Why the Pak economy is sinking

[samika]

As the International Monetary Fund meets to give Pakistan another loan, the country's economy remains in deep trouble.
How serious is US Secretary of State Hillary Clinton when she threatens Pakistan with "severe consequences" for not doing enough to fight terrorism?

Friday, the 14th of May will give us some indication. The Board of the International Monetary Fund (IMF) will meet in Doha to decide the fate of the fifth tranche of the $11.3-billion loan to Pakistan.

IMF has already given Pakistan about $6.35 billion in the previous four tranches. The meeting is in Doha because IMF staff are not willing to risk travelling to Pakistan.

Will Pakistan Finance Secretary Salman Siddique convince the Board that his ministry can deliver on the fiscal deficit target, keeping it below 4 per cent of gross domestic product (GDP), and carry out fiscal reforms, including the implementation of value-added tax (VAT) by July 1, or will he get bogged down answering questions on the government's ability to make its writ run?

As in the case of most other countries, IMF wanted Pakistan to reduce its deficit, raise energy prices, introduce VAT and take other measures to increase the tax-to-GDP ratio in the country.

According to the Atlantic Council, a US think tank, Pakistan has the lowest tax-to-GDP ratio in South Asia.



Pakistan's growth fell sharply in 2008-09, and while IMF has projected an improvement in 2010-11, the structure of the economy suggests achieving this will be an uphill task.

Manufacturing is down to a two-year low (see chart) and GDP is largely driven by agriculture - the contribution of the manufacturing sector was negative in 2008-09 and 2009-10.

Credit to the private sector is down 5 per cent as compared to a year ago; investment-to-GDP ratios are a low 19 per cent; and current account deficit could be around 4 per cent of GDP.

Image: Fiscal deficit rises.




Inflation is running at 13.26 per cent, foreign investment is down from $5 billion in 2007-08 to $3.5 billion in 2008-09 to $2.5 billion in 2009-10, the list of negatives goes on.

This decline in economic performance comes after five years of good performance during the Musharraf years. Musharraf inherited an ailing economy with less than $1 billion in foreign reserves; debt was 82 per cent of GDP; and 35 per cent of government revenues went towards debt servicing.

Economic sanctions implemented in the wake of Pakistani nuclear tests conducted in 1998 had hurt too. Musharraf turned things around and economic reforms were undertaken. In late 1999, he told his people: "The revival of the economy is critical. Our economy is in deep trouble and revolutionary steps are needed to put it back on track.

He introduced austerity measures, increased accountability and rebuilt investor confidence in Pakistan. By allying itself with the US post 9/11, Pakistan under Musharraf was able to end the nuclear sanctions against it and increase the flow of money into the country.

In the three years preceding 9/11, Pakistan received $9 million dollars in aid from the US; in the three years post 9/11, this number climbed to $4.8 billion.

Good economics and good relations with India helped Musharraf deliver an average growth rate of close to 6 per cent during his six years in office. After Musharraf, Pakistan has suffered from a protracted decrease in investments in civil society. The private sector remains almost non-existent.

Exponential population growth puts pressure on power and water sources, while the high rates of inflation make everyday living harder for the average Pakistani citizen. Furthermore, Pakistan is highly dependent on remittances which are an unstable form of revenue.



The recently released United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) report said that "Pakistan's economy has been affected not just by the global economic crisis but also by the declining security situation and intensification of conflict linked to terrorism."

The global economic crisis, combined with the escalated war on terror at its doorstep, sent Pakistan back to IMF in November 2008.

This, in spite of the fact that till August 2008, the US had given $7.89 billion in military assistance and $3.1 billion in economic and developmental assistance to Pakistan. The US International Affairs Budget stated this number would reach $1.6 billion this year. The Defence Department suggests another $700 million in "security force support".

After partition, Pakistan was one of the few countries in the world that had an average growth rate of 5 per cent over a period of four decades, often growing faster than India.

