PRESENTATION ON

The Present Economic Outlook

for Pakistan

By

Ministry of Finance April, 2006

Government of Pakistan
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

2
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

3
Policies pursued to strengthen macroeconomic
environment

• Reducing “Twin Deficits”

• Keeping inflation low
• Building foreign exchange reserves
• Maintaining stability in exchange rate
• Maintaining consistency and continuity in policies

4
Strong commitment to reform agenda

Fiscal Responsibility & Debt Limitation Act

Fiscal
Tax Reforms Transparency

Major
Governance Capital Market
Reforms economic Reforms
reforms
Agriculture Sector Financial Sector
Reforms Reforms

Industry & Deregulation

Investment &
Reforms5 Privatization
Pakistan’s economy has made significant progress
during the last six years

 Transparent and predictable

economic policies
 Reform policies institutionalized,
ensuring continuity

 Fiscal and current A vibrant economy  Confidence of the

account deficits A vibrant economy private sector
spurred by FDI and
lowered spurred by FDI and restored
domestic investment in
 Declining domestic and domestic investment  Inflows of remittances
infrastructure surged
external debt burden

 Improved external balance of

payments
 Increased foreign exchange reserves
 Exports growing at double-digit rates

6
Where Are We Now ?
Robust Economic Growth

Real GDP growth (% yoy change)

8.4
8 7.0
6.4
6 5.1

0. 7
4.2 3.9
4 3.1
1.8
2

5. 6
0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2005-06
(T) (E)

Source: Federal Bureau of Statistics

8
Per Capita Income ($)

Per Capita Income Continues to Rise

800
736

700
652

600 582

526
501 503
500

400
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Source: Federal Bureau of Statistics

9
New Jobs Created
Labour Force Employment Number of New
Survey (in millions) Employment
(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

10
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)

11
Foreign investment

Foreign Investment (US$ million) including Privatization Proceeds

3900
3,495
3600
3300
3000
2700
2400
2100
1,677
1800
1500
1200 922
820
900 543
600 403 475
182
300
0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
(T)

Source: SBP
12
 trong Demand for Credit by the Private Sector

500,000
Net Credit Flows
450,000
to the Private Sector
400,000
Others

350,000
Construction

300,000 Agriculture
PKR millions

Commerce
250,000

200,000 Personal Consumer Loans

150,000
Manufacturing excl. Textiles

100,000

50,000
Textiles

-
02

03

04

05
20

0
(50,000)
-2

-2

-2
1-

02

03

04
0

20

20

20
20

Textiles Manufacturing excl. Textiles Personal Consumer Loans Commerce Agriculture Construction Others

13
Rising Profitability Driving Growth
Profits of Listed Companies
250 Source: KSE

200
Banks

150
PKR (bn)

100 Fuel &

Energy

50
Non
Energy
0 Non
2001 2002 2003 2004 2005 Banks

Profit After T ax (all sectors) except F uel & Energy and Banks
F uel & Energy Banks

14
Currency stabilization and buoyant stock market
reflects optimism in the Pakistan economy
Pakistan’s Karachi Stock Exchange
Exchange rate (PKR/USD)
Index - 100

65 14,000

64
12,000
63
10,000
62
61 8,000
60
6,000
59
4,000
58
57 2,000
56
0
55 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06

Source: Bloomberg
15
Improving budgetary position

Overall fiscal deficit (% of GDP)

0
(1)
(2)
(3) (2.4)
(4) (3.3)
(3.7) (3.8)
(5) (4.3) (4.3)
(6) (5.4)
(7) (6.1)

(8)
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-
06(T)

Source: Ministry of Finance

16
Growing Revenue Collection helps boost up
the economy

Increase Revenue Collection (Rs. Billion)

1000 902 979

CBR Revenue
791
800 721 690
624 591
600 553 519
513
469 461
392 404
400 309 347

200

0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-
06(T)

Source: Ministry of Finance & CBR

17
Overall interest payment ratios
have improved

Interest Payments (As % of Total Revenue)

60.0
51.2
47.0
42.4
39.3
40.0
28.8
24.7 23.3
20.0

0.0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Source: Ministry of Finance

