September 2006

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Pakistan An Economic Turnaround
September 2006
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Pakistans Turnaround Synopsis
Historical Bottlenecks Late 1990s
A Reinvigorated Tiger
International isolation
- Exports doubled - FX risen five fold -
Stable currency - Annual FDI doubled
Highly sanctioned
Near-zero GDP growth
Threat of sovereign default
Deep recession

• Sanctions removed
• Increased integration
• with global economy

- Growth quadrupled to 78 - Increased
wealth levels - Growing middle class
- Fiscal deficit halved - Inflation contained

• Recent international
• sovereign bonds
• issues oversubscribed
• KSE one of the best
• performing markets

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The Growth Story
Pakistan witnessing rapid and sustainable
economic growth
Nominal GDP (US billion) Real GDP Growth ()
Real GDP Growth 06 ()
13 CAGR

• One of the fastest growing economy in Asia
• Expected to surpass the US 200 billion mark by
  2010

Source Pakistan Ministry of Finance, Economist
Intelligence Unit, Abraaj Analysis
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The Growth Story (contd)
Wealth levels have increased and a large
middle-class is emerging
GDP per Capita (US PPP)
Household Income Distribution ()
6.9 CAGR

• Rising disposable income
• Increasing income distribution largely a result
  of decreasing unemployment
• Accelerating income growth across lower and
  middle segments of population

Source Economist Intelligence Unit, Pakistan
Federal Bureau of Statistics
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The Growth Story (contd)
Exports have become competitive and almost
doubled in last five years
Exports (US billion)
Exports ( of GDP), 2006
12.4 CAGR

• Low cost advantage spurring exports
• Broadening geographical reach and more access to
  US, EU and UAE markets
• Potential to increase and diversify target
  countries

Source Economic Intelligence Unit
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The Growth Story (contd)
International investors have begun to take notice
of the Pakistan story, however significant upside
remains as FDI flows are still far below regional
levels
Foreign Direct Investment (US million)
Foreign Direct Investment ( of GDP), 2006
61 CAGR

• Opening up of economy leading to strong foreign
  interest
• FDI inflow more than doubled in 2006
• Broad based inflow across sectors

Source Pakistan Ministry of Finance, Economic
Intelligence Unit
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The Growth Story (contd)
Significant decline in external debt
External Debt ( of GDP)
External Debt ( of GDP), 2006

• Consistent decline in external debt / GDP ratio
• Concerted effort to move away from poorly
  structured high-interest debt
• Allowing increasing government expenditure on
  value-added projects

Source Pakistan Ministry of Finance, Economic
Intelligence Unit
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The Growth Story (contd)
Rapidly increasing foreign exchange reserves and
a stable currency
Foreign Exchange Reserves (US billion)
Exchange Rate (Year-end, PKRUS)
44 CAGR

• Strong remittance flow and growing exports
  leading to accumulation of foreign reserves
• Reserves providing currency stability
• Standard Poors upgrade long-term local and
  foreign rating

Source Pakistan Ministry of Finance, Economic
Intelligence Unit
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The Turnaround Strategy
External debt re-profiling and fiscal reforms
were at the centre of the multi-faceted strategy
Fiscal Deficit ( of GDP)
Interest Payments ( of GDP)
16 decline p.a.

• Restructuring and debt write-off leading to
  reduction in interest payment
• Improved stability of economy manageable fiscal
  deficit
• Recent hike largely due to absorption of high oil
  prices

Excluding earthquake-related spending Source
Pakistan Ministry of Finance, State Bank of
Pakistan
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The Turnaround Strategy (contd)
Privatizations was another key focus
Privatizations (US million)
Current Privatization Pipeline

• A dynamic privatization program
• Strong political support

Source Privatization Commission of Pakistan
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The Turnaround Strategy
Financial sector reforms catalyzed economic
transformation
Bank Lending ( of GDP), 2006
Market Capitalization (US billion) P/E Ratio
(times)

• Financial sector transformation was the main
  driver of economic growth
• Increased availability of credit for all segments
  of the economy

Source Pakistan Ministry of Finance, Economic
Intelligence Unit
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The Turnaround Strategy
Creation of an enabling and governed economic
framework
Policy
Description

• All sectors are open to FDI with equal treatment
  of local and foreign investors
• 100 foreign equity allowed, and royalties,
  franchise fees, capital, profits, dividends etc
  all fully repatriable
• Attractive tax / tariff incentives package
• Low cost of doing business, one-window
  facilitation
• Reduction in corporate tax rate from 39 in 2005
  to 35 by 2007 for private companies

Investment Policy Environment

• Strengthening of the institutional capacity of a
  number of independent regulatory bodies in
  Pakistan that have developed management
  structures, technical expertise, technology and
  enforcement capacity compatible with
  international best practices
• Government is playing an effective role to
  transparently execute and institutionalize
  regulations designed to win the confidence of
  investors and general public

Regulatory Framework

• Transferring powers and responsibilities,
  including those related to social services from
  the federal and provincial governments to local
  levels
• Strengthening governance by increasing
  decentralization, transparency, accountability of
  administrative operations, and peoples
  participation in their local affairs

Power Devolution
Source Pakistan Board of Investment
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Abraaj Capital Investing in Foresight
Level 7, Emirates Towers Offices, P.O. Box
504905, Dubai, U.A.E. Tel. [phone]
Fax [phone] www.abraaj.com