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September 2006

Pakistan An Economic Turnaround

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1

International

isolation

- Exports doubled

- FX risen five fold- Stable currency- Annual FDI doubled

Pakistans Turnaround Synopsis

Historical Bottlenecks Late 1990s

Highly

sanctioned

Near-zero

GDP growth

Threat of

sovereigndefault

Deep

recession

A Reinvigorated Tiger

- Sanctions removed

- Increased integrationwith global economy

- Growth quadrupledto 78%

- Increased wealthlevels

- Growing middle class

- Fiscal deficit halved- Inflation contained

- Recent internationalsovereign bonds

issues oversubscribed- KSE: one of the bestperforming markets

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2

5.7

4.7

5.4

6.6

Pakistan ASEAN Latin America MENA

142

161

207

96

1

25

7282

111

182

3.1

8.2

8.4

6.4

5.1

6.68.07.87.4

2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E

Nominal GDP (US$ billion) Real GDP Growth (%)

Source: Pakistan Ministry of Finance, Economist Intelligence Unit, Abraaj Analysis

The Growth Story

No l ( $ b ll o ) & l o h (%)

g p d d u bl o o g o h

One of the fastest growing economy in Asia

Expected to surpass the US$ 200 billion mark by 2010

l o h 0 (%)

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3

31

1

1

,

,

, 3,

3,

, , 1

1,

,

1

3

1

Source: Economist Intelligence Unit, Pakistan Federal Bureau of Statistics

o

%

ddl

% H

gh

%

The Growth Story (contd)

Weal h level have increased and a large middle-class is emerging

GDP per Capita ( $ PPP) Household Income Distribution (%)

Rising disposable income

Increasing income distribution largely a result of decreasing unemployment

Accelerating income growth across lower and middle segments of population

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4

9.2 9.1

11.2

12.3

14.4

16.5

2001 2002 2003 2004 2005 2006

Source: Economic Intelligence Unit

13.2

36.229.7

106.1

Pakistan China Indonesia Malaysia


Exports have become competitive and almost doubled in last five years

Exports ( $billion) Exports (%of GDP),200

Low cost advantage spurring exports

Broadening geographical reach and more access to US, EU and UAE markets

Potential to increase and diversify target countries

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5Source: Pakistan Ministry of Finance, Economic Intelligence Unit

322485

798

1,524

3,521

949

2001 2002 2003 2004 2005 200


International investors have begun to take notice of the Pakistan story,ho ever significantupside remains as FDI flo s are still farbelo regionallevels

Foreign Direct Investment ( $ million) Foreign Direct Investment (%of GDP),200

2

Pakistan Singapore India UAE

Opening up of economy leading to strong foreign interest

FDI inflow more than doubled in 2006

Broad based inflow across sectors

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6

47

46

44

36

34

38

2001 2002 2003 2004 2005 2006

Source: Pakistan Ministry of Finance, Economic Intelligence Unit


Significant decline in externaldebt

External Debt (%of GDP)

Consistent decline in external debt / GDP ratio

Concerted effort to move away from poorly structured high-interest debt

Allowing increasing government expenditure on value-added projects

External Debt (%of GDP),2006

34.0

.1

16.0

30.8

Pakistan ingapore India AE

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2.1

4.8

9.8

12.613.1

12.3

2001 2002 2003 2004 2005 2006


Rapidly increasing foreign exchange reserves and a stable currency

Foreign Exchange Reserves (US$billion)

1!159

!8

59!157

!258 ! 5

0 ! 9

2001 2002 2003 2004 2005 200

Exchange Rate (Year-end, PKR:US$)

Strong remittance flow and growing exports leading to accumulation of foreign reserves

Reserves providing currency stability

Standard & Poors upgrade long-term local and foreign rating

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Fiscal Deficit (%of GDP)

4"3 4

"3

3 " 7

3 " 2

3 " 4

2 " 4

2001 2002 2003 2004 200#

2006*

6 16 3

4 8

3 2 3 1

4 0

2001 2002 2003 2004 200 2006

*Excluding earthquake-related spending

Source: Pakistan Ministry of Finance, State Bank of Pakistan

The Turnaround Strategy

Externaldebt re-profiling and fiscal reforms were at the centre of the multi-faceted strategy

