world bank report

MEDIUM-TERM OUTLOOK

29. While the economy has started to stabilize, the macroeconomic situation remains fragile and the

medium-term outlook uncertain. As mentioned above, progress with the implementation of reforms has

been uneven, with inadequate measures taken to boost revenue mobilization and control spending. Also,

while the acute phase of the global financial crisis seems to be ending, global recovery will be gradual

and take time. Thus the downside risks remain significant, and the fiscal year 2009/10 looks difficult.

30. Pakistan’s real GDP growth is projected to start slowly recovering in 2009/10, and increase

gradually from 3.0 percent in 2009/10 to 5.0 percent by 2012/13. Aided by increasing public

investment—planned among other things in power and transport—gross capital formation is projected to

rise and contribute to growth recovery and facilitate private sector activity gradually over time.

Agriculture and services are showing good growth prospects, while manufacturing is still contracting and

expected to recover only slowly over time as the domestic aggregate demand picks up and the availability

of power improves as a result of planned investments in power generation. Exports are projected to

continue contracting in 2009/10. Thereafter, with the global recovery, exports are projected very

gradually improve and reduce Pakistan’s external vulnerability over time. However, longer-term

projections are particularly uncertain in view of the volatile global and domestic economic environment.

Also, the short-term growth target seems optimistic and will likely be revised downwards during the

fiscal year.

31. The external current account deficit is projected to narrow only slightly to 4.7 percent of GDP in

2009/10, but thereafter to widen again to above 5 percent of GDP before declining. The sharp decline in

international commodity prices, reduced private sector credit growth, and the economic recession are

expected to lead to further contraction in imports in 2009/10, which is expected to continue exceeding the

contraction in exports. Remittances are also projected to contract by 13.6 percent in 2009/10, but pick-up

thereafter again.

32. In the medium term, in particular in light of uncertainties about the recovery of global demand,

increased productivity and export competitiveness are necessary to generate growth and reduce external

vulnerability consistent with these projections. Pakistan’s exports are poorly diversified both in terms of

products and destination. Almost two thirds of them are textiles and their primary destination is the USA

and EU. To this aim, structural reforms to strengthen the investment climate and competitive

environment are required and urgent. These will include measures to ease firm entry and exit, reduce

barriers to competition and trade, and enhance labor market flexibility. In addition, efforts to improve the

financial sustainability and efficiency of the power sector will be essential to attract investment in new

power generation.

PROGRESS WITH STRUCTURAL REFORMS

25. Progress with structural reforms has been mixed, with progress in key areas lackluster. On the

positive side, the automatic fuel price adjustment mechanism, which was re-introduced in early 2009, has

been operating and domestic prices of fuel products have been adjusted monthly consistent with the

changes in import parity price. Also, the pilot of the Benazir Income Support Program (BISP) with the

new targeting instrument—the poverty scorecard—has been conducted and a full roll-out of the new

targeting methodology is expected to start next, albeit with a substantial delay due to capacity constraints.

Steps to strengthen government’s debt management have also been taken.

26. However, progress with revenue reforms in the past months, owing to resistance from vested

interests and lack of political will, has been weak, as demonstrated by declining tax revenues as a share of

GDP. As part of the 2009/10 budget, government was to adopt significant legal changes to the current

General Sales Tax (GST), moving it closer to VAT by minimizing exemptions and zero-ratings, and

thereby broadening tax base and revenues. However, this did not happen. Further, the long-due

restructuring of FBR, which was launched at the beginning of 2009, was reversed in May owing to a

court case by the customs group, which opposed the reform. After a delay, the restructuring process was

re-launched in July and expected to be completed by end-September 2009.

27. Reforms to strengthen financial sustainability of the electricity sector have stalled. The authorities

had committed to raise electricity tariffs and introduce monthly and quarterly tariff adjustment

mechanisms so as to eliminate tariff differential subsidies by end-June 2009.

Nominal and Real Weighted Lending Rates

Inflation

Money Supply, Credit and Real Interest Rates

PAKISTAN Economic Update 3

12. While the external

position significantly improved in the second half of 2008/09, fiscal problems continued and, according to

the provisional data, the fiscal deficit target was exceeded by 0.9 percent of GDP, as the deficit amounted

to 5.2 percent of GDP in 2008/09 (see Table 4). Revenues underperformed as the economy slowed down.

In addition, attempts to control spending to large extent failed.

13. Revenue collection fell short of the target in 2008/09. According to preliminary data, total revenue

collection was 14.2 percent of GDP, which was 1.0 percent of GDP below the revised program target.

The shortfall was primarily due to lower than projected tax collection of FBR, as the economic slowdown

reduced the buoyancy of Pakistan’s two main tax bases (manufacturing and imports). Instead of the

planned increase of 0.4 percent of GDP, revenues dropped sharply by 1.4 percent of GDP to 8.8 percent

of GDP. In the absence of additional tax policy measures introduced during the year, government

compensated the rising shortfall in FBR revenues by increasing the petroleum development levy (PDL)

during the second half of the fiscal year instead of passing on the international price decreases to

consumers. However, even that was not enough to close the revenue gap.

14. Revenues continued underperforming in the first two months of 2009/10. FBR tax collection

during July-August 2009 increased only by 3.6 percent compared to 19.5 percent required to reach the

annual target. While direct and sales taxes grew by 2.9 percent and 9.7 percent, respectively, excise andcustom duties collection contracted by 4.3 and 14 percent, respectively, compared to the corresponding

period last year.

15. In light of the shortfall in revenues, the federal government attempted to reduce the fiscal deficit in

2008/09 by reducing spending, but its attempts were thwarted. First, as power shortages increased, the

government greatly diluted increases in power tariffs for political reasons. As a result, power subsidies

remained high. Second, large overruns in provincial development expenditures compromised federal

efforts. While federal development spending was below the target, provincial development expenditure

exceeded the target. Most of this additional expenditure at the provincial level was financed by

borrowing from the banking system, mainly from the State Bank of Pakistan, with adverse implications

on money supply and inflation.

16. Developments in the first two months of 2009/10 suggest that these worrisome trends continue.

First, continued government inaction on power tariffs implies that electricity subsidies will remain high in

2009/10. Second, the subsidy bill is increasing significantly at the provincial level, as Sindh has followed

Punjab in launching a provincial income support program. In addition, Punjab has doubled its wheat

procurement target, implying a large increase in wheat subsidy. Moreover, large subsidies are allocated

to the provision of wheat and wheat flour to poorer segments of the society at substantially reduced rates.

Similarly, subsidies are being provided both at federal and provincial level for agricultural tractors and

fertilizers. Finally, the federal scheme of providing loans to people for starting small business is also

likely to have a significant impact on the fiscal situation.

17. Since November 2008, Government has met its financing needs mainly through non-bank

borrowing. Consistent with the stabilization program, government’s net borrowing from SBP has been

zero on a quarterly basis. The increase in T-bill placements since mid-November 2008 has enabled

government to reduce the level of monetization and rely on other sources of financing. Borrowing from

scheduled banks was sharply up in 2008/09.

Interbank and Open-market Exchange Rate (Rs/US$)

ECONOMIC PERFORMANCE UNDER THE STABILIZATION PROGRAM SO FAR

4. The stabilization program has remained broadly on track, though at times with substantial

difficulty. The first program review was completed in March 2009, but the completion of the second

review was delayed by months and finally concluded in August 2009.

5. The rapid decline in international commodity and oil prices during 2008/09 has reduced the risks,

facilitated improvement in the external position and the achievement of program targets. Some of them

were met, some missed in 2008/09. While the economy started stabilizing towards the end of the fiscal

year, overall economic performance has remained mixed. Table 1 summarizes the medium-term

macroeconomic framework the program is supporting.

PAKISTAN Economic Update 2

BACKGROUND

1. In November 2008, to avoid a default on foreign debt payments, the authorities developed a homegrown

stabilization program, which was supported by the IMF through a Stand-By Arrangement (SBA).

In 2007/08, the sharp rise in international oil and food (specifically wheat) prices, in combination with

policy inaction and internal political turmoil, had led to rapidly expanding macroeconomic imbalances in

Pakistan. In the absence of adequate remedial policy measures to address the imbalances—in particular

not passing on the international price increases to domestic consumers, but covering prices increases

through rising subsidies—the economy slid to a balance of payments crisis. By mid-October 2008 the

foreign exchange reserves of the State Bank of Pakistan (SBP) had dropped to about three weeks of

imports (US$3.3 billion), nominal exchange rate had significantly depreciated, monetization of

government debt was in full swing and led to a rapid rise in inflation, and the EMBI Global Bond spread

of Pakistani sovereign bonds had climbed to above 2,000 bp. In response, the stabilization program

envisaged fiscal and monetary tightening to bring down inflation and reduce the external current account

deficit to sustainable levels.

