111

Dr. Vaqar AhmedPlanning Commission

Pakistan Planning and Management Institute24 December 2009

Current Issues in Macroeconomic Management

Contents• Past Economic Trends

• Economic Shocks

• IMF Programme

• Consultations with FoDP

• Current Challenges

• Way Forward2

Past Economic Trends

3

0

1

2

3

4

5

6

7

8

9

10

2001 2002 2003 2004 2005 2006 2007 2008

% G

row

th

Real GDP Growth

Economic Growth 2001-08

0

1

2

3

4

5

6

7

8

1960s 1970s 1980s 1990s 2000-07

Perc

enta

ge G

row

th

Economic Growth 1960 - 2007

16

16.5

17

17.5

18

18.5

19

1970s 1980s 1990s 2000-07

Perc

enta

ge

Investment to GDP ratio

Investment Performance 1970 - 2007

Share in Exports

0

10

20

30

40

50

60

70

80

90

1970s 1980s 1990s 2000-07

Perc

enta

ge

Primary Commodities Semi-Manufactured Goods Manufactured Goods

0

2

4

6

8

10

12

14

16

18

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

$ B

illio

n

Textile Exports Cotton Exports

Textile/Cotton Exports 1997 - 2007

0

2

4

6

8

10

12

14

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Perc

enta

ge S

hare

Pakistan's Share in World Export of Cotton Cloth

Pakistan’s Share in World Export of Cotton Cloth

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Rs.

Mill

ion

Leather Exports

Leather Exports 1971 - 2005

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Rs

Mill

ion

Rice Exports

Rice Exports 1971 - 2005

0

50

100

150

200

250

300

350

2002 2003 2004 2005 2006

Mill

ion

Dol

lars

Export of Engineering Goods

Engineering Exports 2002 - 2006

Design DistributionAssembly &

Production

Plus PlusManufacturing

Manufacturing Sector Thrust3

R&D Product Marketing

0 10 20 30 40 50 60 70

Cotton Manufacturers

Leather

Rice

Synthetic Textiles

Sports Goods

Percentage Share in Exports (2007)

Product Diversification

0 5 10 15 20 25 30

USA

Dubai

UK

Germany

Hong Kong

Saudi Arabia

Japan

Major Export Markets (% Share 2007)

Regional Diversification

Economic Shocks

16

17

Economic Shocks & Political Change: 2007-08

• Oil and food price shock

• Severe macroeconomic imbalances• Fiscal deficit• BOP deficit• High inflation

• Structural / infrastructure imbalances• Food shortages• Energy shortages• Circular debt

• Political Change• New Government in March 2008

Unit Values of Imports - Pakistan ( 1990-91=100 )

18

0

100

200

300

400

500

600

700

800

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09*

Overall Food

Food Import Payment (US $ Million)

19

0

100,000

200,000

300,000

400,000

500,000

600,000Ju

l-03

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Overall Food Wheat Sugar

Increase in Consumer Price Index (%)

20

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Food Overall

Subsidies and Bank Financing of Deficit (Rs billion)

21

-100

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007 2008 2009

Current Subsidies Deficit Financing (Bank)

The State Bank of Pakistan (SBP), in itsMonetary Policy Statement for July-December 2008, estimated that aboutone-third of inflation came from directand indirect impacts of highercommodity prices in 2008. To helpprotect consumers from the impact ofrising inflation, ADO Update observed,Pakistan Government provided largesubsidies for oil products, electricity,imported wheat, and fertiliser.

Export Receipts (US $ Million)

22

0

500000

1000000

1500000

2000000

2500000

Jul-0

3Se

p-03

Nov

-03

Jan-

04M

ar-0

4M

ay-0

4Ju

l-04

Sep-

04N

ov-0

4Ja

n-05

Mar

-05

May

-05

Jul-0

5Se

p-05

Nov

-05

Jan-

06M

ar-0

6M

ay-0

6Ju

l-06

Sep-

06N

ov-0

6Ja

n-07

Mar

-07

May

-07

Jul-0

7Se

p-07

Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-

08N

ov-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9Se

p-09

Total Food Textile

Net Inflow of Foreign Investment (US $ Million)

23

0

1000

2000

3000

4000

5000

6000

7000

8000

2002 2003 2004 2005 2006 2007 2008 2009

Total FDI

Remittances from Abroad (US $ Million)

