Pakistan started it journey as a nation in 1947 with the partition of Pakistan from India. According to Cambridge University Press[1], Pakistan was carved out of the north-western and north-eastern parts of British India. The territories of Baluchistan, Northwest Frontier Province, Sind, and the western part of the Punjab constituted its west wing with an area of 365,529 square miles and an approximate population of 33 million.
West Pakistan (now Pakistan), like most of west Asia, consisted of semi-arid plains and rugged mountains. About one-fifth of its land was cultivated. The distribution of population was highly uneven and was determined primarily by the availability of water. Despite low per capita income and traditional peasant agriculture, Pakistan with a population of 75 million was a sizeable economy.
Pakistan's economy has undergone significant changes over the past several decades, with both positive and negative developments. Here's an overview of Pakistan's economy in the past, present, and future:
Pre-2000 Developments
In the early years after independence in 1947, Pakistan's economy was primarily based on agriculture. However, over time, the country began to industrialize, with a focus on textiles and other manufacturing industries. During the 1960s and 1970s, Pakistan saw rapid economic growth due to a series of reforms and increased foreign aid. However, this growth was not sustainable, and the country began to experience economic difficulties in the 1980s.
The 1990s were a period of economic instability for Pakistan, with high inflation, a growing debt burden, and political instability. However, the country made significant progress in the early 2000s, with increased foreign investment, privatization of state-owned enterprises, and a focus on economic reforms.
According to the World Bank, Pakistan's GDP in 1947 was estimated at USD 1.1 billion. Since then, the country has experienced periods of rapid growth, as well as economic downturns and periods of instability.
In the 1960s and 1970s, Pakistan saw rapid economic growth, with an average GDP growth rate of over 6% per year. However, the 1980s and 1990s were marked by economic instability, with the country experiencing high inflation, political instability, and a growing debt burden.
In the early 2000s, Pakistan made significant progress in implementing economic reforms and attracting foreign investment, leading to a period of steady economic growth. However, the country still faces significant challenges, including high poverty rates, a large trade deficit, and a lack of investment in key sectors such as education and infrastructure.
Real Macroeconomic indicators - Pre-2000
Pakistan’s real GDP in the pre-2000 era show an average 5% growth rate, however, it was able to achieve growth rates above 5% most of the years with peak reaching in 1985 with growth of 8.7%. However, from 1996 the economy started performing below average growth rates.
Agriculture’s contribution to GDP was steady at an average of 32 per cent during 1980 - 2000, while Industry averaged 21% as percentage of GDP. Services sector was major contributor in the share of GDP of Pakistan with an average contribution of 44%. The growth rate of services sector is higher than the growth rate of agriculture and industrial sector. The services sector grew very rapidly, from 1975 to 76 to 2009-10, growth rate of service sector is 5.46 %.
Agriculture: Pre-2020
According to a report published in The Pakistan Development Review[2] written by M. Ghaffar Chaudhry and Ghulam Mustafa Chaudhry, during early Seventies the annual growth rate in agriculture plummeted to the historically lowest level of 0.78 percent. While crop production had a growth rate of 0.49 percent, output of rice, cotton and sugarcane fell persistently.
Except for poultry, growth was equally disappointing in livestock sector. However, the agricultural growth revived in the second half of the Seventies and crop output and livestock registered respective growth rates of more than 4.0 and 3.0 percent.
Since the 1980s, livestock and non-cereal crops emerged as the prime movers of agricultural growth. Against 3.28 percent annual growth rate of agriculture, growth of livestock exceeded 4.77 percent and that of cotton 6.71 percent. By contrast respective growth rates of crop sector and cereal crops were less than 2.63 and 2.0 percent.
During the period of 1984-85 and 1989-90, the production of cotton and livestock witnessed a further acceleration and contributed to more rapid agricultural growth (4.57 percent) than in the previous period. Despite some recovery in wheat, the growth rates of sugarcane and rice remained very low.
In the 1990s, the growth rates fell further to less than 4.0 and 3.0 percent per annum respectively between 1989-90 and 1994-95 and 1994-95 and 1996-97. The high growth rates of the sugarcane and livestock sectors had a positive, and a slower growth of cotton, rice and wheat a negative, effect on the overall agricultural growth in the 1990s.
Industry: Pre-2020
According to Robert E Looney’s paper written 1994 in the Development Policy Review [3], “With regard to the sectoral contributions to growth in Pakistan, Burney (1986) found (over the period 1960-85) that the commodity-producing sectors (agriculture and manufacturing) accounted for than 40% of the growth in GDP, the major crops being the main source of the varying contribution of agriculture, while in the case of manufacturing, the large-scale sector's output accounted for more than 60% of the contribution.
