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Credit Agencies Moody’s: B3 S&P: CCC+ Fitch: na Nominal GDP (2007) USD 145.7 billions Population (2007): 164 millions Total Trade / GDP (2007): 32.2% Currency: Pakistani rupee Exchange regime: Managed float Merchandise imports from Canada: (Jan-Aug 2008) CAD 405 millions (+28.7%) Main sources of Foreign Exchange (excl. FDI): Textile exports Workers remittances Largest Merchandise Export Destination: USA (21.3 %) Main imports: Machinery and transport equipment (26%) Mineral fuels (24%) Risks to the Outlook
Improvements in security Lower commodity prices Failure to reach or implement IMF agreement Political instability
Market Spotlight: The rapid deterioration of external accounts has led to a balance of payment crisis, forcing the government to seek external assistance from the IMF after negotiations with bilateral and multilateral organizations failed. The economy will slow considerable this year as a result of tighter fiscal and monetary policy and weakening external demand for the important textile sector. Recent performance: After reaching a record 7.7% growth rate in FY 2004-05 (starting July 1st) GDP growth slowed to a more sustainable pace of 6.0% in 2007-08 as political and macroeconomic instability took their toll on the country. Tighter domestic monetary conditions and a weakening of FDI and of US demand (Pakistan’s main export market) also contributed to the slowdown, despite continued strong inflows of remittances from the diaspora. While the export sector has shown recent improvements, manufacturing output slowed in the first 2 quarters of the year, and even declined y/y in June (-4.1%). With further tightening of monetary policy, austerity measures from the government and weakening external demand going forward, growth is expected to slow further this year. Fiscal policy: Last year’s populist budget, released in anticipation of the elections, promised to expand price subsidies for politically sensitive items such as food, fertilizers and energy. Surging commodity prices resulted in ballooning expenditure, which rose 43% y/y and 26% higher than initially budgeted for. st The fiscal deficit surged as well, from 4.5% of GDP in FY 2006-2007 (starting July 1 ) to an unsustainable level of 7.4% of GDP in 2007-2008. These and other spending measures were a major contributor to rising inflationary pressures and macroeconomic instability. The new government now has no choice but to rein in spending, and the new budget has already penciled-in substantial cuts to electricity and fuel subsidies, although the government had partly backtracked due to strong popular opposition. As a result, the deficit for the 2008-2009 budget will improve to 5% of GDP. Monetary policy: With inflation rising to 23.98% in Sept-08 (a slight ease from August), the State Bank of Pakistan (SBP, the central bank) has been imposing price controls. Its key policy rate was raised to 13% in July, and the government issued price lists to retailers for the Holy Month of Ramadan to ease pressures. The SBP’s inflation target is 6.5%. The SBP has been dealing with liquidity risk by injecting foreign currency and relaxing cash reserves by 100bp on Oct. 11th. Inflation is expected to remain at an alarming level as it is being exacerbated by political instability, high oil prices, tight food supplies and a weakening currency. Additional interest rate hikes will most likely be a condition in the bailout package that the government is currently negotiating with the IMF. External sector: The surge in oil prices in 2007 bolstered the import bill, triggering massive trade and current account deficits, dwindling FX reserves and a depreciation of the rupee. The current account deficit now stands at around 9% of GDP a far cry from the 4% IMF forecast for the year and almost double the 4.7% recorded in 2006. In the past, FDI flows and remittances funded the previously more manageable shortfall. While remittances continue to increase rapidly (+27.9% in Sep-08), FDI inflows took a 47.9% y/y tumble as foreign investors have become quite concerned about the deteriorating economic and political situation. Foreign exchange reserves have plummeted to unprecedented lows at USD 7.3bn in mid-October losing over two-thirds of their level at the start of the year and representing only 6 weeks of import cover. The currency has depreciated 32.4% year to date. The only upside to the picture is the still manageable external debt at 26.6% of GDP in 2007. Outlook: Pakistan’s current economic turbulence may be appeased in the short term if enough funds are pledged that would enable the country to fund the financing gap. Ongoing talks with the IMF have yet to materialize into actual terms and amounts for the rescue package without which the country will undoubtedly default on its debt obligations. It is now unclear whether international donors will provide financial assistance without an IMF program aimed at structurally overhauling the economy. Despite the tremendous challenges that the economy currently faces, the medium term outlook for Pakistan is nonetheless promising, provided the structural imbalances can be addressed and the necessary reforms enacted. Political stability will therefore be key.
