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Pakistan's Macroeconomic Adjustment and Resumption of Growth, 1999-2004

Author(s):
International Monetary Fund
Published Date:
July 2005
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I. Introduction

Over the past four years, Pakistan has returned to a relatively high growth rate, which is estimated to have accelerated to more than 6 percent for fiscal year 2003–04. This turnaround followed three years of steady decline in growth during 1998–99 through 2000–01. Even in per capita terms, growth has been robust in recent years. Per capita income in U.S. dollars is estimated to have reached $652 in 2003–04, compared to $501 in 2000–01.2

The resumption of growth is especially impressive when viewed in the context of the substantial macroeconomic adjustment that took place in this period. While this adjustment has in part been driven by external factors, right policies played a key role, in particular the government of Pakistan’s commitment to fiscal consolidation and to the pursuit of a broad agenda of market-oriented structural reforms in the fiscal, banking, and corporate sectors. These reforms have aimed at increasing efficiency, including through privatization, transparency, and good governance, and generally improving the business environment.

This paper looks back at the sources of the macroeconomic adjustment and resumption of growth over the past four years by providing an in-depth quantitative analysis of various factors at play. Based on the 2003–04 findings, the paper also highlights the conditions needed to ensure that growth of more than 6 percent can be sustained in 2004–05 and beyond, while maintaining internal and external stability. Both demand and supply factors are analyzed, and while the emphasis is mainly on quantitative indicators, the paper also qualitatively assesses the impact of ongoing structural reforms undertaken in Pakistan. Finally, comparisons are made between Pakistan and selected emerging markets which have managed sustained high growth rates, focusing on key variables recognized as critical for accelerated growth.

Section II details the accounting framework to derive and analyze the behavior of key macroeconomic aggregates in 1999–2000 through 2003–04. Section III looks at the numbers and highlights: first, the sources of macroeconomic adjustment and, second, the sources of economic growth in the period. The main findings are (1) an increase in private national savings during 2001–03 was the key contributor to the turnaround in the external current account in the period. This increase reflected both an increase in disposable private national income and a sharp rise in the savings rate itself. A surge in net private transfers from abroad, enhanced by a post–September 11 portfolio shift by Pakistanis to the home country contributed to this outcome. But a significant improvement in the financial performance of the corporate sector appears to have been a key contributing factor as well; and (2) while growth was mainly export-led before 2003–04, it was largely led by domestic demand in 2004, especially consumer demand but also private and public investment. This assessment is generally supported by an analysis of the breakdown of growth looking at the production side. Section IV draws conclusions for the sustainability of high growth rates going forward. The favorable impact of structural reforms on the business environment and on financial deepening, as well as the improvement in the efficiency and profitability of the corporate sector, augur well for the sustainability of high growth rates, even if certain exceptionally favorable factors, including low international interest rates, level off. We argue that those structural reforms have permanently raised the prospects for higher savings and investment. However, a more externally driven growth would reduce the risk of it not being sustainable. Furthermore, international comparisons with fast growing emerging market economies suggest that Pakistan needs to further catchup in terms of investment levels, external trade orientation, and financial deepening. While Pakistan fares well with regard to the business environment within the South Asia region, it lags behind China and other Southeast Asian countries. Thus, Pakistan needs to further pursue outward-oriented policies to boost exports and encourage foreign direct investment; continue with a broad range of structural reforms aimed at improving the investment climate; focus on developing its human capital toward a more skilled and competitive labor force; accelerate reforms in agriculture to garner potential productivity gains; and strengthen the country’s productive infrastructure, in particular for water management, ports, rural roads, and energy supply.

II. A Simple Accounting Framework

We first outline an accounting framework to analyze the behavior of key macroeconomic aggregates consistent with GDP, fiscal accounts, and balance of payments data.3 The framework is in line with Pakistan’s national accounts methodology, but attempts to more clearly differentiate between nongovernment (private)4and government (public) consumption, thus savings, and their determinants. Here, we limit government to the coverage of the consolidated budget, which allows a direct linkage between macroeconomic developments and the more visible fiscal policy stance.5

Regarding the macroeconomic adjustment over 2000–04, the analysis mainly focuses on the behavior of private and public consumption and savings, private and public gross investment, and external current account transactions expressed as ratios to GDP. Subsequently, the analysis assesses the contribution of these aggregates to growth by looking at their estimated real growth rates and contribution to overall growth. Further insights are gained by looking at the sectoral breakdown of growth from the production side. The role of productivity improvements is inferred from the observed behavior of incremental output-capital ratios.

III. Key Findings

A. Macroeconomic Balances

The macroeconomic balances derived for 1999–2000 through 2003–04 based on the above accounting framework are presented in Table 1 and Annex Table 1 and illustrated in Figure 1. For the analysis, it is convenient to break down the last four years into two subperiods.

Table 1.Pakistan: Macroeconomic Balances, 1999/2000–2003/04(In percent of GDP at market prices, unless otherwise indicated; new base)
1999–20002000–012001–022002–032003–04
Savings-Investment Balances
1. National Savings (S = CA + I)15.715.619.021.719.8
Private savings (Sp = S - Sg)17.717.018.422.119.5
Public savings (Sg = Rg - Ceg)-2.0-1.40.6-0.40.3
Government revenue including net official transfers from abroad (Rg)14.814.516.316.014.8
Government current expenditure adjusted for statistical discrepancy (Ceg)16.815.915.616.514.5
2. Gross total investment (I = Ip + Ig)17.417.216.816.718.1
Private investment (Ip)14.915.013.914.115.3
Government gross investment i.e. PSDP (Ig)2.52.22.92.72.8
Government gross investment including net lending (Ignl = Ig + nl)2.21.72.92.23.0
Net lending (nl)-0.3-0.40.0-0.50.2
3. External current account balance including official transfers-1.6-1.62.24.91.7
Expenditure on Gross Domestic Product
1. Total Consumption (C = Cp + Cg)85.686.084.083.784.8
Private consumption (Cp = Yp - Sp)77.778.376.374.276.6
Public consumption (Cg = Ceg - id - Tg - SG - if)7.97.67.79.58.2
Government current expenditure adjusted for statistical discrepancy (Ceg)16.815.915.616.514.5
Domestic interest payments (id)5.24.44.23.33.0
Transfers from the government (i.e. pension) (Tg)0.90.70.60.80.8
Subsidies and grants (SG)0.70.91.11.51.7
Net foreign interest payments (if)2.12.22.01.30.9
2. Gross total investment (I)17.417.216.816.718.1
3. Balance of exports and imports of goods and nonfactor services (X - M)-3.0-3.1-0.8-0.4-2.9
Exports of goods and nonfactor services (X)13.014.415.416.615.8
Exports of goods11.212.512.713.313.0
Exports of nonfactor service1.91.92.73.32.8
Imports of goods and nonfactor services (M)16.017.516.217.018.7
Imports of goods13.114.313.113.714.5
Imports of nonfactor service2.93.33.13.34.2
4. Nominal GDP at market price (GDPmp = C + I + X - M)100.0100.0100.0100.0100.0
Memorandum items:
1. Disposable gross private national income (Yp = GDPmp - Ti + SG + Tp - PD - To + id + Tg)95.595.494.796.396.1
Nominal GDP at market price (GDPmp)100.0100.0100.0100.0100.0
Indirect taxes (Ti)7.27.27.27.87.5
Subsidies and grants (SG)0.70.91.11.51.7
Net private transfers from abroad (Tp)2.73.44.26.96.4
Net profits/dividends to abroad (PD)0.60.91.21.31.4
Direct and other taxes (To)6.36.17.07.16.8
Domestic interest payments (id)5.24.44.23.33.0
Transfers from the government (i.e. pension) (Tg)0.90.70.60.80.8
2. Aggregate Demand (C + I + X)116.0117.5116.2117.0118.7
3. Domestic Demand(C + I)103.0103.1100.8100.4102.9
4. Private savings in percent of disposable income (Sp/Yp*100)18.617.919.423.020.3
5. Growth in real GDP at factor cost (GDPfcg) (in percent)1.83.15.16.5
6. Growth in real GDP at market price (GDPmpg) (in percent)1.93.25.26.1
7. Incremental output capital ratio (GDPmpgt/(I/GDPmp)t-1))0.110.190.310.36
8. Nominal exchange rate (rupees per U.S. dollar, p.a.) (ER)51.758.361.358.457.4

Figure 1.Pakistan: Macroeconomic Adjustment, 1999/2000–2003/04

2000–01 Through 2002–03

The turnaround in the external current account balance from a deficit of almost 2 percent of GDP in 2000–01 to a surplus of close to 5 percent of GDP in 2002–03 mainly reflected the sharp increase in national savings.

National savings increased mainly on account of private national savings, which are estimated to have risen from 17 percent to almost 22 percent of GDP. Higher public savings contributed to about 1/4 of the external current account adjustment. Gross private and government investment changed little in percent of GDP.