The Pakistan economy has gone through a number of major changes since 1985. In particular (but especially from 1988 onwards) progress has been especially strong in freeing the private sector from regulation and artificial price distortions. In addition, a complementary privatization program was launched with the aim of reducing the role of the public sector in manufacturing and services.
As a side benefit, the program was seen as alleviating the government's financial and administrative burden and creating new opportunities for the private sector.
While growth in large-scale manufacturing output has not accelerated in recent years (nor has its overall contribution to GDP growth increased), there is hope (particularly among official policymakers) that this activity is finally beginning to play the classic role of a leading sector.
However, for manufacturing to be a true leading sector it must be shown that its expansion tends to create several direct linkages with other key sectors such as construction, agriculture and the like. Since these sectors also have numerous linkages with the rest of the economy, an increase in manufacturing would then set in motion a broad-based cumulative expansion of the economy.”
According to another paper written by A. R. Kemal, Chief Economist, Ministry of Planning and Development, Planning and Development Division, Islamabad, in The Pakistan Development Review, “Pakistan’s manufacturing sector is at the crossroads. The import substitution industrial strategy which she has all along pursued did result in the growth rate of the manufacturing exceeding 8 percent upto the Eighties, but in recent years, not only the growth rate has slipped to around 3 percent, but major structural problems have also emerged in the industrial sector.
Lack of diversification in the industrial output, limited exposure to competition, a distorted incentive structure, allocative, technical and inefficiencies, negligible growth in productivity, absence of R&D, lack of quality and standardized products, constrained employment growth, etc., have forced Pakistan to look for alternative strategies.”
Pakistan GDP
Source: World Bank Database
Inflation and GDP Per Capital: Pre-2000
Pakistan has generally been high inflation economy during 1980 to 2000. From 1989 till 1998 Pakistan saw a double-digit inflation. But thereafter the inflation started abetting with the growth in GDP and remained below long-term average till end of 2000. At the same time it saw increase in Per Capita GDP from US$419 in 1980 to US$538 in 1990, a 29% increase, and further increased to US$ 630 in 2000 albeit at a slower rate of 17%.
Source: World Bank Database
Exports and Imports - Pre-2000
In terms of exports and imports, as percentage of GDP, which we call cash inflows and outflows show a healthy trend with the gap between inflows and outflows kept decreasing and was lowest between 1997-2000.
The top exports of Pakistan were House Linens, Rice, Non-Knit Men's Suits, Knit Sweaters, and Non-Knit Women's Suits, exporting mostly to United States, China, Germany, United Kingdom, and United Arab Emirates.
The top imports of Pakistan are Refined Petroleum, Petroleum Gas, Crude Petroleum, Palm Oil, and Vaccines, blood, antisera, toxins and cultures, importing mostly from China, United Arab Emirates, Qatar, Indonesia, and United States.
Agriculture 2001 to 2021
According to Economic Survey of Pakistan 2021-2022, wheat is cultivated over 22 million acres and accounts for 7.8 percent of the value added in agriculture and 1.8 percent of GDP. During 2021-22, area sown decreased to 8,976 thousand hectares (2.1 percent) against last year’s of 9,168 thousand hectares.
The production of wheat declined to 26.394 million tonnes (3.9 percent) compared to 27.464 million tonnes production in 2020-21. Wheat production declined due to decline in area sown, shortfall in irrigation water and drought conditions at sowing, less fertilizers offtake and heat wave in March/April, though the government has increased Minimum Support Price to Rs 2200/40 kg this year is aligned to the cost of production.
This has made Pakistan dependent on Ukraine and Russia for its wheat consumption. Not only wheat but it also depends on imports of pulses and oilseeds on these countries. In 2020-21, imports from Russia and Ukraine contributed for 77.3 percent of total wheat imports, 19.3 percent of total pulses imports, and 10.4 percent of total oilseed imports into the country.
According to World Bank[4], agriculture in Pakistan remains by far the biggest employer of labor and is an especially important sector from a social, livelihood and foreign exchange perspective. Pakistan’s population growth and rate of urbanization is pressurizing the agriculture sector not only to increase production, but also to respond to a changing and diversifying food consumption pattern.
Despite considerable public spending with support from development partners, agriculture growth slowed down from an average of over 4% per year between 1970-2000 to below 3% thereafter. Poorly functioning agricultural markets with significant government intervention, and a pattern of public spending on agriculture characterized by inefficient and poorly targeted subsidies, discourage a move to a more water efficient, higher value agriculture.
