidst the ongoing crisis has

provided Pakistan with an opportunity to capitalize on lower servicing costs on its existing

stock of floating rate external debt. This page includes a chart with historical data for

Pakistan External Debt

Balance of Trade

Pakistan recorded a trade deficit of 74836 PKR Million in April of 2009. Balance of Trade in


Pakistan Balance of Trade averaged -18351.09 PKR Million reaching an all time high of 6457

PKR Million in June of 2003 and a record low of -215020 PKR Million in December of 2011.

Pakistan runs regular trade deficits primarily due to high imports of energy. Main imports

are: fuel (40 percent of total imports); machinery and transport equipment (18 percent) and

chemicals (16 percent). Pakistan exports: cotton and knitwear (28 percent of total exports);

bed wear, carpets and rugs (8 percent) and rice (8 percent). Main trading partners are

United Arab Emirates (10 percent of total exports and 17 percent of imports) and China (9

percent of exports and 15 percent imports). Others include: United States, United Kingdom

and Germany. This page includes a chart with historical data for Pakistan Balance of Trade.

Government External Debt


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Government External Debt in Pakistan decreased to 55445 USD Million in the fourth quarter

of 2009 from 52331 USD Million in the second quarter of 2009. Government External Debt

in Pakistan is reported by the State Bank of Pakistan. Historically, from 2002 until 2013,

Pakistan Government External Debt averaged 46752.59 USD Million reaching an all time

high of 66451 USD Million in December of 2011 and a record low of 33172 USD Million in

September of 2004. This page includes a chart with historical data for Pakistan GovernmentExternal Debt.

Foreign exchange rate

The USDPKR spot exchange rate appreciated 0.1100 or 0.11 percent during the last 30 days.

Historically, from 1988 until 2013, the USDPKR averaged 59.6100 reaching an all time high

of 98.6000 in May of 2013 and a record low of 18.6000 in December of 1988. The USDPKR

spot exchange rate specifies how much one currency, the USD, is currently worth in terms of

the other, the PKR. While the USDPKR spot exchange rate is quoted and exchanged in the

same day, the USDPKR forward rate is quoted today but for delivery and payment on a

specific future date. This page includes a chart with historical data for USDPKR - Pakistan

Rupee Exchange rate.

Global Financial Crisis: Impact on Pakistan and Policy Response

The global recession has posed policymakers around the world with unprecedented

challenges. Severely damaged financial sectors seemed immune to most responses, whilefiscal stimuli and other policy tools have, at best, been sluggish to establish some stability in


36/53

economies dealing with the spill-over of the financial crisis into other sectors and a general

economic slowdown.

As the slump in the global economy prevailed, the Pakistans economy witnessed a period of

significant instability and a deterioration of most macroeconomic indicators. The timing of

the crisis, and Pakistans response to domestic developments might seem contradictory to a

layman. As governments around the world lowered interest rates and implementedexpansionary fiscal measures to revitalize their economies, Pakistan underwent a phase of

fiscal tightening, and a stringent monetary stance with discount rates remaining relatively

high for most of the period (discount rates remained at 15 percent till April 2009). Fiscal,

Monetary, and External debt policies of Pakistan have primarily been driven by the

underlying need to resurrect significant macroeconomic imbalances in the domestic

economy, rather than as a response to the financial crisis and global economic slowdown.

The financial sector of the economy is still in its developing stages with limited, albeit

growing, linkages with global markets. As a result, Pakistan has been relatively well-

insulated against the contagion in international financial markets. It is remarkable to note

that Pakistan is among a handful of countries with a positive rate of growth, and among avery few with the lowest decline in real GDP growth as compared to other countries

affected by the global financial crisis.

Policy Response

Recognizing the complexity and depth of economic challenges, the government and the

central bank (State Bank of Pakistan- SBP) jointly initiated an aggressive macroeconomic

stabilization program with the help of International Monetary Fund (IMF). Several

stabilization measures were taken by the government and the central bank to put the

economy back on a stable path. The response included measures in the area of monetary

policy, fiscal policy and external debt policies.Monetary Policy: SBP which was gradually raising its policy rate from 7.5 percent in April

2005 to 12 percent by May 2008, aggressively increased the policy rate to 15 percent by

November 2008. Further, CRR and SLR were increased for effective liquidity management. In

addition, adjustment in the exchange rate helped in putting a dent in an otherwise

unsustainable growth rate of imports.

