DISTURBED LAW & ORDER AND GDP

S.KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Feb
8 - 14, 2010

Pakistan's economy is facing worsening law and order situation. Gross development product (GDP) is one of the primary indicators of country's economy and represents the total dollar value of all goods and services produced over a specific time. It is the market value of all the output produced in a nation in one year.

SECTORAL CONTRIBUTION TO GDP GROWTH (%)

SECTOR 2007-08 2008-09
Agriculture 0.24 1.00
Industry 0.45 -0.92
Manufacturing 0.91 -0.64
Services 3.41 1.92

Large scale manufacturing which accounts for 12.1% in GDP faced the most difficult period and depicted a negative growth of 7.67% during July-March 2008-09 compared to 4.0% growth in the same period last year.

The share of the services sector increased to 53.8% in 2008-09. The services sector grew 6.6% against the target of 6.1% in the last fiscal year. However, on the eve of the global financial meltdown, the contagion was well observed in the banking and financial sector. The growth in the financial sector slowed down to 12.9% in 2007-08 but registered a negative growth of 1.2% in 2008-09.

FOREIGN INVESTMENT

Pakistan witnessed a substantial fall in FDI inflows in 2008-09. The overall foreign investment during the first ten months (July-April) of the current fiscal year declined by 42.7% and stood at $2.2bn compared to $3.9bn in the same period of last year. Foreign direct investment (private) showed more resilience and stood at $3205.4mn during the first ten months (July-April) of the current fiscal year as compared to $3719.1mn in the same period last year thereby showing a decline of 13.8%. Private portfolio investment on the other hand showed an outflow of $451.5mn as against an inflow of $98.9mn during the comparable period of last year.

COMPOSITION OF GDP GROWTH (%)

FLOWS 2005-06 2006-07 2007-08 2008-09
Private Consumption 0.8 3.4 -0.9 3.6
Public Consumption 3.9 -1.1 3.8 -1.8
Total Consumption [C] 4.7 2.3 2.9 1.8
Gross Fixed Investment 2.9 2.2 0.7 -1.2
Change in Stocks 0.1 0.1 0.1 -0.1
Total Investment [I] 2.9 2.3 0.7 -1.2
Exports (Goods & Serv.) [X] 1.8 0.4 -1.0 1.5
Imports (Goods & Serv.) [M] 3.2 -0.7 0.6 -1.6
Net Exports [X-M] -1.5 1.1 -1.6 3.2
Aggregate Demand (C+I+X) 9.4 5.0 2.6 2.1
Domestic Demand (C+I) 7.6 4.6 3.6 0.6
GDP MP 6.2 5.7 2.0 3.7

USA kept its distinction of being the largest investor with 23.2% stake in the FDI. Other big investors included Mauritius (10.0%), Singapore (7.7%), UK (6.9%), Switzerland (6.6%), UAE (5.3%), and Hong Kong (3.9%). The communication sector (including Telecom) spearheaded the FDI inflows accounting for 27.3% during July-April 2008-09 followed by financial business (22.4%), energy including oil & gas and power (22.7%), and trade (4.9%).

INVESTMENT AND SAVINGS

Law and order situation in Pakistan is deteriorating every day, due to which the total investment declined from 22.5% of GDP in 2006-07 to 19.7 % of GDP in 2008-09. Fixed investment decreased to 18.1% of GDP from 20.4%. Gross fixed capital formation in real terms contracted by 6.5% compared to an expansive of 3.8% last year. However, in nominal terms gross fixed capital formation increased by 13.1% against 15.5% last year. Private sector investment also witnessed a contraction of 7% in real terms and expansion of 12% in nominal terms compared to a growth of 3.6% in real and 15.1% in nominal terms in last year.

GDP GROWTH RATE (%)

YEAR RATE (%)
2001-02 3.1
2002-03 4.7
2003-04 7.5
2004-05 9
2005-06 5.8
2006-07 6.8
2007-08 5.8
2008-09 2.4
2009-10 2.5 to 3.3 (Proj)

National savings at 13.5% of GDP in 2007-08 was the lowest ever level since 1999-2000 and financed 61.5% of fixed investment in 2007-08. The current fiscal year has improved upon this performance and national savings as percentage of GDP stood at 14.3%. Domestic savings declined substantially from 16.3% of GDP in 2005-06 to 11.2% of GDP in 2008-09. In the current scenario, net foreign resource inflows are coming in a huge quantum and financing savings investment gap.

UNEMPLOYMENT

The anti terrorism campaign has led to massive unemployment in the affected regions. With recession come the associated adverse social affects like rising unemployment, underemployment, and poverty. Several developments started earlier in the affected areas of NWFP and tribal region are afflicted with delays, which may ultimately result in large cost overruns.

CONCLUSION

The poor law and order situation brings about political and economic hardships. The economy of Pakistan has slowed down substantially, with major engine growth showing signs of weakness. Therefore, the government has projected GDP growth at 3.3% in financial year 2009-10.