Agriculture growth 2001 to 2021
Source: World Bank Database
Industry 2001 to 2021
Manufacturing sector contributed 12.4 % in GDP in 2021-22. Total industry contributed 18% in 2001. It increased to 22% by 2008 but since then averaged 19% during 2009-2021. Pakistan’s manufacturing is divided into three components: Large Scale Manufacturing (LSM), Small Scale Manufacturing (SSM) and Slaughtering. Establishments having ten or more employees are covered under LSM.
Source: World Bank Database
Services 2001 to 2021
According to a paper written by Henna Ahsan and Ayaz Ahmed of Pakistan Institute of Development Economics, Islamabad, titled “Contribution of Services Sector in the Economy of Pakistan”[5], the increasing growth rate of service sector was due to increasing growth in finance and insurance sector.
As growth rate of finance and insurance sector is 6.8 percent during 1975-2010. The better performance is due to the pursuance of accommodative polices adopted by of State Bank of Pakistan. The growth rate of social and community sector has also been increasing which is recorded 6.5 percent during 1975-2010. The service sector has major contribution in value added and gross fixed capital formation (GFCF) in Pakistan.
It further notes that a group that has experienced modest growth rate, in transport, storage and communication, wholesale and retail trade, ownership of dwelling, public administration and defense.
Employment share in services sector is increasing, people are moving from agriculture sector to services sector. Service sector is also important sources of revenues as 26 percent of revenues are received from taxes compare with 1 percent from agriculture sector.
Between 2005 to 2009 Pakistan’s real GDP took a nose-dive from peak of 9% in 2005 to almost negligible 0.4%. Yes, financial crisis of 2008 contributed to this fall, but the fall started in 2005 and financial crisis only exacerbated the fall. Figure below shows this trend.
According to this paper, after 2009 even with a low base Pakistan economy grew by just 2.6% in 2010 and remained below long-term average of 5% till 2017 from 2010. In 2018 real GDP grew above the long-term average.
In terms of Pakistan’s political and economic management history, fiscal year 2018-19 represents a break from the past. People of Pakistan voted into power a new party – Pakistan Tehreek-i-Insaaf (PTI) – mainly as it was seen to provide a transparent, more efficient government with a more egalitarian development agenda according to Pakistan’s economic survey for 2018-19. It notes that the new government inherited a weakened economy.
The fiscal deficit was high; the current account deficit was at its highest level in country’s economic history; debt liabilities had risen to a level where servicing of the debt took a sizeable portion of the federal government’s budget; and foreign exchange reserves had depleted to a level that was insufficient to finance even two months of imports.
This instability was a result of structural weaknesses in the economy which had remained unaddressed for decades. Insufficient policy action over the last two years aggravated the macroeconomic imbalances.
It further notes that the new government took several policy actions to meet these challenges which included curtailing of non-essential imports, encourage remittances and with support from friendly countries reduced external vulnerabilities.
Real GDP took a hit again and growth rate halved in 2019 and in 2020 due to covid growth turned negative.
Source: World Bank Database
Inflation and GDP Per Capita: 2001-2022
Inflation has severe bouts of inflation with inflation reaching 20% in 2009 but abetting to 10% in 2010 but remained above long-term average of 8% till 2014. From 2015 to 2019 it remained below long-term average but started increasing again in 2020 due to covid. In August 2022, Pakistan faced the most severe flood in the history of the country. According to a news report published by Scientific Reports[6], this caused agricultural losses in the most productive Indus plains aggravated the risk of food insecurity in the country.
As part of the loss and damage (L&D) assessment methodologies, we developed an approach for evaluating crop-specific post-disaster production losses based on multi-sensor satellite data. An integrated assessment was performed using various indicators derived from pre- and post-flood images of Sentinel-1 (flood extent mapping), Sentinel-2 (crop cover), and GPM (rainfall intensity measurements) to evaluate crop-specific losses.
The results showed that 2.5 million ha (18% of Sindh’s total area) was inundated out of which 1.1 million ha was cropland. The remainder of crop damage came from the extreme rainfall downpour, flash floods and management deficiencies.
Thus approximately 57% (2.8 million ha) of the cropland was affected out of the 4.9 million ha of agricultural area in Sindh. The analysis indicated expected production losses of 88% (3.1 million bales), 80% (1.8 million tons), and 61% (10.5 million tons) for cotton, rice, and sugarcane. This ugly reality caused inflation to reach 12% in 2022.
Source: https://www.nature.com/articles/s41598-023-30347-y#:~:text=In%20August%202022%2C%20one%20of,food%20insecurity%20in%20the%20country.
