NUST Business School - EMBA- January, 2011- UPDATED

8/8/2019 NUST Business School - EMBA- January, 2011- UPDATED

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PRESENTATION ONPRESENTATION ON

Addressing PakistansAddressing Pakistans

Economic ChallengesEconomic Challenges

By

Dr. Ashfaque H. KhanDr. Ashfaque H. Khan

Director General & DeanDirector General & Dean

NUST Business SchoolNUST Business School

National University of Sciences &National University of Sciences &Technology, Islamabad.Technology, Islamabad.

January 10, 2011January 10, 2011

At:At:

NUST Business School (NBS)NUST Business School (NBS)


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Outline of the PresentationPart I

Challenges Faced by Pakistan in 1947

Part-II

Key Challenges of the 1990s

Strategy Followed

Major achievements during 2000-2007

Developments in 2005-2007

Part-III

What happened in 2007-08?

Factors Responsible for Creating New Macroeconomic Challenges

Part IV

Ten Economic Blunders

Part-V

Ten Economic Solutions?


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3

Challenges Faced by

Pakistan in 1947


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4

Initial conditions that Pakistan inherited at the time ofindependence in 1947

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

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


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

Shifting of banks head office from Pakistan. Within 4 months of partition 418 out of 631bank office had closed down

In another six months the number declined to only 195. Pakistan, therefore, started with195 branches in banking sector

The Karachi Port was underdeveloped and most of Pakistans trade routed through theIndian ports of Bombay and Calcutta

India refused to release allotted share of cash balance of undivided India to the tune of Rs75 crore (Rs. 750 million) for running the civil administration.

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


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6

Economic Conditions in

1947


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Agriculture

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 areproducing over 23-24 million tons - almost 6 times more

Production of cotton was approximately 1.0 million bales in 1947. Todaywe 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


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Industry

The areas comprised Pakistan presented a dismal picture at the time of

independence. There was little manufacturing industry in Pakistan.

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 millionspindles. There were 4800 looms in 1947; today we have approximately 3.0million power looms


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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 270,000tons of cement. Today we are now producing over 28 million tons

of cement

Pakistan inherited very weak infrastructure at the time ofindependence. Pakistan inherited 22,000 km road and today wehave a road network of 258,350km


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Key Challenges of the 1990s and Strategy

Followed

Key Challenges of the 1990s

Improve macroeconomicImprove macroeconomic

environmentenvironment

Bring debt situation under controlBring debt situation under control

Restore investor confidenceRestore investor confidence

Revive economic growthRevive economic growth Restore financial sovereigntyRestore financial sovereignty

Strategy Followed

Introducing wide-rangingIntroducing wide-ranging

structural reformsstructural reforms Policies to improvePolicies to improve

macroeconomic environmentmacroeconomic environmentReducing twin deficitsReducing twin deficitsReducing inflationReducing inflation

Building foreign exchangeBuilding foreign exchange

reservesreservesMaintaining stability inMaintaining stability in

exchange rateexchange rateMaintaining continuity andMaintaining continuity and

consistency in policiesconsistency in policies

How to:

Part - II


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A Strong economic recoveryStrong domestic demand sustaining

growth momentum

Reduction in unemployment

Sharp reduction in poverty

Reduction in fiscaldeficit

Significant reduction in

countrys debt burden

High double-digit

growth in exports and

imports

Stable exchange rate

15 fold increase in Market

Capitalization of Karachi Stock

ExchangeImpressive increase in foreign

investmentRemittances continue to

maintain strong momentum

MajorMajorAchievementsAchievements

in the lastin the last

seven yearsseven years

Privatization program

moving forwardSuccessful exit from IMF

Programme

Re-entrance of Pakistan

into international

capital markets

Continued Improvement

in credit ratings

MajorMajor

AchievementsAchievements

in 2000-07in 2000-07

Major Achievements in 2000-07


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Developments in 2005-2007

Standard Chartered taking over of Union Bank

ABN AMRO taking over of Prime Bank Tamasek of Singapore taking over PICIC Bank

SAMBA Financial Group of Saudi Arabia taking control of 68% shares of CrescentCommercial Bank

Phillip Morris taking over of Lakson Tobacco

China mobile taking over of Paktel Singapore Telecom (Singtel) has bought 30% shares of Warid Telecom

Port Singapore Authority (PSA) take over Gwadar Port Operations

First GDR of OGDC, MCB and UBL launched

$ 5 billion Refinery Project at Khalifa Point, Balochistan by UAE Investor

$ 1.0 billion Port Development by Hong Kong Group

Real Estate Developments, Construction, Hotels, infrastructure including powerprojects are in operation.


