PRESENTATION ON

‘PAKISTAN'S ECONOMY: CHALLENGES &

SOLUTIONS’

Outline Of The Presentation

What Needs to be Done?

Economy in the Current and the Next Year

Why have we Landed in such a difficult situation?

Recent Development (Post 2007/08)

Pakistan’s Economy in Historical Perspective

Why Economy Matters?

Economy affects the lives of the people of Pakistan

Two Pillars of the State

­ Strong Economy

­ Strong Defense

A strong economy can ensure strong defense; it will enhance country’s power and hence make the country’s defense even more stronger

Economic Backwardness generates violence, social conflicts and political turmoil.

According to historian Paul Kennedy, “a nation’s military strength rests on its economic strength”

What is military strength? It is nothing but power. What is power? It is the ability to influence the behaviour of others in accordance with one’s aims and objectives

WHY ECONOMY MATTERS?

Power can lead to prosperity and prosperity may generate more power

Former US Secretary of Defense Robert McNamara said that “Security means development and without development there is no security”.

No nation can sustain strong defense and nuclear arsenal without a strong economy

A strong economy would ensure strong defense and not the other way round

EXAMPLE FROM SOVIET UNION

PERIOD REAL GDP GROWTH DEFENSE SPENDING AS % OF

GDP

1928-39 4.2 2.0*

1940-49 3.2 -

1950-59 7.1 9.0**

1960-69 4.3 14.5

1970-79 3.4 13.9

1980-89 2.7 15.4@

*1928 **1950 @ 1980-84Source: William Easterly and Stanley Fisher, “The Soviet Economic Decline”, The World Bank Economic Review, Vol. 9, No. 3, September 1995, pp 341-371

One Pillar of the State (Economy) has been weakened to the core in the last five years. Can the second pillar (defense) remain strong and for how long?

It is for this reason that economy needs greater attention

PAKISTAN’ ECONOMY IN HISTORICAL PERSPECTIVES

Not withstanding numerous challenges that we faced over the last 65 yeas, Pakistan has done reasonably well on economic front. Pakistan’s economy has grown at an average rate of 5.0% per annum over the last 65 years.

The influx of refugees from India created insurmountable problems as the country had no resources to meet this challenge

The migration of Hindu and Sikh communities from Pakistan nearly paralyzed the economic and administrative machinery.

The head office of only One Pakistani owned bank was located in Pakistani territory

The Karachi Port was underdeveloped and most of Pakistan’s trade routed through the Indian ports of Bombay and Calcutta

India refused to release allotted share of cash balance of undivided India to the tune of Rs 75 crore (Rs. 750 million) for running the civil administration.

After a long battle India released a much smaller amount than the legitimate share of Pakistan

The share of agriculture in GDP was 60% in 1947. Today, it contributes 22% and 78% contribution comes from industry and services

Production of wheat was 4.0 million tons in 1947. Today we are producing over 23-24 million tons - almost 6 times more

Production of cotton was approximately 1.0 million bales in 1947. Today we are producing close to 13.0 -14.0 million bales

Production of sugarcane was 10 million tons in 1947. Today we are producing over 55-60 million tons

• Out of 14,569 industrial establishments in British India in 1947, only 1406 units (less than 10%) were located in the areas that comprised Pakistan.

• At the time of independence, Pakistan had a narrow industrial base with 34 units of textile, sugar mills and some cement factory

• In 1947 there were 177,000 spindles in Pakistan. Today we have 9.3 million spindles. There were 4800 looms in 1947; today we have approximately 3.0 million power looms

• Pakistan used to produce 35,000 tons of sugar and today we are producing more than 3.5-4.0 million tons of sugar

• At the time of independence Pakistan was producing 270,000 tons of cement. Today we are now producing over 28 million tons of cement

• Pakistan inherited very weak infrastructure at the time of independence. Pakistan inherited 22,000 km road and today we have a road network of 258,350km

• Given its potential, Pakistan could have done better on economic front

UPS AND DOWNS IN PAKISTAN’S ECONOMY

Real GDP Growth (%)1950s 2.5%

1960s 6.8%

1970s 4.8%

1980s 6.5%

1990s 4.6%

2000-01 2.0%

2001-02 3.1%

2002-03 4.7%

2003-04 7.5%

2004-05 9.0%

2005-06 5.8%

2006-07 6.8%

2007-08 5.0%

2008-09 0.4%

2009-10 2.6%

2010-11 3.7%

2011-12 4.4 %

2012-13 3.6%

Source: Pakistan Economic Survey

Real GDP Growth (%)

1950s 1960s 1970s 1980s 1990s 2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

GDP

­ Food & Fuel Crisis (Common Challenges faced by every economy)

­ Intensification of War on Terror

­ Political Instability

­ Less than satisfactory security environment

­ Energy Crisis

­ Economy Remained out of Radar of the Government

­ Instability in economic team

­ Weak economic team

­ Fiscal Indiscipline

­ Weak governance

­ Break down of public–private sector relations

RECENT DEVELOPMENTS (POST-2008)