2. The volatile political and security environment has complicated policy-making and made the

implementation of the stabilization program challenging since its launch. Political tensions between the

two leading parties PPP and PML-N intensified in the second half of 2008/09 and culminated in the “long

march of lawyers” in March 2009. Since then political volatility has somewhat subsided. Terrorist

attacks have, however, continued. The attack on the Sri Lankan cricket team and bombing of a five star

hotel in Peshawar were among them. Furthermore, Pakistan engaged in a full-fledged war with militants

in the Federally Administered Tribal Areas (FATA) and portions of the Northwest Frontier Province

(NWFP) in May 2009, as an agreement to allow Sharia law (Nizam-e-Adal regulation) in Swat in April

2009 quickly fell apart. Full scale military operations have led to about 2.7 million internally displaced

persons (IDPs). Taking care of IDPs as well as reconstructing the conflict-damaged areas will be a

challenge moving forward, and adding to the fiscal burden.

3. Frequent changes in the country’s economic management have also continued, adding instability to

policy-making. While the Finance Minister has remained unchanged since November 2008, a new

Governor took over SBP in early 2009, the Finance Secretary was replaced in March 2009, and the

Chairman of the Bureau of Revenue of Revenue (FBR) in May 2009.

PAKISTAN Economic Update

Stabilization efforts since November 2008 together with a decline in international commodity prices have

succeeded in reducing external imbalances, rebuilding foreign exchange reserves, and lowering inflation

in Pakistan. However, the macroeconomic situation remains fragile and the medium-term outlook

uncertain. Progress with the implementation of reforms has been uneven, with inadequate measures

taken to boost revenue mobilization and control public spending. The volatile political and security

environment has complicated policy-making and made the implementation of stabilization measures

challenging. Also, while the acute phase of the global financial crisis seems to be ending, global

recovery will be gradual and take time. In the meantime, there are significant risks to exports,

remittances and external financing. The fiscal year 2009/10 looks difficult.

Economic activity significantly slowed down in 2008/09. The current account deficit narrowed to 5.1

percent of GDP driven by a sharp contraction in imports which exceeded that in exports, and growing

workers’ remittances. While remittances increased, financial inflows (such as FDI and portfolio

investment) dropped sharply—by over 37 percent—owing to macroeconomic instability, deteriorating

security situation and global recession. Despite these developments, thanks to IMF disbursements, SBP

foreign exchange reserves rebounded to about US$9.1 billion (2.9 months of imports) by end-June 2009.

However, fiscal problems continued during 2008/09 and the fiscal deficit target was exceeded by 0.9

percent of GDP, amounting to 5.2 percent of GDP. Overall revenues fell substantially short of the target

—by one percentage point of GDP—primarily owing to a drop in tax revenues as the economic slowdown

reduced the buoyancy of Pakistan’s two main tax bases (manufacturing and imports). FBR tax revenues

declined from 9.8 to 8.8 percent of GDP. At the same time, federal government’s attempts to control

spending were thwarted by high provincial spending.

The first two months of 2009/10 suggest that fiscal instability will continue, and the first quarter fiscal

deficit target will likely be missed. Revenues have continued underperforming: FBR tax collection during

July-August 2009 increased only by 3.6 percent compared to 19.5 percent required to reach the annual

target. Also, provincial governments have continued spending at high levels, and power subsidies have

remained unaddressed by the federal government.

Failure to raise revenues going forward would further heighten Pakistan’s vulnerability to shocks, and

jeopardize country’s development efforts by limiting resources available for planned investments in

human and physical infrastructure. There is a risk that Pakistan may repeat past mistakes. Pakistan’s

high economic growth in the earlier part of this decade was in part explained by heavy reliance on

external financing and on expansionary fiscal stance, while revenues and savings remained stagnant.

This reliance on external financing left the economy vulnerable to external shocks, which came in

2007/08 and, in the absence of corrective measures, led to a balance of payments crisis. To reduce the

economy’s vulnerability to shocks and avoid the repeat of past mistakes, stepping up domestic revenue

mobilization would be critical.

Political Crisis On A Silent Street

The renowned sociologist Saskia Sassen, having witnessed the

suspension of Pakistan’s Constitution during her recent trip to

Lahore, raises a critical question in her Guardian article: will the

street rise? Based on her experience of the street in Lahore she

concludes that “(m)y experience…was of bustling shops and bazaars:

no closed shops, no drawn shutters.” In brief her categorical answer to

the question, which I agree with, is that no the street in Lahore will

not rise. Unwittingly Professor Sassen’s Guardian article raises a

question and a concern that continues to befuddle the good General:

why is he in a deep political crisis given that food and shopping remain

the mantra of the urban street; and is there something behind the

surface of the street that may yet strike him down?

These are non-trivial questions. There was no teleological certainty

that would have predicted General Musharraf’s deepening political

crisis. Musharraf was hailed as Caesar by all hues of Pakistan’s urban

middle class and its urban elite—then as now the street remained

silent. He was hailed as the embodiment of personal sincerity and

honesty, a statesman with a sense of purpose and for his constituency

this was enough—as for the street it maintained its silence.

Second Coup

The government has responded to the militancy only when domestic

and international demands to do something became overwhelming. But

instead of a legal, politically measured, and thought-out response that

is part of a long-term policy to counter the militancy, Musharraf and

his generals have responded time and again with a spasm. They

unleash a dramatic show of force including artillery, helicopter gun

ships and air strikes, which inevitably result in large numbers of

civilian deaths and injuries, inflame public opinion, and stoke the

militancy.At the heart of Musharraf’s second coup, and what has determined its

timing and character, is not an activist court, illegal detentions or the

militancy. The Court had begun to hear challenges to Musharraf’s role

as both chief of army Staff and president of the republic. Pakistan’s

constitution explicitly forbids holding both positions. A showdown was

imminent. It has been claimed that a Supreme Court judge told the

government that the court was set to rule against Musharraf.

Musharraf ended this threat by removing the chief justice and most of

the rest of the Supreme Court. Before they were bundled out of the

Supreme Court building, seven of the justices, including the chief

justice, issued an order declaring Musharraf’s proclamation of

emergency to be unconstitutional and called on government officials

and the armed forces to refuse to obey it. In a message to the country’s

lawyers, the chief justice called for opposition.

The target of the coup is also obvious from the list of those who have

been the first to be detained in the police raids: leaders of the Human

Rights Commission of Pakistan, prominent lawyers, and prodemocracy

activists. The goal is clearly to prevent a movement for

democracy and rule of law that could confront General Musharraf and

the larger structure of army rule in Pakistan.

Islamic Militancy

General Musharraf has also claimed that the courts are hampering his

efforts to stem the Islamic militancy in the tribal areas, the creeping

talibanization of Pakistan’s northwestern province, and the suicide

bombing that have erupted across major cities over the past few years.

But the Courts have only insisted on the rule of law. Musharraf’s

failure to effectively counter the militancy springs from more other

causes.

The most important problem has been the military regime itself and its

policies towards the Islamic political parties and militants. In need of

some kind of political cover after seizing power in 1999, Musharraf and

his generals cobbled together an alliance of opportunistic politicians,

defectors from other parties and the Islamist political parties.This militarymullah

alliance in Pakistan stretches back over 30 years, and was

central in the U.S.-backed jihad against the Soviet Union in

Afghanistan of the 1980s and the Kashmir insurgency of the 1990s.

When not offering direct support, the Musharraf regime has preferred

neglect and appeasement of Islamist political parties and militants.

Islamic laws are allowed to stay on the books. Militant groups are

grudgingly banned in public and privately allowed to operate. Whether

is in the tribal areas of Waziristan or the militant take-over of the Red

Mosque in the heart of Islamabad, Musharraf and his generals

preferred to ignore it, and then make concessions to the militants in

the vain hope that the problem would go away.

Supreme Court

Musharraf complained in particular that Pakistan’s courts, and

especially the Supreme Court, were subverting the administration. His

proclamation claims that the Court’s “constant interference in

executive functions, including but not limited to the control of

terrorist activity, economic policy, price controls, downsizing of

corporations and urban planning, has weakened the writ of the

government.” It laments “the humiliating treatment meted to

government officials by some members of the judiciary on a routine

basis during court proceedings.”

A particular concern was the Supreme Court taking up the cases of

the hundreds of people picked up in recent years by law enforcement

agencies without warrants and held in custody, without charge or

trial. The demands for due process and habeas corpus proved fruitless

as officials simply lied to the courts about the people they were

holding.

The Human Rights Commission of Pakistan was finally able to

convince the Supreme Court to act. The Court began to summon senior

officials and demanded the government produce the detained people in

court. It threatened senior law enforcement officials with contempt of

court and jail if they did not comply and was considering calling the

chiefs of the armed forces to answer to the court. The system cracked

and the disappeared started appearing.

