Strategies for Improving the Balance of Payments and Overview of Recent Economic Issues in Pakistan

Strategies for Improving the Balance of Payments

To achieve a sustainable Balance of Payments (BoP) position, Pakistan requires a multi-faceted strategy that includes:

• Export Diversification: Expanding beyond textiles to include high-value manufacturing, technology, pharmaceuticals, and engineering goods.

• Import Substitution: Promoting local industries, especially in energy, machinery, and consumer goods, to reduce import dependency.

• Foreign Investment Promotion: Strengthening Foreign Direct Investment (FDI) inflows by improving infrastructure, ensuring policy consistency, and fostering economic confidence.

• Financial Stability: Enhancing worker remittances through formal banking channels and effective debt management policies.

Enhancing Export Competitiveness

• Encourage value addition in agricultural products.

• Boosting the IT sector.

• Streamlining regulations and reducing bureaucratic hurdles to facilitate ease of doing business.

• Providing incentives for exporters.

Reducing Import Dependency

• Investing in renewable energy sources like solar and wind power to reduce reliance on imported fuel, thus saving foreign exchange.

Improving Financial Stability

• Strengthening FDI inflows by improving infrastructure and ensuring policy consistency.

• Effective debt management policies, including restructuring external loans and reducing unnecessary borrowing.

Conclusion

Pakistan's BoP struggles reflect deeper structural weaknesses, including a narrow export base, import dependency, inadequate investment, and reliance on external borrowing. Addressing these issues requires urgent economic reforms focusing on export-led growth, import substitution, increased remittances, and sustainable foreign borrowing.

Overview of Recent Economic Issues in Pakistan

Macroeconomic Imbalances in the 1990s

• Fiscal Deficit: Averaged $6.9$ percent of GDP.

• Current Account Deficit: Averaged $4.5$ percent of GDP.

• Economic Growth Rate: Decelerated from $6.5$ percent in the 1980s to $5.4$ percent in the first half of the 1990s, and further to $3.6$ percent in the second half.

• Poverty: Increased from just over $20$ percent in the late 1980s to $32$ percent in 1998/99.

Crisis Management and IMF Programs

• Despite efforts and three IMF programs between 1988 and 1999, little progress was made in addressing macroeconomic imbalances.

• The result was a decade of stop-go stabilization policies, with a negative impact on growth.

• The imposition of economic sanctions following the nuclear tests of May 1998 further exposed the vulnerabilities of Pakistan's economy.

Debt Accumulation

• Chronic fiscal and external deficits resulted in large domestic and external debt.

• Total debt equaled $100$ percent of GDP at the end of June 1998.

• Interest payments on public debt accounted for $47$ percent of the Government's total expenditure.

• In FY1998, debt servicing exceeded $50$ percent of export earnings.

• By end June 2001, Pakistan's external public sector debt was at $32.8$ billion USD, amounting to $55$ percent of GDP, growing at an average annual rate of $5.4$ percent throughout the 1990s.

• The net present value (NPV) of public external debt was estimated at $260$ percent of the value of total exports of goods and services at the end of FY2001.

Aggregate Growth

• Investors' confidence has not been restored, and the investment rate has plummeted to the lowest level since the 1950s.

• The economic growth rate averaged $3.5$ percent over the last three years.

• Real per capita income increased only marginally, and in dollar terms, it declined from $473$ USD in FY1998 to $429$ USD in FY2001 due to the sharp depreciation of the Pakistan rupee.

• Economic growth in FY2001 is estimated at $2.6$ percent compared to $3.9$ percent in FY2000, primarily due to a drought-induced reduction in the agriculture sector's output (negative growth rate of $2.5$ percent).

• The drought caused a loss in national income of about $2.0$ percent.

• Non-agricultural GDP grew by $4.3$ percent, as against $3.1$ percent in the previous year.

Population, Employment, and Poverty

• The population growth rate is estimated at $2.2$ percent, with a total population of $140$ million in 2001.

• The urban population, according to the 1998 census, is $33.4$ percent of the total.

• Pakistan's labor force is growing at a rate of $2.4$ percent.

• The unemployment rate in 1998-99 was around $6$ percent.

