IOBM

PEP ASSIGNMENT #8
Faculty: Sir Muhammad Usman
BY: SEEMA KHAN 22181
 Pakistan Economic Policy

A Brief History of Pakistani Economy 1947-

2014

The Pakistani economy has experienced impressive growth of 6% a year in the first four decades of its
existence. Despite the rapid population growth during this period, per capita income doubled, inflation
remained low and poverty dropped from 46% to 18% in the late 1980s, according to the well-known Pakistani
economist Dr. Ishrat Husain. This good economic performance was maintained through several wars and
successive civil and military governments in the 1950s, 1960s, 70s and 80s until the decade of the 90s, which is
rightly known as the lost decade today.

Pakistan Growth By Decades. Source: National Trade and Transport Facility

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In the 1990s, economic growth fell between 3% and 4%, poverty reached 33%, inflation reached double digits,
and external debt reached almost all of Pakistan's GDP. In 1999, Before Sharif resigned, both of the political
parties led the mismanagement and corruption for more than 10 years. Paksitn’s total debt in 1999 was the
highest in South Asia - 99.3% of GDP and 629% of revenue compared to Sri Lanka (91.1% and 528%). 3% in
1998) and India (47.2% and 384.9% in 1998). Pakistan's domestic debt accounted for 45.6% of GDP and
289.1% of its revenue in 1999 compared to Sri Lanka (45.7% and 264.8% in 1998) and India (44). 0% and
358.4% in
1998).

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 Pakistan Economic Policy

After a relatively peaceful but economically stagnant decade in the 1990s, 1999 saw a bloodless coup led by
General Pervez Musharraf usher in an era of accelerated economic growth that more than doubled national
GDP and increased considerably. The middle class ruled the city of Pakistan.

Per Capita PPP GDP

Pakistan became one of the four fastest growing economies in Asia in 2000-2007, with average annual growth
of 7.0% for most of that period. Thanks to strong economic growth, Pakistan has succeeded in halving poverty,
creating almost 13 million jobs, halving the country's debt burden, putting foreign exchange reserves in a

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comfortable position and supporting the United States Restores investors and especially Pakistan deletes from
the IMF program.

The above facts were recognized by the PPP government in a Memorandum of Economic and Financial Policy
(MEFP) for the period 2008/09/09/09, when the agreement with the IMF was signed on November 20, 2008.
The document clearly recognized (but reluctantly) that "Pakistan's economy has undergone a major economic
transformation in the past decade. Real GDP has increased from $ 60 billion to $ 170 billion, with income per
capita less than $ 500 to more than $ 1,000 in 2000-07 ". He also admitted that "the volume of international
trade has increased from $ 20 billion to nearly $ 60 billion. The improved macroeconomic performance
enabled Pakistan to re-enter the international capital markets in the mid-2000s. Significant capital inflows
funded the current account deficit and contributed to an increase in official gross reserves to $ 14.3 billion at
the end of June 2007. Sustainable production growth, low inflation and government social policy have helped
to reduce poverty and improve many social indicators. "

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Pakistan Economic Policy

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The decade has also cast a large shadow over the United States' "war on terror" in Pakistan, ultimately
transforming the nation into a frontline state in the increasingly deadly conflict that shows no signs of easing.
With blood, blood and chaos on the streets, there are encouraging signs that the rule of law and accountability
in the country are beginning to restore representative democracy and independent judiciary, mainly in
response to a middle class increasingly assertive. Lively mass media and a growing civil society.