This was not only above the global average, it made Pakistan a model for growth during the 1960s - in fact, South Korea mimicked Pakistan's second five -year Plan (1960-1965).

In the 1990s, due to the combination of poor economic governance by the Pakistan People's Party (PPP) and the Pakistan Muslim League (Nawaz) [PML (N)] rulers, a severe drought and increased defence spending, Pakistan's growth rate slowed to an average of 4 per cent.

While Benazir Bhutto and Nawaz Sharif attempted to place emphasis on the role of the private sector and liberal reforms in the 1990s, these were largely poorly implemented.

The Asian Development Bank has said that "Pakistan's economic prospects over the next two years are predicated on a successful completion of its IMF programme; a gradual improvement in the security and energy situations; and sustained implementation of fiscal reforms along with political stability."

The lessons that Pakistan learns from its economic collapse remain to be seen. Given that improved relations with India under Musharraf resulted in a stronger economic performance, will Pakistan overcome its security-based obsession with India and turn back to fostering stronger trade relations with its resilient neighbour?



Source=
Why the Pak economy is sinking : Rediff.com Business

 

[samika]

Business Standard's report

 

[farhan_9909]

Mush govt was the only govt i whcih pakisan economy growth rate was 8.4% ranking 2nd fastest growing economy in the world after china in 2004

 

[Kinshuk]

Mush govt was the only govt i whcih pakisan economy growth rate was 8.4% ranking 2nd fastest growing economy in the world after china in 2004

And the relation between our nations were also stronger then ever. If China India Pakistan come along, it will be a new eurpoean union.

 

[sohan]

http://www.indexmundi.com/pakistan/gdp_real_growth_rate.htm

According to this the growth rate of Pakistan during 2004 was 5.5%, I think the 8.4% number is nominal (not adjusted for inflation).

 

[sparklingway]

This was not only above the global average, it made Pakistan a model for growth during the 1960s - in fact, South Korea mimicked Pakistan's second five -year Plan (1960-1965).

This widely quoted myth has been proven to be a mere self glorification story that originated from a pleasing statement made by a South Korean Consul General in 1981. Former Consul General in Seoul dealt with this myth in a column earlier.

Learning from Korea

 

[jha]

Pakistan's economy is NOT SINKING..PERIOD...

it is a temporary phase which will pass with time...dont forget india in 91..

 

[T-Faz]

http://www.indexmundi.com/pakistan/gdp_real_growth_rate.htm

According to this the growth rate of Pakistan during 2004 was 5.5%, I think the 8.4% number is nominal (not adjusted for inflation).

You butt hurts like hell when something good about Pakistan turns up. Read this and learn.

South Asia - Doing Business in 2006: South Asian Countries Pick up Reform Pace, says World Bank Group; India Ranks 116th, 25 Places After China; Pakistan Among Top 10 Reformers

@ the OP, the whole point of this biased article is that we become friends with India becuase it was good relations through which we got good economic growth, NO and NO.

And rediff is like rupee news of India, please do not post from such low level online media outlets again.

This article is riddled with misinformation and lack of direction, Sparklingway pointed one such point out.

 

[sparklingway]

Pakistan achieved high growth rated based on massive increase in the role of the services sector. Structural flaws in the economy worsened and during a time of global economic boom ('02-'05), Pakistan went on a trade liberalization policy supported by FDI and consumer financing which led to high growth rates.

Such growth rates based on lower increase in manufacturing sector growth led to the gradual slowing down of a shaky economy. As the global financial crisis hit, Pakistan suffered like all other economies.

No country has been able to support high growth rates seen at the start of this decade. The US being Pakistan's biggest export destination effects our trade balance as well. Pakistan's economy has fared well compared to other comparable economies as we did not face any serious financial meltdowns. Even though we went through an IMF funded bail out, that is the result of constant unbalanced budgets and weakening of our manufacturing sector in the wake of the global financial crisis.

