Pakistan’s Economic Outlook Suffers Due to Internal and External Difficulties

ESCAP’s annual survey analyses region’s challenges, proposes solutions

Bangkok (UN/ESCAP Information Services) – Pakistan’s recent travails – political instability, decreases in export demand and turmoil in global financial markets – will take their toll on the country’s economic growth this year.

Pakistan’s gross domestic product (GDP) is expected to grow just 2.5 per cent this year, after experiencing growth of 6.8 per cent in 2007 and 5.8 per cent in 2008, according to the Economic and Social Survey of Asia and the Pacific 2009.

The flagship publication of the United Nations’ regional arm – the Economic and Social Commission for Asia and the Pacific (ESCAP) – this year’s issue is titled "Addressing Triple Threats to Development.” It analyzes the three global crises which have converged to threaten development in the Asia-Pacific region: the financial crisis, fuel and food prices, and climate change. The Survey provides a regional perspective as well as country-specific analyses, outlining ways in which economies in the region can move forward in unison towards a more inclusive and sustainable development path.

The Survey notes how inflation has been driven up in all the countries of South Asia, partly as a result of unrelenting pressure from higher international prices on commodities such as oil, basic metals, wheat, rice and food oil. In Pakistan, inflation rose from 7.8 per cent in 2007 to 12 per cent in 2008, with food price inflation even higher, at 17.6 per cent. Though international commodities prices have begun to fall, inflation in Pakistan remains in double digits.

The situation was exacerbated by the weak domestic currency, the gradual removal of fuel, food and power subsidies and excessive borrowing by the central bank in order to finance the large fiscal deficit. The longer the inflationary pressure persisted, the greater the chances of creating a wage-price spiral where increased prices and wages continued to drive each other up.

The Pakistani government will need to institute tight monetary and fiscal policies to prevent such a spiral. However, the Survey added, if the budget deficit is not contained, monetary policy alone may not be enough.

Though the Pakistan government’s overall revenue increased in 2008, the increase in expenditures was significantly larger due mainly to subsidies on oil, power, fertilizer, and food items. As a result, the budget deficit rose to 7.4 per cent of GDP in 2008, the highest in the last ten years. Despite a record $6.5 billion in overseas workers’ remittances, the external current account deficit grew to $14 billion, equivalent to 8.4% of gross domestic product. 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.

Among 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, the Survey notes, 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.

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The Economic and Social Survey of Asia and the Pacific 2009 is available online from 0500 GMT/1200 Bangkok on 26 March at: http://www.unescap.org/survey2009/index.asp

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