Fiscal Policy: On account of massive government subsidies, policy inaction, and general

expenditure-revenue mismatch, the fiscal position of the government deteriorated

significantly during 2007-08. In order to arrest this deterioration, the fiscal response has

been two-staged. The initial stage which was implemented during 2008-09 consisted of

fiscal tightening, with expenditure being curbed in order to lower fiscal deficit and a net zeroquarterly limit on government borrowing from the State Bank of Pakistan. The fiscal

consolidation efforts faced headwinds such as the deteriorating security environment and

the domestic political uncertainties along with the deepening of the global financial crisis

and the overall depressed macroeconomic environment. The unanticipated persistence of

inflationary pressures on the economy kept fiscal policy options under check. There has

been a significant improvement in fiscal performance during 2008-09 due to the policy shift,

with the overall fiscal deficit estimated to have dropped to 4.3 percent of GDP. The fiscal

improvement in 2008-09 has been largely based on reduction of oil subsidies and a slash on

development spending.


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The inflation rate in Pakistan is recorded at 11.3 percent in June of 2012. Inflation Rate in


Pakistan Inflation Rate averaged 8.03 Percent reaching an all-time high of 37.81 Percent in

December of 1973 and a record low of -10.32 Percent in February of 1959. In Pakistan, most

important categories in the consumer price index are food and non-alcoholic beverages (35

percent of total weight); housing, water, electricity, gas and fuels (29 percent); clothing andfootwear (8 percent) and transport (7 percent). The index also includes furnishings and

household equipment (4 percent), education (4 percent), communication (3 percent) and

health (2 percent). The remaining 8 percent is composed by: recreation and culture,

restaurants and hotels, alcoholic beverages and tobacco and other goods and services.

Unemployed Persons in Pakistan increased to 3400 Thousand Persons in 2011 from 3120

Thousand Persons in 2010. Unemployed Persons in Pakistan is reported by the State Bank ofPakistan. Historically, from 1986 until 2011, Pakistan Unemployed Persons averaged

2367.59 Thousand Persons reaching an all time high of 3594 Thousand Persons in June of

2003 and a record low of 903 Thousand Persons in June of 1987. In Pakistan, unemployed

persons are individuals who are without a job and actively seeking to work.


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Unemployment Rate in Pakistan increased to 6.50 percent in the fourth quarter of 2012

from 6.10 percent in the third quarter of 2012. Unemployment Rate in Pakistan is reported

by the Pakistan Bureau of Statistics. Historically, from 1985 until 2012, Pakistan

Unemployment Rate averaged 5.38 Percent reaching an all time high of 7.80 Percent in June

of 2002 and a record low of 3.10 Percent in December of 1987. In Pakistan, the

unemployment rate measures the number of people actively looking for a job as apercentage of the labor force.

Interbank Rate in Pakistan decreased to 12 percent in June of 2012 from 14 percent in

December of 2011. Interbank Rate in Pakistan is reported by the State Bank of Pakistan.

Historically, from 1991 until 2012, Pakistan Interbank Rate averaged 10.46 Percent reaching

an all time high of 17.42 Percent in May of 1997 and a record low of 1.21 Percent in July of2003. In Pakistan, the interbank rate is the rate of interest charged on short-term loans

made between banks.

Pakistan recorded a trade deficit of 174836 PKR Million in June of 2012. Balance of Trade in


Pakistan Balance of Trade averaged -18351.09 PKR Million reaching an all time high of 6457

PKR Million in June of 2003 and a record low of -215020 PKR Million in December of 2011.

Pakistan runs regular trade deficits primarily due to high imports of energy. Main importsare: fuel (40 percent of total imports); machinery and transport equipment (18 percent) and


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chemicals (16 percent). Pakistan exports: cotton and knitwear (28 percent of total exports);

bed wear, carpets and rugs (8 percent) and rice (8 percent). Main trading partners are

United Arab Emirates (10 percent of total exports and 17 percent of imports) and China (9

percent of exports and 15 percent imports). Others include: United States, United Kingdom

and Germany.

Exports in Pakistan increased to 209441 PKR Million in June of 2012 from 209274

PKR Million in December of 2011. Exports in Pakistan are reported by the Pakistan Bureau of

Statistics. Historically, from 1957 until 2013, Pakistan Exports averaged 28655.79 PKR

Million reaching an all time high of 210208 PKR Million in March of 2011 and a record low of

51 PKR Million in April of 1958. Pakistan main exports are: cotton and knitwear (28 percent

of total exports); bed wear, carpets and rugs (8 percent) and rice (8 percent). Others

include: leather, fish, sports goods and fruits and vegetables. Main export partners are:

United States (15 percent of total exports), United Arab Emirates (10 percent), Afghanistan

(9.5 percent), China (9 percent), United Kingdom (3 percent) and Germany (2 percent).

