By Dr. Nayyer Ali

The Economy Surges Again

June 29, 2007

Despite the ongoing political turmoil, Pakistan’s economy continues its strong five-year run of growth. The current fiscal year ending June 30 has shown another 7% expansion in the Pak economy, and per capita income in dollar terms is now over 930. Adjusted for purchasing power, per capita income is almost 4000 dollars. It is still a poor country, but it is moving into the ranks of the middle income.
Shaukat Aziz presented the new budget, and it reflects the solid growth seen over the last few years. In the coming year, total spending will be 1.6 trillion rupees, with expected tax revenues reaching 1.4 trillion rupees. In the last year of Nawaz Sharif, the government was not even collecting 400 billion rupees in revenue. Deficit spending has been kept well contained, which has resulted in a sharp drop in the debt burden.
In 1999, Pakistan’s debt equaled its GDP, now the debt is half the size of the GDP. This means that there is more room to spend on social services rather than paying the interest charges. In fact, Pakistan’s interest on the debt has remained basically constant over the last 7 years, while the economy and government revenues have surged.
The Public Sector Development Program (PSDP) will receive over 500 billion rupees this coming year, compared with 90 billion in1999. This means much more funds for schools, health, roads, and major development projects.
The military budget is going up by 20%, but this is less than the increase overall, and the share of the military in the national economy will remain constant. There are also a number of subsidies being supported by the budget. Basic food items will be supported, as will support prices for farm crops. In addition, government workers and pensioners are getting raises of 15-20%, which is much greater than inflation, which came in at about 8% for 2006-2007.
The farm economy did very well, with a record wheat harvest over 23 million tons, and bumper crops of sugar cane, corn, and even cotton, which did not quite outdo the great harvest of two years ago. Livestock production did very well, and the general prosperity of the agricultural sector is critical, as it supports the rural economy and the poorest parts of Pakistan.
Both the industrial and service sectors saw growth of over 8%. Banking in particular did well, as did many areas of manufacturing. The one poor spot was exports, which only grew 4%. Hopefully, export growth will pick back up soon, but the relative value of the rupee may be part of the problem. Despite a very large trade deficit, there was a net flow of dollars into Pakistan, and foreign exchange reserves hit a new high of 15 billion dollars. Dollar flows came from both 5 billion dollars of remittances, and 6 billion dollars of foreign investment. Direct aid from the World Bank and the US, and the sale of dollar-denominated Pakistan government bonds also added to the flow of currency. The stock market has surged 30% this year to another record high as it likes what it sees.
In the coming year, the government is predicting 7% growth or higher. 7% growth for 10 years doubles the economy. To become a developed society, it would take two doublings of GDP per person, from 4000 dollars to 16000 dollars (about the standard of living of Britain in the 1960’s), and this could be done in less than 25 years of 7% growth. The key is to continue solid economic policies.
These critical policies include free markets, competition, privatizing government run businesses, investing in education, infrastructure, health, and electric power, and maintaining low debts, low taxes, and open trading policies. These policies have helped turn Pakistan into one of the fastest growing economies in the world for the last five years; whatever the outcome of the current political struggle, it is imperative that this policy mix be maintained.

 

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