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2009 Pakistan Economic Update

2009 Pakistan Economic Update

2009 Pakistan Economic Update

Stabilize and Grow

October 29, 2009 - Though Pakistan’s economic activity significantly slowed down due to reduced domestic and global demand, initial estimates suggest that the economy still grew by 2% in 2008-09.

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The political and security environment has complicated policy-making and made the implementation of stabilization measures challenging.

Stabilization Program

In November 2008, to avoid a default on foreign debt payments, Pakistan developed a stabilization program, which was supported by the International Monetary Fund (IMF). In 2007-08, the sharp rise in international oil and food (specifically wheat) prices had led to rapidly expanding macroeconomic imbalances in Pakistan.

By mid-October 2008 the foreign exchange reserves of the State Bank of Pakistan (SBP) had dropped to about three weeks of imports ($3.3 billion). In response, the stabilization program envisaged fiscal and monetary tightening to bring down inflation and reduce the external current account deficit to sustainable levels.

Stabilization efforts since November 2008 together with a decline in international commodity prices have succeeded in reducing external imbalances, rebuilding foreign exchange reserves, and lowering inflation in Pakistan.

Macroeconomic Situation

However, the macroeconomic situation remains fragile and the medium-term outlook is uncertain. Progress with the implementation of reforms has been uneven, with inadequate measures taken to boost revenue and control public spending.

The political and security environment has complicated policy-making and made the implementation of stabilization measures challenging. While the worst of the global economic crisis seems to be ending, global recovery will be gradual and may take time. In the meantime, there are significant risks to exports and external financing. The fiscal year 2009-10 looks difficult.

Fiscal Year 2008-09

Economic activity significantly slowed down in 2008-09. The current account deficit narrowed to 5.1% of GDP. Overseas remittances have increased. But financial inflows (such as FDI and portfolio investment) dropped sharply—by over 37%—due to macroeconomic instability, deteriorating security situation and global recession.

But with the assistance of IMF disbursements, SBP foreign exchange reserves rebounded to about $9.1 billion (2.9 months of imports) by end-June 2009.

However, fiscal problems continued during 2008-09 and the fiscal deficit target was 5.2% of GDP. Overall revenues fell substantially short of the target primarily due to a drop in tax revenues as the economic slowdown reduced Pakistan’s two main tax bases-manufacturing and imports.

Fiscal Year 2009-10

The first two months of FY 2009-10 suggest that fiscal instability will continue, and the first quarter fiscal deficit target will likely exceed the estimates. Revenues have continued to underperform. Provincial governments have continued to spend at high levels, and power subsidies have remained unaddressed by the federal government.

Vulnerability

Failure to raise revenues in future would further intensify Pakistan’s vulnerability to external shocks, and jeopardize development efforts by limiting resources available for planned investments in human and physical infrastructure.

Pakistan’s high economic growth in the earlier part of this decade was in part by heavy reliance on external financing and on expansionary fiscal stance, while revenues and savings remained stagnant. This reliance on external financing left the economy vulnerable to external shocks, which came in 2007-08 led to a balance of payments crisis. To reduce the economy’s vulnerability expanding domestic revenue mobilization would be critical.

Additional resources

Bringing Finance to Pakistan’s Poor
For more information. Read More »

Pakistan Homepage
For more information about World Bank activities in Pakistan. Read More »

Pakistan: Development Data
A wide range of social and economic measures on Pakistan, including links to the World Bank's most important online development databases. Read More »

Pakistan: Analysis and Research
Compilation of the World Bank's publications on Pakistan, with 'search' options and links to analysis and research on other South Asian countries. Read More »

World Bank Program in South Asia
Launching pad to all information on World Bank activities in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Read More »




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