Rule Of Force Vs. Rule Of Law In Pakistan

In a desperate bid to stay in power, General Pervez Musharraf staged

a coup against the rule of law in Pakistan in November this year. His

declaration of martial law, suspension of the constitution and basic

rights was aimed at overthrowing Pakistan’s Supreme Court.

Faced with choice of being president and being bound by the

constitution or chief of the army and ruling by diktat, Musharraf

chose khaki and force. His coup announcement is titled “Proclamation

of Emergency declared by Chief of the Army Staff General Pervez

Musharraf” and ends “I hereby order and proclaim that the

Constitution of the Islamic Republic of Pakistan shall remain in

abeyance.”

Musharraf’s proclamation is a litany of complaints about the courts.

The Supreme Court was the only branch of government Musharraf and

the army did not control. In the eight years since his October 1999

seizure of power, Musharraf has rigged parliamentary elections to give

himself a majority, hand-picked his prime minister, and replaced many

senior generals. His control, and through him that of the army

leadership, over government and the state was nearly complete. But

none of this was enough to give him either the unchecked power or the

legitimacy that he wanted.

Statement by the Editorial Advisory Committee 2

The essays gathered here open a small window onto the drama

unfolding in Pakistan. They seek to illuminate some of underlying

political, social and economic issues that are shaping the crisis. The

essays include both current writing and work of historical importance.

They cover, among other topics:

• The politics of the emergency and Pakistan’s elites;

• The hidden narratives of oppression, discrimination and the

subaltern;

• Change and continuity in the economy;

• The politics of Pakistan’s ‘war on terror’ and the role of the

United States.

Statement by the Editorial Advisory Committee

In November 2007, eight years after he first seized power in a coup,

and six years after declaring himself president of Pakistan, General

Pervez Musharraf declared a state of emergency, suspended the

Constitution and basic rights, and dismissed the Supreme Court.

Musharraf claimed that the emergency was needed to stem the

growing Islamic militancy in Pakistan. But his Proclamation of

Emergency was a litany of complaints about the Pakistani courts, the

only branch of government that the general and his army did not

control, for having “weakened the writ of the government.” Musharraf

also banned independent television and clamped down on the print

media, because he said it was “demoralizing the nation.” Washington

was alerted to Musharraf’s impending action. Admiral William Fallon,

the head of US military forces in West Asia, met Musharraf in

Islamabad the day before the coup, and is reported to have warned the

general against declaring an emergency. US officials said that “General Musharraf had been offering private assurances that any

emergency declaration would be short-lived.”

Musharraf’s actions incited protests across the country, led by

lawyers, human rights and democracy activists, students and civil

society groups. These have been met with tear gas, beatings and mass

arrests. The government admitted to detaining over 5000 people. After

42 days, Musharraf gave up the post of Chief of Army Staff,

announced the ‘lifting’ of the emergency and said the constitution was

being restored. The restored constitution has been amended by decree

to protect Musharraf from legal challenge and gives him enhanced

powers as president. He has also appointed a new Supreme Court,

established a law to allow military courts to try civilians, and imposed

restriction on the media specifically preventing criticism of him and

the army.

Pakistan has been here before, as have many of its neighbours in

South Asia. Insecure and undemocratic leaders, weak regimes, a

society that cannot hold its state machinery in check. It is far from

certain that these steps will give Musharraf the unchecked power or

the legitimacy that he and the army seek. The crisis in Pakistan may

be too deep and too fundamental for such easy solutions.

The test for Musharraf, his supporters, and his opponents will come

with the January 2008 elections. The Musharraf government is widely

expected to rig these elections if only to ensure that its opponents do

not win a clear majority and threaten Musharraf’s continued role as

President. Washington has already accepted that “It’s not going to be

a perfect election.” A recent poll found that 70 percent of Pakistanis believed the Musharraf government did not deserve re-election and 67

percent wanted Musharraf to resign immediately.

The Karachi Stock Exchange appreciated the government's decision to continue with the on-going incentives for the capital market including extension of exemption of capital gains tax (CGT) on listed shares for another two years, that is, up to June 30, 2010 along with keeping the current tax regime on stock market unchanged.

Opposition political parties termed the budget as disappointing as it lacks any relief measure for the poor and middle class of the country. In their opinion the government is still ignoring the major issues of high inflation, poverty, unemployment and denial of basic needs for the majority of country’s population.

The Government has proposed certain measures to attain goals set for economic growth and stability. Some of the solid measures include reduction in the fiscal deficit, improvement in the system of provision of subsidy, reduction in current account deficit, and bringing up the foreign exchange reserves. Other steps include increase in the income of poor segments of society through provision of cash money under various programmes, to focus more on enhancing agricultural and manufacturing sectors, to restore confidence of investors, to bring real change in the social indicators through allocation of funds and to increase number in the low-cost housing units for the low income groups.

In spite of some timely decisions of the government (such as allocating more funds for education and increasing the salaries of government employees by 20 percent), common people are still sceptical of how the government would control the hyper-inflation rate confronting people. The government announced that the poorest of the poor would get PKR 1,000 monthly aid. However, people have shown concern over the modalities of this scheme, fearing that this new scheme might fall prey to irregularities.

Despite positive reforms and strong performance, major threats to Pakistan economy are high inflation, particularly food inflation, shortage of electricity and political instability. The agricultural sector is still substantially dependent on weather conditions and demonstrates lack of planning with a consequence of import of a number of minor crops. The high cost of doing business, low productivity, infrastructure constraints, inadequate institutional capacity and lack of skills development still remain major constraints. The economy has shown traction in the form of extended period of high growth but its sustainability in competition with exceptionally high growth economies of India and China would depend on a dynamic reform process, solid institutional support, high quality of governance and transparency coupled with political stability.

The government has not announced any incentive for the ailing textile sector to boost dwindling exports. The textile sector accounting for 57 per cent of total exports, performed poorly as its exports fell 2.5 per cent. The Economic Survey 2007-08, while giving first nine months’ performance of the sector, clearly depicted poor performance of textile products. Except for raw cotton, knitwear, made-up articles and other textile materials, the rest of the products showed a negative growth. The textile ministry, in an Economic Coordination Committee (ECC) meeting on June 3, submitted a proposal to allocate PKR 30 billion under the head of additional duty drawback for the sector, but the committee scrapped the scheme, saying the sector did not deserve it.

The business community has termed the budget as pro-poor and pro-agriculture. They said the incentives announced in the budget will hopefully boost production of food items and other agriculture products and boost employment. The business community however, criticised the increase in the rate of sales tax, specially, at a time when the industry was already facing a higher cost of doing business in the country. They welcomed the government’s earlier announcement before the budget that the country will have an additional 2200 megawatts of electricity by next year and said that it will be very encouraging as the industry needed uninterrupted power supply.

Fully dedicated CNG buses exempted from customs duty.

• Eighteen medicines used for cancer/heart treatment etc. exempted from customs duty.

• Bitumen, JP4&JP8 exempted from duty. Duty rate on base oil for lubricating oils reduced from 20% to 10%.

• Rice seeds, energy saving lamps, dredgers, specified solar energy equipments exempted from customs duty.

• Power plants imported by WAPDA on temporary basis exempted from customs duty.

• Reduction of duty on calcium carbide from 15% to 5%, PTA from 15% TO 7.5%, PSF 6.5% to 4.5%, Caustic soda from Rs.5000/MT to Rs.4000/MT, screens from 15% to 10%, nickel not alloyed from 5% to 0%, Textile buckram from 25% to 10%.

• Duty rates on non-essential & luxury items have been increased. Hence, duty rate on dairy products, fruits, chewing gum, chocolate, processed food, fruit juices, aerated waters, ceramic products, air-conditioners/refrigerators, electric fans, toasters, micro wave ovens, televisions, furniture and lighting equipment etc increased from 25% to 35%. Duty rates on cosmetics increased from 20 -25% to 35%. Duty rate on electric ovens/ cooking ranges etc. increased from 20% to 30%.

• Customs duty @ PKR 500/ per set levied on import of mobile phone.

• Customs duty on betel leaves increased from PKR 150/kg to PKR 200/kg.

• Duty rate increased on sulphonic acid from 10% to 15%.

• Duty rate increased on CKD/SKD of sewing machines from 5% to 20%

• A uniform rate of 30% specified for import of special purpose motor vehicles.

• Increase in duty rates on import of cars/jeeps above 1800cc from 90% to 100%. Fixed duty/tax rates on old and used cars/jeeps increased by 10%.

• The rate of sales tax has been increased from 15% to 16%

• Exemption of sales tax on import and local supply of fertilizers and pesticides

• In order to encourage the farmers to get their crops insured, 5% FED on insurance premium has been exempted.

• Raw materials of Acetic acid have been zero rated.

• To further facilitate the export oriented zero-rated sectors caustic soda flakes/solid, cotton linter and sequins are being zero-rated.