24

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2001 2002 2003 2004 2005 2006 2007 2008 2009

Overall Saudi Arabia USA Dubai

Despite high economic stress banking system and its policies were sound1

• Banking System was well capitalized– Capital adequacy ratio between 12 to 13 % around 2006-07

was well above the minimum threshold

• Asset quality was good– NPLs to loans ratio (net) was at 1.9% as of end September

2008

• Risk absorption capacity of the banking system remained strong

25

26

Short-term Strategy

• Restore and maintain macroeconomic stability

• Attend to the urgent needs of the poorest and vulnerablegroups (BISP), including for those living in terror-strickenareas (IDPs).

• Overcome energy and water shortages

• Focus on agriculture as leading sector

• Revival of industrial sector

• Accelerated development in less developed regions

• Bolster civilian forces to address security challenges

27

9-Point Program for Economic Reform and Sustainable Development

• Achieve Macroeconomic Stabilization• Establish Social Safety Net• Develop and mobilize human resources (HRD)• Expand agriculture production and galvanize Agro-Business

potential• Galvanize industrial competitiveness with supporting strategies• Integrated planning for Energy Development• Deepen and diversify domestic Capital Markets• Establish Public-Private Partnership as major method for

infrastructure development• Administrative Reform: Consolidation, Specialization and

Devolution

Points to Ponder

• Look at other war economies and their economic plans

• Financing of plan…need for foreign financing

IMF Programme

29

IMF Standby Arrangement

• Programme initiated on November 24, 2008

• Programme facility: $7.6 billion

• Interest rate of 3.5 to 4.5 percent

• Average tenor of facility is 3.5 – 5 years

30

Major IMF Conditionalities

• Reduce Fiscal Deficit to 4.2% of GDP by June, 2009

• Tax Revenue to increase by 13.5% of GDP during program period

• Elimination of subsidies (oil & electricity)

• Limit SBP financing of budget deficit

31

Friends of Democratic Pakistan

Friends of Democratic Pakistan4

• Focus Areas for Financing:

– Food security

– Reducing cost of doing business

– Poverty alleviation and employment

– Security challenges

34

Food Security

• Focus on availability of water

• Increasing fragmentation of farms

• Addressing low productivity

• Investment in agriculture research

• Promote value and supply chains

• Ensure quality and compliance

A thriving agriculture sector that ensures food security, poverty reduction, employment generation and export growth

35

Reducing cost of doing business• Addressing supply side lapses

• Institutional reform and capacity building

• Modernization of transport system

• Bridging productivity gap

• Trade facilitation

• Security of assets and profits for building

investor’s confidence

Rapid reduction in transaction costs and a comprehensive program to revamp quality and efficiency of transport and communication sectors

36

Poverty alleviation and employment

• Aligning development priorities in line with MDGs

• Skill-based human resource development

• Eliminate gender and regional disparities

• Improve Institutional capacity in education and health

• Sustained help to those living in terror stricken areas

• Direct intervention to protect the most vulnerable

Enhancing livelihood opportunities through pro-poor investment, building up human resources, reforming health and education, and social protection for

vulnerable

37

Security

• Mass displacement of civilian population in

NWFP and FATA

• Wave of militancy threatening human life

• Geo-strategic location posses complex issues

• Cost of fighting terrorism escalating as time

passes

An environment of security, peace and rule of law that will permit progress towards the social and economic well-being of all citizens and allow displaced

persons to return to their homes

Current Challenges

Current Challenges

• Consolidating macroeconomic stability

• Reforms in energy sector

• Dealing with impact of global financial crisis on exports

• Tax administrative reforms

• Donor support for development objectives

• Social policy support to IDPs and targeted poor

• Vigilant monetary policy

Way Forward

Water for agriculture

Energy for industry

http://www.pc.gov.pk/

42

References

• 1 Presentation by Dr. Shamshad Akhtar, Governor, State Bank of Pakistan on the “State of Pakistan Economy” to the Senate Committee on Finance, Revenue, Economic Affairs and Statistics (1st December 2008)

• 2Economic Survey of Pakistan 2008-09

• 3Presentation on Medium Term Development Framework by Dr. Akram Shiekh, Deputy Chairman, Planning Commission 2005-06.

• 4 Presentation by Secretary, Planning & Development Division 2009.

43