ISLAMIC REPUBLIC OF PAKISTAN
As a relatively impoverished country, Pakistan is made-up of a large number of contributing forces that can greatly impact on its advancement. Stability is key to Pakistan's survival but this is indeed challenging for a nation consisting of its diverse ethnic make-up, regional rivalries, fundamentalists, Islamist elements, anti-Americanism, militarization of the economy, Taliban & al Qaeda terrorism pockets, a wide array of poverty, social difficulties, infrastructure deficiencies, etc.
At present for the most part, Pakistan is stable but serious threats remain. A first glance would reveal the nation appears to be improving economically but great challenges lie ahead in its political framework. In addition to these great internal forces, other external forces may also threaten the value of the rupee. Pakistan’s goal is clear; to stabilize the domestic and external risks in order to promote investment and growth thus increasing the standard of living for its large population of 173 million of which one-third live below the poverty line. Overviews of these dynamics that impact the Pakistani rupee are presented below.
POLITICS: independence from the United Kingdom in 1947.
The militarization of the Pakistani economy is clear with the military's central role in the functions of government and in much of the corporate affairs of the economy. The military dominates the nation thus a backbone to its stability; it is questionable whether or not that is positive. The delicate framework and core make-up of Pakistan is volatile with tremendous forces tearing at the country from all angles as Pakistan is a very challenging nation to govern with regional, ethnic, external and cultural pressures mounting. For example, the majority Sunni background in Pakistan do have hostilities towards the minority Shiites. A return to civilian rule took place in September 2008 with the election of President Zardari after over 8 years of military rule. Political instability and disputes since Pakistan’s inception as a country has mitigated economic advancement with persistent fiscal deficits, lower GDP growth, low foreign direct investment (FDI) and high inflation over the decades.
ECONOMY: recovery plan underway as economy turned sharply negative after a period of robust economic advancement from year 2000 with strong GDP growth output, price stability and an increase in trade. The economy turned for the worse in mid 2008 as inflation rose, GDP growth slowed ultimately reflecting with IMF financial support of 7.5 billion USD in November 2008 to help support the Pakistani economy during the global credit crisis. This funding package may inhibit Pakistan’s flexibility in setting its economic rebound agenda. Another detriment to the economy is the large bureaucracy and support for protectionist policies. One of Pakistan's main sources of hard currency is by borrowing abroad including support from the International Monetary Fund. The economy lacks large scale foreign investor confidence which reflects in Pakistan's low foreign investment which helps to keep the nation impoverished. Economic reforms include widening the tax net from the previous one percent of the population who only paid taxes to the masses with an implementation of a GST (Goods & Services tax). Inflation spiked in 2008 due to peak in oil, commodity prices with October 2008 inflation recorded at 25 percent. Inflation is forecasted to decline to 20 percent by July 2009.
Economic Statistics
GDP as measured by purchasing power parity stands at 454 billion USD (2008 with corresponding GDP/capita at 2,600 USD although most Pakistanis survive on 400 USD per year. Market GDP recorded at 161 billion USD (2008). Real GDP growth figures include 2008 at 5.4 percent, year 2009 forecasted at 1.5 percent, years 2004-07 ranged from 6 to 8 percent. Inflation quotes include year 2007 at 7.7 percent, February 2003 inflation at 3.5 percent, 2001 at 2.7 percent, year 1998 at 7.8 percent. Current account is in deficit at 8.5 percent of GDP for 2007-08 with the trade component in shortfall at 15 billion USD for 2008. The fiscal deficit increased to 7.4 percent of GDP in 2007-08 and is projected to retract to the 5 percent range for 2008-09. Year 2008 public debt has declined to 50 percent of GDP from 100 percent in 2001. Total external debt is measured at 43.2 billion USD (December 2008). Industries include textiles & clothing, food processing, paper products, beverages, agriculture, chemicals, construction and military hardware sales. United States and the United Kingdom are Pakistan's largest export markets.
POSITIVES: implementation of a GST tax will help reign in the country's massive underground economy, established export market in the EU with the likes of Germany, UK; industry privatization is moving ahead. CONCERN: poor income tax collection, inadequate infrastructure, dependent upon foreign oil with imports at 260,000 bpd (2005), high population growth rate requires high GDP growth rates in the range of 5 percent to maintain stability, substantial underemployment, electricity shortfalls, high infant mortality rate, child labor, high risk for infectious diseases.
BANKING SYSTEM: current liquidity pressures. There is a history of corruption amongst bureaucrats, politicians and amongst bankers who have been coerced into granting loans to the elite and powerful regardless if they qualified. Total foreign exchange reserves were measured at 9.12 billion USD as of December 2008 held at the State Bank of Pakistan (SBP) representing almost 3 months of import coverage. The net reserve level is a sharp rebound from the October 2008 low of 3.4 billion USD (less than 1 month of imports). High broad money growth may spark further inflationary fears. Policy discount rate is at 15 percent. The SBP is committed to a market flexible exchange rate regime.
