Pakistan Economy - A Journey from 1947 to 2004

Society Pakistan & World Affairs
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1947 - A Nation Born

Pakistan attained nationhood under difficult circumstances. At the partition of British India in 1947 resulting in the creation of the independent nations of India and Pakistan, Pakistan was an agrarian economy in which a small number of powerful landowners with large holdings dominated the countryside. The majority of the population consisted of tenant farmers who cultivated small plots for a meager existence. Scant rainfall in West Pakistan (present-day Pakistan) forced farmers to rely on the extensive irrigation system developed by the British. The headwaters of the Indus River and its main tributaries, however, were under Indian control. Disputes arose between the two nations and were not settled until the Indus Waters Treaty of 1960 was signed.

Pakistan had almost no industry in 1947. Under British rule, the area that became Pakistan supplied agricultural products for processing to the territory that became the independent India. Energy sources were rudimentary, with wood and animal dung furnishing the bulk of the energy consumed. Ports, transportation, and other services, such as banking and government, were underdeveloped. More than 1,600 kilometers of Indian territory separated the East Wing and West Wing of Pakistan until the former became independent Bangladesh in 1971. In 1949 a dispute over exchange rates halted the flow of goods between Pakistan and India, disrupting the complementary nature of their economies that had developed under British colonial rule.

1951-1991 - Sustained Growth

Despite formidable problems, Pakistan achieved rapid economic expansion. From FY 1951 to FY 1986, the GDP growth rate measured at a constant FY 1960 factor averaged 5.2 percent. Rates of growth averaged 3.1 percent in the 1950s–when agriculture stagnated–but rose to 6.8 percent in the 1960s. They fell to 3.8 percent between FY 1971 and FY 1977 but rebounded to 6.8 percent between FY 1978 and FY 1986. From FY 1987 to FY 1991, growth averaged 5.8 percent, and a rate of 7.8 percent was achieved in FY 1992. Provisional data indicate that GDP grew only 2.6 percent in FY 1993. This decline is mainly a result of the floods in September 1992, which reduced agricultural output.

Rapid growth substantially altered the structure of the economy. Agriculture’s share (including forestry and fishing) declined from 53 percent of GDP in FY 1950 to 25 percent in FY 1993. A substantial industrial base was added as industry (including mining, manufacturing, and utilities) became the fastest growing sector of the economy. Industry’s share of GDP rose from 8 percent in FY 1950 to 21.7 percent in FY 1993. Various services (including construction, trade, transportation and communications, and other services) accounted for the rest of GDP.

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Current Development - Trends and Issues

A. Recent Political and Social Developments

  1. Following elections in October 2002, new governments at the federal and provincial levels were formed in November 2002. The Senate elections were subsequently held in February 2003. The Pakistan Muslim League (Quaid Group) or PML (Q), heads the coalition governments in the center and three of the four provinces, while the Muttahida-Majlis-e-Amal (MMA), a coalition of religious parties, holds office in North-West Frontier Province (NWFP).

  2. The Federal Government and the highest political levels in the provincial governments have reaffirmed their continued commitment to the ongoing governance and economic reform program, as well as the policy emphasis on macroeconomic stability, poverty reduction, and growth. However, the elected governments face continuing pressure for populist policies, which may impact the ongoing reforms. Also, negotiations between the Government and the opposition on the Legal Framework Order (LFO)1 are stalled, which is the cause of a degree of political uncertainty in the country. On the positive side, the recent signs of rapprochement with India could have great significance for internal stability, continuity of governance reforms, and private investment.

B. Economic Assessment and Outlook

  1. The economy’s overall performance improved significantly in fiscal year (FY) 2003. The gross domestic product (GDP) growth rate is estimated at 5.1% compared with 3.4% in FY2002 (Appendix 1, Table A1.2). The higher growth was made possible by strong performance in all sectors of the economy: 4.1% growth in agriculture, 5.4% in industry (7.7% in manufacturing), and 5.3% in services. Supported by the sharp fall in interest rates, total investment increased to 15.5% of GDP in FY2003, and the fiscal deficit declined to 4.6% of GDP. For the first 9 months of FY2003, inflation declined to 3.3%; exports and imports increased by 16.6% and 21.9% respectively; and workers’ remittances increased to $3.1 billion from $1.5 billion during the same period in the last fiscal year. As a result, the current account surplus, excluding official transfers, increased to $2.6 billion compared with $1.0 billion during the same period in the last fiscal year. The foreign exchange reserves with the State Bank of Pakistan (SBP), at $9.3 billion on 31 May 2003, have increased to 8 months of imports.