Higher private national savings reflected in part higher private national income in connection with the significant increase in net private transfers from abroad (remittances and foreign currency deposits of residents-FCAs) by almost 4 percentage points of GDP. Disposable gross private national income in percent of GDP increased much less, and this is apparently due to two main factors: an increase in revenues collected by government, as part of fiscal consolidation, and a decline in domestic interest payments made by government (reflecting both lower market interest rates and the phasing out of the subsidy element in the interest rates on the National Saving Scheme’s instruments).6

The main explanatory factor for the turnaround in the external current account was an increase in the private national savings rate7from a low of about 18 percent to 23 percent in the period (Figure 2). Household behavior in line with application of the permanent income hypothesis could in part account for this increase. But since the increase in disposable gross private national income in percent of GDP was only modest, as just mentioned, other factors must have been at play. Foremost, the much improved financial performance of the corporate sector (both private and public) should have been a major contributor to the higher savings rate. This would reflect the direct impact of retained earnings on savings and the greater propensity to save out of distributed earnings. As shown in Table 2, after-tax profits of corporations listed on the Karachi Stock Exchange (KSE), which covers only about 700 corporations, alone rose by more than a full 1 percent of GDP in the period 2001–03.8

Figure 2.Pakistan: Private Savings Behavior, 1999/2000–2003/04

Table 2.Pakistan: Profits of Companies Listed on the Karachi Stock Exchange, 2001–03(In millions of Pakistani rupees)
200120012002200220032003
before taxafter taxbefore taxafter taxbefore taxafter tax
Mutual fund4934905465445,6135,602
Modaraba-197-2897116821,1821,150
Leasing3812889620984875
Bank5,8692,93017,3809,18628,91618,545
Insurance193-61,6289372,2611,776
Textile spinning2,5611,6781,3597131,6061,003
Textile wearing44631715842230113
Textile composite2,8492,1703,0742,2633,4992,897
Woolen916385707063
Synthetic and rayon3,1032,1422,0881,5531,4001,045
Jute-164-204-86-128371216
Sugar and allied industries-687-901-492-1,013-242-386
Cement-1,663-1,83536287-568-18
Tobacco9757631,8021,1661,9151,176
Fuel and energy9,7084,5747,7521,80820,48913,147
Engineering-84-1863-172930695
Auto and allied industries2,7251,6534,5603,1019,2146,180
Cable and electrical goods329152610438881514
Transport and communication27,11515,89233,86022,45341,43025,192
Chemical and pharmaceutical2,783-7319,9137,7889,9595,527
Paper and board1,2019491,7461,3842,1541,663
Vanaspati and allied industries-227-266773733-62
Construction10-3-1-1
Leather and tanneries32424120013813065
Food and allied industries3,6182,2644,8293,1495,5633,697
Glass and ceramics208159156106334317
Miscellaneous483329676493359252
Total62,44332,63393,09156,845138,71591,244
(in percent of GDP)(1.5)(0.8)(2.0)(1.2)(2.8)(1.8)
Memorandum items:
Number of listed companies747747711711701701
Source: Karachi Stock Exchange website (http://www.kse.com).
Source: Karachi Stock Exchange website (http://www.kse.com).

2003–04

A leveling-off in net private transfers from abroad and a decline in the savings rate contributed to a decline in national savings in 2003–04 by about 2 percentage points of GDP to just below 20 percent. At the same time there was an increase in investment, both private and public, by about 1 ½ percentage points to just above 18 percent of GDP, with a concomitant decline in the external current account balance. The downward correction in the private savings rate could reflect, on the households’ side, the working of the permanent income hypothesis. It also correlates with the banking system’s success in intermediating more of the abundant liquidity to the household and enterprise sectors. It is worth noting that national savings remained significantly higher than at the beginning of the period under review. This development, if continued, would augur well for the sustainability of higher rates of economic growth.

B. Sources of Growth

1. Demand Side

By analyzing the sources of the acceleration in growth from the demand side, we built a constant 1999–2000 prices series of national accounts aggregates highlighted above; the deflators used (Annex Table 2) are from the Federal Bureau of Statistics (FBS).9 From the results in Tables 3a and 3b, Annex Table 3, and also illustrated in Figure 3, we draw the following observations.

Table 3a.Pakistan: Real Growth Rates (Demand Side), 2000/01–2003/04(In percent, new base)
2000–012001–022002–032003–04
1. Gross total investment (I = Ip + Ig)5.10.33.612.4
Private investment (Ip)7.5-4.94.713.2
Government gross investment i.e. PSDP (Ig)-9.236.3-1.48.3
2. Total Consumption (C = Cp + Cg)-0.11.02.66.4
Private consumption (Cp = Yp - Sp)-0.20.7-0.38.2
Public consumption (Cg = Ceg - id - Tg - SG - if)1.23.829.6-6.2
3. Exports of goods and nonfactor services (X)13.213.226.03.2
Exports of goods15.07.722.25.9
Exports of nonfactor service2.849.444.0-7.9
4. Imports of goods and nonfactor services (M)4.3-2.310.911.0
Imports of goods4.0-2.810.56.6
Imports of nonfactor service5.7-0.212.729.3
5. Aggregate Demand (C + I + X)2.22.45.96.8
6. Domestic Demand(C + I)0.80.92.87.5
7. GDP at constant market price (GDPmp)1.93.25.26.1
Table 3b.Pakistan: Contributions to Real Growth Rates (Demand Side), 2000/01–2003/04(In percent, new base)
2000–012001–022002–032003–04
1. Gross total investment (I = Ip + Ig)0.90.10.62.1
Private investment (Ip)1.1-0.80.71.9
Government gross investment i.e. PSDP (Ig)-0.20.80.00.2
2. Total Consumption (C = Cp + Cg)-0.10.82.15.2
Private consumption (Cp = Yp - Sp)-0.10.6-0.25.8
Public consumption (Cg = Ceg - id - Tg - SG - if)0.10.32.3-0.6
3. Exports of goods and nonfactor services (X)1.71.94.10.6
Exports of goods1.71.02.90.9
Exports of nonfactor service0.10.91.2-0.3
4. Imports of goods and nonfactor services (M)0.7-0.41.71.8
Imports of goods0.5-0.41.30.9
Imports of nonfactor service0.20.00.40.9
5. Aggregate Demand (C + I + X)2.62.86.97.9
6. Domestic Demand(C + I)0.80.92.77.3
7. GDP at constant market price (GDPmp)1.93.25.26.1

Figure 3.Pakistan: Breakdown of GDP Growth (Demand Side), 2000/01–2003/04

2000–01 Through 2002–03

The sustained double digit growth in export volumes was a remarkable source of growth during these years. The growth in investment was erratic, while the growth in consumption, although showing an upward trend, was relatively weak. The growth in export volumes was especially impressive in 2002–03, with all sectors (primary commodities, textile manufactures, and others) contributing to it (Tables 4a and 4b). Inputs for textile and machinery (textile and others) appear to have led the recovery in import volumes in this year (Tables 5a and 5b).

