PRESENTATION ON

Addressing Pakistan’s
Economic Challenges
By

Dr. Ashfaque H. Khan

Director General & Dean
NUST Business School
National University of Sciences &
Technology, Islamabad.

At:
NUST Business School (NBS)
January 10, 2011
1
 Outline of the Presentation
Part – 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?

2
Challenges Faced by
Pakistan in 1947

3
 Initial conditions that Pakistan inherited at the time of
independence in 1947

 The influx of refugees from India created insurmountable

problems as the country had no resources to meet this challenge

 The migration of Hindu and Sikh communities from Pakistan

nearly paralyzed the economic and administrative machinery.

4
 The head office of only One Pakistani owned bank was located in Pakistani territory

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

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

 The Karachi Port was underdeveloped and most of Pakistan’s trade routed through the
Indian ports of Bombay and Calcutta

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

 After a long battle India released a much smaller amount than the legitimate share of
Pakistan

5
Economic Conditions in
1947

6
 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 are

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

 Production of cotton was approximately 1.0 million bales in 1947. Today

we 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

7
 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 million
spindles. There were 4800 looms in 1947; today we have approximately 3.0
million power looms

8
 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 270,000

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

 Pakistan inherited very weak infrastructure at the time of

independence. Pakistan inherited 22,000 km road and today we
have a road network of 258,350km

9
 Part - II
Key Challenges of the 1990s and Strategy
Followed
Key Challenges of the 1990s
How to:
 Improve macroeconomic
environment
 Bring debt situation under control
 Restore investor confidence
 Revive economic growth
 Restore financial sovereignty
10
Strategy Followed
 Introducing wide-ranging
structural reforms
 Policies to improve
macroeconomic environment
Reducing ‘twin deficits’
Reducing inflation
Building foreign exchange
reserves
Maintaining stability in
exchange rate
Maintaining continuity and
consistency in policies
Major Achievements in 2000-07

A Strong economic recovery

Strong domestic demand sustaining
growth momentum
Reduction in unemployment
Sharp reduction in poverty

Privatization program
moving forward Major Reduction in fiscal
Successful exit from IMF
Programme
Major
Achievements
deficit
Significant reduction in
Re-entrance of Pakistan
into international Achievements
in the last
country’s debt burden
High double-digit
capital markets
Continued Improvement in 2000-07
seven years
growth in exports and
imports
in credit ratings Stable exchange rate

15 fold increase in Market

Capitalization of Karachi Stock
Exchange
Impressive increase in foreign
investment
Remittances continue to
maintain strong momentum
11
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 Crescent
Commercial 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 power
projects are in operation.

12
Barring two years the real GDP grew at an
average rate of 3.8% p.a in the 1990s
Growth recovered during 2003-2007 to an average of 7.0% p.a.

Source: Various Issues of Economic Survey

13
Large-Scale Manufacturing Accelerated During
2000-07

14
Investment Picked up During 2000-07
Investment recovered during 2003-04 to 2006-07 but slowed in 2007-08

Source: Various Issues of Economic Survey

15
 Significant Reduction in Unemployment
Unemployment declined … 13.5 million jobs created in seven
years

Labour Force Employment Number of New

8.5 8.3
Survey (in Employment
8.0 7.8 7.7 millions) (in millions)
7.5
7.0
6.5
FY 97 34.13 -
6.2
6.0 FY 00 36.32 2.19
5.5
5.5 5.3 5.2 FY 02 38.37 2.05
5.0 FY 04 42.00 3.63
4.5 FY 06 46.95 4.95
4.0
FY 07 47.65 0.70
1999- 2001- 2003- 2005- 2006- 2007- 2008-
00 02 04 06 07 08 09 FY 08 49.09 1.44
FY 09 50.79 1.70

We need to create 3.5- 4.0 million

jobs per year in the next 10 years
Source: Economic Survey 2006-07
for new entrants
Source: Labour Force Survey, FBS
16
Percent of people living below the poverty line
reduced

17
Inflation remained below 5% most of the period during
2000-07. inflation accelerated since August 2007

•August
2007
•Source: FBS

18
Overall Fiscal Deficit (% of GDP) Continued to
remain manageable during 2000-07

Source: Ministry of Finance

19
Current Account Deficit Growing (% of GDP)
Shrank, Turned Surplus and then started widening
• Current Account Deficit remained high in the 1990s despite low economic growth.

