Pakistan: State of the Economy

Pakistan: State of the Economy

1

Last Updated: 18th February 2013

Outline

Introduction & Background

Macroeconomic Trends

Current Options

External Options

Future Directions

Pakistan Economic Growth 1961 - 2012

0

2

4

6

8

10

121

96

1

19

64

19

67

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

% C

han

ge in

Rea

l GD

P

Falling long run growth due to lack of structural reforms and conducive market environment

Pakistan Vs. South Asia 1961 - 2012

0

2

4

6

8

10

12

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

% C

han

ge in

Re

al G

DP

Pakistan

-4

-2

0

2

4

6

8

10

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

% C

han

ge in

Re

al G

DP

South Asia

There is an ignorance about long run ingredients of economic growth i.e. labour (education and health) and capital (market reforms and competition)

Fixed Investment 1961 - 2012

0

5

10

15

20

25

30

35

401

96

0

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

20

08

20

12

% o

f G

DP

Pakistan

South Asia

Literature shows that Pakistan is not a capital constraint country, however incentives for sustained investments and retention of capital have been declining overtime

Gross Domestic Savings 1971 - 2011

0

5

10

15

20

25

30

35

% o

f G

DP

Pakistan

South Asia

Pakistan has found it difficult to raise its savings level and to channel these savings into high impact investments

Fiscal Performance 2001-2012

0

5

10

15

20

252

00

1

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

% o

f G

DP

Government Revenue

GovernmentExpenditure

Low tax to GDP ratio implies lesser fiscal space for development expenditure and repeated resort to debt for managing government’s consumption expenditures

Budget Deficit and Inflation 2001-2012

-10

-5

0

5

10

15

20

25

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

% o

f G

DP

Budget Deficit

CPI (% Growth)

High 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

Inflationary Pressures

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012

Co

nsu

me

r P

rice

s (%

Ch

ange

)

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

Current Vs. Development Expenditure 2001-2012

02468

101214161820

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

% o

f G

DP

Current Expenditure

DevelopmentExpenditure

Debt servicing, defense, law & order have not allowed government’s current expenditures to come down. This also implied lesser expenditure availability for MDGs

Spending on Education & Health

0

0.5

1

1.5

2

2.5

32

00

1

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

% o

f G

NP

Education Spending

Health Spending

Education and health expenditures are compromised first once current expenditures increase. The also impact longer run productivity of the economy

Infant Mortality

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

pe

r 1

,00

0 li

ve b

irth

s

Pakistan

South Asia

Polio and Measles continue to exist. Consistent failure due to coordination at various tiers of the state machinery (however funding adequately available)

External Performance

-15

-10

-5

0

5

10

15

20

25

301

98

0

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

% o

f G

DP

Current accountbalance

Exports of goods andservices

Imports of goods andservices

While 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

External Performance - II

0

2

4

6

8

10

12

14

16

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

USD

Bill

ion

Remittances

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

USD

Bill

ion

External Debt Outstanding

-1000

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011 2012

USD

Mill

ion

Foreign Direct Investment

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008 2009 2010 2011 2012

USD

Bill

ion

Net Forex Reserves

Rising remittances and debt contribute to Dutch disease effect

Real Sector Outlook

Indicators 2011-12 (Provisional)

2012-13 (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 135774

Source: Economic Survey of Pakistan and Planning Commission’s Annual Plan 2012-13

Fiscal Sector Outlook

Indicators 2011-12 (Provisional) PKR Billion

2012 (July - December) 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 626

Source: Economic Survey of Pakistan

Balance of Payments

Indicators 2011-12 (Provisional) USD Million

2012-13 (Jul-Jan)

USD Million

Exports (fob) 24696 14170

Imports (fob) 40461 22944

Workers’ Remittances 13186 8207

Current account balance

-4635 62

Foreign Direct Investment

850 1800

Foreign Portfolio Investment

-152 507

Foreign Exchange Reserves

11901 9873

In months of imports 2.4 1.9

Source: State Bank of Pakistan

Two months import bill available to provide for Letter of Credits, and imports for food, edible and crude oil

