Major Econimic Issues

In recent years, Pakistan has faced severe macroeconomic imbalances, declining economic growth, rising poverty, and poor social indicators. During the 1990s, the fiscal deficit and the current account deficit as a proportion of the gross domestic product (GDP) averaged 6.9 percent and 4.5 percent, respectively (compared with the 1980s average of 7.0 and 3.9 percent respectively). The average economic growth rate decelerated from 6.5 percent in the 1980s to 5.4 percent in the first half of the 1990s, and to 3.6 percent in the second half. The incidence of poverty increased from just over 20 percent in the late 1980s to 32 percent in 1998/99.

Crisis management of public finances and external balances dominated the economic policy agenda in Pakistan during the 1990s. However, despite all efforts, and three International Monetary Fund (IMF) programmes between 1988 and 1999, little progress was made in addressing the macroeconomic imbalances. The result was a decade of stop-go stabilisation policies, with the attendant negative impact on growth, but without the desired improvement of macroeconomic fundamentals. The imposition of economic sanctions following the nuclear tests of May 1998 further exposed the vulnerabilities of Pakistan’s economy.

Chronic fiscal and external deficits resulted in the accumulation of large domestic and external debt. Total debt (both domestic and external) equalled 100 percent of GDP at the end of June 1998, and interest payments on the public debt accounted for 47 percent of the Government’s total expenditure. Of Pakistan’s ‘twin’ debt problems the external debt is the more critical issue for short-to-medium-term economic management. In fiscal year (FY) 1998, debt servicing exceeded 50 percent of export earnings, and even after debt rescheduling, debt servicing in FY2001 was over 35 percent of export earnings. By end June 2001, Pakistan’s external public sector debt, at $32.8 billion1 amounted to 55 percent of GDP, having grown at an average annual rate of 5.4 percent throughout the 1990s. The net present value (NPV) of public external debt was estimated at 260 percent of the value of total exports of goods and services at the end of fiscal year (FY) 2001.

Major Economic Issues

A. Aggregate Growth

Despite the Government’s best efforts and the successful implementation of the IMF’s Standby Arrangement (SBA), investors’ confidence has still not been restored; the investment rate has plummeted to the lowest level since the 1950s. The falling investment rate has adversely impacted the economic growth rate, which averaged 3.5 percent over the last three years. As a result, given Pakistan’s high population growth rate (2.2 percent), real per capita income increased only marginally over the three years. In dollar terms, per capita income declined from $473 in FY1998 to $429 FY2001 because of the sharp depreciation in the Pakistan rupee.

Economic growth in FY2001 is estimated at 2.6 percent compared to 3.9 percent in FY2000. The deceleration of the growth rate was primarily due to the drought-induced reduction in the agriculture sector’s output, which posted a negative growth rate of 2.5 percent, as well as a reduction in hydroelectric power generation. The drought caused a loss in national income of about 2.0 percent. Non-agricultural GDP grew by 4.3 percent, as against 3.1 percent in the previous year. During the three-year period, average growth rates in all sectors have been low and there are wide year-to-year fluctuations as well.

Table 1: Growth Rates of GDP

Item	1980s	1997-1998	1998-1999	1999-2000	2000-2001(P)	Average 1988/99 to 2000/01
Real GDP (at factor cost)	6.5	3.5	4.2	3.9	2.6	3.5
Agriculture	5.4	4.5	2.0	6.1	-2.5	1.8
Industry	8.2	6.1	4.9	-0.1	4.2	3.0
Services	6.7	1.6	5.0	4.8	4.4	4.7

Source: Economic Survey, 2000-20001, Economic Advisor’s Wing, Finance Division, Government of Pakistan, 2001.

B. Population, Employment and Poverty

The population growth rate is estimated to be 2.2 percent and total population at 140 million in 2001. The urban population, according to the 1998 census, is 33.4 percent of the whole but this is generally assumed to be an underestimate. A large number of areas, urban in nature but not in the purview of any municipality or corporation, are excluded from the urban population. The 1998 census also shows an increase in the share of females in the population, from 46.4 percent in 1981 to 48.4 percent in 1998, which may be a sign of some improvement in gender status.

Pakistan’s labour force is growing at a rate of 2.4 percent. With the declining rate of economic growth, the capacity to generate employment has also fallen. With an employment elasticity of around 0.4, the growth in productive jobs during the last three years may have been no more than 1.4 percent per year. As a result, about 1.5 million people may have been added to the ranks of the unemployed. The unemployment rate in 1998-99 was already around 6 percent, and this did not take into account the very large number of workers who were not fully occupied. Unemployment in urban areas was higher (8 percent), and, while gender-desegregated data are not available, some surveys show that the unemployment rate is higher among females than males.

Falling growth rates, accompanied by rising income inequality and increasing unemployment, have resulted in increasing poverty during the 1990s. Whereas the proportion of the poor estimated in various studies shows variation, in 1998-99 roughly one third of the population was below the poverty line, based on a minimum consumption requirement of 2550 calories per adult. The number of people living below the poverty line in terms of a minimum income of $1 a day was 31 percent in 1996. In terms of $2-a-day poverty line, the proportion of the poor in 1996 was 84.7 percent. Since 1998-99, economic growth has slowed further, the fiscal squeeze has intensified, development spending has declined, and the country has experienced a severe drought; therefore, the incidence of poverty in Pakistan today is likely to be significantly higher than it was in 1998-99.