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1. Structural data:

Geographical extension: 796,095 km2

Population size: 163.9 million

Population density: 206 inhabitants/ km2

Per-capita GDP: USD 890 (2007)

Capital: Islamabad

Currency: Pakistani rupee (PKR)

Exchange rate (Nov 08): PKR/USD 80.4

With per-capita GDP even falling short of USD 1,000 (2007) - or USD 2,570, accord-

ing to the World Bank s calculations, after adjustment for differences in purchas-

ing power - the Islamic Republic of Pakistan is among the worlds (and indeed the

Asian regions) poorest countries. On the basis of the Human Development Index

(HDI), which compares the quality of life in various countries, Pakistan is in the

bottom quarter of the global league-table. 24% of the population is languishing

beneath the poverty level (i.e. living on less than USD 1 per day). Pakistan is also

lagging far behind in terms of other social indicators. Further proof that the econ-

omy is still under-developed is provided by the economic structure, where the ag-

ricultural sector continues to play a major role. This sector, which still provides

employment for more than 40% of the workforce, accounts for around 20% of

GDP.

2. Political trends:

The constellation on both the domestic-policy and foreign-policy fronts remains

instable. Terrorist attacks, ethnically motivated acts of violence, aspirations to

autonomy in the territories bordering on Afghanistan, government crises and a

corrupt administrative apparatus continue to number - along with great poverty -

among the most urgent problems on the domestic-policy agenda. The present

year has been overshadowed by the parliamentary and presidential elections

which were brought forward but then failed to calm the climate in the domestic-

policy arena. There continue to be no clear majorities and no permanent coali-

tion alliances. Presidential elections became necessary (the president is elected

by the members of parliament) when the former state president, Pervez Mushar-

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raf, stepped down in August to forestall the threat of impeachment proceedings.

He had previously enjoyed the support of the United States and of Pakistans

army. The new head of state, who took office in September, is Asif Ali Zardari of

the governing Pakistan People's Party (PPP). Pakistan is only placed 138th

place in

a field of 179 countries tracked in the latest Corruption List published by

Transparency International. The fundamental problems namely resurgent Is-

lamic extremism and the large measure of political influence exercised by the

military are presumably hardly going to be solved in the foreseeable future.

Indications of dtente can be recognised on the foreign-policy front. For exam-

ple, two trading routes linking the Indian and the Pakistani parts of Kashmir

were reopened this October after having been closed for more than six decades.

Pakistan continues to be one of the USAs most important partners in the war

against terrorism, with the United States providing financial support in return. It

is admittedly the case that Pakistan is gradually putting an end to its interna-

tional isolation; on the other hand, the foreign-policy tack currently being

adopted, which tends to be pro-Western, remains highly controversial among

the population.

3. Macroeconomic development:

In contrast to the political situation, which is difficult, the countryseconomictrack-record looks more favourable. Over the past years, the free-market policy be-

ing pursued - marked by progress on the liberalisation front, by the privatisation of

state-owned enterprises and by a progressive opening-up of the economy to for-

eign interests - has sparked off an upswing whose momentum few countries have

managed to surpass. By way of illustration, real GDP has expanded by an average

of more than 7% p.a. over the past four years. The forecasts agree that high real

GDP growth of approximately 6% should be registered in the current year as well.

However, macroeconomic growth must be expected to slow significantly, to about

3%, next year on account of the deterioration in the global economic environment.

Above all exports and investment (key mainstays of the economy in recent years)

are set to lose a distinct amount of altitude due to more sluggish foreign demand.

