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Political turbulence, low investment and fiscal mismanagement have impeded Pakistans economic development. While income and expenditure grew over the 2006-2011 period, per capita disposable income has yet to reach US$1,000. Political volatility and extensive rural poverty present major obstacles to national investment. Nonetheless, a large and expanding population plus healthy projected increases in income and spending levels give the South Asian market significant commercial potential.
EXECUTIVE SUMMARY
Over the 2006-2011 period, per capita annual disposable income in Pakistan grew by 18.6% in real terms, to reach PKR80,565 (US$934) in 2011. Per capita consumer expenditure performed slightly better, climbing by 22.2% in real terms over the same period to reach PKR76,721 (US$889) in 2011; The 40-44 age bracket was predominant among the most affluent, making up 28.3% of individuals in the uppermost gross income bracket of over US$150,000 (constant terms) in 2011. High-ranking positions in Pakistani business and politics are commonly held by individuals, generally men, in this age group; In 2011, 36.5% of the population aged 15+, or 47.4 million individuals, belonged to social class D. and another 42.0 million people, or 32.3% of the population aged 15+ belonged to social class E. While a huge number of people are living on very limited incomes, there are also opportunities for business models and commercial devices, such as discounters, private labels, no-frills goods and services, and price promotions; Pakistan has a substantial middle class made up of households with between 75.0% and 125% of median income which consisted of 12.3 million households in 2011, or 42.4% of the total number of households. This marked a 10.4% increase over the 2006-2011 period, on the back of population growth; Hotels and catering is projected be the most dynamic consumer spending category over the 2013-2020 period, expanding 41.3% in real terms, followed by education (38.6%) and health goods and medical services (37.3%); Pakistani consumers spend on alcoholic beverages and tobacco in inverse proportion to their income: in 2011, decile 1 contributed 12.2% of outlay on this category against 6.0% from decile 10. This is quite unusual as under the countrys Islamic law, alcohol is strictly forbidden, and smoking is more common in lower-income groups.
Chart 1 Per Capita Disposable Income in Asia Pacific and Australasia: 2011
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perform slightly better, with a 4.6% upswing in 2012 followed by a 2.3% rise in 2013, underpinned by respectable annual real GDP hikes of 3.4% and 4.7% in 2012 and 2013 respectively. Pakistans per capita annual disposable income will post a tepid hike of 7.3% in real terms over the 2013 -2020 period, with consumer expenditure projected to expand by 7.6% over the same period. These figures are well below the growth posted in the 2000-2007 period prior to the global economic crisis, when real per capita annual disposable income increased by 22.0% and real consumer expenditure by 24.0%, as an extensive programme of economic reforms combined with low interest rates, generous liquidity and impressive external demand saw strong real annual GDP growth over the 2000-2007 period. The countrys savings ratio will softe n marginally from 4.4% of disposable income in 2012 and 2013 to 4.1% in 2020, as Pakistans low annual incomes move gradually upwards, slightly improving consumer confidence. The weak forecast suggests that marketers and planners should thoroughly research the specifics of Pakistans consumer market before attempting a market entry, while players already active in the country should be braced for challenging trading conditions through to 2020 and amend their strategies accordingly.
Chart 2 Per Capita Annual Disposable Income, Spending and Savings Ratio: 2006-2020
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Euromonitor International from national statistics/trade sources/OECD Per capita disposable income and consumer spending are expressed in constant 2011 prices, fixed 2011 US$ exchange rate. Data for 2012-2020 are forecasts.
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Pakistans total gross income map for 2011 features one hot spot the red area that shows the highest total income which demarcates a young age spectrum of 15-30, corresponding to a gross income range of US$550 to just over US$2,500 per capita. Demographics are at play in the formation of this hot spot: Pakistans population distribution is heavily skewed towards the young, with every five-year age bracket smaller than all its younger equivalents. Either still in full-time education or in fairly junior positions in the workforce, members of this cohort have very limited earning power but are interesting to marketers for their sheer weight of numbers the 15-29 age groups contained a total of 62.3 million individuals in 2012, or 30.5% of the total population and rising income. Among Pakistani teenagers aged 15-19, fashion and gadgets such as mobile phones are popular purchases, and Western brands enjoy cachet. Marriage at a young age (especially for women and girls) is fairly common in Pakistan, in particular in rural areas. As a result, many 20-somethings have young children and their spending will go on equipping the home, which is often shared with older generations, and acquiring childcare paraphernalia, toys and schoolbooks. In urban areas, where lifestyles tend to be more metropolitan and modern, Pakistanis in their 20s will commonly still be studying or pursuing careers, and their outlay will go on books, laptops and socialising with friends.
