ECONOMIC PERFORMANCE OF PAKISTAN: 5 YEAR AT A GLANCE

MARIAM NASIR
Manager Research, PAGE
Dec 31, 2007 - Jan 06, 2008

Pakistan's economy witnessed the best performance in the last couple of years. Throughout these years the government has carried out ultra reforms which accelerated economic growth to 7% in FY07 on the back of robust growth in agriculture, manufacturing and services. Pakistan's real GDP has grown at an average rate of 7% per annum during the last five years (FY 03-07). Policymakers have in recent years created an environment in which the private sector has begun to thrive. Measures taken include substantial privatization, reforms in the banking and utility sectors and efforts to reduce red tape. The need to raise levels of foreign direct investment and exports to counteract the negative trends at work in the economy should now be a focus of the government policy.

Foreign investment has increased at a great pace since the past five years. During FY07 it has went up from a meager US$816mn to US$6,960mn. During the last fiscal year, foreign direct investment in Pakistan soared by 45.6% to US$5.14bn during 2006-07 while portfolio investment climbed by 417.9% to US$1.82bn compared to the previous fiscal year whereas in the first half of current fiscal year (up to October) the investment stood at US$1.29bn. Total remittances inflows since FY 01-02 and until FY 06-07 have amounted almost US$25bn. In FY 06-07, Pakistan received an amount of US$5.5bn as against over US$4.6bn in FY 05-06, showing an increase of US$893.53mn or 19.42%. The remittances have not stopped and the pace is continuing as in the current year the remittances touched US$2.08bn.

Pakistan trade balance has over the years continuously deteriorated. The deficit in FY07 stood at US$13.6bn, close to 9% of GDP, the highest on record. Exports in the period FY 03-07 has increased at a Compound Annual Growth Rate (CAGR) of 11% while imports during the same period witnessed a humongous CAGR of 26%. Trade balance in the four months of current fiscal period stood at US$4.13bn. Pakistan current account has witnessed a gradual increase from a surplus of US$1.81bn in FY04 to a deficit of US$7.09bn in FY07. Huge current account deficits (as percentage of GDP) of 3.93% in FY06 and 4.94% in FY07 explain Pakistan's robust domestic demand story. Despite billions of US dollars of investment in recent years, the textile sector, which accounts for around 70% of Pakistan's exports, is not meeting expectations. The Prime Minister, Shaukat Aziz, asked the textile industry to improve its efficiency, but representatives of the industry are demanding greater subsidies. The government argued that the supply chain was generally competitive but was let down by workers" productivity and management expertise, and that greater investment by the sector in improving skills would increase productivity. At the same time, Pakistan's competitors such as India, China and Bangladesh have cut subsidies to their textile sectors in recent years. Although Pakistan's exporters should be in a position to benefit from the depreciation of the Pakistani rupee against the US dollar in contrast, for example, to the sharp appreciation of the Indian rupee against the dollar. Low productivity and the reliance on subsidies were severely harming the sector's competitiveness.

Monetary policy stance of the SBP has undergone considerable changes over the last several years switching from an easy (FY 00-03) to a broadly accommodative stance (FY 03-04) and then from a gradual tightening (FY 04-05) to an aggressive tightening stance till date. In July 2007 the State Bank of Pakistan raised its benchmark lending rate by 0.5 percentage points to 10% in order to stem inflation; this was the first such rate rise since July 2006. The SBP's move was risky, given that economic growth is slowing and exports are underperforming. But it has proved prudent: consumer price inflation fell slightly, from an average of 7.2% year on year in the four months to 7.6% in the second quarter.

Pakistan's overall Forex Reserves increased by US$3.2bn in FY07 compared to a rise of US$881mn in FY06. The reserves touched the mark of US$17.92bn which included gold reserves worth US$1.36bn. The increase in the overall reserves was mainly due to US$2.580bn rise in the SBP reserves, which were mostly accumulated in the second half of FY07. Currently in the four month period the reserves hover around US$16.3bn.

Economic Indicators

FY04

FY05

FY06

FY07

4M/FY08

Nominal GDP (US$ bn)

98.10

111.00

129.00

146.00

NA

GDP Growth (%)

7.50%

8.60%

6.60%

7%

NA

Per Capita Income (US$)

669.00

733.00

833.00

925.00

NA

Inflation (%)

4.57%

9.28%

7.92%

7.78%

7.60

Exports (US$ bn)

12.30

14.40

16.50

17.01

6.00

Imports (US$ bn)

15.60

20.60

28.60

30.50

10.13

Trade Deficit (US$ bn)

(3.30)

(6.20)

(12.10)

(13.49)

(4.13)

Remittances (US$ bn)

3.90

4.20

4.60

5.49

2.08

Foreign Direct Investment (US$ bn)

0.95

1.52

3.52

5.14

1.29

Forex Reserves (US$ bn)

13.16

13.33

14.59

15.18

16.30

External Debt (US$ bn)

33.31

34.04

35.66

37.36

NA

Current Account Balance (US$ mn)

1,811.00

(1,534.00)

(4,990.00)

(7,094.00)

NA

M2 Growth (%)

19.59%

19.12%

15.07%

19.32%

NA

Population (mn)

149.65

152.53

155.37

158.17

NA

Literacy Rate (%)

53.00

53.00

54.00

55.00

NA

Unemployment Rate (%)

8.30

7.70

7.70

6.20

NA

Source: SBP, Economic Survey, FBS
NA - Not Available

Pakistan's economy has grown strongly in recent years despite political instability. However, law and order disturbance had a serious impact on the economy. The closure of businesses also affects those further down the supply chain particularly poorer communities who grow perishable products for the urban market. The impact was also immediately felt in the tourism industry. Despite all, Pakistan has remained in the centre of attraction over the years and has attracted huge amount of investment. The thing left to do is to just control and maintain the law and order situation and everything would be in place for a perfect growth.