pakistan: state of the economy
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Outline
Introduction & Background
Macroeconomic Trends
Current Options
External Options
Future Directions
Pakistan Economic Growth 1961 - 2012
0
2
4
6
8
10
121
96
1
19
64
19
67
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97
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00
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03
20
06
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09
20
12
% C
han
ge in
Rea
l GD
P
Falling long run growth due to lack of structural reforms and conducive market environment
Pakistan Vs. South Asia 1961 - 2012
0
2
4
6
8
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61
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63
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65
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01
20
03
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05
20
07
20
09
20
11
% C
han
ge in
Re
al G
DP
Pakistan
-4
-2
0
2
4
6
8
10
19
61
19
63
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65
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67
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69
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71
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73
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93
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95
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97
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99
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01
20
03
20
05
20
07
20
09
20
11
% C
han
ge in
Re
al G
DP
South Asia
There is an ignorance about long run ingredients of economic growth i.e. labour (education and health) and capital (market reforms and competition)
Fixed Investment 1961 - 2012
0
5
10
15
20
25
30
35
401
96
0
19
64
19
68
19
72
19
76
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80
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84
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88
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92
19
96
20
00
20
04
20
08
20
12
% o
f G
DP
Pakistan
South Asia
Literature shows that Pakistan is not a capital constraint country, however incentives for sustained investments and retention of capital have been declining overtime
Gross Domestic Savings 1971 - 2011
0
5
10
15
20
25
30
35
% o
f G
DP
Pakistan
South Asia
Pakistan has found it difficult to raise its savings level and to channel these savings into high impact investments
Fiscal Performance 2001-2012
0
5
10
15
20
252
00
1
20
02
20
03
20
04
20
05
20
06
20
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20
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20
12
% o
f G
DP
Government Revenue
GovernmentExpenditure
Low tax to GDP ratio implies lesser fiscal space for development expenditure and repeated resort to debt for managing government’s consumption expenditures
Budget Deficit and Inflation 2001-2012
-10
-5
0
5
10
15
20
25
20
01
20
02
20
03
20
04
20
05
20
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20
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20
12
% o
f G
DP
Budget Deficit
CPI (% Growth)
High government subsidies and overall lack of fiscal discipline has kept the budget deficits high, in turn also keeping inflation at a level which is above Pakistan‘s GDP growth
Inflationary Pressures
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
Co
nsu
me
r P
rice
s (%
Ch
ange
)
Pakistan
South Asia
Pakistan had higher price levels in comparison to its neighbors. While South Asian economies also maintained high subsidies, however they were better targeted and prudently financed
Current Vs. Development Expenditure 2001-2012
02468
101214161820
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
% o
f G
DP
Current Expenditure
DevelopmentExpenditure
Debt servicing, defense, law & order have not allowed government’s current expenditures to come down. This also implied lesser expenditure availability for MDGs
Spending on Education & Health
0
0.5
1
1.5
2
2.5
32
00
1
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
% o
f G
NP
Education Spending
Health Spending
Education and health expenditures are compromised first once current expenditures increase. The also impact longer run productivity of the economy
Infant Mortality
0
10
20
30
40
50
60
70
80
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
pe
r 1
,00
0 li
ve b
irth
s
Pakistan
South Asia
Polio and Measles continue to exist. Consistent failure due to coordination at various tiers of the state machinery (however funding adequately available)
External Performance
-15
-10
-5
0
5
10
15
20
25
301
98
0
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
% o
f G
DP
Current accountbalance
Exports of goods andservices
Imports of goods andservices
While falling long run growth and higher prices implied downward pressure on export competitiveness. However weak currency has and global rise in commodity prices has helped Pakistani exports
External Performance - II
0
2
4
6
8
10
12
14
16
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
USD
Bill
ion
Remittances
0
5
10
15
20
25
30
35
40
45
50
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
USD
Bill
ion
External Debt Outstanding
-1000
0
1000
2000
3000
4000
5000
6000
2007 2008 2009 2010 2011 2012
USD
Mill
ion
Foreign Direct Investment
0
2
4
6
8
10
12
14
16
2005 2006 2007 2008 2009 2010 2011 2012
USD
Bill
ion
Net Forex Reserves
Rising remittances and debt contribute to Dutch disease effect
Real Sector Outlook
Indicators 2011-12 (Provisional)
2012-13 (Projected)
Economic Growth (%)
