INTRODUCTION

Pakistan officially the Islamic Republic of Pakistan is a sovereign country in South Asia. With a population exceeding 180 million people, it is the sixth most populous country in the world. Located at the crossroads of the strategically important regions of South Asia, Central Asia and Western Asia, Pakistan has a 1,046-kilometre (650 mi) coastline along the Arabian Sea and the Gulf of Oman in the south and is bordered by India to the east, Afghanistan to the west and north, Iran to the southwest and China in the far northeast. It is separated from Tajikistan by Afghanistan's narrow Wakhan Corridor in the north, and also shares a marine border with Oman.

Pakistan's economic growth since its inception has been varied. It has been slow during periods of civilian rule, but excellent during the three periods of military rule, although the foundation for sustainable and equitable growth was not formed. The early to middle 2000s was a period of rapid reform; the government raised development spending, which reduced poverty levels by 10% and increased GDP by 3%. The economy cooled again from 2007. Inflation reached 25% in 2008 and Pakistan had to depend on an aggressive fiscal policy backed by the International Monetary Fund to avoid possible bankruptcy year later, the Asian Development Bank reported that Pakistan's economic crisis was easing. The inflation rate for the fiscal year 201011 was 14.1%. Pakistan is one of the largest producers of natural commodities, and its labor market is the 10th largest in the world. The 7 million strong Pakistani diasporas, contributed US$11.2 billion to the economy in FY2011.The major source countries of remittances to Pakistan include UAE, USA, Saudi Arabia, GCC countries (including Bahrain, Kuwait, Qatar and Oman), Australia, Canada, Japan, UK and EU countries like Norway, Switzerland, etc. According to the World Trade Organization Pakistan's share of overall world exports is declining; it contributed only 0.128% in 2007.The trade deficit in the fiscal year 2010 11 was US$11.217 billion. Pakistan has seen twenty-three governments in the past sixty years, including: fourteen elected or appointed prime ministers, five interim governments and thirty-three years of military rule under four different leaders.23 Excluding the military and interim governments, the average life span of a politically elected government has been less than two years. If the five-year period of Bhutto is excluded, then the average span falls to 1.6 years. In Pakistan, transitions from one political regime to another have been quite difficult, causing uncertainty and short-term reductions in the speed of economic growth. The transfer of power from the military to civilian regimes in 1971, 1988 and 2008 were marked with macroeconomic instability, a slow down in economic activities, rising unemployment and inflation and the adoption of a wait-and-see attitude by investors. But economic recovery has also been resilient; short-term losses caused by political volatility have not been large enough to offset the positive long-term secular economic movement.

Chapter 01

Development experience of Pakistan (Period: 1985-1989)

The overthrow of the Bhutto government by a military coup in July 1977 and the ascendancy of a right wing military leader, General Zia ul- Haq, halted the socialist experiment. Political party activity was soon banned, thereby limiting political participation to the local level only. Zia benefited from participating in the campaign to overthrow the Soviet Union in Afghanistan, as large amounts of military and economic assistance from the United States flowed into Pakistan. The long-term costs were, however, colossal. Economic conditions, however, did improve: GDP grew at 6.6 percent annually, with agriculture at 4 percent and the manufacturing sector at 9 percent. Fiscal deficits, however, widened to 8percent of GDP despite a decline in development expenditure. Domestic borrowing to finance these deficits did not weaken growth immediately but had serious repercussions for public finances and macro-economic stability in the 1990s. As a consequence, Pakistan had to approach the International Monetary Fund (IMF) for assistance in 1988.

GDP growth
As a consequence of military ruling the GDP grew at 6.6 percent in 1987. We can relate this growth to the participation in the campaign to overthrow the Soviet Union in Afghanistan. This growth continues in 1988 despite of transfer of power from the military to civilian regimes. But it saw fall in 1989. Indicator Name GDP growth (annual %) 1985 7.6 1986 5.5 1987 6.5 1988 7.6 1989 5.0

GDP growth (annual %)

8 6 4 2 0 1985 1986 1987 GDP growth (annual %) 1988 1989

External debt stocks

As a consequence of cold relation between military government and other countries especially USA there was a stable flow of external debt. Indicator Name External debt stocks (% of GNI) 1985 38.3 1986 41.74 1987 42.04 1988 39.04 1989 41.15

External debt stocks (% of GNI)

43 42 41 40 39 38 37 36 1985 1986 1987 External debt stocks (% of GNI) 1988 1989

Foreign Direct Investment

As the civilian government took control of the country from military one the foreign direct investment has a significant rise in 1988 and onward. Indicator FDI(US$) 1985 131,389,252. 20 1986 105,730,331.8 0 1987 129,377,643.6 0 1988 186,491,557.3 0 1989 210,599,917.1 0

FDI(US$)
250,000,000.00 200,000,000.00 150,000,000.00 100,000,000.00 50,000,000.00 0.00 1985 1986 1987 FDI(US$) 1988 1989

Budget Deficit/Surplus
The annual budget deficit in Pakistan has ranged continuously around 5 percent of GDP since 1980-81. Until the mid-80s, the contribution of the primary budget deficit i.e. overall budget deficit net of interest payments, was larger than interest payments and now, not only the reverse holds, but the interest payments also claim the major share in the budget deficit. Large fiscal deficits have considerable adverse implications for macroeconomic balances. The government under many circumstances may be tempted to go for high fiscal deficits. In fact, the level of fiscal deficit is related directly to the requirements of external assistance and the rate of inflation. It appears that if the debt-GDP ratio is not maintained and unless corrective measures are taken, the primary budget deficit in absolute terms is expected to rise annually at about 18 percent, net external borrowing at around 15 percent and internal borrowing at 16 percent. As such, Pakistans external debt position in the absence of preventive policies is expected to become worse in the future and the position of the internal debt is not likely to improve either. Consequently, the budget of servicing the external debt will rise to more than 9 percent of GDP and budget deficit as percentage of GDP will rise beyond tolerable limits. However, since high fiscal deficits are fraught with unfavorable consequences, determining and keeping fiscal deficit within tolerable limits becomes imperative. It is to this end that this paper has calculated the level of fiscal deficits under different scenarios based on relevant macro variables.

Indicator Deficit(%of GDP)

1985 7.6

1986 8.2

1987 8.5

1988 7.4

1989 6.5

Deficit(%of GDP)
10 8 6 4 2 0 1985 1986 1987 Deficit(%of GDP) 1988 1989

Unemployment rate
Though the trend of unemployment rate was stable till 1987, but in 1988 it has seen a sudden trend which we believe to be caused by the transfer of power from the military to civilian regimes and it was marked with macroeconomic instability, a slowdown in economic activities, rising unemployment and inflation. Indicator Name Unemployment (% Annual) 1985 3.6 1986 3.6 1987 3.1 1988 5.3 1989 3.1

Unemployment (% Annual)
6 5 4 3 2 1 0 1985 1986 1987 Unemployment (% Annual) 1988 1989

Domestic credit to private sector

The credit provided by domestic to private sector has seen a stable trend in these 5 years. Indicator Domestic credit to private sector (% of GDP) 1985 27.8 1986 29.8 1987 27.6 1988 26.4 1989 24.9

Domestic credit to private sector (% of GDP)

31 30 29 28 27 26 25 24 23 22 1985 1986 1987 1988 1989 Domestic credit to private sector (% of GDP)

Human Development Index

From the table below we can see that Pakistan have very low level of HDI value. It does mean that the composites of HDI; a long and healthy life, access to knowledge and a decent standard of living are not up to the mark. The Human Development Index of the United Nations Development Programme ranked Pakistan in one of its lowest development categories.

Year

Life expectancy at birth 59.4 60.7

Expected years of schooling 4.2 4.4

Mean years of schooling 2.1 2.3

GNI per capita (2005 PPP$) 1,543 1,689

HDI value 0.367 0.383

level

1985 1990

Very low Very low

Inflation
The available research evidence shows that large fiscal deficits on the one hand push up the inflation and interest rates, and discourage saving and private investment, on the other. It is the fiscal deficit that sets the basis of determining governments loan requirements. It also serves as an important determinant of the inflation rate. High fiscal deficits create higher loan requirements and contribute positively to the prevailing rate of inflation. Indicator Inflation (annual %) 1985 4.5 1986 3.3 1987 4.5 1988 9.6 1989 8.6

Inflation (annual %)
12 10 8 6 4 2 0 1985 1986 1987 Inflation (annual %) 1988 1989

Balance of Trade
Pakistan is one of those countries who are facing trade deficit from last many years. Pakistan was facing trade deficit in financial year (FY) 1957-58. Foreign trade sector was sensibly good during financial year 1953, 1954 & 1956. Its average exports were 161 million US dollar more than its imports. Except these years Pakistan is facing the problem of trade and current account deficit. This trade deficit is partly due to the strengthen foreign currency against the home currency which results in imports of goods and services becoming more expensive as compared to exports and cause for devaluing of the home currency and a balance of payments deficit. Again, flow in trade deficit is due to costly imports of oil, fertilizer, wheat and other necessities as well as fall in countrys textile sectors exports, which is an addict of compensatory duty hitches, excessive incentives and recently approved explore and evolution support benefits

Indicator Exports of goods and services (% of GDP) Imports of goods and services (% of GDP)
25 20 15 10 5 0 1985 1986