Table 4a:Pakistan: Major Exports, 1999/2000–2003/04(Value: million U.S. dollar; Unit value: U.S. dollar)
1999/20002000/012001/022002/032003/04
UnitQuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.
A. Primary commodities1,106.91,199.91,073.11,263.91,275.0
1 RiceMT1,916.1539.7281.72,294.3525.5229.11,684.3448.2266.11,820.0555.5305.21,822.7634.5348.1
2 Raw cottonMT83.072.6874.6135.1139.31,031.035.024.7707.455.149.0889.637.347.71,277.8
3 Raw wool (excluding wool tops)MT0.91.21,315.60.50.71,209.91.10.9860.61.51.3900.32.21.4632.8
4 Fish and fish preparationsMT89.9138.91,545.782.0137.81,679.684.5125.61,487.793.2134.51,442.9103.3152.91,480.8
5 LeatherSQM12,898.3175.213.617,532.2232.913.317,290.4239.913.915,349.4234.815.316,049.6251.715.7
6 Guar and guar productsMT25.936.01,390.822.120.5926.923.516.4698.325.523.8932.924.520.2824.0
7 FruitsMT239.879.9333.1260.178.7302.7289.883.1286.7258.883.2321.3354.4102.7289.7
8 VegetablesMT238.942.9179.7190.536.9193.6158.329.1183.5195.131.5161.6172.831.3181.1
9 Crude animal materialMT24.315.8648.230.515.8517.021.713.2606.117.013.5795.17.615.52,023.4
10 Oil Seeds & nuts, etc.MT9.74.9501.222.811.8519.748.520.5422.514.57.2500.019.411.2577.5
11 WheatMT80.511.0136.7642.671.4111.11,137.0129.6114.042.96.0140.2
B. Textile manufactures5,588.15,790.95,810.67,263.18,073.0
12 Cotton yarnMT513.01,071.62,089.0545.11,073.51,969.3540.0929.71,721.6519.3928.41,787.6499.11,126.92,258.0
13 Cotton fabrics (woven)SQM1,574.91,096.20.71,735.81,032.50.61,909.31,130.80.62,036.31,345.70.72,409.41,711.50.7
14 Hosiery (Knitwear)DOZ39,313.1886.722.639,384.5911.423.136,556.3845.923.152,133.41,146.722.066,378.81,458.722.0
15 Bed wearMT132.6709.95,354.4148.4744.95,020.6181.2918.65,070.2241.91,329.15,494.6244.21,383.35,664.6
16 TowelsMT51.2195.63,818.567.5241.73,582.678.7267.73,401.1100.6374.83,726.6101.8403.53,963.4
17 Cotton bags and sacksMT4.419.24,397.14.719.04,034.94.015.83,931.24.217.04,083.73.715.54,133.7
18 Readymade garmentsDOZ30,420.0771.725.435,860.1826.823.141,414.8875.021.136,457.21,092.630.027,591.7993.336.0
19 Tarpaulin & other canvas goodsMT20.952.92,533.021.849.22,262.822.549.72,204.632.273.32,275.331.974.82,342.1
20 Tule, lace embroidery, etc.(-)---13.3------10.4------9.7------11.2------11.4---
21 Synthetic textilesSQM640.6457.70.7842.9544.60.6654.9410.00.6787.9574.30.7654.6470.80.7
22 Other textile made-up(-)---307.6------330.9------350.9------359.8------416.6---
23 Waste material of tex. fibres/fabricsMT9.85.7580.711.36.0528.512.16.9571.315.810.3652.512.06.8565.1
C. Other manufactures1,268.91,537.01,530.31,696.51,776.2
24 Carpets, carpeting rugs & matsSQM5,141.0264.351.46,381.1288.745.25,081.0249.649.14,259.4220.951.94,148.0231.455.8
25 Petroleum and petroleum productsMT439.881.9186.2824.5183.9223.11,021.4190.7186.71,004.7248.6247.4986.9294.5298.4
26 Sports goods(-)---279.2------270.6------304.5------335.2------324.8---
27 Leather manufactures(-)---338.7------425.5------383.2------386.5------414.3---
28 Surgical and medical instrumentsNO86,210.2120.11.496,655.5124.11.3120,377.4145.01.2111,565.8150.01.3---132.6---
29 CutleryGR497.822.946.0757.726.434.9728.424.533.6951.329.631.11,179.329.725.2
30 Onyx manufacturedMT5.710.01,741.37.012.01,712.36.310.01,601.26.611.71,764.06.811.61,706.8
31 Chemicals and pharmaceuticals(-)---100.0------164.3------152.8------260.9------263.0---
32 MolassesMT1,748.842.524.31,190.041.334.71,742.768.739.41,272.645.535.71,457.346.932.2
33 SugarMT30.59.4309.90.00.03.81.3335.332.27.7238.027.6
D. Others604.6673.8720.6---936.8---1,189.1---
Total exports8,568.69,201.69,134.611,160.212,313.29
Source: Federal Bureau of Statistics.
Source: Federal Bureau of Statistics.
Table 4b.Pakistan: Major Exports, 1999/2000–2003/04(Percentage change over corresponding period)
1999/20002000/012001/022002/032003/04
UnitQuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.
A. Primary commodities10.48.4-10.617.80.9
1 RiceMT7.11.1-5.619.7-2.6-18.7-26.6-14.716.28.123.914.70.214.214.0
2 Raw cottonMT4,645.93,017.5-34.362.892.017.9-74.1-82.2-31.457.698.225.8-32.3-2.743.6
3 Raw wool (excluding wool tops)MT-48.2-56.3-15.7-39.6-44.4-8.0101.843.6-28.936.542.84.650.65.8-29.7
4 Fish and fish preparationsMT13.613.2-0.3-8.7-0.88.72.9-8.8-11.410.47.0-3.010.813.72.6
5 LeatherSQM2.3-1.2-3.435.933.0-2.2-1.43.04.5-11.2-2.210.24.67.22.5
6 Guar and guar productsMT33.39.6-17.8-14.6-43.1-33.46.1-20.1-24.78.745.233.6-4.0-15.2-11.7
7 FruitsMT32.543.98.68.4-1.5-9.111.45.5-5.3-10.70.112.136.923.5-9.8
8 VegetablesMT21.3-10.7-26.4-20.3-14.17.7-16.9-21.2-5.223.28.5-12.0-11.4-0.712.1
9 Crude animal materialMT-0.1-7.0-6.925.30.0-20.2-28.7-16.417.2-21.92.531.2-55.014.4154.5
10 Oil Seeds & nuts, etc.MT-49.1-55.2-12.0133.8142.43.7113.273.3-18.7-70.2-64.718.334.455.215.5
11 WheatMT698.3548.6-18.776.981.62.6-96.2-95.423.0
B. Textile manufactures12.43.60.325.011.2
12 Cotton yarnMT21.713.4-6.86.30.2-5.7-0.9-13.4-12.6-3.8-0.13.8-3.921.426.3
13 Cotton fabrics (woven)SQM16.2-1.7-15.410.2-5.8-14.510.09.5-0.46.719.011.618.327.27.5
14 Hosiery (Knitwear)DOZ21.019.5-1.30.22.82.6-7.2-7.20.042.635.5-5.027.327.2-0.1
15 Bed wearMT19.316.2-2.611.94.9-6.222.123.31.033.544.78.41.04.13.1
16 TowelsMT16.910.1-5.831.723.5-6.216.710.8-5.127.840.09.61.27.66.4
17 Cotton bags and sacksMT-7.6-7.7-0.17.7-1.1-8.2-14.7-16.9-2.63.67.63.9-10-8.91.2
18 Readymade garmentsDOZ8.818.58.917.97.1-9.115.55.8-8.4-12.024.941.9-24-9.120.1
19 Tarpaulin & other canvas goodsMT27.429.81.94.1-7.0-10.73.50.9-2.643.047.63.2-0.92.02.9
20 Tule, lace embroidery, etc.(-)---43.1-------21.7-------7.1------16.3------1.1---
21 Synthetic textilesSQM26.714.8-9.431.619.0-9.6-22.3-24.7-3.120.340.116.4-16.9-18.0-1.3
22 Other textile made-up(-)---20.5------7.6------6.0------2.5------15.8---
23 Waste material of tex. fibres/fabricsMT7.3-5.8-12.315.04.7-9.07.015.78.130.849.414.2-23.9-34.1-13.4
C. Other manufactures-2.121.1-0.410.94.7
24 Carpets, carpeting rugs and matsSQM35.030.4-3.424.19.3-12.0-20.4-13.68.5-16.2-11.55.6-2.64.87.6
25 Petroleum and petroleum productsMT-0.472.673.487.5124.719.823.93.7-16.3-1.630.332.5-1.818.520.6
26 Sports goods(-)---9.0-------3.1------12.5------10.1-------3.1---
27 Leather manufactures(-)---1.3------25.6-------9.9------0.9------7.2---
28 Surgical and medical instrumentsNO-9.37.718.712.13.3-7.824.516.8-6.2-7.33.411.6-11.6
29 CutleryGR11.526.913.852.215.4-24.2-3.9-7.3-3.530.620.7-7.624.00.3-19.1
30 Onyx manufacturedMT68.070.71.622.420.3-1.7-10.8-16.6-6.56.016.810.22.0-1.3-3.2
31 Chemicals and pharmaceuticals(-)---102.9------64.3-------7.0------70.8------0.8---
32 MolassesMT-4.78.013.4-32.0-2.842.946.466.213.5-27.0-33.8-9.414.53.1-10.0
33 SugarMT-96.6-95.921.4-100.0-100.0-100.0748.2501.9-29.0---259.5---
D. Others19.211.46.930.026.9
Total exports10.17.4-0.722.210.3
Source: Federal Bureau of Statistics.
Source: Federal Bureau of Statistics.
Table 5a.Pakistan: Major Imports, 1999/2000–2003/04(Value: million U.S. dollar; unit value: U.S.dollar)
1999/20002000/012001/022002/032003/04
UnitQuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.
A. Food Group------1,113.1---990.0---823.2------978.0------1,033.3---
1. Milk & cream incl. milk food for infants*MT17.330.01,738.110.220.01,961.17.016.12,293.812.822.81,778.011.021.31,936.5
2. Wheat unmilledMT2,005.8283.5141.380.015.4192.4267.250.0187.2147.928.7194.2108.023.6218.6
3. Dry fruitsMT57.248.0839.284.837.2438.091.231.2342.084.925.8303.766.118.3277.2
4. TeaMT108.6210.51,937.1111.9206.41,845.299.4156.61,575.1108.1172.71,597.3116.0192.51,660.1
5. SpicesMT22.923.31,019.616.818.61,107.221.417.0793.535.123.0654.772.040.8566.5