Source: SBP
20
Foreign Investment (US $ million) surged 2004-05
Onward
Foreign Investment Rising Sharply: touched 5.8% of GDP in 2006-07

Total Investment

FDI

* Jul-May
Source: SBP
21
Remittances ($ Million) Continued to rise
during 2000-07

22
PUBLIC DEBT (As % of GDP)
Public Debt Burden Declined Sharply ( End June )

110

100.3
100
95.9
91.7
89.1
90
83.8
79.8
80
75.0

70 67.2

62.5 62.7

60 57.2 57.8 58.3

55.5

50

40
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

23
EXTERNAL DEBT & LIABILITIES (% of Forex
Earnings)

Debt Burden is Less than one half (End June)

347.0

330
297.2

290
259.5
236.8
250

210
181.2
164.7
170
134.3 148.0 146.0
121.6 124.1
130 124.0

90
8 -9
9
1

9 -0
1

0 -0
2

1 -0
0
2

0 -0
2

3 -0
0
2

4 -0
0
2

5 -0
0
2

6 -0
0
2

7 -0
0
2

8 -0
0
2

9 -1
0
2
9

0
24
INDICATORS OF DEBT BURDEN
External Debt (As % of GDP)
Declining Trend in Debt Burden Stopped

75
70 66.3
65
60
51.7
55 52.2 50.9
50
45 43.0
40 36.0
35 32.9 32.1 32.2
29.5 28.1 28.2
30
25
20
1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009-
99 00 01 02 03 04 05 06 07 08 09 10

25
 Part - III
What Happened in 2007-08?
 2007-08 has been the most difficult year in Pakistan’s 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

26
Factor Responsible for Creating Macroeconomic
Challenges
Higher Food Higher Oil Prices
Prices

Higher Food Rising Oil Import

Inflation Bill

Higher Overall Higher Import Bill

Inflation

Absence of Adequate
Policy Response

Pressure on Pressure on BOP

Budget

Loss of Forex
Reserves

Pressure on
Exchange Rate
27
Correlation between the USD-Euro Exchange

a
l)(U
S
rb
e
p
$
155
145
135
125

105
115

95
85
75
65
55

4 -…
2
Corr. =0.92

8-Oct -08
2 -…
4-Sp -0
e 8
8 -…
1
1 -Ju
3 l -0
8
5 -Ju
1 l -0
8
6 -…
2
0 -…
1
2 -…
Rate & International Oil Prices

8-My -…
a
2 -…
4-Ar -0
p 8
9 -…
1
3-Mr -0
a 8
4 -…
1

28
9 -…
2
1 -…
6 -…
2
0 -…
1
2 -…
6-Nv -0
o 7
9 -…
1
3-O ct -0
7
O il

7 -…
1
0 -…
3
4 -…
1
Exchange Rate

7 -Ju
2 l -0
7
1 -Ju l -0
7
5 -…
2
7-Ju
n -0 7
2 -…
4-My -…
a
8 -…
1
2-Ar -0
p 7

1.56
1.52
1.48
1.44

1.36
1.32
1.28
1.24
1.6

1.4

1.2
R
e
g
n
a D
/U
S
xch
t) (E
ro
u
Oil Prices Vs. Euro-Dollar Parity

29
Domestic & International Prices of Wheat
850 28
International Domestic
26
750
24
650
22

550 20

450 18

)(Dm
o
tic
s
e
io
a
rn
l)(Ite

16
350
14
250
12

150 10
v
o
N

p
e
S

c
e
D

y
a
M
l -0
u
J
n
a
J

n
u
J

b
e
F

r -0
a
M
r -0
p
A

t -0
c
O
7
-0

-0

-0
-0

-0

-0
6

8
-0
5

9
7
5

30
Domestic & International Prices of Rice
53 900

Rice Basmati Broken (Rs/Kg)

48 Rice International ($/Ton)

800

43 700

38 600
m
sticR
(D

/T
./K

l$
io
ra
te
(In
g e
o

)
)