18
Low inflation has provided monetary
flexibility

Inflation (%) (Base year 2001 = 100)

10.0 9.3
9.0 8.0
8.0
7.0
5.7
6.0
5.0 4.4 4.6
4.0 3.6 3.5
3.1
3.0
2.0
1.0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-
06(T)

Source: FBS

19
Month-wise Trend in Inflation
12
11.5
11 11.1
Supply Side Actions
10.5
10
10.2 •Projected
9.9 9.8
9.5
9 9
8.7 8.75
8.5 8.5 8.4 8.5 8.3 8.51
%

8 7.89 8.05
7.5
7.3
7 7
6.7
6.5 6.4
6
5.5 5.6
5
Dec-04

Feb-05

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

6-Feb

6-Apr

6-Jun
20
Regional Price Comparison of Essential Commodities
COMPARISON OF PRICES OF ESSENTIAL HOUSEHOLD BUDGET ITEMS WITH REGIONAL
COUNTRIES in Pak Rupees
S# Items Unit Islamabad New Delhi Kabul Tehran
28/03/06 27/03/06 19/03/06 22/03/06
1 Wheat KG 11.88 19.18 18.15 -
2 Wheat Flour KG 13.24 19.18 24.20 -
3 Rice Basmati KG 22.63 27.40 42.35 82.16
4 Moong Pulse KG 49.67 65.76 60.50 39.43
5 Mash Pulse KG 56.02 71.24 60.50 -
6 Masoor Pulse KG 43.96 43.92 60.50 59.15
7 Gram Pulse KG 31.79 41.10 60.50 52.58
8 Onion KG 11.07 10.96 18.15 29.58
9 Tomatoes KG 14.99 16.44 36.50 29.58
10 Garlic KG 58.02 61.37 72.00 52.58
11 Chicken Farm KG 55.65 68.50 121.00 92.01
12 Mutton KG 196.56 191.80 266.20 427.20
13 Sugar KG 36.03 31.51 31.46 39.43
16/03/06 10/3/2006 19/03/06 22/03/06
14 Diesel Litre 37.25 42.54 34.00 1.05
15 Petrol (Super/Octane 90) Litre 56.36 61.38 36.30 5.26
16 Kerosene Oil Litre 37.50 49.32 39.00 1.08

21
Source: FBS & Ministry of Commerce
 Money Supply, Inflation & Growth
Tightening Money Supply

25.0%

20.0% M2

15.0%
Percentage

10.0% Nominal
GDP

5.0%
Inflation

0.0% Real GDP

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

M2 Growth Inflation GDP growth Nominal GDP Growth

22
Low interest rates encouraged private
investment and fuelled growth

Weighted Average Lending Rate (% per annum)

16

14

12

10

4
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-
Dec

Source: SBP

23
Exceptionally strong external liquidity

Imports and Exports (US$ million)

26,000
23,629
24,000 Imports Exports
22,000
20,000 18,724
16,993
18,000
16,000 14,371
13,604
14,000 12,396
11,333
12,000 10,202 10,889
9,613 9,602
10,000 8,933 9,434 9,140
7,528 8,190
8,000
6,000
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
(T)

Source: SBP

24
As confidence in the economy builds,
remittances from abroad have risen sharply

Remittances (US$ million)

5,000
4,237 4,169 4,300
3,872
4,000

3,000
2,389

2,000
1,060 984 1,087
1,000

0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-
06(T)

Source: SBP

25
Current account deficit remains
under control

Current account (% of GDP)

3.8
4
1.4
1 0.1

-2 -0.7
-1.6 -1.6
-5 -3.7 -4.1 -4.2
-5.4 -4.8 -4.8
-8 -6.2
-7.2
-11
80- 84- 89- 90- 95- 96- 98- 99- 00- 01- 02- 03- 04- 05-
81 85 90 91 96 97 99 00 01 02 03 04 05 06

Source: SBP

26
 Financial
2005-06 Flows (Million $)
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

Source: Ministry of Finance

27
...aided by a phenomenal buildup
in FX reserves

Foreign exchange reserves (US$ billion)