GDP Growth 3.7 4.3
Agriculture 3.1 4.0
Manufacturing 3.6 4.1
Services 4.0 4.6
Investment and Savings (as percent of GDP)
Investment 12.5 13.1
National Savings 10.7 13.2
Foreign Savings 1.8 -0.1
Inflation (% Growth) 9.7 9.5
GNP Per Capita (PKR) 121173 135774
Source: Economic Survey of Pakistan and Planning Commission’s Annual Plan 2012-13
Fiscal Sector Outlook
Indicators 2011-12 (Provisional) PKR Billion
2012 (July - December) PKR Billion
Total Revenue 2567 1462
Tax Revenue 2053 1012
Total Expenditure 3936 2086
Current Expenditure 3123 1722
Interest 889 553
Defense 507 257
Development Exp. 744 278
Fiscal Deficit 1370 625
Fiscal Deficit (% of GDP) 6.6 2.6
External financing 129 1.4
Domestic financing 1241 626
Source: Economic Survey of Pakistan
Balance of Payments
Indicators 2011-12 (Provisional) USD Million
2012-13 (Jul-Jan)
USD Million
Exports (fob) 24696 14170
Imports (fob) 40461 22944
Workers’ Remittances 13186 8207
Current account balance
-4635 62
Foreign Direct Investment
850 1800
Foreign Portfolio Investment
-152 507
Foreign Exchange Reserves
11901 9873
In months of imports 2.4 1.9
Source: State Bank of Pakistan
Two months import bill available to provide for Letter of Credits, and imports for food, edible and crude oil
Repayment to IMF
• Pakistan would repay the IMF under Stand-by Arrangement (SBA) loan facility’s second phase installment of USD354 million on February 26, 2013
• This is 9th installment as Pakistan has already paid around USD 2.38 billion against the total fund of USD 7.80 billion
• Rupee has lost 39 % of its value against the dollar since March 2008
• Pakistan is paying over 2.5 % interest on the loan annually is facing a 5.6 % increase in IMF loans repayment due to changing dollar-rupee parity
Monetary Sector
Indicators 2011-12 (Provisional) PKR Million
3-Feb. 2012 PKR Million
Net Foreign Assets -248122 -33436
Net Domestic Assets 1,194,723 610640
Net Government Borrowing
1,237,441 772,675
Credit to Private Sector 235242 238034
Credit to Public Sector Enterprises
-130464 -270889
Broad Money (M2) 946601 316,734
Percent Growth 14.1% 4.7%
Source: State Bank of Pakistan
State of Poverty
• Three different figures
• No release of official information
• SDPI’s work on multidimensional poverty reveals that 33% of Pakistan’s population is poor
Current Options
• Business as usual (BAU) scenario
• BAU + Short term measures
• BAU + Short term measures + Structural reforms
Business as usual Scenario
• Pakistan’s foreign exchange reserves will deplete by June 2013
• Pakistan will need IMF Stand by arrangement in July 2013
BAU + Short term measures
• Short term measure may include – Auctioning of 3G license
• May attract USD 800 million
– Engaging with Etisalat
• Payment due USD 645 million
– Advanced Settlement of Coalition Support Fund
– Pakistan Remittances Initiative (Plus)
BAU + Short term measures + Structural reforms
• Structural reforms
– Deregulating energy (and other high impact sectors)
– Privatization or public private partnership mode for state owned enterprises
• Reforms of foreign direct investment
– Poor law and order in key investment hubs
– Weak dispute resolution mechanism
– Sovereign guarantees for investors
Possible IMF Reactions
• State of Structural Reforms – Energy Sector
• Restructuring of boards of GENCOs and DISCOs • Reform of tariff in electricity and gas • Reduce line losses
– Tax Administration • Widen tax net and broaden tax base • Introduce agricultural taxation • Remove tax exemptions
• Demanding reforms from present government • Breather for caretaker government • Conditionalities for future government
Pakistan Economy: Future Directions
• Engaging Diaspora – Increased Joint Ventures and Remittances
• Planning Commission’s Growth Strategy – Revitalizing Domestic Commerce through urban
management
• Regional trade and connectivity – Reducing import bill by tapping neighbors
Workers’ Remittances: Futuristic Outlook
Demand Side
• Most believe that the flow will continue to increase
• With tightening of regulations in US and Continental Europe, Pakistani migrants have embarked to untraditional destinations too
• For Diaspora weak Pakistani currency implies a buyers’ market in Pakistan
• Banking sector in Pakistan envisaging targeted financial instruments for Diaspora
Supply Side
• EU region will remain in recession for medium term
• North America will maintain stringent visa regime and work approvals
• Middle East will continue to diversify away from South Asian migrants
• Look East – may be an option!
• Pakistanis losing on opportunities associated with Chinese proximity
Workers’ Remittances and Dutch Disease
• Is a Remittances-led welfare model sustainable? – Kerala's example not very encouraging
• What about Dutch Disease?
Increasing Remittances
Appreciates Exchange Rates
Hurts Exports Curtails
Production Increase in
Unemployment
Countering Dutch Disease
• Engaging Diaspora beyond monetary contributions
– Knowledge and technology transfer
• Banking sector instruments: Going beyond Pakistan Remittances Initiative
• Directing remittances towards higher multiplier and value added activity
• Caution: Government cannot do sector picking, however it can create a level playing filed for all sectors
• Example: Indian Diaspora’s own budget airline for Indians in Middle East (workers’ class). Pakistan’s Sialkot Chamber of Commerce engaging Diaspora for Municipal Investment
Aligning Migration Policy with Development Policy
• Framework for Economic Growth Silent on Migration / Remittance Prospects
• What about Federal Budget Can it be a short term instrument for leveraging remittances?