33 500

28 400

23 300

18 200
r -0
p
A

ct -0
O

r -0
p
A

ct -0
O

r -0
p
A

ct -0
O

r -0
p
A

ct -0
O
l -0
Ju

l -0
Ju

l -0
Ju

l -0
Ju
n -0
Ja

n -0
Ja

n -0
Ja

n -0
Ja
5

8
5

8
5

31
Domestic & International Prices of Cooking Oil

L
5
r2
t)e kR
s.p(P
a
400

350

300

250

200

150

ct -0
O 8
l -0
Ju 8
r -0
p
A 8
n -0
Ja 8
ct -0
O 7
l -0
Ju 7
r -0
p
A 7
n -0
Ja 7
ct -0
O 6
l -0
Ju 6
r -0
p
A 6
n -0
Ja 6

32
ct -0
O 5
l -0
Ju 5
r -0
p
A 5
n -0
Ja 5
Palm Oil International($/Ton)

ct -0
O 4
Cooking Oil (Rs/2.5Ltr)

l -0
Ju 4
r -0
p
A 4
n -0
Ja 4
ct -0
O 3
l -0
Ju 3
r -0
p
A 3
n -0
Ja 3
ct -0
O 2
lJ -0
u 2

1400

1200

1000

800

600

400

200
n rm
ticoU
S
e
p
$
 Trend in Oil Prices (Monthly Average)

130
July 2008
125
$ 128.77 /bbl Sep 2008
120 $ 115.79 /bbl
115
110
105
100
95
90 Aug 2007
/b
l)($

85
$ 69.28 /bbl
80
75
70
65
Dec 2008
60
$ 41.7 /bbl
55
50
45
40

Source: Ministry of Petroleum & Natural Resources

33
Quarter-wise Current Account Deficit ($ Million)

34
Foreign Exchange Reserves (End period)

Oct 2007 Sep 2010

$ 16.4 billion $ 17 billion

31 Oct, 08
$ 6.8 billion

35
Open Vs Inter Bank Exchange Rate (Rs./US $)
May 11, 2010
Open Market Rs. 84.2/$
Inter Bank Rs. 84.2/$

15 Oct 00
30 Oct 04 30 Oct 07
15 Aug 01

30 Mar 99

Source: SBP
36
Progress is reflected in the ratings
momentum on Pakistan
B1

B2 B2 B2
Moody’s

B3 B3
B3
Caa1
Aug, 2009
Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Outlook:
Oct-08 stable

B+ B+
B B
Aug, 2009
S&P

B- B-
CCC+ B-
CCC
CCC- CCC
CC SD Outlook: Negative

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

31
37
Ratings Scale
Moody’s Investors
Services STANDARD
&POOR’S
( Long-Term ) ( Long-Term )

Aaa AAA
Aa1 AA+
Aa2 AA
Aa3 AA-
Investment A1 A+
A2 A
grade A3 A-
Baa1 BBB+
Baa2 BBB
Baa3 BBB-

Ba1 BB+
Ba2 BB
Ba3 BB-
Non B1 B+ Pakistan’s Ratings in
B2 B 2007
Investment B3 B-
grade Caa1 CCC+
Caa2 CCC Current Ratings
Caa3 CCC-
Ca
38
 Part – IV
Ten Economic Blunders
1. Misguiding the People of Pakistan about the health of the economy
2. Irresponsible Statement issued by the then Finance Minister
3. 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 beyond
recognition

39
 Part – V
Ten Economic Solutions
1. 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 binding
constraint for provinces to generate targeted surpluses.

40
 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 and
Communicate with Private Sector.
8. Political Confrontation and Polarization must end
 Weak and Vulnerable Economy is the greatest threat to national security

41
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 against
Rs. 1796 billion in previous seven years
 External Debt and Liabilities Increased by $16 billion in three years
as against $2.6 billion in previous seven years
 Public Debt increased by Rs. 1200 billion in three years only
because 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 by
end-June 2010.

42
(Continue……)
 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 of
GDP, 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 the
next 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 will
enter in another program of Three years in 2011/12

43
 CONCLUDING VIEWS
 Pakistan – one of the four fastest growing economies (China, India,
Vietnam and Pakistan) in Asian region in 2007 has become a totally
forgotten economy in 2010

 Destruction of Economy has emerged as a major threat to national

security

 Total Apathy on the part of political leadership to Economy

 Pakistan cannot Afford such mismanagement of the economy any more

44
THANK YOU

45