Structural Weaknesses of Pakistan's Economy
1
Dr. Vaqar Ahmed
11th March 2014
Long term
sources of
growth
Labour
Capital
Productivity
Short term
drivers of growth
Energy
Water
Simplistic View – Pakist...
0
2
4
6
8
10
12
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
%ChangeinRealGDP
0
5
10
15
20
25
30
35
40...
Inflationary Pressures
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
ConsumerPrices(%Change)
Pakistan
South Asia
Pakistan ...
Current Vs. Development Expenditure 2001-2012
0
2
4
6
8
10
12
14
16
18
20 2001
2002
2003
2004
2005
2006
2007
2008
2009
201...
Spending on Education & Health
0
0.5
1
1.5
2
2.5
3 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
%ofGNP
Educ...
External Performance - I
-15
-10
-5
0
5
10
15
20
25
30 1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
%ofGDP
Curre...
External Performance - II
0
2
4
6
8
10
12
14
16
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
USDBillion
Rem...
Real Sector Outlook
Indicators 2012-13
(Provisional)
2013-14
(Projected)
Economic Growth (%)
GDP Growth 3.6 4.4
Agricultur...
Fiscal Sector Outlook
Indicators 2012-13
PKR Billion
2013 (July-Dec)
PKR Billion
Total Revenue 2982 1685
Tax Revenue 2,199...
Balance of Payments
Indicators 2012-13
USD Million
2013-14
(Jul-Jan)
USD Million
Exports (fob) 24802 14712
Imports (fob) 4...
Monetary Sector Flows
Indicators 2012-13
PKR Million
Up to 21-Feb-14
PKR Million
Net Foreign Assets -263,300 -146,167
Net ...
• Three Year Under Extended Fund Facility (EFF), with focus
on structural reforms
• Access to 425 % of Quota; Amount $6.6 ...
• Level of Net International Reserves; Size of Budget
Deficit; Borrowings from SBP*; Stock of SBP
foreign currency swap/fo...
2013-14
MACROECONOMIC STABILIZATION
Balance of Payments
• Improve Balance of Payments from Deficit of $2.3 billion to surp...
Balance of Payments
• Depreciate the Rupee (REER to fall by 8%)
• Interest Rates to rise with Rate of Inflation
• Higher i...
At the End of First Six Months of 2013-14
 Projected FE Reserves by IMF at end – December of $ 5.4 billion; Actual
Reserv...
• Level of Foreign Exchange Reserves by end June 2014 will
hinge on the following large capital inflows:
i. CSF of $ 900 m...
• FDI in textile sector
– Chinese example
• Critical question of energy supplies to energy
• Building value chains
– Bangl...
Structural Reforms
Short-term
• Eliminating SROs and related exemptions
• Tax administration and human interference
• Debate on including new sources of...
• Correct energy prices
– To cover full cost of production
– To correct incentives for private sector
• Eliminate untarget...
• Restructuring liabilities and outstanding debt
• Empowering management with autonomy
– NBP and Finance Secretary [Confli...
• Trade in goods (Afghanistan, China and India)
• Trade in services (Afghanistan and China)
• Trade in energy (Iran and In...
• Pakistan’s economy not comfortably positioned, even in the presence of
an IMF program: Dr. Hafiz A. Pasha
• Implications...
www.sdpi.org, www.sdpi.tv
26
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Structural Weaknesses of Pakistan Economy

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Structural Weaknesses of Pakistan Economy

Dr. Vaqar Ahmed

Sustainable Development Policy Institute

Islamabad

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Structural Weaknesses of Pakistan Economy