6. Edible oilMT1,050.9413.4393.41,143.6327.6286.41,196.8393.0328.41,293.5586.8453.61,360.7658.6484.0
SoyabeanMT202.488.4436.6128.444.1343.534.312.7369.482.747.5574.580.845.6564.8
Palm oilMT848.5325.1383.11,015.2283.5279.21,162.5380.3327.21,210.9539.3445.41,280.0613.0478.9
7. SugarMT66.614.8222.1930.2251.9270.885.723.5273.78.32.6315.211.43.3287.2
8. PulsesMT293.089.6305.7364.8113.0309.7460.3135.9295.3394.4115.6293.2261.474.9286.4
B. Machinery group------1,997.7---2,066.3------2,175.8------2,942.3------4,220.4---
1. Power generating machinery------141.7---197.9------203.8------268.5------277.8---
2. Office machinery------158.0---233.1------224.3------211.5------209.5---
3. Textile machinery------211.0---370.2------406.9------531.9------598.0---
4. Construction & mining machinery------88.4---82.5------118.6------101.2------101.5---
5. Electrical machinery & apparatus------155.0---131.6------128.0------216.7------258.1---
6. Railway vehicles------39.5---25.7------38.3------49.6------72.5---
7. Road motor vehicles------345.5---320.9------329.9------501.2------652.8---
8. Aircraft, ships, and boats------179.1---79.7------132.3------134.1------789.8---
9. Agricultural machinery & implements------49.8---23.8------16.1------36.8------37.7---
10. Other machinery------629.7---601.0------577.6------890.8------1,222.8---
C. Petroleum group---16,263.02,804.4172.416,983.63,360.8197.916,368.92,807.0171.515,241.63,066.4201.213,303.73,166.6238.0
1. Petroleum productsMT11,809.91,999.4169.310,128.52,000.3197.59,228.51,576.2170.88,449.51,699.9201.25,412.21,401.4258.9
2. Petroleum crudeMT4,453.1805.0180.86,855.01,360.6198.57,140.41,230.8172.46,792.01,366.5201.27,891.51,765.1223.7
D. Textile group------152.6------161.8------187.5------221.6------260.5---
1. Synthetic fibreMT61.976.51,236.460.277.81,291.359.974.41,242.169.792.01,319.971.4106.11,485.9
2. Synthetic & artificial silk yarnMT23.047.52,063.534.059.51,753.554.282.41,521.359.691.81,541.769.4118.01,699.7
3. Worn clothingMT81.728.5349.6140.624.5174.199.830.7307.5117.137.8322.5112.536.4323.4
E. Agricultural and other chem. group------1,997.2------1,901.7------1,862.9------2,160.7------2,797.7---
1. FertilizerMT1,120.9197.6176.3954.0170.5178.71,219.3176.2144.51,295.2239.8185.11,347.8284.7211.2
2. InsecticidesMT26.190.73,472.121.361.22,878.631.885.92,703.622.258.52,629.241.4124.12,997.3
3. Plastic materialsMT391.7332.9849.9418.3354.3847.0457.9352.7770.2513.2421.1820.5605.4549.3907.4
4. Medicinal productsMT11.7259.422,244.518.3238.713,067.59.7228.123,471.08.7221.825,472.19.5274.628,965.4
5. Others------1,116.6------1,077.0------1,019.9------1,219.6------1,564.9---
F. Metal group------372.3------361.4------433.9------507.4------687.7---
1. Iron and steel scrapMT190.423.8125.2367.243.0117.1409.250.6123.7344.547.9138.9545.993.6171.4
2. Iron and steelMT861.0304.5353.7824.7277.9337.01,145.8336.1293.31,099.0402.3366.11,264.2512.0405.0
3. Aluminium wrought & worked------43.9---0.040.4------47.2------57.2------82.1---
G. Miscellaneous group------268.4------265.5------285.4------306.4------378.3---
1. Rubber crudeMT55.637.0665.958.739.2668.065.441.1628.563.849.1770.076.668.2891.0
2. Rubber tyres & tubesNos2,825.469.424.62,789.462.522.43,156.766.621.13,809.978.320.54,061.189.021.9
3. Wood & cork------24.0------15.3------14.7------26.4------25.8---
4. JuteMT72.720.5281.689.423.2259.490.926.2288.189.221.0235.6112.930.9273.7
5. Paper and paper board & manufacturesMT175.0117.5671.5160.5125.3780.7197.2136.8693.7217.1131.7606.4263.4164.4624.1
H. Others---1,603.81,621.41,763.82,037.33,047.3
Total imports:10,309.410,728.910,339.512,220.315,591.8
Source: Federal Bureau of Statistics.
Source: Federal Bureau of Statistics.
Table 5b.Pakistan: Major Imports, 1999/2000–2003/04(Percentage change over corresponding period)
1999/20002000/012001/022002/032003/04
UnitQuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.QuantityValueUnit val.
A. Food group-------29.9----11.1----16.9------18.8------5.7---
1. Milk & cream incl. milk food for infants*MT-9.1-17.1-8.8-40.9-33.312.8-31.3-19.717.082.741.6-22.5-14.2-6.58.9
2. Wheat unmilledMT-38.1-24.921.3-96.0-94.636.1233.9224.9-2.7-44.6-42.63.7-27.0-17.812.6
3. Dry fruitsMT3.517.613.648.2-22.7-47.87.5-16.1-21.9-6.9-17.3-11.2-22.1-28.9-8.7
4. TeaMT-9.2-5.64.03.0-1.9-4.7-11.1-24.1-14.68.810.31.47.211.43.9
5. SpicesMT-37.7-36.81.5-26.5-20.28.627.3-8.8-28.364.035.3-17.5105.477.7-13.5
6. Edible oilMT-20.7-48.8-35.58.8-20.8-27.24.720.014.68.149.338.15.212.26.7
SoyabeanMT-44.4-60.5-28.9-36.6-50.1-21.3-73.3-71.37.5141.0274.855.5-2.3-4.0-1.7
Palm oilMT-11.7-44.4-37.019.6-12.8-27.114.534.217.24.241.836.15.713.77.5
7. SugarMT558.0382.8-26.61296.11602.221.9-90.8-90.71.1-90.3-88.815.237.124.9-8.9
8. PulsesMT50.843.4-4.924.526.21.326.220.3-4.7-14.3-14.9-0.7-33.7-35.2-2.3
B. Machinery group-------9.1------3.4------5.3------35.2------43.4---
1. Power generating machinery-------39.7------39.6------3.0------31.8------3.5---
2. Office machinery------25.8------47.5-------3.8-------5.7-------1.0---
3. Textile machinery------28.6------75.5------9.9------30.7------12.4---
4. Construction & mining machinery-------5.6-------6.7------43.7-------14.6------0.2---
5. Electrical machinery & apparatus------4.8-------15.1-------2.7------69.2------19.1---
6. Railway vehicles------15.6-------35.0------49.1------29.5------46.3---
7. Road motor vehicles------10.6-------7.1------2.8------51.9------30.2---
8. Aircraft, ships, and boats-------8.1-------55.5------65.9------1.4------488.8---
9. Agricultural machinery & implements------13.9-------52.3-------32.4------129.3------2.3---
10. Other machinery-------25.6-------4.6-------3.9------54.2------37.3---
C. Petroleum group---7.5104.5---4.419.814.8-3.6-16.5-13.3-6.99.217.3-12.73.318.3
1. Petroleum productsMT10.8106.186.0-14.20.016.7-8.9-21.2-13.5-8.47.817.8-35.9-17.628.7
2. Petroleum crudeMT-0.5100.7101.753.969.09.84.2-9.5-13.2-4.911.016.716.229.211.2
D. Textile group-------9.2------6.0------15.9------18.2------17.5---
1. Synthetic fibreMT-14.7-18.8-4.8-2.71.64.4-0.6-4.4-3.816.523.86.32.415.312.6
2. Synthetic & artificial silk yarnMT15.76.3-8.247.525.3-15.059.638.5-13.29.911.41.316.528.510.3
3. Worn clothingMT5.3-2.0-6.972.2-14.2-50.2-29.025.376.617.323.14.9-3.9-3.70.3
E. Agricultural and other chem. group------10.7-------4.8-------2.0------16.0------29.5---
1. FertilizerMT-30.5-25.07.8-14.9-13.71.427.83.4-19.16.236.128.14.118.714.1
2. InsecticidesMT-18.1-18.10.0-18.6-32.5-17.149.540.4-6.1-30.0-31.9-2.886.2112.214.0
3. Plastic materialsMT-8.27.216.76.86.4-0.39.5-0.5-9.112.119.46.518.030.510.6
4. Medicinal productsMT7.6-0.1-7.256.6-8.0-41.3-46.8-4.479.6-10.4-2.88.58.923.813.7
5. Others------29.9-------3.5-------5.3------19.6------28.3---
F. Metal group------6.6-------2.9------20.1------16.9------35.5---
1. Iron and steel scrapMT39.627.3-8.892.980.4-6.511.417.75.6-15.8-5.512.358.595.623.4
2. Iron and steelMT28.84.0-19.3-4.2-8.7-4.738.920.9-13.0-4.119.724.815.027.310.6
3. Aluminium wrought & worked------16.5-------7.9------16.7------21.1------43.6---
G. Miscellaneous group------1.4-------1.1------7.5------7.4------23.5---
1. Rubber crudeMT0.8-3.9-4.75.55.80.311.54.9-5.9-2.519.422.520.038.915.7
2. Rubber tyres & tubesNos-13.1-4.110.3-1.3-9.9-8.813.26.5-5.920.717.6-2.66.613.86.7
3. Wood and cork-------0.2-------36.0-------4.0------79.1-------2.2---
4. JuteMT10.723.211.323.113.4-7.91.712.911.1-1.9-19.8-18.226.546.916.2
5. Paper and paper board & manufacturesMT7.03.9-2.9-8.36.616.322.99.2-11.210.1-3.8-12.621.324.82.9
H. Others---0.81.18.815.549.6
Total imports:10.44.1-3.618.227.6
Source: Federal Bureau of Statistics.
Source: Federal Bureau of Statistics.

