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The Current Economic and Political Outlook of Pakistan:

Challenges and Prospects
RESEARCH APRIL 2015
DOI: 10.13140/RG.2.1.2108.8800

1 AUTHOR:
Khalid Ahmed
University of Cambridge
13 PUBLICATIONS 28 CITATIONS
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Retrieved on: 03 September 2015

The Current Economic and Political Outlook

of Pakistan:
Challenges and Prospects

Dr. Khalid Ahmed

Assistant Professor (Sukkur IBA)
Research Fellow (KIEP)

2014. 04

Contents
1. Some Macroeconomic Indicators
2. Key Benchmarks
3. Business Environment
4. Business and Trade Reforms
5. 5-Reasons to Invest in Pakistan
6. Attractive Investment Policy
7. Key Challenges

Contents
8. Opportunities
9. Political Outlook
10. Sharif s Govt. and Politico-Economic Agenda
11. Pak-China Strategic Relations and Future Trade Prospects
12. Pak-India Relations and Kashmir
13. Policy Challenges
14. Conclusions

The Economy of Pakistan

1. Some Macroeconomic Indicators
Population 179.2 mn. (2012)
GDP by Sector (%)

GDP $574.1 bn. (PPP 2013 est.)

-Agriculture 21.2%
-Industry
25.4%
-Services
53.4%
Inflation 7.93% (CPI, as of march 2014)
Unemployment 6.6 (2013 est.)
GDP per capita $3,100 (PPP 2013 est.)

21%
53%

26%

Agri
Industry
Services

The Economy of Pakistan

Labor Force 60.38 mn. (2012 est.)
by occupation:
-Agriculture 43.1%
-Industry
20.3%
-Services
36.6%
(7th largest pool of scientists & engineers in the world)

Main Industries
Textile and apparel Leather
Chemicals
Mining
Engineering
Motorcycle
Paper

Food processing
Construction
Machinery
Software
Auto parts
Fertilizer

Pharmaceuticals
Cement
Steel
Hardware
Electronics
Shrimp

The Economy of Pakistan

Exports 25.5 bn. (2013 est.)
Main Export Commodities

Textile (Garments, apparel, bed, linen, cotton, yarn, etc), Rice, Leather
Goods, Sports Goods, Chemicals, Manufactures, Carpets & Rugs
and Electrical equipments etc.

Top 10 Export Destinations

EU (18.2%),

US (13.6%),

China (11.1%),

UAE (8.5%),

Afghanistan (7.8%),

South Korea (2.8%),

Saudi Arabia (2.4%),

India (2.1%),

Turkey (2.0%),

Iran (1.8%)

The Economy of Pakistan

Imports 33.27 bn. (2013 est.)
Main Import Commodities
Petroleum,

Petroleum Products,

Machinery,

Transportation equipments,

Iron & steel,

Edible Oil

Paper and paper products,

Tea

Electronics-

-Products,

Plastics

Top 10 Import Destinations

China (19.7%),

Saudi Arabia (12.2%),

UAE (12.1%),

EU (10.4%),

Kuwait (6.3%),

Malaysia (3.9),

India (3.7),

Japan (3.6),

Iran (3.4%),

USA (3.2%)

The Economy of Pakistan

2. Key Benchmarks
Worlds largest natural gas consumer.

FDI Home $24.33 bn. (31.Dec.2013)

4th largest Cotton producer

FDI Abroad $1.57 bn. (31.Dec.2013)

(in early 2014 Pakistan has become Chinas
largest FDI destinations in South Asia)

4th largest Apricot producer

4th largest Sugarcane producer

5th largest Mango producer

5th largest Milk producer
6th largest date palm producer
8th largest Rice producer
10th largest Oranges producer
Source World Bank

Source : W.T.O, Economic Survey of Pakistan, IMF etc

The Economy of Pakistan

3. Business Environment
World Banks Ease of Doing Business Ranking 2013 (South Asia)
Country

World Rank

Regional Rank

Sri Lanka

85

Maldives

95

Nepal

105

Pakistan*

110

Bangladesh

130

India

134

Bhutan

141

*In 2010, Pakistan was 85th in world and 1st in South Asia
Source :World Bank

The Economy of Pakistan

4. Business and Trade reforms
Pakistan is one of the most trade liberalized economy.
Recently received GSP+ status from EU.
Signed Free Trade Agreement (FTA )with P.R CHINA.
Enhanced bilateral trade relations with neighboring countries
Proposed grant of MFN status to INDIA
Currently a the most Investment friendly environment

