Overall economic analysis of Pakistan

INTRODUCTION:

Pakistan officially the Islamic Republic of Pakistan is a country in South Asia. It has a
1,046-kilometre (650 mi) coastline along the Arabian Sea and the Gulf of Oman in the
south and is bordered by Afghanistan and Iran in the west, India in the east and China
in the far northeast.Tajikistan also lies very close to Pakistan but is separated by the
narrow Wakhan Corridor. Strategically it is located in a position between the
important regions of South Asia, Central Asia and the Middle East.

Pakistan is a federal parliamentary republic consisting of four provinces and four

federal territories. With over 170 million people, it is the sixth most populous country
in the world] and has the second largest Muslim population after Indonesia. It is an
ethnically and linguistically diverse country with a similar variation in its geography
and wildlife. With a semi-industrialized economy, it is the 27th largest in the world in
terms of purchasing power. Since gaining independence, Pakistan’s history has been
characterised by periods of military rule, political instability and conflicts with
neighbouring India. The country faces challenging problems including poverty,
illiteracy, corruption and terrorism.

Pakistan has the seventh largest standing armed force and is the only Muslim-majority
nation to possess nuclear weapons. It is designated as a major non-NATO ally of the
United States. It is a founding member of the Organization of the Islamic Conference
and a member of the United Nations,[ Commonwealth of Nations, Next Eleven
economies and the G20 developing nations.

PESTEL ANALYSIS:

POLITICAL ANALYSIS:

Pakistan is a democratic parliamentary federal republic with Islam as the state

religion. The first Constitution of Pakistan was adopted in 1956, but was suspended in
1958 by General Ayub Khan. The Pakistani military has played an influential role in
mainstream politics throughout Pakistan’s history, with military presidents ruling from
1958-71, 1977-88 and from 1999-2008. The 1990s were characterised by coalition
politics dominated by the Pakistan Peoples Party and a rejuvenated Muslim League.
Pakistan is an active member of the United Nations (UN) and the Organisation of the
Islamic Conference (OIC), the latter of which Pakistan has used as a forum for
Enlightened Moderation, a plan to promote a renaissance and enlightenment in the
Muslim world. Pakistan is also a member of the South Asian Association for Regional
Cooperation (SAARC) and the Economic Cooperation Organisation (ECO).

Political Effectiveness:

The Pakistani military has played an influential role in mainstream politics throughout
Pakistan’s history, with military presidents ruling from 1958-71, 1977-88 and from
1999-2008. Pakistan has fairly political effect on the country if it is in the rural or in
the urban areas, elected representative are responsible to solve their problems. Elected
representatives are more often belongs to the urban, they are as important as the rural.
Institutional Stability:

Pakistan has very bad atmosphere regarding to manage the organizational structure,
whether that belong to the government or belong to the private sector. There are too
many changes and it keeps the country from growing fast and healthy.

ECONOMIC ANALYSIS

Pakistan has a semi-industrialized economy. Despite being a very poor country in

1947, Pakistan’s economic growth rate has been better than the global average during
the subsequent four decades, but imprudent policies led to a slowdown in the late
1990s. GDP growth was steady during the mid-2000s at a rate of 7%; however,
slowed down during the Economic crisis of 2008 to 4.7%. A large inflation rate of
24.4% and a low savings rate, and other economic factors, continue to make it
difficult to sustain a high growth rate. Pakistan’s GDP is US$167 billions. The
structure of the Pakistani economy has changed from a mainly agricultural base to a
strong service base. Agriculture now only accounts for roughly 20% of the GDP,
while the service sector accounts for 53% of the GDP. Significant foreign investments
have been made in several areas including telecommunications, real estate and energy.
Other important industries include apparel and textiles (accounting for nearly 60% of
exports), food processing, chemicals manufacture, and the iron and steel industries.
Pakistan’s exports in 2008 amounted to $20.62 billion (USD). Pakistan is a rapidly
developing country.

