Research Analyst
Feb 14 - 20, 2011

Pakistan's economy continues to face problems internally. Internal structural problems persist in the form of power shortages, law and order situation, and absence of domestically generated resources.


2003 140 24 25 189
2004 435 184 244 863
2005 430 81 137 648
2006 608 325 538 1471
2007 1523 597 1479 3599
2008 2155 654 3906 6715
2009 2307 1011 8267 11585
Total 7598 2876 14596 25070

During the last few years, exporters have faced serious political instability, which caused million of rupees losses, especially from Dec to July.

Energy consumption growth rate is increasing with 4.8 per cent annually and is expected to grow at 8 per cent to 10 per cent per annum. Therefore, there is a dire need to have a sustained growth in energy supply and infrastructure capacity of 7 per cent to 8 per cent per annum to support the sustainable GDP growth.

The economy is facing many challenges due to worst law and order situation. LSM which accounts for 12.1 per cent stake in GDP faced the most difficult period of its recent history and depicted a negative growth of 7.67 per cent during July-March 2008-09 compared to four per cent in the same period last year. Pakistan has also seen a major transformation in the economic structure and the share of the services sector has risen to 53.8 per cent in 2008-09. The services sector grew 3.6 per cent against the target of 6.1 per cent and actual outcome of 6.6 per cent.

However, on the eve of the global financial meltdown the contagion is well observed in Pakistan's banking and financial sector. The growth in the financial sector slowed down to 12.9 per cent in 2007-08 but registered a negative growth of 1.2 per cent in 2008-09. Pakistan has also witnessed a substantial fall in FDI inflows in 2008-09 in line with all other developing countries. However, the deteriorating security environment exacerbated the case of Pakistan.

The overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 42.7 per cent and stood at $ 2.2 billion compared to $3.9 billion in the same period of last year.

Foreign direct investment (private) showed more resilience and stood at $3205.4 million during the first ten months (July-April) of the current fiscal year as compared to $3719.1 million in the same period last year thereby showing a decline of 13.8 per cent. Private portfolio investment on the other hand showed an outflow of $451.5 million as against an inflow of $98.9 million during the comparable period of last year.

The USA kept its distinction of being the largest investor with 23.2 per cent stake in the FDI. Other big investors originated from Mauritius (10 per cent), Singapore (7.7 per cent), UK (6.9 per cent), Switzerland (6.6 per cent), UAE (5.3 per cent), and Hong Kong (3.9 per cent).

Law and order situation in Pakistan is deteriorating every day, due to which the total investment has declined from 22.5 per cent of GDP in 2006-07 to 19.7 per cent of GDP in 2008-09. Fixed investment has decreased to 18.1 per cent of GDP from 20.4 per cent last year. Gross fixed capital formation in real terms has contracted by 6.5 per cent compared to an expensive of 3.8 per cent last year.

However, in nominal terms gross fixed capital formation increased by 13.1 per cent against 15.5 per cent last year. Private sector investment also witnessed a contraction of seven per cent in real terms and expansion of 12 per cent in nominal terms compared to a growth of 3.6 per cent in real and 15.1 per cent in nominal terms in last year.

Domestic savings also declined substantially from 16.3 per cent of GDP in 2005-06 to 11.2 per cent of GDP in 2008-09. In the current scenario, net foreign resource inflows are coming in a huge quantum and financing savings investment gap. The anti terror campaign has led to massive unemployment in the affected regions.


The poor law and order situation causes political and economical instability. While the near term outlook for growth and investment improved moderately, it is likely to remain constrained due to a continuation of the difficult macroeconomic environment. Nonetheless, the incipient growth recovery in the economy can gain some more traction if momentum in important segments of the economy, LSM, services, and selectively in the export sector, is reinforced and not derailed or interrupted. With relatively low levels of capacity utilization in the economy currently, a turnaround in investor confidence can unleash large productivity gains even with low levels of fixed investment.