CONSEQUENTLY ­ Economic growth slowed to an average of 3.0% per annum

over the last five years from an average of 7.0 per annum during the previous five years

­ Investment is down to 50 years low at 12.5% of GDP from as high as 22.5% of GDP only five years ago

­ Domestic Saving Rate at 5.8% of GDP is the lowest in the country’s history from an average of 15% of GDP during the previous five years

­ Large – scale manufacturing growth averaged 0.7% per annum over the last five years from an average of 12.4% per annum during the previous five years

Years China India Sri Lanka Bangladesh Pakistan

2005 11.3 9.0 6.2 6.3 9.0

2006 12.7 9.5 7.7 6.5 5.8

2007 14.2 10.0 6.8 6.3 6.8

2008 9.6 6.7 6.0 6.2 5.0

2009 9.1 8.0 3.5 5.7 0.4

2010 10.4 8.4 8.0 6.1 2.6

2011 9.2 6.2 8.0 6.7 3.7

2012 7.8 5.0 6.2 6.3 4.4

2013 8.0 6.4 6.5 6.0 3.6

Real GDP Growth (percent)

P = projected Source: Annual Report 2010-11; State Bank of Pakistan

12.7%

6.8%

9.5% 6.9%

6.1%

6.4%

6.4% 3.3%

7.2%

9.0%

­ Budget deficit averaged 7.0% of GDP, reaching as high as 8.8% in 2012-13

­ Public debt more than doubled in 5 years from Rs. 5 trillion in 2007 to Rs. 13 trillion in 2012

­ Over $20 billion external debt added in 5 years

­ Foreign Investment has simply collapsed – down from $8.5 billion in 2007 to just $0.8 billion in 2012

­ Inflation persisted in double digits for more than 50 months in a row

­ Pak Rupee has lost 39% of its value

­ Poverty and Unemployment have increased

­ Foreign exchange reserves is at $10.0 billion, of which, $4.8 billion is the SBP’s reserves and $5.2 billion is commercial banks reserves with SBP on August 30, 2013

­ PSEs are bleeding and consuming over Rs. 300 billion annually

­ Power Sector has received Rs. 1500 billion in subsidy in the last five years

REAL GDP GROWTH SLOWED TO LESS THAN ONE HALF IN THE LAST 5 YEARS

Source: Various Issues of Economic Survey

Growth recovered during 2003-2007 to an average of 7.0% p.a.

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

0

1

2

3

4

5

6

7

8

9

10

5.6

7.7

2.3

4.4

5.1

6.6

1.7

3.5

4.23.9

1.8

3.1

4.7

7.5

9.0

5.8

6.8

3.7

1.7

3.1 3.0

3.7

INVESTMENT PICKED UP DURING 2000-07 BUT REACHED TO A 50 YEARS LOW LAST YEAR

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

19.0

20.120.7

19.4

18.418.8

17.717.3

15.6

17.4 17.216.8 16.9 16.6

19.1

21.1

22.522.1

18.2

15.4

13.4

12.5

Source: Various Issues of Economic Survey

SIGNIFICANT REDUCTION IN UNEMPLOYMENT 2000-07 BUT RISING THEREAFTER

Unemployment declined …

Source: Economic Survey 2010-11

1999-00 2001-02 2003-04 2005-06 2006-07 2007-08 2008-09 2009-10 2010-114.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

7.8

8.3

7.7

6.2

5.3 5.25.5 5.6

6

PERCENT OF PEOPLE LIVING BELOW THE POVERTY LINE REDUCED TO ONE HALF

INFLATION ACCELERATED AFTER 2007-08

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

0

2

4

6

8

10

12

14

16

18

20

22

3.64.4

3.5 3.1

4.6

9.37.9 7.8

12

20.8

11.7

13.9

11

Inflation (%)

OVERALL FISCAL DEFICIT (% OF GDP) CONTINUED TO REMAIN MANAGEABLE DURING 2000-07 BUT SURGED TO A NEW HEIGHT LAST YEAR

Source: Ministry of Finance

Da

te

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

*

(10.0)

(9.0)

(8.0)

(7.0)

(6.0)

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

0.0 0.0

(8.7)

(7.4)

(8.0)

(5.9)(5.6)

(6.5) (6.4)

(7.7)

(6.1)

(5.4)

(4.3) (4.3)

(3.7)

(2.4)

(3.3)

(4.2) (4.3)

(7.4)

(5.2)

(6.3)(6.6)

(8.5)(8.8)

• Projected

PUBLIC DEBT MORE THAN DOUBLE IN THE LAST FIVE YEARS

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

30183489 3510 3618 3789 4065 4363

4802

6044

7629

8921

10709

12668

14000

Public Debt (Billion Rs)

Current Account Deficit remained high in the 1990s despite low economic growth.