The Zardari-Gilani government inherited a relatively solid economy on March 31, 2008. It inherited foreign
exchange reserves of $ 13.3 billion, an exchange rate of Rs 62.76 to the US dollar, d '' a CFE index of Rs 15,125
and a market capitalization of $ 74 billion and inflation of 20.6% and the burden of Lands debt on a downward
trajectory. The government itself admitted in the same document that "the macroeconomic situation in
2007/08 and in the first four months of 2008/09 deteriorated significantly due to the unfavorable
development of security, exogenous price shocks (oil and food), global financial turmoil and political transition

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to the new government.” (Article 3 of the MEFP, November 20, 2008)

Why did the Pakistani economy work well under military governments and develop poorly when run by
politicians? To put all of this in perspective, we remember how well Dr. Mahbub ul-Haq, the renowned
Pakistani economist who is credited with the idea of the UNDP Human Development Index (HDI), has
explained the corrosive effects of political patronage over Pakistan's economic policy.

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In an interview with Professor Anatol Lieven of King's College on October 10, 1988, recently quoted in a book
"Pakistan-A Hard Country", Dr. Haq:

"when a political party succeed in election the first thing they do is to appreciate and reward those people
who helped them to succeed. This appreciation or reward is in term of jobs. Because these people convince
people that their campaign promises mean something that doesn't matter for long-term development. In
terms of development, our system has the worst characteristics of oligarchy and democracy. "

Therefore, only the technocratic and apolitical governments of Pakistan were able to increase their income.
But they cannot stay in power for long because they have no political support ... For the same reason, despite
seven years of testing, we have not been able to deregulate the economy as much as I wanted because
politicians that officials had the Bhutto Presentation system (late Prime Minister Zulfikar Ali Bhutto). This suits
them very well because they have given them many lucrative government-sponsored jobs in industry and
banks that they could take on for themselves or share with loved ones and supporters. "

The Pakistani economist and professor NUST Ashfaque Husain Khan explains the current situation:

What went wrong? Why was one of the fastest growing economies in Asia completely forgotten in the region
until two years ago? First, the speed and scale of the exogenous price shocks (oil and food) have been
extraordinary. Second, the current government was completely ill-prepared and had no idea how to face the
challenges of the shocks. When the rest of the world took corrective action and adjusted to rising food and fuel
prices, Pakistan had gone from crisis to crisis.

Political instability persisted despite peaceful elections and a smooth transition to a new government. For a
long time, there were no ministers of finance, trade, petroleum and natural resources and health in the
country. The government has lost six precious months to gain a foothold. It gave the impression of having little
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sense of direction and purpose. A crisis of confidence worsened when investors and development partners
began to move away. The stock market collapsed, capital flight started, foreign exchange reserves collapsed,
and the Pakistan rupee lost a third of its value. In short, Pakistan's macroeconomic vulnerability had become
unbearable. There was no choice but to return to the IMF for a bailout. There were no plans A, B and C. There
was only one plan, namely to return to the IMF.

As the country quickly approached the IMF, the Treasury had prepared a plan to raise $ 4 billion in four
transactions by June 30, 2008. On April 23, 2008, an inaugural meeting was scheduled at the ministry to put
the sidelines final to the various road shows. These transactions were canceled on April 20, 2008. Who ordered
the cancellation of a $ 4 billion transaction? This cancellation led to a balance of payments crisis and the rest
became historic.

The economy remains in intensive care and barely breaths with funding from the IMF, the World Bank and the
Asian Development Bank. The economy is not on the government's radar screen, and as such, economic
managers have nothing to do with the current political situation. The release of ShaukatTarin is a classic
example. At least he did his best to promote financial discipline, but paid the price of teaching prudent
financial management.

Abdul Hafeez Shaikh has taken the post of Minister of Finance since the departure of Tarin. It is still too early to
judge, as the economy has suffered another major shock from the widespread devastation caused by the
recent floods. This contributed to the already extreme challenge for Pakistani leaders to give the nation
political and economic stability.

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Current Economic Situation in Pakistan and

Government Policy
The current economy of Pakistan is deteriorating and many discussions have been done regarding this issue.
The devaluation of Pakistani rupee against US dollar in the domestic market, negative growth rate, high
interest rate, high inflation rate, high oil prices, and lower revenues all these economic indicators are showing
alarming situation for the future. Now people are concerned about how this government will handle this
situation and will run the economy toward positive side by implementing and making policies that are aligned
with their targets.

