Pakistan: State of the Economy

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Pakistan: State of the Economy

  1. 1. Pakistan: State of the Economy Last Updated: 18th February 2013 1
  2. 2. OutlineIntroduction & BackgroundMacroeconomic TrendsCurrent OptionsExternal OptionsFuture Directions
  3. 3. Pakistan Economic Growth 1961 - 2012 12 10 % Change in Real GDP 8 6 4 2 0 1970 1979 1988 1961 1964 1967 1973 1976 1982 1985 1991 1994 1997 2000 2003 2006 2009 2012Falling long run growth due to lack of structural reforms and conducive market environment
  4. 4. % Change in Real GDP 10 12 0 2 4 6 8 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 reforms and competition) 1987 Pakistan 1989 run ingredients of economic growth i.e. labour (education 1991 and health) and capital (market 1993 There is an ignorance about long 1995 1997 1999 2001 2003 2005 2007 % Change in Real GDP 2009 2011 10 0 2 4 8 6-4 -2 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 Pakistan Vs. South Asia 1961 - 2012 1989 South Asia 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
  5. 5. Fixed Investment 1961 - 2012 40 35 30 25 % of GDP 20 Pakistan 15 South Asia 10 5 0 1964 1996 1960 1968 1972 1976 1980 1984 1988 1992 2000 2004 2008 2012Literature shows that Pakistan is not a capital constraint country, however incentives for sustained investments and retention of capital have been declining overtime
  6. 6. Gross Domestic Savings 1971 - 2011 35 30 25 % of GDP 20 Pakistan 15 South Asia 10 5 0Pakistan has found it difficult to raise its savings level and to channel these savings into high impact investments
  7. 7. Fiscal Performance 2001-2012 25 20 % of GDP 15 Government Revenue 10 Government Expenditure 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001Low tax to GDP ratio implies lesser fiscal space for development expenditure and repeated resort to debt for managing government’s consumption expenditures
  8. 8. Budget Deficit and Inflation 2001-2012 25 20 15 % of GDP 10 Budget Deficit 5 CPI (% Growth) 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2001 2011 -5 -10High 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
  9. 9. Inflationary Pressures 25 Consumer Prices (% Change) 20 15 Pakistan 10 South Asia 5 0 2007 2008 2009 2010 2011 2012Pakistan 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
  10. 10. Current Vs. Development Expenditure 2001-2012 20 18 16 14 % of GDP 12 Current Expenditure 10 8 Development 6 Expenditure 4 2 0 2001 2002 2003 2004 2006 2008 2009 2010 2011 2012 2005 2007Debt servicing, defense, law & order have not allowed government’s current expenditures to come down. This also implied lesser expenditure availability for MDGs
  11. 11. Spending on Education & Health 3 2.5 2 % of GNP 1.5 Education Spending 1 Health Spending 0.5 0 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2004Education and health expenditures are compromised first once current expenditures increase. The also impact longer run productivity of the economy
  12. 12. Infant Mortality 80 70 per 1,000 live births 60 50 40 Pakistan 30 South Asia 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Polio and Measles continue to exist. Consistent failure due to coordination at various tiers of the state machinery (however funding adequately available)
  13. 13. External Performance 30 25 20 Current account 15 balance % of GDP 10 Exports of goods and 5 services Imports of goods and 0 services 1980 1983 1986 1989 1995 1998 2001 2004 2007 2010 1992 -5 -10 -15While 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
  14. 14. External Performance - II 16 14 External Debt Outstanding Remittances 50 12 45 40 10USD Billion 35 USD Billion 8 30 6 25 20 4 15 2 10 5 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 6000 Foreign Direct Investment 16 Net Forex Reserves 5000 14 12 4000 USD Billion 10USD Million 3000 8 2000 6 4 1000 2 0 0 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 -1000 Rising remittances and debt contribute to Dutch disease effect
  15. 15. Real Sector Outlook Indicators 2011-12 2012-13 (Provisional) (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 135774Source: Economic Survey of Pakistan and Planning Commission’s Annual Plan 2012-13
  16. 16. Fiscal Sector Outlook Indicators 2011-12 2012 (July - (Provisional) December) PKR Billion 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 626Source: Economic Survey of Pakistan
  17. 17. Balance of Payments Indicators 2011-12 2012-13 (Provisional) (Jul-Jan) USD Million USD Million Exports (fob) 24696 14170 Imports (fob) 40461 22944 Workers’ Remittances 13186 8207 Current account -4635 62 balance Foreign Direct 850 1800 Investment Foreign Portfolio -152 507 Investment Foreign Exchange 11901 9873 Reserves In months of imports 2.4 1.9 Source: State Bank of PakistanTwo months import bill available to provide for Letter of Credits, and imports for food, edible and crude oil