Historically, Pakistan’s overall economic output (GDP) has grown every year since a
1951 recession. Despite this record of sustained growth, Pakistan’s economy had,
until a few years ago, been characterized as unstable and highly vulnerable to external
and internal shocks. However, the economy proved to be unexpectedly resilient in the
face of multiple adverse events concentrated into a four-year (1998-2002) period –

the Asian financial crisis.

economic sanctions – according to Colin Powell, Pakistan was “sanctioned to the

eyeballs”;

The global recession of 2001-2002;

a severe drought – the worst in Pakistan’s history, lasting about four years;

heightened perceptions of risk as a result of military tensions with India – with as

many as 1 million troops on the border, and predictions of impending (potentially
nuclear) war;

the post-9/11 military action in neighboring Afghanistan, with a massive influx of

refugees from that country;

Despite these adverse events, Pakistan’s economy kept growing, and economic
growth accelerated towards the end of this period. This resilience has led to a change
in perceptions of the economy, with leading international institutions such as the IMF,
World Bank, and the ADB praising Pakistan’s performance in the face of adversity.
Due to inflation and economic crisis worldwide, Pakistan’s economy reached a state
of Balance of Payment crisis. “The International Monetary Fund bailed out Pakistan
in November 2008 to avert a balance of payments crisis and in July last year increased
the loan to $11.3 billion from an initial $7.6 billion.” Today Pakistan is amongst the
elite group of 11 countries,also termed as ‘The Next Eleven”identified by Goldman
Sachs investment bank as having a high potential of becoming the world’s largest
economies in the 21st century along with the BRICs.

By October 2007, Pakistan raised back its Foreign Reserves to a handsome $16.4
billion. Exceptional policies kept Pakistan’s trade deficit controlled at $13 billion,
exports boomed to $18 billion, revenue generation increased to become $13 billion
and attracted foreign investment of $8.4 billion.

The middle term however may be less turbulent, depending on the political
environment. The EIU estimates that inflation should drop back to single digits in
2010, and that growth should pick up to over 5% per annum by 2011. Although less
than the previous 5 year average of 7%, it would represent an overcoming of the
present crisis wherein growth is a mere 3.5-4%.

SOCIAL ANALYSIS:

Pakistan is that country that shares common values, language and customs. Pakistan is
an Islamic republic; of its population 97 percent are Muslim’s, 2 percent are
Christian’s and 1 percent are Hindu’s or Buddhists. Pakistan has very good moral
values regarding cultural and language. Pakistanis use their official language and
practice their Islamic laws. There is fully freedom for minorities regarding their
religion, culture and language.

a) Education:

Pakistan has very good education system and it is free up to graduate levels. Students
are prepared to the requirements of study, and they are the assets of the nation.
Pakistan spends 75% of total national budget on education. Every province has good
universities and there are many international students from around the world in
engineering, medicine, literature and textile engineering. There are literacy rate is
35%, out of them male is 47 percent and female is 2l percent.

b) Railroads

Pakistan has railroads (8,773 Km), high ways (110,677 Km); 110 airports and two big
sea ports (Gwadar and Mohammed bin Basin) for trade. Pakistan is still improving
their highways system and recently they built a free high way that covers east to west
and north to south. Pakistan has a good transportation system that is really helpful for
trade from one city to another city.

c) Freedom From Outside Control:

Citizens of Pakistan are free from control by any agency or force. They are free and
independent. The government are not allowed to interfere with personal interaction.
Pakistan also provide the protection to citizens regarding international involvement, if
any body involved in any activity they are not to be taken out of the country.

d) Income Distribution:

Gini Index: 41

Household income or consumption by percentage share:

lowest 10%: 4.1%

highest 10%: 27.7% (1996)

middle 10%: 10.5%

e)Protection of Public Health and Safety

Government tries to regulate safety direction and also provide free health facilities,
but there is no enforcement of these laws. Big companies don’t want to pay attention
regarding the health and safety regulations, they just want to make money. Pakistani
government made many plans regarding the disease and they are try to cure from
every prospective.