Interest Payments (%of GDP)

Restructuring and debt write-off leading to reduction in interest payment

Improved stability of economy; manageable fiscal deficit

Recent hike largely due to absorption of high oil prices

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A dynamic privatization program

Strong political support

3,5$ %

34317

%

18

558671

33

21

7

$

12

2001 2002 2003 2004 2005 T2006

Va& '

e(

f P) 0vat

0zat

0

(

n1 2

S3

4 0 & & 0

(

n5 6 ' 4 7

e)

(

f8

ea&s

Company Sector Company Sector

Pak9 stan Pet @ A B eC

D O9 B & Gas Mo @ afcoIndC

st @ 9 es, Fa 9 s IndC

st @ y &Rea B Estate

Pak9 stan State O9 B O9 B & Gas Lya B B pC

@Che D 9 ca B

Fe @ t 9 B 9 ze@Che D 9 ca B s

SC

9Southe @ n GasCo O9 B & Gas Haza@ a Phosphate Fe @ te @ Indust @ y &

Rea B Estate

Su9

E

o@

the@

n Gas P9

peB 9

ne O9 B

& Gas ToD

ato Paste PB

ant Indust@

y &Rea B Estate

Eat

9 ona B Invest D ent T@ ust F9 nanc9 a B Pak9 stan Tou@ 9 sD F

eve B op D ent Co@ p.Tou@ 9 sD

State L9 fe Insu@ ance Co. F9 nanc9 a B S 9 ndh Eng 9 nee @ 9 ng Const @ uct 9 on

Fa 9 saB a G ad Elect @ 9 cSupplyCo

H t 9 lities HeavyMechanicalCoD plex, Taxila

Indust @ y

Genco1I

JaD sho@ o) H tilities HeavyElect @ icalCoD plex,

Hatta @Powe @

Peshawa @ Elect @ ic Supply

Co

Htilities Pakistan Machine Tool

Facto@ y,Ka @ achiIndust @ y

Eational Powe @ Con Co H tilities Se @ vice Inte @ national

Hotel,Laho@ eSale ofLand

Source: Privatization Commission of Pakistan

Privatizations (US$ million) Current Privatization Pipeline

The Turnaround Strategy (contd)

Privatizations was another key focus

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67.863.64.

40.5

Pakistan Sin a re In ia AE

17

47

30

46

10

.7x

. x7.7x

12. x

4.4x

2002 2003 2004 2005 D2006*

MarketP aQ

itali R atiS

n

T

railinU

P/ERatiS


Financial sector reforms catalyzed economic transformation

Bank Lending(%of GDP),2006 Market Capitalization (US$billion)& P/ERatio(times)

Financial sector transformation was the main driver of economic growth

Increased availability of credit for all segments of the economy

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InvestmentPolicy &Environment

RegulatoryFramework

Strengtheningof the institutional capacity of a numberof independent regulatory bodies in Pakistan thathave developed management structures, technical expertise, technology and enforcement capacitycompatible with internationalbest practices

Government is playing an effective role to transparently execute and institutionalize regulations designedto win the confidence of investors andgeneralpublic

ll sectors are open to FDI with equal treatment oflocal and foreign investors

100% foreign equity allowed, and royalties, franchise fees, capital,profits,dividends etc all fully repatriable

ttractive tax/ tariff incentives package

Low cost ofdoingbusiness,one-window facilitation

Reduction in corporate tax rate from 39% in 2005 to35%by 2007 forprivate companies

PowerDevolution

Source: Pakistan Board of Investment


Creation of an enabling andgoverned economic framework

Policy Description

Transferringpowers and responsibilities, including those related to social services from the federal andprovincialgovernments tolocallevels

Strengtheninggovernance by increasingdecentralization, transparency, accountability of administrativeoperations, andpeoples participation in theirlocal affairs

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