• Overseas Pakistan’s Division
Planning Commission’s Growth Strategy
• Three low hanging fruits – Civil Service Reforms
• Empowerment with accountability
– Domestic Commerce • Reforming urban spaces for accommodating
entrepreneurship
– Regional trade and connectivity • Reducing barriers to trade with neighbors
Connecting Pakistan - Regionally
• Intra regional trade
– South Asia (5%)
– ASEAN (30%)
– EU (60%)
• Regional competition beneficial for both producers and consumers
Regional Trade Diplomacy
• China – Pakistan Free Trade Agreement (FTA)
• Pakistan – Sri Lanka FTA
• Malaysia – Pakistan FTA
• Slow progress with India – India has given MFN status to Pakistan and allowed FDI from
Pakistan
– Pakistan needs to reciprocate
– Sri Lanka already has a Comprehensive Economic Partnership Agreement with India – leading to benefits for both countries
• Slow progress on South Asia Free Trade Agreement (SAFTA)
Location Externalities
• Pakistan has handed over operations of Gawadar port to China
• Pakistan has made significant progress with Afghanistan Pakistan Transit Trade Agreement – Benefits also to India and Tajikistan
• India sees Pakistan as bridge between Far East with Central Asia – India has demanded land route for sending goods to Iran,
Afghanistan and Central Asia
• Slow progress on gas/oil pipelines – Tajikistan-Afghanistan-Pakistan-India (TAPI) Pipeline – Iran-Pakistan-India Pipeline
Informal Economy
• SDPI Study: Informal economy = USD 34 billion per annum
– Illegal economy is estimated at USD 1.5 billion
• FBR Study: Informal economy is 31.4- 44 % of GDP
• PIDE Study: Pakistan’s informal economy is 91.4 % of the formal economy
Three Broad Reform Areas
39
• Energy Governance
• Energy Pricing
• Public Sector’s role in Energy Sector
I. Energy Governance
40
• Independence of boards
• Induction of professional management
• Strengthening of regulatory bodies oversight
• Appropriate legislative changes to allow deregulation
• Case of Punjab Government
II. Energy Pricing
41
• Phase out subsidies
• Hidden Subsidies
• Cross Subsidies
• Targeted Subsidies
• Rationale for pricing
• Producer pricing
• Consumer pricing
• Economic basis for all sectoral pricing
• Full cost recovery of service provided
III. Government’s Role in Energy Sector
42
Limiting Government’s role to policy and planning
Regulator to oversee
Investment and management to be by
private sector
Learning from Indian example
Government should provide level playing
field
Integrated energy policy….and ensure its
implementation
National Energy Conference focused
on short term solutions
Government must take lead in
conclusive discourse
Issue of large dams
Thar Coal (and procedural hickups)
Energy trade with neighbors
• Power sector (India)
• Gas Pipelines (TAPI, Iran, Qatar etc.)
Sequencing of Solutions
43
Short Term
• Curtail power sector losses
• Costs of nonpayment of bills
• Power sector theft
• Transmission losses
• Allowing provincial government to take autonomous decisions
Medium Term
• Integrated Energy Plan
• Implementation of energy efficiency standards
• Gas sector linkages with neighbors
Long Term
• Multi-buyer Multi-seller private sector energy market
• Insulating gas sector from security threats
• Incentivize oil exploration (removal of subsidies on other sources)
• Develop national consensus on hydro and coal sources (e.g. dams and Thar coal)
• Vision and capacity for renewables
While TAPI and other Central Asian prospects will be driven by geo-politics, are there any medium term solutions?
45
Trade in Energy (SAARC)
47
Petroleum products
Trade in power
Infrastructure development
Decentralized
electricity
solutions
Efficient energy
markets
Synchronizing National Policies
48
• Joint techno-economic evaluation of opportunities and determination of pre-requisites
• Establish financially sustainable energy entities, promote competition and ensure cost-reflective pricing of energy goods and services
• Develop project-specific legal/institutional arrangements
• Seek advice and support from multilateral institutions particularly in drawing experiences from Southern Africa Power Pool, Nordel/Nord Pool and electricity trade in Europe
India – Pakistan Power Trade
49
• Transmission lines through Wagah-Attari border
• Surplus pockets in Indian Punjab (and downwards)
Implementation
51
• Issue of rent-seeking – Rental power plants debacle
– Who steels power? [98.5% are large scale]
– Pricing and need for microeconomists at executive and regulatory branches of government
• Reforming service structure in energy entities – Who runs the ministry? [turnover rate of federal secretary too high]
• Enforcing results based management with clear KPIs
• Lack of demand-side accountability – Stronger consumer bodies needed
– Who are the regulators? [need for regulatory assessment]
– Punjab blocks GT Road for its supplies
– SDPI’s report on Karachi Electric Supply Corporation
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