The financial support forthcoming from western industrialised nations (the United

States in particular) and from international financial institutions will at least offset

this to a certain extent

The negative trend in the macroeconomic framework conditions is also taking its

toll. Inflationary pressure has accelerated to a noticeable extent over the course of

this year, and the inflation rate is presumably going to spike up from 7.6% (2007)

to approximately 20% in whole-year 2008. Indeed, rates of change have actually

been in excess of 20% since the middle of the year. Even though positive factors

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(the decline in oil quotations and the more anaemic pace of cyclical activity) are

going to make for a calmer price climate in the months ahead, the inflation rate is

probably destined to remain in the double digits in 2009. The decisive determinant

here is the sharp depreciation in the local currency, which is making imports ap-

preciably more expensive. The Pakistani rupee has forfeited more than 20%

against the US dollar in the course of the present year, and further currency losses

look likely. The state of public finances is likewise inauspicious: government-

budget deficits ought to widen again to 6%-7% of GDP in 2008 and 2009. The room

for fiscal manoeuvre is limited in any case: interest payments and military expendi-

ture alone swallow up more than 40% of government revenue.

4. Foreign trade:

One of the economys Achilles heels is its poor external position. The external

accounts have moved ever deeper into the red over the past few years, and this

negative trend has not been brought to a stop in the present year either. Heavy

import requirements, on the one hand, and poorly diversified (and - to make

matters worse - scarcely competitive) exports products, on the other, will add up

to a merchandise-trade deficit of virtually USD 15 billion in whole-year 2008. This

deficit trend can no longer be made up for by transfer payments within the

framework of international development aid, by remittances from Pakistanis

working abroad and by a more favourable debt-service constellation. The corol-lary is that the current account, which had still been in positive territory back in

2003, closed with a deficit of USD 8.3 billion (-5.7% of GDP) last year. The deficit

on the current account can be expected to widen to more than USD 10 billion in

the present year. Such deficits cannot be offset by direct-investment inflows, and

the countrys stock offoreign-currency reserves has also shrunk significantly over

the course of the present year from USD 14 billion to a mere USD 5.5 billion

(cut-off date: September 2008).

5. Financial status:

On account of the unfavourable trend in numerous indicators, Pakistans finan-

cial status continues to be poor. The volume of foreign indebtedness (about 95%

of which involves medium- to long-dated, predominantly public-sector liabilities)

has increased again to a relatively pronounced extent since 2006 after a multi-

year consolidation phase and will probably come to USD 43 billion, or there-

abouts, in the present year. It is true that external liabilities are comparatively

low as a proportion of GDP (at less than 30%), and the situation on the debt-

service front is also tending to look advantageous (the debt-service ratio is

probably going to correspond to less than 10% of export revenues in the present

year). Nevertheless, this is still tantamount to an enormous burden in view of the

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external disequilibria which exist and of the low level of currency reserves. The

country continues to be reliant on foreign support.

In the Country Credit Rating published in the September 2008 issue of the maga-

zine Institutional Investor, Pakistan came 98th out of a field of 177 countries

which received ratings, gathering 35.2 out of a possible total of 100 points.

Moodys awards Pakistan an FCR of B2.

6. Assessment:

Pakistans current macroeconomic performance is looking predominantly nega-

tive, and the outlook also tends to look poorly-aspected. Economic growth is los-

ing a noticeable amount of momentum, inflation remains in the double digits,

government-budget deficits are widening to 6%-7% of GDP and there are no in-

dications that a fundamental trend reversal could be in the offing regarding the

deficit-ridden external accounts. Other downside factors are the depreciation in

the local currency and the dwindling stock of currency reserves. Although there

is evidence that Pakistan has above-average growth potential in the long term,

not least on account of its large single market (the population of 164 million is

young and continuing to grow fast), economic prospects are quite unambigu-

ously being overlaid by political instability, which is inevitably putting pressure

on the countrys financial status as well. An indication of the weakness of Paki-stans financial status at the moment is that spreads have widened to a pro-

nounced extent over the past few months.

Completed on 21st November 2008

Author:

Manfred Heinich

Tel: +49/89/2171-21308manfred.heinich@bayernlb.de

Editorial staff:

Economic Country and Sector

AnalysisEconomics and Research

volkswirtschaft@bayernlb.de

www.bayernlb.de

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