1985 10.4 22.8

1986 11.9 22.7

1987 13.2 21.0

1988 13.6 21.7

1989 13.9 21.7

1987

1988

1989

Exports of goods and services (% of GDP)

Imports of goods and services (% of GDP)

Gross Domestic Savings

From our observation we have found that gross domestic savings has an upward trend over the year from 1985 to 1987. But in 1988 it has seen a sudden downward trend which we believe to be caused by the transfer of power from the military to civilian regimes and it was marked with macroeconomic instability, a slowdown in economic activities, rising unemployment and inflation and the adoption of a wait-and-see attitude by investors. As a consequence the gross domestic savings has seen a fall. Indicator Name Gross domestic savings (% of GDP) 1985 5.9293 1986 8.0084 1987 11.3655 1988 9.93044 1989 11.0476

Gross domestic savings (% of GDP)

12 10 8 6 4 2 0 1985 1986 1987 1988 1989 Gross domestic savings (% of GDP)

Development experience of Pakistan (Period: 1990-1995)

This period saw heightened political instability. Despite far-reaching reforms introduced in 1991, economic indicators once again fell sharply in contrast with the 1985s for several reasons other than political instability. The failure to implement successive agreements led to the loss of Pakistans credibility among the international financial community. The confidence of local investors eroded when the foreign currency deposits of Pakistanis were suddenly frozen. Foreign investors were unhappy as all the power purchase agreements were re-opened and criminal action was initiated against Hubco, Pakistans largest foreign-owned power generation company. The GDP growth rate decelerated to 5 percent.

GDP growth (annual %)

9 8 7 6 5 4 3 2 1 0 1990 1991 1992 1993 1994 1995

Indicator Name 1990 GDP growth (annual %) 4.4585

1991 5.0615

1992 7.7058

1993 1.757

1994 3.7374

1995 4.9626

FDI(US$)
800000000 700000000 600000000 500000000 400000000 300000000 200000000 100000000 0 1990 1991 1992 1993 1994 1995

Indicator FDI(US$)

1990 245262 96

1991 25841448 7

1992 336479857. 1

1993 348556957. 8

1994 421024638. 5

1995 722631560. 7

Export of goods and services

40 35 30 25 20 15 10 5 0 -5 1990 1991 1992 1993 1994 1995

Indicator Name Exports of goods and services (annual % growth)

1990 1.1249 7379

1991 33.465 2299

1992 13.820 9806

1993 1.3173 5807

1994 1995 3.1106 629 3.07531 501

The persistence of fiscal (above 7 percent of GDP) and external deficits (4 to 5 percent of GDP) led to the accumulation of large levels of domestic and external debt throughout the decade. Development expenditures took a major hit and GDP dropped to 3 percent from 8 percent in the first half of the 1980s. Social sector expenditures were squeezed to accommodate higher debt service and defense expenditures.

Indicator Deficit(%of GDP)

1990 -2.4645

1991 -5.5277 1991 6.9045

1992 -5.8307 1992 6.7706

1993 -6.5787 1993 6.7214

1994 -5.3800 1994 6.2840

1995 -5.2832 1995 6.0023

Indicator 1990 Defense expense(%of GDP) 6.8462

Total external debt levels became unsustainable, rising from $20 billion in 1990 to $43 billion (47.6 percent of GDP) in 1998. Exports stagnated and Pakistan lost its market share in a buoyant world trade environment. The incidence of poverty nearly doubled from 18 to 34 percent, and the unemployment rate rose as well. Social indicators lagged behind other countries in the region. The Human Development Index of the United Nations Development Programme ranked Pakistan in one of its lowest development categories.

External debt stocks (% of GNI)

53 52 51 50 49 48 47 46 45 44 1990 1991 1992 1993 1994 1995

Indicator Name External debt stocks (% of GNI)

1990 49.3330 933

1991 50.0682 897

1992 50.5699 14

1993 47.1630 766

1994 52.5176 094

1995 49.3818 979

The rate of inflation is an important macroeconomic indicator by which the central banks around the world analyze and set their monetary policy. Pakistan is among those countries, which are still experiencing double digit inflation. There has been an increasing trend of inflation from 12 percent in 1990 to almost 22 percent in 1995. Inflation is documented in the range of 3 percent to 22 percent during the said period

Inflation, consumer prices (annual %)

14 12 10 8 6 4 2 0 1 2 3 4 5 6

Indicator Name Inflation (annual %)

1990 9.052

1991 1992 11.7912 9.5090

1993 9.973

1994 12.3681

1995 12.3435

The unemployment rate can be defined as the number of people actively looking for a job divided by the labor force. Changes in unemployment depend mostly on inflows made up of non-employed people starting to look for jobs, of employed people who lose their jobs and look for new ones and of people who stop looking for employment.

Unemployment Rate( %annual)

8 7 6 5 4 3 2 1 0 1990 1991 1992 1993 1994 1995

Indicator Unemployment rate

1990 5.6

1991 6.8

1992 7.5

1993 6.9

1994 6.1

1995 5.6

Domestic credit to private sector refers to financial resources provided to the private sector, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises.

Domestic credit to private sector(%GDP)

25 24 23 22 21 1991 1992 1993 1994 1995

Indicator Domestic credit to private sector (% of GDP)

1990 1991 1992 1993 1994 1995 24.16 22.32 23.62 24.55 24.01 24.21

Human Development Index (HDI) The HDI is a summary measure for assessing long-term progress in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living. As in the 2011 HDR a long and healthy life is measured by life expectancy. Access to knowledge is measured by: i) mean years of schooling for the adult population, which is the average number of years of education received in a life-time by people aged 25 years and older; and ii) expected years of schooling for children of school-entrance age, which is the total number of years of schooling a child of school-entrance age can expect to receive if prevailing patterns of age-specific enrolment rates stay the same throughout the child's life. Standard of living is measured by Gross National Income (GNI) per capita expressed in constant 2005 international dollars converted using purchasing power parity (PPP) rates. year Life expectancy Expected at birth years of schooling 60.7 62 4.4 4.4 Mean years of schooling GNI per capita (2005 PPP$) 1,689 1,795 HDI value level

1990 1995

2.3 2.8

0.383 0.403

Very low Very low

Financial reforms Nawaz Sharif Government in 1991 introduced a major reform program through Economic Reform order consisting of liberalization, privatization and deregulation. Foreign exchange regime was liberalized, investment controls were relaxed, state owned-enterprises were privatized, and incentives were provided for domestic and foreign private investment. Reforms were introduced in a number of different dimensions; privatization of public financial institutions, removal of restrictions to entry into banking, measures aimed at spurring competition in financial markets, reduction of legal reserve requirements, improving the capacity of financial institutions for domestic resource mobilization efforts, enhancing the effectiveness of monetary policy instruments ,strengthening the supervisory role of central bank, elimination of directed lending, prudential regulation measures, measures aimed at securities markets development and openness of capital account etc along with interest rate liberalization.

CREDIT PROVIDED BY BANK(% GDP)

57 56 55 54 53 52 51 50 49 48 1990 1991 1992 YEAR 1993 1994 1995

Indicator Name Domestic credit provided banking sector (% of GDP)

% of GDP

1990 by 50.871 1658

1991 51.176 1146

1992 55.919 4943

1993 54.895 5604

1994 51.645 5396

1995 51.023 2327

First focus of the reform was gradual liberalization of control on banking activities. The process of deregulation began with the denationalization of two commercial banks, govt started to issues licenses to new commercial banks, investment banks and leasing companies. To liberalization the interest rate govt started to sell govt securities under auction system. In 1991 govt began to auctioning of the treasury bills and federal investments bond in the open market.

In 1991 external sector further opened up, exchange control was virtually abolished, new debt instruments denominated in foreign currency were introduced and many incentives are provided to foreigners.
Official exchange rate against US$
35 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995

Indicator Name Official exchange rate (LCU per US$, period average)

1990 21.70 738

1991 23.800 7667

1992 25.082 7917

1993 28.107 1833

1994 30.566 5917

1995 31.642 6833

In the equity market, exchange and payments reforms are introduced during early 1990s. Islamabad Stock Exchange starts functioning in 1992. Foreigners are allowed to trade in domestic stock markets and allowed to hold 100% of venture control. To reduce the cost and improve efficiency, banks are allowed to close down any of their existing branches provided that an alternative arrangement provision is there for local community. To deal with the NPLs, multi track strategy were adopted which included enacting of new loans, creation of institutions to recovery bad loans. As a result new banking courts and Tribunals are established to strengthen the recovery process and resolved the disputes. To facilitate the depositors to make informed judgment, it has been made mandatory for all banks, non- banks to get them rated by one of the approved rating agency.

Gross domestic savings (% of GDP)

20 18 16 14 12 10 8 6 4 2 0 1990 1991 1992 1993 1994 1995

Indicator Name Gross domestic savings (% of GDP) Gross domestic savings (current US$)

1990 11.1024 915 4442154 099

1991 17.4656 052 7938460 113

1992 17.0674 84 8300812 199

1993 14.6838 694 7559014 372

1994 16.7844 039 8710232 084

1995 15.8327 09 9600332 765

To promote SME, a small and medium bank was established to provide leadership in developing new product loans, new credit appraisal and documentation techniques. But it is argued that political instability and poor governance acted against these reform efforts. Instead, the greater openness of the economy contributed to the financial crisis.

