Overview of Pakistan's Economy
OVERVIEW OF PAKISTAN'S ECONOMY
The economy of Pakistan is the 27th largest in the world in terms of purchasing power parity (PPP) and 38th largest in terms of nominal Gross Domestic Product. In 2014-15, the GDP was recorded at 4.24 percent up from 4.02 percent in 2013-14.
Traditionally the economy of Pakistan has been semi- industrialized with agriculture as the major contributor to GDP, with centers of growth along the Indus River. Over the decades services and industrial sectors have developed significantly. The service sector has grown to become the biggest contributor to GDP, calculated at 58.8 percent in 2014-15. During the same period, the agricultural and industrial sector respectively accounted for 20.9 percent and 20.3 percent of the GDP.
With a large population, majority of which is young, Pakistan is a consumption oriented economy. Consumption, investment and exports are the drivers of the country with exports being the biggest driver of economic growth. Most of Pakistan’s exports are to Afghanistan, United States of America, United Arab Emirates, European Union, the United Kingdom and the Middle East. Major exports include agricultural products, textile products, sports goods, leather & leather products, surgical instruments, light engineering goods and services. The import bill accounts mostly for the import of fuel, heavy machinery and industrial equipment. Major sources of imports are China, Saudi Arabia, United States, Malaysia, United Arab Emirates, United Kingdom, the European Union and Japan.
Pakistan is a fast urbanizing country. The biggest industrial hub is the port city of Karachi (Sindh Province). Other industrial centers are located in major cities of the Punjab Province. A vast population lives outside major urban centers in small towns and villages practicing traditional trades of economy i.e. agriculture, animal husbandry and small scale cottage industry.
The country’s economic management is based on liberalization including privatization of state-owned corporations as well as de-regulation and economic restructuring. The objective is to create a market-based competitive economy through innovation and investment. Pakistan is implementing extensive fiscal control programmes aimed at reducing non- developmental expenditures and increasing government revenues through tax reforms.
I n 2014 Paki stan ranked 3rd amongst the top ten best per formi ng capi tal markets in the worl d for the thi rd consecutive year. A series of initiatives have helped stabilize the capital market. This has led to a stable financial outlook on the long-term rating by Standard & Poor.
The historical agreement with the Chinese Government on China-Pakistan Economic Corridor (CPEC), good reviews from IMF, issuance of Ijara Sakuk Bond, Euro Bond after a period of 9 years, decline in unemployment rate from 6.2 to 6.0 percent all point to a faster growing economy.
MAIN ECONOMIC SECTORS
In recent years, the services sector has grown at a considerably faster rate than the commodity producing sector of the Pakistani economy. It has emerged as the most significant driver of economic growth. In 2014-15 the services sector contributed 58.8 percent of the GDP and registered a growth rate of 4.95 percent. This sector has potential for further growth.
The sub-sectors are: Transport, Storage and Communication; Wholesale and Retail Trade; Finance and Insurance; Housing Services (Real Estate); General Government Services (Public Administration and Defense); and Other Private Services (Social Services).
During 2014-15, the growth of these sub-sectors were as follows: Transport, Storage and Communication - 4.21 percent, Wholesale and Retail Trade - 3.38 percent, , Finance and Insurance - 6.18 percent, Housing Services - 4.0 percent, General Government Services - 9.44 percent and Other Private Services - 5.94 percent.
- Pakistan is home to a host of multinational companies and financial institutions. There is room for further investment in fi nancial and insurance markets.
- The demand for large scale commercial transportation and mass-transit systems is growing with the expansion of road infrastructure. Foreign investors can take advantage of this opportunity and invest in the transport sector.
- With a 190 million population, over 50 percent of which is the middle class, Pakistan is now a consumption driven society. Demand for branded products and international franchises is also increasing as new and modern shopping malls are coming up in major cities.
- There is tremendous potential of investment in the tourism industry in Pakistan which is endowed with many tourist attractions. These are historic sites such as remnants of the Indus Valley Civilization at Mohenjo-daro, Harappa and Taxila as well as architectural marvels of the Mughal era and the breathtaking beauty of Gilgit-Baltistan where the second highest peak of the world i.e. K-2 is located.