Pakistan recorded a Government Budget deficit equal to 5.5 percent of the country's

Gross Domestic Product in 2012. Government Budget in Pakistan is reported by the

Government of Pakistan. Historically, from 1990 until 2012, Pakistan Government Budget

averaged 3.76 Percent of GDP reaching an all time high of 8.80 Percent of GDP in December

of 1990 and a record low of -5.5 Percent of GDP in June of 2012. Government Budget is anitemized accounting of the payments received by government (taxes and other fees) and


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the payments made by government (purchases and transfer payments). A budget deficit

occurs when a government spends more money than it takes in. The opposite of a budget

deficit is a budget surplus.

Government External Debt in Pakistan decreased to 65833 USD Million in the June of

2012 from 65987 USD Million in the December of 2011. Government External Debt in

Pakistan is reported by the State Bank of Pakistan. Historically, from 2002 until 2012,

Pakistan Government External Debt averaged 46752.59 USD Million reaching an all time

high of 65987 USD Million in December of 2011 and a record low of 33172 USD Million in

September of 2004.

The Gross domestic savings (% of GDP) in Pakistan was last reported at 9.37 in 2011,

according to a World Bank report published in 2012. Gross domestic savings are calculated

as GDP less final consumption expenditure (total consumption).


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Human Development IndexThe Human Development Index (HDI) is a composite statistic of life expectancy, education,

and income indices used to rank countries into four tiers of human development. It was

created by the Pakistani economist Mahbubul Haq and the Indian economist AmartyaSen in

1990and was published by the United Nations Development Programme.

Pakistans HDI value for 2012 is 0.515in the low human development category

positioning the country at 146 out of 187 countries and territories. The rank is shared with

Bangladesh. Between 1980 and 2012, Pakistans HDI value increased from 0.337 to 0.515, an

increase of 53 percent or average annual increase of about 1.3 percent.

The rank of Pakistans HDI for 2011 based on data available in 2012 and methods

used in 2012 was 146 out of 187 countries. In the 2011 HDR, Pakistan was ranked 145 outof 187 countries. However, it is misleading to compare values and rankings with those of

previously published reports, because the underlying data and methods have changed.

Year Life

expectancy at

birth

Expected

years of

schooling

Mean years

of schooling

GNI per

capita (2005

PPP$)

HDI value

2010 65.2 7.3 4.9 2505 0.512

2011 65.4 7.3 4.0 2526 0.513

2012 65.7 7.3 4.9 2566 0.515

Poverty headcount ratio at national poverty line (% of population)

National poverty rate is the percentage of the population living below the national

poverty line. National estimates are based on population-weighted subgroup estimates

from household surveys.


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Foreign Exchange RatePakistan maintains foreign reserves with State Bank of Pakistan. The currency of the

reserves was solely US dollar incurring speculated losses after the Dollar prices fell during

2005, forcing the then Governor SBP IshratHussain to step down. In the same year the SBP

issued an official statement proclaiming diversification of reserves in currencies including

Euro and Yen, withholding ratio of diversification. In 2010 exchange rate was 85.194 Rupees

(PKR) per US dollar. In 2011 exchange rate was 86.3434Rupees (PKR) per US dollar and in

2012 exchange rate was 95.1 Rupees (PKR) per US dollar.

Graph: PKR to USD exchange rate

Pakistan has recently experienced high inflation persisting in double-digits, fiscal

imbalances, low private sector credit growth and stagnant economic growth. One major

constraint for monetary policy in Pakistan arises from the need of the government tocontinuously borrow from the State Bank. If fiscal policy relies on a permanent flow of

80

82

84

86

88

90

92

94

96

2010 2011 2012

Pakistani Rupees (PKR) per US dollar


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Chapter 2


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Some crucial impediment to the development of

Pakistan

At least four main factors determined Pakistans economic performance in the 1990s. First,political instability and frequent changes in the government followed by a reversal of

decisions taken by the preceding government created an environment of uncertainty and a

lack of predictability. Second, there was widespread misgovernance by the two major

political parties ruling the country during this period. Personal, parochial and party loyalty

considerations dominated decision making while institutions were bypassed. Third, there

was a lack of political will to make timely and difficult decisions. The cumulative effect of

avoiding and postponing such decisions, coupled with the failure to correct the distortions

at the right time, proved too costly. Fourth, there were unforeseen exogenous shocks, such

as the nuclear testing in May 1998 that shook investorsconfidence, accelerated the flight of

capital, led to the imposition of economic sanctions and disrupted external economicassistance.

