Is Pakistan's Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth

Jesus Felipe, J. S. L. McCombie, Kaukab Naqvi
2010 Oxford Development Studies  
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more » ... von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Series is a forum for stimulating discussion and eliciting feedback on ongoing and recently completed research and policy studies undertaken by the Asian Development Bank (ADB) staff, consultants, or resource persons. The series deals with key economic and development problems, particularly those facing the Asia and Pacific region; as well as conceptual, analytical, or methodological issues relating to project/program economic analysis, and statistical data and measurement. The series aims to enhance the knowledge on Asia's development and policy challenges; strengthen analytical rigor and quality of ADB's country partnership strategies, and its subregional and country operations; and improve the quality and availability of statistical data and development indicators for monitoring development effectiveness. Abstract This paper examines the extent to which Pakistan's growth has been, or is likely to be, limited or constrained by its balance-of-payments (BOP). The paper begins by briefly considering the BOP-constrained growth model in the context of demand and supply-oriented approaches to economic growth. Evidence presented suggests that Pakistan's maximum growth rate consistent with equilibrium on the basic balance is approximately 5% per annum. This is below the long-term target rate of a growth of gross domestic product of 7-8% per annum. This BOP-constrained growth approach provides some important policy prescriptions for Pakistan's development policy. Real exchange rate depreciations will not lead to an improvement of the current account. Pakistan must lift constraints that impede higher growth of exports. In particular, it must shift its export structure to products with a higher income elasticity of demand and sophistication. These include Pakistan's nuclear tests in 998 and the subsequent loss of international aid, especially from Japan and the United States. It was only after 200 that aid was restored. 2 As of December 2008, Pakistan's foreign currency long-term debt was rated CCC by Standard and Poor's. The ranking of local currency long-term debt was CCC+. Pakistan has in the past been able to run current account deficits that have been largely covered by overseas development assistance and expatriate workers' remittances. Even though Pakistan's exports experienced a growth of 6% per annum between 2002-200 and 2005-2006, this is dwarfed by a growth of imports of 29% over the same period.
doi:10.1080/13600818.2010.525351 fatcat:lmyralldeba5nctlz6fhhsabtu