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.