Development experience of Pakistan (Period: 1995-2000)

The economic policies of both major political parties, the Pakistan Muslim League (PML) and the Pakistan Peoples Party (PPP), who took turns ruling during the 1990s, were similar and could not be faulted. Both parties were committed to deregulation, privatization, liberalization, greater reliance on market forces and other economic reforms. The supporters of PML and PPP argued that the dismissal of the Nawaz Sharif government in 1993 and of the Benazir government in 1996 did not allow positive trends to persist. Bhutto was re-elected for a second term, in 1993. But Bhutto's government was dismissed by President Farooq Leghari in November 1996. Then Khalid was appointed as a caretaker Prime Minister after the dismissal of Bhutto's government from 5 November, 1996 to 17 February, 1997. Nawaj Sharif was re-elected as Prime Minister with an exclusive mandate from all over Pakistan for a non-consecutive second term, in February 1997. His government was deposed by General Pervez Musharraf in October 1999, and Martial law was imposed in the entire country. It can only be speculated whether the economic output for the decade would have been better had these governments completed their terms in office. Poor governance would have been largely offset by the continuity in policies, programs and projects. The stop-and-go cycle faced by Pakistani economic actors imposed enormous costs in terms of macroeconomic instability. In October 1999, the incoming military government was faced with four main challenges: 1. Heavy external and domestic indebtedness; 2. High fiscal deficit and low revenue generation capacity; 3. Rising poverty and unemployment; and 4. A weak balance of payments with stagnant exports. The country faced a serious external liquidity problem as its reserves were barely sufficient to buy three weeks of imports and could not possibly service its short-term debt obligations. Workers remittances decreased by $500 million, foreign investment flows dwindled by $600 million, official transfers turned negative and Pakistan had no access to private capital markets. In the domestic sector, the declining tax-to-GDP ratio and inflexible expenditure structure constrained the governments ability to increase the level of public investment. Total GDP also deteriorated heavily. The graph below shows the scene. Indicator Name GDP growth (annual %) 1995 4.962609 15 1996 4.846581 28 1997 1.01439 602 1998 2.55023 429 1999 3.6601 3274 2000 4.26008 801

GDP growth (annual %)

6 5 4 3 2 1 0 1995 1996 1997 1998 1999 2000 GDP growth (annual %)

Pakistan has been successful in attracting FDI. There are indications that FDI is tied to imports of plants and machinery and other inputs from parent countries. Evidently, such tied imports put a heavy burden on the countrys import bill. Foreign firms resist entering into export-oriented production activities. Given the persistent balance of payments problems in Pakistan, it is therefore suggested that in its future FDI policy the government should encourage foreign investment in export-oriented industries. Likewise, FDI needs to be encouraged in industries where rise in import bill is commensurate with export performance of the foreign firms. Indicator Name FDI(US$) 1995 72263156 1 1996 92197618 3 1997 71625312 5 1998 50600000 0 1999 53200000 0 2000 30800000 0

Foreign Direct Investment (US$)

Millions 1000 800 600 400 200 0 1995 1996 1997 FDI(US$) 1998 1999 2000

The persistence of fiscal and external deficits led to the accumulation of large levels of domestic and external debt throughout the decade. Development expenditures took a major hit and GDP growth dropped to 1 percent. Social sector expenditures were squeezed to accommodate higher debt service and defense expenditures. 80 percent of revenues were preempted to debt servicing and defense. Indicator Name Deficit(%of GDP) 1995 -5.2832 1996 -6.5987 1997 -6.7332 1998 -5.6388 1999 -5.5396 2000 -4.0864

Deficit (%of GDP)

0 -1 -2 -3 -4 -5 -6 -7 -8 Deficit(%of GDP) 1995 1996 1997 1998 1999 2000

Indicator Name Defense expense(%of GDP)

1995 6.0023

1996 5.8485

1997 5.4358

1998 5.2284

1999 5.0027

2000 4.0249

During this period, Pakistans net external debt stocks remained high. In 1999, it rose to 54 percent. Changes in the Govt. structure lead to rise in the inflation rate and as well as unemployed youths. Exports stagnated and Pakistan lost its market share in a buoyant world trade environment. The dismissal of the Nawaz Sharif government in 1993 and of the Benazir government in 1996 did not allow positive trends to persist. It can only be speculated whether the economic output for the decade would have been better had these governments completed their terms in office. Poor governance would have been largely offset by the continuity in policies, programs and projects. The stop-and-go cycle faced by Pakistani economic actors imposed enormous costs in terms of macroeconomic instability. Indicator Name External debt stocks (% of GNI) 1995 49.38189 79 1996 47.17130 7 1997 48.4579 506 1998 52.2731 556 1999 54.583 9867 2000 45.1262 14

External debt stocks (% of GNI)

60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 External debt stocks (% of GNI)

Indicator Name Unemployment, youth total (% of total labor force ages 15-24)

1995 8.899999 62

1996

1997

1998

1999

2000 13.3000 002

10

10.5

11.1

Unemployment, youth total (% of total labor force ages 15-24)

14 12 10 8 6 4 2 0 1995 1996 1997 1998 1999 2000 Unemployment, youth total (% of total labor force ages 15-24)

Pakistan follows the flexible exchange rate system since July 2000. Prior to this period it followed a managed floating exchange rate since 1982 and a fixed rate prior to 1982. Due to controlled exchange rate a little fluctuation in exchange rate was observed. It is empirical concluded that the Pakistan's share of exports in world market did not indicate any significant change during fixed and managed floating exchange rate regime. The volatility of exchange rate adversely affect on export demand after adoption of flexible exchange rate system.

Indicator Name Official exchange rate (LCU per US$, period average)

1995

1996

1997

1998

1999

2000

31.6426

36.0786

41.1115

45.0466

49.500

53.6481

Official exchange rate (LCU per US$, period average)

60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 Official exchange rate (LCU per US$, period average)

Financial reforms In Pakistan, transitions from one political regime to another have been quite difficult, causing uncertainty and short-term reductions in the speed of economic growth. The transfers of power from the military to civilian regimes were marked with macroeconomic instability, a slowdown in economic activities, rising unemployment and inflation and the adoption of a wait-and-see attitude by investors. There has been a broad consensus among all major political parties on the general principles that should underpin Pakistans economic direction, namely:

Central planning and bureaucratic judgment are poor substitutes for the markets judgment in the allocation of scarce resources.

Licensing to open, operate, expand and close business by government functionaries should be discouraged. Public sector ownership and management of business, production, distribution and trade leads to inefficiency, waste and corruption. Over-regulation controls and restrictions of all kinds on the private sector hike up the cost of doing business. High tax rates on individuals and corporations are counterproductive as they discourage effort and initiative. Banks and financial institutions owned and managed by the public sector offering cheap credit and/or directed credit have a pernicious effect on economic growth. Administered prices of key commodities are the worst possible means of insulating the poor segment of the population from the onslaught of market forces. Subsidies on inputs such as fertilizers, seeds, water, etc., incur heavy budgetary costs and benefit the well-to-do classes rather than the poor. Foreign investment and multinational corporations are to be encouraged as they are important conduits for the transfer of technology, managerial skills and organizational innovation.

While the governments implementation of policies, programs and projects has seen uneven and mixed results, the initiative in driving the economy can be credited to the private sector. Indicator Name Gross domestic savings (% of GDP) Gross domestic savings (current US$) 1995 15.8327 1996 14.4727 1997 13.2308 8260453 445 1998 16.6690 1036681 2450 1999 13.951 878609 8675 2000 15.9796 1181734 7185

96003327 91641598 65 26

Gross Domestic Savings

18 16 14 12 10 8 6 4 2 0 1995 1996 1997 1998 1999 2000

Graph: Gross Domestic Savings

Development experience of Pakistan (Period: 2000-2005)

In October 1999, the then military government was faced with four main challenges: heavy external and domestic indebtedness; high fiscal deficit and low revenue generation capacity; rising poverty and unemployment; and a weak balance of payments with stagnant exports. The most difficult challenge faced by the Military Government in October, 1999 was external liquidity problem i.e. its ability to meet its current obligations such as imports of goods and service, its debt service obligations and other payments at the same time. After May 1998, the country had lost an important source of external liquidity i.e. foreign currency deposits. Workers remittances through official channels were down to $1 billion. Foreign investment inflows were less than $ 400 million oil import prices had shot up from $ 14- $ 15 per barrel to $ 28- $ 30 per barrel and the oil import bill had Foreign investment inflows were less than $ 400 million oil import prices hadshot up from $ 14- $ 15 per barrel to $ 28- $ 30 per barrel and the oil import bill had doubled from $1.3 billion to $ 2.6 billion in first one year. Despite increase in the volume of textile exports, the unit value of exports were down by 7-10 percent on average. There was thus a gap between external receipts and external payments of about $2.5 billion to $ 3 billion annually for the next few years. To meet this gap and keep the wheels of the economy moving Pakistan had to get its debt service obligations reschedule and find ways to obtain external debt rescheduling or relief was to have an agreement with the IMF that was in good standing.Pakistan therefore had to enter into a stand-by arrangement with the IMF in 2000for nine month period followed by a three year Poverty Reduction and Growth Facility (PRGF). The Executive Board of the International Monetary Fund (IMF) had approved a three-year arrangement for Pakistan under the Poverty Reduction and Growth Facility (PRGF)totaling SDR 1.034 billion (about US$1.322 billion). Under the PRGF-supported program and in line with the objectives stated in the I-PRSP, the government was required to implement an ambitious reform agenda aimed at raising growth and reducing poverty, while consolidating macroeconomic stability and external viability. The strategy centered on sustained fiscal adjustment supported by a major reform of tax administration and a widening of the tax net. It also aimed at increasing public spending for poverty alleviation. Program also required to undertake a cautious monetary policy under the floating exchange regime which aimed at keeping inflation below 5 percent and raising official reserves to three months of imports by the end of the three-year program. For the first time in the history of Pakistan the IMF was able to complete all the reviews successfully and released all the tranches on time. Pakistan successfully met all the performance criteria under the Stand-by program and the Poverty Reduction and Growth Facility (PRGF) negotiated with the IMF. The major areas of successful reforms were Trade and Tariff, Financial Sector including the privatization of nationalized commercial banks, breaking up the monopoly of Pakistan Telecommunication Corporation and opening up the sector to the private sector and Promotion of Higher Education. The credibility of Pakistan

