PRESENT STATE OF THE PRESENT STATE OF THE ECONOMY AND FUTURE ECONOMY AND FUTURE

PROSPECTSPROSPECTS

ByBy

Dr. Dr. AshfaqueAshfaque H. KhanH. KhanDirector GeneralDirector General

(Debt Office)(Debt Office)Ministry of FinanceMinistry of Finance

May 26, 2003May 26, 2003

OUTLINE OF THE PRESENTATIONOUTLINE OF THE PRESENTATION

!! IMMEDIATE PASTIMMEDIATE PAST

!! MAJOR ECONOMIC CHALLENGESMAJOR ECONOMIC CHALLENGES

!! PRESENT STATE OF THE ECONOMYPRESENT STATE OF THE ECONOMY

!! FUTURE PROSPECTS OF PAKISTAN’S FUTURE PROSPECTS OF PAKISTAN’S ECONOMYECONOMY

"" How to achieve debt How to achieve debt sustainability?sustainability?

"" How to revive investment and How to revive investment and economic growth?economic growth?

"" How to prevent people falling How to prevent people falling below the poverty line?below the poverty line?

"" How to improve governance?How to improve governance?

PAKISTAN’S MAJOR PAKISTAN’S MAJOR ECONOMIC CHALLENGESECONOMIC CHALLENGES

! PAKISTAN SUSTAINED A VERY LARGE (7.0 % OF GDP) FISCAL DEFICIT FOR A VERY LONG PERIOD OF TIME (TWO DECADES).

! PAKISTAN ALSO SUSTAINED A LARGE CURRENT ACCOUNT DEFICIT (5% OF GDP) FOR ABOUT ONE DECADE (1990s)

WHY WE LANDED INTO SUCH DIFFICULTIES?

58

448

1645

0

200

400

600

800

1000

1200

1400

1600

1800

1980-81 1990-91 1999-2000

(Bill

ion

Rup

ees)

DOMESTIC DEBT CONTINUED TO DOMESTIC DEBT CONTINUED TO RISE AT AN ASTRONOMICAL RATERISE AT AN ASTRONOMICAL RATE

EXTERNAL DEBT AND FOREIGN EXTERNAL DEBT AND FOREIGN EXCHANGE LIABILITIES INCREASEDEXCHANGE LIABILITIES INCREASED

10

22

38

0

5

10

15

20

25

30

35

40

1980-81 1990-91 1999-2000

(Bill

ion

US

$)

Debt Servicing as % of total revenue surgedDebt Servicing as % of total revenue surged

12

40

66

0

10

20

30

40

50

60

70

1980-81 1990-91 1999-2000

(Per

cent

)

WHAT HAVE BEEN THE WHAT HAVE BEEN THE IMPLICATIONS?IMPLICATIONS?

DEVELOPMENT EXPENDITURE DEVELOPMENT EXPENDITURE CONTINUED TO DECLINE AS % OF GDPCONTINUED TO DECLINE AS % OF GDP

9

6.5

3

0

1

2

3

4

5

6

7

8

9

10

1980-81 1990-91 1999-2000

(Per

cent

)

BOTH INVESTMENT AND GDP BOTH INVESTMENT AND GDP GROWTH SLOWEDGROWTH SLOWED

18.6 19.517.4

15.6 15.3 16.0

0

3

6

9

12

15

18

21

1980s

1990-95

1995-99

1998-99

1999-02

2002-03(P

erce

nt)

TOTAL INVESTMENT AS % OF GDPTOTAL INVESTMENT AS % OF GDP

BOTH INVESTMENT AND GDP BOTH INVESTMENT AND GDP GROWTH SLOWEDGROWTH SLOWED

6.1

5.1

4 4.2

3.3

4.5

0

1

2

3

4

5

6

7

1980s

1990-95

1995-99

1998-99

1999-02

2002-03(P

erce

nt)