Source: World Bank Database
GDP Per Capita (Current US$) – 2001 to 2022
Pakistan has seen a steady rise in Per capita based on Purchasing-Power-Parity (PPP)" exchange rate basis. In 2001 per capita GDP was US$ 602 and increase to US$ 1123 in 2010 a whooping increase of 87%, however, if we compare 2010 figure with 2020 the increase slowed down to 23% and reached US$ 1377 in 2020 and further slowed down to 20% and reached US$1658 in 2022.
Export and Imports – 2001 to 2021
The share of services in export has been increased from 17.68 percent to 20.77 percent in 2008-09 to 2009-10. Whereas the share of services in imports has been declined from 19.08 percent to 17.99 percent, which helped to decrease the trade deficit in 2009-10.
Source:http://wits.worldbank.org/tradedata/monthlydata/en/country/PAK/year/2018/quarterly
It can be seen that Pakistan imports show significant month -on-month increase while the exports have shown steady degrowth. According to World Bank, at HS 6-digit level, top five exports in 2020 were rice, bed linen of cotton, toilet linen and kitchen linen and ensembles of cotton.
In terms of goods, in 2021, Pakistan was the world's biggest importer of Petroleum Oils, natural gas, palm oil, transmission apparatus, Tea, Hydraulic Turbines, Jute and Other Textile Fibers, and Metallic Yarn.
Foreign Exchange Reserves: 2001-2021
Source: World Bank Database
Post 2022 – Things start to get ugly
Pakistan's economy faces several economic challenges, including high inflation, a large trade deficit, and a significant debt burden, high poverty rate, high levels of corruption, and a lack of investment in key sectors such as education and infrastructure.
Inflation the killer blow
Inflation is not going to abet anytime during the next two years i.e. 2023-24 with inflation remaining well above long term average of 8%.
Source: IMF World Economic Review , October 2022
The government has implemented a series of economic reforms aimed at addressing these issues, including measures to increase tax revenue, reduce government spending, and improve the business environment.
To address these issues, the government will need to continue implementing economic reforms and focus on building a more sustainable and diversified economy. Additionally, the country could benefit from increased regional trade and cooperation, particularly with neighboring countries such as India and China.
Foreign Exchange Reserves 2022 and beyond
Pakistan’s foreign exchange reserves which included gold reserves was at a healthy level of US$ 22812 Million at the end of 2021, also peak level since 1980, plummeted to just US$ 4343 million at end of 2022. Though they have doubles from that level at end of February 2023. The decline in foreign exchange is due to heavy external debt servicing and import financing.
Source: World Bank Database
Pakistan has been to IMF 23 times during the last 75 years bailouts. As of February 2020, according to IMF [7], “Pakistan: History of Lending Commitments” amount agreed by IMF for lending to Pakistan was to the tune of US$23.65 billion out of which Pakistan has already drawn US$ 14.83 billion. There were US$ 4.837 billion outstanding as on date.
Source: IMF
Note
4/The expiration date for outright disbursements (RFI and RCF) reflects the date the disbursement was drawn, or the date the disbursement expires, i.e., 60 days following the Board approval date. The expiration dates for arrangements under the GRA, PRGT, and RST reflect either the approved expiration date of the arrangement or the date the last disbursement takes place under the fully drawn arrangements.
Countering Inflation in Pakistan
Economic theory suggests inflation can be either demand pull or cost push. Now demand push inflation happens when total demand for goods and services exceed supply. Demand increase may come from government, increase in exports or businesses which puts upward pressure on prices, leading increase in inflation.
To meet this demand additional labor is required leading to increase in employee costs and hence total cost to manufacture the products or services resulting in inflation. Further, higher income of households due to increase wages may result in high demand further causing high inflation.
According to Forbes article Demand-Pull inflation is caused by:
There are usually a few interrelated forces working in tandem that cause demand-pull inflation.
These can include:
1. A strong economy. When the economy is booming and unemployment is low, consumers tend to earn more income and spend more money, which drives up levels of aggregate demand throughout an economy.
2. Supply shortfalls. Higher income and more spending drive growing demand, and companies respond by trying to increase supply to keep up. Waves of demand for raw materials, subcomponents and labor ripple through an economy, and it may take time for production to meet the demand.
3. A rapid increase in supply of money. One of the jobs of the Reserve Bank of a country is to monitor and influence supply of money. Occasionally, Reserve Bank will print money, though—during times of severe economic stress, for example—and this rapid increase in liquidity can drive higher demand for goods and services. Demand-pull inflation occurs when businesses can’t increase their supply to match demand.
