Not just surviving but thriving

Political strife and a US recession affecting global economies have not dented Pakistan's economy, which grew seven per cent in 2006-07.

Pakistan has endured a number of challenges in the recent past — high inflation, insurgency and the assassination of popular political leader Benazir Bhutto being just a few. However, hope is a common denominator among its people. They believe that Pakistan will survive and thrive despite difficult times. February's parliamentary elections were an important step in that direction.

The results of the election saw President Pervez Musharraf and his party face defeat at the hands of Pakistan's leading opposition parties, the Pakistan People's Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N).

These parties have since agreed to forge an alliance to form a national coalition government. President Musharraf, who took on the role of civilian president in November last year, has announced that he intends to work with the new government and will serve out his term, which expires in 2012.

Regardless of how that plays out, the new government will have quite a task on their hands when it comes to tackling insurgency and inflation, among other issues.

The good news is that Pakistan's economy has been getting stronger over the past few years. Economic growth touched seven per cent in 2006-07, riding on the upbeat performance of sectors such as agriculture, manufacturing and services.

The growth achieved by Pakistan during this period will bode well for the new government during this financial year despite challenges such as decelerating exports and soaring food prices.

The latter, according to the Economic Survey report (2006-07) released by the finance ministry (economic adviser's wing), is fuelled by a combination of global trends in the prices of several commodities and local supply-and-demand driven factors.

Keys to growth

According to the report, Pakistan has been experiencing the longest spell of strong growth in years. Mansoor Ahmad Bajwa, Commercial Counsellor in Dubai, says that the commodity-producing sectors' (agriculture and industry) contribution was a key driver of growth last year. According to the report, agriculture contributed 15 per cent to real GDP growth while industry's input was 25 per cent. The services sectors contributed the remaining 60 per cent. Per capita income, an important benchmark for economic progress, grew by 11 per cent in 2006-07 to $925 (about Dh3,397), which were an increase from $833 (about Dh3,059) in 2005-06. Acceleration in real GDP growth, a stable exchange rate, and a five-fold increase in the inflow of workers' remittances, which was approximately $5.5 million (about Dh20.19 million) in 2005-06, contributed to the rise in per capita
income.

Bajwa says that the country's good economic performance was a result of sound economic policies, on-going structural reforms and a favourable international economic environment. According to the economic survey report, growth was also driven by strong domestic demand. Another positive factor was the steep rise in investment, especially private investment which was high despite strong consumer demand.

The privatisation drive, especially in sectors such as banking, telecom, oil and gas and steel, has also helped push the economy (see box for more statistics). The flow of foreign direct investment (FDI), in particular, also reflects Pakistan's growing profile as an attractive destination for international investors. Foreign direct investment was seen in areas such as telecom, energy, banking and finance and food and beverages.

In the fiscal year ending June 2007, the country attracted FDI worth $5.12 billion (about Dh18.8 billion) — a 46 per cent increase over the year earlier, says Bajwa. He says that during the first four months of the current fiscal year, Pakistan managed to attract FDI worth $1.23 billion (about Dh4.51 billion), an increase of almost four per cent.

The government has also announced a number of incentives for foreign investors, including setting up special economic zones, a five year tax exemption and duty free import of machinery.

The banking sector is also a major beneficiary of the country's economic transformation. "Mergers and acquisitions of local institutions by foreign banks include Standard Chartered Bank's purchase of an 80.86 per cent interest in Union Bank (the country's eighth largest bank in terms of market share) for $413 million (about Dh1.51 billion). Further, enormous profits in recent years have attracted more foreign banks to Pakistan and local entrepreneurs to step into this sector," he says.

Poverty, a serious issue in Pakistan, has also been reduced by economic growth, high levels of remittances and social development and poverty related programmes. According to the finance ministry's report, Rs2,217 billion (about Dh130.3 billion) was spent on these programmes from 2001-02 to 2006-07.

At the national level, the count of poor people fell from 49.23 million in 2001 to 36.45 million in 2004-05. Rural poverty declined by 11.13 per cent while urban poverty fell by 7.75 per cent.

However, the gap between the rich and poor segments of society is still a bone of contention, especially with the growth in population and the resulting pressure on resources.

Literacy drive

Other social indicators also show an improvement according to the national/provincial findings of the Pakistan social and living standards measurement (PSLM) Survey 2005-06. The survey covered 15,453 households across urban and rural communities.

For instance, in the education sector, the gross enrolment rate (GER) for primary schools (age five to nine) increased from 86 per cent in 2004-05 to 87 per cent in 2005-06. The GER for middle-level (age 10-12) increased from 46 to 49 per cent.