vis-a-vis international financial institutions was restored setting the stage for the re-profiling of Pakistans external debt owed to Paris Club. Out of Pakistans total external debt and foreign exchange liabilities of $ 37.8 billion at the end of the fiscal year 2001-01, Pakistans bilateral debt to Paris Club was $12.5 billion. On December 13, 2001 Pakistan was able to re-profile this stock of bilateral debt by reaching an agreement with Paris Club for repayment of ODA component debt over a thirty eight years period with a grace period of 15 years and non-ODA component of debt over twenty three years with a five year grace period. In addition, the US cancelled its bilateral debt by $ 1 billion after September 11, 2001.The debt relief provided some fiscal space, allowed the government to reduce its and stabilize the economy. In addition, Pakistan started receiving new concessional loans from the IMF, World Bank and Asian Development Bank which helped in financing the current account and fiscal deficits. There are some positive outcome those had been observed during this period. Gross Domestic Product Structural policy reforms combined with an improvement in economic governance laid the foundations for accelerated growth from 2000 to 2006. Pakistans economic performance in this sub-period was impressive in terms of income per capita, employment generation and poverty reduction. As a result of reasonably high GDP growth rate of about 6.3 percent a year for five years the per capita income in current dollar terms has risen to about $ 1000. GDP growth that was 1.98 percent in 2000/01 rose to 8.96 percent in 2005/06.

Indicator Name GDP growth (annual %)

2000 3.91

2001 1.96

2002 3.11

2003 4.73

2004 7.48

2005 8.96

Inflation Inflation rose from 4.14% in the year 2000 to 9.06% in the year 2005.But it does represent complete picture. The inflation rate, which was at 4.14% percent in 1999-2000, was further reduced to 2.91% percent by 2002-03 (the lowest in the last three decades). This was because as per condition of IMF PRGF program State Bank of Pakistan was required to undertake a cautious monetary policy under the floating exchange regime which aimed at keeping inflation below 5 percent. This low level of inflation was supported by strict fiscal discipline, the lower monetization of the budget deficit, an output recovery, a reduction in duties and taxes, and appreciation of exchange rate. During this time period, the country had very low levels of food inflation, as domestic supply was plentiful as were international stockpiles. Inflation began to pick upafter the first quarter of 2003-04, reaching as high as 9.06% percent in June 2005 (i.e. at the end offiscal year 2004-05) for a variety of reasons including arise in the support price of wheat, shortages ofwheat, and a rise in international prices includingthe oil prices. Indicator Name Inflation 2000 4.14 2001 4.36 2002 3.15 2003 2.91 2004 7.74 2005 9.06

Unemployment Pakistan's employment growth has been the highest in South Asia region since 2000.There was change in Unemployment rate in both direction during the period .First the overall unemployment rate increased from 6 percent in 2000/01 to 7.8 percent in 2002/03.However, it declined during the next two years to 7.4 percent in2004-2005. It further declined to 5.2 percent in 2006-2007. During the period unemployment rates dropped considerably among females and in urban areas compared to the male and rural areas, respectively. Youth unemployment levels are higher than the overall unemployment rate. Among the youth, female and rural inhabitants have faced the unemployment level higher than their counterparts .During this period, the economy witnessed comparatively high growth and poverty reduced sharply.About 11.8 million new jobs were created in

FY2005-2006 period. At that period 3566 thousand persons of labor force were unemployed.

Balance of Trade Pakistan successfully met all the performance criteria under the Stand-by program and the Poverty Reduction and Growth Facility (PRGF) negotiated with the IMF which includes successful reforms of Trade and Tariff. Pakistan had been able to increase their export to foreign countries during these periods.Pakistan main exports are: cotton and knitwear (28 percent of total exports); bed wear, carpets and rugs (8 percent) and rice (8 percent). Others include: leather, fish, sports goods and fruits and vegetables. Main export partners are: United States (15 percent of total exports), United Arab Emirates (10 percent), Afghanistan (9.5 percent), China (9 percent), United Kingdom (3 percent) and Germany (2 percent). Pakistans exports increased from 15000 PKR million to more than 88000n PKR million by June 2001.The factual improvement in balance of payment can be seen after the event of September 11 I FY-2001.As a result during 2003-2004 pakistan had surplus of balance of trade.

On the other hand imports by Pakistan also huge primarily due to high imports of energy which resulted in huge regular trade deficits. Main imports are: fuel (40 percent of total imports); machinery and transport equipment (18 percent) and chemicals (16 percent).

Budget Deficit/Surplus Pakistan had surplus budget for the fiscal year 2000-2001 which was about 5.4 percent of GDP. But as the condition of IMF supported PRGF program Pakistan government had to increase government spending which lead to reduction in budget surplus to 3.33 as percentage of GDP in 2005-2006 and led to budget deficit thereafter.

Gross Domestic Savings In this period overall growth of Pakistan accelerated. Successful Implementation of PRGF program supported by IFM led to liberalization in Financial Sector which resulted in the privatization of nationalized commercial banks. Competition among the bank ensured. GNI per capita also increased during this period. This period experienced stable growth in saving as percentage of GDP as people tendency to save increased. Indicator Gross Domestic Savings (% of GDP) 2000 15.98 2001 15.94 2002 16.49 2003 17.35 2004 17.61 2005 15.2

18 17 16 15 14

Gross domestic savings (% of GDP)

2000

2001

2002

2003

2004

2005

Human Development Index The HDI is a summary measure for assessing long-term progress in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living. HDR a long and healthy life is measured by life expectancy. Access to knowledge is measured by: i) mean years of schooling for the adult population, which is the average number of years of education received in a life-time by people aged 25 years and older; and ii) expected years of schooling for children of school-entrance age, which is the total number of years of schooling a child of school-entrance age can expect to receive if prevailing patterns of age-specific enrolment rates stay the same throughout the child's life. Standard of living is measured by Gross National Income (GNI) per capita expressed in constant 2005 international dollars converted using purchasing power parity (PPP) rates. Pakistans HDI value for 2005 is 0.485in the low human development category positioning the country at 146 out of 187 countries and territories. In the 2005 HDR, Pakistan was ranked 145 out of 187 countries.

Period

Life expectancy at birth 62 63.1 64.1

Expected years of schooling

Mean years of schooling

GNI per capita (2005 PPP$) 1,795 1,826 2,190

HDI value

1995 2000 2005

4.4 2.8 4.4 3.3 6.5 4.5 Figure: HDI Value of Pakistan

0.403 0.419 0.485

Government External Debt Stocks (% of GNI) Government had been able to reduce it external debt throughout this period. The credibility of Pakistan vis-a-vis international financial institutions was restored setting the stage for the re-profiling of Pakistans external debt owed to Paris Club. On December 13, 2001 Pakistan was able to re-profile this stock of bilateral debt by reaching an agreement with Paris Club for repayment of ODA component debt over a thirty eight years period with a grace period of 15 years and non-ODA component of debt over twenty three years with a five year grace period. In addition, the US cancelled its bilateral debt by $ 1 billion after September 11, 2001. The debt relief provided some fiscal space, allowed the government to reduce its and stabilize the economy. In addition, Pakistan started receiving new concessional loans from the IMF, World Bank and Asian Development Bank which helped in financing the current account and fiscal deficit. Government external debt stocks was about 45 percent of GNI in the year reduced to approximate 30 percent of GNI by the end of the year 2005.

External debt stocks (% of GNI)

50 40 30 20 10 0 2000 2001 2002 2003 2004 2005

Poverty headcount ratio at national poverty line (% of population): Pakistan government had been able to alleviate poverty at this period to some extent. Government increased public spending during this period for for poverty alleviation as per PRGF program. Unemployment reduced in this period by a great extent also contributed to reduction of level of poverty. Poverty headcount ratio at national poverty line (% of population) in the following shows that it reduced from 34.5 percent in 2002 to 23.9 in the year 2005.