Pakistan has a rich and vast natural resource base covering various ecological and climate zones. It also has one of the largest canal water irrigation systems in the world. This gives the country the potential for producing a variety of food commodities. Land totaling 22.45 million hectares is already under cultivation, 16.5 million hectares of which are located in the Punjab Province.
Pakistan has huge dairy industry, with the country ranking fourth among milk producing countries with a production of 45,529 tons of milk which is worth Rs. 177 billion (approximately US$ 1.77 billion). This sector has immense potential for further development . Milk production can easily be multiplied by applying mechanized farming techniques and scientific breeding methods. Foreign investors have found the dairy sector as an attractive avenue for investment.
Livestock and Poultry
Pakistan has the 3rd largest livestock population in the world. Traditionally this sector has been dominated by small producers to meet their food security needs and supplement this income. The livestock and poultry sector performs a vital role in Pakistan’s economy with contribution of around 12 percent of GDP. During 2014-15, livestock share in the agriculture sector value addition stood at 56.3 percent. Livestock recorded a growth of 4.12 percent. Major livestock and poultry products include meat, eggs, animal and hides. The major share of production is consumed locally. Meat demand in Pakistan is growing at approximately 6 percent per annum and there is increased potential investment in production and distribution of meat, poultry and good quality slaughters houses.
Pakistan has a total coast line of 1050 km. with a total fishing area of approximately 300270 sq.km. These fishing areas are rich in marine life and are home to species of commercial significance. Apart from marine fisheries, inland fisheries (based in rivers, lakes, ponds, dams etc.) are also commercial significant. Fisheries add substantially to the national income through export earnings. In 2014-15 the fisheries sub-sector registered a growth rate of 5.75 percent.
With a share of 11.1 percent in value addition of agriculture sector crops contribute 2.3 percent to the GDP. This sub-sector has grown mildly at 1.09 percent over the last year. Similarly growth has been registered production of crops such as onion, grams, lentils, chilies and potatoes. The fruit and vegetables production has remained stable.
Cotton Ginning has 7.4 percent share in the crops subsector and 2.9 percent contribution in agriculture sector and contributes 0.6 percent in GDP of the country. Cotton ginning has witnessed significant growth registered which was at 7.38 percent last year.
- Of the total 16.5 million hectares of cultivable land in Punjab, a vast 1.7 million hectares is still available for corporate farming.
- As much as 30% of horticultural produce that goes to waste every year can be converted into economic gain by investing in agribusiness value chain industries.
- Despite being 4th largest milk producer globally and an average annual milk demand growth of 20 percent, only 8 percent of milk is processed in Pakistan. There is significant potential for setting up processing units and chillers for local consumption and export.
- Despite having the 3rd largest livestock population, the average yield of milk per animal is one of the lowest in the world. Opportunity for investment exists in breed improvement, animal husbandry, veterinary medicines and genetic research labs.
- Meat demand in Pakistan is growing at 6 percent per annum. Fattening farms using modern techniques are a potential area of investment. Likewise, slaughter houses, meat processing units, Halal meat export, organic farming are significant areas of investment and growth potential.
The industrial sector in Pakistan contributes 20.30 percent to the GDP. It has four sub-sectors including mining and quarrying, manufacturing, electricity and gas generation and distribution, and construction. Each sub sector of the industrial sector has its own role and significance in the economy. Performance of these sub-sectors is given below:
Manufacturing sector accounted for 13.3 percent of GDP and employed 14.2 percent of the total employed labour force. There are three subsectors: Large Scale Manufacturing, Small Scale Manufacturing and Industrial processing.
Large Scale Manufacturing (LSM) contributes 10.6 percent of GDP and dominates the overall manufacturing sector, accounting 80 percent of the sector share. Small Scale Manufacturing accounts for 1.7 percent of total GDP and 13.0 percent of Manufacturing. Industrial processing accounted for only 7.0 percent of overall Manufacturing sector.
The manufacturing sector showed growth during July-March 2014-15 in products such as Iron and Steel at 35.63 percent, Automobiles at 17.02 percent, Leather Products at 9.62 percent, Electronics at 8.21 percent, Pharmaceuticals at 6.38 percent, Chemicals at 5.94 percent, Non-Metallic mineral products at 2.56 percent, Petroleum Products at 4.73 percent, Fertilizers at 0.95 percent and Textile at 0.50 percent.
