As a relatively backwards society, 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.,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 the rupee. Paksitan'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 148 million of which 32 percent live below the poverty line. An overview of these dynamics that impact the Pakistani rupee are presented below.
POLITICS: independence from the United Kindom in 1947. In October 1999, then Prime Minister Sharif's government was overthrown by the military with the chief of army staff, General Pervez Musharraf taking over executive command of Pakistan. At the time, Pakistan was in a state of economic turmoil and disarray. In June 2001, General Musharraf officially became President of Pakistan and was granted the Presidency until 2007. Pakistan is under the format of a centralized military leadership rule with a civilian government running the government as a new Federal government was elected in November 2002 although President Musharraf holds the nation's power. President Musharraf granted himself extraordinary powers including the right to dismiss an elected parliament. During Pakistan's 56 years of independence, the military has now ruled for 28 of those years. President Musharraf may provide for responsible leadership, possibly eliminate corruption from previous democratic elected governments and root out the rampant corruption that has existed for years, implement economic reforms and return stability to society. President Musharraf seems to be a moderate and seems to have the majority support and confidence at least of the urban Pakistanis.
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 postive. 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. More recently in October 2002, another significant looming political risk to Pakistan is the parliamentary election victories for the Islamic parties which may further attempt to try to destabilize Pakistan.
ECONOMY: over the last 2 years, great strides have been made in macro-economic stability especially when compared to 1998 when Pakistan was pushed to near bankruptcy. This was in part due to the United States and other Western countries imposing economic sanctions to punish Pakistan for nuclear tests conducted in May 1998 although sanctions were later eased after tests were stopped. During 1999-2000, Pakistan benifitted from an improvement in macroeconomic performance, rebound in exports to east Asia and a greater degree of exchange rate stability following the rapid depreciation in previous years. Both foreign aid and remittances offset the current account shortfall with annual remittances in the range of $3 billion USD/year and aid at $2 billion USD/year, a signicant increase after September 11, 2001 as many Pakistanis feared losing their monies to terror investigations abroad. This accordingly has boosted the Karachi stock market exchange value in 2002 as the KSE-100 zoomed ahead at over 110 percent accounting for one of the world's best performances. Pakistan's large public debt cripples social spending as defense and debt servicing represent a disportionate large share of the budget at 80 percent of the budget. 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).
Economic Statistics
GDP as measured by purchasing power parity is at $300 billion USD (2001), GDP/capita at $2,100 USD (2001) although most Pakistanis survive on $400 USD/year. Record low interest rates have helped to fuel real GDP growth as 2002 came in at 3.6 percent, 2001 at 2.1 percent, 2000 at 4 percent. Inflation has remained low with year February 2003 inflation at 3.5 percent, 2002 at 3.3 percent, 2001 at 2.7 percent, 1998 at 7.8 percent. Current account for 2002 was essentially balanced helped by large capital inflows from remittances - Pakistanis working abroad particularly in Middle East oil fields, current account was in deficit for year 2000 at 1.3 percent of GDP, 2001 at 2.3 percent. Fiscal deficits are in the 6 percent range for 2002 although 2003 is forecasted to drop to 4.6 percent. Year 2001 unemployment is at 6 percent. Year 2001 net public debt at 100 percent of GDP although declining. Total external debt is measured at $34 billion USD (December 2002) and domestic debt at approximately $25 billion although some foreign debt has been written off for Pakistan's cooperation in the war against terror (see below 'Knowledge' section for more details). Agriculture is an important industry segment accounting for 25 percent of GDP and 44 percent of the labour force including production in wheat, cotton, sugar cane. Industry accounts for 24 percent of output while services are at 50 percent. Industries include textiles & clothing, food processing, paper products, beverages and construction and military hardware sales. The United States and the United Kingdom are Pakistan's largest export markets. Foreign loans and grants account for 25 percent of all government revenues.
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 literacy rate particularly with women, poor tax collection, high public debt, very poor infrastructure with inadequate telecommunication system with only 4 million phones approximately, dependent upon foreign oil, military spending is very high at 5 percent of GDP, high population growth rate requires high GDP growth rates in the range of 5 percent to maintain stability.