The Economy of Pakistan

5. 5-Reasons to Invest in Pakistan
Geostrategic
Location

Special
Economic
zone

Population
and Work
Force

5
Reasons

Investment
Policy

Economic
Outlook

Source: Board of Investment(BOI), Government of Pakistan. http://boi.gov.pk

The Economy of Pakistan

6. Attractive Investment Policy
Policy Parameters

Manufacturing
Sector

Non-Manufacturing Sector
Agriculture

Govt. Permission
Remittances of profit,
dividends, etc.
Upper Limit of foreign
equity allowed

Not required except 4

specified industries *

Infrastructure and
social

Services including
IT & Telecom
Services

Not required except specific licenses from concerned agencies.

Allowed

Allowed

100%

100%**

100%

100%

Customs duty on import of

PME

5%

0%

5%

0-5%

Tax relief (IDA, % of PME

cost)

25%

25%

No restriction for payment of

royalty & technical fee.

Allowed as per guidelines - Initial lump-sum up to $100,000 - Max

Rate 5% of net sales - Initial period 5 years

Royalty & Technical Fee

*Arms and ammunitions ,High Explosives. Radioactive substances Security Printing, Currency and Mint. No new unit for the manufacturing of alcohol,
except, industrial alcohol ** Only for CAF (Corporate Agriculture Farming)
PME= Plant, Machinery and Equipment
IDA= Initial Depreciation Allowance>
Source: Board of Investment(BOI), Government of Pakistan. http://boi.gov.pk

The Economy of Pakistan

7. Key Challenges
Energy
Shortage
Trade
Deficit

Population
Growth
Challenges

Budget
Deficit

Low
Savings

Public &
External
Debts

The Economy of Pakistan

Energy shortage
Demand and Supply Trend of Electricity (2003-12)
25000

Megawatts (MW)

20000

15000
Demand
Supply

10000

5000

0
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Note: In 2013 Pakistan had plant capacity of 19,588 MW but could only generate 10,000 to 15,000 MW.
Source: Private Power Infrastructure Board, www.ppib.gov.pk

The Economy of Pakistan

Population Growth
Annual Population Growth in (1965-2012)
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

Population growth (annual %)

Note: Population in 1983, 88.5 mn. and in 2012 ,179.1 mn. (doubled in 30 years)

Source: Ministry of Finance, Government of Pakistan

The Economy of Pakistan

Public Debts
Year / Billion (Rs.)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

a) Debt Payable (Rs)

1576

1728

1715

1852

1979

2152

2322

2601

3266

3852

4651

6014

7638

9521

Debt payable ($)

27.5

27.8

29.9

30.6

31.2

32.1

33.9

36.4

40.7

46.4

50.0

54.6

53.2

47.9

Exc. Rate (E.O.P)

52.5

63.4

60.1

57.7

57.9

59.7

60.2

60.4

68.3

81.4

85.5

86.0

94.5

99.1

b) Foreign Debt (Rs)

1442

1761

1795

1766

1810

1913

2041

2201

2778

3776

4270

4694

5030

4747

c) Total Debt (a + b)

3018

3489

3510

3618

3789

4065

4363

4802

6044

7629

8921

10709

12668

14268

3826

4163

4402

4823

5641

6500

7623

8673

10243 12724

14837

18063

20091

22909

513

553

624

721

806

900

1095

1298

1851

2078

2261

2566

2969

- GDP

78.9

83.8

79.8

75.0

67.2

62.5

57.2

55.4 59.0

60.0

68.1

59.3

63.0

62.3

- Revenue

588

631

563

502

470

452

398

370

412

429

474

494

481

GDP (mp)
Total Revenue

1499

Total Debt as % of:

Source: Ministry of Finance, Government of Pakistan

403

The Economy of Pakistan

External Debt Trend US$ bn. (1980-2013)
70

66.4

65

65.8

63.9

61.1

60

55

52.4

50

46.3

45

38.9

40
35
30.1

32

32.6

33.6

40.5
37.9

37.1

36.5

35.4

35.3

35.8

37.6

30
25

20.5

21.2

20
12.9

15
10

8.8

5
1980- 1987- 1989- 1990- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 201281
88
90
91
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
External Debt

Source: Ministry of Finance, Government of Pakistan

The Economy of Pakistan

Low Savings
GDS as % of GDP compared with Inflation
25

20

15
Savings
Inflation

10

Note: Population in 1983, 88.5 mn. and in 2012 ,179.1 mn. (doubled in 30 years)
Source: World Bank

The Economy of Pakistan

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

0.0

1990-91

Date

Budget Deficit (as % 0f GDP (1990-2013))

0.0
(1.0)
(2.0)
(2.4)

(3.0)

(3.3)

(4.0)

(3.7)
(4.3) (4.3)

(5.0)

(6.0)

(5.9)

(5.4)

(5.6)

(7.4)

(8.0)

(8.0)
(9.0)

(8.7)

(10.0)

Source: Ministry of Finance, Government of Pakistan

(5.4)

(6.1)

(6.5) (6.4)

(7.0)

(4.2) (4.3)

(7.7)

(6.3)

(6.6)

(7.4)
(8.5)

(8.8)

The Economy of Pakistan

Trade Deficit
Pakistan's Trade Deficit 1967-12
30
25
20

% of GDP

15
Exports %

10

Imports %
5

Net %

0
1967

71

75

-5
-10
-15
Source: World Bank

79

83

87

91

95

99

03

07

2012

The Economy of Pakistan

Net Bilateral Aid Flow in Pakistan
Net Total and US bilateral Aid Flow in Pakistan 1960-2011
3500
3000

2000
Total Aid Flow

1500

US aid Flow

1000
500
0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

Million US $

2500

-500

Source: World Bank

The Economy of Pakistan

Policy Challenges
Fiscal Policy Challenge (Least tax payer nation, 8.4% tax-to-GDP-ratio 2013*, only 0.4% * of
population pay taxes, high Govt. expenditures)

Monetary Policy Challenge

(Mostly IMF dictated monetary policy is adopted , however, Current acc

ount BoP is mainly maintained by personal remittances received ,which is avg. 5~6% of GDP and YOY gro
ws at 10 % and foreign aid and FDI.

Weak Disaster Management System

(One of the major reasons of economic slow down in Pakist

an from 2009~2012 was financial crisis of 2008 followed by two devastating floods in 2010, and 2011 res
pectively. Agriculture production collapsed, infrastructure heavily damaged and 1.5 million Internally Disp
laced People (IDPs) borne by the economy).

-Poverty

(In 2008 there were 17.3% people living below poverty line in Pakistan but in 2012 this ratio rise to
22.4%. Poverty is a common issues of whole region and it needs to be resolved collectively as a quick reme
dy)

Population

(The population growth has been very high which has been a major concern for lower growth a
nd higher unemployment rate.

Infrastructure (Pakistan needs to have very strong infrastructure of roads, transportation,

buildings, I.T
and communication in order to compete with other developing and emerging economies and for the attainm
ent of sustained growth rate.

The Economy of Pakistan

8. Opportunities
Pakistan has 4th largest Coal reservoirs and also posses unexplored huge oil and gas reservoirs
in Sindh and Balochistan provinces.

It has 1046 KM Coast line having fast enough winds and sunlight throughout the year , that are
the potential renewable energy sources, which are yet unutilized.
Being an agricultural country the bio-fuels can be exploited at large.

Although the agriculture productivity has declined during last two decades but country is self
sufficient in food crops, however the productivity can be increased in both cash and food crops
that can boost the GDP growth.
Pakistan has worlds 7th largest scientist and engineers pool and 60 million young labor force.

Pakistan neighbors with worlds most populous and giant economies i.e. China and India. There
are many bilateral comparative advantages that can enhance trade potential.
Pakistan lies nearest to worlds 2/3 of oil producing countries (gulf).