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Barring two years the real GDP grew at anaverage rate of 3.8% p.a in the 1990s

Source: Various Issues of Economic Survey

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


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Large-Scale Manufacturing Accelerated During2000-07


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Investment Picked up During 2000-07

Source: Various Issues of Economic Survey

Investment recovered during 2003-04 to 2006-07 but slowed in 2007-08


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Significant Reduction in Unemployment

Unemployment declined 13.5 million jobs created in seven

years

Source: Economic Survey 2006-07Source: Labour Force Survey, FBS

Labour ForceSurvey

Employment(in

millions)

Number of NewEmployment

(in millions)

FY 97 34.13 -FY 00 36.32 2.19

FY 02 38.37 2.05

FY 04 42.00 3.63

FY 06 46.95 4.95

FY 07 47.65 0.70FY 08 49.09 1.44

FY 09 50.79 1.70

We need to create 3.5- 4.0 millionjobs per year in the next 10 yearsfor new entrants

7.8

8.3

7.7

6.2

5.3 5.2

5.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

1999-

00

2001-

02

2003-

04

2005-

06

2006-

07

2007-

08

2008-

09


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Percent of people living below the poverty linereduced


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Inflation remained below 5% most of the period during2000-07. inflation accelerated since August 2007

August2007

Source: FBS


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Overall Fiscal Deficit (% of GDP) Continued toremain manageable during 2000-07

Source: Ministry of Finance


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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

Source: SBP


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Foreign Investment (US $ million) surged 2004-05Onward

Source: SBP

Total Investment

F D I

Foreign Investment Rising Sharply: touched 5.8% of GDP in 2006-07

* Jul-May

R itt ($ Milli ) C ti d t i


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Remittances ($ Million) Continued to riseduring 2000-07


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PUBLIC DEBT (As % of GDP)

Public Debt Burden Declined Sharply ( End June )Public Debt Burden Declined Sharply ( End June )

91.789.1

100.3

95.9

83.8

79.8

75.0

67.2

62.5

57.255.5

57.8 58.3

62.7

40

50

60

70

80

90

100

110

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


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EXTERNAL DEBT & LIABILITIES (% of ForexEarnings)

347.0

297.2

259.5

236.8

181.2

164.7

134.3

121.6 124.1124.0

148.0 146.0

90

130

170

210

250

290

330

1998

-99

1999

-00 -

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

Debt Burden is Less than one half (End June)Debt Burden is Less than one half (End June)


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INDICATORS OF DEBT BURDEN

66.3

51.752.2

50.9

43.0

36.032.9

29.528.1 28.2

32.1 32.2

20

25

30

35

40

45

50

55

60

65

70

75

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

External Debt (As % of GDP)External Debt (As % of GDP)

Declining Trend in Debt Burden Stopped

P t III


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Part - III

What Happened in 2007-08? 2007-08 has been the most difficult year in Pakistans Economic History

Political and Economic Events Occurred Unexpectedly

On Domestic Front

Disturbed Political Conditions

Unstable Law & Order Situation

Three Governments in 2007-08

Election Year

Government In Transition

Policy In-Action during Transition

On External Front

Unprecedented Surge in Oil, Food and other Commodity Prices

Turmoil in International Financial Market

Great Depression II

Policy Inaction

F t R ibl f C ti M i


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Factor Responsible for Creating Macroeconomic

Challenges

Higher Food

Prices

Higher Oil Prices

Higher FoodInflation

Rising Oil ImportBill

Higher Overall

Inflation

Higher Import Bill

Absence of AdequatePolicy Response

Pressure on

Budget

Pressure on BOP

Loss of ForexReserves

Pressure on

Exchange Rate

C l ti b t th USD E E h


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Correlation between the USD-Euro Exchange

