The Outlook for Pakistan - Carnegie Endowment for ... · Fiscal policy 8 Fiscal Deficit Financing, 2009–11 (In percent of GDP) 6 Bank Nonbank External 4 2 0 2008/09 2009/10 2010/11

The Outlook for Pakistan

Carnegie Endowment for International PeacegMarch 7, 2012

Paul RossMiddle East and Central Asia Department

International Monetary Fund

Key Messages

• Pakistan has abundant potential• Pakistan has abundant potential

• Non-economic factors have hurt economic performance

(political, security, and natural catastrophes)

• So have inappropriate economic policies

• Risks and vulnerabilities have grown, and the external

environment has deterioratedenvironment has deteriorated

• Measures are needed now to contain vulnerabilities and

move the economy to high and inclusive growth

My presentation todayy p y

K F t f th E• Key Features of the Economy

• Economic OutcomesEconomic Outcomes

• Outlook

• Policies

• Key Messages

I. Key Features of the Pakistan E d P li F kEconomy and Policy Framework

Pakistan’s potentialChina

Saudi Arabia

UAE

IndiaArabia

Key Features of the Pakistan Economy and Policy Framework

An economy vulnerable to shocksy


An economy vulnerable to external shocks

Share of Petroleum Products in Total Imports

yHeavy dependence on oil and textile price.

Share of Petroleum Products in Total ImportsShare of Textiles and Cotton in Total ExportsShare of Petroleum Products in Total Imports (Average 2008/09 - 2010/11)

Share of Petroleum Products in Total Imports (Average 2008/09 - 2010/11)

Share of Textiles and Cotton in Total Exports(Average 2008/09 - 2010/11)

Oil 31%

Oil 31%

Textiles 49%

Other 69%

Other 69%

Other 51%


Limited buffers - Weak fiscal structure

30

General Government Tax Revenue, 2010

20

25

GDP

10

15

Perc

ent o

f G

0

5

tan

tan

pia

esia

nes

pal

ypt

eru

dia on and

bia

nia

ina

key

aria

nya

nd hile tan

cco

azil

rica

ary

ine

ina

ssia

Afgh

anist

Paki

stEt

hiop

Indo

nePh

ilipp

inN

e Egy Pe Ind

Leba

nTh

ail a

Colo

mb

Rom

an Chi

Turk

Bulg

aKe

nPo

la C hKa

zakh

stM

oroc Br

aSo

uth

Afr

Hung

aU

krai

Arge

nt Rus

Source: IMF Fiscal Monitor DatabaseSource: IMF Fiscal Monitor Database.


Weak fiscal structure

45

Interest Expenditure, 2010

30

35

40

45

Reve

nue

15

20

25

Perc

ent o

f Tax

R

0

5

10

an pt dia es ey zil bia ry ya nd na sia ca co nia ru pal

nd ne pia ria na ile sia an

P

Paki

sta

Egy

Ind

Phili

ppin

Turk

eBr

aCo

lom

bHu

nga

Keny

Pola

nAr

gent

inIn

done

sSo

uth

Afri

Mor

occ

Rom

an Pe Nep

Thai

lan

Ukra

inEt

hiop

Bulg

arCh

inCh

iRu

ssKa

zakh

sta

Source: IMF Fiscal Monitor Database.


Source: IMF Fiscal Monitor Database.

Weak fiscal structure: Public enterprises

• Large public enterprises operate in energyLarge public enterprises operate in energy, transportation, food and other sectors

• Many run large losses that end up on budget• Many run large losses that end up on budget

• Services provided by these enterprises are i li h id dpoor in quality, e.g., there are widespread

electricity shortages and power cuts


Weak fiscal structure: Fiscal decentralization

• Increased share of revenue allocated toIncreased share of revenue allocated to expenditure responsibilities devolved to provincesprovinces

• But rules of the game need strengtheningLittl i ti f i t i– Little incentive for provinces to raise own revenue

– No binding mechanism in place to coordinate federal and provincial fiscal targetsfederal and provincial fiscal targets


Constrained energy supplygy pp y

• Energy shortages a longstanding issueEnergy shortages a longstanding issue

• Reform plans not implemented

id d h h h• Widespread outages that hurt growth

• Large budgetary subsidies that hurt public finances


Private sector credit

4500

Banking Sector Credit, 2008–11(In billions of Rupees)

3500

4000

4500

Private Sector

2000

2500

3000

500

1000

1500 Public Sector

0

500

Jan-08 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

Sources: Pakistani authorities; and IMF staff calculations


Sources: Pakistani authorities; and IMF staff calculations.