f)Pakistan has a growing upper & upper middle class, which was estimated at 6.8
million in 2002] and has now grown to 17 million people as of 2010, with relatively
high per capita incomes.

g)Poverty in Pakistan

-Pakistan government spent over 1 trillion Rupees (about $16.7 billion) on poverty
alleviation programs during the past four years, cutting poverty from 35% in 2000-01
to 24% in 2006.Rural poverty remains a pressing issue, as development there has been
far slower than in the major urban areas. Poverty levels have decreased by 10% since
2001. Foreign Companies which provide for Pakistani middle classes have been very
successful

h)Demographics

Pakistan is considered by the World Bank as a medium-income country, it is also

recorded as a “Medium Development Country” on the Human Development Index.
Pakistan has a large informal economy, which the government is trying to document
and assess. Approximately 56% of adults are literate, and life expectancy is about 64
years.

i)Employment

The high population growth in the past few decades has ensured that a very large
number of young people are now entering the labor market. Even though it is among
the seven most populous Asian nations, Pakistan has a lower population density than
Bangladesh, Japan, India, and the Philippines. In the past, excessive red tape made
firing from jobs, and consequently hiring, difficult. Significant progress in taxation
and business reforms has ensured that many firms now are not compelled to operate in
the underground economy.

TECHNOLOGICAL ANALYSIS:

The National Commission for Science and Technology (NCST) is the apex decision
making body that provides directions to the scientific and technological development
of the nation. The Commission is headed by the Prime Minister of Pakistan. The
NCST functions through the Executive Committee of National Commission for
Science and Technology (ECNCST) chaired by the Minister for Science and
Technology with Deputy Chairman Planning Commission as its co-chairman. The
Secretariat of NCST is established at the Pakistan Council for Science and
Technology. The focus of NCST is on the acceleration of scientific and technological
capacity building for rapid and sustainable economic growth.

For the first time ever in the history of Pakistan, Science and Technology attracted the
political will and an eminent scientist has been appointed as Minister for Science and
Technology. The present government has increased the budget of Ministry of Science
and Technology from Rs 120 million to Rs 6.0 billion per annum; a 5000 percent
increase in the development budget.

Over 300 projects for the development of Science and Technology in general and for
the promotion of Information Technology in particular have been launched. This
represents a major step forward towards building an indigenous S&T capacity and a
knowledge-based economy in Pakistan.

Communication System

Pakistan has all new ways of technology such as: 15 telephones per 1,000 residents;
T.V.; radio; fax; and, email. Pakistan has just signed a contract with MCI to provide E-
mail in Pakistan by the end of 1997. Pakistan is a developing country, but trying to
make their communication system better.

ECOLOGICAL ANALYSIS:

Pro-business climate:

Pakistan has known a feudal system of land ownership. These feudal barons are
dominant in society. Business class is also attractive for bureaucrats and technocrats
because they can use their position as a platform for their unethical activities. They
bribe people who are elected as a member of national assembly and receive in return
protection from crimes and police investigation for the land owners. Some of these
people are also involved in drug dealing and this is very bad for country situation.

Tourism
Tourism in Pakistan is a growing industry. Major attractions include ruins of Indus
valley civilization and mountain resorts in the Himalayas. Himalayan and Karakoram
range (which includes K2, the second highest mountain peak in the world, attracts
adventurers and mountaineers from around the world. Karachi and Lahore are major
attractions for authentic Pakistani food and culture

LEGAL ANALYSIS:

a) Freedom From Internal Control

Pakistani business agencies are free to move from one corner to other end of the
country. They have right to register their vote in that area and they will get same
benefits as local residents. Pakistan government also provides protection to people
who move from one province to another; they have to inform the local “Municipal
Court” that they are moved from one city to another. This is only to keep track record
of that person, if they involved in any illegal activity. Pakistan government has not yet
get new technology such computerized system for I.D, but still every citizen in the
country is free to move around without any hesitation.

