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Pakistan - Economy

Millions were left without light or electricity across Pakistan after the national power grid was disrupted by a fault in the transmission system. Power across the country of 220 million people was abruptly cut late on 09 January 2021 because of a fault at the Guddu thermal power plant, sending the entire country into darkness. Pakistan's electricity supply was being gradually restored 10 January 2021 after the country's national power grid experienced a major breakdown, leaving millions of people in darkness. All major cities, including the capital Islamabad, were hit. The blackout is one of the worst that the country has experienced. In 2015, around 80% of the country was left without power after a key transmission line broke down.

While the increase in generation capacity in recent years has seen large-scale scheduled blackouts, which were once the norm, reduce in frequency, many Pakistani homes and businesses continue to maintain power backup systems, including diesel and gas-powered generators and battery-based uninterruptible power supply (UPS) systems, particularly in urban areas.

Pakistan’s real GDP growth is estimated to have declined from 1.9 percent in FY19 to -1.5 percent in FY20. The first contraction in decades, this reflects the effects of COVID-19 containment measures that followed monetary and fiscal tightening prior to the outbreak. To curtail the spread of the pandemic, a partial lockdown – that included restrictions on air travel, inner-city public transport, religious/social gatherings and the closure of all schools and non-essential businesses – was imposed in March, and gradually eased from May 2020 onwards. This disrupted domestic supply and demand, as businesses were unable to operate and consumers curbed expenditures, which specifically affected services and industries. The services sector is estimated to have contracted, by over 1 percent, while industrial production is expected to have declined even more, due to the high policy rates prior to the pandemic and plunging domestic and global demand thereafter. The agriculture sector, partially insulated from the effects of the containment measures, is estimated to have expanded modestly over the year.

On the demand side, private consumption is estimated to have contracted in FY20, as households reduced consumption amid the lockdown and dimmer employment prospects. Similarly, with heightened uncertainty, disrupted supply chains and a global slowdown, investment is estimated to have fallen drastically. Exports and imports also shrank given weaknesses in global trade and domestic demand. In contrast, government consumption growth rose, reflecting the rollout of the fiscal stimulus package to cushion the effects of the pandemic.

The current account deficit shrunk from 4.8 percent of GDP in FY19 to 1.1 percent of GDP in FY20, the narrowest since FY15, driven mainly by import values falling 19.3 percent. Total export values also contracted 7.5 percent due to weak global demand. Despite the global downturn, workers’ remittances increased relative to FY19, underpinning a wider income account surplus. Meanwhile, higher net foreign direct investment, and multilateral and bilateral disbursements, more than offset a decline in portfolio flows, leading to a larger financial account surplus. The balance of payments consequently swung to a surplus of 2.0 percent of GDP in FY20, and official foreign reserves increased to US$13.7 billion at end-June 2020, sufficient to finance 3.2 months of imports.

By 2019 Pakistan faced one of the worst economic crises in its history. Prime Minister Imran Khan's government s massively devalued the Pakistani rupee in the past nine months. The interest rates have spiked, and inflation has risen from 3.6% to over 9%. At the same time, the prices of essential commodities have increased by 200%. Pakistan has long imported more than it exported. The result is a surging current account deficit — now estimated at over 5 percent of gross domestic product (GDP) — and a looming balance-of-payments crisis. Corruption and tax evasion remain rampant, resulting in reduced revenue for the state. Less than 1 percent of Pakistanis, for instance, pay income tax.

Prime Minister Nawaz Sharif came to power in 2013. The government sealed an agreement with the IMF in 2013, and successfully completed it in September 2016 — the first time in the country's history. It made sure that the program focused on high growth, and in three years, Pakistan's growth reached close to 6% — the highest in the past 15 years. At the same time, it brought the inflation level from 12% to 3.6% — the lowest in 40 years. It also managed to lower interest rates. All of these steps activated the economy, which grew from 22,000 billion Pakistan rupees (€129 billion) to 34,000 billion (€200 billion).

Since independence, the economic growth rate in Pakistan has been higher than the average growth rate of the world economy. The average annual real GDP growth rates were 6.8% in the 1960s, 4.8% in the 1970s, and 6.5% in the 1980s. The average annual growth fell to 4.6% in the 1990s when the real GDP growth declined to an average of 4.9% in the first half, and 4.0% in the second half of the decade.

The economic growth varied considerably after the turn of the century. It was just about 2 % in 2000 but it took a turnaround at over 5 per cent in 2002-2003. Growth performance for the next four years (2004-08) was striking - recording an average rate of 7.0 per cent per annum. Since the beginning of 2008, however, Pakistan's economic outlook took a turn to stagnation due to domestic and external shocks including the sharp rise in international oil and food prices, the internal security hazards brought on by the war on terror and the repeated natural disasters in the form of successive floods.

Pakistan remains unable to exploit its economic potential and huge reservoir of human resource to the maximum mainly because of the grave law and order crisis. When foreign and local investors and business - people feel insecure even travelling to, or within, Pakistan, talk of pushing the economy in the realm of high growth trajectory remains a pipe-dream. Incidents such as terror attacks on vital defense installations, security personnel or on the country's largest airport in Karachi, tarnish the brand Pakistan and transform it into one of the world's most dangerous places.