REGIONAL: India, Afghanistan, Asia
Tensions with India (see 'Knowledge' section below) remain while Afghanistan is a major supplier of opium and other illicit drugs as Pakistan is a transshipment centre for the drug trade. Other neighboring countries include Iran of which Pakistan has very little to do with in trade. For the most part, Pakistan also has very little to with other countries in Asia except for China as trade for the most part is with EU countries and the United States.
KNOWLEDGE: India/Al-Qaeda/Islamic Militants
Since 1947, Pakistan and India have fought three wars. With the collapse of the former Taliban regime in neighboring Afghanistan, Pakistan's immediate clear and danger threat is internal domestic instability with terrorists associated with Osama bin Laden's al Qaeda and Islamic militant groups taking residency in certain areas of Pakistan. The potential is real for increased Islamic uprisings. The Mumbai, India attacks in November 2008 clearly indicate the inherent risk from Islamic militants, these attacks have further put India- Pakistan relations under further pressure.
The downside for Pakistan is the government’s strong support & U.S. ally on this war on terror is that some Pakistanis view the government as a traitor to Islam. The upside for Pakistan is that it is likely with increased U.S. military and NATO support in the region that al Qaeda and the Taliban will be knocked down militarily significantly.
A movement of rising anti-Americanism is taking place as despair amongst a large part of the Pakistani population is due to its inherent nature of cultural rifts presents a very volatile society. The solution to offset these domestic instability forces is to increase economic growth and raise the standard of living for the masses. A recent U.S. Pentagon report suggested that Pakistan within 25 years is vulnerable to a rapid and sudden collapse similar to what took hold in the former Yugoslavia Republic.
CURRENCY: ISO symbol 'PKR', Pakistani rupee. At time of review on February 24, 2009, the Pakistani rupee was valued at 79.825 PKR to 1 US-dollar ('USD') and/or 101.67 PKR to 1 Euroland euro (EUR). Flexible exchange rate system is in place. The Pakistani rupee depreciated tremendously during 2008 by upwards of 22 percent in relation to the USD.
Pakistan is a net beneficiary of large private capital inflows from remittances particularly from Pakistani labor working in the Middle East although this may slow as locales such as Dubai where a slow economy is taking place with the global recession.
CURRENCY HISTORY: the PKR has been in circulation since 1947 with national independence. Historical valuations include year 1995 at 31.64 PKR to 1 USD, July 1996 at 35.18, November 1996 at 40.07, July 1998 at 48.19, November 1998 at 54.88, November 1999 at 51.23, December 2000 at 57.78, March 2001 at 60.07, September 2001 at 64.07, and December 2002 at 58.31. The 1997-98 Asian foreign currency crises did impact the Pakistani rupee. By November 1998, the rupee depreciated to a level of 54.6 PKR to 1 USD from a level of 44 PKR to 1 USD in January 1998 representing a 20 percent drop in 11 months. The government made the Pakistani rupee fully convertible in June 1994, though rupee parity with other currencies was still determined by a managed float of a basket of currencies. Since January 2001, the PKR has been relatively stable versus the USD except during year 2008. Recent exchange quotes include January 2009 at 78.91 PKR to 1 USD, October 2008 at 80.11, July 2008 at 70.93, January 2008 at 62.47, January 2007 at 60.9, January 2005 at 59.47, January 2004 at 57.25, January 2003 at 58.12, January 2002 at 60.08.
CURRENCY FORECAST: continued slowdown in remittances from abroad coupled with a marginal international reserve position project continued modest depreciation for the Pakistani rupee with a year end 2009 target of 90 PKR to 1 USD as best estimated by BankINTRO.com In our view contradictory to popular opinion, we think that the USD has recently entered a multi-year bull market. Stability however is the wild card within Pakistan including a history of rampant government corruption. The key to the Pakistani rupee is an improving economic foundation which will accordingly help to keep Pakistan stable. If domestic economic growth stays subdued for a prolonged period, the downside risk to the currency could be significant as all the forces that currently hold the society together become unglued and the Pakistani rupee could fall to a level of 120 PKR or even higher to 1 USD. Exchange pressure will be tied to Pakistan’s large current account shortfall projected at 8 percent of GDP for 2009 of which capital inflows are required to help finance, the global credit crisis may make this challenging. Short term debt to net reserves is satisfactory at 27 percent. Currency risk is clearly associated with civilian political rivalries, domestic security issues in tandem with a deepening global recession. The Pakistani rupee warrants a higher risk category for currency safeness.
