With the global downturn affecting the country's economy, and abundant international support, Pakistan has opportunities ahead.
Few economies in the world have had to contend with the onslaught of natural disasters, internal political upheavals, threats to national security and domestic economic turmoil, as have beset Pakistan in recent years. And that's before dropping in a global economic crisis, which has brought far less challenged countries to the brink.
For Pakistan the situation reached crisis point at the end of 2008, and the country was forced to seek assistance from the International Monetary Fund (IMF). It has not been alone in this regard. The likes of Iceland, Romania and Hungary, to name just a few, have needed such financial underpinning over the past year.
It was just a few years ago that Pakistan was hitting the business page headlines with record gains on its stock market, and indeed was one of the fastest-growing economies in the world, with GDP storming along at an average of 7.25 per cent between 2004 and 2008. In addition, great strides were being made in the privatisation of the banking system, and the telecommunications sector was expanding at breakneck speed, with network coverage reaching 90 per cent of the country.
Foreign direct investment (FDI) reached record levels, escalating from $1 billion (Dh3.6 billion) in 1999 to $8.4 billion (Dh30.8 billion) in the financial year 2006-07. Along with high levels of remittances of non-resident Pakistanis working overseas, that change of gear boosted the country's foreign exchange reserves to record levels.
Investment from overseas was spread across the economy's sectors. Gulf and European banks set up offices, while property companies, including the UAE's Emaar and Al Ghurair Group, were participating in the country' booming construction sector. International hotel chains announced projects — Jumeirah in Islamabad, the French chain Sofitel in Karachi, and the US group Hyatt Regency in Lahore. In retail, the French giant Carrefour announced it was entering the market with at least ten stores, making it the first hypermarket operator in the country.
A downward spiral
Then during 2007 came the downturn. The worsening security situation, with rising militancy along the western border, rising commodity prices at the international level, notably in oil and food, and a crash in the rupee hurt the economy. Trade and current account deficits deteriorated sharply. By early 2008 inflation was on the climb. Power shortages were hitting the country's main manufacturing base, the textile sector, the leading earner of foreign exchange, accounting for 66 per cent of merchandise exports.
At that juncture the global financial crisis really kicked in.
Exports fell and budget cuts were implemented by multinationals operating in the country. The stock market went into meltdown as domestic and foreign investors pulled out. Riots erupted outside the Karachi Stock Exchange when investors were prevented from selling their shares as the market collapsed.
A catalogue of misfortune
In the wider economy, growing fiscal deficits, due in large part to energy subsidies, were being financed by the central bank through expansion of the money supply. That's a familiar developing-economy expediency, but, as a result, inflation reached 25 per cent in mid-2008, the rupee's depreciation continued, and foreign currency reserves imploded. For the year to June 2009 FDI had fallen to $3.5 billion (Dh12.8 billion).
All in all, a catalogue of misfortune.
Pakistan had no option but to look to external support. The country had recourse to IMF funding earlier in the decade.
In November 2008 the IMF approved a 23-month, $7.6-billion(Dh27.9 billion) loan in order to aid the balance of paymentsso as to avert default on foreign loans.
As is often the case with IMF involvement, the loan was not without conditions. They included the elimination of all subsidies on energy, petroleum products, and fertiliser, slashing government spending, and raising taxes. In order to signal intent, the State Bank of Pakistan (SBP) raised its lending rate by two percentage points to 15 per cent. None of these would be popular measures for the man on the street or domestic businesses.
In addition, other external sources were tapped, including $6.5 billion (Dh23.8 billion) from the World Bank, and $6 billion (Dh22 billion) from the Asian Development Bank. Bilateral aid has come also from developed and oil-rich countries, namely the US with $1.5 billion (Dh5.5 billion) per year, Japan promising $500 million (Dh1,836 billion) annual economic aid, the EU $640 million (Dh2,355 billion) over four years and Saudi Arabia $700 million (Dh2,576 million) over two years.
Making a positive start
So has it worked? According to the IMF's latest review, the institutionally backed programme got off to a good start. Macroeconomic imbalances have shrunk and inflation has fallen. The exchange rate has stabilised and foreign currency reserves have increased from $3.3 billion (Dh12.12 billion) in November 2008 to $8.2 billion (Dh30.13 billion) in May 2009. The SBP was able to lower interest rates by one percentage point in April 2009. The current account deficit has started to narrow, helped by the decline in oil prices. Inflation has fallen and at the end of July 2009 was at 14 per cent. Steps have been taken to reform the electricity sector.
While exports are still falling amid global downturn, by 6.7 per cent to $17.8 billion (Dh65.3 billion) in the year to June 2008, at least the trade gap is narrowing as imports declined by 12.9 per cent to $34.8 billion (Dh128 billion), and foreign reserves are accruing from record remittances from nationals working abroad (reaching an unprecedented $7.8 billion). The government's latest forecast sees GDP growth recovering to 3.3 per cent in 2009/10, and inflation easing to 9.5 per cent after averaging 21 per cent for the financial year just ended.
Under IMF scrutiny, Pakistan has targeted an increase in its fiscal deficit to 4.9 per cent of GDP for 2009-10, from 4.3 per cent in 2008/09. A key factor in the budget is the government is counting on foreign aid to fund almost a third of next year's budget gap.
Upbeat forecast
Market research has responded. HSBC's senior Asia economist, Frederic Neuman, is reported as saying a modicum of balance has been achieved and that economic growth may get a boost this year, primarily from lower interest rates. The Economist Intelligence Unit also painted a modestly upbeat outlook for the medium term, estimating that inflation should drop back to single digits in 2010, and that growth should pick up to five per cent by 2011.
While the IMF's current forecast for a faster than expected recovery in the global economy in 2010 will obviously benefit Pakistan, the risks are unlikely to go away, most notably for an energy-deficit country that of a rising oil price, and, perhaps more significant, the cost of funding the struggle against the insurgency, and the impact this threat has on the business community's willingness to invest.
However, the clear support of the international community and the initial success in stabilising the economy do augur well for a rebalanced economy, and, with the fair wind which the world generally could do with right now, perhaps the resumption of a sustained shift towards a more prosperous future.