  18. 18. 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
  19. 19. Monetary SectorIndicators 2011-12 3-Feb. 2012 (Provisional) PKR Million PKR MillionNet Foreign Assets -248122 -33436Net Domestic Assets 1,194,723 610640 Net Government 1,237,441 772,675BorrowingCredit to Private Sector 235242 238034Credit to Public Sector -130464 -270889EnterprisesBroad Money (M2) 946601 316,734 Percent Growth 14.1% 4.7%Source: State Bank of Pakistan
  20. 20. 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
  21. 21. Current Options• Business as usual (BAU) scenario• BAU + Short term measures• BAU + Short term measures + Structural reforms
  22. 22. Business as usual Scenario• Pakistan’s foreign exchange reserves will deplete by June 2013• Pakistan will need IMF Stand by arrangement in July 2013
  23. 23. 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)
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. Engaging Diaspora
  28. 28. Workers’ Remittances: Futuristic Outlook Demand Side Supply Side• Most believe that the flow will • EU region will remain in recession continue to increase for medium term• With tightening of regulations in • North America will maintain US and Continental Europe, stringent visa regime and work Pakistani migrants have approvals embarked to untraditional • Middle East will continue to destinations too diversify away from South Asian• For Diaspora weak Pakistani migrants currency implies a buyers’ market • Look East – may be an option! in Pakistan • Pakistanis losing on opportunities• Banking sector in Pakistan associated with Chinese proximity envisaging targeted financial instruments for Diaspora
  29. 29. Workers’ Remittances and Dutch Disease• Is a Remittances-led welfare model sustainable? – Keralas example not very encouraging• What about Dutch Disease? Increasing Appreciates Curtails Increase in Hurts Exports Remittances Exchange Rates Production Unemployment
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. Connecting Pakistan - Regionally• Intra regional trade – South Asia (5%) – ASEAN (30%) – EU (60%)• Regional competition beneficial for both producers and consumers
  34. 34. 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)
  35. 35. 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
  36. 36. Some Current Issues
  37. 37. 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
  38. 38. Energy Sector Reforms
  39. 39. Three Broad Reform Areas• Energy Governance• Energy Pricing• Public Sector’s role in Energy Sector 39
  40. 40. I. Energy Governance• Independence of boards• Induction of professional management• Strengthening of regulatory bodies oversight• Appropriate legislative changes to allow deregulation • Case of Punjab Government 40
  41. 41. II. Energy Pricing• 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 41
  42. 42. III. Government’s Role in Energy Sector Limiting Government should Government must Government’s role to provide level playing take lead in policy and planning field conclusive discourse Integrated energy Regulator to oversee policy….and ensure its Issue of large dams implementation National Energy Investment and Conference focused Thar Coal (and management to be by on short term procedural hickups) private sector solutions Energy trade with neighbors Learning from Indian example • Power sector (India) • Gas Pipelines (TAPI, Iran, Qatar etc.) 42
  43. 43. Sequencing of Solutions Short Term Medium Term Long Term• Curtail power sector • Integrated Energy Plan • Multi-buyer Multi- losses • Implementation of seller private sector • Costs of nonpayment energy efficiency energy market of bills standards • Insulating gas sector • Power sector theft • Gas sector linkages from security threats • Transmission losses with neighbors • Incentivize oil• Allowing provincial exploration (removal government to take of subsidies on other autonomous decisions sources) • Develop national consensus on hydro and coal sources (e.g. dams and Thar coal) • Vision and capacity for renewables 43
  44. 44. What about External Solutions? 44
  45. 45. While TAPI and other Central Asian prospects will be driven by geo-politics, are there any medium term solutions? 45
  46. 46. Trade in EnergyRegional Prospects (e.g. SAARC) 46
  47. 47. Trade in Energy (SAARC) EfficientPetroleum Infrastructure energy products development markets Trade in Decentra power lized electricit y solutions 47
  48. 48. Synchronizing National Policies• 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 48
  49. 49. India – Pakistan Power Trade• Transmission lines through Wagah-Attari border• Surplus pockets in Indian Punjab (and downwards) 49
  50. 50. Implementation !! Who will do it? 50
  51. 51. Implementation• 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 51
  52. 52. Thank Youwww.sdpi.org, www.sdpi.tv 52

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