Thus, net exports contributed 1.0, 2.3, and 2.4 percentage points to the overall real GDP growth rates of 1.9, 3.2, and 5.2 percent during these years.

2003–04

There was a remarkable pick-up in both public and especially private investment in this year, with an overall increase of more than 12 percent in real terms. At the same time, private consumption rebounded strongly, growing by more than 8 percent in real terms. Given its share in GDP, consumption mainly drove the acceleration in overall GDP growth in 2003–04.

Indeed, consumption contributed 5.2 percentage points, and gross investment 2.1 percentage points to the overall 6.1 percent real GDP growth achieved in the year. Net exports appear to have been a drag on overall growth in 2003–04.

In real terms, exports of goods and services grew by only 3 percent in 2003–04, consistent with the observation that the 10 percent increase in exports of goods in U.S. dollar terms (primary commodities, textile manufactures, and other manufactures) appears to have mainly reflected higher unit values.10 The growth in “other” exports, by 27 percent in U.S. dollar terms, was, however, encouraging, following a similar growth in 2002–03 and suggests some progress toward export diversification, albeit from a still relatively low level (representing only about 10 percent of total exports).

The acceleration in import growth in U.S. dollar terms in 2003–04 owed in part to the aircraft, ship, and boat category, but also to other machinery, as well as agricultural, metal, and other inputs. Notwithstanding the sharp rise in other machinery (still representing less than 10 percent of imports), the breakdown of imports only partially supports the view that a broad-based surge in productive investments has mainly been driving the growth in imports.

2. Production Side

Next, we look at the production side of GDP to gain further insights on the sources of growth and corroborate the findings so far. From Tables 6a and 6b (based on Annex Table 4), Table 7, and Figure 4 we draw the following observations.

Table 6a.Pakistan: Real Growth Rates (Production Side), 1999/2000–2003/04(In percent, at constant factor cost of 1999/2000, new base)
Sectors2000/012001/022002/032003/04
A. Commodity Producing Sectors (1+2)0.51.34.97.9
1. Agriculture-2.20.14.12.6
2. Industry (i + ii + iii + iv)3.62.65.813.5
i. Mining and quarrying-1.77.316.10.0
ii. Manufacturing9.34.56.914.0
Large scale11.03.57.218.1
Small scale7.57.57.57.5
Slaughtering3.03.03.02.8
iii. Construction0.51.63.17.9
iv. Electricity, gas, and water supply-13.7-7.0-2.622.5
B. Services Sectors (3+4+5+6+7+8)3.14.85.35.2
3. Transport, storage, and communication5.31.24.03.9
4. Wholesale and retail trade4.52.85.98.0
5. Finance and insurance-15.117.2-3.2-3.7
6. Ownership of dwellings3.83.53.53.5
7. Public administration and defence2.26.910.15.9
8. Public administration and defence5.67.96.34.8
GDP at factor cost (A + B)1.83.15.16.5
GDP at market price1.93.25.16.1
Sources: Federal Bureau of Statistics; and IMF staff estimates.
Sources: Federal Bureau of Statistics; and IMF staff estimates.
Table 6b.Pakistan: Contributions to Growth (Production Side), 2000/01–2003/04(In percent, new base)
Sectors2000/012001/022002/032003/04
A. Commodity Producing Sectors (1+2)0.30.62.33.7
1. Agriculture-0.60.01.00.6
2. Industry (i + ii + iii + iv)0.80.61.33.1
i. Mining and quarrying0.00.10.20.0
ii. Manufacturing1.40.71.12.3
Large scale1.10.40.81.9
Small scale0.30.30.30.3
Slaughtering0.00.00.00.0
iii. Construction0.00.00.10.2
iv. Electricity, gas, and water supply-0.5-0.2-0.10.6
B. Services Sectors (3+4+5+6+7+8)1.62.52.82.8
3. Transport, storage, and communication0.60.10.50.4
4. Wholesale and retail trade0.80.51.11.5
5. Finance and insurance-0.60.5-0.1-0.1
6. Ownership of dwellings0.10.10.10.1
7. Public administration and defence0.10.40.70.4
8. Public administration and defence0.50.70.60.5
Growth in real GDP at factor cost1.83.15.16.5
Growth in real GDP at market price1.93.25.16.1
Sources: Federal Bureau of Statistics; and IMF staff estimates.
Sources: Federal Bureau of Statistics; and IMF staff estimates.
Table 7.Pakistan: Production of Selected Large Scale Manufacturing Items, 2000/01–2003/04(Growth rates in percentage)
Weights2000/012001/022002/032003/04
Textile24.54.87.53.65.7
Cotton yarn13.13.15.15.91.1
Cotton cloth7.512.116.02.413.0
Cotton ginned3.4-4.6-1.2-3.73.3
Others (five) items0.51.1-12.48.49.5
Food, beverages, & tobacco14.420.04.31.215.7
Petroleum products5.219.114.12.84.4
Pharmaceuticals5.0-1.92.32.313.8
Chemicals4.88.34.811.924.4
Nonmetallic minerals4.23.72.59.819.4
Cement4.13.82.79.219.5
Leather products2.311.0-4.8-2.531.7
Paper and board0.622.2-38.715.68.1
Tyres and tubes0.35.79.716.60.3
Wood products0.0-18.8-1.78.3-25.4
Automobiles4.013.81.046.650.2
Cars and jeeps2.521.92.853.758.2
Tractors0.7-7.1-25.38.936.2
LCVs0.44.622.043.415.7
Motorcycles0.124.213.132.471.9
Trucks0.1-3.020.470.93.7
Buses0.1-11.7-17.521.93.0
Metals3.53.6-2.99.82.2
Fertilizers3.444.4-33.3-7.465.5
Electronic equipment2.53.037.430.453.6
Engineering items0.418.20.835.716.3
Overall index75.111.03.57.118.1
Source: Federal Bureau of Statistics.
Source: Federal Bureau of Statistics.

Figure 4.Pakistan: Breakdown of GDP Growth (Production Side), 2000/01–2003/04

2000–01 Through 2002–03

Services remained the main contributor to growth during 2000/01–2002/03 accounting for more than half of the overall GDP growth rate achieved. But manufacturing was the sector experiencing the faster growth in the period, averaging almost 7 percent. Even in its best year of 2002–03, agriculture contributed less than 1 percentage point to overall growth. Textile, which accounts for about 25 percent of large-scale manufacturing production, was a significant contributor to growth, especially during the first two years of this period, which corroborates the earlier conclusion of an export-led economic recovery.

Particularly during 2002–03, other industrial sectors experienced impressive growth as well. Noteworthy in that year was the strong growth of chemicals, nonmetallic minerals (mainly cement), and especially automobiles, electronic equipment, and engineering items. In total, these groups represent some 12 percent of large-scale manufacturing.

2003–04

Industry became the largest contributor to growth in 2003–04, accounting for almost half of the 6.5 percent real GDP growth achieved. This mainly reflected large-scale manufacturing, which posted a growth rate of more than 18 percent for the year. But within industry, construction and especially electricity, gas, and water supply, registered significant gains as well.

The significant pickup in large-scale manufacturing growth in the year was broad-based, but appears on balance consistent with the view that domestic rather than external demand was the main engine of growth. Particularly impressive was the further acceleration of growth in automobiles and electronic equipment compared to 2002–03, as well as the high growth rates registered in food/beverages/tobacco, chemicals, cement, and leather products. The food and beverage and automobile sectors each contributed more to real GDP growth than textile. There is little evidence of a significant pickup in exports of such products, except perhaps in the case of leather products and electronic equipment, with the latter possibly explaining part of the high growth rate in “other” exports.

There was a rapid recovery in the incremental output-capital ratio (GDP growth rate divided by the (lagged) investment to GDP ratio) during 2000–04, from barely 0.1 to almost 0.4 (Figure 5). While this is consistent with an improvement in “efficiency,” the development also likely reflects the impact of cyclical recovery on productivity. Assuming that the incremental output-capital ratio of 0.36 achieved in 2003–04 applies to 2004–05, the higher investment-to-GDP ratio of 18.1 percent of 2003–04 would be consistent with a real GDP growth rate of 6.5 percent. Notwithstanding the scope for further improvement in efficiency, a significant acceleration in growth above 6.5 percent will necessitate a further rise in the investment/GDP ratio.

Figure 5.Pakistan: Growth and Incremental Output (Capital Ratio), 2000/01–2004/05

IV. Toward Sustainable High Growth Rates

Will the relatively high growth rate achieved in 2003–04 be repeated or even surpassed in 2004–05 and beyond? The finding that domestic demand appears to have mainly driven growth in 2003–04 suggests a vulnerability. Did the surge in domestic demand in 2003–04 mainly reflect the lagged impact of a mostly one time surge in national income in connection with the post-September 11 portfolio shift by Pakistanis toward the home country? The ensuing abundant liquidity resulted in historically low domestic interest rates also supported by historically low international interest rates. The accommodating monetary policy could have encouraged a debt-financed domestic consumption and investment boom that might not be sustainable.