Development Experience of Pakistan Period 2006-2009

In Pakistan, transitions from one political regime to another have been quite difficult, causing uncertainty and short-term reductions in the speed of economic growth. The transfer of power from the military to civilian regimes in 1971, 1988 and 2008 were marked with macroeconomic instability, a slowdown in economic activities, rising unemployment and inflation and the adoption of a wait-and-see attitude by investors. But economic recovery has also been resilient; The Pakistans economy witnessed a period of significant instability and a deterioration of most macroeconomic indicators. The timing of the crisis, and Pakistans response to domestic developments might seem contradictory to a layman. As governments around the world lowered interest rates and implemented expansionary fiscal measures to revitalize their economies, Pakistan underwent a phase of fiscal tightening, and a stringent monetary stance with discount rates remaining relatively high for most of the period (discount rates remained at 15 percent till April 2009). Fiscal, Monetary, and External debt policies of Pakistan have primarily been driven by the underlying need to resurrect significant macroeconomic imbalances in the domestic economy, rather than as a response to the financial crisis and global economic slowdown. GDP AND GDP GROUTH RATE The Gross Domestic Product (GDP) in Pakistan was worth 163.89 billion US dollars in 2009. The GDP value of Pakistan represents 0.34 percent of the world economy. GDP in Pakistan is reported by The World Bank Group. Historically, from 1960 until 2011, Pakistan GDP averaged 48.8 USD Billion reaching an all time high of 211.1 USD Billion in December of 2011 and a record low of 3.7 USD Billion in December of 1960. The gross domestic product (GDP) measures of national income and output for a given country's economy. The gross domestic product (GDP) is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time.A chart with historical data for Pakistan GDP

The Gross Domestic Product (GDP) in Pakistan expanded 4.99 percent in 2008 from the previous year. GDP Annual Growth Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1952 until 2013, Pakistan GDP Growth Rate averaged 4.94 Percent reaching an all time high of 10.22 Percent in June of 1954 and a record low of -1.80 Percent in June of 1952. Pakistan is one of the poorest and least developed countries in Asia. Pakistan has a growing semi-industrialized economy that relies on manufacturing, agriculture and remittances. Although since 2005 the GDP has been growing an average 5 percent a year, it is not enough to keep up with fast population growth. To make things even worst, political instability, widespread corruption and lack of law enforcement hamper private investment and foreign aid.A chart with historical data for Pakistan GDP Growth Rate is given here

Inflation Rate The inflation rate in Pakistan was recorded at 20 percent in May of 2009. Inflation Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1957 until 2013, Pakistan Inflation Rate averaged 8.03 Percent reaching an all time high of 37.81 Percent in December of 1973 and a record low of -10.32 Percent in February of 1959.but in 2008 inflation rate was 25 percent. This page includes a chart with historical data for Pakistan Inflation Rate.

Unemployment Rate Unemployment Rate in Pakistan increased to 5.3 percent in the first quarter of 2010 from 5 percent in the third quarter of 2009. Unemployment Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1985 until 2012, Pakistan Unemployment Rate averaged 5.38 Percent reaching an all time high of 7.80 Percent in June of 2002 and a record low of 3.10 Percent in December of 1987. In Pakistan, the unemployment rate measures the number of people actively looking for a job as a percentage of the labour force. This page includes a chart with historical data for Pakistan Unemployment Rate.

Pakistan Interest Rate The benchmark interest rate in Pakistan was last recorded at 9.50 percent. Interest Rate in Pakistan is reported by the State Bank of Pakistan. Historically, from 1992 until 2013, Pakistan Interest Rate averaged 12.70 Percent reaching an all time high of 20 Percent in June of 1997 and a record low of 7.50 Percent in November of 2002. In Pakistan, interest rates decisions are taken by the State Bank of Pakistan. The official interest rate is the discount rate. This page includes a chart with historical data for Pakistan Interest Rate.

External Debt External Debt in Pakistan decreased to 50737 USD Million in the first quarter of 2009 from 45388 USD Million in the fourth quarter of 2008.The global crisis has impacted Pakistans external debt through the depreciation of the US dollar against major international

currencies leading to significant translational losses. A receptive debt policy is currently being formulated in order to monitor, assess, and take steps to mitigate this currency risks. On the other hand, the current low interest rate environment amidst the ongoing crisis has provided Pakistan with an opportunity to capitalize on lower servicing costs on its existing stock of floating rate external debt. This page includes a chart with historical data for Pakistan External Debt

Balance of Trade Pakistan recorded a trade deficit of 74836 PKR Million in April of 2009. Balance of Trade in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1957 until 2013, Pakistan Balance of Trade averaged -18351.09 PKR Million reaching an all time high of 6457 PKR Million in June of 2003 and a record low of -215020 PKR Million in December of 2011. Pakistan runs regular trade deficits primarily due to high imports of energy. Main imports are: fuel (40 percent of total imports); machinery and transport equipment (18 percent) and chemicals (16 percent). Pakistan exports: cotton and knitwear (28 percent of total exports); bed wear, carpets and rugs (8 percent) and rice (8 percent). Main trading partners are United Arab Emirates (10 percent of total exports and 17 percent of imports) and China (9 percent of exports and 15 percent imports). Others include: United States, United Kingdom and Germany. This page includes a chart with historical data for Pakistan Balance of Trade.

Government External Debt

Government External Debt in Pakistan decreased to 55445 USD Million in the fourth quarter of 2009 from 52331 USD Million in the second quarter of 2009. Government External Debt in Pakistan is reported by the State Bank of Pakistan. Historically, from 2002 until 2013, Pakistan Government External Debt averaged 46752.59 USD Million reaching an all time high of 66451 USD Million in December of 2011 and a record low of 33172 USD Million in September of 2004. This page includes a chart with historical data for Pakistan Government External Debt.

Foreign exchange rate The USDPKR spot exchange rate appreciated 0.1100 or 0.11 percent during the last 30 days. Historically, from 1988 until 2013, the USDPKR averaged 59.6100 reaching an all time high of 98.6000 in May of 2013 and a record low of 18.6000 in December of 1988. The USDPKR spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the PKR. While the USDPKR spot exchange rate is quoted and exchanged in the same day, the USDPKR forward rate is quoted today but for delivery and payment on a specific future date. This page includes a chart with historical data for USDPKR - Pakistan Rupee Exchange rate.

Global Financial Crisis: Impact on Pakistan and Policy Response The global recession has posed policymakers around the world with unprecedented challenges. Severely damaged financial sectors seemed immune to most responses, while fiscal stimuli and other policy tools have, at best, been sluggish to establish some stability in

economies dealing with the spill-over of the financial crisis into other sectors and a general economic slowdown. As the slump in the global economy prevailed, the Pakistans economy witnessed a period of significant instability and a deterioration of most macroeconomic indicators. The timing of the crisis, and Pakistans response to domestic developments might seem contradictory to a layman. As governments around the world lowered interest rates and implemented expansionary fiscal measures to revitalize their economies, Pakistan underwent a phase of fiscal tightening, and a stringent monetary stance with discount rates remaining relatively high for most of the period (discount rates remained at 15 percent till April 2009). Fiscal, Monetary, and External debt policies of Pakistan have primarily been driven by the underlying need to resurrect significant macroeconomic imbalances in the domestic economy, rather than as a response to the financial crisis and global economic slowdown. The financial sector of the economy is still in its developing stages with limited, albeit growing, linkages with global markets. As a result, Pakistan has been relatively wellinsulated against the contagion in international financial markets. It is remarkable to note that Pakistan is among a handful of countries with a positive rate of growth, and among a very few with the lowest decline in real GDP growth as compared to other countries affected by the global financial crisis. Policy Response Recognizing the complexity and depth of economic challenges, the government and the central bank (State Bank of Pakistan- SBP) jointly initiated an aggressive macroeconomic stabilization program with the help of International Monetary Fund (IMF). Several stabilization measures were taken by the government and the central bank to put the economy back on a stable path. The response included measures in the area of monetary policy, fiscal policy and external debt policies. Monetary Policy: SBP which was gradually raising its policy rate from 7.5 percent in April 2005 to 12 percent by May 2008, aggressively increased the policy rate to 15 percent by November 2008. Further, CRR and SLR were increased for effective liquidity management. In addition, adjustment in the exchange rate helped in putting a dent in an otherwise unsustainable growth rate of imports. Fiscal Policy: On account of massive government subsidies, policy inaction, and general expenditure-revenue mismatch, the fiscal position of the government deteriorated significantly during 2007-08. In order to arrest this deterioration, the fiscal response has been two-staged. The initial stage which was implemented during 2008-09 consisted of fiscal tightening, with expenditure being curbed in order to lower fiscal deficit and a net zero quarterly limit on government borrowing from the State Bank of Pakistan. The fiscal consolidation efforts faced headwinds such as the deteriorating security environment and the domestic political uncertainties along with the deepening of the global financial crisis and the overall depressed macroeconomic environment. The unanticipated persistence of inflationary pressures on the economy kept fiscal policy options under check. There has been a significant improvement in fiscal performance during 2008-09 due to the policy shift, with the overall fiscal deficit estimated to have dropped to 4.3 percent of GDP. The fiscal improvement in 2008-09 has been largely based on reduction of oil subsidies and a slash on development spending.