  2. The medium-term prospects for the Pakistan economy have improved since the finalization of the country strategy and program (CSP). The reduced economic uncertainty because of Pakistan’s improved macroeconomic fundamentals should boost investment and economic growth. The rate of inflation is expected to remain low. On the external account, both exports and imports are likely to continue to grow strongly, and remittances are expected to sustain their current high levels. Thus, while the trade gap will widen, the current account on the balance of payments is expected to remain in surplus. However, this positive outlook is subject to certain risks that will need to be carefully managed to ensure that the process of economic recovery is not derailed. These include the risk that the Government’s commitment to the reform program may waiver on account of pressure to implement populist measures and postpone unpopular decisions. There is also the risk that weaknesses in implementation capacity may hamper good macroeconomic management and improved service delivery at the local level. Further, global factors, such as a slowdown in the world economy, may also check the favorable economic outlook.

C. Implications for Country Strategy and Program

  1. The focus of the CSP is on supporting poverty reduction in Pakistan through provision of assistance in the key strategic areas of good governance, sustainable pro-poor economic growth, and inclusive social development, with good governance being the primary theme of the strategy. Under good governance, the CSP emphasizes successful implementation of governance reforms, in particular devolution, and legal, judicial, police, and civil service reforms, which are critical to achieving Pakistan’s development objectives. For pro-poor economic growth, interventions in the areas of rural development, employment generation, and infrastructure are emphasized, together with support for sector-level policy reforms. In the area of inclusive social development, the CSP prioritizes assistance for decentralized financing, planning, and delivery of social services, mainstreaming gender issues, and improving social protection mechanisms. Finally, the CSP emphasizes a number of crosscutting themes including subregional cooperation, sustainable environmental management, and the decentralization of Asian Development Bank (ADB) assistance to provincial governments.

  2. This strategy continues to be relevant, and is in line with the priorities of the new Government; it will therefore remain unchanged. However, while the federal and provincial governments have assured their commitment to, and continuity in, the ongoing governance and economic reform program, it needs to be recognized that the new political governments would have to develop broad-based support to sustain the reform process. Thus, in terms of implementation of the reforms, there could be some uncertainties. This underscores the critical importance of continued ADB support for governance reforms in general, and devolution in particular, to assist the country in achieving its reform objectives.

  3. ADB will support the deepening of the ongoing governance and macroeconomic reforms, through provision of assistance for second generation reforms at the provincial and sector levels. Gender reforms would be an integral part of the governance program and ADB’s strategy would focus on supporting political, administrative, and fiscal initiatives to consolidate these reforms. ADB will continue to support effective relations between the nongovernment organization (NGO) sector and governments in respect of policy advocacy, in the implementation of the new institutional arrangements at the local level that provide for greater citizen involvement in the affairs of government; ADB will also aim to strengthen NGO engagement in the delivery of services. ADB lending to devolved sectors will aim to strengthen devolution, by ensuring that the design of future ADB projects is consistent with the new governance structures under the local government ordinances (LGOs) promulgated in August 2001. Where appropriate, efforts will be made to realign recently approved ADB projects for devolved sectors. Finally, ADB will assist the Government in improving its communication of the reform program, and broadening stakeholder ownership, through organizing a series of workshops on related topics with support from the Asian Development Bank Institute (ADBI).

  4. With the expected improvement in growth, ADB will reinforce its emphasis on rural development and employment generation to ensure that the growth is pro-poor. An important addition proposed in ADB’s strategy in this regard is its re-engagement in the water sector through province-focused projects on water conservation, drought mitigation, and rehabilitation of the irrigation infrastructure. ADB’s assistance in this sector will be based on the Water Resources Strategy Study completed in June 2002, and will take into account the need for strengthening institutional capacity. As regards inclusive social development, ADB’s emphasis will remain on improving delivery of social services by supporting both increased public sector allocations made possible by enhanced fiscal space, and improved governance through strengthening devolution, sector administration, and financial management.

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Present: Pakistan Enjoys Explosive Economic Growth

Pakistan is in the midst of an explosion in economic growth. Despite the recent slump in the global economy, Pakistanis have managed to boost exports while keeping their inflation rate down and their currency stable. The country's challenge now is to transform this economic expansion into real gains for Pakistan's poor. Pakistan is making leaps in almost every economic statistic. Economic growth has more than doubled from a struggling two percent two years ago to above five percent now.

A two-year drought that hit the agricultural sector - the centerpiece of the Pakistani economy - is finally over, and cotton, rice and wheat production is booming.

As a result, the Asian Development Bank reported last month that exports are growing faster than at any time since the 1980s, with Pakistani knit-wear, cotton cloth and basmati rice shipping out across the globe.

The financial sector also is experiencing flush times. If you had invested in every company on the main index at the Karachi Stock Exchange in June 2002, you would have seen a return of 150 percent by now.
And although the stock market has seen some losses in the past few weeks, analysts say its upward trend is likely to continue.
Economists such as Henri Ghesquiere, with the International Monetary Fund in Pakistan, say that if the economic pattern continues over the next decade, the country could become a new "Asian Tiger."
"Pakistan would be slowly following the path of some of the more successful East Asian countries, which have grown fast on the basis of export performance," he said. "And gradually, then, Pakistan would be moving in the direction of countries like Indonesia, Malaysia, for example, then eventually Taiwan, and ultimately - but that would take some time - South Korea."