As those favorable circumstances level off, and in particular interest rates begin to rise, consumers and businesses might cut back their consumption spending and investment plans, in the latter case, especially if they have been domestic rather than outward oriented.

The fact that disposable private national income increased significantly less than the surge in private external transfers, due to the concomitant impact of fiscal consolidation, suggests that the post-September 11 impact was blunt in part. This, and the impact of significant structural reforms implemented in Pakistan during 2000–04, appear to argue against a “one-off” gain interpretation. A more correct interpretation would be that the Pakistani authorities took advantage of the greater “breathing space” provided by the post-September 11 environment to push through their economic reforms, perhaps more effectively than otherwise.

Improvements in macroeconomic management and the business environment, fiscal consolidation, as well as the strengthening of both the banking system and corporate sector should make a strengthening of domestic savings and a rise in investment permanent. This augurs well for accelerated growth within a sustainable external balance. In particular, the structural reforms have enhanced the incentives for inward remittances; the process of financial deepening has contributed to increase permanent incomes and made the realization of new productive ventures possible; and higher profitability and efficiency of enterprises have permanently increased their contribution to national savings as well as the marginal efficiency of capital, thus investment.11

These processes, however, are still at an early stage in Pakistan when compared with the developments in China and other Southeast Asian countries (Table 8). All comparator countries, except the Philippines, have investment/GDP ratios significantly higher than Pakistan; and all display a higher level of financial deepening.

Table 8.Pakistan: Growth and Development Indicators, 1980–2003
198019902000–032003
Real GDP growth rates (in percent)
Indonesia5.84.34.14.5
Philippines2.02.84.54.9
Thailand7.35.34.87.2
China10.09.78.29.1
India5.95.75.47.8
Pakistan6.34.03.36.5(2004)
Investment/GDP ratio (in percent)
Indonesia24.726.920.919.7
Philippines22.322.218.316.6
Thailand28.636.023.024.0
China29.033.337.237.8(2001)
India20.422.322.122.5(2002)
Pakistan17.017.017.018.1(2004)
Exports/GDP ratio (in percent)
Indonesia24.930.538.131.2
Philippines24.738.150.849.1
Thailand25.943.065.865.6
China8.817.025.631.0
India4.77.79.512.3(2002)
Pakistan10.414.014.915.8(2004)
Imports/GDP ratio (in percent)
Indonesia22.728.230.825.7
Philippines26.344.351.951.7
Thailand28.844.058.558.9
China9.814.622.427.9
India7.29.412.312.3(2002)
Pakistan20.319.016.718.7(2004)
External trade/GDP ratio (in percent)
Indonesia47.658.768.956.9
Philippines50.982.4102.8100.7
Thailand54.787.1124.4124.6
China18.631.748.058.9
India11.917.021.822.3(2002)
Pakistan30.733.031.634.5(2004)
Broad money/GDP ratio (in percent)
Indonesia22.648.756.453.4
Philippines28.149.159.356.9
Thailand52.783.8101.396.7
China53.3108.3170.4191.2
India41.646.460.363.6
Pakistan41.544.240.645.6(2004)
Private credit/GDP ratio (in percent)
Indonesia18.748.322.424.2
Philippines24.434.634.630.6
Thailand42.291.979.979.2
China66.798.0133.4147.7
India25.624.430.631.9
Pakistan28.227.222.525.0(2004)
FDI/GDP ratio (in percent)
Indonesia0.41.1-1.3-0.3
Philippines0.61.91.50.4
Thailand1.02.62.11.4
China0.53.93.63.3
India0.40.70.7(2002)
Pakistan0.30.90.71.0(2004)
Source: IMF, International Financial Statistics, 2004.
Source: IMF, International Financial Statistics, 2004.

The prospects for continued and accelerated growth in Pakistan would be further strengthened if the process was more externally driven. A faster growth in exports would make total demand less sensitive to rising domestic real interest rates and/or indebtedness, secure productivity gains as a result of competition on the international market, and relax the foreign exchange constraint for imports. The re-tooling effort that has apparently taken place in the textile sector over the past few years should position the sector well for the removal of textile exports quotas by the beginning of 2005, and Pakistan is expected to gain markets as a result of this liberalization. Only limited progress, however, has been made toward export diversification, which remains a challenge. Trade policy in recent years has been supportive, but more could be done to reduce the implicit (and sometimes explicit) export bias.12

While Pakistan compares favorably with India (a much larger country) in terms of openness to international trade, it lags on all other comparator countries (Table 8). The speed at which these countries (even India) have witnessed an increase in the volume of external trade in percent of GDP over the past 20 years is remarkable. In contrast, Pakistan’s trade/GDP ratio has risen only marginally from the level of 30 percent already achieved in the 1980s.

Higher foreign direct investment in Pakistan would relax the foreign exchange constraint for imports, and support the increase in the investment/GDP ratio necessary to deliver the higher growth rates. With foreign direct investment, there should also be a productivity increasing transfer of technology. Given the size of Pakistan’s domestic market, it is not surprising that the limited amount of foreign direct investment that has taken place so far has mainly been directed toward the domestic market. Prospects in this regard would be enhanced by a broad-based improvement in incomes. Direct foreign investment in labor intensive export sectors (agro-businesses and information technology, for instance) should offer great potential for growth and employment. To be realistic, however, FDI should only be expected to increase significantly in Pakistan once domestic investment itself has taken off.

Much has been done in recent years to improve the business climate in Pakistan, and Pakistan ranks well in this regard within the South Asia region (Table 9).13 Among 22 indicators of the World Bank’s “Doing Business,” Pakistan is doing better than other South Asian countries with regard to 13. It lags, however, significantly behind China and Thailand outside South Asia. The World Bank’s “Investment Climate Surveys” also suggest that Pakistan is behind India, China, and even the Philippines in terms of providing an enabling environment for investors. Clearly, further progress can be made in Pakistan. For instance, property rights remain weak, including because of poor land record; there is still too much government intervention with the market mechanism in the case of some key commodities; red tape is still excessive, particularly at the provincial level; labor regulations have hindered the functioning of formal labor markets and employment; corruption remains a problem (Pakistan ranked 129 out of 146 countries in Transparency International Corruption Perception Index 2004); and the enforcement of contracts, financial obligations, and bankruptcy law, as well as the interpretation of tax laws remain difficult. In addition, educational and more generally human development indicators remain quite weak in Pakistan, resulting in a workforce often ill-equipped with the skills necessary for higher value-added productions. Finally, there is much room for improving the physical infrastructure of the country, the current state of which contributes to the high costs of doing business. Of course, some impediments to domestic and foreign investment, namely political and security risks, cannot easily be removed or offset with right economic policies; but this should be viewed as a challenge to do more and better than elsewhere in the region.

Table 9.Pakistan: Comparative Investment Climate in Pakistan
Pakistan

vs

China
Pakistan

vs

India
Pakistan

vs

Bangladesh
Pakistan

vs

Sri Lanka
Pakistan

vs

Nepal
Pakistan

vs

Philippines
Pakistan

vs

Indonesia
Pakistan

vs

Thailand
Pakistan

Vs

South Asia
Pakistan

vs

OECD
I. Doing Business Indicators 1/
1. Macroeconomic Environment
GNI Per Capita in U.S. Dollar (2003)WBBWBWWWBW
External Debt, Present Value (in percent of GNI, 2002)WWWBWBBB--
Avg. Annual Real GDP Growth (in percent, 1990–2003)WWWWWBBWWB
Avg. Annual Growth in GDP Deflator (in percent, 1990–2003)WWWBWWBW--
External Balance of Goods and Services (in percent of GDP, 1990–2003)WWWBBWWW--
External Trade (openness of economy) (in percent of GDP, 1990–2003)WBBWWWWW--
Foreign Direct Investment (in percent of GDP, 1990–2003)WBBWBWBW--
2. Starting a Business (2004)
Number of Procedures (in numbers)BEWWWEBWWW
Duration (Days)BBBBWBBBBB
Cost (percent in GNI per capita)WBBWBWBWBW
Minimum Capital (percentage of GNI per capita)BEEEEBBEEB
3. Hiring and Firing of Workers (2004)
Difficulty of Hiring Index (higher values imply more rigid)WWWWWWWWWW
Rigidity of Hours Index (higher values imply more rigid)EWEEWBEEWB
Difficulty of Firing Index (higer values imply more rigid)BBWBBBBWBW
Rigidity of Employment Index (higher values imply more rigid)WWWWWWBWWW
Firing Costs (weeks)EWWBEEBWWW
4. Registering Property (2004)
Number of Procedures (in number)WB-B-BBWEW
Time (days)WB-B-WWWBW
Cost (percentage of property per capita)WB-B-BBBBB
5. Getting Credit (2004)
Legal Rights Index (higher scores imply better laws to access credit)BE-BEWWWBW
Credit Information Index (higher values imply more credit information)BBBBBBBWBW
Cost to Create Collateral (percentage of income per capita)WWBWWWWWWW
6. Protecting Investor (2004)
Disclosure Index (higher values imply more disclosure)EEBEBWEWBW
7. Enforcing Contracts (2004)
Number of Procedures (in number)WWWWWWWWWW
Time (days)WBWBWWBWWW
Cost (percentage of debt)WBWWWBBWBW
8. Closing Business (2004)BW
Time (years)WBBWBBBBBW
Cost (percentage of estate value)BBBBBBBWBB
Recovery Rate (cents on each dollar)BBBBBBBW
Summary Results of Doing BusinessB = 8B = 15B = 11B = 14B = 10B = 13B = 19B = 4B = 13B = 6
W = 18W = 10W = 12W = 12W = 13W = 14W = 8W = 23W = 9W = 18
Pakistan (2002)