Development Experience of Pakistan Period 2010-2012

Decades of internal political disputes and low levels of foreign investment have led to slow growth and underdevelopment in Pakistan. There are many reasons for deceleration of growth momentum like massive terms of trade shock of 2008, global financial crisis, and intensification of war on terror, security hazards and high profile killings.The GDP growth in the country slowed considerably to 2.4 per cent in fiscal year 2011 from 3.8 per cent in the previous year, mainly due to prevailing security concerns, the exogenous shock from elevated oil prices and unprecedented floods in a large part of the country and shortage of electricity and natural gas have also hampered the economic growth But in the fiscal year 2012 the economy of Pakistan changes a lot. The Gross Domestic Product (GDP) in Pakistan is grown by 3.66 per cent in 2012 which is an improvement from 2.58 per cent growth in 2011. The economic growth of the country has increased mainly due to the enhanced output of agriculture sector.The agriculture sector was improving due to the post-flood recovery in cotton, rice, wheat, sugar cane and other minor crops. Cut in monitory policy by 200 basis points by the State Bank of Pakistan also supported the economic growth of the country. The Gross Domestic Product (GDP) of Pakistan isincreasedto 3.7 percent in the fiscal year 2012from the previous year 2.58 percent. GDP Annual Growth Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1952 until 2013, Pakistan GDP Growth Rate averaged 4.94 Percent reaching an all-time high of 10.22 Percent in June of 1954 and a record low of -1.80 Percent in June of 1952. Pakistan has a growing semiindustrialized economy that relies on manufacturing, agriculture and remittances. Although since 2005 the GDP has been growing an average 5 percent a year, it is not enough to keep up with fast population growth. To make things even worst, political instability, widespread corruption and lack of law enforcement hamper private investment and foreign aid.

GDP Growth (Annual %)

4.00% 3.50% 4 3.00% 3.5 2.50% 3 2.00% 2.5 1.50% 2 1.00% 1.5 0.50% 1 0.00% 0.5 0 -0.5 2007 2008 2009 2010 2011 2010 2011 2012

GNI per capita growth (annual %)

The inflation rate in Pakistan is recorded at 11.3 percent in June of 2012. Inflation Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1957 until 2012, Pakistan Inflation Rate averaged 8.03 Percent reaching an all-time high of 37.81 Percent in December of 1973 and a record low of -10.32 Percent in February of 1959. In Pakistan, most important categories in the consumer price index are food and non-alcoholic beverages (35 percent of total weight); housing, water, electricity, gas and fuels (29 percent); clothing and footwear (8 percent) and transport (7 percent). The index also includes furnishings and household equipment (4 percent), education (4 percent), communication (3 percent) and health (2 percent). The remaining 8 percent is composed by: recreation and culture, restaurants and hotels, alcoholic beverages and tobacco and other goods and services.

Unemployed Persons in Pakistan increased to 3400 Thousand Persons in 2011 from 3120 Thousand Persons in 2010. Unemployed Persons in Pakistan is reported by the State Bank of Pakistan. Historically, from 1986 until 2011, Pakistan Unemployed Persons averaged 2367.59 Thousand Persons reaching an all time high of 3594 Thousand Persons in June of 2003 and a record low of 903 Thousand Persons in June of 1987. In Pakistan, unemployed persons are individuals who are without a job and actively seeking to work.

Unemployment Rate in Pakistan increased to 6.50 percent in the fourth quarter of 2012 from 6.10 percent in the third quarter of 2012. Unemployment Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1985 until 2012, Pakistan Unemployment Rate averaged 5.38 Percent reaching an all time high of 7.80 Percent in June of 2002 and a record low of 3.10 Percent in December of 1987. In Pakistan, the unemployment rate measures the number of people actively looking for a job as a percentage of the labor force.

Interbank Rate in Pakistan decreased to 12 percent in June of 2012 from 14 percent in December of 2011. Interbank Rate in Pakistan is reported by the State Bank of Pakistan. Historically, from 1991 until 2012, Pakistan Interbank Rate averaged 10.46 Percent reaching an all time high of 17.42 Percent in May of 1997 and a record low of 1.21 Percent in July of 2003. In Pakistan, the interbank rate is the rate of interest charged on short-term loans made between banks.

Pakistan recorded a trade deficit of 174836 PKR Million in June of 2012. Balance of Trade in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1957 until 2012, Pakistan Balance of Trade averaged -18351.09 PKR Million reaching an all time high of 6457 PKR Million in June of 2003 and a record low of -215020 PKR Million in December of 2011. Pakistan runs regular trade deficits primarily due to high imports of energy. Main imports are: fuel (40 percent of total imports); machinery and transport equipment (18 percent) and

chemicals (16 percent). Pakistan exports: cotton and knitwear (28 percent of total exports); bed wear, carpets and rugs (8 percent) and rice (8 percent). Main trading partners are United Arab Emirates (10 percent of total exports and 17 percent of imports) and China (9 percent of exports and 15 percent imports). Others include: United States, United Kingdom and Germany.

Exports in Pakistan increased to 209441 PKR Million in June of 2012 from 209274 PKR Million in December of 2011. Exports in Pakistan are reported by the Pakistan Bureau of Statistics. Historically, from 1957 until 2013, Pakistan Exports averaged 28655.79 PKR Million reaching an all time high of 210208 PKR Million in March of 2011 and a record low of 51 PKR Million in April of 1958. Pakistan main exports are: cotton and knitwear (28 percent of total exports); bed wear, carpets and rugs (8 percent) and rice (8 percent). Others include: leather, fish, sports goods and fruits and vegetables. Main export partners are: United States (15 percent of total exports), United Arab Emirates (10 percent), Afghanistan (9.5 percent), China (9 percent), United Kingdom (3 percent) and Germany (2 percent).

Pakistan recorded a Government Budget deficit equal to 5.5 percent of the country's Gross Domestic Product in 2012. Government Budget in Pakistan is reported by the Government of Pakistan. Historically, from 1990 until 2012, Pakistan Government Budget averaged 3.76 Percent of GDP reaching an all time high of 8.80 Percent of GDP in December of 1990 and a record low of -5.5 Percent of GDP in June of 2012. Government Budget is an itemized accounting of the payments received by government (taxes and other fees) and

the payments made by government (purchases and transfer payments). A budget deficit occurs when a government spends more money than it takes in. The opposite of a budget deficit is a budget surplus.

Government External Debt in Pakistan decreased to 65833 USD Million in the June of 2012 from 65987 USD Million in the December of 2011. Government External Debt in Pakistan is reported by the State Bank of Pakistan. Historically, from 2002 until 2012, Pakistan Government External Debt averaged 46752.59 USD Million reaching an all time high of 65987 USD Million in December of 2011 and a record low of 33172 USD Million in September of 2004.

The Gross domestic savings (% of GDP) in Pakistan was last reported at 9.37 in 2011, according to a World Bank report published in 2012. Gross domestic savings are calculated as GDP less final consumption expenditure (total consumption).

Human Development Index The Human Development Index (HDI) is a composite statistic of life expectancy, education, and income indices used to rank countries into four tiers of human development. It was created by the Pakistani economist Mahbubul Haq and the Indian economist AmartyaSen in 1990and was published by the United Nations Development Programme. Pakistans HDI value for 2012 is 0.515in the low human development category positioning the country at 146 out of 187 countries and territories. The rank is shared with Bangladesh. Between 1980 and 2012, Pakistans HDI value increased from 0.337 to 0.515, an increase of 53 percent or average annual increase of about 1.3 percent. The rank of Pakistans HDI for 2011 based on data available in 2012 and methods used in 2012 was 146 out of 187 countries. In the 2011 HDR, Pakistan was ranked 145 out of 187 countries. However, it is misleading to compare values and rankings with those of previously published reports, because the underlying data and methods have changed.

Year

2010 2011 2012

Life Expected expectancy at years birth schooling 65.2 7.3 65.4 65.7 7.3 7.3

Mean years GNI per HDI value of of schooling capita (2005 PPP$) 4.9 2505 0.512 4.0 4.9 2526 2566 0.513 0.515

Poverty headcount ratio at national poverty line (% of population) National poverty rate is the percentage of the population living below the national poverty line. National estimates are based on population-weighted subgroup estimates from household surveys.

Foreign Exchange Rate Pakistan maintains foreign reserves with State Bank of Pakistan. The currency of the reserves was solely US dollar incurring speculated losses after the Dollar prices fell during 2005, forcing the then Governor SBP IshratHussain to step down. In the same year the SBP issued an official statement proclaiming diversification of reserves in currencies including Euro and Yen, withholding ratio of diversification. In 2010 exchange rate was 85.194 Rupees (PKR) per US dollar. In 2011 exchange rate was 86.3434Rupees (PKR) per US dollar and in 2012 exchange rate was 95.1 Rupees (PKR) per US dollar.

Pakistani Rupees (PKR) per US dollar

96 94 92 90 88 86 84 82 80 2010 2011 2012

Graph: PKR to USD exchange rate Pakistan has recently experienced high inflation persisting in double-digits, fiscal imbalances, low private sector credit growth and stagnant economic growth. One major constraint for monetary policy in Pakistan arises from the need of the government to continuously borrow from the State Bank. If fiscal policy relies on a permanent flow of

revenue from money creation (seigniorage), the inflation rate in the long run is determined by the rate of growth of the monetary base needed to yield the long-run level of seigniorage. In this case, monetary policy cannot independently determine a long-run inflation target. A crucial question is whether fiscal policy is prepared to adjust primary deficit to stabilize government debt at some target level. If fiscal policy stabilizes government debt, then monetary policy can stabilize inflation and output by following a conventional rule whereby the real interest rate is increased in response to an increase in inflation above the long-run rate and to an increase in the output gap. However, the conventional interest rate response to inflation may not be desirable or even feasible if the government is not willing or able to adjust primary deficit in response to debt growth. Such an inflexible fiscal policy - - that subordinates monetary policy to fiscal needs - - is referred to as "fiscal dominance" in the literature. Under fiscal dominance, a tightening of monetary policy in response to higher inflation has been shown to lead to perverse results. Fiscal and monetary policies are also responsible for unemployment. In view of fiscal policy, Pakistan has fewer funds to invest in job providing projects. Every annual budget shows deficit. Through the monetary policy if the government increases the rate of interest, it discourages the investors from getting loans.