Is Pakistan's economy sinking - No, because all others are sinking more rapidly. Our recovery has been slower but we didn't sink faster either

 

[jagjitnatt]

Pakistan's economy isn't sinking anymore. The global recession hit the Pakistan's economy just like it did to every other nation in the world. But now since the recession is over, the economy is improving and growing.

The growth rate did slow down, but as long as its growing, its fine. Although there are some worries regarding trade deficit and Foreign exchange reserve, but the worst times are over and its should be some nice times ahead for Pakistan.

The thread is not correct. I recommend mods to close it. Would have been valid 6 months back but now situation has turned.

 

[Patriot]

The economy is in much better shape now imo better then 2007/8/9..Anyway the day electricity crsis are finished as well as terrorism i think the economy will grow much faster.

 

[tingumaster]

50% of the pakistani brain keep on thinking how to disturb india and 51% is eaten by america and taliban....thatz by pak economy is not growing...

50% of the indian brain eaten by how to tackle pakistan as a result indian focus on security buy weapons but still we r growing at 8+%...we can grow even faster (double digit growth)....you people can grow more if we both focus 100% on ecomomy

 

[xenia]

@sparklingway
its not the case as portrayed..pakistan used Domars Growth Model n had a successful experience initially..s. korea followed the same model..its not that pakistan invented a model that was imitated bu s.korea

 

[xenia]

IMF releases $1.13bn, waives two conditions ​

By Anwar Iqbal


WASHINGTON, May 15: The International Monetary Fund (IMF) released $1.13 billion of loan to Pakistan on Saturday to help overcome its economic vulnerabilities and create room for urgent security outlays.
The fund also accepted the government’s request for waiver of certain conditions in the current arrangement.

In return, the government pledged to levy the value added tax (VAT) from July 1, as scheduled. It also had to accept some remedial actions proposed by the IMF.

The IMF expressed the hope that the loan package would help the country overcome its economic vulnerabilities caused by a volatile security situation and persistent inflation.

At a meeting held here, the IMF executive board approved waivers to give room for “urgent security outlays and avoid undue cuts in other priority spending”.

According to a statement, the board completed the fourth review of Pakistan’s economic performance under a programme supported by a standby arrangement. The completion of the review enabled the immediate disbursement of about $1.13 billion.

“Pakistan’s vulnerabilities remain high due to persistent inflation, securityrelated spending pressures, energy-sector problems and shortfalls in revenue collection and external financing,” IMF’s Deputy Managing Director Murilo Portugal said.

But “against a background of adverse security developments and a rapidly changing political environment, economic conditions have improved,” he said.

“Real GDP growth has begun to pick up and the external position has strengthened. Preparations for important and politically difficult tax reforms have moved forward and there has been steady progress in financial sector reform.” The IMF has so far extended $7.27 billion to Pakistan, including the current instalment.

The waivers agreed on the government’s request include combining the remaining three instalments into two.

The concession follows an assurance from the government to fulfil its pledge to introduce the VAT despite stiff resistance at home.

The executive board also approved Pakistan’s request for waivers over its failure to meet two quantitative performance criteria by the end of March.

The waivers were granted for overruns on the overall budget deficit and net government borrowing from the State Bank.

The board observed that non-observance of the criteria was in part because of a temporary factor -- delay in disbursements of foreign financing.

It agreed to a request for modification of the end-June, 2010, performance criteria for the budget deficit to increase the cumulative end-quarter ceilings by 0.15 per cent of gross domestic product (GDP).

This will allow space for urgent security outlays and avoid undue cuts in other priority spending. It will also raise the floor for the net foreign assets of the SBP by $300 million given a strengthened external position.

The 23-month standby arrangement of about $7.61 billion was approved on Nov 24, 2008. On Aug 7 last year, the arrangement was augmented to about $10.66 billion and extended to the end of 2010.

