Pakistan – An Economic Turnaround

September 2006
Pakistan’s Turnaround Synopsis

Historical Bottlenecks –Tiger

A Reinvigorated Late 1990s

t an
k is
Pa

- Growth quadrupled - Recent international

- Exports doubled Threat of
Highly
- Sanctions removed to 7–8%Near-zero International Deep sovereign bonds
- Increased integration - Increased wealth
- FX risen five fold - Fiscal deficit halved sovereign
issues oversubscribed
sanctioned GDP growth isolation
- Stable currency -recession
Inflation contained
with global economy levels default
- KSE: one of the best
- Annual FDI doubled
- Growing middle class performing markets

2
The Growth Story

Pakistan witnessing rapid and sustainable economic growth

Nominal GDP (US$ billion) & Real GDP Growth (%) Real GDP Growth ‘06 (%)

207 6.6
R
% CAG
13 182 5.7
5.4
8.4 161
4.7
142
6.6 8.2
6.4 7.8 8.0
111 7.4
125
5.1
72 96
82
3.1

2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E Pakistan ASEAN Latin America MENA
Nominal GDP (US$ billion) Real GDP Growth (%)

• One of the fastest growing economy in Asia

• Expected to surpass the US$ 200 billion mark by 2010

Source: Pakistan Ministry of Finance, Economist Intelligence Unit, Abraaj Analysis 3

The Growth Story (cont’d)

Wealth levels have increased and a large middle-class is emerging

GDP per Capita (US$ PPP) Household Income Distribution (%)

C AGR 3,420
6.9% 3,200
2,980
2,780
2,590
2,410 41.7
49.3
2,210
2,070
1,980

48.6
45.0

5.7 9.7

2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 1991 2002
Lowest 20% Middle 60% Highest 20%

• Rising disposable income

• Increasing income distribution largely a result of decreasing unemployment
• Accelerating income growth across lower and middle segments of population

Source: Economist Intelligence Unit, Pakistan Federal Bureau of Statistics 4

The Growth Story (cont’d)

Exports have become competitive and almost doubled in last five years

Exports (US$ billion) Exports (% of GDP), 2006

106.1
16.5

GR
% CA 14.4
4
12.
12.3
11.2

9.2 9.1 36.2

29.7

13.2

2001 2002 2003 2004 2005 2006 Pakistan China Indonesia Malaysia

• ‘Low’ cost advantage spurring exports

• Broadening geographical reach and more access to US, EU and UAE markets
• Potential to increase and diversify target countries

Source: Economic Intelligence Unit 5

The Growth Story (cont’d)
International investors have begun to take notice of the Pakistan story, however significant
upside remains as FDI flows are still far below regional levels

Foreign Direct Investment (US$ million) Foreign Direct Investment (% of GDP), 2006

3,521

13.9
GR
CA
61%

9.1
1,524

949
798
485 2.8
322
1.1

2001 2002 2003 2004 2005 2006 Pakistan Singapore India UAE

• Opening up of economy leading to strong foreign interest

• FDI inflow more than doubled in 2006
• Broad based inflow across sectors

Source: Pakistan Ministry of Finance, Economic Intelligence Unit 6

The Growth Story (cont’d)

Significant decline in external debt

External Debt (% of GDP) External Debt (% of GDP), 2006

47
46 34.0
30.8
44

19.1
38 16.0

36
34

2001 2002 2003 2004 2005 2006 Pakistan Singapore India UAE

 Consistent decline in external debt / GDP ratio

 Concerted effort to move away from poorly structured high-interest debt
 Allowing increasing government expenditure on “value-added” projects

Source: Pakistan Ministry of Finance, Economic Intelligence Unit 7

The Growth Story (cont’d)

Rapidly increasing foreign exchange reserves and a stable currency

Foreign Exchange Reserves (US$ billion) Exchange Rate (Year-end, PKR:US$)

