“THE POPULATION, EDUCATION AND ECONOMIC DIMENSIONS OF PAKISTAN”

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Lesson 14

"THE POPULATION, EDUCATION AND ECONOMIC DIMENSIONS OF PAKISTAN"

Note: This particular handout deals with the third of the three dimensions covered by this lecture i.e. the

economic dimension.

Students are advised to study the verbal content of the lecture carefully as well as the PPTs before reviewing

the text given below which is reproduced from the official publication of the Government of Pakistan titled:

"Pakistan Economic Survey 2004-05". This publication is normally released just before the presentation of

the annual Budget of the Government of Pakistan which normally takes place in end-May or June of each

year as the financial year of the Government's Budget is 1st July of one year to 30th June of the next year.

While there is some acknowledgement of economic problems and issues in this text, the overall approach

reflected in this text is "positive" and "official". To this extent, the text below may not be sufficiently

balanced with criticism. However, a study of this text is relevant and necessary for students to gain a proper

understanding of the official viewpoint and of various practical realities that have shaped Pakistan's own

economic situation in 2004-05 as well as the global economic environment.

Students are advised to visit the following two websites:

www.finance.gov.pk

www.finance.org.pk

Excerpt from the Pakistan's Economic Survey 2004-05 page-(i) to (iii).

Pakistan is in the midst of an economic upturn. Since 2002-03, the economy has mounted a strong recovery

with a sustained improvement in prospects. During the fiscal year 2004-05, many of its macroeconomic

indicators show marked improvement over (the previous) year. The most important achievements of the year

include: the fastest pace in real GDP growth, powered by stellar growth in large-scale manufacturing, a sharp

pick-up in agriculture, a continuing robust performance in services, and an extra-ordinary strengthening of

consumer demand; a double-digit growth in per capita income in dollar terms, reaching $ 736; investment

upturn gaining a strong footing, particularly private sector investment which remained buoyant owing to a

rare confluence of various positive developments; an unprecedented increase in credit to the private sector

for the second year in a row; sharp increases in the consumption of oil, gas, electricity and coal reflecting

rising level of economic activity; fiscal deficit remaining on target despite a Rs.50 billion shortfall in revenue

on account of lower collection of petroleum development levy (PDL); higher than targeted collection of

taxes; a high double-digit growth in exports and imports; workers' remittances maintaining their momentum;

a continued accumulation of foreign exchange reserves and stability in the exchange rate; a sharp decline in

the public and external debt burden; privatization programme continued to maintain its robust momentum;

launching of the first-ever Islamic Bond (Sukuk) in international capital markets; and the performance of

Eurobond remained in line with the markets, with the spread over US Treasury undergoing further

compression.

It is not uncommon to see pressures building up on prices, trade and current account balances when

economic activity accelerates. Pakistan's economy is undergoing structural shifts that are fueling rapid

changes in consumer spending patterns. Three years of strong economic growth complimented by record

low-interest rates and the on-going structural shift of many households in Pakistan toward higher

consumption have injected new life into domestic spending. The extra-ordinary surge in domestic demand in

conjunction with the unprecedented rise in oil prices fueled import demand which more than offset the

improved outcome for exports. Accordingly, this year has witnessed a widening of the trade deficit more

than what was envisaged at the beginning of the year. With the trade gap widening, the current account

balance slipped into the red after posting surpluses for three consecutive years. This year has also seen

inflation rising to a 8-year high, hurting the poor and fixed income groups the most. In particular, food

inflation at high double-digits has put an extra-ordinary burden on the poor segment of society as they spend

the bulk of their income on food items. A surge in domestic demand on the one hand and supply side

shocks emanating from rising commodity and oil prices on the other, have been responsible for the sharp

pick-up in inflation this year.

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This year has seen improvements in many, macro-economic indicators along with improvements in social and

living conditions indicators. Results from the recently concluded Pakistan Social and Living Standards

Measurement (PSLM) Survey show a marked improvement in social and living conditions indicators. Key

indicators such as literacy rate, gross and net enrolment in primary, middle and metric levels; access to

sanitation and safe drinking water; use of electricity and gas as sources of lighting and cooking fuel,

respectively; various health indicators such as child immunization and treatment of diarrohea, have all shown

marked improvements over the last 4 to 7 years. While socio-economic and macro-economic policies

pursued during the year have had a strong influence on across-the-board improvement, an increasingly broad

and dynamic global recovery has aided Pakistan in this endeavour.