vs

China (2002/03)
Pakistan (2002)

vs

India (2003)
Pakistan (2002)

vs

Bangladesh (2002)
Pakistan

vs

Sri Lanka
Pakistan

vs

Nepal
Pakistan

vs

Philippines (2003)
Pakistan

vs

Indonesia (2004)
Pakistan

vs

Thailand
II. Investment Climate Survey Indicators 2/
1. Policy Uncertainity
Policy Uncertainity as Major Constraint (in percent)WWB--WB-
Unpredictable Interpretation of Regulations (in percent)WWW--WW-
2. Corruption
Corruption as Major Constraint (in percent)WWB--WB-
Reports Bribes are Paid (in percent)W-B--WW-
Average Bribes (percentage of sales)W-W--BB-
3. Courts
Lack Confidence Courts Uphold Property Rights (in percent)WWB--WW-
4. Crimes
Crimes as Major Constraint (in percent)WWB--BB-
Report Losses from Crimes (in percent)B-B--BB-
Average Losses from Crimes (in percent of sales)B-W--BB-
5. Regulation snd Tax Administration
Tax Rates as Major Constraint (in percent)WWW--WW-
Tax Administration as Major Constraint (in percent)WWB--WW-
Obtaining Licensing as Major Constraint (in percent)BWB--WB-
Management Time Dealing With Officials (percentage of management time)BBW--BB-
Average Days to Clear Customs (days)WWW--WW-
6. Finance
Finance as Major Constraint (in percent)WWB--WW-
Small Firms With a Loan (in percent)WWW--WW-
7. Electricity
Electricity as Major Constraint (in percent)WWB--WW-
Firms Reporting Outage (in percent)WWW--WW-
Losses from Outage (in percent of sales)WBW--BW-
8. Labour
Skills as Major Constraint (in percent)BWB--WB-
Labour regulation as major constraint (in percent)BBW--BB-
Summary Results of Investment Climate SurveysB = 6

W = 15
B = 3

W = 14
B = 11

W = 10
-

-
-

-
B = 7

W = 14
B = 10

W = 11
-

-
III. Economic Freedom Index (2004) 3/BBBWBWBW
IV. Corruption Perceptions Index (2004) 4/WWBWWWBW
‘B’ denotes relatively better; ‘W’ denotes relatively worse, ‘E’ denotes equal, and ‘-’ denotes not available

World Bank, Doing Business (2005) andWorld Development Report (2005).

World Bank, Investment Climate Surveys (2002).

The Heritage Foundation Wall Street Journal Index of Economic Freedo m, 2004.

Transparency International Corruption Perceptions Index, 2004.

‘B’ denotes relatively better; ‘W’ denotes relatively worse, ‘E’ denotes equal, and ‘-’ denotes not available

World Bank, Doing Business (2005) andWorld Development Report (2005).

World Bank, Investment Climate Surveys (2002).

The Heritage Foundation Wall Street Journal Index of Economic Freedo m, 2004.

Transparency International Corruption Perceptions Index, 2004.

With agriculture still representing close to 25 percent of GDP, growth in this sector and in related rural activities will have to pick up for the objective of significantly higher overall GDP growth rates to be sustained in the near term. The scope for productivity gains appears to be still large, land remains underutilized, and the market infrastructure in the rural areas remains weak. Recent positive developments, if sustained, could boost the prospects for large productivity gains. They include greater availability of bank financing for agriculture (from a low base) and the decision to increase Public Sector Development Program expenditures for improving water availability (lining of canals and water courses) and for rural infrastructure (roads to market). A productivity enhancing land reform, reduction of government intervention in the development and working of competitive markets in agriculture, and strengthening of research and extension services would increase the prospects for accelerated growth in the sector.

V. Conclusions

Pakistan achieved a remarkable turnaround during 2000–04, marked by a sharp adjustment in macroeconomic balances toward external sustainability and a resumption, followed by acceleration, in economic growth. The adjustment was mainly driven by a rise in private savings, though fiscal consolidation helped as well. Both favorable external factors, post-September 11, and greater domestic confidence, resulted in a significant increase in private remittances from abroad and in foreign currency deposits of residents. Structural reforms in the banking and corporate sectors contributed to rebuilding domestic confidence as well as to enhancing productivity and profitability. These factors combined to increase the private savings rate and strengthen the incentives to invest.

Net exports were the key driving force behind the restoration of growth early in the period, but consumption as well as investment led the acceleration of growth in 2003/04. While this suggests a vulnerability with regard to sustainability of accelerated growth, the structural reforms implemented in Pakistan should lead to a permanent rise in both savings and investment, auguring well for sustainable higher growth rates. These reforms have improved Pakistan’s performance in terms of variables generally recognized as important for higher growth. Nevertheless, Pakistan appears to still lag behind other competitor Asian countries in this regard. Further advancing structural reforms on a broad front, while maintaining overall macroeconomic stability and paying close attention to the human development effort that will determine the effectiveness of these reforms, should allow Pakistan to catch up with the fast growing economies of Asia.