The forces behind the new prosperity include a crackdown on tax collections and official corruption, and a strong fiscal policy that has stabilized the rupee and reined in inflation.

The war on terror also is helping. Islamabad has allied itself with the United States in fighting terrorists, including Islamic extremists in Afghanistan and Pakistan. To cut terrorist finances flowing into the country, Pakistan has clamped down on under the table money transfers.

This drove Pakistanis to make such transfers through legitimate banks. That, in turn, more than doubled the country's foreign exchange reserves in a year.

Pakistan's war on terror has also brought it financial support from the West in the form of foreign debt relief.

But the picture is by no means perfect. Economists point out that despite the rising prosperity, many Pakistanis still lead a life of poverty and hunger.

The Asian Development Bank (ADB) reported last month that the number of poor in Pakistan, the world's sixth most populous nation, continues to grow.

According to the most recent data, about one third of the country lives below the poverty line, defined by the government as those unable to afford a diet of 2,350 calories a day.

The politicians are certainly aware of the problem, and the same ADB report notes that spending on poverty reduction rose by a third during the last fiscal year.

Economists such as Iffat Zehra Mankani of Pakistan's Capital One Equities, say such efforts are encouraging. But she added that poverty-reduction programs must focus on improving the lot of the nation's farmers, who serve as the linchpin for the economy.

"The whole service sector, as well as the manufacturing sector, is dependent on agriculture," said Ms. Mankani. "Then if there's a good crop, that bodes well for the manufacturing sector, especially related to textile industries."

She said that if farmers could access better technology to increase crop yields and improve profits, it would cascade across the entire economy, creating jobs and, as a result, raising wages.

Pakistan's poor have even more reason for hope, because the United States plans to give its anti-terror ally a five-year, $3 billion aid package.

While half of the money is for military spending, U.S. Treasury Secretary John Snow says the rest should be used to help the poor.
"We've encouraged the government of Pakistan to set some priorities with respect to the use of these funds that will tie to projects and actions and activities that reduce poverty," said Mr. Snow.

Economic trouble could still resurface if tensions with rival India send global investors fleeing, or if Pakistan, heavily dependent on foreign oil, sees crude prices spike.

But between the homegrown economic turn-around and the infusion of aid from abroad, economists say Pakistan seems to be on the way from economic basket case to economic prodigy.

*Source Material From:

  1. US Library of Congress – “1947 – A Nation is Born” & “1951-1991 - Sustained Growth”
  2. Asian Development Bank – “Current Development - Trends and Issues”
  3. Voice of America News – “Present: Pakistan Enjoys Explosive Economic Growth”*
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Nice effort :k:

Going to read it thoroughly

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nice post ... great job...

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credit to Shoukat Aziz :k:
and a nice effort Faisal Bhai

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[QUOTE]
Originally posted by Faisal: *
**Present: Pakistan Enjoys Explosive Economic Growth*

Pakistan is in the midst of an explosion in economic growth. ....
[/QUOTE]

No doubt about it. In order to speed up this growth Pakistan urgently needs to follow a 5 point agenda:

  1. An independent Tax office with a chairperson having guaranteed 10 years of posting.

  2. Four or five year election cycle with fix election dates and a predetermined polling period.

  3. An emphasis on earning money by shipping out tens of thousands of highly trained Pakistani army men, sailors, doctors, nurses, teachers, carpenters, masons.

  4. Changing the course work in schools and colleges to make sure Mullahs are out and love of learning is in. English, GRE, TOEFL should be part of the compulsory courses.

These are the 5 pillars tailored for Pak progress.

14th August Mubarak, Pakistan Zinda-Baad.

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Hi!!

This is the result of taking correct decisions at correct time.

Selecting and Bringing a man with real good profile, in an attempt to improve Pakistan economy.

I pray GOD give more success to our country.

We have lots of money blocked, since Nawaz shareiff's time in a Pakistani banks. (Nawaz Govt. Wrong decision for foreigners' money)

This was the reason foreigners had stopped sending money to Pakistan.

This was the reason people had stopped investing money in Pakistan.

It is all education,which makes difference; but nothing!

More and more educated people would be in the Govt. higher the peak of the graph of Pakistan's economy would be. Inshallah Amin suma amin

Did you hear the schem of BEdar Pakistan:?

Bedar Pakistan scheme seems to be good , but I think it would only work until the coupins would reach certain growth. Later only salaried people would purchase the coupins regularly, so again only salaried people would pay an indirect tax.

Yes at least all black/hidden money would reach to government treasury. Bye Sokoon