REAL GDP GROWTHREAL GDP GROWTH

Economic Growth SlowedEconomic Growth Slowed

INCIDENCE OF POVERTYINCIDENCE OF POVERTY

121416182022242628303234363840

1992-93 1993-94 1996-97 1998-99 2000-01 2003

RURAL

URBAN

TOTAL

WHAT POLICIES WE PURSUED?WHAT POLICIES WE PURSUED?Stabilization policy to reduce twin deficits Stabilization policy to reduce twin deficits (budget and current account deficits) with (budget and current account deficits) with a view to attaining debt sustainability.a view to attaining debt sustainability.Wide ranging Structural Reform to remove Wide ranging Structural Reform to remove impediments for private sector impediments for private sector development, raising investment and development, raising investment and growth.growth.Launched a credible and monitor able Launched a credible and monitor able program for poverty alleviation.program for poverty alleviation.Transparency and consistency in policy Transparency and consistency in policy and civil service reforms to improve and civil service reforms to improve governance.governance.

Despite series of domestic and Despite series of domestic and external shocks such as: external shocks such as:

"" unprecedented drought,unprecedented drought,

"" the events of September 11,the events of September 11,

"" the military build up of Indiathe military build up of India

Pakistan’s economy has made Pakistan’s economy has made significant progress during the last significant progress during the last three years. three years.

"" The economy is now more The economy is now more stablestable

"" economic policies are economic policies are transparent and predictabletransparent and predictable

"" confidence of the private sector confidence of the private sector is restored to a larger extent; is restored to a larger extent;

"" expatriate Pakistanis are expatriate Pakistanis are bringing their capital back; bringing their capital back;

"" stock market is buoyant; stock market is buoyant;

"" external balance of payments are external balance of payments are in comfortable position; in comfortable position;

"" foreign exchange reserves have foreign exchange reserves have crossed $ 10 billion and are crossed $ 10 billion and are sufficient to sufficient to finance 11 months of finance 11 months of imports;imports;

"" exchange rate is stable; exchange rate is stable; "" inflation is low and interest rates are inflation is low and interest rates are

declining; declining; "" domestic and external debt have domestic and external debt have

declined; declined;

"" fiscal deficit has been lowered and fiscal deficit has been lowered and current account balance is in current account balance is in surplus; surplus;

"" tax collection is growing; tax collection is growing;

"" exports have picked up, exports have picked up,

"" and lastly, Pakistan’s credit rating in and lastly, Pakistan’s credit rating in international capital markets has international capital markets has improved.improved.

Let me add some statistics:Let me add some statistics:Fiscal Side:Fiscal Side:

CBR Tax collection is Above CBR Tax collection is Above Target. Rs. 310.3 billion as Target. Rs. 310.3 billion as against the target of Rs. 309 against the target of Rs. 309 billion.billion.Tax collection is up by 15 Tax collection is up by 15 percent during the Julypercent during the July--March, March, 20022002--03.03.Fiscal Deficit down to 4.6 Fiscal Deficit down to 4.6 percent of GDP from an average percent of GDP from an average of 7.0 percent.of 7.0 percent.

7.1 7.16.7

4.6

0

1

2

3

4

5

6

7

8

1980s 1990-95 1995-99 2002-03

FISCAL DEFICIT (As % of FISCAL DEFICIT (As % of GDP)GDP)

20.9

29.7

43.4 44.7 46.243.3 44.8

51.751.8

42.9

10

15

20

25

30

35

40

45

50

55

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03 (E)

Domestic Debt as % of GDP continued to rise during the 1980s andDomestic Debt as % of GDP continued to rise during the 1980s and most part of the most part of the 1990s.1990s.

Domestic Debt Declines from 52% to Domestic Debt Declines from 52% to 43% of GDP)43% of GDP)

Growth in Domestic Debt slowedGrowth in Domestic Debt slowed

27.6

20.223.9

16.113.2

9.4

1-2.5

-5

0

5

10

15

20

25

30

1980s-I

1980s-II

1980s

1990-99

1999-00

2000-01

2001-02

2000-03Pe

rcen

t

Domestic Debt grew almost twice the size of income growth until Domestic Debt grew almost twice the size of income growth until 19981998--9999

# Cost of financing domestic debt has also declined from 12.5% in end-June 1999 to 7.5% in end-December 2002.

# Debt servicing as percent of total revenue has declined from 66 percent to 44 percent in 2002-03.

# Declining trend in development spending has been arrested. As opposed to 3.0 percent, development spending is 3.3 percent to GDP in 2002-03.

