Economic history / Macroeconomic reform and prospects

Macroeconomic reform and prospects

Islamabad Business Offices

According to many sources, the Pakistani government has made substantial economic reforms since 2000, and medium-term prospects for job creation and poverty reduction are the best in nearly a decade.

Government revenues have greatly improved in recent years, as a result of economic growth, tax reforms - with a broadening of the tax base, and more efficient tax collection as a result of self-assessment schemes and corruption controls in the Central Board of Revenue - and the privatization of public utilities and telecommunications. Pakistan is aggressively cutting tariffs and assisting exports by improving ports, roads, electricity supplies and irrigation projects. Islamabad has doubled development spending from about 2% of GDP in the 1990s to 4% in 2003, a necessary step towards reversing the broad underdevelopment of its social sector.

Liberalization in the international textile trade has already yielded benefits for Pakistan's exports, and the country also expects to profit from freer trade in agriculture. As a large country, Pakistan hopes to take advantage of significant economies of scale, and to replace China as the largest textile manufacturer as the latter China moves up the value-added chain. These industries play to Pakistan's relative strengths in low labor costs.

Growing stability in the nation's monetary policies has contributed to a reduction in money-market interest rates, and a great expansion in the quantity of credit, changing consumption and investment patterns in the nation. Pakistan's domestic natural gas production, and its significant use of CNG in automobiles, has cushioned the effect of the oil-price shock of 2004-2005. Pakistan is also moving away from the doctrine of import substitution which some developing countries (such as Iran) dogmatically pursued in the twentieth century. The Pakistani government is now pursuing an export-driven model of economic growth successfully implemented by South East Asia and now highly successful in China.

In 2005, the World Bank reported that

"Pakistan was the top reformer in the region and the number 10 reformer globally — making it easier to start a business, reducing the cost to register property, increasing penalties for violating corporate governance rules, and replacing a requirement to license every shipment with two-year duration licenses for traders."

In addition, reduced tensions with India and the ongoing peace process raise new hopes for a prosperous and stable South Asia, with more intra-regional trade. However, due to global economic crisis in year 2007-2008 the economic progress has been adveresely affected and unemployment has increased.

Shahid Javed Burki, former vice president of World Bank and who was in charge of the bank’s Latin American division when Mexico was hit by the crisis in 1994, said Pakistan is facing symptoms that preceded the Mexican financial crisis more than 10 years ago. He points to the nation’s current account deficit, ‘excessive’ speculative business activity and weak banking system. In a direct comparison with Indian economy, Pakistan's economy is 1/10th in size however, Pakistan by virtue of its area and population is approximately 1/5th to India's area and population. A lot more needs to be done to raise the standard of the rural and tribal people.