PAKISTAN ECONOMIC SURVEY 2009-10

Investment
At current market prices, Gross Fixed Capital Formation (GFCF) has been estimated to have declined 0.6%, after recording a 5.5% increase in 200809. A decline in fixed investment by the private sector has accounted for the overall change, with an estimated contraction of 3.5% for the year. The bulk of the decline has occurred in Electricity & Gas, Large Scale Manufacturing, Transport & Communication, and Finance & Insurance. General Government GFCF is estimated to have risen 9.8%. There is a sharp decline in global flows of Foreign Direct Investment (FDI), which fell 32 percent in 2009 according to estimates of the International Institute of Finance (IIF), direct investment from this source saw a steep reduction in Pakistan. For the period July to April 200910, FDI totaled US$ 1.8 billion as compared to US$ 3.2 billion in the same period of FY09. This represents a decline of 45 percent. This substantial decline in FDI inflow for the period also contributed to the decline in fixed investment in 200910.

Inflation
After declining for much of calendar 2009, inflationary pressure has intensified of recent on account of a number of adverse developments. From a low of 8.9 percent in October 2009, year onyear Consumer Price Index (CPI) inflation has accelerated to 13.3 percent as of April 2010. Food inflation has remained elevated in the past few months, stabilizing at around 14.5 percent (from 7.5 percent in October 2009), while the rate of change in prices of NonFood items has been recorded at 12.2 percent for April (from 10 percent in October). Core inflation, defined as inflation in the nonfood, nonenergy (NFNE) component of the CPI basket, has reversed its path of moderate decline, and stood at 10.6 percent in April. On a periodaverage basis, overall inflation was recorded at 11.5% for July to April. For the corresponding period in 200809, average inflation stood at 22.3%.

Education
It is widely acknowledged that education is amongst the single most important factor contributing to poverty alleviation. Education plays an overarching role and has a cross cutting impact on all aspects of human life. It is a vital investment for human and economic development. With public spending on education as a percentage of GDP amongst the lowest in the chosen sample, the outcome with regard to literacy levels is not surprising. While the literacy rate has improved gradually over a period, Pakistans indicators on this front continue to rank at the bottom end of global rankings. Within the region, only Bangladesh has a worse outcome on both indicators, spending by the public sector as well as literacy rate. Nepal spends a substantial fraction more than Pakistan on education, while its literacy rate is marginally higher.

 Labour Force And Employment

Pakistan is the 10th largest country in the world according to the size of the labour force. On the basis of a participation rate of 32.8 percent, as per the latest Labour Force Survey 200910, the labour force is estimated at 53.72 million. Of the total labour force, 50.79 million are employed while 2.93 million persons are unemployed, resulting in an unemployment rate of 5.5 percent.

Trade (X,M)
Exports amounted to $ 15.9 billion in JulyApril 200910 as against $ 14.7 billion in same period last year, showing a growth rate of 8.0 percent compared to the negative growth rate of 3.0 percent in same period last year. Higher quantum export of items like rice, fruits and raw cotton due to their improved production in country along with recovery of international demand and exchange rate depreciation were major reasons for the increase in exports during the period under review. Within the broad categories of exports, all major sectors witnessed positive growth during JulyApril 200910 over the corresponding period of last year. Import growth during JulyApril 200910 declined by 2.8 percent against the corresponding period last year. Lower international prices, compressed domestic demand, exchange rate depreciation and improved production of cotton crops remained the major factors behind the overall decline in import bill. Among the major import groups: food, machinery and telecom groups witnessed a decline during JulyApril 200910 while Petroleum, consumer durables, raw materials and other items groups witnessed an increase in growth during the period under review.

Government Spending
In the Federal budget for 200910, a total expenditure of Rs. 2,877.4 billion was estimated for the full year, comprising of Rs. 2,260.9 billion of current expenditure (79% of total), and Rs. 616.5 billion of development expenditure, including net lending. Among the major expenditure heads, interest payments of Rs. 647.1 billion were estimated, while Rs. 342.9 billion was earmarked for Defence services. Rs. 132 billion was allocated for subsidies, while the allocation for Grants amounted to Rs. 313.7 billion. In terms of structure of budgeted expenditure, current expenditure was estimated to account for 79% of total spending, with development and net lending at 21% of the total. Debt servicing accounted for 27% of total expenditure in the federal budget 200910, a substantial decline of nearly 5 percentage points over 200809 actuals. Share of defence services stood at 17.2%, while subsidies and grants totaled an estimated 11.8%.