R 13.1
% CAG 12.3 12.6
44

9.8
60.9 59.1 59.8 61.1
58.5 57.2

4.8

2.1

2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006

• Strong remittance flow and growing exports leading to accumulation of foreign reserves
• Reserves providing currency stability
• Standard & Poor’s upgrade long-term local and foreign rating

Source: Pakistan Ministry of Finance, Economic Intelligence Unit 8

The Turnaround Strategy

External debt re-profiling and fiscal reforms were at the centre of the multi-faceted strategy

Fiscal Deficit (% of GDP) Interest Payments (% of GDP)

4.3 4.3
6.3
6.1
16%
de
3.7 clin
ep
.a.
3.4 4.8
3.2
4.0

3.2 3.1
2.4

2001 2002 2003 2004 2005 2006* 2001 2002 2003 2004 2005 2006

• Restructuring and debt write-off leading to reduction in interest payment

• Improved stability of economy; manageable fiscal deficit
• Recent hike largely due to absorption of high oil prices

* Excluding earthquake-related spending

Source: Pakistan Ministry of Finance, State Bank of Pakistan 9
The Turnaround Strategy (cont’d)

Privatizations was another key focus

Privatizations (US$ million) Current Privatization Pipeline

Company Sector Company Sector

3,598 Pakistan Petroleum Oil & Gas Morafco Industries, Fais Industry &
21 Real Estate

Pakistan State Oil Oil & Gas Lyallpur Chemical Chemicals

Fertilizer

12 Sui Southern Gas Co Oil & Gas Hazara Phosphate Fert’er Industry &
Real Estate
9
7 Sui Northern Gas Pipeline Oil & Gas Tomato Paste Plant Industry &
Real Estate
3 671
558 3 National Investment Trust Financial Pakistan Tourism Tourism
178 Development Corp.
18 343
State Life Insurance Co. Financial Sindh Engineering Constructio
2001 2002 2003 2004 2005 YTD n
2006 Faisalabad Electric Utilities Heavy Mechanical Industry
Value of Privatization (US$ million) Number of Deals Supply Co Complex, Taxila

Genco 1 (Jamshoro) Utilities Heavy Electrical Complex, Power

Hattar

Peshawar Electric Supply Utilities Pakistan Machine Tool Industry

Co Factory, Karachi

National Power Con Co Utilities Service International Sale of

Hotel, Lahore Land

 A dynamic privatization program

 Strong political support

Source: Privatization Commission of Pakistan 1

The Turnaround Strategy

Financial sector reforms catalyzed economic transformation

Bank Lending (% of GDP), 2006 Market Capitalization (US$ billion) & P/E Ratio (times)

67.8
64.9 63.9

40.5

Pakistan Singapore India UAE

• Financial sector transformation was the main driver of economic growth

• Increased availability of credit for all segments of the economy

Source: Pakistan Ministry of Finance, Economic Intelligence Unit 1

The Turnaround Strategy

Creation of an enabling and governed economic framework

Policy Description
 All sectors are open to FDI with equal treatment of local and foreign investors
 100% foreign equity allowed, and royalties, franchise fees, capital, profits, dividends etc all fully repatriable
Investment
Policy &  Attractive tax / tariff incentives package
Environment  Low cost of doing business, one-window facilitation
 Reduction in corporate tax rate from 39% in 2005 to 35% by 2007 for private companies

 Strengthening of the institutional capacity of a number of independent regulatory bodies in Pakistan that
have developed management structures, technical expertise, technology and enforcement capacity
Regulatory compatible with international best practices
Framework  Government is playing an effective role to transparently execute and institutionalize regulations designed
to win the confidence of investors and general public

 Transferring powers and responsibilities, including those related to social services from the federal and
provincial governments to local levels
Power  Strengthening governance by increasing decentralization, transparency, accountability of administrative
Devolution operations, and people’s participation in their local affairs

Source: Pakistan Board of Investment 1

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