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Even by its high standards, 2011 has been a tumultuous year for Pakistan. Political uncertainty, energy shortages, terrorism, and flood devastation all feature heavily in the central bank’s end of year report on the state of the economy, which makes for predictably glum reading.
According to the State Bank of Pakistan’s report, domestic problems are of greatest concern, including, “the collapse of fixed investment; acute energy shortages; urban violence and lawlessness; poor physical infrastructure; and institutional fragility”.
Such ‘structural deficiencies’, coupled with an absence of good governance and the floods that hit last year, saw the economy grow by 2.4 per cent of GDP in fiscal year 2011, which runs from July to June, a significant undershooting of the projected 4.5 per cent estimated by the central bank.
Even discounting regional giant India, this modest growth puts the country well below its South Asian neighbours Sri Lanka and Bangladesh, both of whom are posting growth rates of 6-7 per cent of GDP.
Pakistan’s public finances are most worrying for its central bank. The budget deficit of 6.6 per cent is well above the 4 per cent target and plugging the shortfall will prove problematic as the government stalls in implementing vital fiscal reforms, such as expanding the tax-base.
Only 1 per cent of the population pays income tax in Pakistan and despite year-on-year increases, tax revenues still fell in real terms in FY11. The failure to make significant moves on fiscal management has led to Islamabad prematurely ending a three-year IMF loan-programme.
The report is also further evidence of the disconnect between what outsiders often see as Pakistan’s huge economic potential and the faltering fundamentals that seem to hold it back from becoming a success story.
After all, Pakistan is included in Jim O’Neill’s ‘next 11’ growth markets alongside South Korea, Indonesia, and Turkey – mainly on account of its massive 180m population. And according to at least one Indian economist who spoke to beyondbrics, Pakistan’s near neighbours have also come to see the clear benefits of developing ties with their erstwhile rivals.
“More and more people in India are realising that we have a stake in a stable and more prosperous Pakistan. The business opportunities are simply huge”.
Normalising relations with India will not be a panacea to Pakistan’s ills but plans to grant Delhi ‘Most Favoured Nation’ status should be a first step in diversifying the country’s trade relations. Approximately 50 per cent of Pakistan’s exports go to the EU and US, and access to the Indian market should certainly provide a fillip to the country’s powerful industrialists.
But as warned by the SPB, the government needs first to address deteriorating business conditions, the most crucial of which is energy supply. Insufficient resources have put a ‘ceiling on growth potential’ and the demand-supply gap for electricity in particular has led to growing social unrest and the shutting down of factories for large parts of they day.
Pakistan ranks 105th out of 183 countries surveyed in the World Bank’s ease of doing business scores, a fall of nine places from 2010.
Inflation is 12.9 per cent and has been running in double-digits for 50 consecutive months, whilst benchmark interest rates have been held at 12 per cent, having been cut by 150 basis points in October. The central bank estimates growth to be between 3-4 per cent and inflation to fall by less than one percentage point for FY12.
For all its potential, Pakistan’s end of year report reads conclusively as ‘try harder next time’. In the words of the central bank: “policymakers must focus on the basics if Pakistan’s economy is to move forward.”
Pakistan: focus on the basics | beyondbrics | News and views on emerging markets from the Financial Times
According to the State Bank of Pakistan’s report, domestic problems are of greatest concern, including, “the collapse of fixed investment; acute energy shortages; urban violence and lawlessness; poor physical infrastructure; and institutional fragility”.
Such ‘structural deficiencies’, coupled with an absence of good governance and the floods that hit last year, saw the economy grow by 2.4 per cent of GDP in fiscal year 2011, which runs from July to June, a significant undershooting of the projected 4.5 per cent estimated by the central bank.
Even discounting regional giant India, this modest growth puts the country well below its South Asian neighbours Sri Lanka and Bangladesh, both of whom are posting growth rates of 6-7 per cent of GDP.
Pakistan’s public finances are most worrying for its central bank. The budget deficit of 6.6 per cent is well above the 4 per cent target and plugging the shortfall will prove problematic as the government stalls in implementing vital fiscal reforms, such as expanding the tax-base.
Only 1 per cent of the population pays income tax in Pakistan and despite year-on-year increases, tax revenues still fell in real terms in FY11. The failure to make significant moves on fiscal management has led to Islamabad prematurely ending a three-year IMF loan-programme.
The report is also further evidence of the disconnect between what outsiders often see as Pakistan’s huge economic potential and the faltering fundamentals that seem to hold it back from becoming a success story.
After all, Pakistan is included in Jim O’Neill’s ‘next 11’ growth markets alongside South Korea, Indonesia, and Turkey – mainly on account of its massive 180m population. And according to at least one Indian economist who spoke to beyondbrics, Pakistan’s near neighbours have also come to see the clear benefits of developing ties with their erstwhile rivals.
“More and more people in India are realising that we have a stake in a stable and more prosperous Pakistan. The business opportunities are simply huge”.
Normalising relations with India will not be a panacea to Pakistan’s ills but plans to grant Delhi ‘Most Favoured Nation’ status should be a first step in diversifying the country’s trade relations. Approximately 50 per cent of Pakistan’s exports go to the EU and US, and access to the Indian market should certainly provide a fillip to the country’s powerful industrialists.
But as warned by the SPB, the government needs first to address deteriorating business conditions, the most crucial of which is energy supply. Insufficient resources have put a ‘ceiling on growth potential’ and the demand-supply gap for electricity in particular has led to growing social unrest and the shutting down of factories for large parts of they day.
Pakistan ranks 105th out of 183 countries surveyed in the World Bank’s ease of doing business scores, a fall of nine places from 2010.
Inflation is 12.9 per cent and has been running in double-digits for 50 consecutive months, whilst benchmark interest rates have been held at 12 per cent, having been cut by 150 basis points in October. The central bank estimates growth to be between 3-4 per cent and inflation to fall by less than one percentage point for FY12.
For all its potential, Pakistan’s end of year report reads conclusively as ‘try harder next time’. In the words of the central bank: “policymakers must focus on the basics if Pakistan’s economy is to move forward.”
Pakistan: focus on the basics | beyondbrics | News and views on emerging markets from the Financial Times
