dr shah april 2006

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PRESENTATION ON

The Present Economic Outlookfor Pakistan

By

Ministry of Finance

Government of Pakistan

April, 2006



2

Outline of Presentation

Key Macroeconomic Challenges of the 1990s

How did we address those challenges

Where Are We Now?

Where do we want to see Pakistan in the next five years

Key Macroeconomic targets for the next five years

New Challenges

How to address new challenges

Concluding remarks



3

Overcoming macroeconomic challenges

• 1990s Macroeconomic Scenario – Macroeconomic imbalances leading to buildup of public debt,

deceleration of growth and investment, and stagnation in exports• Challenges of the 90s

– Improve macroeconomic environment

– Bring debt situation under control – Restore investor confidence – Revive economic growth – Restore financial sovereignty

• 2000-onwards: Two-pronged Strategy followed – Policies pursued to strengthen macroeconomic environment – Introducing wide-ranging structural reforms



4

Policies pursued to strengthen macroeconomicenvironment

•

Reducing “Twin Deficits”• Keeping inflation low• Building foreign exchange reserves• Maintaining stability in exchange rate•

Maintaining consistency and continuity in policies



5

Strong commitment to reform agenda

Majoreconomicreforms

Tax ReformsTax Reforms

GovernanceGovernanceReformsReforms

Capital MarketCapital MarketReformsReforms

Industry &Industry &InvestmentInvestment

ReformsReforms

FiscalFiscalTransparencyTransparency

Agriculture SectorAgriculture SectorReformsReforms

Financial SectorFinancial SectorReformsReforms

DeregulationDeregulation&&

PrivatizationPrivatization

Fiscal Responsibility & Debt Limitation ActFiscal Responsibility & Debt Limitation Act



6

Improved external balance of paymentsIncreased foreign exchange reservesExports growing at double-digit rates

Pakistan’s economy has made significant progressduring the last six years

A vibrant economyA vibrant economyspurred by FDI andspurred by FDI and

domestic investment indomestic investment in

infrastructureinfrastructure

Transparent and predictableeconomic policies

Reform policies institutionalized,ensuring continuity

Confidence of theprivate sectorrestored

Inflows of remittances

surged

Fiscal and currentaccount deficitslowered

Declining domestic and

external debt burden

A vibrant economyA vibrant economyspurred by FDI andspurred by FDI and

domestic investmentdomestic investment



Where Are We Now ?



Robust Economic Growth

Real GDP growth (% yoy change)

4.23.9

1.8

3.1

5.1

6.47.0

8.4

0

2

4

6

8

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06(T)

2005-06(E)

Source: Federal Bureau of Statistics

6 . 5

7 . 0



Per Capita Income ($)

526501 503

582

652

736

400

500

600

700

800

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Per Capita Income Continues to Rise

Source: Federal Bureau of Statistics



New Jobs Created

Labour ForceSurvey

Employment(in millions)

Number of NewEmployment

(in millions)

FY 00 36.82 -

FY 02 39.05 2.23

FY 04 42.01 2.96

FY 06 (Q1) 47.55 5.54

Source: Labour Force Survey, FBS



Reduction in Poverty

Area 2000-01 2004-05 Changes(% Points)

Overall 32.1 25.4 -6.7

Rural 39.0 31.8 -7.2

Urban 22.7 17.2 -5.5

Source: Center for Research on Poverty Reduction and Income Distribution (CRPRID)



Foreign investment

Foreign Investment (US$ million) including Privatization Proceeds

Source: SBP

403 543182

475820 922

1,677

3,495

0

300600900

1200150018002100240027003000330036003900

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06(T)



rong Demand for Credit by the Private Sector

Textiles

Manufacturing excl. Textiles

Personal Consumer Loans

Commerce

Agriculture

Construction

Others

(50,000)

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2 0 0 1

- 2 0 0 2

2 0 0 2

- 2 0 0 3

2 0 0 3

- 2 0 0 4

2 0 0 4

- 2 0 0 5

Texti les Manufacturing excl . Texti les Personal Consumer Loans Commerce Agricul ture Construction Others

Net Credit Flows

to the Private Sector



Profits of Listed Compa

0

50

100

150

200

250

2001 2002 2003 2004 2005

P K R ( b n )

Profit After Tax (all sectors) e xcept F uel & Energy an d BanksFuel & Energy Banks

Banks

Fuel &Energy

NonEnergy

NonBanks

Rising Profitability Driving Growth

Source: KSE



Currency stabilization and buoyant stock marketreflects optimism in the Pakistan economy