Pakistan Manufacturing Output Index (y/y % change)
Anne-Marie Shaker firstname.lastname@example.org
GDP (% growth, real) Inflation (%, year-end) Fiscal Balance (% of GDP) Exports (% growth) Imports (% growth) Current Account (% of GDP) Reserves (month of imports) External Debt (% of GDP) Debt Service ratio Currency (per USD, year-end) Source: EIU, EDC Economics 02-06 avg. 5.8 6.1 -3.0 13.3 22.3 0.0 5.2 36.8 11.2 59.1 2007 6.0 7.6 -4.5 6.3 7.7 -5.7 3.9 26.6 10.9 61.2 2008 6.0 21.6 -7.4 15.8 24.6 -7.7 2.3 25.8 7.6 70.9 2009 4.2 15.3 -5.0 6.7 1.6 -6.5 2.4 24.0 9.1 74.2
35 30 25 20 1 5 1 0 5 0 -5Jan-1 03 0 -1 5 -20
Jul- Jan03 04
Jul- Jan04 05
Jul- Jan05 06
Jul- Jan06 07
Jul- Jan07 08
Source: Haver Analytics
General Political Environment: Pakistan’s political environment has undergone enormous change over the past year. President Pervez Musharraf’s dominance of the political scene since a bloodless coup in 1999 began unravelling in 2007 as Musharraf resigned as President and as Chief of Army Staff, signalling an end to military rule in Pakistan. The February 2008 elections brought about a change in government as Musharraf’s party, the Pakistan Muslim League-Quaid (PML-Q) was ousted. The Pakistan People’s Party (PPP), which had been led by Benazir Bhutto until her assassination in Dec. 2007, fared the best followed by the Pakistan Muslim League-Nawaz (PML-N). Given that no single party succeeded in gaining a parliamentary majority, a coalition – the Pakistan Democratic Alliance (PDA) – was created. The PPP led by Asif Ali Zardari and the PML-N led by Nawaz Sharif – two parties that campaigned to varying degrees on an anti-Musharraf platform – formed the PDA; however, there are several factors which undermined its effectiveness. In August the PML-N, announced that the party would be withdrawing from the ruling coalition due to several issues on which they remained divided. In spite of the PML-N’s withdrawal, the PPP-led government still has a parliamentary majority thanks to its own seats and those of its partners, and has continued governing. In fact, since the collapse of the coalition the PPP has further strengthened its position as its leader, Zaradari, was elected president in September. The PPP-led government is expected to survive over the short term; however, it is difficult to predict how long the government will survive without the PML-N. As evinced by recent events, building coalitions is difficult in a country as political volatile as Pakistan and these coalitions are even more difficult to maintain. Given that any coalition formed will include several smaller parties with differing interests, it will be difficult for the PPP to keep the union together. This will become more difficult when the PML-N becomes a more active force in opposition and seeks to gain the support of smaller parties as well. Given these issues and the fact that both the PPP and the PML-N retain considerable support in Pakistan, it is likely that the PPP-led government will not succeed in building a sustainable coalition of sufficient strength to retain power and elections will be called at some point in 2009. The unfolding economic crisis in Pakistan, and the government’s sinking popularity stemming from the crisis, also lessens the likelihood of the present government’s long term survival. However, elections would change little as these two parties will remain the two most popular parties and are widely expected to dominate Pakistan’s political scene over the medium to long term. The likelihood of a military takeover increases as the economic crisis – and the government’s apparent incapability to deal with it – deepens. Investment Environment: The government welcomes foreign investment in Pakistan and has hastened the privatisation of public sector assets. Key challenges include highly underdeveloped strategic infrastructure and an antiquated taxation system. Administrative organizations are generally regarded as corrupt and ineffective. The government has a track record in bringing unilateral changes to investors’ contracts. Corruption and issues of commercial morality remain areas of concern. Political Violence: The greatest security threat facing Pakistan is that posed by Islamist and other militant groups operating in the country’s tribal areas bordering Afghanistan. These groups have launched attacks against security forces, political officials and increasingly Western targets (including the 2008 bombings of the Marriot Hotel and of the Danish Embassy in Islamabad) throughout the country. Al-Qaida and the Pakistan and Afghan Taliban are examples of such groups operating in the tribal areas, which are virtual ‘no-go’ areas. The government’s perceived bias towards Punjab, Pakistan’s most affluent province, has caused disgruntlement amongst the underdeveloped, yet resource-rich provinces in the hinterland, particularly Baluchistan. This unrest often leads to political violence as militants have taken to sabotaging strategic infrastructure, such as natural gas lines, in recent years.
Political Structure Federal Parliamentary Democracy President Asif Ali Zardari Prime Minister Yusuf Raza Gilani
Legislative Bodies • National Assembly (the lower housel): 342 seats • Senate (upper house): 100 seats Major Parties • Pakistan Peoples Party (PPP) 87 seats • Pakistan Muslim LeagueNawaz (PML-N) 67 seats. • Pakistan Muslim League – Quaid (PML-Q) 40 seats– supports Musharraf Last Elections Legislative: February 2008 Presidential: 2008 Next Elections • Legislative: 2013 • Presidential: 2013
Press Freedom Survey: • 2007 Score: 63 Not Free (0: Free; 100: Not Free) freedomhouse.org Control of Corruption Index: • 2007 Score: -0.83 (-2.5: Worst; +2.5: Best) worldbank.org
November 2008 Peter Whelan email@example.com
Political Outlook Legislative elections in February 2008 effectively ended the period of military rule that had been in place since 1999. A coalition made up of secular parties was formed but quickly fell apart. The PPP is now in control of the legislature and of the presidency following Zardari’s victory in the presidential election in September 2008. Pakistan faces two very significant challenges. The first is related to the ongoing attacks that occur throughout the country undertaken by militant groups based in the Afghan border areas. The second is the rapidly worsening economic situation in the country.
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