4. Inflation expectations. The rate at which people expect prices to rise in the future is referred to as inflation expectations —actual inflation often follows a similar trajectory. If consumers expect inflation to rise soon, they may preemptively start buying more things now to avoid paying what they expect will be higher prices later. This can lead to a problem with supply, leading to demand-pull inflation.
5. Government policy. Fiscal policy responses to economic conditions—like providing a stimulus during an economic downturn or providing tax breaks for certain products—can also impact how much money people have to spend on goods and services or, in some cases, where they might decide to spend that extra money.
Cost push inflation on other hand happens when production and supply of goods and services in the country falls. Fall in production and supply may happen due supply chain interruptions or disruption caused by natural disasters or currency fluctuations if major inputs are imported. High input prices or low availability of inputs caused by supply chain disruptions push up product and service prices accentuating inflation.
What is causing inflation Pakistan?
Pakistan imports key inputs from China, UAE, Indonesia, Saudi Arabia and USA which include petroleum, chemicals, plastic or rubber, capital goods, textile and clothing, raw materials and others like vegetables, food products.
Pakistan Product Imports from China 2020
Pakistan Product Imports from United Arab Emirates 2020
Pakistan Product Imports from United States 2020
Pakistan Product Imports from Saudi Arabia 2020
Pakistan Product Imports from Indonesia 2020
Source: World Integrated Trade Solution
As can been observed from figures above, Pakistan not only imports majority of raw materials and intermediate goods but also essential consumption goods like vegetables and food products it is getting into trouble since its currency has depreciated substantially, and exports have not increased in same proportion.
Pakistani Rupee has been falling like nine-pins in recent years against major currencies like US dollar. From the figure below it is observed that the rupee fell from Rs. 184.78 on April 4, 2022, to Rs. 283.80 on April 1, 2023. If we compare it with figures 5 year ago on April 18, 2018, it was Rs. 115.45 which is even worse.
Source: Google
Will things improve on inflation front?
According to news agency Reuters, Inflation Pakistan could average 33% in H12023, indicated by Moody’s economist [8], "Our view is that an IMF bailout alone isn't going to be enough to get the economy back on track. What the economy really needs is persistent and sound economic management," senior economist Katrina Ell said in an interview”.
What is Pakistan doing to fight inflation and will it work?
One of the weapons in central banks arsenal to curb inflation is increase in increase rates thereby limiting money supply. In recent times Pakistani central bank increased its key interest rates by 300 basis points to 20% in February 2023 which is the highest level since October 1996. This rate hike is come after Pakistan's consumer price index (CPI) jumped 31.5% in February 2023, year-on-year, due to surge in food, beverage and transportation prices of more than 45%.
According to news report by Business Total[9], “Pakistan’s central bank – State Bank of Pakistan– is likely to hike interest rates further to 21 per cent in its upcoming policy review meeting in April. The rate hike will be aimed at arresting inflation levels in the cash-strapped country, said the Pakistani brokerage firm Arif Habib Limited (AHL). If it is materialized, this will be the biggest interest rate hike by the State Bank of Pakistan.”
But will this work in Pakistan’s case. The answer is no. Pakistan economy has been facing severe structural problems. To the list the few:
1. High government involvement in economic activities
2. Large informal and unorganized industry sector
3. Product production and export limitation of cotton-based clothing
4. Lack of educational infrastructure
5. Low rate of savings
6. Neglect of Small and Medium enterprises
7. Too much army involvement in business, judiciary, policies
8. Non-existent institutional structure
9. Lack of incentives for exports
10. Import substitution policies
[1] https://www.cambridge.org/core/books/abs/cambridge-economic-history-of-india/pakistan-economy-since-independence-194770/48DA8C90A0B4ADB18878DA788C957723
[2] https://core.ac.uk/download/pdf/7203089.pdf
[3] https://core.ac.uk/download/pdf/36732867.pdf
[4] https://www.worldbank.org/en/country/pakistan/brief/pakistan-agriculture-food-systems
[5] https://file.pide.org.pk/pdfpideresearch/wp-0079-contribution-of-services-sector-in-the-economy-of-Pakistan.pdf
[6]https://www.nature.com/articles/s41598-023-30347-y#:~:text=In%20August%202022%2C%20one%20of,food%20insecurity%20in%20the%20country.
[7] https://www.imf.org/external/np/fin/tad/extarr2.aspx?memberKey1=760&date1key=2020-02-29
[8] https://www.reuters.com/world/asia-pacific/inflation-pakistan-could-average-33-h1-2023-says-moodys-economist-2023-02-15/
[9] https://www.businesstoday.in/latest/world/story/pakistan-set-for-another-rate-hike-by-100-bps-to-21-highest-ever-374040-2023-03-20
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