• Enhancement of rate of Federal Excise Duty (FED) from 15% to 16% on goods and services which are subject to FED in VAT mode

• Rate of FED on telecommunication services is being enhanced to 21%.

• Federal excise duty on Cement is enhanced to Rs. 900/- per tonne from Rs. 750/- per tonne.

• Rate of FED on banking, insurance and franchise services is enhancement from 5% to 10%

• Sales tax refund to foreign nationals visiting Pakistan on trade fairs on reciprocal basis.

• Exemption of sales tax on medical equipment, apparatus, reagents, disposables, spares and donations supplied to operating hospitals of 50 beds or more

The provinces have been allocated an amount of PKR 150 billion for budget estimates 2008-09 in their PSDP.

• An amount of PKR 27 billion has been allocated to Earthquake Reconstruction and Rehabilitation Authority (ERRA) in the PSDP 2008-09.

• In the budget estimates 2007-08 subsidies were 1.1% of GDP, in revised estimates 2007-08 at 3.9% of GDP and in the budget estimates 2008-09 reduced to 2.4% of GDP.

• Pakistan's defence budget has been classified since the country went to war with India in 1965. The military has since kept spending concerns out of the realm of civilians for reasons of national security. According to the two-page document issued in Islamabad, Pakistan's army gets the largest share. The army accounts for PKR 188bn (USD 2.80bn) out of a total defence expenditure of PKR 294bn (USD 4.39bn). The country's air force gets PKR 71bn (USD 1.07bn), while the navy gets comparatively measly PKR 29bn (USD 432 m). Most of the army's budget is going to be spent on its staff. The case is similar as far as the air force and navy are concerned. Operational costs for the two services are listed as PKR 16bn (USD 238m) and PKR 4bn (USD59.56m). Analysts believe the move to declare the budget will lead to greater accountability in the forces. But they insist there is still a need for a proper audit of the military's expenses to ensure greater transparency. The force has been faced allegations in the past of kickbacks over arms sales and alleged misappropriations of funds

The budget 2008-09 has the following main features:

• The total outlay of budget 2008-09 is PKR 2010 billion. This size is 29.7 % higher than the size of budget estimates 2007-08.

• The resource availability during 2008-09 has been estimated at PKR 1836 billion against PKR 1394 billion in the budget estimates of 2007-08.

• Net revenue receipts for 2008-09 have been estimated at PKR 1111 billion indicating an increase of 23.1% over the budget estimates of 2007-08.

• The provincial share in federal revenue receipts is estimated at PKR 568 billion during 2008-09 which is 22% higher than the budget estimates for 2007-08.

• The capital receipts (net) for 2008-09 have been estimated at PKR 221 billion against the budget estimates of PKR 59 billion in 2007-08.

• The external receipts in 2008-09 are estimated at PKR 300 billion. This shows an increase of 16.1 % over the budget estimates for 2007-08.

• The overall expenditure during 2008-09 has been estimated at PKR 2010 billion of which the current expenditure is PKR 1493 billion and Public Sector Development Programme (PSDP) at PKR 550 billion. Current expenditure shows a decrease of 1.5 % over the revised estimates of 2007-08, while PSDP will increase by 20 % in 2008-09 over the revised estimates of 2007-08. The share of current expenditure in total budgetary outlay for 2008-09 is 74.3 % as compared to 77.8 % in revised estimates for 2007-08.

• The expenditure on General Public Services (inclusive of debt servicing transfer payments and superannuation allowance) is estimated at PKR 930 billion which is 62.3 % of the current expenditure.

• The size of Public Sector Development Programme for 2008-09 is PKR 550 billion. While for Other Development Expenditure an amount of PKR 44 billion has been allocated. The PSDP shows an increase of 20% over the revised estimates 2007-08.

Federal Budget 2008-09

Federal Budget 2008-09

Federal Minister for Finance announced the national budget for the fiscal year 2008-09 (01 July 2008-30 June 2009) in the National Assembly on 11 June 2008. The total outlay of budget 2008-09 is PKR 2010 billion. This size is 29.7 % higher than the size of budget estimates 2007-08.

• Budget - 2008 – 09 at a Glance

(a)Tax Revenue -CBR1251.5(A) CURRENT1493.2(b) Non Tax Revenue427.8General Public Service929.5Gross Revenue Receipts1679.2Defence Affairs & Services296.1Less Provincial Share568.3Public Order Safety Affairs26.8Economic Affairs201.2I. Net Revenue Receipts1110.9Environment Protection0.2II. Net Capital Receipts221.3Housing & Community1.4III. External Receipts300.2Health affairs & Services5.5IV. Self financing of PSDP by Provinces124.4Recreational, Culture services3.2V. Change in Provincial cash balance78.9Education Affairs Service24.6VI. Privatisation Proceeds25.1Social Protection4.8VII. Bank Borrowings149.0(B) DEVELOPMENT516.6PSDP549.7 Federal Government399.7 Provincial Government150.0Est. Operational Shortfall-77.0Other Development Expenditure43.9TOTAL RESOURCES2009.8TOTAL EXPENDITURE2009.8(I to VII)(A + B)PKR in billionReceiptsExpenditure

• Comparative Budgetary Position 2007-08 and 2008-09

Maintaining Foreign Exchange Reserves: Flawed Rationale

Maintaining Foreign Exchange Reserves

By A.B. Shahid

In August 02, a series of three scholarly articles by Dr Ishrat Husain appeared on the opinion pages of this newspaper. The articles explained, at length, the rationale behind the current policy on maintenance of foreign exchange reserves, to the policy’s critics as well as the uninitiated readers who were likely to be misled by the criticism of the policy.

One year seems a fair time lag to examine whether the policy was founded on credible bases.

The single most interesting aspect of the analytical exercise was the absence of a reference to the policy’s sociological impact, although the articles admitted that it had a direct impact on the monetary policy and therefore the economy as a whole. The author cannot be blamed for this striking gap in the analysis.

Economists around the world still don’t deem it fit to include this all-important variable in the macroeconomic models they design, which has been the reason for their failure in resolving macroeconomic problems.

In Pakistan, failure of economic planners (in which they are ably assisted by tactless and often corrupt politicians) throughout the past three decades has led to a sustained rise in the level of poverty. Yet, they are not prepared to accommodate the social aspect in their planning models. Instead, they make it a point to belittle the critics who point out this serious shortcoming. They pity their critics as if the social aspect is an alien variable that could distort their models.

The culture of belittling policy critics is gaining momentum as economies come under firmer control of academics that are used to postulating outcomes while assuming that environment will not react in certain ways. This club of “like-minded” people, who tend to follow, often unimaginatively, what their counter-parts do elsewhere, places incompetent and gullible politicians on the wrong track. These articles too cited a Reuter story about growth in Asian forex reserves and recommended duplication of that model in Pakistan suggesting that, “ for the country to be free from the influence of the IMF there is no other better option to assert our economic sovereignty than to accumulate these reserves.”

The same clan of advisors (quoted in Reuter story) failed to predict “sudden change in market sentiment” that left many Asian economies vulnerable to the 1997 crisis. Now they insist that developing countries become more cautious by increasing savings at the expense of increasing misery, realizing little that such a doctrine will lead to a more serious crisis - a social upheaval that could rapidly lead to unmanageable chaos. Signs thereof (poverty and deprivation-driven crime and terrorism) are already clearly visible.

Towards the end of the last article in the series, the basis of the policy favouring accumulation of foreign exchange reserves was aptly summed by saying “there is an inherent trade-off in the short run between debt reduction strategy and public sector-led growth acceleration strategy. As the country was under a heavy debt burden and faced with an acute liquidity shortage, it was decided to reduce this vulnerability and secure the external sector of the economy.” This implied downgrading all other priorities in favour of supporting the external sector. Admittedly, there was a need for this policy shift but not carrying it on for nearly four years has, undeniably, been detrimental for the economy.

The rationale behind this momentous decision needs examination i.e. the inherent trade-off between debt reduction and growth. The pre-fix “public sector” seems superfluous because critics of the policy on foreign exchange reserves did not advocate public “sector” led growth. Instead, what they advocated was government investment in maintaining the physical and social infrastructure, which was essential for any kind of growth led either by public or private sector. It is undeniable that Pakistan’s infrastructure is falling apart.

It was viewed too casually during the last two decades. The havoc caused by this year’s monsoon rains will shatter it even more. Postponing action any further on repairing it will cause long-term damage to the economy, with or without foreign exchange reserves.