CURRENT ACCOUNT DEFICIT GROWING (% OF GDP) SHRANK, TURNED SURPLUS AND THEN STARTED WIDENING

1990-91

1995-96

1996-97

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

-4.8

-7.2

-6.2

-4.1

-1.6

-0.7

0.1

3.8

1.4

-1.6

-4.4-5.0

-8.3

-5.7

-2.0

0.2

-2.4

-1.3

Source: SBP

FOREIGN INVESTMENT (US $ MILLION) SURGED DURING 2004-05 ONWARD BUT COLLAPSED IN THE LAST FIVE YEARS

Source: SBP

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

8500

23

7

55

4

44

3

64

3

15

32

13

07 9

50

82

3 40

3

54

3 18

2

47

5

82

0

92

2

16

77

38

75

84

28

54

75

26

65 2

08

6

19

79

70

8

Foreign Investment

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1060 984

1087

2389

42373872

41694600

5493

6450

7811

8906

11701

13186

13921

REMITTANCES ($ MILLION) CONTINUED TO RISE

TRENDS IN EXTERNAL DEBT AND LIABILITIES

External Debt and Foreign Exchange Liabilities (Billion $)

We added $2.6 billion in in 7 years (2000-07) but added $24 billion in 6 years (2007-12)

Source: Ministry of Finance

Why Have we Landed in Such a Difficult Situation? Economy Never Received Due Attention by the Outgoing Government

Political Instability continued since March 2007

Intensification of War on Terror

Deteriorating Security Environment

Frequent Changes in Economic Team

Absence of Key Ministers for six months

Weak Economic Team

Food & Fuel Price Shocks

Fiscal Indiscipline

­ New NFC Award

­ Reckless Spending

Bleeding PSEs Consuming over Rs. 300 billion annually

Energy Mismanagement Resulting in “Crisis”

Weak Governance

Weakening of Key Economic Institutions

­ Ministry of Finance

­ State Bank of Pakistan

­ Planning Commission

No Interaction of Government with Private Sector

Deliberate or Incompetence?

New Government has inherited­ A slowing economy

­ Investment plummeting to the lowest rising unemployment and poverty

­ Large fiscal deficit

­ Unsustainable Debt

­ Foreign investment drying up

­ Foreign Exchange reserves declining rapidly to a dangerously low level

­ Looming debt crisis

­ Bleeding PSEs

­ Persisting energy crisis

­ Crumbling infrastructure

­ A nervous private sector

­ Dwindling state authority

• Debt Repayment Crisis forced the government to seek a new IMF Program.

• Pakistan’s Medium-term (3 to 5 years) economic prospects will hinge how we deliver on IMF Program.

DEBT REPAYMENT CRISIS IN 2012-13 AND 2013-14Period External Debt & Liabilities

(Million $)Public Debt (Billion Rs)

1947-48 0.0 -

1949-50 0.0 -

1959-60 145.0 -

1969-70 2959.0 -

1979-80 9458.0 155.4

1989-90 19207 801.2

1999-2000 37860 3018

2006-07 40500 4814

2009-10 57600 8911

2012 (Dec.) 61000 13904

Source: State Bank of Pakistan and Debt Office, Ministry of Finance

CHANGES IN DEBT PROFILE

Period External Debt & Liabilities (million $)

Public Debt (Billion) Rs)

1948-60 145 -

1960-70 2814 -

1970-80 6499 155.4

1980-90 9749 646

1990-2000 18653 2217

2000-2007 2640 1796

2007-2012 Dec 20500 9090

Newly Elected Government must bring a strong economic team

Political Leadership must provide full support to the team

No Room for Business-as-usual Policy

Extraordinary situation Demand Extraordinary Measures

Financial Discipline is the key to success

Bring Budget Deficit down to 3.0 – 3.5 percent of GDP in the next 3-5 years

•

WHAT NEEDS TO BE DONE?

Undertake wide-ranging structural reforms ­ Taxation side

­ Expenditure side

­ Accelerating Privatization

­ Power Sector Reform

­ Circular Debt Issues

­ Correcting the Manufacturing defects of the NFC Award

­ Strengthening of Infrastructure

­ Strong Linkages with Private Sector

­ Road show in major capital markets

Challenging Time Ahead but Surmountable

• New government appears to be the continuation of the previous regime

• Weak Economic Team

• Same old Economic Team

• Why should we Expect Different Result?

• New Government has thus far borrowed from the SBP Rs. 15.3 billion per day as compared with Rs. 1.3 billion per day by the previous regime

• Implementation of the IMF conditionalities will be extremely painful for the people

• The new program of the IMF is not likely to be completed

• The general perception is that IMF wishes to keep Pakistani economy hanging in balance during the US withdrawal out of Afghanistan

CONCLUDING REMARKS

Serious Challenges for the economy in the next two years

Issues are not insurmountable

Theses challenges can be addressed in a three year framework

We need a strong economic team

There is no dearth of good people in the country

What is required is honest, competent and patriotic leadership providing full support to economic team

We have the capacity to turnaround the economy in three years

The country has faced serious challenges in the past but we recovered

We have the capacity to recover from the ground zero once again, Inshallah