# Inflation at 3.5 percent during July-March 2002-03 is below the target of 4.0 percent. It is much lower than the average of 10 percent during the 1990s

POVERTY AND SOCIAL SECTOR POVERTY AND SOCIAL SECTOR SPENDING INCREASEDSPENDING INCREASED

114 119133

161

185

0

20

40

60

80

100

120

140

160

180

200

1999-00 2000-01 2001-02 2002-03 2003-04(T)

(Bill

ion

Rs)

18.6 19.517.4

15.6 15.3 16.0

0

3

6

9

12

15

18

21

1980s

1990-95

1995-99

1998-99

1999-02

2002-03

Investment continued to decline until 1998Investment continued to decline until 1998--9999

TOTAL INVESTMENT AS % OF GDPTOTAL INVESTMENT AS % OF GDP

BOTH BOTH INVESTMENTINVESTMENT AND AND GROWTHGROWTHPICKING UPPICKING UP

6.1

5.1

4 4.2

3.3

4.5

0

1

2

3

4

5

6

7

1980s

1990-95

1995-99

1998-99

1999-02

2002-03REAL GDP GROWTH (Percent)REAL GDP GROWTH (Percent)

BOTH BOTH INVESTMENTINVESTMENT AND AND GROWTHGROWTHPICKING UPPICKING UP

$ Interest rates are falling. Weighted average lending rate down from 14 percent in June 2001 to 9.36 percent in February 2003.

$ Private sector credit is up by 52.7 percent.

$ Industrial production during July-February 2002-03 is up by 8.0 percent.

$ Stock market has remained buoyant during July-March 2002-03. KSE-100 index has increased from 1770 points to 2716 points—up by 53.4 percent.

Pakistan has been the most profitable Pakistan has been the most profitable market in the world.market in the world.

-30

-20

-10

0

10

20

30

40

50

60

Pakistan

Sri Lanka

India

Malaysia

Singapore

Thailand

Hong

Kong

Korea

Philippine

Taiwan

Indonesia

China

Japan

EXTERNAL SECTOR

" Both exports and imports have picked up despite uncertain global environment.

" Exports are up by 20 percent and imports by 23 percent during July-March 2002-03.

EXPORTS ($ Million)EXPORTS ($ Million)

8628

7779

8569

9202 9135

10340

7500

8000

8500

9000

9500

10000

10500

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

Exports are up by 20 percent so far.Exports are up by 20 percent so far.

IMPORTS ($ Million)IMPORTS ($ Million)

10118

9432

10309

10729

10340

11100

9000

9500

10000

10500

11000

11500

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

Imports are up by 23 percent. Sign of Economic Revival and good for revenue.

REMITTANCESREMITTANCES STOOD AT $ 2.9 BILLION AND ARE UP BY 105 STOOD AT $ 2.9 BILLION AND ARE UP BY 105 PERCENT DURING JULYPERCENT DURING JULY--FEBRUARY 2002FEBRUARY 2002--03. REMITTANCES ARE 03. REMITTANCES ARE LIKELY TO TOUCHED AT ALL TIME HIGH OF $ 4.3 BILLION.LIKELY TO TOUCHED AT ALL TIME HIGH OF $ 4.3 BILLION.

1866

1087

23891848

1446

1409 984

4300

1467

800

1300

1800

2300

2800

3300

3800

4300

480019

90-9

1

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

US $

Rising flow of remittances is an example of confidence of the exRising flow of remittances is an example of confidence of the expatriate patriate Pakistanis on the country’s economy. Pakistanis on the country’s economy.