Chapter 2

Some crucial impediment to the development of Pakistan

At least four main factors determined Pakistans economic performance in the 1990s. First, political instability and frequent changes in the government followed by a reversal of decisions taken by the preceding government created an environment of uncertainty and a lack of predictability. Second, there was widespread misgovernance by the two major political parties ruling the country during this period. Personal, parochial and party loyalty considerations dominated decision making while institutions were bypassed. Third, there was a lack of political will to make timely and difficult decisions. The cumulative effect of avoiding and postponing such decisions, coupled with the failure to correct the distortions at the right time, proved too costly. Fourth, there were unforeseen exogenous shocks, such as the nuclear testing in May 1998 that shook investorsconfidence, accelerated the flight of capital, led to the imposition of economic sanctions and disrupted external economic assistance. Political Instability and Economic Growth Pakistan has seen twenty-three governments in the past sixty years, including: fourteen elected or appointed prime ministers, five interim governments and thirty-three years of military rule under four different leaders. Excluding the military and interim governments, the average life span of a politically elected government has been less than two years. If the five-year period of Bhutto is excluded, then the average span falls to 1.6 years. The agricultural sector, representing 20 percent of GDP, is owned and managed by private farmers. Manufacturing, with a few odd exceptions, is under the control of private firms. Wholesale and retail trade, transportation (with the exception of railways and Pakistan International Airlines), personal and community services, finance and insurance, ownership of dwellings and the construction sector all fall within the purview of the private sector. Only public administration, defense services and public utilities are directly managed and operated by the government. Imports and exports of goods and services are also privately managed. A rough approximation would indicate that goods and services produced, traded and distributed by the private sector amount to 90 percent or more of the national income while the government directly or indirectly owns, manages, controls or regulates the remaining 10 percent of national income. So it is the strength of private initiative, with all its flaws, operating in a relatively liberal policy environment that has been the main driver of long-term economic growth in Pakistan. In Pakistan, transitions from one political regime to another have been quite difficult, causing uncertainty and short-term reductions in the speed of economic growth. The transfer of power from the military to civilian regimes in 1971, 1988 and 2008 were marked with macroeconomic instability, a slowdown in economic activities, rising unemployment and inflation and the adoption of a wait-and-see attitude by investors. But economic recovery has also been resilient; short-term losses caused by political volatility have not been large enough to offset the positive long-term secular economic movement.

Authoritarian vs. Democratic Regimes In Pakistan, the debate over whether authoritarian or democratic regimes have delivered better results in terms of economic performance has been quite fierce since General Khan took power in 1958. The spurts in economic growth during the 1960s, 1980s and 2000s, when the country was governed by military dictators, have led many to conclude that authoritarian regimes are better suited to bring about economic development. Parallels are drawn with China, Indonesia, Korea and Singapore. Detractors of the authoritarian regimes, however, have skillfully torn apart the economic performance record of the Ayub, Zia and Musharraf periods. Since the legitimacy and perpetuation of these regimes were justified on the basis of good economic outcomes, those opposed to these regimes have assailed the very economic record that has been espoused as their achievement. Such detractors lay out three arguments. First, they argue that the United States had always been more favorably disposed toward Pakistans military dictators, as they are relatively more obsequious and subservient to the American interests. Thus, it is the acceleration of inflows of foreign assistance to Pakistan that led to the observed higher growth rates rather than sound economic policies, better governance and the efficient utilization of resources. Although empirical evidence to substantiate this argument hardly exists, it has become popular folklore: Ayub was rewarded for his close economic and military ties with the United States in confronting the Soviet Union; Zia ul-Haq received a boost as $5 billion was channeled through Pakistan for Afghanistans mujahideen; and Musharrafs decision to openly support the United States in the war on terror brought in approximately $10 billion of military assistance. Second, the solid record of high growth rates under military regimes is believed to result invariably in adverse distributional consequences. The Ayub period is blamed for the widening regional disparities that led to the secession of East Pakistan. Zia ul-Haqs policies were criticized for their failure to deal with structural weaknesses or reverse the damage done by the policies of nationalization. According to Parvez Hasan, Zias economic policies represented a rather sharp contrast between reasonably satisfactory short-term economic management and an almost total neglect of long-term policy issues. The long period of political stability and sustained growth under Zia ul-Haq offered major opportunities for dealing with the underlying structural issues but these were not exploited.26 Musharrafs economic strategy, which made Pakistan one of the fastest growing Asian economies, was also dismissed on the same grounds: that consumer-led, credit-induced, service-focused growth neglected agriculture and the manufacturing sectors, making the rich richer and the poor poorer.27 While the World Bank and Asian Development Bank publicly acknowledged a significant decline in the incidence of poverty and International Labor Organization (ILO) experts validated the fall in the unemployment rate, the authenticity of the poverty and unemployment data has been challenged. It became the norm to practice selective acceptance of government-produced data showing negative trends and outright rejection of the data from the same source showing positive trends.

The third line of argument is quite persuasive. Economic accomplishments devoid of political legitimacy, however impressive they may be, prove to be short lived. Without the involvement and participation of the people, elegant and technically sound economic solutions developed by authoritarian regimes are quickly replaced once the regime changes, causing irreparable losses to the economy. The recent example whereby good initiatives taken by the Musharraf regime were either suspended deprived of funds or abolished completely attests to this phenomenon. Some of these initiatives, such as revitalizing higher education and expanding adult literacy and health programs have been brought to a grinding halt. The Devolution Plan of 2001, which decentralized the delivery of basic services to local levels, is at serious risk of abandonment. The phenomenon of abandoning the previous governments plans and policies is not confined to the military -civil transitions but also from one elected civilian government to the other. Benazir Bhutto rightly embarked upon public-private partnerships by inviting independent power producers (IPPs) from the private sector to set up electricity generation plants to overcome power shortages. The IPPs were put on hold by the new government, which alleged that corruption was involved in the awarding of contracts. In another example, the incoming Bhutto government suspended the motorway project initiated by the Nawaz Sharif government. By the time the project had resumed, time delays, cost over-runs, contract cancellations and legal entanglement had reduced the efficacy of the project. Both the civilian-elected and military regimes have demonstrated the same characteristics and weaknessespersonality cult leadership, centralized decision-making, repression of opponents and cronyism. When one goes beyond labels and examines the actual behavior of military and civilian regimes, most distinctions appear superficial. Pakistan has over the last sixty years been an authoritarian polity both under the civilian as well as military regimes. Authoritarianism involves great relevance and obedience to authority and stands opposite to individualism and freedom that come with it. Both the civilian leaders coming from an agrarian and feudal social background and military leaders from the Command and Control structure of the armed forces have demanded absolute loyalty and compliance with their institutions of origin. External Influences The international community showed skepticism at the creation of Pakistan. Liberal Western democracies were unable to reconcile themselves with the partition of a country on the basis of religion. In any case, the structural deficiency in the creation of Pakistan, the adversarial relationship with its large neighbor India, the internal fissiparous tendencies among the various ethnic and linguistic communities and a weak economic base with no significant natural or human resources all added to Pakistans insecurities and pushed it toward finding a strong ally. The United States was more than happy to oblige and found that Pakistans strategic location fit in well with its desire to build a cordon sanitaire around the Soviet Union, China and Eastern Europe. Pakistan viewed U.S.-sponsored pacts, including the Southeast Asia Treaty Organization (SEATO) and the Central Treaty Organization (CENTO), as guarantees that the United States would come to its rescue if its territorial integrity was threatened by India. During the Cold War, Pakistan aligned itself with the United States while India aligned itself with the Soviet Union. Despite lofty ideals