Figure 1 GDP

Following are the main economic indicators that indicate the current economic situation in detail.

Debt Situation:

Currently Pakistan has to pay the following debt.

Foreign debt includes: Multilateral (IMF, World bank), bilateral (with whom Pakistan have good terms),
commercial banks debt, bonds, IMF and domestic debt. Domestic debt is around 22.3 trillion rupees.
Permanent debt is 13.2 trillion. Floating debt is 5.7 trillion. Unfunded debt 3.4 trillion (NCC scheme)

State bank of Pakistan increased interest rate to attract hot money (3.6 billion) but this lead to high debt
situation because interest payment increased on domestic borrowings. Also when this hot money was
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withdrawn due to covid-19 it leads it devaluation of Pakistan rupee due to which foreign borrowing payment
increased.

There are three main reason of high debt:

 Debt for Budgetary deficit to complete financing gap

 State own enterprises: 1400 debt was of previous year and now it has reached to 2800 billion debt
 Circular debt

A country cannot print currency notes when borrowed from IMF (Pakistan can’t take loan from state bank of
Pakistan). The government claimed that they didn't borrow from state bank to control inflation but this was
decided on the basis of IMF instructions as IMF doesn't allow Pakistan to borrow from central bank instead
they can borrow from commercial banks. Although the reason behind this (to control inflation) is solid but
when government borrow from commercial banks instead of central bank the commercial banks then cannot
afford to give loans to businesses and entrepreneurs. This leads to negative impacts on economic cycle of the
country. Businesses do not perform well, people do not invest in businesses, and they cannot expand their
businesses which lead to unemployment and lower purchasing power of people. When people cannot
purchase goods or services, the demand drops this ultimately leads to lower production and lower economic
activities. Another important point is that there is a term open market operation where central bank gives
loan to commercial banks so that they can buy bond and T bills of government in this way we can say that the
government is still taking loan from state bank of Pakistan but only the term is different.

Figure 2 External Debt

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Taxation:

Government of Pakistan set high targets (revenue targets) but announce policies that are not aligned with
these targets. For example the government set target of 5.5 for raising revenue but FBR could not collect
direct tax because State bank of Pakistan announced policies that are aligned with the suggestions of IMF not
with their targets. Currently state bank of Pakistan increased interest rate due to which Business activities
stopped when interest rate was high. The main reason was that business and entrepreneurs need fund/ loans
for starting or operating their businesses but due to high interest rates most of the companies decided not to
expend their businesses which lead to lower production and thus did not increased their revenues. The second
problem is that FBR does not have information that is required for collecting tax. Currently in Pakistan FBR is
collecting indirect taxes about 62 to 65% and direct taxes are about 35 to 38%. In this way it is clear that FBR is
not able to collect direct tax that is why they put all the burden indirect tax collection. FBR capacity
constraints, lack of information, and outdated software lead to this situation. That is why the government
focus should be on direct tax collection.

Figure 3 Pakistan Corporate Tax Rate

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Figure 4Personal Income Tax

Figure 5Sales tax rate

Import and Exports:

It was also said that Pakistan rupee was devalued to boost export but our exports are depend on imports (raw
material). Input cost (utilities, rent, and raw material) of exporters was increased with devaluation of rupees
so it was not a good decision. Government is still not able to make policies to boost exports therefore the
exports are not going up.

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Figure 6 Exports

Figure 7 Import

Monetary Policy:

Before the corona virus pandemic the interest rate was high (13.25) attracting foreign investors. Up to 3
billion of hot money was welcomed in Pakistan. But after the corona virus investors failed to prolong their stay
and opted to pull out of the market following outbreak of the corona virus. The reason was that the interest
rate was high when they invested, and government kept interest rate higher for several months because they
wanted these international investors to invest for more time. When corona virus pandemic disturbed the

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whole economy, SBP has to lower the interest rates. It causes the international investors to pull their
investment from the market. Interest rate risk is important for long term bonds.