FOREIGN INVESTMENTFOREIGN INVESTMENT HAS ALSO PICKED UP. AS AGAINST $ 247 HAS ALSO PICKED UP. AS AGAINST $ 247 MILLION, FOREIGN INVESTMENT STOOD AT $ 640 MILLION IN MILLION, FOREIGN INVESTMENT STOOD AT $ 640 MILLION IN THE FIRST EIGHT MONTHS OF THE CURRENT FISCAL YEAR. THE FIRST EIGHT MONTHS OF THE CURRENT FISCAL YEAR. IT IS EXPECTED TO TOUCH $ 1.0 BILLION THIS YEAR. IT IS EXPECTED TO TOUCH $ 1.0 BILLION THIS YEAR.

1307

950823

403543

182

475

1000

0

200

400

600

800

1000

1200

140019

95-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

Improved Economic Indicators are encouraging Foreign Improved Economic Indicators are encouraging Foreign Investment in the country. Investment in the country.

CURRENT ACCOUNTCURRENT ACCOUNT HAS TURNED SURPLUS AS OPPOSED TO A HAS TURNED SURPLUS AS OPPOSED TO A DEFICIT OF 5.0 PERCENT OF GDP. DURING JULYDEFICIT OF 5.0 PERCENT OF GDP. DURING JULY--FEBRUARY FEBRUARY 20022002--03 CURRENT ACCOUNT SURPLUS HAS REACHED $ 2.7 03 CURRENT ACCOUNT SURPLUS HAS REACHED $ 2.7 BILLION. IT IS LIKELY TO TOUCH $ 3.0 BILLION IN THIS YEAR. BILLION. IT IS LIKELY TO TOUCH $ 3.0 BILLION IN THIS YEAR.

-2171

-3688

-2484

-4575

-3846

-1921-2429

-1143-513

1275

3000

-5000-4000-3000-2000-1000

01000200030004000

1990

-91

1992

-93

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

(E)

Current Account Deficit ranged between $ 2.0 billion to $ 4.5 biCurrent Account Deficit ranged between $ 2.0 billion to $ 4.5 billion during most llion during most part of the 1990s.part of the 1990s.

FOREIGN EXCHANGE RESERVESFOREIGN EXCHANGE RESERVES HAVE CROSSED $ 10 BILLION HAVE CROSSED $ 10 BILLION AND LIKELY TO REACH $ 11.0 BILLION BY THE END OF 2002AND LIKELY TO REACH $ 11.0 BILLION BY THE END OF 2002--03. 03. OUR RESERVES ARE SUFFICIENT TO FINANCE 11 MONTHS OF OUR RESERVES ARE SUFFICIENT TO FINANCE 11 MONTHS OF IMPORTS.IMPORTS.

583

27371730 1968

3219

6260

10339

0100020003000400050006000700080009000

1000011000

1990

-91

1994

-95

1998

-99

1999

-00

2000

-01

2001

-02

April

9,03

"" STONG BRUILD UP IN RESERVES STONG BRUILD UP IN RESERVES HAS STRENGTHEND PAKISTANI HAS STRENGTHEND PAKISTANI RUPEE VIZ US DOLLAR. RUPEE VIZ US DOLLAR. EXCHANGE RATEEXCHANGE RATE HAS HAS APPRECIATED BY 11 PERCENT APPRECIATED BY 11 PERCENT SINCE JULY 3, 2001.SINCE JULY 3, 2001.

"" PAKISTAN’S TOTAL STOCK OF PAKISTAN’S TOTAL STOCK OF EXTERNAL DEBTEXTERNAL DEBT AND AND FOREIGN FOREIGN EXCHANGE LIABILITIESEXCHANGE LIABILITIES HAVE HAVE DECLINED BY $ 3.0 BILLION.DECLINED BY $ 3.0 BILLION.