15 14.3
12.3 12.6
13
11 9.8
9
7
4.8
5
3 1.7 2.1
1.4
1
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
(T)

Source: SBP

28
Debt Profile of Pakistan
 PUBLIC DEBT (As % of GDP)

( End June )
110

100.3
100 95.9
91.7
89.1
90
83.8
79.7
80
75.1

70
68.4

61.7
60 56.5

50
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006(T)

Source: Debt Office, Ministry of Finance

30
 EXTERNAL DEBT AND LIABILITIES
(% of Foreign Exchange Earnings)
Significantly reducing vulnerability to external shocks
360 347.0

320 297.2

280 260.2
236.8
240

200 181.2
164.9
160 137.2

120
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Source: Debt Office, Ministry of Finance

31
 INDICATORS OF DEBT BURDEN
External Debt (As % of GDP)
70 66.3

60
51.7 52.2 51.0
50
43.0
40 36.6
32.5
28.8
30

20
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-
06(T)

Source: Debt Office, Ministry of Finance

32
 INDICATORS OF DEBT BURDEN
External Debt As Multiples of FX Reserves
40 38.2
35
30
25.1
25
20 17.9

15
10 8.4

5 3.3 2.9 2.8

0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Source: Debt Office, Ministry of Finance

33
Pakistan’s Economy
In the Next Five Years
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 Improving
 Social Indicators Improving

35
Key Macroeconomic Targets
For The Next Five Years
 Key Macroeconomic Targets for the Next Five Years
• Continue to Maintain Macroeconomic Stability
Sustainable Budget Deficit Ensuing Macroeconomic Stability

0
(1)
(2)
(3) (2.4)
(4) (3.3) (3.4) (3.3) (3.2)
(3.7) (3.6) (3.6)
(5) (4.3) (4.3)
(6) (5.4)
(7)
(8)
1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
Source: Ministry of Finance
37
Key Macroeconomic Targets for the Next Five Years

• Continue to Maintain Macroeconomic Stability

Public Debt Attaining Sustainability

110
100 95.9
90 83.8
79.7 75.1
80
68.4
70 61.7
60 56.5
53.2 50.6 47.9
50 45.4
40
30
1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10
Source: Ministry of Finance
38
 Key Macroeconomic Targets for the Next Five Years
• Continue to Maintain Macroeconomic Stability
Country No Longer Vulnerable to External Shocks: External Debt As % of GDP

55
52.2 51.0
50

45 43.0
(Percent)

40
36.6
35 32.5

30 28.8
26.7
24.9
25 23.3
22.0

20
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Source: Ministry of Finance

39
 Key Macroeconomic Targets for the Next Five Years
• Rising Investment
Investment as % of GDP Rising

25
23.3
21.8
22
20.5
19.3
19 18.0
(Percent)

17.3 16.9
16.8 16.7
16

13

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

Source: Ministry of Finance

40
 Key Macroeconomic Targets for the Next Five Years
• Sustaining Growth Momentum
Pakistan on a higher Growth Trajectory

9.0 8.4
8.5 8.0
8.0 7.8
7.4
7.5 7.0
7.0 6.7
6.4
6.5
6.0
5.5 5.1
5.0
4.5
4.0
3.5 3.1
3.0
2.5
2.0 1.8
1.5
1.0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Source: Ministry of Finance

41
New Challenges
Second generation reforms

Strengthening
institutions

Judicial reform,
Improving
Police Reform and
competitiveness of
Civil Service Reform
industry

Second
Promoting
transparency in
generation Facilitate expansion
economic policy reforms and increased role
making of private sector

Further strengthening of tax Building robust

administration financial system

32
43
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

44
Continuing Economic Agenda
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

45
Continuing Economic Agenda

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

46
Continuing Economic Agenda

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

47
Conclusions
i. Economy Continues to Grow Strongly

ii. Reduction in Unemployment

iii. Growing Profitability of Private Sector

iv. Robust Banking System

v. Strong Growth in Diversified Sectors

vi. Vibrant Telecom Sector

vii. Strong Domestic & External Demand Sustaining Economic

Growth

viii. Growing opportunities in Infrastructure

ix. Growing Role of the Private sector

48