Briefing Notes for the Launch in Islamabad, March 2009
Growth moderates but remains robustPakistan’s economy suffered from political instability, law and order problems, supply shocks, a softening of external demand, turmoil in international financial markets and high prices for oil, food and other commodities. GDP growth slowed to 5.8% in 2008, down from 6.8% in the previous year. The performance of the agriculture sector was dismal, with 1.5% growth compared with 3.7% in 2007. Manufacturing registered modest growth of 5.4% against 8.2% in the previous year. GDP growth in 2008 was principally driven by the services sector, which posted a growth of 8.2% against 7.6% in 2007. On the demand side, economic growth was driven entirely by consumption, especially private consumption. The contribution of investment declined, and net exports remained a drag. Due to global economic slowdown and internal difficulties, GDP growth in Pakistan is expected to further moderate to 2.5% in 2009.
Rapid increase in inflationInflation has been driven up in all the countries of South Asia, partly by unrelenting pressures from higher international commodity prices, particularly the prices of oil, basic metals and selected food items. In Pakistan, inflation rose from 7.8% in 2007 to 12% in 2008. Food inflation was even higher, at 17.6%, driven primarily by an unprecedented rise in global prices of a few items such as wheat, rice and edible oil. The situation was exacerbated by the weakness of the domestic currency, the gradual removal of fuel, food and power subsidies and the monetary overhang of excessive borrowing from the central bank to finance the large fiscal deficit. The longer the inflationary pressure persists, the greater the chance for a wage-price spiral to gain hold; tight monetary and fiscal policies are necessary to prevent such a spiral. If the budget deficit is not contained, tight monetary policy alone may not achieve the desired results. With fall in oil and other commodity prices in international markets, inflation has started to fall.
Fiscal situation deterioratedIn Pakistan the Government’s overall revenue increased in 2008, but the increase in expenditure was much larger, due mainly to subsidies on oil, power, fertilizer, wheat and other food items. The fiscal situation deteriorated as the Government absorbed the high price of oil for domestic consumers, while at the same time, it had to import wheat at high prices and sell to domestic consumers at cheaper prices. As a result, the budget deficit rose to 7.4% of GDP in 2008, the highest in the last 10 years.
External balances under pressureThe surge in prices of fuel oil, food and other commodities created severe problems for the external balances of most countries in South Asia. Merchandise exports of Pakistan grew by 15.3% in 2008, compared to 3.4% in 2007. Imports grew by 31.2% with an extraordinary surge in imports of petroleum products as well as food and raw material; the trade deficit was estimated at over $20 billion, more than 12% of GDP, in 2008. Despite a record $6.5 billion in overseas workers’ remittances, the external current account deficit grew to $14 billion, equivalent to 8.4% of GDP. This deficit, coupled with a substantial outflow of portfolio investment, resulted in a deficit of overall balance of payments and reduction in foreign exchange reserves. The Government has taken several measures to contain import growth, and the current account deficit is expected to narrow in 2009. In November 2008, the International Monetary Fund and the Government of Pakistan signed a $7.6 billion, 23-month Stand-By Arrangement to help the country meet its serious balance of payments difficulties and to support the country’s economic stabilization programme.
Poverty and widespread inequalities remain major challengeAmong long-term challenges, poverty remains a major problem for most countries in South Asia. Also, economic and social inequalities remain widespread. The main challenge for countries in the subregion, therefore, is not only to improve growth rates on a sustained basis but also to make them more inclusive for a rapid reduction in poverty and inequality. The composition of sectoral growth has important implications for pro-poor growth. Agriculture, construction and small and medium-sized enterprises (SMEs) generate pro-poor growth through employment generation, and should be supported.
To benefit from employment opportunities, the development of human resources is essential. In turn, education and health services are key to the development of human resources. Public provision of these services is crucial to the poor, as they can not afford to pay the prices charged by private providers. Print and public media should be vigorously used to change people’s attitude towards girls’ education and other forms of social exclusions and to ensure that the poorest of the poor have access to information on available opportunities.
Social safety nets are also essential for the poor and vulnerable who are unable to benefit from economic growth directly or indirectly. This support should be strengthened to provide a coping mechanism for the poor, especially in the event of macroeconomic shocks such as current global economic crisis. Without such interventions to address the problem of poverty and inequality, rapid economic growth cannot be sustained over the long term, for there are clear links between inequality and social unrest and violence.
Lack of physical infrastructure is a major impediment to business growth in South Asia, most notably shortcomings in electricity service. Huge gaps between supply and demand of electricity exist in several countries in the subregion, and these gaps will widen unless new electricity capacity is added. Involvement of the private sector through private public partnerships is the only way to meet the growing needs for energy. Along with generating more electricity, it is important to efficiently utilize existing capacity. Transmission and distribution losses are massive, partly due to theft. Rehabilitation and proper maintenance of the distribution system should be a priority to minimize transmission and distribution losses.