BANKING SYSTEM: history of corruption amongst bureaucrats, politicians and bankers, particularly within the Pakistani banking system where banks have been coerced into granting loans to the elite and powerful regardless if they qualified. Since President Musharraf has taken power, the banking sector has strenghened with non-performing loans falling to 8.85 percent from the 20 percent level as financial restructuring within corporate and banking sectors have taken hold. It is also important to note that rumours and suggestions from several Pakistani banking experts that have called on the government to "Islamicize" the country's economy by abolishing interest rates (ie. zero interest rates therby creating no incentive for capital formation) and avoiding deficit spending are true to a limited degree. Pakistan is implementing a dual or parallel banking system that follows rigid Islamic banking ideology, this parallel system in actual fact will not result in a significant devaluation for the Pakistani rupee. Total liquid reserves are at $10.32 billion USD as of March 29, 2003 at the State Bank of Pakistan (SBP) representing almost 1 year of import coverage. This reserve position is impressive considering this figure is growing significantly compared to year 2000 when the SBP only had $1 billion USD in reserves. High broad money growth may spark inflationary fears.
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 neighbouring countries include China and Iran of which Pakistan has very little to do with in trade. For the most part, Pakistan has very little to with other countries in Asia as trade is with EU countries and its historical ally, the United States.
KNOWLEDGE: since 1947, Pakistan and India have fought three wars. Armed stand-off with India over Kashmir remains as Muslim holy warriors want control of this region. In BI.C's view, the nuclear war threat is all hype and the theatrics will continue as this is more for political grandstanding. Both India and Pakistan have test fired short-range missiles with nuclear strike capability in March 2003. Pakistan is currently building a second nuclear facility for energy production. The nuclear stand-off is a deterrent as it helps to consolidate political power while providing a sense of security for each of their respective countries. With the ending of nuclear tests in 1998, the United States has since removed all economic sanctions.
With the collapse of the former Taliban regime in neighbouring 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 after Gulf War II completes in Iraq (spring 2003). However, Pakistan has received $600 million USD from the United States along with the elimination of $1 billion USD in bilateral debt in economic benefits for Pakistan's cooperation with the United States over terrorism. In addition, several governments and international banks have rescheduled $12.5 billion USD in Pakistani debts up to 38 years ammortization. Upwards of 1,000 U.S. soldiers & FBI agents are currently in Pakistan helping to fight the war on terror. The downside for Pakistani President Musharraf's strong support & US ally on this war on terror is that many Pakistanis view President Musharraf as a traitor to Islam. A movement of rising anti-Americanism is taking place as dispair amongst a large part of the Pakistani population is due to its inherint 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.
CURRENCY: ISO symbol 'PKR', Pakistani rupee. At time of review on April 4, 2003, the Pakistani rupee was valued at 57.75 PKR to 1 US-dollar ('USD'). Flexible exchange rate system is in place. The Pakistani rupee appreciated slightly versus the USD in 2002 by a modest 9 percent due to the USD entering a bear market coupled with Pakistan being a net beneficiary of large private capital inflows from remittances.
CURRENCY HISTORY: 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 crisis 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 stable versus the USD.
CURRENCY FORECAST: continued remittances from abroad supported by a healthy international reserve position will give the Pakistani rupee a continued modest appreciation for year end 2003 at 55 PKR to 1 USD as estimated by BI.C. Although the US-dollar has entered a steady decline, Pakistan's trade difficulties will be mitigated by a strengthening euro which will make Pakistani products cheaper in important export markets in the European Union. Stability however is the wild card 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 stalls suddenly, 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 70 PKR or even higher to 1 USD. Greater currency depreciations would be measured against an appreciating Euroland euro 'EUR'. Currency risk is clearly associated with political domestic security issues coupled with external events balanced by a relatively stable economy and fairly large reserves. The Pakistani rupee warrants a higher risk category for currency safeness.
UPDATED: April 4, 2003