 National Saving
The unfunded category of internal debt, composed of NSS instruments, has recorded a modest expansion of 11.1 percent during the ongoing fiscal year (till March 2010). Special Savings Certificates attracted Rs. 81.7 billion followed by Bahbood Savings Certificates and Regular Income Scheme. Massive retirements in Defence Savings Certificates turned the net accrual to a negative Rs. 35 billion during the period under review. The Central Directorate of National Savings (CDNS) launched tradable bonds with the name of National Savings Bonds having maturity of 3, 5 and 10 years in January 2010. The stock of these bonds stood at Rs. 3.7 billion as of March 31, 2010 with an almost 95 percent concentration in the 3year tenor. The NSS contains a number of instruments with similar features, however targeting different market segments.

PAKISTAN ECONOMIC SURVEY 2010-11

Investment
Investment is a key means for reviving economic growth to its historical levels. The total Investment has declined from 22.5 percent of GDP in 2006-07 to 13.4 percent of GDP in 201011. Fixed investment has decreased to 18.1 percent of GDP from 20.4 percent last year. Gross Fixed capital formation in real terms has contracted for third year in a row by 0.4 percent compared to a contraction of 57 percent last year. Even in nominal terms gross fixed capital formation increased by only 4.4 percent against decrease of 3.4 percent last year. Private sector investment on average contracted by 6 percent per annum in real terms and recorded third contraction in a row. It contracted by 3.1 percent in nominal terms during 2010-11 as against contraction of 6.1 percent last year. Public sector investment is crucial for catalyzing economic development and it has created spillover effects for private sector investment through massive increase in development spending particularly on infrastructure in the past. However, squeeze on development expenditures made it to decelerate at a brisk pace. It decelerated from 5.6 percent of GDP in 2006-07 to just 3.3 percent in 2010-11.

Inflation
Inflation is regarded as regressive taxation against the poor. The most visible impact of inflation in recent times is its effect on real output, relative prices, taxes and interest rates. It also discourages saving and promotes consumption. The effect of inflation severity is more social than economic due to the erosion of the real value of money the real value of money. The recent inflationary environment in the country may be blamed to some extent for lower deposit growth and lower savings. Inflation as measured by the changes in Consumer Price Index (CPI) has escalated by 14.1 percent in July-April 2010-11 as against 11.5 percent in the comparative period of last year.

Education
Education is central to the development strategy of an economy. It plays a vital role in human capital formation. Educated human capital has been found to have strong and consistent positive effects on economic growth and productivity of a country. It reflects substantial impact on the degree of social cohesion in a country. Equalization of education levels reduces the regional disparities. Like many other developing countries, the situation of education sector in Pakistan has not been very encouraging due to poverty and dismal economic situation in the country. Hence, it is necessary the proportion of development spending on education must be increased. An extremely high portion of the education budget is spent on recurrent heads, mainly comprising of salaries in contrast to the meager amount spent on quality improvements, such as teachers training, curriculum development, supervision, monitoring etc.; therefore, additional

funds must be allocated for the purpose. According to the latest Pakistan Labour Force Survey 2009-10, the overall literacy rate (age 10 years and above) is 57.7 percent (69.5 percent for male and 45.2 percent for female) compared to 57.4 percent (69.3 percent for male and 44.7 percent for female) for 2008-09. The data shows that literacy remains higher in urban areas (73.2 percent) than in rural areas (49.2 percent), and is more prevalent for men (80.2 percent) compared to women (65.5 percent) in rural areas. However, it is evident from the data that ruralurban and male-female disparity seems to be closing a bit. When analysed provincially, literacy rate in Punjab stood at (59.6 %), Sindh (58.2%), Khyber Pakhtunkhwa (50.9%) and Balochistan at (51.5%). The literacy rate of Punjab and Khyber Pakhtunkhwa has improved considerably during 2008-09 and 2009-10.

Labour Force And Employment

Without productive employment, achieving the goals of decent living standards, social and economic integration, personal fulfillment and social development becomes a chimera. Enterprise promotion and human resource development are key elements in achieving these goals. Pakistan is the 9th largest country in the world with respect to the size of labour force in 2010. According to the Labour Force Survey 2009-2010, with a population of 173.51 million and crude participation rate of 33 percent, Pakistan has a labour force of 54.92 million people which is 1.20 million more than the previous year. The portion of both, male and female, is increased by 0.53 and 1.67 million. Pakistans greatest asset is its quality human resource on which progress and prosperity of the country largely depends. Paucity of resources constricted policies to properly develop human resources and their effective utilization. During the LFS 2009-10 and LFS 2008-09, there is a marginal increase in the comparative profiles of own account workers and employers while decrease in the case of employees and unpaid family workers. Gender disaggregated figures indicate mixed trend.

