2009 Index of Economic Freedom

Quick Facts

Population:

• 159.0 million

GDP (PPP):

• $375.4 billion
• 6.9% growth
• 6.0% 5-year compound annual growth
• $2361 per capita

Unemployment:

• 7.5%

Inflation (CPI):

• 7.8%

FDI Inflow:

• $4.3 billion

Pakistan’s economic freedom score is 57, making its economy the 102nd freest in the 2009 Index. Its score is 1.4 points better than last year, reflecting modest improvement in six of the 10 components of economic freedom. Pakistan is ranked 19th out of 41 countries in the Asia–Pacific region, and its overall score is below the world average.

Pakistan has pursued reform to improve its overall business climate and stimulate private-sector development, but these efforts have been interrupted and undermined by political instability, producing only marginal improvements. Despite some success in achieving steady economic growth and reducing poverty, Pakistan lags significantly behind other countries in the region.

Pakistan scores above the world average only in business freedom, fiscal freedom, and government size. Challenges to overall economic freedom include a wide range of institutional weaknesses. Trade freedom remains burdened by high tariffs and non-tariff barriers. Despite ongoing reforms to cut tax rates, broaden the tax base, and increase transparency, the tax system is complex and inefficient. Pakistan's financial market is constrained by burdensome regulations and bureaucracy. The judicial system suffers from a serious case backlog, understaffed facilities, and poor security. Considerable corruption taints the judiciary and civil service.

Background Back to the top

Pakistan, the second-largest Muslim country, has alternated between unstable democratic governments and military rule since its independence from Britain in 1947. It held largely successful democratic elections in February 2008 but continues to face terrorist attacks and an intensified insurgency along the border with Afghanistan. The economy benefited from political stability and liberalization under former President Pervez Musharraf, who opened Pakistan to international trade and privatized state-run industries. Today, Pakistan faces a severe balance-of-payments crisis and can cover only about four–six weeks’ worth of imports. It is currently negotiating with the International Monetary Fund on a balance-of-payments support package to avoid defaulting on debt payments.

Business Freedom 72.5 Back to the top

The overall freedom to conduct a business is relatively well protected under Pakistan's regulatory environment. Starting a business takes an average of 24 days, compared to the world average of 38 days. Obtaining a business license takes about the world average of 18 procedures and 225 days, but costs are high. Closing a business is relatively easy and straightforward.

Trade Freedom 65.6 Back to the top

Pakistan's weighted average tariff rate was 12.2 percent in 2006. Liberalization has progressed, but import bans and restrictions, import taxes, inconsistent and burdensome regulations, non-transparent government procurement, export subsidies, weak enforcement of intellectual property rights, and corruption add to the cost of trade. Ten points were deducted from Pakistan's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 80.4 Back to the top

Pakistan has moderate income tax rates and high corporate tax rates. The top income tax rate has been reduced to 25 percent, and the top corporate tax rate has been reduced to 35 percent. Other taxes include a general sales tax (GST) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 10.6 percent.

Government Size 90.7 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 17.6 percent of GDP. Privatization has been revitalized as part of a broader reform agenda.

Monetary Freedom72.2 Back to the top

Inflation is relatively high, averaging 7.9 percent between 2005 and 2007. The government controls pharmaceutical and fuel prices, subsidizes agriculture, and influences prices through state-owned enterprises and utilities, including electricity and water. Ten points were deducted from Pakistan's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom40.0 Back to the top

Foreign investment receives national treatment, and foreign investors may own 100 percent of most businesses, except in certain sectors. Investment screening occurs if investors apply for special incentive packages or government tariff protection and price guarantees. Foreign ownership in agriculture is capped at 60 percent, and minimum initial investments are required in agriculture, infrastructure, and social services. Deterrents to investment include security threats, political instability, civil unrest, corruption, poor infrastructure, weak contract enforcement, inconsistent and arbitrary regulation, and a lack of coordination between the federal and regional governments. Restrictions on foreign exchange accounts include the need for government approval in some cases. Payments, transfers, and capital transactions may be subject to approval, quantitative limits, and other restrictions.

Financial Freedom40.0 Back to the top

Pakistan's financial system has undergone restructuring. The state-dominated banking sector has gradually moved toward a more privately owned system as a result of consolidation, improved transparency, and modernization of the regulatory framework. About 80 percent of Pakistan's commercial banks are now in private hands. Despite this progress, the sector remains concentrated and vulnerable to government influence. Five domestic banks account for over 80 percent of assets. The government has a majority stake in the largest commercial bank and controls several specialized banks. Although restrictions on the number of foreign bank branches have been removed, the central bank must approve all new openings. The reform process has gradually advanced across Pakistan's financial sector. Foreign investors are now allowed to hold up to 100 percent of the equity share of companies operating in the life and general insurance sectors. However, competition remains limited by state domination, and a state-owned firm accounts for over 70 percent of the market. There are three stock exchanges, the largest of which is based in Karachi.

Property Rights30.0 Back to the top

Pakistan's judiciary, separate by law from the executive, remains hampered by poor security for judges and witnesses, sentencing delays, a huge backlog of cases, and corruption. The government has taken steps to close down several pirate optical disc factories and has somewhat improved the enforcement of intellectual property rights.

Freedom From Corruption24.0 Back to the top

Corruption is perceived as pervasive. Pakistan ranks 138th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption among executive and legislative branch officials is viewed as widespread.

Labor Freedom54.5 Back to the top

Pakistan's rigid labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is low, but the difficulty of laying off a worker creates a disincentive for additional hiring.