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

Monetary Sector

Indicators 2011-12 (Provisional) PKR Million

3-Feb. 2012 PKR Million

Net Foreign Assets -248122 -33436

Net Domestic Assets 1,194,723 610640

Net Government Borrowing

1,237,441 772,675

Credit to Private Sector 235242 238034

Credit to Public Sector Enterprises

-130464 -270889

Broad Money (M2) 946601 316,734

Percent Growth 14.1% 4.7%

Source: State Bank of Pakistan

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

Current Options

• Business as usual (BAU) scenario

• BAU + Short term measures

• BAU + Short term measures + Structural reforms

Business as usual Scenario

• Pakistan’s foreign exchange reserves will deplete by June 2013

• Pakistan will need IMF Stand by arrangement in July 2013

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)

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

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

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

Engaging Diaspora

Workers’ Remittances: Futuristic Outlook

Demand Side

• Most believe that the flow will continue to increase

• With tightening of regulations in US and Continental Europe, Pakistani migrants have embarked to untraditional destinations too

• For Diaspora weak Pakistani currency implies a buyers’ market in Pakistan

• Banking sector in Pakistan envisaging targeted financial instruments for Diaspora

Supply Side

• EU region will remain in recession for medium term

• North America will maintain stringent visa regime and work approvals

• Middle East will continue to diversify away from South Asian migrants

• Look East – may be an option!

• Pakistanis losing on opportunities associated with Chinese proximity

Workers’ Remittances and Dutch Disease

• Is a Remittances-led welfare model sustainable? – Kerala's example not very encouraging

• What about Dutch Disease?

Increasing Remittances

Appreciates Exchange Rates

Hurts Exports Curtails

Production Increase in

Unemployment

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

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

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

Connecting Pakistan - Regionally

• Intra regional trade

– South Asia (5%)

– ASEAN (30%)

– EU (60%)

• Regional competition beneficial for both producers and consumers

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)

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

Some Current Issues

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

Energy Sector Reforms

Three Broad Reform Areas

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• Energy Governance

• Energy Pricing

• Public Sector’s role in Energy Sector

I. Energy Governance

40

• Independence of boards

• Induction of professional management

• Strengthening of regulatory bodies oversight

• Appropriate legislative changes to allow deregulation

• Case of Punjab Government

II. Energy Pricing

41

• 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

III. Government’s Role in Energy Sector

42

Limiting Government’s role to policy and planning

Regulator to oversee

Investment and management to be by

private sector

Learning from Indian example

Government should provide level playing

field

Integrated energy policy….and ensure its

implementation

National Energy Conference focused

on short term solutions

Government must take lead in

conclusive discourse

Issue of large dams

Thar Coal (and procedural hickups)

Energy trade with neighbors

• Power sector (India)

• Gas Pipelines (TAPI, Iran, Qatar etc.)

Sequencing of Solutions

43

Short Term

• Curtail power sector losses

• Costs of nonpayment of bills

• Power sector theft

• Transmission losses

• Allowing provincial government to take autonomous decisions

Medium Term

• Integrated Energy Plan

• Implementation of energy efficiency standards

• Gas sector linkages with neighbors

Long Term

• Multi-buyer Multi-seller private sector energy market

• Insulating gas sector from security threats

• Incentivize oil exploration (removal of subsidies on other sources)

• Develop national consensus on hydro and coal sources (e.g. dams and Thar coal)

• Vision and capacity for renewables

What about External Solutions?

44

While TAPI and other Central Asian prospects will be driven by geo-politics, are there any medium term solutions?

45

Trade in Energy Regional Prospects (e.g. SAARC)

46

Trade in Energy (SAARC)

47

Petroleum products

Trade in power

Infrastructure development

Decentralized

electricity

solutions

Efficient energy

markets

Synchronizing National Policies

48

• 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

India – Pakistan Power Trade

49

• Transmission lines through Wagah-Attari border

• Surplus pockets in Indian Punjab (and downwards)

Implementation !! Who will do it?

50

Implementation

51

• 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

www.sdpi.org, www.sdpi.tv 52

Thank You