An array of structural problems hamper sustained economic development and a reduction in pervasive poverty rates. Infrastructure shortcomings and lack of skilled labor constitute a major deterrent to sustainable medium-term growth. Unreliable power and telecommunication networks may be the main difficulties that businesses face, but the transport sector in particular is in need of investment to meet increasing demand from personal and freight traffic. Endemic corruption, a slow and opaque bureaucracy, a weak legal framework, and inconsistent policy implementation continue to thwart investment activity.

Out of total annual export receipts of $17 billion, nearly $5 billon is sent to Pakistan by Americans. During 2005, total U.S. imports from Pakistan were worth $3.25 billion (up 13% over 2004). About two-thirds of this value came from the purchase of cotton apparel and textiles. As of 2008 more than 60 percent of Pakistan's exports were cotton-related, and close to 90 percent of Pakistan's exports to the US are composed of textiles and apparels. Fully 35 percent of Pakistan's labor force is employed by the textile sector. By one accouting, American consumers are keeping more than 15 million Pakistani workers -- around 30 percent of the total labor force -- gainfully employed.

Pakistan is one of the largest importers of U.S. Pima/ELS cotton for its specialized export industry. Given the need for higher-count yarns and better quality fabrics for the export market and specialized products demanded by the domestic market, Pakistan’s textile industry is expected to rely increasingly on U.S. Pima cotton and contamination-free upland cotton. Firms often import upland cotton for their export programs due to contamination problems with local cotton, particularly with alien fibers -- mainly polypropylene and jute. The problem occurs during harvesting and handling. These alien fibers wreak havoc in the industry by creating yarn with different yarn strengths and dye uptake. Estimates suggest that contamination raises costs by 10 percent. Some mills have standardized their blend for export markets, with a predefined origin and percentage of imported cotton in the product.

The World Bank considers Pakistan a low-income country. No more than 55.0% of adults are literate, and life expectancy is about 64 years. The population, currently about 167 million, is growing at 1.81% annually.

In 2000, the government made significant macroeconomic reforms: Privatizing Pakistan's state-subsidized utilities, reforming the banking sector, instituting a world-class anti-money laundering law, cracking down on piracy of intellectual property, and moving to quickly resolving investor disputes. After September 11, 2001, and Pakistan's proclaimed commitment to fighting terror, many international sanctions, particularly those imposed by the United States, were lifted. Pakistan's economic prospects began to increase significantly due to unprecedented inflows of foreign assistance at the end of 2001. This trend is expected to continue through 2009. Foreign exchange reserves and exports grew to record levels after a sharp decline. The International Monetary Fund (IMF) lauded Pakistan for its commitment in meeting lender requirements for a $1.3 billion IMF Poverty Reduction and Growth Facility loan, which it completed in 2004, forgoing the final permitted tranche. The Government of Pakistan has been successful in issuing sovereign bonds, and has issued $600 million in Islamic bonds, putting Pakistan back on the investment map. Pakistan's search for additional foreign direct investment has been hampered by concerns about the security situation, domestic and regional political uncertainties, and questions about judicial transparency.

On October 8, 2005 a magnitude 7.6 earthquake struck Pakistan, India, and Afghanistan. The epicenter of the earthquake was near Muzaffarabad, the capital of Pakistani-administered Kashmir, and approximately 60 miles north-northeast of Islamabad. An estimated 75,000 people were killed and 2.5 million people were left homeless. The disaster of such a huge magnitude galvanized an international rescue and reconstruction effort in support of the affected region. The earthquake cost Pakistan $1.1 billion in resettling those affected.

U.S. assistance has played a key role in moving Pakistan's economy from the brink of collapse to setting record high levels of foreign reserves and exports, dramatically lowering levels of solid debt. Also, despite the earthquake in 2005, GDP growth remained strong at 6.6% in fiscal year 2005-2006. In 2002, the United States led Paris Club efforts to reschedule Pakistan's debt on generous terms, and in April 2003 the United States reduced Pakistan's bilateral official debt by $1 billion. In 2004, approximately $500 million more in bilateral debt was granted. Consumer price inflation eased slightly to an average of 8% in 2005-2006 from 9.3% in 2004-2005.

Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. Pakistan's extreme poverty and underdevelopment are key concerns, especially in rural areas.

About two-thirds of Pakistan's live in rural areas and depend on agriculture for their livelihood. Unlike India, land reform was limited in Pakistan. As a result, less than half of arable land is held by a large number of small farmers, while the remainder is held by a small number of large landowners. There are a large number of landless sharecroppers and agricultural laborers.

Pakistan's agricultural sector is characterized by low productivity, limited investment, and a weak extension service. In addition, inefficient resource use, a skewed distribution of farm holdings, a thin land market reflecting insecure tenure, inefficient non-price allocation of water and irrigation systems in a drought-prone region, and poor quality inputs and infrastructure continue to hinder the sector. Food security based on selfsufficiency is a potentially costly policy and a major government priority.

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Page last modified: 29-01-2021 18:54:50 ZULU