Chart 4 Total Gross Income Map: 2011
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Euromonitor International from national statistics The horizontal axis depicts the age of individuals and the vertical axis the distribution of per capita income by annual gross income brackets. The shading refers to the total income in thousand US$. The closer to red, the larger the amount of total income in that age and income range.
Chart 5
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number of households between 2012 and 2020 will be seen in the income bracket of US$25,000-US$35,000 (in constant terms), which is expected to expand by 54.6% to reach 401,700 households in 2020. Every income bracket above US$10,000 is forecast to post an increase of around 40.0% in its number of households over the 2012-2020 period. This will support across-the-board hikes in discretionary spending, as well as the steady expansion of Pakistans niche luxury market. Sectors from high -performance vehicles and private tuition to consumer electronics all stand to benefit from these gains.
Chart 6 Household Income Distribution: 2011
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CONSUMER EXPENDITURE
Hotels and catering remains the top performer
In 2011, 68.4% of total consumer expenditure in Pakistan went on non-discretionary items (food, non-alcoholic beverages and housing) with the remaining 31.6% of total outlay going on discretionary spending, such as communications and clothing and footwear. Total consumer expenditure in the country grew by a dynamic 44.1% in real terms between 2006 and 2011. The best performing consumer expenditure category was hotels and catering, with a 78.1% real increase over the 2006-2011 period, driven by increased vacation receipts over the period and a thriving fast food culture. This was followed by spending on food and non-alcoholic beverages (up 61.2% in real terms over the same period) on the back of food price inflation. The third most dynamic category during the period was household goods and services (45.7%). Subsidised land and government housing schemes enable even less affluent Pakistanis to own their own homes, and this combined with the swiftly rising number of households which grew from 24.3 million in 2006 to 30.1 million in 2011 supported spending in this category. Health goods and medical services was the only spending category posted a decline over the review period contracting by 2.4% in real terms. Provision of state-run health services is patchy and private healthcare and insurance are beyond the reach of many citizens, limiting take-up of medical care. The second most lacklustre category was leisure and recreation (up 8.6% in real terms over 2006-2011). Many Pakistanis still spend their leisure time at home, watching TV or doing chores, and going out often means visiting relatives, as the absence of modern leisure facilities, especially in rural areas, tamps down spending in this category. Every other category posted a 20.0% hike in real terms or more over the 2006-2011 period. The global economic downturn of 2008-2009 had a pronounced impact on Pakistani spending patterns. With the exception of spending on hotels and catering and food and non-alcoholic beverages in 2008, all categories posted negative growth annually in real terms. 2009 brought a strong rebound in all categories posting real growth with only leisure and recreation and health goods and medical services failing to notch up double-digit gains. However, in 2010 and 2011, real growth in most categories moderated. Annual disposable income and consumer expenditure move in tandem in Pakistan. Overall consumer expenditure will post healthy hikes of 8.1% and 5.6% in real terms in 2012 and 2013. Over the 2013-2020 period, hotels and catering will be the fastest growing spending category, posting a projected 41.3% rise in real terms, a continuation of its impressive performance during the review period. This will be followed by spending on education with an upswing of 38.6% in real terms forecast over the same period, driven by higher numbers of women in urban areas obtaining access to education, increasing primary school admission and rising university attendance, including a
greater role for private universities. Spending on health goods and medical services will also witness robust growth during this period (37.3% in real terms over the 2013-2020 period), driven by a markedly expanding cohort of elderly citizens. Between 2013 and 2020, Pakistans annual average growth in total consumer expenditure will grow by 3.7% in rea l terms, compared to a 6.0% real average annual rise over the 2000-2007 period. The still decent projection lays the grounds for opportunities for marketers and planners in sectors from communications to education, as Pakistans consumers steadily improve their living standards.
Chart 7 2006=100 Real Growth Index of Consumer Expenditure by Selected Category: 2006-2020
Source: Note:
Euromonitor International from national statistical offices/OECD/Eurostat Data for 2012-2020 are forecasts.