Following the executive board’s discussion on Pakistan, Mr Murilo noted that the challenges the country was facing highlighted the importance of pursuing a credible fiscal consolidation, maintaining a flexible exchange rate and a cautious stance to monetary policy, and improving governance.

Pakistani “authorities’ resolve to press ahead with the structural reform agenda will also be key,” he said.

“The authorities reaffirmed their commitment to proceed with legal and administrative steps to ensure that the VAT is introduced on July 1 as scheduled, providing the needed tax revenue for investments in human resources, infrastructure and poverty reduction,” Mr Murilo said.

The success of this commitment “depends crucially on prompt passage of consistent VAT laws by parliament and provincial assemblies, harmonisation of other tax laws and an effective refund system,” he said.

washington, may 15: the inter- national monetary fund (imf) released $1.13 billion of loan to pakistan on satur- day to help overcome its economic vul- nerabilities and create room for urgent security outlays. the fund also accepted the govern- ment’s request for waiver of certain con- ditions in the current arrangement. in return, the government pledged to levy the value added tax (vat) from july 1, as scheduled. it also had to accept some remedial actions proposed by the imf. the imf expressed the hope that the loan package would help the country overcome its economic vulnerabilities caused by a volatile security situation and persistent inflation. at a meeting held here, the imf exec- utive board approved waivers to give room for “urgent security outlays and avoid undue cuts in other priority spend- ing”. according to a statement, the board completed the fourth review of pakis- tan’s economic performance under a pro- gramme supported by a standby arrange- ment. the completion of the review ena- bled the immediate disbursement of about $1.13 billion. “pakistan’s vulnerabilities remain high due to persistent inflation, security- related spending pressures, energy-sec- tor problems and shortfalls in revenue collection and external financing,” imf’s deputy managing director murilo portugal said. but “against a background of adverse security developments and a rapidly changing political environment, econom- ic conditions have improved,” he said. “real gdp growth has begun to pick up and the external position has strengthened. preparations for impor- tant and politically difficult tax reforms have moved forward and there has been steady progress in financial sector re- form.” the imf has so far extended $7.27 bil- lion to pakistan, including the current in- stalment. the waivers agreed on the govern- ment’s request include combining the re- maining three instalments into two. the concession follows an assurance from the government to fulfil its pledge to introduce the vat despite stiff resist- ance at home. the executive board also approved pakistan’s request for waivers over its failure to meet two quantitative perform- ance criteria by the end of march. the waivers were granted for overruns on the overall budget deficit and net gov- ernment borrowing from the state bank. the board observed that non-observ- ance of the criteria was in part because of a temporary factor -- delay in disburse- ments of foreign financing. it agreed to a request for modification of the end-june, 2010, performance crite- ria for the budget deficit to increase the cumulative end-quarter ceilings by 0.15 per cent of gross domestic product (gdp). this will allow space for urgent secur- ity outlays and avoid undue cuts in other priority spending. it will also raise the floor for the net foreign assets of the sbp by $300 million given a strengthened ex- ternal position. the 23-month standby arrangement of about $7.61 billion was approved on nov 24, 2008. on aug 7 last year, the arrange- ment was augmented to about $10.66 bil- lion and extended to the end of 2010. following the executive board’s discus- sion on pakistan, mr murilo noted that the challenges the country was facing highlighted the importance of pursuing a credible fiscal consolidation, maintain- ing a flexible exchange rate and a cau- tious stance to monetary policy, and im- proving governance. pakistani “authorities’ resolve to press ahead with the structural reform agenda will also be key,” he said. “the authorities reaffirmed their com- mitment to proceed with legal and ad- ministrative steps to ensure that the vat is introduced on july 1 as scheduled, pro- viding the needed tax revenue for invest- ments in human resources, infrastruc- ture and poverty reduction,” mr murilo said. the success of this commitment “de- pends crucially on prompt passage of consistent vat laws by parliament and provincial assemblies, harmonisation of other tax laws and an effective refund system,” he said.

 

[xenia]

deleted.......