Political Instability and Economic Growth

Pakistan has seen twenty-three governments in the past sixty years, including:

fourteen elected or appointed prime ministers, five interim governments and thirty-three

years of military rule under four different leaders. Excluding the military and interim

governments, the average life span of a politically elected government has been less than

two years. If the five-year period of Bhutto is excluded, then the average span falls to 1.6

years.

The agricultural sector, representing 20 percent of GDP, is owned and managed by

private farmers. Manufacturing, with a few odd exceptions, is under the control of private

firms. Wholesale and retail trade, transportation (with the exception of railways and

Pakistan International Airlines), personal and community services, finance and insurance,

ownership of dwellings and the construction sector all fall within the purview of the private

sector. Only public administration, defense services and public utilities are directly managed

and operated by the government. Imports and exports of goods and services are also

privately managed. A rough approximation would indicate that goods and services

produced, traded and distributed by the private sector amount to 90 percent or more of the

national income while the government directly or indirectly owns, manages, controls or

regulates the remaining 10 percent of national income. So it is the strength of private

initiative, with all its flaws, operating in a relatively liberal policy environment that has been

the main driver of long-term economic growth in Pakistan.

In Pakistan, transitions from one political regime to another have been quite difficult,

causing uncertainty and short-term reductions in the speed of economic growth. The

transfer of power from the military to civilian regimes in 1971, 1988 and 2008 were marked

with macroeconomic instability, a slowdown in economic activities, rising unemployment

and inflation and the adoption of a wait-and-see attitude by investors. But economic

recovery has also been resilient; short-term losses caused by political volatility have notbeen large enough to offset the positive long-term secular economic movement.


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Authoritarian vs. Democratic Regimes

In Pakistan, the debate over whether authoritarian or democratic regimes have

delivered better results in terms of economic performance has been quite fierce sinceGeneral Khan took power in 1958. The spurts in economic growth during the 1960s, 1980s

and 2000s, when the country was governed by military dictators, have led many to conclude

that authoritarian regimes are better suited to bring about economic development. Parallels

are drawn with China, Indonesia, Korea and Singapore.

Detractors of the authoritarian regimes, however, have skillfully torn apart the economic

performance record of the Ayub, Zia and Musharraf periods. Since the legitimacy and

perpetuation of these regimes were justified on the basis of good economic outcomes,

those opposed to these regimes have assailed the very economic record that has been

espoused as their achievement. Such detractors lay out three arguments.

First, they argue that the United States had always been more favorably disposed toward

Pakistans military dictators, as they are relatively more obsequious and subservient to the

American interests. Thus, it is the acceleration of inflows of foreign assistance to Pakistan

that led to the observed higher growth rates rather than sound economic policies, better

governance and the efficient utilization of resources. Although empirical evidence to

substantiate this argument hardly exists, it has become popular folklore: Ayub was

rewarded for his close economic and military ties with the United States in confronting the

Soviet Union; Zia ul-Haq received a boost as $5 billion was channeled through Pakistan for

Afghanistans mujahideen; and Musharrafs decision to openly support the United States inthe war on terror brought in approximately $10 billion of military assistance.

Second, the solid record of high growth rates under military regimes is believed to result

invariably in adverse distributional consequences. The Ayub period is blamed for the

widening regional disparities that led to the secession of East Pakistan. Zia ul-Haqs policies

were criticized for their failure to deal with structural weaknesses or reverse the damage

done by the policies of nationalization. According to Parvez Hasan, Zias economic policies

represented a rather sharp contrast between reasonably satisfactory short-term economic

management and an almost total neglect of long-term policy issues. The long period of

political stability and sustained growth under Zia ul-Haq offered major opportunities fordealing with the underlying structural issues but these were not exploited.26 Musharrafs

economic strategy, which made

Pakistan one of the fastest growing Asian economies, was also dismissed on the same

grounds: that consumer-led, credit-induced, service-focused growth neglected agriculture

and the manufacturing sectors, making the rich richer and the poor poorer.27 While the

World Bank and Asian Development Bank publicly acknowledged a significant decline in the

incidence of poverty and International Labor Organization (ILO) experts validated the fall in

the unemployment rate, the authenticity of the poverty and unemployment data has been

challenged. It became the norm to practice selective acceptance of government-produced

data showing negative trends and outright rejection of the data from the same source

showing positive trends.