A dispassionate look at the infrastructure reveals the following painful realities:

* large dams suffer from the effects of silting, and can no longer store quantities of water that the provinces require to sustain agriculture; the conflict led to serious inter-provincial differences that threatened the unity of the State;

* irrigation system has degenerated because river banks were not repaired for decades; land erosion and salinity have left vast tracts of arable land unusable;

* power generation and transmission systems are virtually falling apart forcing people to switch to expensive and environment unfriendly alternatives;

* railway system has become so archaic that practically every component thereof needs replacement;

* roads, especially in big cities (look at Karachi’s roads), are in a terrible state; condition of bridges is no better;

* fuel oil storage capacity is capable of holding just 75-day buffer stocks; God alone will help us in an emergency;

* state-run schools, colleges and universities, which account for almost 75 per cent of educational institutions are grossly under-funded, ill-managed and produce half-educated, unskilled young men and women who can’t find jobs;

* state-run hospitals, which account for almost 80 per cent of the healthcare services are grossly under-funded, ill-managed and wholly incapable of delivering even essential healthcare services; controlling spread of epidemics is impossible;

* emergency services are virtually zero when compared with the country’s size and population spread; their response to natural calamities and disasters in the recent past should leave no one in doubt about their gross inadequacy;

* besides being inherently corrupt, law enforcement agencies lack modern forensic and surveillance equipment;

* the legal system is seriously handicapped by the incompatibility between its size and mounting demands thereon, which is a reflection of the fast deteriorating social conditions.

Overlooking the neglect of the development aspect, the first article in the series faulted critics for their opposition to the policy’s obsession with building reserves by saying: “The second group [of critics] consists of those who consider foreign reserves to be ‘irrelevant’ as this has not helped the conditions of common man. They confuse the domestic budgetary resources with external resources and are not perhaps fully aware of the distinction between the fiscal and external accounts.

Foreign reserves belong to the whole nation - the government and private sector - while budgetary resources belong to the government alone. In theory, these reserves can be transferred to the government by the SBP in form of loans.

“ The government can then use these resources in a variety of ways: (a) to increase its development expenditure and thus boost the declining investment level; (b) to insulate the general public from hikes in petroleum prices, electricity and gas prices by providing subsidies; (c) to devise special schemes such as Housing, Yellow Cab, Yellow tractor; (d) to set up programmes for direct employment creation; (e) to extend concessional loans at low rates of interest to agriculture, exports, SME and IT sectors. What will be the consequences of this policy? The reserves will be exhausted in less than two years, the government’s domestic debt will increase by Rs420 billion and debt-servicing component of the budget will create additional annual budgetary outlays of Rs40 billion every year and inflation will most likely be in double digits.”

It is undeniable that building exchange reserves by withholding vitally needed expenditure on sustaining the country’s dwindling infrastructure, has dampened the investment climate, halted creation of large new businesses and jobs, and multiplied social problems that the State now seems hard put to resolve. It is an accepted fact that, until an under-developed economy reaches a take-off stage (Pakistan is far from it), the State remains the biggest “business” that could boost growth. To fault those who advocate (a) increasing outlay on development expenditure, was unfair.

Reservations about (b) public expenditure for minimizing (not “insulating” the public from) the impact of price hike in utilities are also flawed. There is a critical “trade-off” between the policy on sustaining residual incomes and demand creation if economic growth is to be maintained at a level commensurate with the rise in population and the issues that it give rise to.

The implied disapproval of (c) devising special [financing] schemes (not the “Yellow Cab” or the “Yellow Tractor” types) to promote housing too was mistimed. Aren’t both the central bank and the State now encouraging banks to launch such schemes? Does it not prove that (claims about containing inflation aside) purchasing power is being diluted by steeply rising utility and fuel costs, and reducing consumer demand as a consequence thereof?

A for the reference to (d) setting up employment programmes, the use of the pre-fix “direct” requires explanation. If the implication is “without merit” the reference was wrong; no critic ever asked for lowering merit because it will eventually lead to worsening of an already inefficient bureaucratic set-up, and increase waste.

What the critics certainly asked for was creation of employment opportunities (not arbitrarily but) as a logical consequence of increase in development expenditure and initiation of projects to sustain the physical and social infrastructure.

Finally, (e) are we not extending loans at low interest rates to agriculture, export, IT and SME sectors, though it is yet to be established credibly whether SME sector too is benefiting from this policy?

As for the dangerous scenario (painted in the articles) that could emerge if all these policy initiatives were taken, it has yet to unfold. For the present, there are no signs of the reserves being exhausted in less than “two” years even if outlay on development expenditure was increased by another Rs. 60 billion to bridge some of the yawning gaps in the country’s infrastructure cited above.

Neither do we see the signs of government’s domestic debt rising by Rs420 billion nor is inflation in double digits, not, at least, according to official sources.

All signs are that the government could do a lot more than it has opted to do in the area of improving the vital but dilapidated components of the country’s infrastructure.

Accumulating reserves while openly disregarding other vital aspects of the economy was ill advised. That’s what the critics have been pointing out.

The assertion that the “strategy to draw down reserves and allow the government to pump the domestic economy will prove short-sighted, expose Pakistan once again to the enhanced risk of default on its external debt and liabilities in the future, and generate uncertainties and turbulence in the markets,” was grossly unfair because no critic ever suggested that the State should overlook maintaining a balance between meeting its commitments to foreign lenders and pressing development needs.

This comment was a classic example of how academics sometimes choose to belittle their critics.

Admittedly, the policy of accumulating foreign exchange reserves contributed its “share” in stabilizing the exchange rate, reversing [the] flight of capital, arresting dollarization of the economy, lowering inflation (?), reducing interest rates, and lowering debt ratios. But it is unfair for the central bank to claim credit for all these achievements. The assertion that inward remittances flow has been inspired by central bank’s action in restoring confidence in Pakistan’s banking channels is exaggerated. 9/11 had a great deal to do with it. Similarly, flight of capital could hardly be induced by falling rates of profit on deposits in Pakistani banks, and the weak investment sentiment. Once again 9/11 deserves credit for limiting the flight of capital.

The benefit of lower interest rates, which went entirely to business and industry, has not been recycled to consumers even partially. Proof thereof is the amazing rise in the 2002-profits of the large end of the corporate sector.

What comes out, though, as a stark reality, is the fact that while businesses have benefited from drop in interest rates, saving deposit holders continue to get a negative real rate of return, which is pushing up poverty. And there is precious little proof of low inflation having benefited the lower income groups.

The only significant benefits of the current policy on foreign exchange reserves have been lower external debt ratios and low country risk associated with Pakistan but weak investment sentiment prevents benefiting therefrom.

The belief that offering concessions to business and industry through lower interest rates and extraordinarily easy borrowing terms alone will boost growth, has backfired because infrastructure deficiencies continue to discourage investment.

The disastrous consequence of pursuing this policy will be that Pakistan will stay dangerously unprepared for the scenario after January 2005. The country could be flooded with cheaper imported goods rather than produce them locally.

In the end, it would be less than fair not to admit that criticism of the policy of accumulating foreign reserves has been flawed in as much as some critics faulted open market purchases of foreign exchange by the central bank. It betrays their lack of knowledge about the flaws in the banking system that led, over time, to remittances being transacted in the open market.

To bring that inflow back into to the official domain was not something that should have been criticised, especially because it was followed by squeezing of these parallel banking channels; what needed scrutiny was the manner in which the central bank went about buying foreign exchange from the open market. Surely, there would be instances of excesses that deserved punitive or remedial action by the central bank.

PakistanAgriculture Economy and Policy 4

($184 million), milk and milk products ($62 million), and dry fruits ($45 million).

Pakistan’s main agricultural exports in FY 2006/07 included rice ($1.13 billion), fruits

and vegetables ($234 million), fish and fish preparations ($191 million), raw cotton ($76

million), meat and meat preparations ($55 million) oilseed nuts and kernels ($22 million)

and spices ($16 million). Pakistan is a growing market for consumer-ready food products

and FAS/Islamabad is actively facilitating increased U.S. participation in the retail sector.

Agricultural Trade with the United States

The volume of agricultural, fish and forestry trade between the United States and Pakistan

during CY 2007 totaled $410 million. Agricultural exports from the United States to

Pakistan totaled $355 million, while exports from Pakistan to the United States remained

at about $55 million.

Duties on Agricultural Products

Tariffs range from 0 to 25 percent and will be reduced further under a long-term plan to

rationalize the duty structure. The GOP levies surcharges on certain items, including

vegetable oil, to protect the domestic industry. Revenue collection remains problematic

due to, for example, a narrow tax base. As a result, the GOP finds it effective to collect

sales and income taxes on imports upon arrival.

SPS and Regulatory Systems

Pakistan is in the process of developing an sanitary and phytosanitary (SPS) regulatory

system compatible with international standards. A new regulatory agency, the National

Animal and Plant Health Inspection Service (NAPHIS), is being established for this

purpose. The Plant Protection and Quarantine Department and the Office of Animal

Husbandry Commissioner under the Ministry of Food, Agriculture and Livestock

(MINFAL) are responsible for SPS issues.