The contribution of construction in industrial sector is 12.0 percent. It provides employment opportunities to 7.33 percent of labour force. This sub-sector has potential for growth as demand is high, especially for low cost housing. The construction sector recorded a growth of 7.0 percent last year.
Electricity generation & distribution and Gas Distribution
This sub-sector of industr y plays an impor tant role in development of the country and also contributes to the growth of all sectors of the economy. Its share in industrial sector is 8.2 percent.
Mining and Gems
Pakistan has enormous mineral potential including precious metals and dimension stones. Availability of abundant raw material, low cost of production, talented, artisans and mining concessions by the government makes this a primary sector for investment.
Pakistan has abundant reserves of coal, copper, rock salt, limestone and onyx marble, China clay, dolomite, fire clay, gypsum, silica sand and granite, as well as precious and semi- precious stones. This sub-sector contributes 2.9 percent of GDP. Mining and quarrying recorded a growth of 3.8 percent in 2014-15.
Pakistan Mineral Development Corporation offers joint venture in the following projects:
- Gold and Base Metals Exploration in the Northern Areas of Pakistan
- Coal Briquetting Plants
- Coal mining for small thermal power plants
- Production of Ultra Refined Salt
Pakistan is the 8th largest exporter of textile products in Asia. This sector contributes 8.5 percent to the GDP and provides employment to 40 percent of the industrial labour force. Pakistan is the 4th largest product of cotton with the third largest spinning capacity in Asia. The major markets of Pakistani yarn during 2011-12 were Bangladesh, Turkey, Egypt and Colombia.
Development of the textile Industry and making full use of its abundant resources of cotton has been a priority area in industrial policy. Following the GSP Plus Agreement with the European Union, Pakistan products now have a competitive edge in the European market.
- As the 4th largest cotton producer and well developed textile industry, significant opportunities exist in setting up value-addition units, such as apparel lines.
- With the rising quantity and quality of domestic consumption, the textile industry is looking to expand capacity to meet the local demand. This provides investment opportunity.
- The investors in textile sector can take advantage of the Pakistan’s GSP Plus Status with European Union, which allows Pakistani products to enter the EU markets on concessional rates.
As the Pakistani economy develops, the country face a severe power deficit as the demand for electricity has grown at a faster pace than the generation capacity. Power deficit is estimated to cost the economy 2 percent of GDP per annum. Current power deficit stands between 5,000- 8,000 MW. Current energy mix for power generation is heavily dependent on power generation (approximately 70 percent of generation mix). The Government’s focus is to encourage investments in indigenous resources to generate cheap electricity such as coal, nuclear, hydropower, solar and wind energy generation.
Pakistan offers attractive incentive packages for power generation.
- Guaranteed uptake of power produced by Independent Power Producers (IPP) at profitable prices per unit.
- Liberal and transparent policy for investors to set up IPP projects.
- One-Window facilitation for power projects – Private Power Infrastructure Board (PPIB).
- Guaranteed Power Purchase Agreement (PPA) for IPPs, backed by sovereign guarantee of Government of Pakistan (GoP).
- 20 percent return on wind energy and between 14-17 percent return on equity in coal and solar energy.
PROSPECTS OF ECONOMIC GROWTH
Year 2014-15 was a good year for Pakistan’s economy, with projected GDP growth crossing 4 percent, driven by vibrant manufacturing and service sectors and improving energy availability.
With tax reforms and collection and restricted current and development expenditure, the economic indicators have improved. The Inflation Index (CPI) is the lowest since 2003, steady at 4.8 percent and the fiscal deficit is contained at around 3.8 percent of GDP. External reserves have grown with coordinated monetary and exchange rate policies. Private investment is also on the rise along with increased FDI.
In addition to monetary and fiscal policies, Pakistan’s recent economic growth has been driven mainly by the services and manufacturing sectors. Acceleration in growth of large-scale manufacturing comes from strong performance of agro-based industries, iron and steel, construction, cotton yarn and textiles. On the demand side, growth continues to be driven by increase in household consumption.