9.9

21.9

38.9 40.542.7

37.6 37.9 37.1 36.5 35

0

5

10

15

20

25

30

35

40

45

19

80

19

90

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

EXTERNAL DEBT LIABILITIES EXTERNAL DEBT LIABILITIES (BILLION $)(BILLION $)

"" PAKISTAN PAKISTAN NET DEBTNET DEBT AND AND LIABILTIESLIABILTIES STOOD AT $ 37 STOOD AT $ 37 BILLION IN ENDBILLION IN END--JUNE 2000 AND JUNE 2000 AND EXPECTED TO DECLINE TO $ 26 EXPECTED TO DECLINE TO $ 26 BILLION BY ENDBILLION BY END--JUNE 2003JUNE 2003——A A REDUCTION OF $ 11 BILLION IN REDUCTION OF $ 11 BILLION IN 3 YEARS.3 YEARS.

"" EXTERNAL DEBT BURDEN HAS EXTERNAL DEBT BURDEN HAS ALSO DECLINED ALSO DECLINED SIGNIFICANTLY.SIGNIFICANTLY.

165.4

256.6

304.2 314.1 319.8335.4

297.2

259.5236.8

193.1

0

50

100

150

200

250

300

350

400

19

80

19

90

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

EXTERNAL DEBT AS PERCENT OF EXTERNAL DEBT AS PERCENT OF FOREIGN EXCHANGE EARNINGSFOREIGN EXCHANGE EARNINGS

INCIDENCE OF POVERTYINCIDENCE OF POVERTY

121416182022242628303234363840

1992-93 1993-94 1996-97 1998-99 2000-01 2003

RURAL

URBAN

TOTAL

FUTURE PROSPECTSFUTURE PROSPECTS

"" Per capita income to rise by 46 Per capita income to rise by 46 percent in 5 years , i.e. from $ 427 percent in 5 years , i.e. from $ 427 to $ 623 .to $ 623 .

"" Poverty to be reduced by 25 Poverty to be reduced by 25 percent from the current level of percent from the current level of 31.8 percent to 23.8 percent.31.8 percent to 23.8 percent.

"" Taking real GDP growth to 6 Taking real GDP growth to 6 percent in 5 years from the current percent in 5 years from the current year target of 4.5 percent.year target of 4.5 percent.

FUTURE PROSPECTSFUTURE PROSPECTS

"" Investment as percentage of GDP Investment as percentage of GDP to rise to 18 percent from the to rise to 18 percent from the current level of 15current level of 15--16 percent.16 percent.

"" Saving rate rising from the current Saving rate rising from the current level of 15 percent to 16.5 percent.level of 15 percent to 16.5 percent.

FUTURE PROSPECTSFUTURE PROSPECTS"" Inflation to remain below 5 Inflation to remain below 5

percent. percent. "" Fiscal deficit declining to less Fiscal deficit declining to less

than 3 percent of GDP in 5 years. than 3 percent of GDP in 5 years. "" Development spending rising to Development spending rising to

4.1 percent of GDP from the 4.1 percent of GDP from the current level of 3.3 percent.current level of 3.3 percent.

"" Public debt as % of GDP is Public debt as % of GDP is targeted to decline to 76 percent targeted to decline to 76 percent in 5 years from the current level in 5 years from the current level of 90 percent. of 90 percent.

RISKS/DANGERRISKS/DANGER"" Tax culture not gaining Tax culture not gaining

grounds.grounds.

"" We may become fiscally We may become fiscally irresponsible.irresponsible.

"" We may use gimmicks to We may use gimmicks to resolve economic problems.resolve economic problems.

PREPRE--REQUISITE TO ACHIEVE REQUISITE TO ACHIEVE TARGETSTARGETS

"" We must continue to pursue We must continue to pursue consistent and transparent economic consistent and transparent economic policies. policies.

"" Complete the On Going Structural Complete the On Going Structural Reform Program. Reform Program.

"" Continue to work to reduce social Continue to work to reduce social gap. gap.

"" We must continue to remain fiscally We must continue to remain fiscally responsible. responsible.

"" We must Avoid Being the Victim of We must Avoid Being the Victim of Lobbies.Lobbies.