Rate & International Oil Prices

55

65

75

85

95

105

115

125

135

145

155

1.2

1.24

1.28

1.32

1.36

1.4

1.44

1.48

1.52

1.56

1.6

2-Apr

-07

18

-

4-May

-

22

-

7-Jun

-07

25

-

11

-Jul

-07

27

-Jul

-07

14

-

30

-

17

-

3-Oct

-07

19

-

6-Nov

-07

22

-

10

-

26

-

11

-

29

-

14

-

3-Mar

-08

19

-

4-Ar

-08

22

-

8-Ma

-

22

-

10

-

26

-

15

-Jul

-08

31

-Jul

-08

18

-

4-Se

-08

22

-

8-Oct

-08

24

-

(US$perbarrel)

(Euro/USDExchangeRate)

Exchange Rate Oi l

Corr. =0.92


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Oil Prices Vs. Euro-Dollar Parity


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Domestic & International Prices of Wheat

10

12

14

16

18

20

22

24

26

28

150

250

350

450

550

650

750

850

Jan

-05

Jun

-05

Nov

-05

Apr

-06

Sep

-06

Feb

-07

Jul

-07

Dec

-07

May

-08

Oct

-08

Mar

-09

(Domestic)(International)

International Domestic


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Domestic & International Prices of Rice

200

300

400

500

600

700

800

900

18

23

28

33

38

43

48

53

Jan

-05

Apr

-05

u-

ct

-

Jan

-06

Apr

-06

Jul-06

Oct

-06

Jan

-07

Ar

-07

Jul-07

Oct

-07

Jan

-08

Ar

-08

Jul-08

Oct

-08

nternatonaon(DomesticRs./Kg)

Rice Basmati Broken (Rs/Kg)

Rice International ($/Ton)


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Domestic & International Prices of Cooking Oil

150

200

250

300

350

400

200

400

600

800

1000

1200

1400

Jul-02

Oct

-02

Jan

-03

Ar

-03

Jul-03

ct

-

Jan

-04

Ar

-04

Jul-04

Oct

-04

an

-

Ar

-05

Jul-05

Oct

-05

Jan

-06

Ar

-06

Jul-06

Oct

-06

Jan

-07

Ar

-07

Jul-07

Oct

-07

Jan

-08

Ar

-08

Jul-08

Oct

-08

as.per.trUSpermetricton

Palm O il International($/Ton)

Cooking Oil (Rs/2.5Ltr)


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Trend in Oil Prices (Monthly Average)

40

45

50

55

60

65

70

75

8085

90

95

100

105

110

115

120125

130

($/bbl)

Source: Ministry of Petroleum & Natural Resources

Aug 2007

$ 69.28 /bbl

July 2008

$ 128.77 /bbl Sep 2008$ 115.79 /bbl

Dec 2008$ 41.7 /bbl


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Quarter-wise Current Account Deficit ($ Million)


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Foreign Exchange Reserves (End period)

Oct 2007$ 16.4 billion

31 Oct, 08

$ 6.8 billion

Sep 2010$ 17 billion


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Open Vs Inter Bank Exchange Rate (Rs./US $)

30 Mar 99

15 Oct 00

15 Aug 01

30 Oct 04

May 11, 2010

30 Oct 07

Open Market Rs. 84.2/$

Inter Bank Rs. 84.2/$

Source: SBP

P i fl t d i th ti


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Oct-97 Oct-98 Oct -99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08

Progress is reflected in the ratingsmomentum on Pakistan

N ov- 97 N ov- 98 N ov- 99 N ov- 00 N ov- 01 N ov- 02 N ov- 03 N ov- 04 N ov- 05 N ov- 06 N ov- 07 N ov- 08

Moo

dy

s

S&P

B+

B-

CC

CCC

CCC-

SD

B-

B

Outlook: stable

Outlook: Negative

B+

B2

B3

Caa1

B3

B2

Aug, 2009

Aug, 2009

31

B1

CCC

CCC+

B

B2

B3

B-


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Ratings Scale

STANDARD

&POORS

Moodys Investors

Services

Investmentgrade

NonInvestmentgrade

AaaAa1Aa2Aa3A1

A2A3Baa1Baa2Baa3

( Long-Term ) ( Long-Term )