Source: Bloomberg

Exchange rate (PKR/USD) Pakistan’s Karachi Stock ExchangeIndex - 100

55

56

57

58

59

60

61

62

63

64

65

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06



Improving budgetary position

Overall fiscal deficit (% of GDP)

Source: Ministry of Finance

(6.1)(5.4)

(4.3) (4.3) (3.7)

(2.4)(3.3)

(3.8)

(8)

(7)

(6)

(5)

(4)

(3)

(2)

(1)

0

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06(T)



Growing Revenue Collection helps boost upthe economy

Increase Revenue Collection (Rs. Billion)

469 513 553624

721791

902 979

309 347 392 404461

519591

690

0

200

400

600

800

1000

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-

06(T)

Source: Ministry of Finance & CBR

CBR Revenue



Overall interest payment ratioshave improved

Interest Payments (As % of Total Revenue)


47.051.2

42.439.3

28.824.7 23.3

0.0

20.0

40.0

60.0

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05



Low inflation has provided monetaryflexibility

Source: FBS

Inflation (%) (Base year 2001 = 100)

5.7

3.64.4

3.5 3.14.6

9.3

8.0

1.02.03.04.05.0

6.07.08.09.0

10.0

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-

06(T)



20

7.3

8.5

9.910.2

11.1

9.8

8.79

8.48.5

8.37.89

8.518.75

8.05

7

5.6

6.46.7

55.5

6

6.5

7

7.5

8

8.5

9

9.5

10

10.5

11

11.5

12

D e c - 0 4

F e b - 0 5

A pr - 0 5

J un- 0 5

A u g- 0 5

O c t - 0 5

D e c - 0 5

6 -F e b

6 -A

pr

6 - J un

Month-wise Trend in Inflation

Supply Side Actions

•Projected



22

Money Supply, Inflation & GrowthTightening Money Supply

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

P e r c e n t a g e

M2 Growth Inflation GDP growth Nominal GDP Growth

M2

NominalGDP

Inflation

Real GDP



23

Low interest rates encouraged privateinvestment and fuelled growth

Weighted Average Lending Rate (% per annum)

Source: SBP

4

6

810

12

14

16

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-

Dec



24

Exceptionally strong external liquidity

Source: SBP

Imports and Exports (US$ million)

9,613 9,602 10,2029,434

11,333

13,604

18,724

23,629

14,371

16,993

8,9338,1907,528

12,396

10,889

9,140

6,0008,000

10,00012,00014,00016,00018,00020,00022,00024,00026,000

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06(T)

Imports Exports



25

As confidence in the economy builds,remittances from abroad have risen sharply

Source: SBP

Remittances (US$ million)

1,060 984 1,087

2,389

4,2373,872

4,169 4,300

0

1,000

2,000

3,000

4,000

5,000

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-

06(T)



26

Current account (% of GDP)

Current account deficit remainsunder control

-3.7-5.4 -4.8 -4.8

-7.2-6.2

-4.1

-1.6-0.7

0.1

3.8

1.4

-1.6

-4.2

-11

-8

-5

-2

1

4

80-81

84-85

89-90

90-91

95-96

96-97

98-99

99-00

00-01

01-02

02-03

03-04

04-05

05-06

Source: SBP



27

Financial Flows (Million $)2005-06 2004-05

Privatization Proceeds 1645 363

Grants 637 231

Capital Markets 1500 600

Project & Program Aid 2893 2044

Foreign Investment 1850 1676

Total 8525 4914

Current Account Deficit -5353 -1753

Amortization -1042 -1434

Other Payments - 416 -1500

Total -6811 -4687

Addition to Reserves 1714 227




28

...aided by a phenomenal buildupin FX reserves

Source: SBP

Foreign exchange reserves (US$ billion)

1.7 1.42.1

4.8

9.8

12.3 12.614.3

1

3

5

79

11

13

15

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

(T)



Debt Profile of Pakistan



30

PUBLIC DEBT (As % of GDP)

91.789.1

100.3

56.5

61.7

68.4

75.179.7

83.8

95.9

50

60

70

80

90

100

110

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006(T)

( End June )( End June )

Source: Debt Office, Ministry of Finance



31

EXTERNAL DEBT AND LIABILITIES(% of Foreign Exchange Earnings)

297.2

260.2

236.8

181.2164.9

137.2

347.0

120

160

200

240

280

320

360

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Significantly reducing vulnerability to external shocks




32

INDICATORS OF DEBT BURDEN

51.7 52.2 51.0

43.0

36.632.5

28.8

66.3

20

30

40

50

60

70

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06(T)

External Debt (As % of GDP)External Debt (As % of GDP)




33

INDICATORS OF DEBT BURDEN

38.2

17.9

8.4

3.3 2.9 2.8

25.1

0

5

10

15

20

25

30

35

40

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

External Debt As Multiples of FX ReservesExternal Debt As Multiples of FX Reserves




Pakistan’s EconomyIn the Next Five Years



35

Pakistan’s Economy in the Next Five Years

Strong Economic Growth Ranging between 6 – 8% p.a.