Resources: Pakistan embassy; USDOC, Country profiles.

b) Common Laws

Pakistan is basically practice English common laws and there is always loopholes for
those people who have power (political/wealth). There are laws but there is no
enforcement. People think that laws are made to be broken. There is no practical laws
that are valid for the public: laws are permitted to remain silent and look good only in
the books.

c) Central Bank:

The central bank is influenced the by government. There is too much inflation and
things are very expensive. They are controlled by the government. Central banks
should be free of any restriction and they should think about the welfare of the
country rather than politicians.

d) High Wage Policy:

Pakistan has a poor economy: there are no regulation regarding wage policy, you can
pay workers wha ever you want to pay them. This also has a bad impact on the
standard of living, because companies from overseas pay a little amount money to
workers without benefits. Pakistan should enforce their laws regarding this situation
and should protect workers from the money makers.

e) Foreign Trade Impact

Pakistan basically relays on agricultural products such as cotton, rice and sugar cane
for export earnings; but since the last three years when Pakistan suffered floods in
Punjab and Sindh, the country has to import cotton and rice to satisfy requirements.
Pakistan had a big deficit in term of trade, and GDP is not growing at the rate as it
should be.

f) Government Enterprises:

Since 1988, management of the Pakistan economy has been guided by the policy
framework agreed to by the IMF and the world and the world bank. This framework is
designed to stabilize the principal macroeconomics variables in the short term;
provide the basis for long term, sustainable growth aimed at reducing the role of the
public sector; encouraging the private sector to play a more dominant role in the
economy; and supporting industrial, export oriented production.

a)Permission/sanction to establish industries is no longer required.

b) Foreign exchange restriction have been removed and payment reforms introduced.
· The financial sector has been exposed to market forces.

c)Private sector has been allowed to invest in airlines, shipping and

telecommunication. ·

d)Disinvestment of public sector enterprises has moved rapidly.

e) Apart from opening the economy, these reforms are intended to disengage the
government from a large area of economic activity more suitable for the private
sector, thereby releasing scarce public resources for allocation to social sectors and
infrastructure development. The reforms have focused specially on the following
principal areas :

Trade liberalization through the reduction of tariff and non-tariff barriers.

Encouraging foreign and domestic private investment through deregulation. · A
relaxation of capital and exchange controls. . Dismantling state control over key areas
of the economy through privatization of state-owners enterprises.

COMPETETIVE ENVIRONMENT

Business environment:

Located in the heart of Asia, Pakistan is the gateway to the energy rich Central Asian
States, the financially liquid Gulf States and the economically advanced Far Eastern
tigers. This strategic advantage alone makes Pakistan a marketplace teeming with
possibilities.

Here the people are mostly English proficient, hardworking and intelligent. They have
lesser costs.

Well-established infrastructure and legal systems are deep-rooted foundation to lure

investment. It includes comprehensive road, rail, sea links; good quality
telecommunications and IT services; modern company laws and long-standing
corporate culture.

A composite scheme of National Industrial Zones engulfing industrial estates, Free

Industrial Zones, Free Trade Zones and Export-Oriented Units (EOU) and Estates for
small and medium industries within areas of its boundary has been launched to
promote exports. In addition, establishment of export-oriented units will be allowed to
be set up all over the country.

Foreign investors are allowed participation in industrial projects, on the basis of 100%
foreign equity, without any permission from the Government.

The manufacturing sector was open to foreign investment. Now, the policy regime has
been liberalized by opening up other economic sectors to FDI and by mobilizing
domestic financial resources to encourage investment.

Full repatriation of capital gains, dividends and profits.There is no requirement to

obtain a No Objection Certificate (NOC) from the Provincial Governments for the
establishment of projects.