The Economy of Pakistan

9. Political Outlook
Political interests dominate economic interests in Pakistan even in current and
future outlookWhy?
The frequent change of regimes (democratic and military)
Geo strategic location

Unresolved Kashmir issue

Post cold war syndrome
War on terror and current policy shift
Talibanization (Internal security)

The Economy of Pakistan

10. Sharif s Govt. and Politico-Economic Agenda
The swift power shift of democratic Govt. portray a sound and stabilizing political environment.

First time in the history, the military institution has shown great support for strengthening of
democratic process.
Sharifs Govt. has always been business friendly during its past tenures and at present as well.

The recent bilateral relations with India has been the most friendly as compare to last decade.
The Govt. has taken drastic measures for investors security by providing fool proof security
measures with help of army and other law enforcing agencies.
The ongoing process of peace talks with Taliban has further ease to conduct business activities.
The Govt. is seeking national consensus on all the political and economic issues which is also a good
sign.

The Economy of Pakistan

11.Pak-China Strategic Relations and Future Trade Prospects
The Future Energy Hub

Straight of Hormuz

The Economy of Pakistan

12. Pak-India Relations and Kashmir
Bone of contention b/w Pak-India

Increasing water disputes

If include N.A only route to connect
with P.R China

Major drawback to economic well

being of region (i.e., SAARC)
Major hindrance to economic well
being of both countries

Root cause of overall socio-politico-economic disputes between two nations

The Economy of Pakistan

13. Policy Challenges
10 million Afghan refugees who never went
back

Pakistans growth has been deteriorated

majorly because of the change of regime
from military to democracy and vice versa.

Drugs dealing
Weapon and arms spread
Illegal cross border trade
Terrorism
Extremism

Every time the shift has reinitiated the

process of development and never
remained consistent.
The consistent political process and regime
is imperative for sustained growth and
economys development

Talibanization
Again this time the pleasant Civil-Military
relationships is a challenge for sustainable
political situation

Post-Cold War Syndrome

Civil-Military relations

The Economy of Pakistan

14. Conclusion
The main challenges, Pakistan economy is facing are energy shortage, high population growth rate, low saving rate
, high government expenditures, consistent budget deficit, trade deficit and internal and external debts.
The main indicators which positively contribute to reduce current account deficit are inward home remittances and f
oreign aid. However, there is need of higher FDI inflow and exports volume which is still under potential.
Although Pakistan is facing severe energy and security issues but yet it possesses strong potential to overcome both
the major hurdles.

The deterioration of economic growth during 2009~12 was mainly because of global financial crisis and two consec
utive worst natural disasters of country's history.
But Pakistan still managed to secure its 4th position in world banks ease of doing business in South Asia, which wa
s 1st in 2010 report.
Owing to Governments pro-active economic policies, the economy hit 5% growth rate for 1Q-FY 14, compare to o
nly 2.9% 1Q-FY 13, although the target set for FY-14 is 4.4%.
Pakistan lacks in basic and IT infrastructure i.e. Buildings, roads, communication, transportation, e-government etc.
Due to weak disaster management system, country is fragile to natural calamities and disasters.

The Economy of Pakistan

Conclusion
The deteriorated macro-economic indicators are improved within first quarter of FY14 which is good sign and it
also shows that the Pakistan economy is highly dynamic.
The new governments economic policies are highly friendly for private sector investment and trade. As a result
Pakistan could get GSP+ status but EU, and attracted substantial FDI from China, Turkey and EU recently.
The attractive sectors for foreign investors in Pakistan are: Energy, infrastructure and construction, automotive,
agriculture, mining, retail and pharmaceuticals.
After the completion of Gwadar port and its related projects to connect it with P.R China and Central Asian states
with open new corridors of trade and business.
The political set up of Pakistan has been frequently changed and resulted inconsistency in policies. This trend
always pushed economy backward and could not finished recovery phases even.
The current political set up is quite strong and has started to reflect positive signs.
The Pak-India relations have been very pleasant recently and Pakistan has decided to grant MFN status to India
after the elections are held, however the Kashmir issues will be still core issue and until its resolution the relations
may not be sustainable.