Private sector credit

35

Private Credit, 2001–11 (In percent of GDP)

30

35

20

25

15

20

102000/01 2002/03 2004/05 2006/07 2008/09 2010/11



II. Economic Outcomes

Past economic outcomes - growth

30003000

Real GDP per Capita(In U.S. dollars)

2500

3000

2500

3000

Bangladesh India

1500

2000

1500

2000 Sri Lanka Pakistan

500

1000

500

1000

0

500

0

500

1980 1984 1989 1993 1998 2002 2007 2011

Economic Outcomes

980 98 989 993 998 00 00 0

Sources: Pakistani authorities; and IMF staff estimates.

Past economic outcomes - savings

4040

Gross National Savings (In percent of GDP)

30

35

40

30

35

40Bangladesh India

Sri Lanka Pakistan

20

25

20

25

10

15

10

15

0

5

0

5

1980 1984 1989 1993 1998 2002 2007 2011

Economic Outcomes

Sources: Pakistani authorities; and IMF staff estimates.

Past economic outcomes - investment

4545

Gross Capital Formation, 1980-2010 (In percent of GDP)

35

40

45

35

40

45Bangladesh India

Sri Lanka Pakistan

20

25

30

20

25

30

10

15

20

10

15

20

0

5

0

5

1980 1985 1990 1995 2000 2005 2010

Economic Outcomes


Growth

10

Real GDP, 1980–2011 (In y-y percent change)

7

8

9

10

4

5

6

1

2

3

01980 1984 1989 1993 1998 2002 2007 2011


Economic Outcomes

Growth

Pakistan’s New Growth StrategyPakistan s New Growth Strategy• The government of Pakistan has formulated a

th t t (NGS)new growth strategy (NGS)

• The NGS promotes sustained growth by addressing what it considers the two main constraints to growth: – Inadequate market development

– Inefficient public sector management

Economic Outcomes

Employment

• Official unemployment is low butOfficial unemployment is low, but

• There is considerable underemployment and considerable unpaid employment andconsiderable unpaid employment and

• A young population; an average GDP growth f 7 i d d b bof 7 percent per year is needed to absorb

about 2 million new labor market entrants

Economic Outcomes

Inflation

• Recent inflation performance has been poorRecent inflation performance has been poor

• High inflation is regressive and hurts the poor the mostthe most

• High inflation harms growth

Economic Outcomes

A weakening external positionSBP Gross International Reserves and Net Swap/Forward Position, 2009‒12 (In billions of U.S. dollars)

0.0

0.5

1.0

14

16SBP Net Swap / Forward Position (RHS)

SBP Gross International Reserves

(In billions of U.S. dollars)

-1.5

-1.0

-0.5

10

12

-2.5

-2.0

8

ul-0

9

ov-0

9

ar-1

0

ul-1

0

ov-1

0

ar-1

1

ul-1

1

ov-1

1

eb-1

2

1/ Positive values indicate net purchases in the interbank foreign exchange

J No M J No M J No


Fe

Economic Outcomes

1/ Positive values indicate net purchases in the interbank foreign exchange market.

Past economic outcomes

S b th• Subpar growth

• Low savings and investment

• High inflation in recent years

• Considerable underemployment and unpaidConsiderable underemployment and unpaid employment

• Weakening external position• Weakening external position

Economic Outcomes

III OutlookIII. Outlook

Short-term outlook

The outlook for 2011/12 is challenging, clouded b i k i th ldby risks in the world economy:

• Real growth is recovering, but remains at a relatively low level

• Double digit Inflation expected to continue• Balance of payments pressures• Fiscal pressures

Outlook

Medium-term outlook

Without policy changesWithout policy changes

• Fiscal deficits could crowd out credit to the private sectorprivate sector

• Savings and investment would decline

• Growth would settle around 3½ percent per year

• External position could deteriorate

• Sizeable financing gaps could resultSizeable financing gaps could result

Outlook

Risks

• There are several risks tilted to the downsideThere are several risks tilted to the downside

– Gross fiscal financing requirements

– Inflation

ll f k l b l– Spillovers from weak global economy

– Financial stability risksy

Outlook

IV PoliciesIV. Policies

Policies

• Policy objectives: to reduce short-termPolicy objectives: to reduce short term vulnerabilities and boost long-term growth

• Fiscal policies• Fiscal policies

• Financial sector policies

• Structural reforms

Policies

Alternative scenario

• To manage these risks and lift growth, an To manage these risks and lift growth, analternative set of policies is proposed.