  1. 1. Structural Weaknesses of Pakistan's Economy 1 Dr. Vaqar Ahmed 11th March 2014
  2. 2. Long term sources of growth Labour Capital Productivity Short term drivers of growth Energy Water Simplistic View – Pakistan Economy
  3. 3. 0 2 4 6 8 10 12 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 %ChangeinRealGDP 0 5 10 15 20 25 30 35 40 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 %ofGDP Pakistan South Asia Fixed Investment 1961 - 2012Economic Growth 1961-2012 0 5 10 15 20 25 30 35 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 %ofGDP Pakistan South Asia Gross Domestic Savings 1971-2011 0 5 10 15 20 25 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 %ofGDP Government Revenue Government Expenditure Fiscal Performance 2001-2012
  4. 4. Inflationary Pressures 0 5 10 15 20 25 2007 2008 2009 2010 2011 2012 ConsumerPrices(%Change) 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
  5. 5. Current Vs. Development Expenditure 2001-2012 0 2 4 6 8 10 12 14 16 18 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 %ofGDP Current Expenditure Development Expenditure Debt servicing, defense, law & order have not allowed government’s current expenditures to come down. This also implied lesser expenditure availability for MDGs
  6. 6. Spending on Education & Health 0 0.5 1 1.5 2 2.5 3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 %ofGNP Education Spending Health Spending Education and health expenditures are compromised first once current expenditures increase. The also impact longer run productivity of the economy
  7. 7. External Performance - I -15 -10 -5 0 5 10 15 20 25 30 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 %ofGDP Current account balance Exports of goods and services Imports of goods and services
  8. 8. External Performance - II 0 2 4 6 8 10 12 14 16 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 USDBillion Remittances 0 5 10 15 20 25 30 35 40 45 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 USDBillion External Debt Outstanding -1000 0 1000 2000 3000 4000 5000 6000 2007 2008 2009 2010 2011 2012 USDMillion Foreign Direct Investment 0 2 4 6 8 10 12 14 16 2005 2006 2007 2008 2009 2010 2011 2012 USDBillion Net Forex Reserves Rising remittances and debt contribute to Dutch disease effect
  9. 9. Real Sector Outlook Indicators 2012-13 (Provisional) 2013-14 (Projected) Economic Growth (%) GDP Growth 3.6 4.4 Agriculture 3.3 3.8 Manufacturing 3.5 4.5 Services 3.7 4.6 Investment and Savings (as percent of GDP) Investment 14.2 15.1 National Savings 13.5 14.0 Foreign Savings -0.7 1.1 Inflation (% Growth) 7.7 8.0 GNP Per Capita (PKR) 1368 1464 Source: Economic Survey of Pakistan and Planning Commission’s Annual Plan 2013-14
  10. 10. Fiscal Sector Outlook Indicators 2012-13 PKR Billion 2013 (July-Dec) PKR Billion Total Revenue 2982 1685 Tax Revenue 2,199 1172 Total Expenditure 4,816 2225 Current Expenditure 3,660 1888 Interest 991 598 Defense 541 295 Development Exp. 1140 326 Fiscal Deficit 1834 540 Fiscal Deficit (% of GDP) 8.0 2.1 External financing 1676 43 Domestic financing 1836 584 Source: Finance Division, Government of Pakistan
  11. 11. Balance of Payments Indicators 2012-13 USD Million 2013-14 (Jul-Jan) USD Million Exports (fob) 24802 14712 Imports (fob) 40157 24433 Workers’ Remittances 13922 9033 Current account balance -2496 -2055 Foreign Direct Investment 1456 523 Long term loans 2274 1043 Foreign Exchange Reserves 11,019 7,988 Source: State Bank of Pakistan Less than 1.5 month import bill available to provide for Letter of Credits, & imports for food,edible &crude
  12. 12. Monetary Sector Flows Indicators 2012-13 PKR Million Up to 21-Feb-14 PKR Million Net Foreign Assets -263,300 -146,167 Net Domestic Assets 1,479,317 579,390 Net Government Borrowing 1,479,183 415,047 Credit to Private Sector -19,041 280,689 Credit to Public Sector Enterprises 31,096 58,143 Broad Money (M2) 1,216,017 433,223 Percent Growth 15.91% 4.89% Source: State Bank of Pakistan
  13. 13. • Three Year Under Extended Fund Facility (EFF), with focus on structural reforms • Access to 425 % of Quota; Amount $6.6 billion IMF Program