for democracy promotion, the United States found the efficiency of an obsequious military regime, with its unified command and control structure, to be more suitable for its larger geopolitical goals as opposed to dealing with a messy, dispersed and ineffective democracy. Would a democratic regime have allowed U.S. access to an air base in Peshawar to fly spy planes to the Soviet Union? Would the U.S. strategy of removing the Soviets from Afghanistan have been so successful absent a military regimes help? Would the Bush ultimatum in the aftermath of 9/11 have been accepted by a political leadership that did not combine the command of the military and the constitutional authority of the civilian government? The answers to these questions are unclear at best. As political uncertainty and instability are anathema to a market-based economy, something had to be done to fix this supposed problem. The solution was the strengthening of the military, which even today remains professionally the best institution in the country. Because of its merit based induction and promotion system, coupled with superb professional training and conduct, the Pakistani military was considered the real guardian of the nations territorial and ideological frontiers. It believed it had the best interests of the country at heart and therefore knew exactly how to bring about the reforms needed to spur economic development. Every military dictator removed the preceding elected governments on the pretext that they were damaging the economy. Transparency, continuity, consistency and predictability are needed by the markets, and the military regimes thought they were the only ones who could provide those enabling factors. The empirical evidence to the above hypothesis is provided by the relative economic outcomes during the three military regimes compared to the dozen civilian governments. Economic development under Ayub was a high point in U.S.-Pakistan relations as Pakistan was presented as a model for other developing countries to follow. Zia ul-Haq and Musharraf pursued the same set of policies over longer periods of stability, producing impressive results. Nawaz Sharifs reforms in 1991 were even more far -reaching and were followed by Benazir Bhutto and now by the Zardari government. But the outcomes under these civilian regimes have been disappointing; it was weak governance and not policy direction that created the deviations from the trend under various regimes. Stephen Cohen also echoed the popular belief that the two most dramatic spurts in economic growth during the Ayub and Zia ul-Haq years were accompanied by high levels of aid from the United States, military grants from China and subsidies from Saudi Arabia. The strained relationship with India, which has existed since 1947, has resulted in three wars and can be seen as one of the factors behind the erratic performance of Pakistans economy. It is popularly believed that a high level of defense spending has had a detrimental effect on the economy. The wars fought with India over Kashmir are presumed to have led to substantial increases in defense expenditure. Parvez Hasan estimates that economic growth and social progress would have been faster if defense spending had been reduced by 2 percent of GDP and the liberated resources were utilized to increase public development spending by more than onethird. Pakistans quest to acquire nuclear capability, conventional weapons, delivery systems and other defense mechanisms, was also a reaction to Indias move to become a nuclear power. Whether this objective was achieved by sacrificing investment in education and social development remains a

debatable but unsettled question. According to Hussain Haqqani, the intermittent flow of U.S. military and economic assistance encouraged Pakistans military leaders to overestimate their power potential. This, in turn, has contributed to their reluctance to normalize relations with India even after learning through repeated misadventures that Pakistan can, at best, hold India to a draw in military confrontations. Dependency on Debt The occurrence of debt in Pakistan started in 1984-85 when its surplus revenue account turned for the first time into deficit. Subsequently, both the fiscal deficit and debt started to increase at multiple rates. The overall deficit (total revenue minus total expenditures) amounted to Rs 89.2 billion in 1990-91, which swelled by 66 percent to Rs 148 billion in 1997-98. While the domestic component of national debt increased from Rs 448 billion to Rs 1280 billion (185 percent) foreign debt, increased from Rs 272 billion to Rs 697 billion (156 percent) over the same period of time. Trade Deficit Pakistan is suffering deficit in the balance of payments that has lasted for many decades. Trade deficit is major causes which have very harmful effect on the economy of Pakistan. Trade deficit happened when imports are more as compare to exports. In financial year 1956 -57 and in financial year 2003-4 Pakistan has surplus balance of trade. This was the financial year in which Pakistan had a favorable balance of trade. Measures engaged by the Economic Monitoring Committee (EMC) and State Bank of Pakistan have acutely failed to decrease import volume of the country. Forex reserves of Pakistan rapidly draining Government is difficult to manage the balance of trade payment thats why foreign currency against the home currency is strengthen which results in imports of goods and services becoming more expensive as compared to exports and cause for devaluing of the home currency and a balance of payments deficit. As the merchandise trade deficit carries on to shake the countrys economy, the services trade deficit minimized substantially by 66 percent in September of recent fiscal over the same month of previous year. Thanks to the rupee devaluation that helped increasing exports. Apart from trade of goods, services sector has also been seen to consume major lump of dollars on the payment of royalties and import of business, financial and other services. The export of government services primarily consisting of defence services led the export types in service sector followed by logistic support provided to foreign countries. Transportation services, visits of tourists and businessmen and construction services were also among the significant export categories. Flow in trade deficit is due to costly imports of oil, fertilizer, wheat and other necessities as well as fall in countrys textile sectors exports, which is an addict of compensatory duty hitches, excessive incentives and recently approved explore and evolution support benefits. The countrys inadequate export sector has also been unsuccessful to cash in on the Rupee devaluation. Below this miserable performance of the textile sector, exports of the nontraditional items, which are not enjoying any Research and Development benefit or incentives are growing at a faster pace and helping the country to diversify its exports basket.

Recommendations Pakistan exports great quantities of cotton, leather, gem stone etc. in their raw form. Instead of this we should establish industries and export these things after processing and converting them to some finish goods. Literacy rate of the Pakistan is 55% which is too low as compare to other country china 94% turkey 91% Indonesia 92%Iran 85% Egypt 66%and India 62% etc. Pakistan must improve the literacy rate of the country must be 90% as Growth in literacy Pakistan become the better policy Electricity is the main problem of the Pakistan we construct more dams and generate electricity through hydral power stations, this electricity would be very cheap so it and also installed the alternative energy plants like solar and wind mills there are help in the agricultural and industrial sector Pakistan is one of the countries who has a lot of mineral resources Pakistan should use mineral resources and increase their GDP. Industrialization and mineral resources also play a vital role in building countrys economy, so they also need our special attention and they are in massive need of improvement. Pakistan is an agrarian country.70% of its economy is based on agriculture the agriculture sectors production can be improved by introducing mechanization and making it common for farmers. Most of the farmers in Pakistan are poor and unable to adopt modern techniques. So they should be provided with (easy to return) loans. The farmer should be educated that they must only use the seeds of good quality; they must use appropriate fertilizers in right quantities. The farmer should be made aware that they should practice collective farming instead of farming on small fragments of land, by doing this they would be able to set up tube wells and buy tractors (of their own)collectively. .it will increase the foreign exchange reserve Industries should be established near to the resources to save the fuel used for transporting the raw material Pakistan imports great quantities of petrol and other fuels most of the reserve are used for oil and fuel payment we should reduce the import it will help to manage our trade deficit and reserve will increase. Government must improve the economic policies such as taxes, subsidy, education policies and reserve monetary policies. Trade system, minimizes tariffs, import quotas, and exchange rate and also control the inflation rate. Pakistan should try to establish more domestic as well as international industries inside the country to increase the domestic productions. It will help you to fulfill domestic demands but also increase the exports of the country. The country should provide opportunities to foreign investors to develop their businesses in a peaceful society of Pakistan. Focus should be made on those industries where we have the genius comparative advantages and raw material availability in the domestic markets i.e. increase investment in the gem stone, jewelry, leather industries, textile manufacturing, surgical instruments, and sports goods. R&D helps us to reduced cost with better quality and it will also help you to increase the quantity which will fill the domestic requirements but also can export. Pakistan must make greater investments in the area of research and development.

 Pakistans exports are not all over the world. Most of .he export only in se ven countries of the world. Pakistan must spread its exports and try to find some new markets. If raw materials and machinery used in domestic productions are supplied by domestic industries (local manufacture) this will increase demand for their products, which creates more employment. Higher export growth helps in achieving higher economic growth. Pakistan must take various steps to increase foreign direct investment. The Pakistan of government must build up the confidence of outside Pakistani and enhance workers remittance. It will help to reduce the current account deficit. Disparity between Fiscal and Monetary policy In modern literature, the comparative effect of monetary and fiscal policy on economic growth had been widely discussed. The co-integration tests confirm positive long run relationship between monetary and fiscal policy with economic growth. However, monetary policy has more concerned with economic growth than fiscal policy. However, the combination and harmonization of both monetary and fiscal policy are highly recommended. However, we find that there is a weak coordination between monetary and fiscal authorities. We can infer that fiscal policy continuous to substantially influence the monetary policy even State Bank of Pakistan (SBP) is enjoying sufficient amount of independence. For an effective monetary management of the economy, public sector deficit has to be contained. The policy of financing the deficit through bank sources has led to greater monetary expansion and higher rates of inflation whenever the monetary authorities adhered to such a mode of financing the deficit. This trend of financing the deficit needs to be changed to constrain and reduce inflation in the economy while rate of growth of output needs to be improved as well. Credit constraints to private sector, especially for nonproductive purposes, would also help to control money supply in the economy. On the basis of superficial empirical evidence it may be tempting to make a spurious correlation between economic growth and authoritarian regimes. But in reality the country has always paid a heavy price in the aftermath of non-democratic regimes in the form of severe economic disruptions, policy reversals, complete breakdowns of institutions and a lack of accountability. An orderly transition of power at regular intervals through a predictable democratic process is the least damaging means of keeping the economy moving on an even keel. The tour dhorizon of the past sixty years of Pakistans economic history lends credence to the argument that interruptions to the orderly political process whereby elected governments were dismissed, forced to resign or overthrown further accentuated the tendency of risk aversion. Besieged with a feeling of uncertainty over their future, elected representatives have indulged in distribution of patronage to their supporters as well as to self-enrichment. Both the preoccupation with keeping power applied to both the military rulers and the elected regimesand fending off attacks from the opposition by co-opting them through state patronage or by coercion has led to laxity in fiscal and monetary policies and to the concentration of economic and political power. The excessive use of discretion in case-by-case policymaking to favor narrow interest groups has derailed institutionalized decision-making based on well-established rules and transparency

in transactions. The lesson to be learned from this experience is quite obvious but worth repeating. Democracy, with such flaws and shortcomings as corruption and patronage, may cause economic disruptions and slow down development in the short-term. But it should be allowed to run its course as the inherent process of fresh leadership and governmental accountability through new elections provides a built-in stability to the system that eventually brings the economy back to equilibrium. Interruptions to the democratic process in the name of economic efficiency have created more problems than solutions in Pakistan.