• The scenario assumes prudent fiscal and pmonetary policies and structural reforms (tax policy, energy, business climate, and others) to

bl f th fi l lid ti d hi henable further fiscal consolidation and higher productivity.

• These policies and reforms would produce higher• These policies and reforms would produce higher growth, lower unemployment and inflation, and a more robust reserve cover.

Policies

Fiscal policy

8

Fiscal Deficit Financing, 2009–11 (In percent of GDP)

6

8 Bank Nonbank External

4

2

02008/09 2009/10 2010/11

S P ki t i th iti d IMF t ff l l ti

Policies


Fiscal policyp y

• In the near term contain the deficit inIn the near term, contain the deficit in 2011/12 through revenue and spending measuresmeasures– Revenue measures

Limit power subsidies– Limit power subsidies

– Keep provincial budgets in surplus

Policies

Fiscal policyp y

• In the medium termIn the medium term – Revenue mobilization

Improving composition of spending by reducing– Improving composition of spending by reducing untargeted subsidies, tightening other non-wage current spending and making space for highercurrent spending and making space for higher spending on social protection, education and health

– Improve cash and debt management

– Strengthen fiscal decentralization framework

Policies

Financial policies

• Monetary and exchange rate policyMonetary and exchange rate policy– Cautious monetary policy needed

Allow more exchange rate flexibility– Allow more exchange rate flexibility

– Strengthen central bank autonomy

Policies

Financial policies

• Safeguarding financial sector stability• Safeguarding financial stability in the face of rising risks

– Address NPLs Limit regulatory forbearance and promptly restructure– Limit regulatory forbearance and promptly restructure problem banks

– Improve financial governance I t d d it i– Introduce deposit insurance

– Establish commercial courts. • Development of capital markets priority p p p y

– Encourage the development of the managed funds industry, and

– Greater transparency in company datap y p y

Policies

Structural reforms

Improving Pakistan’s competitivenessImproving Pakistan s competitiveness • The key to Pakistan’s external competitiveness is

improving security conditions, the reliability of p g y , yenergy supply, and its business environment and governance.

• Out of 142 countries included in the World Economic Forum’s Global Competitiveness Report 2011 12 Pakistan ranked 1182011–12, Pakistan ranked 118.

• The World Bank Doing Business Report 2011, in which Pakistan ranked 83rd out of 183 countrieswhich Pakistan ranked 83 out of 183 countries.

Policies

Structural reforms

Sustained and inclusive growth requires a number of structural reforms

– Improve reliability and efficiency of Pakistan’s energy supply

A strategy to restructure the large public enterprises– A strategy to restructure the large public enterprises

– A program to further reduce the state’s footprint in the economy

– Improve the investment climate, by promoting better regulation and governance and facilitating the entry and exit of firms

– Civil service reformCivil service reform

– Improve the functioning of the financial sector

– Further strengthening of the social safety net

– Continue trade liberalization

Policies

Alternative scenario - Public finances

00Fiscal Balance

7070Public Debt (I t f GDP)(In percent of GDP)

6060

(In percent of GDP)

-5-5

5050

Baseline

Reform

5050Baseline

Reform

-10-10

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

40402

00

6/0

7

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

Outlook

Alternative scenario - Credit and GDP growth

4040Private Credit

1010Real GDP (at factor cost)

3030

(In percent of GDP) (In y-y percent change)

B li

2020

Baseline

R f

55

Baseline

Reform

1010Reform

00

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

002

00

6/0

7

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

Outlook

Alternative scenario—FDI and reserves

88FDI

2020SBPGross International ReservesFDI

(In U.S. dollar billions)

Baseline 1515

SBP Gross International Reserves(In U.S. dollar billions)

Baseline

44

Baseline

ReformReform

1010

00

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

552

00

6/0

7

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

Outlook

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Key Messages

• Pakistan has abundant potential• Pakistan has abundant potential

• Non-economic factors have hurt economic performance

(political, security, and natural catastrophes)

• So have inappropriate economic policies

• Risks and vulnerabilities have grown, and the external

environment has deterioratedenvironment has deteriorated

• Measures are needed now to contain vulnerabilities and

move the economy to high and inclusive growth

h kThank you

For further information, please see http://www.imf.org/external/pubs/cat/longres.aspx?sk=25714.0

Documents

The Outlook for Pakistan - Carnegie Endowment for ... · Fiscal policy 8 Fiscal Deficit Financing, 2009–11 (In percent of GDP) 6 Bank Nonbank External 4 2 0 2008/09 2009/10 2010/11