Legacy of the 1990s
The period of 1990s was a stagnant decade in terms of economic growth, with lash back in the increase of poverty, overall debt, large fiscal and current deficits all pointing towards poor social indicators, leading the higher rate of inflation. But in all fairness the entire blame for this particular outcome cannot be laid on the economic managers and policy makers of that time for there are other factors too.
After an impressive record of economic growth and poverty alleviation during the 1980s Pakistan suffered serious setbacks in the 1990s in terms of most economic and social indicators. During the 1990 the economic growth rates declined, inflation rose to peak, debt load escalated substantially, macroeconomic deficit widened and worst of all the incidence of poverty almost doubled. Pakistan’s credibility in the international financial community was at its lowest level. Confidence of the local investors was seriously injured when the hard earned foreign currency deposits of resident and non-resident Pakistanis, accumulated over a long period of time, were suddenly frozen by the then new government.
The annual growth rate during the 1980s was 6.3 %, which declined to 4.9 % during the first half of the 1990s, and further plunged down to 4 % during the second half. As compared to an average record of 8.2 % the sectoral growth witnessed a sharp fall to almost 4 % in the late 1990s.
The Investment ratio moving in a downward direction since 1995 reached its lowest of 13.9% in 1998-9. This short fall of investment made it even more difficult for the economy to resume a higher growth rate.
The persistence of fiscal and external deficits led to accumulation of large domestic and external debt throughout the decade. Total debt consequently rose from $20 billion in June 1990 to a peak of $43 billion in May 1998. Pakistan’s external debt reached 47.6 % of GDP, having grown at an average annual rate of 8.1 % throughout the 1990s. Domestic debt accounted for 49.1 % of GDP. Public debt service claimed as much as 61 % of total revenues in mid-1999 compared to 35.7 % in 1990 thus leaving very little fiscal space for development expenditure.
The burgeoning burden of debt service was reflected in the persistently high level of fiscal deficit, above 7 % of GDP, Tax-GDP ratio had moved up to 14.4 % by 1994-5 but since then it had consistently eroded and was down to 12.8 % by 1999-2000.
External sector deficit also jumped from 2.6 % of GDP in the 1980s to 4 % in 1990s. A major factor responsible for this trend was stagnation of exports and the loss of market share in world exports. Incidence of poverty also doubled during this decade, from 18 to 34 %, primarily due to lower growth, higher inflation and limited access by the poor to basic social services.
1999-00 to 2001-02 – Stabilizing Economy
The period from 1999-2002 the economy was able to achieve the following results:
Fiscal deficit was reduced from 5.4 to 4.3 % of the GDP.
Trade gap reduced from $ 1.6 billion to $ 1.2 billion.
Current account balance turned surplus to $ 2.7 billion from a deficit of $ 1.9 billion.
Foreign remittances increased 2.5 times from $ 1,060 million to about $ 2,400 million.
FDI flows averaged $ 400 million annually.
Re-profiling of bilateral debt stock resulted in a saving of debt servicing of $ 1 billion annually.
Repayment of $ 4.5 billion private, commercial and short term debt and liabilities reduced the amount of debt and thus reducing future debt servicing obligations.
IMF, World Bank, ADB and other donors provided concessional assistance of about $ 2.5-3 billion annually while their hard term loans were repaid.
Foreign currency reserves held by State Bank of Pakistan rose from $ 991 million FY 1999-2000 to $ 1.677 billion in FY 2000-01 and $ 4.333 billion by FY 2001-02.
New foreign currency deposits of $ 2.1 billion by resident and non-resident Pakistanis were deposited in to Pakistani banks.
Pakistan’s exports increased from $ 7.8 billion to $ 9.2 billion by June 2001.
Table given below draws a comparison between macroeconomic indicators of FY99 and FY2002. The fourth column shows f the change was positive or negative.
2002-03 to 2006-07 – The Economic Take-off
Pakistan’s economic performance during the above period has been very impressive in terms of income per capita growth, new employment opportunities and poverty reduction. As a result high GDP growth rate of about 6.3 % a year, for five years, the per capita income in current dollar terms had risen to $ 1000. GDP growth that was 3.1 % in 2001/02 rose to 7 % in 2006/07. Unemployment rate also declined from 8.4 % to 6.5 % and about 11.8 million new jobs were created in FY99-08 period. The significant outcomes recorded during 2002/03 to 2006/07 were:
The amount of External debt and liabilities as %age of foreign exchange earnings was reduced to 28 % from 46 % of the GDP.
Foreign exchange reserves rose to US $14 billion covering six months’ imports from $ 6.4 billion in FY02.
Exports rose from $ 13.6 billion to $ 21.2 billion recording 55% increase.
Tax Revenues rose 14 % annually doubling in five years.
The Fiscal deficit remained close to 4 % of GDP.
Low interest bank rates on loans touched as low as 4 to 5 % this encouraged investment and fuelled growth.
Manufacturing sector share of GDP rose from 14.7% to 19.1% by FY07.
Investment rate grew to 23% in FY07 from 16.8 % in FY02 reflecting about six %age point growth in investment/GDP ratio.
Significant growth in foreign capital inflows of $13.5 billion over this period.
The foreign remittances increased 6 times and reached $6.5 billion for FY08. The foreign exchange companies under a new policy were brought under the regulatory framework of the State Bank of Pakistan which contributed another $ 3-4 billion of foreign exchange inflow.
The Tariffs on imports of plant, machinery and equipment for industrial sector has been reduced to 5% and for agriculture sector the tariff is reduced to 0 %.
Inflationary pressure that remained quite low in FY02-04 began to intensify since FY05 and food inflation touched double digits.
Unemployment decreased from 8.3 % in 2001-02 to 5.27 % in 2006-07 mainly because of a steep decline in women’s unemployment from 13 % to 9 %.
