Bangkok (UN Information Services) – Pakistan’s economy is expected to remain strong in 2008, growing at 6.5 per cent, despite political uncertainties and disturbances, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) reported.
In its Economic and Social Survey of Asia and the Pacific ESCAP said the growth would be close to the seven per cent expansion recorded in 2007 and the 6.6 per cent in 2006. The sustained growth also highlights the impact of economic reforms and policies over recent years.
“In just a few years, sound macroeconomic policies have transformed Pakistan’s consumption-led growth impetus to one in which investment-led growth can assume a more important role,” ESCAP said.
In 2007, the agricultural sector recovered strongly, growing by five per cent from just 1.6 per cent in 2006, while the manufacturing sector’s growth continued at 8.4 per cent in 2007, marginally down from the 10 per cent recorded in 2006.
A major driver of growth was investment. Both domestic private sources and a record inflow of foreign direct investment, in which inflows doubled from 2006 to reach US$8.4 billion last year boosted the performance. “In 2007, investment in real terms increased by over 20 per cent,” ESCAP said.
Inflation remains high as higher food prices raise concerns
While Pakistan’s inflation rate was 7.8 per cent in 2007, the main concerns lay in higher food prices, which rose by 10.3 per cent with its effect felt most strongly by “people living on low and fixed incomes.” Inflation in 2008 is expected to remain high, close to last year’s levels.
“The inflation was fuelled by global increases in some commodity prices, higher utility tariffs, and by local supply- and demand-driven factors,” ESCAP said. Government efforts to stem price rises included the expansion of the public-sector utility-store network, even extending the programme of subsidies for essential edibles to rural areas.
ESCAP said the government’s expansionary fiscal policy was seeking to promote more investment growth and pro-poor spending. Development expenditure has been taking an increasing share of overall expenditure in recent years. But the central government’s budget deficit in 2007 has remained steady at 4.2 per cent of gross domestic product (GDP).
Concerns were evident over a sharp slowing in the growth of Pakistan’s exports and imports in 2007. The rates of growth for exports fell 3.4 per cent while for imports the growth rate dropped by 6.9 per cent.
A widening trade deficit was partly covered by remittances from migrant workers, which in 2007 rose to a record amount of $5.5 billion. At the same time, the current account deficit is expected to further widen in 2008.
ESCAP says the current account deficit is to remain an issue for both Pakistan and other South Asian countries due to higher oil prices and the impact on the garment and textiles trade with the lifting of quota restrictions on Chinese exports over 2008. “To reduce the risk of depending too heavily on a single sector, export diversification should remain an important part of government strategies,” ESCAP said.
Issues of sustaining public debt and fiscal deficits
ESCAP says that for most South Asian nations, including Pakistan, public debt remains a serious problem with domestic public debt now accounting for a larger component of total public debt.
“In Pakistan, public debt growth during the 1990s was unprecedented. A credible debt reduction strategy and fast economic growth cut the public debt burden from 84 per cent of GDP in 2000 to 57 per cent by 2006,” ESCAP said.
Pakistan successfully reduced its external debt burden through rescheduling, a debt swap for social spending, debt cancellation and the prepayment of expensive debt. As a result the debt service ratio has declined substantially over the years 2000 to 2006 though some 30 per cent of government revenues remain allocated to debt servicing.
ESCAP says the reduction in public debt has enabled funds to be freed for development expenditures, from about two per cent of GDP in 2001 to about five per cent of GDP in recent years. “An ESCAP Secretariat analysis shows a further 20 per cent decrease in public debt service to government revenue ratio could increase development spending by 24 per cent,” it said.
ESCAP noted that steps are needed to be taken by policy makers to contain public debt, especially promoting economic growth. Also, as budget deficits are a major cause of public debt, “every effort should be made to maintain a primary surplus in the budget.”
It also called for the strengthening of the tax administration, improving the efficiency of the tax systems including simpler tax systems, with fewer exemptions, less discretion and better compliance. Also, given the needs of the poor, “the challenge for governments is to contain wasteful public spending and orient it toward priority sectors,” ESCAP added.
Agriculture’s revitalization key to reducing poverty
ESCAP, in a wider view of the Asia Pacific region, said efforts to reduce poverty especially in the rural areas required the promotion of productivity in the agriculture sector. The rural poor account for some 70 per cent of the poor in the Asia-Pacific region.
“Agriculture appears to be neglected, even though it still provides jobs for 60 per cent of the working population and generates about a quarter of the region’s gross GDP,” ESCAP said in its Survey.
The Survey goes on to note that growth and productivity in the sector have slowed and the green revolution appears to have by-passed millions. “In South Asia, growth in agriculture dropped from 3.6 per cent in the 1980s to three per cent in 2002-2003,” ESCAP said.
ESCAP said that by raising the average agricultural productivity across the region some 218 million, a third of the region’s poor, could be taken out of poverty. It also noted that “large gains in poverty are also possible through comprehensive liberalization of global agricultural trade, which could lift a further 48 million people out of poverty in the region.”
The policy focus needs to be on revitalizing agriculture. This, ESCAP said, requires connecting the poor to markets through improvements to rural infrastructure, the availability and management of water, agricultural technology, increasing the capacity to adapt technologies, and speeding up diversification and commercialization.
ESCAP says improving land distribution and access to credit and extension are also important, as well as making macroeconomic policy “friendlier to agriculture, all enabling the poor to make a dent on poverty by themselves.”
It also called for support for those looking to shift from agriculture to industry and services, whether it is still in rural areas or by way of migration to the cities.
Further information on the Survey can be found at:
For more information, please contact:
Hak-Fan Lau, UN Information Services, ESCAP
Tel.: +66-2-288-1866, Mob.: +66-84700-1147
Ari Gaitanis, UN Information Services, ESCAP
Tel.: +66-2-288-1862, Fax: +66-2-288-1052