Annex Table 1.Pakistan: Macroeconomic Balances, 1999/2000–2003/04(In billions of Pakistani rupees, unless otherwise indicated, new base)
1999–20002000–012001–022002–032003–04Sources of data
Savings-Investment Balances
1. National savings (S = CA + I)597.4650.8835.81044.51080.5Derived
Private savings (Sp = S - Sg)673.1709.4808.81065.71064.7Residual
Public savings (Sg = Rg - Ceg)-75.7-58.627.1-21.215.8Derived
Government revenue including net official transfers from abroad (Rg)560.4601.9715.6773.6809.4IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Grants from fiscal tables (G)33.440.583.1114.231.7IMF fiscal tables
Official transfers (net) in U.S. $ million*ER (in PRs. billion) from BoP tables (G1)47.848.991.652.829.1IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Discrepancy in grants numbers (in PRs. billion)14.48.38.4-61.4-2.6Derived
Government current expenditure adjusted for statistical discrepancy (Ceg)636.1660.5688.6794.9793.6IMF fiscal tables
Government current expenditure626.4645.7700.2791.7793.6IMF fiscal tables
Statistical discrepancy (i.e. additional current expenditure)9.714.8-11.73.20.0IMF fiscal tables
2. Gross total investment (I = Ip + Ig)659.1715.5738.4806.9986.9Federal Bureau of Statistics (new base)
Private investment (Ip)563.5625.7612.2677.7834.9Federal Bureau of Statistics (Ip = I - Ig)
Government gross investment i.e. PSDP (Ig)95.689.8126.2129.2152.0IMF fiscal tables
Government gross investment including net lending (Ignl = Ig + nl)82.772.2126.0106.5164.1IMF fiscal tables
Net lending (nl)-12.9-17.6-0.2-22.712.1IMF fiscal tables
3. External current account balance including official transfers-61.7-64.897.5237.693.6IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Expenditure on Gross Domestic Product
1. Total consumption (C = Cp + Cg)3247.33578.23699.44035.54634.8Derived
Private consumption (Cp = Yp - Sp)2947.83260.23359.23577.34187.0Derived
Public consumption (Cg = Ceg - id - Tg - SG - if)299.5318.1340.2458.2447.9Derived
Government current expenditure adjusted for statistical discrepancy (Ceg)636.1660.5688.6794.9793.6IMF fiscal tables
Domestic interest payments (id)198.4183.5184.6160.5161.5IMF fiscal tables
Transfers from the government (i.e. pension) (Tg)32.730.927.237.242.6IMF fiscal tables
Subsidies and grants (SG)27.438.046.674.491.7IMF fiscal tables
Net foreign interest payments (if)78.190.289.964.649.9IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
2. Gross total investment (I)659.1715.5738.4806.9986.9Federal Bureau of Statistics (new base)
3. Balance of exports and imports of goods and nonfactor services (X - M)-113.0-131.1-36.1-21.1-158.9IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Exports of goods and nonfactor services (X)494.6599.0677.3799.1865.3IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Exports of goods423.1520.4559.9640.8712.2IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Exports of nonfactor service71.578.6117.4158.4153.1IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Imports of goods and nonfactor services (M)607.6730.2713.4820.21024.1IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Imports of goods495.9594.3577.8661.7793.7IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Imports of nonfactor service111.6135.9135.6158.5230.4IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
4. Nominal GDP at market price (GDPmp = C + I + X - M)3793.44162.74401.74821.35462.9Federal Bureau of Statistics (new base) and Latest Growth in QIN
Memorandum items:
1. Disposable gross private national income (Yp = GDPmp - Ti + SG + Tp - PD - To + id + Tg)3620.93969.64168.04643.05251.7Derived
Nominal GDP at market price (GDPmp)3793.44162.74401.74821.35462.9Federal Bureau of Statistics (new base) and Latest Growth in QIN
Indirect taxes (Ti)272.9297.8315.6377.0411.1IMF fiscal tables
Subsidies and grants (SG)27.438.046.674.491.7IMF fiscal tables
Net private transfers from abroad (Tp)103.2143.3184.1335.0350.0IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Net profits/dividends to abroad (PD)21.735.652.164.576.7IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Other taxes etc (To)239.7255.2308.5343.8369.2IMF fiscal tables
Domestic interest payments (id)198.4183.5184.6160.5161.5IMF fiscal tables
Transfers from the government (i.e. pension) (Tg)32.730.927.237.242.6IMF fiscal tables
2. Aggregate demand (C + I + X)4401.04892.85115.15641.56487.0Derived
3. Domestic demand(C + I)3906.44293.84437.84842.45621.8Derived
4. Private savings in percent of disposable income (Sp/Yp*100)18.617.919.423.020.3Derived
5. Growth in real GDP at factor cost (GDPfcg) (in percentage)1.83.15.16.5Federal Bureau of Statistics (new base) and Latest Growth in QIN
6. Growth in real GDP at market price (GDPmpg) (in percentage)1.93.25.26.1Federal Bureau of Statistics (new base) and Latest Growth in QIN
7. Incremental output capital ratio (GDPmpgt/(100*I/GDPmp)t-1))0.110.190.310.36Derived
8. Nominal exchange rate (rupees per U.S. dollar, p.a.) (ER)51.758.361.358.457.4IMF tables on national accounts
Annex Table 2.Pakistan: Deflators, 1999/2000–2003/04(1999–2000=1)
1999–20002000–012001–022002–032003–04Sources of data
1. Total investment deflator (Id)1.001.031.061.121.22Federal Bureau of Statistics
Private investment deflator (Ipd)1.001.031.061.121.23Federal Bureau of Statistics
Public investment deflator (Igd)1.001.031.071.111.20Federal Bureau of Statistics
2. Total consumption deflator (Cd)1.001.101.131.201.30Federal Bureau of Statistics
Private consumption deflator (Cpd)1.001.111.131.211.32Federal Bureau of Statistics
Public consumption deflator (Cgd)1.001.051.081.121.17Federal Bureau of Statistics
3. Exports and imports of goods and nonfactor services deflator
Exports of goods and nonfactor services deflator (Xd)1.001.071.071.001.05Federal Bureau of Statistics
Imports of goods and nonfactor services deflator (Md)1.001.151.151.191.34Federal Bureau of Statistics
4. GDP (at market price) deflator (GDPd)1.001.081.101.151.23Federal Bureau of Statistics
Annex Table 3.Pakistan: Real GDP(Demand Side), 1999/2000–2003/04(In billions of Pakistani rupees at constant market price, new base)
1999–20002000–012001–022002–032003–04Sources of data
1. Gross total investment (I = Ip + Ig)659.1692.6694.6719.9809.2Federal Bureau of Statistics (new base)
Private investment (Ip)563.5605.7576.3603.2682.8Federal Bureau of Statistics (Ip = I - Ig)
Government gross investment i.e. PSDP (Ig)95.686.8118.3116.7126.4IMF fiscal tables
2. Total Consumption (C = Cp + Cg)3247.33245.23277.93362.03578.7Derived (C = GDP - I - X + M)
Private consumption (Cp = Yp - Sp)2947.82942.22963.52954.43196.4Residual (Cp = C - Cg)
Public consumption (Cg = Ceg - id - Tg – SG - if)299.5303.0314.4407.6382.2IMF fiscal tables
3. Exports of goods and nonfactor services (X)494.6560.0633.9798.4823.9IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Exports of goods423.1486.5524.0640.2678.1IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Exports of nonfactor service71.573.5109.8158.2145.8IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
4. Imports of goods and nonfactor services (M)607.6633.8619.0686.4762.0IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Imports of goods495.9515.8501.3553.8590.6IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
Imports of nonfactor service111.6118.0117.7132.6171.4IMF BOP tables and SBP BOP Table (Aug. 18, 2004)
5. Aggregate demand (C + I + X)4401.04497.84606.44880.35211.7Derived
6. Domestic demand(C + I)3906.43937.83972.64081.94387.8Derived
7. GDP at constant market price (GDPmp)3793.43864.03987.44193.94449.7Federal Bureau of Statistics (new base) and Latest Growth in QIN
Annex Table 4.Pakistan: Real GDP, (Production Side), 1999/2000–2003/04(In millions of Pakistani rupees, at constant factor cost of 1999/2000, new base)
Sectors1999/20002000/012001/022002/032003/04
A. Commodity producing sectors (1+2)1,721.81,730.71,753.61,839.61,984.9
1. Agriculture923.6903.5904.4941.3965.4
2. Industry (i + ii + iii + iv)798.2827.2849.1898.41,019.6
i. Mining and quarrying48.447.651.059.359.3
ii. Manufacturing522.8571.4596.8638.0727.3
Large scale338.6375.7388.9416.8492.2
Small scale132.4142.3153.0164.5176.8
Slaughtering51.853.455.056.658.2
iii. Construction87.487.889.292.099.3
iv. Electricity, gas and water supply139.6120.5112.0109.2133.7
B. Services sectors (3+4+5+6+7+8)1,807.51,863.41,952.12,055.62,163.3
3. Transport, storage and communication401.0422.2427.3444.3461.4
4. Wholesale and retail trade621.8649.6667.6706.8763.6
5. Finance and insurance132.5112.5131.8127.6122.9
6. Ownership of dwellings110.4114.6118.6122.8127.1
7. Public administration and defence220.3225.2240.6265.0280.5
8. Public administration and defence321.6339.4366.3389.2407.8
GDP at factor cost (A + B)3,529.33,594.13,705.73,895.34,148.2
GDP at market price3,793.43,864.03,988.44,193.84,449.7
Source: Federal Bureau of Statistics.
Source: Federal Bureau of Statistics.
References

The authors are Senior Resident Representative of the IMF in Pakistan and Senior Economist in the IMF Resident Representative Office in Pakistan, respectively. We thank Axel Schimmelpfennig and the participants at a Development Economics Seminar at the World Bank in Islamabad for useful comments. The views expressed in this paper are our own, and do not necessarily represent the views of the IMF.

Using new GDP numbers based on 1999–2000.

The analysis uses the recently rebased GDP series available for 1999–2000 through 2003–04 (fiscal year starting in July). With the new base year of 1999–2000, the coverage of productive activities was broadened, and, as a result, the new GDP numbers are about 20 percent higher than the GDP numbers based on the old base year of 1980–81.

Including state-owned enterprises.

The accounting framework operates as follows: first, national savings are derived from the external current account balance (including official transfers) plus total gross investment. Second, public savings are derived from the fiscal accounts (revenue including net official transfers from abroad minus current expenditure). These steps allow a derivation of private national savings. Third, public consumption is derived from government current expenditure by subtracting those government current expenditures that are mere transfers of resources to the domestic private sector or to abroad. Fourth, private consumption is derived by subtracting private national savings from disposable gross private national income. The latter is GDP at factor cost (GDP at market prices minus indirect taxes plus subsidies) plus government transfers to the domestic private sector, minus direct and other taxes, plus government domestic interest payments, plus net private transfers from abroad, and minus net profits/dividends to abroad. It is then verified that the sum of private and public consumption, private and public investment, and net exports of goods and nonfactor services add up to GDP at market prices.

Table 1 shows that in percent of GDP disposable gross private national income was only about 1 percentage point higher in 2002–03 than at the beginning of the period.

Defined in percent of disposable gross private national income.

For evidence on the improvement in the financial performance of state-owned enterprises, see, in particular, Iqbal (2004).

Because the breakdown of total consumption between public and private consumption is derived somewhat differently, private consumption at constant prices is obtained as a residual to ensure consistency with the overall GDP at constant prices from FBS sources, while public consumption at constant prices is derived using the FBS deflator for public consumption.

It is possible that, for some exports, the higher unit values reflect not just higher export prices, but also new products moving up the value-added scale.

For evidence on the key role of capital investment in the growth process in Pakistan and elsewhere, see, for instance, van Rooden (2004), Iqbal and Sattar (2004), Clements, Bhattacharya, and Nguyen (2003), Khan and Kumar (1997), Barro and Sala-i-Martin (1995), Easterly and Rebelo (1993), Easterly (1993), Barro (1991), and Khan and Reinhart (1990).

The relationship between growth and external trade has been well documented by Barro and Sala-i-Martin (1995), Barro (1991), and Iqbal and Zahid (1998), among others.

The critical role played by a conducive business environment, and generally good governance, for growth was especially highlighted in the latest World Development Report (World Bank, 2005).

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