Profitability of banking sector surged reaching $1.7 billion in FY07.
Capital market capitalization reached $65.9 billion by end FY07.
Pakistan’s total foreign exchange earnings almost tripled from $16.8 billion in FY00 to $46 billion.
Table given below presents a summary of the changes in key macroeconomic indicators over the period 2001/02 – 2006/07.
2007-08; Economic Meltdown
The year 2007-08 has been a bad year for Pakistan’s economy. This can be assessed in the the following facts:
GDP growth rate was below the target, i.e. 5.8 % but was still quite respectable in view of the severe political and economic difficulties faced by the country.
Fiscal deficit widened to 7.4 %
There was drastic increase in the Government borrowing from the State Bank of Pakistan to a record high of Rs.688 million compared to Rs. 112 billion in the previous year.
In agricultural sector, cotton, wheat and rice crops did not perform well and together with increased prices of imported commodities, contributed to food inflation.
Large scale manufacturing growth slowed down to 4.8 % – almost one half of the rate recorded in FY07.
A worsening trade imbalance fuelled external current account deficit to exceed 8.4 % of GDP.
The drawdown of foreign exchange reserves to meet the balance of payments deficit created pressures on Rupee-dollar exchange rates leading to a depreciation of about 25 %.
Inflation crossed 12 %.
61 state projects that were in the pipeline remained untouched. On the other hand, the subsidies claimed by WAPDA, and PIA escalated substantially.
Important Macroeconomic Indicators
Following select macroeconomic indicators attempt to depict the difficulty Pakistan face today to attain desired level of growth.
Low Domestic Savings
Pakistan save only 15% of its national income whereas India save 35% and china 50% and the minimum saving percentage for national development must be above 25% and so Pakistan needs to go a long way to increase its national saving otherwise Pakistan will have to depend upon external sources which will intensify our debt and growth rates will remain low.
Balance of Payments
Due to inflation and economic recession globally, Pakistan’s economy also face a state of Balance of Payment crisis. IMF bailed out package for Pakistan in November 2008 to turn away a balance of payments crisis and in July last year increased the loan to $11.3 billion from an initial $7.6 billion.
By October 2007, Pakistan raised back its Foreign Reserves to a handsome $16.4 billion. These Outstanding policies kept Pakistan’s trade deficit controlled at $13 billion, exports boomed to $18 billion, revenue generation increased to become $13 billion and attracted foreign investment of $8.4 billion.
The political instability has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan’s economy, with gaping trade deficits, high inflation and a crash in the value of the Rupee.
Pakistan’sÂ CurrentÂ AccountÂ DeficitÂ narrowedÂ downÂ byÂ 65.9Â %Â asÂ aÂ resultÂ CADÂ declinedÂ toÂ $3.06Â billion inÂ Julyâ€AprilÂ 2009â€10Â asÂ againstÂ $Â 8.98Â billion lastÂ year.Â ThisÂ decline inÂ CADÂ during Julyâ€April 2010 was contributed by the improvement in trade, services, income & current transfers during the period. Specifically, decline in imports and a strong increase in current transfersÂ playedÂ aÂ fundamentalÂ roleÂ inÂ bringingÂ downÂ theÂ currentÂ accountÂ deficit.Â FallÂ inÂ paymentsÂ onÂ accountÂ ofÂ repatriation of dividends, interest on debt, freight onÂ merchandise imports and lower outflows fromÂ foreign exchange companies were other contributory factors behind the contraction in the currentÂ accountÂ balanceÂ duringÂ theÂ period.Â
Decline in trade deficit is dueÂ mainly to a fall in imports complimented by overall improvement in exports during Julyâ€April 2009â€10. The trade deficit improved by 18.3 % during this period. TheÂ deficitÂ inÂ servicesÂ tradeÂ shrankÂ byÂ 39.9Â %Â duringÂ Julyâ€AprilÂ 2009â€10Â over theÂ correspondingÂ period lastÂ onÂ theÂ backÂ ofÂ 15.3Â %Â growth inÂ servicesÂ exportsÂ andÂ 12.2Â %Â decline inÂ services imports.Â The increase inÂ servicesÂ exports isÂ mainly ledÂ byÂ communication, financial,Â government and other business services.Â
The table given below shows five major components of BoP and their contribution to overall GDP in past years. As evident from the table, trade deficit, having widened significantly, have started to shorten in the current period. Worker’s remittances have gone high over the period and current account deficit, after widening for long, have started to shrink as the IMF assistance came in to action.
Fading Export and Rising Imports
Pakistan’s major merchandise goods are stuck at US $20 billion for past several years. Services exports are even more insignificant. Exports is concentrated in five items i.e. cotton manufacturers, leather, rice, synthetic textile and sports goods. These five categories accounts for 71 % share in the total exports. Out of this 71%, 50%+ is from cotton related items. Although, Pakistan have free trade agreement with China but we are yet to mark our presence in Chinese supply chain globally. Other Asian countries have integrated themselves in this cycle and are benefiting from the outstanding demand for goods by the world’s largest exporting nation. Pakistan struggle to capture at least 1 % of Chinese market.
Table and graph, appended below, depicts the sectors which have shown significant performance in exports sector. It is worth mentioning here that textile sector is prone to fall if stringent WTO clauses come in action in years to come. This requires textile sector to take timely measures to render it efficient and globally competitive.
During 2007-2008, 80% of our imports were financed by our export revenue. This ratio has come down to only 50%, it may go up to 60% but a gap of 40% of financing needs in order to keep with the import level still exists.
The biggest import of all is Petroleum products which amount to about 30% of the imports and in food group tea and oil accounts for about 5% of imports. If these two items are curtailed this would result in tremendous saving and improving our BOP.