There has also been a slight increase in the proportion of residents (10 years and above) who report that they are literate. The number showed a rise from 53 per cent in 2004-05 to 54 per cent in 2005-06. Health indicators such as infant mortality and a decline in children suffering from diarrhoea showed significant decreases in 2005-06.

Dr Zafar Iqbal, Counsellor, says that women are an important force of society. He says that a growing number of women were pursuing higher studies and are also part of the country's workforce.

He says that 60 seats are also reserved for women in the 342-member National Assembly. A stronger focus on literacy will further the cause of improving life for women.

Need for infrastructure

However, there's more that needs to be done in several other areas. A new World Bank report released in February stated that Pakistan must strengthen its capacity to undertake major infrastructure projects needed to boost economic growth and wipe out poverty.

According to the study Pakistan Infrastructure Implementation Capacity (PIICA), the country suffers from a lack of infrastructure in the water, irrigation, power and transport sectors.

The report states that Pakistan could face a severe water shortage in the future if adequate investment was not made. According to the report, Pakistan must invest around $1 billion (about Dh3.67 billion) per year in reservoirs and related infrastructure over the next five years.

It also mentions that the energy sector stands to face severe power shortages of around 6,000 megawatts by 2010. Similarly, inefficiencies in the transport sector are also costing the economy between four and five per cent of GDP each year.

According to the report, the government has tripled its annual infrastructure investment from an average of $2.5 billion (about Dh9.18 billion) to $7.3 billion (about Dh26.8 billion) to combat the situation.

However, recurrent delays and cost overruns, problems linked to planning and execution of projects still pose setbacks.

The new government will have a lot of such factors to consider when it starts focussing on infrastructure development.

Positive prediction

However, with the positive economic forecast for 2008, development work can begin on a good note. According to the economic survey report (2006-07), growth is expected to increase to 7.2 per cent supported by sectors such as agriculture and manufacturing.

While overall consumer price index (CPI) based inflation averaged at 7.8 per cent last year, inflation has been targeted at 6.5 per cent this year. Investments are also forecast to increase to 23.5 per cent.

These estimated macro economic indicators are heartening for Pakistanis who, as Dr Iqbal says, are eager to be a productive part of the global community.

Macro-economic indicators

Pakistan's real per capita GDP grew by 5.2 per cent and has maintained average growth of 5.4 per cent over the last four years.

The government has been following a sound fiscal policy, which has helped it reduce fiscal deficit to 3.5 per cent during the last seven years. The associated public debt also declined sharply from more than 100 per cent of the GDP to 53 per cent of the GDP by the end of March 2007. External debt and liabilities declined from 29.4 per cent to 27.1 per cent. The merchandise trade deficit widened to $11.1 billion (about Dh40.76 billion) in the first 10 months of the current fiscal year against $9.5 billion (about Dh34.88 billion) in the same period last year. Pakistan's balance of payments showed a record increase in capital flows that offset the gradual widening of the current account deficit. Pakistan's total liquid foreign exchange reserves also stood at $15.1 billion (about Dh55.45 billion) at the end of June 2007. Private remittances, flotation of bonds, higher FDI flows and privatisation proceeds were some of the factors that contributed to the increase in reserves.

The stock market, in particular, reflected the positive trends in the economy in 2006-07. The Karachi Stock Exchange also crossed the barrier of 12,000 for the second time in the history of the capital market and touched an all time high on May 31, 2007.

Almost 78 per cent of the FDI into Pakistan in 2006-07 came from countries such as the UAE, the US, the UK, China and the Netherlands.

According to the information provided by the Consulate General in Dubai, green field investments and the establishment of manufacturing and similar units, attracted a record high investment of $4.85 billion (about Dh17.81 billion) during the last fiscal year, compared with $1.98 (about Dh7.26 billion) billion in the fiscal year 2005-06. Investment from the Middle East, including Saudi Arabia, has led FDI into Pakistan in recent years, targeting communications, construction and the financial sector.

"This year, the US and British investments are mainly in areas such as oil and gas. However, the UAE ranks first among foreign investors.

"In fact, in June 2007, the government sold its 26 per cent stake in Pakistan Telecommunication Company Limited (PTCL) to the UAE-based telecom company, Emirates Telecommunication Corp (Etisalat)," says Mansoor Ahmad Bajwa, Commercial Counsellor.

— Information courtesy: Economic Advisors Wing, Finance Division, Government of Pakistan