Also it was claimed that the interest rate was increased in order to lower the inflation but it could not work as
when interest rate was on its highest ( 13.25) the inflation rate was also high ( 14.6). To revive economy during
this corona virus pandemic, during one month the interest rate has been reduced by 350 basis points by SBP.
The decision of The MPC to reduce interest rate was of the view that this action would cushion the affect of
the Corona virus shock on growth, economy and employment. Also the inflation expectations to ease
borrowing cost and the debt service burden of household and firms facilitate businesses and exporters who
seek loans frequently from commercial banks to run their businesses and also to maintain financial stability. As
the production has been stopped, people are in lockdown, economic activities have been slowed down so they
decided to reduce the interest rate so the economy can perform better. Outbreak of Corona virus has taken a
significant toll in human life around the world as it has reduced external and domestic demand for consumer
goods also it has increased the risk aversion and uncertainty about the future. State bank o f Pakistan stated
that monetary committee, based on uncertainty of the situation, changed the interest rate as no one is sure
about the future so the volatility is high. The world economy is expected to enter in a very serious recession
even worst than 2009.This would be a much deeper recession than the contraction of 0.07% during the global
financial crisis in 2009.

Figure 8 Interest rate

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Figure 9 Inflation

Devaluation of Pakistani Rupee:

Since 2017 Pakistan rupee is facing devaluation. In December the value of Pakistan rupee was 105 against US
dollar but then a great shock was faced by macroeconomic situation and reached to 119 in June 2018. With
the devaluation of rupee many other problems aroused such as prices of imports increased, purchasing power
of people dropped also our exports are dependent on imported raw material so their cost of production also
increased. According to data combined by Bloomberg,” the Pakistani rupee was Asia’s worst-performing
currency this year”. However some of the analysts and economists are predicting further decrease of rupee in
future. While according to Standard Chartered PLC “the rupee will fall to 125 per dollar by the end of the year
and International Monetary Fund may request authorities (such as IMF) to weaken it even further.

Government will have to seek help form IMF. Pakistan public debt is still higher and will remain the same in
the future. As (structural change) CPEC project related issues have elevated current account deficit and has
risen external debt servicing and this will lead to higher external financing needs in the future. The IMF also
said that “While the level of external debt has remained moderate, continued mobilization of external
financing at favorable rates could become more challenging in the future against the background of rising
international interest rates and increasing financing needs”. There is upward trend in oil prices because of the
devaluation as devaluation hurt the economy of all courtiers particularly Pakistan Where the inflation rate is
already high. When there is an equilibrium deficit, then all the lenders like the IMF and the World Bank put
pressure on the government to devalue their currency. In this way, debt repayment increases and the

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government still oppose this restriction. The agricultural sector is also opposed to this policy because it will
increase the prices of imported goods (machinery). The industrial sector supports this decision because it
increases the prices of end products for end consumers, which helps them generate more income. Currently,
the devaluation of the rupee in Pakistan has led to higher prices for finished products, but it has also affected
the industrial sector (exports from Pakistan), since most companies use imported raw materials and therefore
had to buy materials raw materials at high prices, which resulted in high production costs.

Figure 10 Rupee Value

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References:

https://www.thenews.com.pk/print/627871-pakistan-tax-collection-62pc-below-its-potential-imf

https://profit.pakistantoday.com.pk/2020/01/13/the-problem-of-revenue-is-bad-tax-policy-not-cheating/

https://tradingeconomics.com/pakistan/forecast

http://www.riazhaq.com/2010/09/brief-history-of-pakistani-economy-1947.html

Pakistan Growth By Decades. Source: National Trade and Transport Facility

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