  14. 14. • Level of Net International Reserves; Size of Budget Deficit; Borrowings from SBP*; Stock of SBP foreign currency swap/forward position*; net domestic assets of SBP at end of each Quarter Structural Benchmarks (not met in the 2nd Review) • Amend Law for SBP Autonomy (March 2014); Privatise 26% of PIA to strategic Investor (Dec 2014); Issue Tax Notices to 75,000 Non-Filers (March 2014); Eliminate SROs (June 2014) Performance Benchmarks
  15. 15. 2013-14 MACROECONOMIC STABILIZATION Balance of Payments • Improve Balance of Payments from Deficit of $2.3 billion to surplus of $ 4.6 billion • Raise FE reserves from $6 billion to $ 9.6 billion by end of 2013-14 BUDGET • Reduce fiscal deficit to 5.8 % of the GDP from 8% of GDP Macroeconomic Stabilization Targets
  16. 16. Balance of Payments • Depreciate the Rupee (REER to fall by 8%) • Interest Rates to rise with Rate of Inflation • Higher inflow of Aid from World Bank, ADB, etc., due to Program Budget • Taxation Proposals in Budget of over Rs 200 billion (GST, direct taxes etc) • Subsidy reduced by substantial Jump in Power Tariff • Higher taxation of Gas • Cut Development Expenditure by 25 % Policy Targets
  17. 17. At the End of First Six Months of 2013-14  Projected FE Reserves by IMF at end – December of $ 5.4 billion; Actual Reserves of $ 3.4 billion. Therefore, program is already off-track  Projected depreciation of Rupee in the Program of almost14 percent in 2013-14; Already 6 percent in the first six months  Budgetary Position is better at 2.2 percent of the GDP in first six months of 2013-14; but almost Rs. 500 billion printing by the Central Bank (SBP)  FBR revenue growth of 17 per cent; as compared to target growth rate of 23 per cent  ‘Core` Inflation rate close to 9 percent; compared to annual projection of below 8 percent in the program Six Monthly Position (2013-14)
  18. 18. • Level of Foreign Exchange Reserves by end June 2014 will hinge on the following large capital inflows: i. CSF of $ 900 million ii. Privatisation receipts of $ 800 million iii. 3-G Action of $ 1200 million iv. Higher Program Assistance of $1000 million by Donors v. Euro bond flotation of $ 1000 million vi. $ 1100 million from IMF subject to meeting program Criteria • Size of the Current Account Deficit, Projected at $ 2.3 billion for 2013-14; Already $ 2 billion in first seven months • Therefore, considerable uncertainty about the level of FE reserves Some Risks
  19. 19. • FDI in textile sector – Chinese example • Critical question of energy supplies to energy • Building value chains – Bangladesh example Will GSP+ Deliver?
  20. 20. Structural Reforms Short-term
  21. 21. • Eliminating SROs and related exemptions • Tax administration and human interference • Debate on including new sources of income in the tax net – Agriculture – Services – Capital and money markets Taxation Reforms
  22. 22. • Correct energy prices – To cover full cost of production – To correct incentives for private sector • Eliminate untargeted, hidden and cross subsidies – Retain only for life line block • Check technical losses and theft – Transmission and distribution losses – Kunda methods Energy Reforms
  23. 23. • Restructuring liabilities and outstanding debt • Empowering management with autonomy – NBP and Finance Secretary [Conflict of Interest] • Private participation in state enterprises – Public Private Partnerships – Privatization Public Sector Enterprises
  24. 24. • Trade in goods (Afghanistan, China and India) • Trade in services (Afghanistan and China) • Trade in energy (Iran and India) Regional Trade
  25. 25. • Pakistan’s economy not comfortably positioned, even in the presence of an IMF program: Dr. Hafiz A. Pasha • Implications of gift payments by Saudi government not known • Improvement in the economic situation will also hinge on o The Security Situation o Electricity situation – as summer months approach • If Pakistan manages to build up reserves of $7 billion or so (1½ month’s import cover) by June 2014 then conditions will improve in 2014-15 and beyond as net receipts will take place from IMF: Economy of Tomorrow Report • Pakistan can then start a program of economic revival and try to achieve 6 per cent growth rate by 2016-17: Economy of Tomorrow Report Way Forward
  26. 26. www.sdpi.org, www.sdpi.tv 26 Thank You
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