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The third line of argument is quite persuasive. Economic accomplishments devoid of

political legitimacy, however impressive they may be, prove to be short lived. Without the

involvement and participation of the people, elegant and technically sound economic

solutions developed by authoritarian regimes are quickly replaced once the regime changes,

causing irreparable losses to the economy. The recent example whereby good initiativestaken by the Musharraf regime were either suspended deprived of funds or abolished

completely attests to this phenomenon. Some of these initiatives, such as revitalizing higher

education and expanding adult literacy and health programs have been brought to a

grinding halt. The Devolution Plan of 2001, which decentralized the delivery of basic services

to local levels, is at serious risk of abandonment. The phenomenon of abandoning the

previous governments plans and policies is not confined to the military -civil transitions but

also from one elected civilian government to the other. Benazir Bhutto rightly embarked

upon public-private partnerships by inviting independent power producers (IPPs) from the

private sector to set up electricity generation plants to overcome power shortages. The IPPs

were put on hold by the new government, which alleged that corruption was involved in theawarding of contracts. In another example, the incoming Bhutto government suspended the

motorway project initiated by the Nawaz Sharif government. By the time the project had

resumed, time delays, cost over-runs, contract cancellations and legal entanglement had

reduced the efficacy of the project.

Both the civilian-elected and military regimes have demonstrated the same characteristics

and weaknessespersonality cult leadership, centralized decision-making, repression of

opponents and cronyism. When one goes beyond labels and examines the actual behavior

of military and civilian regimes, most distinctions appear superficial. Pakistan has over the

last sixty years been an authoritarian polity both under the civilian as well as militaryregimes. Authoritarianism involves great relevance and obedience to authority and stands

opposite to individualism and freedom that come with it. Both the civilian leaders coming

from an agrarian and feudal social background and military leaders from the Command and

Control structure of the armed forces have demanded absolute loyalty and compliance with

their institutions of origin.

External Influences

The international community showed skepticism at the creation of Pakistan. Liberal

Western democracies were unable to reconcile themselves with the partition of a countryon the basis of religion. In any case, the structural deficiency in the creation of Pakistan, the

adversarial relationship with its large neighbor India, the internal fissiparous tendencies

among the various ethnic and linguistic communities and a weak economic base with no

significant natural or human resources all added to Pakistans insecurities and pushed it

toward finding a strong ally. The United States was more than happy to oblige and found

that Pakistans strategic location fit in well with its desire to build a cordon sanitaire around

the Soviet Union, China and Eastern Europe. Pakistan viewed U.S.-sponsored pacts,

including the Southeast Asia Treaty Organization (SEATO) and the Central Treaty

Organization (CENTO), as guarantees that the United States would come to its rescue if its

territorial integrity was threatened by India. During the Cold War, Pakistan aligned itselfwith the United States while India aligned itself with the Soviet Union. Despite lofty ideals


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for democracy promotion, the United States found the efficiency of an obsequious military

regime, with its unified command and control structure, to be more suitable for its larger

geopolitical goals as opposed to dealing with a messy, dispersed and ineffective democracy.

Would a democratic regime have allowed U.S. access to an air base in Peshawar to fly spy

planes to the Soviet Union? Would the U.S. strategy of removing the Soviets from

Afghanistan have been so successful absent a military regimes help? Would the Bushultimatum in the aftermath of 9/11 have been accepted by a political leadership that did not

combine the command of the military and the constitutional authority of the civilian

government? The answers to these questions are unclear at best.

As political uncertainty and instability are anathema to a market-based economy, something

had to be done to fix this supposed problem. The solution was the strengthening of the

military, which even today remains professionally the best institution in the country.

Because of its merit based induction and promotion system, coupled with superb

professional training and conduct, the Pakistani military was considered the real guardian of

the nations territorial and ideological frontiers. It believed it had the best interests of thecountry at heart and therefore knew exactly how to bring about the reforms needed to spur

economic development. Every military dictator removed the preceding elected

governments on the pretext that they were damaging the economy. Transparency,

continuity, consistency and predictability are needed by the markets, and the military

regimes thought they were the only ones who could provide those enabling factors.