The Pakistan Pure Food Laws (PFL) of 1963 are the basis of the existing trade-related

food quality and safety legislative framework. These laws cover 104 food items falling

under nine broad categories: milk and milk products, edible oils and fat products,

beverages, food grains and cereals, starchy food, spices and condiments, sweetening

agents, fruits and vegetables and miscellaneous food products. The regulations address

purity issues in raw food and as well as additives, food preservatives, food and synthetic

colors, antioxidants, and heavy metals.

Pakistan has been known to establish SPS barriers without reference to either accepted

international guidelines or to any risk assessment methodology.

PakistanAgriculture Economy and Policy 3

snowmelt and monsoon rains. Improvements to Pakistan’s irrigation system—one of the

world’s largest—are critical to the future success of this sector.

Major issues facing Pakistan’s agricultural sector include a lack of adequate irrigation,

improved marketing infrastructure,WTO compliant sanitary and phyto-sanitary

regulations, development and implementation of food safety regulations, avian influenza

surveillance and public health measures, and the development of improved plant and

animal genetics.

General and Agricultural Trade Situation

Pakistan is one of the pioneering members of theWorld Trade Association (WTO) and is

an active member of various groups and alliances. Within the G-20, Pakistan has played a

pivotal and leading role. Pakistan joined the Cairns Group in 2005 to lobby for what it

deems a fair and market-oriented agricultural trading system. In negotiations on market

access, domestic support and export competition, Pakistan’s stance is supportive of the G-

20 collective position. Pakistan strongly supports improvement in market access by

reducing tariffs, reducing tariff escalation, and eliminating tariff peaks. Pakistan also

works closely with the Cairns Group on tropical products issues.

Pakistan has entered into Free Trade Agreements (FTA) with China, Malaysia and Sri

Lanka and has exchanged a draft FTA with Singapore which includes an investment

protection clause. In addition to WTO membership, Pakistan is party to two agreements

for regional trade liberalization: the Economic Cooperation Organization (ECO)

comprised of Turkey, Iran, Afghanistan, Azerbaijan, Kazakhstan, Kyrgyz, Tajikistan and

Turkmenistan; and the SouthAsian Association for Regional Cooperation (SAARC) with

India, Bangladesh, Sri Lanka, Bhutan, Nepal and the Maldives.

ATrade and Investment FrameworkAgreement (TIFA) has been in place between

Pakistan and the United States since July 2003. Both countries are now negotiating a

Bilateral Investment Treaty (BIT).

Trade and Trends

During FY 2006/07, Pakistan’s imports totaled $27 billion while exports were $17 billion.

Textiles dominate exports, accounting for 59 percent of export value. Other major exports

include rice, seafood and products, sporting goods, leather and products and carpets.

Major imports include petroleum, machinery, edible oil and chemicals. The GOP has had

limited success in bridging the gap as a widening trade deficit continues to strain

resources.

Agricultural Trade

Vegetable oil is the largest agricultural import, totaling 1.5 million tons annually. In FY

2006/07, Pakistan imported over $3.0 billion in agricultural products, including vegetable

oil ($883 million), cotton ($647 million), sugar ($313 million), pulses ($225 million), tea

PakistanAgriculture Economy and Policy 2

The agriculture sector consists of crops, livestock, fishing and forestry. Major crops

include wheat, cotton, rice, sugarcane, corn and chickpeas. Minor crops include oilseeds,

other pulses, potatoes, onions, chilies and garlic. The crop sector has gradually declined

from 65 percent of agricultural activity in 1990-91 to 48 percent in 2006-07. By contrast,

the share of livestock in agriculture has increased from 30 percent to 50 percent over the

same period. The contributions of fishing and forestry have been insignificant at only 0.3

percent and 0.2 percent of the sector, respectively. Growth in the agricultural sector

bounced back from a modest 1.6 percent in 2005-06 to 5 percent during 2006-07.

Agriculture provides basic inputs for key industries, particularly textiles. Pakistan is the

world’s fourth largest producer and consumer of cotton. Overall, Pakistan is a net

importer of agricultural commodities.

Domestic Agricultural Policy Overview

About two-thirds of Pakistan’s live in rural areas and depend on agriculture for their

livelihood. Unlike India, land reform was limited in Pakistan. As a result, less than half

of arable land is held by a large number of small farmers, while the remainder is held by a

small number of large landowners. There are a large number of landless sharecroppers

and agricultural laborers.

Cotton, rice, and sugarcane are grown during the “kharif” season, (May-November) and

wheat and oilseeds are grown during the “rabi” season (November-May). About half of

all agricultural income is derived from livestock.

Amajority of Pakistani politicians and legislators are from rural backgrounds. These

political leaders, along with powerful industry groups including the All Pakistan Textile

Mills Association and the Pakistan Sugar Mills Association, heavily influence agricultural

policy. These pressure groups consider their own particular interests over those of small

famers.

Pakistan’s agricultural sector is characterized by low productivity, limited investment, and

a weak extension service. In addition, inefficient resource use, a skewed distribution of

farm holdings, a thin land market reflecting insecure tenure, inefficient non-price

allocation of water and irrigation systems in a drought-prone region, and poor quality

inputs and infrastructure continue to hinder the sector. Food security based on selfsufficiency

is a potentially costly policy and a major government priority.

Agricultural policy is aimed at maintaining a growth rate higher than population growth.

The average agricultural growth rate for the past forty years was 4.3 percent. As arable

land is limited to about 25% of total land area, increased productivity is critical. The GOP

plans to increase yields through biotechnology, better water and crop management

practices and focused research and extension. Availability of agricultural credit and inputs

has improved. Crop production is heavily dependent upon irrigated water systems fed by

PakistanAgriculture Economy and Policy 1

PakistanAgriculture Economy and Policy

February 2009

The Indus Valley, home to ancient civilizations, has been settled for over 5,000 years.

Subjected to frequent invaders, includingAlexander the Great, the region flourished under

the Mughal Empire in the 16th and 17th centuries. British rule began to dominate in the

18th century, ending when the Muslim state of Pakistan was established in 1947 with the

partition of the Indian sub-continent.

Macroeconomic Situation and Trends

Pakistan has a population of about 165 million people in an area slightly less than twice

the size of California. It is bordered by Iran, Afghanistan, China, India and the Indian

Ocean. Pakistan is subject to frequent earthquakes, flooding during the summer

monsoons, and a severe lack of potable water. Highly pathogenic H5N1 has been

identified in Pakistan with one confirmed human death.

In 2008, Pakistan’s economic growth slowed to an eight-year low of 5.7 percent, and is

project at only 2.2 percent in 2009. The economy was pulled back from the brink of crisis

by a $7.6 billion, International Monetary Fund (IMF) loan agreement agreed to in

November 2008. The IMF program is anchored on fiscal and monetary tightening that

will drain further momentum from the economy. The IMF program highlights the array of

structural problems that continue to hamper sustained economic development and a

reduction in pervasive poverty rates. Infrastructure shortcomings and lack of skilled labor

constitute a major deterrent to sustainable medium-term growth. Unreliable power and

telecommunication networks may be the main difficulties that businesses face, but the

transport sector in particular is in need of investment to meet increasing demand from

personal and freight traffic. Endemic corruption, a slow and opaque bureaucracy, a weak

legal framework, and inconsistent policy implementation continue to thwart investment

activity.

The Agricultural Economy

Agriculture is the single largest sector of the Pakistani economy. This sector accounts for

22 percent of GDP and employs nearly half of the labor force. Agriculture contributes to

economic growth as a supplier of raw materials to industry, as a market for industrial

products, and is Pakistan’s main source of foreign exchange earnings.

Approximately 67 percent of the country’s population lives in rural areas and directly or

indirectly relies on the agricultural sector for their livelihood. The average farm size has

declined from 13.1 acres in the early 1970’s to 7.7 acres in 2000. While per capita

income is approaching $1,000, there is wide disparity between urban and rural incomes.

TheWorld Bank estimates that about 14% of the population in urban Sindh Province lives

below the poverty line, while 41% of people living in the rural North West Frontier

Province borderingAfghanistan live in poverty.

EMBASSY OF PAKISTAN 11

Natural gas average production per day stood at 3,966 million cubic feet

during 2007-08 as compared to 3,876 million cubic feet last year, showing

an increase of 2.3 percent.

􀂃 Overall production of gas has increased to 1,090,620 million cubic feet

during July-March 2007-08 as compared to 10,62,124 million cubic feet in

the same period last year, showing an increase of 2.7 percent.

􀂃 Power sector consumes 36.8 percent of gas, followed by fertilizer (20.7

percent), industrial sector (19.8 percent), household (17.4 percent),

commercial sector (2.7 percent) and cement (1.1 percent) during last 10

years i.e. 1997-98 to 2006-07.

Electricity

􀂃 Installed generation capacity has increased to 19,566 MW during July-

March 2007-08 from 19,440 MW during the same period last year, showing

a marginal increase (0.65 percent)

􀂃 Installed capacity of WAPDA stood at 11,654 MW during July-March

2007-08 of which, hydel accounts for 55.6 percent or 6,474 MW, thermal

accounts for 44.4 percent or 5,180 MW.