Global economic environment (2204-2005)

From the developing countries' perspective, the global economic environment this year (2004-2005) has

been relatively less benign than last year (2003-2004). In terms of economic recovery, the world economy

enjoyed one of its strongest years of growth (5.1%) in 2004 and this momentum is expected to continue this

year, albeit at a more moderate pace (4.3%), owing to higher and volatile oil prices and rising interest rates.

Although the global economy posted strong growth in 2004, the overall picture hides growing divergence

across regions. Growth in the United States was stronger than expected on the back of strong domestic

demand but it was disappointing in Europe and Japan the two major growth poles of the world economy,

reflecting weak domestic demand and equally weaker export performance.

The story of emerging markets is altogether different. Real GDP growth in 2004 exceeded expectations in

almost all regions. In emerging Asia, China's growth momentum remained very strong while growth in India

also remained robust. Pakistan's growth performance in emerging Asia has also been extra-ordinarily strong

on the back of strengthening domestic demand and robust global economic expansion. In the ASEAN

region, Indonesia, Malaysia, Thailand and the Philippines posted growth in the range of 5 to 6 percent. While

South Asia remained a strong performer on account of sharp pick-up in growth in Pakistan and India, Sri

Lanka and Bangladesh also experienced growth of over 5 percent. Robust global growth of the last two years

has strengthened the external demand environment, which contributed to the sharp pick-up in growth in

developing countries via strong increases in exports. Pakistan also benefited from a healthy external demand

environment as its exports continued to grow at high double-digits during the last two years.

Notwithstanding strong global economic expansion supporting growth in developing countries, several other

factors have impacted these countries adversely to varying degrees. These factors include: rising oil prices,

sliding dollar, rising inflation and interest rates. This year (2004-2005) has seen an unprecedented rise in oil

prices on the back of rising demand and a series of supply disruptions including capacity constraints in raising

supply. Although the main consumers of oil continue to be the industrialized world (US, OECD Europe, and

Japan together consume about half of annual oil output) they have at the same time prepared themselves to

face oil price volatility. Over the last 30 years, they have succeeded in reducing oil intensity or use of oil per

unit of output by one-half. It is the oil-importing countries who are severely affected by the unprecedented

rise in oil prices in several ways. Firstly, these countries are less oil-efficient despite the fact that their oil

intensity, on average, has declined by one-third; secondly, their foreign exchange reserves are relatively low

and their balance of payments are fragile. Even a temporary period of higher oil prices can force substantial

adjustment in domestic consumption at a considerable cost to growth and poverty reduction. The fiscal

impact can be significant when domestic petroleum products prices are not adjusted accordingly. During the

current fiscal year, Pakistan had to face serious difficulties in managing the cost of the unprecedented rise in

oil prices. In order to shield its domestic consumers and industries from higher oil prices, it absorbed a fiscal

cost of Rs.50 billion in the fiscal year 2004-05. Furthermore, it had to pay an additional $ 700 800 million in

oil import bills.

The sliding dollar, as a result of widening US current account deficit, raised the debt burden of developing

countries on account of the valuation effect. During the first nine months of the current fiscal year,

Pakistan's external debt increased by $ 628 million due to the valuation effect alone. However, given the

present outlook of exchange rate movements, particularly the weakening of the Euro after France's rejection

of the proposed European Union constitution, a further decline in the valuation effect is expected in the

fourth quarter of the current fiscal year. In fact, after the French rejection, the Euro was trading at a 7-month

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low of $ 1.23; and the Japanese Yen at 108.4. These are good signs for Pakistan as its external debt would

decline further during the fourth quarter of the year if the decline in non-US dollar currencies continues.

The surge in international oil prices coupled with an unprecedented rise in world prices of commodities

combined to spark inflationary pressures not just in Pakistan, but in the the global economy as well. Rising

interest rates, reflecting a gradual tightening of monetary cycle to counter inflationary expectations, raised the

cost of borrowing for developing countries. This cost is likely to adversely affect the balance of payments of

developing countries, their fiscal position, as well as prospects for growth.

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