Trade (X,M)
The phenomenal growth in developing countrys trade volumes started in the second half of 2010 and early 2011 in Asia have boosted economic growth. Exports from South Asia jumped more than a fifth in the last quarterly increase of 2010 and Pakistan was an active player. Commodity exporters in all regions are benefiting from strong global demand. Volatile oil prices and supply could adversely affect many developing oil importers, especially those with high GDP dependence on petroleum group. Pakistan in the past had crucial sensitivity to higher oil prices and the SBP estimated that a $10 hike in crude oil prices could cause deterioration of 0.5 percent of GDP in the current account, however, inordinate price escalation in crude oil prices was neutralized by many supporting factors, and Pakistan economy witnessed un-anticipated and unusual current account surplus of $ 748 million in the first ten months of the current fiscal year. Exports; Merchandise exports rose to $20.2 billion in July- April 2010-11 as against $ 15.8 billion in the comparable period of last year, thereby showing inordinate growth of 27.8 percent. The growth in exports remained broad based as almost all the groups (textile and non-textile) witnessed a high positive growth. However, the lions share of this years exports came from textile sector

and food group contributing 61.8 percent and 18.1 percent, respectively to overall exports growth during the period under review. Imports; Merchandise imports increased to $ 32.3 billion in July-April 2010-11 as against $ 28.1 billion in the comparable period of last year, thereby showing an increase of 14.7 percent. The overall import bill is higher by $ 4.1 billion, reflecting the impact of higher global crude oil and commodity prices. With the exception of machinery group, the higher import bill is contributed by food group ($ 1,528 million), petroleum group ($ 678.3 million), consumer durables ($ 247 million), raw material group ($ 1,039 million), telecom ($ 245 million) and on other items group ($ 951 million). The price and quantity effects worked in the same direction; however price effect remained stronger than quantity effect. The imports excluding petroleum group grew by 17.3 percent and excluding petroleum and food grew by 11.2 percent. This implies dominant role of food imports on import growth.

Government Spending
Public expenditure remained under tremendous pressure in the year under review as commensurate increase in revenues was not available. There is a need for strengthening the public finances in order to enable the government for higher spending on development and poverty reduction, and to increase much-needed social outlays over the medium term. As discussed earlier, that fiscal consolidation could not be maintained in 2009-10 largely because of a sluggish growth in revenues, persistence of security related pressure on public expenditures and greater than budgeted subsidies. The expenditure overrun instead of reduction in development expenditures is a major cause of concern but equally important is revenue shortfalls. Total expenditures (TE) rose to Rs 3,007.2 billion or 20.3 percent of GDP in 2009-10 as compared to Rs 2,531 billion or 19.9 percent of GDP in 2008- 09; however it is likely to decline to 18.0 percent in 2010-11 on account of slashing of development expenditures. In the current expenditure the decline is coming from non-interest-non-defence spending. Expenses under the head of running of the civil administration increased by 23.4 percent, mainly due to the impact of higher salaries and allowances for federal government employees in 2010-11. Similarly, during July-March, 2011, flood relief measures claimed an unbudgeted 1.7 percent of consolidated public expenditures. During July-April, 2011, the government has disbursed Rs 30 billion under Watan card scheme.

National Saving
The contribution of national savings to the domestic investment is indirectly the mirror image of foreign savings required to meet investment demand. The requirement for foreign savings needed to finance the saving-investment gap simply reflects the current account deficit in the balance of payments. The marked improvement in the current account deficit is a reflection of narrowing savings-investment gap. If we disaggregate private and public savings-investment gaps, both gaps have improved to contribute in current account improvement. There are two ways of improving saving-investment gap; one is through increasing savings or through decreasing investment. Both in the public and private sectors saving-investment gaps, it is the

fall in investment that has contributed to narrowing gap rather than increase in savings. Pakistan needs to gear up both savings and investment to enhance employment generating ability of the economy as well as more resource availability for investment. National Savings at 13.8 percent of GDP in 2010-11 is reflecting one of the lowest savings in peer economies. Domestic savings has also declined substantially from 18.1 percent of GDP in 2001-01 to 9.5 percent of GDP in 2010-11. This is the lowest ever domestic savings level in almost two decades.