ishrat husain : structural reforms in pakistan ’ s economy speech by mr ishrat husain, governor of the state bank of pakistan, public lecture at the indian business school, hyderabad, 7 october 2005. * * * pakistan is one of the few developing countries that was able to attain an impressive record of economic growth and poverty reduction in the first forty years of its existence. gdp growth rate until late 1980s averaged about 6 percent per annum and the incidence of poverty was lowered from 46 percent to 18 percent. inflation remained low and despite high population growth per capita incomes had almost doubled. this favorable situation was reversed in the decade of the 1990s. growth rates tumbled to an average 3 to 4 per cent and poverty resurged to 33 percent of the population. inflation was in double digits, large current account and fiscal deficits escalated debt – gdp ratios to over 100 percent. the country ’ s foreign exchange reserves fell to less than $ 1 billion, exports were stagnant, tax collection efforts were lackluster. the country was almost on the verge of a default crisis on its external payments in october 1999 when president musharraf took over the reigns of the government. he assembled an economic team of technocrats under the leadership of shaukat aziz to formulate and implement a strategy that prevented not only the payments crisis but also led to the revival of the economy. the team was given full support and a free hand in its work. i do not wish to dwell on the actual course of events but suffice to say that the outcome of the implementation of this strategy during the last six years is quite remarkable. gdp growth in 2004 - 05 reached 8. 4 percent after recording upward moving growth rates in the preceding three years ; inflation during the first five years of the present regime was lower than 4 percent, only in 2004 - 05 it exceeded 9 percent ; manufacturing sector output growth was over 15 percent, exports have doubled in us dollar terms in these five years, tax revenues have risen by 14 percent a year although tax - gdp ratio is still low. consolidated fiscal deficit is down to 3. 3 percent of gdp. current account was in surplus for three consecutive years turning to a modest deficit of 1. 5 percent of gdp in last fiscal year due to oil price shock. workers ’ remittance flows have multiplied four - fold to over $ 4 billion annually and foreign direct investment has witnessed a sharp escalation to $ 1. 5 billion, about 1.

2 / 3 objective as in the globalized world efficiency can improve only under a competitive environment. the breaking down of these artificial barriers has led to significant productivity gains and manufactured exports now account for 90 percent of the total exports. imports of all kinds of goods – capital, consumer, raw materials – are freely allowed into the country at negligible import duty rates. foreign investment regime in pakistan is also highly open and liberal. there are no restrictions or ceilings or prior approvals required for foreign investors to set up their business in pakistan for any sector of the economy – agriculture, real estate, retail trade, manufacturing, services, banking, insurance and other financial services. as long as they bring in their initial foreign investment and register it with the central bank, the foreign investors are free to repatriate their profits, dividends, royalties, technical fees, debt servicing, etc. through their bankers without any prior approval. foreign companies are allowed to raise funds from domestic sources, including bank loans, without any restrictions. they are treated equally with national firms in all respect and can bring in and out expatriate staff to run their businesses. deregulation of oil and gas telecommunication and civil aviation sectors have also brought about significant positive results. oil and gas exploration activity has stepped up in recent years and constant discovery and production from new gas fields operated by private sector companies have added new capacity to meet the growing energy needs of the country. independent power producers – both domestic and foreign private companies – have played a critical role in filling in electricity generation requirements of pakistan. telecommunication has witnessed a boom since the private sector companies were allowed licenses to operate cellular phones. one million new cellular phone connections are being added every month and the number of phones has already reached about 15 million. long distance international and local loop monopoly of pakistan telecommunications corporation has been broken and new licenses including for wireless local loop have been issued. the customers are reaping rich dividends as the prices of phone calls – local, long distance, international – are currently only a fraction of the previous rates. since the government recently announced the policy of allowing the private operators to fly on international routes, there has been a big uptake in the aviation business. domestic airfares have been cut by pia which had almost a monopoly and seat load factor has reached an all time high. pia and the private airlines are all scrambling for new planes to meet the pent up demand for air travel. despite these reforms, pakistan is facing many difficult