Stable Macroeconomic Environment

Debt Burden Reaching Sustainable Level

Lives of the Common Man ImprovingSocial Indicators Improving



Key Macroeconomic TargetsFor The Next Five Years



37

Key Macroeconomic Targets for the Next Five Years

Sustainable Budget Deficit Ensuing Macroeconomic Stability

• Continue to Maintain Macroeconomic StabilityContinue to Maintain Macroeconomic Stability

(5.4)

(4.3) (4.3)(3.7)

(2.4)

(3.3) (3.6) (3.6) (3.4) (3.3) (3.2)

(8)

(7)

(6)

(5)(4)

(3)

(2)

(1)

0

1 9 9 9 - 0 0

2 0 0 0 - 0 1

2 0 0 1 - 0 2

2 0 0 2 - 0 3

2 0 0 3 - 0 4

2 0 0 4 - 0 5

2 0 0 5 - 0 6

2 0 0 6 - 0 7

2 0 0 7 - 0 8

2 0 0 8 - 0 9

2 0 0 9 -1 0





38

Public Debt Attaining Sustainability


83.879.7

68.461.7

56.5 53.2 50.6

75.1

45.447.9

95.9

30

40

50

6070

80

90

100

110

1 9

9 9 - 0 0

2 0

0 0 - 0 1

2 0

0 1 - 0 2

2 0

0 2 - 0 3

2 0

0 3 - 0 4

2 0

0 4 - 0 5

2 0

0 5 - 0 6

2 0

0 6 - 0 7

2 0

0 7 - 0 8

2 0

0 8 - 0 9

2 0

0 9 -1 0





39

Country No Longer Vulnerable to External Shocks: External Debt As % of GDP


51.0

43.0

36.6

32.5

28.826.7

24.923.3

22.0

52.2

20

25

30

35

40

45

50

55

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

( P e r c e n t

)





41

Pakistan on a higher Growth Trajectory

• Sustaining Growth MomentumSustaining Growth Momentum

1.8

3.1

5.1

6.4

8.4

6.77.0

7.4 7.88.0

1.01.52.02.53.03.54.04.55.05.56.0

6.57.07.58.08.59.0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10





43

Secondgeneration

reforms

Second generation reforms

Improvingcompetitiveness of

industry

Facilitate expansionand increased role

of private sector

Further strengthening of taxadministration

Promotingtransparency ineconomic policy

making

Judicial reform,Police Reform and

Civil Service Reform

Strengtheninginstitutions

32

Building robustfinancial system

Further strengthening of taxadministration



44

Continuing Economic Agenda

i. Curtailing High Energy Costs

• Power Sector Reforms

• Hydel Power

• Gas Pipelines

• Reforms of Oil and Gas industry

ii. Removing Water Shortages

• Water Reservoirs

• Management of Water Resources

• Efficient Usage at the Farm Level



45


iii. Improving Logistics & Removing Supply Chain Constraints

• National Trade Corridor

• Retail & Wholesale Markets Development

• Ports Modernization

• Modernizing Transport Fleet

iv. Unlocking the Land Bank

• NIPs (National Industrial Parks)

• Release of Government Land ( Defence, Railways, Provincial Governments

etc.)

• Computerization of Land Transactions



46


v. Removing Skills Gap & Enhancing Productivity

•

NTEVTA• 5 New Engineering Universities & HEC Initiatives

• Education Sector Reforms

vi. Boosting Agriculture Sector Development

• Livestock Sector

• Fisheries

• Horticulture & Value Added Agriculture

• Research & Extension Services

• Yield Enhancement

C i i E i A d



47


vii. Tourism & Hotel Industry Expansion

viii. SMEs & One Village One Product

ix. Sustaining Industrial Development Beyond Textiles

x. Developing Knowledge Based Industry &

Outsourcing

xi. Strengthening Growth Prospects of Service Sector

xii. Obtaining Preferential Access to Global Markets



Conclusions

i. Economy Continues to Grow Strongly

ii. Reduction in Unemploymentiii. Growing Profitability of Private Sector

iv. Robust Banking System

v. Strong Growth in Diversified Sectorsvi. Vibrant Telecom Sector

vii. Strong Domestic & External Demand Sustaining Economic

Growthviii. Growing opportunities in Infrastructure

ix. Growing Role of the Private sector

dr shah april 2006

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