􀂃 Villages electrified increased to 126,296 by March 2007 from 113,605 upto

2005-06, showing an increase of 11.2 percent.

CNG

􀂃 2,068 CNG stations are operating in the country. By March 2008 about 1.7

million vehicles were converted to CNG as compared to 1.35 million

vehicles during the same period last year, showing an increase of 26 percent.

ENVIRONMENT

􀂃 Cost of environmental neglect and degradation to Pakistan’s economy has

amounted to Rs. 365 billion during the current year.

Millennium Development Goals

􀂃 Pakistan is likely to achieve many of the Millennium Development Goals

(MDGs) 2015 Targets

EMBASSY OF PAKISTAN 9

Headcount ratio, i.e., percentage of population below the poverty line has

fallen marginally from 23.94 percent in 2004-05 to 22.32 percent in 2005-06,

an improvement of 1.62 percentage points.

􀂃 Poverty in rural areas declined from 28.13 percent to 27.0 percent,

showing an improvement of 1.13 percentage between 2004-05 and 2005-06.

􀂃 Poverty in Urban areas also registered a decline from 14.94 percent to 13.1

percent during 2004-05 and 2005-06, thereby, depicting an improvement of

1.84 percentage points in the period.

􀂃 Expenditures on pro-poor sectors in 2006-07 at 5.7 percent of GDP were

well above the requirement under the Law.

TRANSPORT AND COMMUNICATION

􀂃 Total road network is about 260,000 km of which around 60% is paved.

Road density is 0.32 km/km2 which is low and compares unfavorably with

other South Asian countries (Bangladesh-1.7 km/km2, Sri Lanka-1.5

km/km2 and India-1.0 km/km2).

􀂃 Government intends to generate/ mobilize all possible resources to double

road density to 0.64 km/km2.

􀂃 Tele-density in the country has jumped from a mere 6% to 57% (Mar- 08)

in few years.

􀂃 Total subscriber base stands at 82.5 million (Mar 2008) whereas it was

34.5 million in 2006.

􀂃 Currently there are a total of almost 12,689 Broadband subscribers, 3.5

million internet subscribers; total users crossed 17 million marks. Currently

around 3,008 cities are connected to internet cities.

ENERGY

Oil and Gas

􀂃 Transport sector consumes 50.9 percent of the petroleum products,

followed by power sector (32.8 percent), industry (11.0 percent), household

(1.9 percent), other government (2.2 percent), and agriculture (1.2 percent)

during last 10 years i.e. 1997-98 to 2006-07

􀂃 Crude oil production per day has increased to 70,166 barrels from 66,485

barrels per day last year, showing an increase of 5.54 percent.

􀂃 Overall production of crude oil has increased to 19.3 million barrels

during July-March 2007-08 from 18.2 million barrels last year showing an

increase of 5.9 percent.

EMBASSY OF PAKISTAN 8

􀂃 Male literacy rate (10 years & above) increased from 58 percent in 2001 to

67 percent in 2006-07

􀂃 Female Literacy rate increased from 32 to 42 percent for female during the

same period.

􀂃 Literacy remains higher in urban areas (72%) than in rural areas (45%)

during 2006-07.

􀂃 Higher Education Commission (HEC) has awarded 5,837 PhD scholarships

(3,237 indigenous, 2,600 foreign) over the past three years to promote R&D

HEALTH AND NUTRITION

􀂃 945 hospitals, 4755 dispensaries, 5349 basic health units & sub health

centers and 903 maternity and child health centers in Pakistan.

􀂃 127859 doctors, 8195 dentists ,62651 nurses and 103285 hospital beds

􀂃 Population and health facilities ratio turnout to be 1225 persons per

doctor,19121 person per dentist, 2501 persons per nurse and 1517 persons

per bed which shows an improvement over the last year.

􀂃 Various health programs with a special focus on major public health

problems include the national programs for the prevention and control of

tuberculosis, malaria, HIV/AIDS, hepatitis, blindness and program on

maternal, neonatal and child health etc.

POPULATION, LABOUR FORCE AND EMPLOYMENT

􀂃 Current population is 160.9 million with a growth rate of 1.80 percent.

􀂃 Life expectancy for males is 64 years and for females is 66 years.

􀂃 2.6 million labour force is estimated as un-employed in 2006-07 and

unemployment rate is 5.3 percent.

􀂃 Share of agriculture in employment has increased from 43 percent in 2003-

04 to 43.61 percent by the year 2006-07, with manufacturing (13.54%) and

trade(14.43%) & services(14.41%) absorbing a growing share of the work

force.

􀂃 To generate employment, the government has not only started President’s

Rozgar Scheme under which an average loan size of Rs.100,000 is given for

a maximum period of five years.

POVERTY

􀂃 2005-06 inflation-adjusted poverty line used is Rs.944.47 per adult

equivalent per month, up from Rs.878.64 in 2004-05.

EMBASSY OF PAKISTAN 7

Food inflation is estimated at 15.0 percent and non-food 6.8 percent, against

10.2 percent and 6.2 percent in the corresponding period of last year.

􀂃 Wholesale Price Index (WPI) during July-April, 2007-08 have increased

by 13.7 percent, as against 6.9 percent of last year.

􀂃 Sensitive Price Indicator (SPI) has recorded an increase of 14.1 percent

during July-April, 2007- 08, as against 11.1 percent of last year.

EXTERNAL SECTOR

􀂃 Exports were targeted at $ 19.2 billion or 12.9 percent higher than last year.

􀂃 Exports during the first ten months are up by 10.2 percent – rising from $

13847.3 million to $ 15255.5 million.

􀂃 Imports were targeted to increase by 5.9 percent in 2007-08 to $ 32.3 billion

from last year’s level of $ 30.5 billion.

􀂃 Imports are up by 28.3 percent during ten months 2007-08 – rising from $

25.0 billion to $ 32.0 billion, showing an increase of almost $ 7.0 billion.

􀂃 Major contributions to this year’s additional import bill have come from

petroleum groups (40%). Raw material (21%) and food groups (16.3).

􀂃 Trade deficit widened to $ 17 billion in the first ten months of the current

fiscal year as against $ 11 billion in the same period last year and is likely to

touch $ 20.5 billion or 12.3 percent of GDP

􀂃 Current Account Deficit further widen to $ 11.6 billion (6.8% of GDP) in

the first ten months (July-April) of the current fiscal year from 6.6 billion

(4.6% of GDP) in the same period last year.

REMITTANCES AND RESERVES

􀂃 Workers’ remittances totaled $ 5.31 billion in the first ten months of the

fiscal year against $ 4.45 billion in the same period last year, depicting an

increase of 19.5 percent

􀂃 Total Foreign Exchange Reserves stood at $ 12,344 million at the end of

April 2008 significantly lower than end June 2007 level of $ 15,646 million.

􀂃 Pakistan Rupee after remaining stable for more than 4years, depreciating

by 6.4% against US Dollar during July – April 2008.

II. SOCIAL SECTORS

EDUCATION

􀂃 Overall literacy rate (10 years & above) was 45 percent in 2001 which has

increased to 55 percent in 2006-07, indicating a 10 % increase

EMBASSY OF PAKISTAN 6

EDL were 236.8 percent of foreign exchange earnings (FEE) but declined to

127.1 percent in the same period.

􀂃 EDL were nearly 5.8 times foreign exchange reserves (FER) at the end of

FY02 but have declined to 3.4 percent by end-March 2008.

􀂃 Interest payments on external debt were 7.8 percent of current account

receipts but declined to 2.5 percent during the same period.

MONEY AND CREDIT

􀂃 Money Supply (M2) during July-May 10, 2007-08grew by 9 percent against

the annual target of 13.7 percent and last year’s expansion of 14 percent for

the same period.

􀂃 Net domestic assets increased to Rs.656.7 billion as compared to increase of

Rs.395.5 billion in the same period of last year.

􀂃 Net foreign assets have recorded a contraction of Rs.289 billion against the

increase of Rs.84.6 billion in the same period of last year.

􀂃 Government borrowing for budgetary support has recorded an increase of

Rs.362 billion as compared to Rs.212 billion in the same period of last year.

􀂃 Credit to private sector amounted to Rs.369.8 billion during July-May

10,2007-08 as compared to Rs.263.4 billion in the same period last year.

􀂃 Credit to manufacturing sector recorded to be Rs.193 billion compared with

Rs.119 billion in the same period of last year.

􀂃 Weighted average lending and deposit rates increased to 10.9 percent and

4.2 percent in March 2008 while weighted average yields on 6 months T-bill

increased to 9.4 percent in March 2008.

CAPITAL MARKETS

􀂃 KSE-100 Index closed at 12,130.5 points on May 30, 2008, down by 1,642

points (or 11.9 percent) from the end June position of the last year.