• About one-third of the population was below the poverty line in 1998-99, based on a minimum consumption requirement of 2550 calories per adult.

• The number of people living below the poverty line in terms of a minimum income of $1$ USD a day was $31$ percent in 1996. In terms of $2$ USD a day poverty line, the proportion of the poor in 1996 was $84.7$ percent.

• Since 1998-99, economic growth has slowed further, the fiscal squeeze has intensified, development spending has declined, and the country has experienced a severe drought; therefore, the incidence of poverty in Pakistan is likely to be significantly higher than it was in 1998-99.

Investment

• Investment and savings rates in Pakistan have fallen to the lowest levels since the early 1950s.

• Public investment declined from $9.1$ percent of GDP in FY1993 to $5.6$ percent in FY2001.

• Private sector investment also declined from $10.1$ percent of GDP to $7.5$ percent during the same period.

• Total investment and fixed investment were $14.7$ percent and $13.1$ percent of GDP, respectively, in FY2001, compared to $17.3$ percent and $14.7$ percent of GDP in FY1998.

• The decline has occurred only in private sector investment; public investment increased slightly, from $5.2$ to $5.6$ percent of GDP.

• Foreign investment peaked in FY1995 at over $1.5$ billion USD but declined to just $182$ million USD in FY2001.

Savings

• National savings have declined from $14.3$ percent of GDP in FY1998 to $12.7$ percent in FY2001.

• Domestic savings declined from $15.2$ to $14.4$ percent of GDP over the three-year period.

• Negative government savings were a negative $1.8$ percent of GDP in FY2001.

External Trade and Balance of Payments

• In FY2001, the rupee depreciated by $18.6$ percent against the dollar, resulting in a real depreciation of over $10$ percent.

• Exports grew by $19$ percent and imports by $15$ percent in the two years following trade liberalization and economic restructuring.

• The export concentration ratio in Pakistan is $0.56$ being high (textiles account for almost $70$ percent).

Excessive Debt

• Total debt increased from PRs $2,672$ billion in FY1998 to PRs $4,003$ billion in FY2001.

• As a percentage of GDP, total debt increased from $100$ to $115$ percent, with domestic debt increasing from $44$ to $49$ percent, and external debt from $55$ to $64$ percent.

• Total debt servicing increased from PRs $278$ billion to PRs $325$ billion, and interest payments increased from PRs $192$ billion to PRs $237$ billion during 1997-98 to 2000-01.

• External debt servicing accounted for as much as $55.4$ percent of total export earnings and $34.9$ percent of total foreign exchange earnings in FY1998.

Impact of 11 September, 2001 Events

• GDP growth in 2002 is projected to slow down to around $3.0$ percent from earlier government projections of $4.0$ percent.

• The current account deficit is also likely to widen somewhat in 2002.

• Inflation during 2002 is expected to pick up somewhat on account of rupee depreciation and an increase in utility prices.

Conclusion and Policy Issues

Economic Growth

Pakistan's economic situation is likely to remain weak over 2002-2004. Key challenges include:

• Restoring economic growth.

• Managing the large debt burden.

• Promoting domestic and foreign investors' confidence.

• Increasing exports to generate foreign exchange.

• Maintaining a level of social development spending to stem the deteriorating social indicators.

Poverty Alleviation

The major causes of poverty in Pakistan include:

• Lack of employment opportunities.

• A slowdown in the pace of economic growth in the 1990s.

• A decline in the public sector development program.

• Failure of governance is a key determinant of poverty.

Good Governance

Pakistan faces daunting governance challenges, including:

• Poor fiscal performance.

• Political and social exclusion of the poor, women, and minorities.

• Failure to address accountability, corruption, and poor public sector performance.

• Ineffective intergovernmental relations.

• Loss of trust in public institutions.

Human Resource Development

Pakistan ranked 138 out of 174 countries in the 1999 human development ranking of the UNDP.

Debt Burden & Resource Management

The primary economic policy issue for Pakistan is the reduction of its debt burden.

Economic Restructuring

Another important economic policy issue is restructuring the economy to enhance the efficiency and outward orientation of the agriculture and manufacturing sectors.

Devolution of Power

Elected local governments took power on August 14, 2001, but there is still some confusion regarding the powers and roles of the various levels of government.