AAAAA+AAAA-A+

AA-BBB+BBBBBB-

Ba1

Ba2Ba3B1B2B3Caa1Caa2Caa3Ca

BB+

BBBB-B+BB-CCC+CCCCCC-

Pakistans Ratings in2007

Current Ratings


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Part IV

Ten Economic Blunders1. Misguiding the People of Pakistan about the health of the economy

2. Irresponsible Statement issued by the then Finance Minister3. Cancellation of $4 billion Transactions

4. No Finance, Commerce, Petroleum and Health Ministers for six months

5. Seeking $11.3 billion Resources from the IMF

6. Criminal Increase in Support Price of Wheat

7. New NFC Award

8. Failure to Deliver on the Commitments with the IMF

9. Little or No Consultation with Stakeholders on VAT

10. Absence of Credible Economic Team

Ignoring Economy; Allegations of wide-spread corruptions and bad governance are the

greatest sins committed by the Government which has damaged the economy beyondrecognition


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Part V

Ten Economic Solutions1. Economy Must be brought at the centrestage

2. Implementing Financial Discipline Tax System and Tax Administration Reform

Rationalization of current Expenditure

Prioritization of Development Expenditure

1. Bring Budget Deficit down to less than 3% of GDP in the next three years

4% in 2010-11

3.5% in 2011-12

3.0% in 2012-13

2.7% in 2013-14

1. Postpone Implementation of NFC Award for three years or introduce bindingconstraint for provinces to generate targeted surpluses.


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5. Outright Privatization of PSEs

6. Circular Debt Resolution through

Energy Audit of WAPDA and IPPs

Withdrawing Free Electricity from WAPDA employees Strengthening of WAPDA: Finance Department

Giving Line Losses and theft target to each CEOs of Discos

5. Freeze Support Price of Wheat for the next two years at the current level

6. The size of the new IMF Program should not be more than 100 percent of quota

7. Finance Minister must stay in the country, talk to print and electronic media andCommunicate with Private Sector.

8. Political Confrontation and Polarization must end

Weak and Vulnerable Economy is the greatest threat to national security


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Summary: What Happened in the Last Three

Years and Where are we Heading

Sharp increase in Budget and Current Account Deficits Sharp Depreciation in Exchange Rate (From Rs. 60.6 to Rs. 86/$)

Public Debt Increased by Rs. 4099 billion in three years as againstRs. 1796 billion in previous seven years

External Debt and Liabilities Increased by $16 billion in three yearsas against $2.6 billion in previous seven years

Public Debt increased by Rs. 1200 billion in three years onlybecause of exchange rate depreciation.

Every Pakistani was carrying debt of Rs. 22078 in 1999-2000,increased to Rs. 30,702 in 2006-07, and surged to Rs. 53574 byend-June 2010.

(Continue)


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Going Forward, Public Debt will double in the next five years (2009/10-2013/14), rising from Rs.7542 billion to Rs. 13,157 billion. As percentage ofGDP, it will not return to 2006-07 (55.5%) level in the next five years.

Every Pakistani will carry debt of Rs. 74,000 by 2013/14

External Debt will be $72 billion by 2013/14 additional $16.5 billion in thenext four years.

IMF Debt alone will increase from $1.3 billion in 2007-08 to $ 11.4 billion in

the next two years (2010/11) Pakistan will have to pay back to the IMF $8.36 billion in the next three

years alone.

Pakistan may not be able to retire debt in three years time, therefore, it willenter in another program of Three years in 2011/12


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CONCLUDING VIEWS

Pakistan one of the four fastest growing economies (China, India,

Vietnam and Pakistan) in Asian region in 2007 has become a totallyforgotten economy in 2010

Destruction of Economy has emerged as a major threat to nationalsecurity

Total Apathy on the part of political leadership to Economy

Pakistan cannot Afford such mismanagement of the economy any more


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NUST Business School - EMBA- January, 2011- UPDATED