􀂃 Nevertheless, the index broke the psychological barrier of 15,500 points as

it was all-time high of 15,676 points on April 18, 2008

􀂃 Aggregate Market Capitalization declined abruptly by Rs 273 billion,

from Rs 4,019 billion in June 2007 to Rs 3,746 billion in May 2008.

􀂃 Foreign portfolio investment showed a net outflow of US$45 million

during first nine months of fiscal year 2007-08.

INFLATION

􀂃 Inflation as measured by the changes in Consumer Price Index (CPI)

stood at 10.3 percent during July-April 2007-08, as against 7.9 percent in the

comparable period of last year.

EMBASSY OF PAKISTAN 5

billion from the budgeted revenues was mainly due to higher than targeted

non-tax collections.

􀂃 Tax collection is estimated Rs 1.0 trillion, short by Rs 25 billion than target

􀂃 Tax revenue-to-GDP ratio stood at only 10 percent of GDP during 2007/08

as compared to an average of 18 percent for the developing countries

indicating that substantial tax policy reforms are still needed to broaden the

tax base.

􀂃 The indirect tax-to-GDP ratio stood at around 6 percent, while the direct

tax-to-GDP ratio was calculated to be 4 percent.

􀂃 Gross and Net tax collection increased by 12.3% and 16.3% respectively.

EXPENDITURE

􀂃 Revised Estimates for 2007-08 stood at Rs 2228.9 billion against budgeted

Rs. 1875 billion

􀂃 Oil Subsidy is projected at Rs 175 billion against targeted level by Rs 160

billion.

􀂃 Import of 1.7 million tons of wheat at all time high prices because of

smuggling and early export

􀂃 Interest payments are project at Rs 503.2 billion against budgeted Rs 375

billion

BORROWINGS AND PUBLIC DEBT

􀂃 Borrowing increased from Rs 324 billion (net of privatization proceeds) to

Rs 683.4 billion (with no privatization proceeds)—an increase of 111 %

􀂃 External resource of Rs 119.4 billion are expected to materialize against

budgeted Pakistan could

􀂃 Domestic Borrowings increased to Rs 564 billion against budgeted Rs 131

billion

􀂃 Public debt as a percentage of GDP stood at 85 percent in end-June 2000,

has declined to 55.2 percent by end-June 2007

􀂃 Public debt as percentage of GDP stood at 53.5 percent by end March 2008.

􀂃 Domestic Debt rose by Rs 409.9 billion over end-2007 stock of Rs 2610.2

billion and increased to Rs 2030.1 billion or 30.3 % of GDP

􀂃 External debt and liabilities (EDL) at the end of March FY08 were US$ 45.9

billion, a net addition of $ 5.4 billion represents a 13.3 percent increase over

the stock at the end of FY07.

􀂃 New disbursements in external debt are only $1.2 billion while $4.2 billion

are added to the stock of external debt because of translation effect.

EMBASSY OF PAKISTAN 4

Major crops registered negative growth of 3.0 percent as against an

impressive positive growth of 8.3 percent last year and target for the year at

4.5 percent.

􀂃 Cotton production at 11.7 million bales in 2007-08 has decreased by 9.3

percent in comparison to 12.9 million bales of last year.

􀂃 Wheat production is estimated at 21.7 million tons in 2007-08 as against

23.3 million tons last year showing a decrease of 6.6 percent.

􀂃 Rice production has increased from 5.4 million tons in 2006-07 to 5.6

million tons in 2007-08 showing an increase of 2.3 percent.

􀂃 Sugarcane production has increased by 16.8 percent in 2007-08 from 54.7

million tons in last year to 63.9 million tons in 2007-08.

􀂃 Total off-take of fertilizer remained flat (0.5 percent) as nitrogen offtake

increased by 11.4 percent while that of phosphate and potash decreased by

25.3 and 33.3 percent, respectively during July - March 2007-08.

􀂃 Livestock exhibited improvement in growth from 2.8 percent last year to 3.8

percent in 2007-08.

􀂃 Agriculture credit disbursement of Rs 138.6 billion during July-March

2007-08 is higher by 24.6 percent over last year [Rs 111.2 billion].

MANUFACTURING & MINING

􀂃 Overall manufacturing, accounting for 18.9 percent of GDP, registered a

modest growth of 5.4 percent against 8.2 percent last year.

􀂃 Large-scale manufacturing, accounting for 70.0 percent of overall

manufacturing, registered a growth of 4.8 percent in 2007-08 against the

target of 10.9% and last year’s achievement of 8.6%.

􀂃 Construction continued its strong showing, partly helped by activity in

private housing market, spending on physical infrastructure, and

reconstruction activities in earthquake affected areas. The construction

sector is estimated to grow by 15.2 percent in 2007-08 as against

extraordinary growth of 17.9 percent last year.

􀂃 Mining and quarrying sector has registered a growth rate of 4.9 percent as

against a target of 4.5 percent and 3.0 percent last year.

FISCAL OPERATION

􀂃 Fiscal Deficit is likely to be Rs 683.4 billion or 6.5 percent of GDP against

target of Rs 398 billion or 4 percent of GDP ---the highest in last ten years.

􀂃 Total revenues collected during the current year stood at Rs 1545.5 billion,

higher than the targeted level of Rs 1476 billion. This increase of Rs 69.5

EMBASSY OF PAKISTAN 3

FOREIGN INVESTMENT

􀂃 Overall Foreign Investment during the first ten months (July-April) of the

current fiscal year has declined by 32.2 percent and stood at $ 3.6 billion as

against $5.3 billion in the comparable period of last year.

􀂃 Foreign direct investment (private) stood at $3481.6 million during the first

ten months (July-April) of the current fiscal year as against $4180.8 million

in the same period last year thereby showing a decline of 16.7 percent.

Almost 57 percent of FDI has come from three countries, namely, the UAE,

US, and UK. US investors with 33.4 percent investment are on the top

during the first ten months.

􀂃 Private portfolio investment witnessed massive decline of 91 percent by

recording inflow of $98.9 million as against $1097.3 million during the

comparable period of last year.

􀂃 Public foreign investment depicted modest inflow of only $20.5 million as

against outflow of $66.6 million in the comparable period of last year.

PER CAPITA INCOME

􀂃 Per capita real GDP has risen at a faster pace in real terms during the last

six years (4.5% per annum on average in rupee terms) leading to a rise in

average income of the people. Such increases in real per capita income have

led to a sharp increase in consumer spending during the last three years.

􀂃 Per capita income in dollar term has grown at an average rate of 13.5

percent per annum during the last six years rising from $ 586 in 2002-03 to

$ 1085 in 2007-08.

NATIONAL SAVINGS

􀂃 National Savings at 13.9 percent of GDP has financed 65 percent of fixed

investment in 2007-08 as against 77.7 percent last year.

􀂃 Domestic savings has declined to 11.7 percent of GDP from 16.0 percent of

GDP.

AGRICULTURE

􀂃 Agriculture sector grew by 1.5 percent as against 3.7 percent last year and

target of 4.8 percent.

EMBASSY OF PAKISTAN ECONOMIC DIVISION 2

HIGHLIGHTS OF FISCAL YEAR 2008

The highlights of the economy during FY2008 are enumerated below:

GROWTH AND INVESTMENT

􀂃 Real GDP grew by 5.8 percent in 2007-08 as against 6.8 percent last year

and growth target of 7.2%.

􀂃 Total investment could not sustain its record level of 22.9 percent of GDP

of the last fiscal year and declined to 21.6 percent of GDP in 2007-08.

However, total investment has increased from 16.9 percent of GDP in 2002-

03 to 21.6 percent of GDP in 2007-08 — showing an increase of 5.7 percent

of GDP in five years.

􀂃 Fixed investment has declined to 20.0 percent of GDP from 21.3 percent

last year.

􀂃 Private investment grew by 16.3 percent per annum in real terms and 30.7

percent per annum in nominal terms during the period (2004-07). However,

it declined substantially to marginal 0.9 percent in real terms and 9.7

percent in nominal terms in 2007-08. The share of private sector investment

in domestic fixed investment has increased from less than two-third (64.2%)

to almost three-fourth (73.2%) in the last seven years clearly reflecting the

growing confidence of private sector in the current and future prospects of

the economy.

􀂃 Private sector investment grew by 9.7 percent this year as against 13.3

percent increase in last year in nominal terms. Major nominal growth in

private sector investment is witnessed in, mining & quarrying (15.3%),

electricity & gas (11.0%), financial business (11.4%), and wholesale and

retail trade (18.4%).

􀂃 Public sector investment has also increased by 30.0 percent per annum

during the last three years and 20.2 percent during the current fiscal year in

nominal terms.

PRIVATIZATION

􀂃 GoP has privatized around 166 units at Rs. 475.08 billion (approx US$ 8.9

billion) between January 1991 to February 2007.