The empirical evidence to the above hypothesis is provided by the relative economic

outcomes during the three military regimes compared to the dozen civilian governments.

Economic development under Ayub was a high point in U.S.-Pakistan relations as Pakistan

was presented as a model for other developing countries to follow. Zia ul-Haq andMusharraf pursued the same set of policies over longer periods of stability, producing

impressive results. Nawaz Sharifs reforms in 1991 were even more far-reaching and were

followed by Benazir Bhutto and now by the Zardari government. But the outcomes under

these civilian regimes have been disappointing; it was weak governance and not policy

direction that created the deviations from the trend under various regimes.

Stephen Cohen also echoed the popular belief that the two most dramatic spurts in

economic growth during the Ayub and Zia ul-Haq years were accompanied by high levels of

aid from the United States, military grants from China and subsidies from Saudi Arabia.

The strained relationship with India, which has existed since 1947, has resulted in three

wars and can be seen as one of the factors behind the erratic performance of Pakistans

economy. It is popularly believed that a high level of defense spending has had a

detrimental effect on the economy. The wars fought with India over Kashmir are presumed

to have led to substantial increases in defense expenditure. Parvez Hasan estimates that

economic growth and social progress would have been faster if defense spending had been

reduced by 2 percent of GDP and the liberated resources were utilized to increase public

development spending by more than onethird. Pakistans quest to acquire nuclear

capability, conventional weapons, delivery systems and other defense mechanisms, was

also a reaction to Indias move to become a nuclear power. Whether this objective wasachieved by sacrificing investment in education and social development remains a


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debatable but unsettled question. According to Hussain Haqqani, the intermittent flow of

U.S. military and economic assistance encouraged Pakistans military leaders to

overestimate their power potential. This, in turn, has contributed to their reluctance to

normalize relations with India even after learning through repeated misadventures that

Pakistan can, at best, hold India to a draw in military confrontations.

Dependency on Debt

The occurrence of debt in Pakistan started in 1984-85 when its surplus revenue

account turned for the first time into deficit. Subsequently, both the fiscal deficit and debt

started to increase at multiple rates. The overall deficit (total revenue minus total

expenditures) amounted to Rs 89.2 billion in 1990-91, which swelled by 66 percent to Rs

148 billion in 1997-98. While the domestic component of national debt increased from Rs

448 billion to Rs 1280 billion (185 percent) foreign debt, increased from Rs 272 billion to Rs

697 billion (156 percent) over the same period of time.

Trade Deficit

Pakistan is suffering deficit in the balance of payments that has lasted for many

decades. Trade deficit is major causes which have very harmful effect on the economy of

Pakistan. Trade deficit happened when imports are more as compare to exports. In financial

year 1956 -57 and in financial year 2003-4 Pakistan has surplus balance of trade. This was

the financial year in which Pakistan had a favorable balance of trade. Measures engaged by

the Economic Monitoring Committee (EMC) and State Bank of Pakistan have acutely failed

to decrease import volume of the country. Forex reserves of Pakistan rapidly draining

Government is difficult to manage the balance of trade payment thats why foreign currencyagainst the home currency is strengthen which results in imports of goods and services

becoming more expensive as compared to exports and cause for devaluing of the home

currency and a balance of payments deficit. As the merchandise trade deficit carries on to

shake the countrys economy, the services trade deficit minimized substantially by 66

percent in September of recent fiscal over the same month of previous year. Thanks to the

rupee devaluation that helped increasing exports. Apart from trade of goods, services sector

has also been seen to consume major lump of dollars on the payment of royalties and

import of business, financial and other services. The export of government services primarily

consisting of defence services led the export types in service sector followed by logistic

support provided to foreign countries. Transportation services, visits of tourists and

businessmen and construction services were also among the significant export categories.

Flow in trade deficit is due to costly imports of oil, fertilizer, wheat and other necessities as

well as fall in countrys textile sectors exports, which is an addict of compensatory duty

hitches, excessive incentives and recently approved explore and evolution support benefits.

The countrys inadequate export sector has also been unsuccessful to cash in on the Rupee

devaluation. Below this miserable performance of the textile sector, exports of the non-

traditional items, which are not enjoying any Research and Development benefit or

incentives are growing at a faster pace and helping the country to diversify its exports

basket.


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Recommendations

Pakistan exports great quantities of cotton, leat

Economic Development of Pakistan 1985-2012

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