Pakistan: Economic Sustainability
Akhtar, Shamshad, Economic Review
Pakistan has withstood series of endogenous events, including political uncertainty as a lead up to election, and the unprecedented exogenous shocks that have ranged from financial markets turmoil to climbing global commodity prices. On domestic political front, with elections now over the country is well on its way to a smooth transition gearing for a fully democratic system. Leading parties' efforts to cement a coalition augurs well for confidence building; smooth functioning of legislature and their inbuilt accountability, while ensuring representation of public voice in steering the formulation and implementation of the future economic agenda. Ruling and opposition parties will need to rise above personal agenda to ensure sustainability of democracy.
After a period of benign global economic environment, world economic outlook since August 2007 has been adversely impacted by subprime mortgage meltdown and its ripple effects on financial markets. Advanced countries are facing slowdown in economic activity. To mitigate the ensuing recessionary pressures, easing of monetary policy by the United States are to compound the already high inflationary pressures emerging from the exceptional rise in the global commodity prices, in particular of products such as oil, gold and wheat.
Thus far Pakistan, like other Asian economies, remained immune to these shocks. Economic and financial markets remained calm in Pakistan as they had limited exposure to the US subprime market and other related products. With financial market turmoil deepening, the slowdown in economic growth and consequent reduced demand of advanced countries triggered greater uncertainty and induced vulnerabilities in international equity markets. These developments have begun to cast shadow, impacting emerging economies equity markets softening their growth prospects, albeit they remain set to grow strongly
Pakistan, like other emerging markets, faces a key question regarding sustainability of its economic achievements. Abstracting from political debates, there is widespread confidence that Pakistan has achieved a significant economic turnaround. While short terms challenges and stresses have magnified, I propose to provide perspectives that the turnaround achieved is sustainable provided it is urgently backed by a well designedmacroeconomic stabilization package and deeper structural reforms. In my presentation I make the case that Pakistan has strong economic growth potential given the country's inherent dynamics. Second, restoring macroeconomic sustainability, despite disruption in FY08 trends, has to be on top of economic agenda and is feasible given scope for domestic resource mobilization and improved debt management. Third, there is need to deepen investment incentives and climate have to improve.
Finally, Pakistan has to build momentum to diversify agriculture, industry as well as export base, and developinfrastructure. Implementation of this agenda will augur well for country's long term economic growth prospects while offering wide range of investment opportunities that make Pakistan an attractive destination.
Economic performance and potential:
Pakistan's' average economic growth rate was 6.3% for fiscal years (FY) FY03-07: during these 5 years economic growth was above 7% in two years and 9% in FY04-05 confirming rise in trend growth rate and capturing well the real economic potential. In productive sectors growth has been broadbased but accompanied by underlying structural shifts. Services sector has been the most buoyant and constitute over 53% of the overall GDP, with agricultural sector's share declining from 25.9% in FY00 to 20.9% in FY07 and industrial sector's contribution rising from 23% to 27% over this period.
Rising domestic consumption demand has been the main driver of growth; accompanying rise, albeit somewhat slow, in investment rate. After averaging around 18.6% over the FY03-06, investment rate grew to 23% in FY07 - reflecting a 4. …