Economic Outlook

Pakistan is one of the fastest growing economies of the world having touched a GDP
growth rate of 8.4% in 2005. Today Pakistan has 160 million consumers with an ever-
growing middle class. Foreign investment has risen sharply from an average of $400
million in the 1990s to over $ 3.5 billion in 2005-06. Fiscal deficit has declined from
an average 7% of GDP in the 1990s to around 3% in recent years. And FOREX
reserves have also increased .

Large and growing domestic market includes 140 million consumers with growing
incomes and a growing middle-class moving to sophisticated consumption habits.

Abundant land and natural resources exists in Pakistan including extensive

agricultural land, crop production; wheat, cotton, rice, fruit and vegetables; mineral
reserves; coal, crude oil, natural gas, copper, iron ore, gypsum; and fisheries and
livestock production.

Tourism has been declared an industry and as such holds great promise for
prospective investors interested in exploring the true potential of a land as rich and
diverse in its culture as it is in its geographical distribution. From snow-capped
mountains in the north, with vast fertile plains of the Punjab, rugged land of the south,
deserts and a long seacoast, Pakistan has all the hall marks to become a major tourist
attraction.

Investment policies, laws and regulations

Current investment policies have been tailor made to suit investor needs. Pakistan ‘s
policy trends have been consistent, with liberalization, de-regulation, Privatization,
and facilitation being its foremost cornerstones.
The capital markets are being modernized, and reforms have resulted in development
of infrastructure in the stock exchanges of the country. The Securities and Exchange
Commission has improved the regulatory environment of the stock exchanges,
corporate bond market and the leasing sector. Whilst the Central Board of Revenue
has facilitated structural reform in tax and tariffs and the State Bank of Pakistan has
invigorated the banking sector into high returns on investment.

Pakistan has a liberal foreign exchange regime with few restrictions on holding
foreign exchange and bringing it in or out of the country. There are no limits on the
inflow or outflow of funds for remittances of profits, debt service, capital, capital
gains, returns on intellectual property, or payments for imported inputs.

The facility for contracting foreign private loans is available to all those foreign
investors who make investment in the approved sectors.

Foreign controlled manufacturing concerns are allowed to borrow on the domestic

market according to their requirements.There is a greater degree of transparency in
procurement practices since the current government took office in October 1999.
International tenders are properly advertised and there is no sole sourcing, as contract
specifications are not made according to any company’s requirements, as was done in
the past. Sanctity of contracts, however, remains a major concern for companies.

Foreign controlled semi-manufacturing and non-manufacturing concerns can access

loans equal to @ 75% & 50%, respectively, of their paid up capital including reserves.

There is no restriction on payment of royalty / technical fee etc., in the manufacturing

sector, allowed non in non-manufacturing sectors. For non-manufacturing sector, the
initial lump sum fee should not exceed US $ 100,000. The maximum rate will be 5%
of net sales. Initial period for which such fees may be allowed should not exceed 5
year. Further information can be supplied by BOI.

Reducing minimum foreign equity from US$ 0.5 million to US$ 0.3 million.

Zero import duties on capital goods, plant and machinery and equipment not
manufactured locally. Central Board of Revenue (CBR) can supply a list of locally
manufactured good. In case of doubt the investor is invited to consult the Board of
Investment (BOI).

The import tariff on agriculture machinery (not manufactured locally) for registered
corporate agricultural projects will be zero-rated.

The investors who invest in the newly opened sectors can import plant, machinery &
equipment (not manufactured locally) at discounted rate of customs duty which is
10% and also avail first year allowance @ of 50% of the cost of plant, machinery &
equipment.

Zero import duties on raw materials used in the production of exports.

Remittance of royalty, technology and franchise fee allowed to projects in social,

service, infrastructure, agriculture and international chains food franchise.
Regulatory reforms have led to the establishment of a legal framework for licensing
and regulating private housing lenders. At present, five private housing companies are
operating in a regulated environment and offering a variety of loan instruments. In
order to mobilize funds, private housing companies may issue certificates of
investment.