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Pakistan’s Economy
Pangs of Political Instability
D. Suba Chandran
Assistant Director, IPCS, New Delhi
The State Bank of Pakistan recently published its been politically tumultuous for Pakistan, affecting its
report for the third quarter. Syed Naveed Qamar, economic growth. Ever since the sacking of Chief
the Finance Minister of the new democratic Justice Iftikhar Choudhary, Pakistan has faced crisis
government, led by the PPP, presented his first after crisis, including the lawyers’ movement,
budget in the Parliament. In between, the violence in Karachi, the Lal Masjid debacle,
government also unveiled the Economic Survey militancy in FATA and NWFP and its impact on other
for the fiscal year 2007-08. parts of the country, the return of Benazir Bhutto
and her subsequent assassination, and the decision
What are the major issues in Pakistan’s economy? to postpone the elections – all the above events
How stable is it today? Have the previous indubitably made a huge impact on the economy.
governments, since the military takeover,
managed the economy better? What are the What sectors have contributed to the economic
challenges facing the PPP government? growth? And what sectors affected it? Pakistan’s
economic growth in the current fiscal year was
The above mentioned reports provide basic data primarily driven by the services sector, whose
on Pakistan’s current economic situation and contribution has increased since last year.
highlight the status of Pakistan’s economy. Even
though the assessment of the Economic Survey Compared to last year’s 7.6 percent, the services
may not be critical of the government, since it is sector grew at 8.2 percent this year. While the
produced by them, the facts therein need to be Transport and Communication sectors alone
accepted. Despite concerning itself mainly with contributed to 10 per cent of the GDP, the Telecom
the macroeconomic aspects of Pakistan’s sector contributed more than a hundred billion
economy, the State Bank’s report is much more rupees, especially with the mobile market of
critical than the Economic Survey. Pakistan growing at a fast pace. In every 100, 39.4
in Pakistan are mobile cellular subscribers, when
Since it will be difficult to review Pakistan compared to 34.8 in China, 25.9 in Sri Lanka, 13.3 in
economy in all its aspects, this brief will look into Bangladesh, and 14.8 in India. This growth is both
certain key issues and attempt to make an the reason and expression of an expanding middle
assessment class in Pakistan.
producing sector. It is, therefore, safe to conclude towards the manufacturing industry and also the
that this year’s growth is services sector-led- country’s exports. Its significance for Pakistan’s
growth.” economy can be seen from the fact that cotton
textiles account for 46 per cent of total
For the year 2008-09, one could expect the manufacturing and 60 per cent of total exports.
services sector to continue its positive Had it not been for the relatively better
performance. The overall economic growth, performance of minor crops, livestock and fishing,
however will depend on how much the the agricultural sector’s contribution to the GDP
agricultural and manufacturing sectors contribute. would have been a total disaster.
impact of inflationary expectations is likely to be supply – have added to Pakistan’s export woes.
more lasting. There are evidences that the erosion
in purchasing power and squeeze in profit margins Besides, Pakistan’s major export basket is
are contributing to second round of inflationary composed of only a few items; cotton, leather,
pressures.” rice, synthetic textiles, and sports goods – these
five items alone contribute to more than 72 per
The inherent flaws include the narrow tax base in cent of the total exports. Hence, a problem in the
Pakistan, tax evasion, tax omission, and over production of
dependence on indirect taxes. How many in any of these five
Pakistan actually pay tax? Increasing the tax rate items can cause
is unlikely to increase the collection. On the the country’s Despite the fact the FDI
contrary, the greater the increase in tax rates, the exports to suffer.
more will be the tax evasion. Rather, what is
has declined during the
essential is expanding the tax base - which The textile fiscal year 2007-08 by 32.2
subsequent governments have failed to achieve. industry, which
per cent, Pakistan was still
forms a primary
Tax exemptions, given by subsequent component ofable to attract a substantial
governments, mostly for political reasons and at the economy amount of 3.6 billion
times, due to pressure from lobby groups, have and accounts for
also affected the entire tax collection process. An 57 per cent of
dollars during this year,
unfortunate truth in Pakistan has been that the P a k i s t a n ’ s compared to 5.3 billion
richer and more politically powerful one is, the exports, needs dollars during 2006-07.
more exemption he/she gets. overall reforms in
all respects –
While this has generally been a problem in from installing
Pakistan, the political unrest during the last year productive machines to improving the skills of
severely hampered revenue collection. In 2007-08, workers. Unfortunately, during this fiscal year, the
defence expenditure increased by 10 per cent, export of textile materials recorded a decline of
from 250 billion rupees in 2006-07 to 275 billion 2.5 per cent. But fortunately, the food group,
rupees in 2007-08. especially rice, contributed positively to Pakistan’s
exports. Despite contributing to only about 13 per
On the positive side, the per capita income cent of the country’s exports, the food group grew
increased by 18.4 per cent. Does this reflect an by 22.4 per cent.
increase in per capita income across all sections,
or an increase only within the economically rich? If In terms of destination of exports, though it is not a
the latter is true, then this would only affirm that major problem, the fact that Pakistan’s goods are
economic growth in recent years has benefited sent mainly to the USA, Germany, Japan, UK,
only the rich, not the poor. However, it appears Hong Kong, Dubai and Saudi Arabia, is an issue
that besides the upper class, even the middle that the government has to look into.
class is growing rapidly.
While the exports declined, on the other hand,
Undoubtedly, the performance of the PML-Q led imports increased by 28.3 per cent. According to
government since 2006 has played a major role in the Economic Survey report, “the surge in
Pakistan’s increased fiscal deficit and inflation, the international community and oil prices is reflected
new government has to take appropriate in Pakistan’s import bill. Pakistan’s import was
measures to arrest them, than complaining. inflated by $ 4099 million, in the first ten (July0April)
months of the current fiscal year, mainly on
IV
account of higher international prices of
TRADE & FDI FLOW
commodities, including oil.”
WILL THEY PICK UP THIS YEAR?
On the positive side, despite the political instability,
Pakistan’s exports from 2002-06, grew at 16 per foreign direct investment (FDI) continues, and
cent annually, but dropped to 4 per cent during according to the Economic Survey report, FDI “has
2006-07. Failure of crops, problems in the emerged as a major source of private external
manufacturing industry and inadequate energy flows for Pakistan as well amidst widening savings-
PAKISTAN’S ECONOMY PAGE 4
Since the agricultural sector continues to be the Thus, politically, Pakistan’s economy is inter-twined
major provider of employment to nearly two-thirds with not only political stability at the national level,
of Pakistan’s population living in rural areas, the but also with regional security. Much will depend
importance of agriculture needs to be underlined. on how the PPP led government reformulate
Since water is a major issue, both droughts and Pakistan’s economic priorities and policies and link
floods are likely to become major causes for it with external relations.
concern. Construction or the lack of major dams
across the Indus, and the quantity of water flow An economically weak Pakistan is not in the
on the main river and its tributaries is likely to interest of the region as well.
become a matter of life and death for the
majority in Pakistan.