Beating all the odds

There's no disguising the fact that Pakistan's economy is faced with several challenges.

Even before the catastrophic floods of 2010, the country was struggling on a number of fronts according to the ebb and flow of policy advances.

To be plain about it, security issues are a continuing drain on government resources, while power shortages are negatively impacting the main manufacturing base and largest earner of foreign exchange, namely the textile sector.

In the background there are better signs — in reserves accumulation from funds flows and relations with China.

But for the general population, there is pressure on living standards, with inflation perhaps the number one concern at present. In single digits for many years, the latest reported figure was just over 14 per cent. Not only driven by external factors, such as rising global commodity prices, inflation is being prompted by the government's monetisation of its growing fiscal deficit.

Policy tension has strained the relationship with the International Monetary Fund (IMF). A central requirement of providing a two-year $11 billion (Dh40 billion) loan package set up in 2008 was the implementation of comprehensive economic reform, aiming particularly at raising Pakistan's low tax-to-GDP ratio (at roughly 10 per cent, one of the lowest in the world). Fractious internal politics have, however, hampered that shift.

Need for reform

An IMF team is due in Pakistan this month to review the situation. According to Reuters, analysts expect an overshoot of the revised budget deficit target of 4.7 per cent of GDP agreed with the IMF. Some foresee considerably higher, beyond the central bank's prediction of between 6 and 6.5 per cent, if reforms are not implemented.

In July and August last year, the country experienced its worst floods since 1920, imposing further stress. That disaster saw around 20 million people displaced, caused serious damage to infrastructure and to agriculture, the bedrock of the Pakistan economy, accounting for 25 per cent of GDP and employing 50 per cent of the country's workforce.

A World Bank report estimated the overall damage at Rs855 billion (about Dh37 billion) — 5.8 per cent of 2009/2010 GDP — with the cost to agriculture alone amounting to Rs429 billion (over 14 per cent of that sector's income). Estimates of economic growth had to be scaled back in the wake of that setback. The government revised its GDP forecast to 2.5 per cent for the fiscal year ending June 30, compared with an earlier forecast of 4.5 per cent.

But a certain resilience has nevertheless been in play.

Notably, data from the State Bank of Pakistan (SBP) show that remittances by overseas Pakistanis amounted to $6.12 billion during the first seven months of the fiscal year 2010/11, up nearly 18 per cent, feeding off the global upturn.

Also, net foreign investment rose by nearly 45 per cent to $1.18 billion in the same period. While long-term investors have taken a cautious attitude because of the key uncertainties already mentioned, the country has seen a slew of portfolio flows into the main stock market as international fund managers target emerging markets as potential growth hotspots.

Rise in investment

Foreign portfolio investment rose by 176 per cent to $235 million in the first seven months of the 2010/11 fiscal year, compared with an outflow of $309 million in the counterpart period the previous year.

Consequently, Pakistan's main stock exchange finished up 29 per cent at 2010 year-end, driven by foreign buying mainly in the energy sector, which (weighted at 40 per cent of the index) naturally benefited from international oil prices rising to over $90 a barrel — and more recently higher still. Such monies boost the foreign exchange coffers, already swelled by remittances and a steady performance in exports.

Reserves held by the SBP amounted to $14.1 billion in the week ending February 19, 2011, as against $12.9 billion at the end of the fiscal year 2009/2010.

On the trade side, the all-important textile receipts are set to benefit from trade concessions provided by the European Union (EU). According to the central bank, that leeway will be given for a period of three years, effective from the beginning of this year. The products covered account for nearly 30 per cent of Pakistan's total exports to the EU.

Thus, though the economy undoubtedly has suffered, it still shows its bright spots. One of special interest in the past year is the alignment with emerging powerhouse China (see box), which has now surpassed Japan as the world's second-largest economy.

Since the country has demonstrated the ability to achieve growth rates of5 to 8 per cent, and now has such a dominant player as ‘an all-weather friend', investors need to keep a close eye on Pakistan's progress.

Pakistan-China ties
Firm industrial relations lay the foundation for future growth

2011 has been declared the ‘Pak-China friendship year' in recognition of the countries' close ties over the past 60 years.

The declaration follows the visit in December 2010 by the Chinese Prime Minister Wen Jiabao to Pakistan, during which commercial and trade deals worth $35 billion were signed.

Pakistan has much to gain from this association. China offers vast opportunities for both public and private sectors to develop the fields of energy, construction, agriculture and science and technology. In fact, co-operation between the two nations in the following sectors has already yielded beneficial results for Pakistan:

• Power plants: Having already built one, and in the process of finishing another, China is preparing to build two new reactors at Chashma, in the Punjab. Such facilities will contribute to Pakistan's urgent need to boost energy supplies.
• Sea port: Located in Baluchistan on the Arabian Sea coast, the port at Gwadar was built on a turnkey basis by China. Inaugurated in 2007, it is currently being expanded into a deep-sea facility and naval base with Chinese technical and financial assistance.

Latest data show that bilateral trade between the two countries in 2010 increased by 28 per cent and Pakistan's exports to China grew by 37 per cent, as compared to 2009. It is expected that trade between Pakistan and China may surge from around $9 billion to $18 billion in the next five years.

China has its incentives. The Gwadar sea port and other infrastructure developments assist in securing access the Arabian Sea - thus enabling Chinese exports to the Middle East and beyond - and facilitate energy imports from the MENA region.

Extensive cooperation in key sectors such as energy and infrastructure might play a significant part in Pakistan's economic recovery.