1. Pakistan: State of the Economy
Last Updated: 18th February 2013
1

2. Outline
Introduction & Background
Macroeconomic Trends
Current Options
External Options
Future Directions

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
2012
Falling long run growth due to lack of structural reforms and conducive market environment

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. 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
2012
Literature shows that Pakistan is not a capital constraint country, however incentives for
sustained investments and retention of capital have been declining overtime

6. Gross Domestic Savings 1971 - 2011
35
30
25
% of GDP
20
Pakistan
15
South Asia
10
5
0
Pakistan has found it difficult to raise its savings level and to channel these savings into high
impact investments

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
2001
Low tax to GDP ratio implies lesser fiscal space for development expenditure and repeated
resort to debt for managing government’s consumption expenditures

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
-10
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

9. Inflationary Pressures
25
Consumer Prices (% Change)
20
15
Pakistan
10 South Asia
5
0
2007 2008 2009 2010 2011 2012
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

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
2007
Debt servicing, defense, law & order have not allowed government’s current expenditures to
come down. This also implied lesser expenditure availability for MDGs

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
2004
Education and health expenditures are compromised first once current expenditures increase.
The also impact longer run productivity of the economy

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 2011
Polio and Measles continue to exist. Consistent failure due to coordination at various tiers of the
state machinery (however funding adequately available)

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
-15
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

14. External Performance - II
16
14
External Debt Outstanding
Remittances 50
12 45
40
10
USD 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
10
USD 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. 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 135774
Source: Economic Survey of Pakistan and Planning Commission’s Annual Plan 2012-13

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 626
Source: Economic Survey of Pakistan

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

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. Monetary Sector
Indicators 2011-12 3-Feb. 2012
(Provisional) PKR Million
PKR Million
Net Foreign Assets -248122 -33436
Net Domestic Assets 1,194,723 610640
Net Government 1,237,441 772,675
Borrowing
Credit to Private Sector 235242 238034
Credit to Public Sector -130464 -270889
Enterprises
Broad Money (M2) 946601 316,734
Percent Growth 14.1% 4.7%
Source: State Bank of Pakistan

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. Current Options
• Business as usual (BAU) scenario
• BAU + Short term measures
• BAU + Short term measures + Structural
reforms

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. 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. 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. 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. 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. Engaging Diaspora

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. Workers’ Remittances and Dutch Disease
• Is a Remittances-led welfare model sustainable?
– Kerala's example not very encouraging
• What about Dutch Disease?
Increasing Appreciates Curtails Increase in
Hurts Exports
Remittances Exchange Rates Production Unemployment

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. 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. 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. Connecting Pakistan - Regionally
• Intra regional trade
– South Asia (5%)
– ASEAN (30%)
– EU (60%)
• Regional competition beneficial for both
producers and consumers

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. 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. Some Current Issues

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. Energy Sector Reforms

39. Three Broad Reform Areas
• Energy Governance
• Energy Pricing
• Public Sector’s role in Energy Sector
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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. 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
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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. 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. What about External Solutions?
44

45. While TAPI and other Central Asian prospects will be driven by
geo-politics, are there any medium term solutions?
45

46. Trade in Energy
Regional Prospects (e.g. SAARC)
46

47. Trade in Energy (SAARC)
Efficient
Petroleum Infrastructure energy
products development markets
Trade in Decentra
power lized
electricit
y
solutions
47

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. India – Pakistan Power Trade
• Transmission lines through Wagah-Attari border
• Surplus pockets in Indian Punjab (and downwards)
49

50. Implementation !!
Who will do it?
50

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
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52. Thank You
www.sdpi.org, www.sdpi.tv
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