Chart 8
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Euromonitor International from national statistics/UN/OECD Data are in current terms, year-on-year US$ exchange rate.
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Euromonitor International from national statistical offices/OECD A: Food and non-alcoholic beverages; B: Alcoholic beverages and tobacco; C: Clothing and footwear; D: Housing; E: Household goods and services; F: Health goods and medical services; G: Transport; H: Communications; I: Leisure and recreation; J: Education; K: Hotels and catering; L: Miscellaneous goods and services. The figure in brackets refers to the average disposable income of households in each decile.
The category that sees spending vary the most depending on income was hotels and catering, where decile 1 households accounted for 0.7% of total category outlay in 2011, against 57.9% contributed by decile 10. While wealthy Pakistanis travel extensively and dine out regularly, their poorer compatriots would seldom use hotels and dine almost exclusively at home or at the house of relatives. The second most discretionary category in 2011 was education, where decile 1 was responsible for 0.8% of overall spending against decile 10s 55.5%. Educational provision is patchy in poor, rural areas, and impoverished families often opt to train children to earn money rather than send them to school. University and private schools are dominated by the offspring of the more affluent. Highly unusually, spending on alcoholic beverages and tobacco attracts spending in inverse proportion to wealth: in 2011, decile 1 accounted for 12.2% of outlay on this category comp ared to 6.0% from decile 10. Under Pakistans Islamic law, alcohol is strictly forbidden, and smoking is more common in lower-income groups. The second least discretionary category in 2011 was health goods and medical services, where decile 1 contributed 7.0% of total category spending in 2011 versus decile 10s 13.4% share. Health insurance plays an important role in funding treatment, keeping a lid on outlay for policyholders; however, with many low-income Pakistanis employed informally, they lack access to insurance and have to dip into savings, sell assets or prevail upon relatives to cover costly private treatment in an emergency. Spending is dominated by the wealthy in hotels and catering, where deciles 8-10 together accounted for 80.0% of total spending on the category; education, where deciles 8-10 contributed 78.3% of category spending that year; and leisure and recreation, where the share of deciles 8-10 stood at 74.9% in 2011. While this suggests that in the shortterm companies active in these sectors may wish to tailor business models to a wealthy consumer profile (for example through luxury hotels and upmarket restaurants, private schools and tuition, and high-end shopping malls and home cinema equipment), it also points to a vast untapped budget market in the future for services, such as budget motels, fast food, distance learning programmes and retail parks.
Chart 10 Proportion of Total Spending on Selected Categories by Decile: 2011
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DEFINITIONS
Deciles
Deciles are calculated by ranking all of the households in a country by disposable income level, from the lowest earning to the highest earning. The ranking is then split into 10 equal sized groups of households. Decile 1 refers to the lowest earning 10%, through to Decile 10, which refers to the highest earning 10% of households.
Disposable income
This is gross income minus social security contributions and income taxes. Gini index: A standard economic measure of income inequality, based on a Lorenz Curve. A society that scores 0% on the Gini index has perfect equality, where every inhabitant has the same income. The higher the number over 0%, the higher the inequality, and a score of 100% indicates total inequality, where only one person receives all the income. In reality, countries tend to fall between 25% and 60%.
Gross income
Annual gross income refers to income before taxes and social security contributions from all sources including earnings from employment, investments, benefits and other sources such as remittances.
Median income
The median income is the amount which divides the household income distribution into two equal groups, half having disposable income above that amount and half having income below that amount.
Middle class
The middle class is defined as the number of households with between 75% and 125% of median income.
Savings ratio
Savings ratio is the proportion of household disposable income which is saved. The savings ratio is dependent on: the proportion of older people (as they have less motivation and capability to save); the tax system (it can encourage or discourage saving); the rate of inflation (expectations of rising prices encourage people to spend now).
Social class A
Social Class A presents data referring to the number of individuals with a gross income over 200% of an average gross income of all individuals aged 15+.
Social class B
Social Class B presents data referring to the number of individuals with a gross income between 150% and 200% of an average gross income of all individuals aged 15+.
Social class C
Social Class C presents data referring to the number of individuals with a gross income between 100% and 150% of an average gross income of all individuals aged 15+.
Social class D
Social Class D presents data referring to the number of individuals with a gross income between 50.0% and 100% of an average gross income of all individuals aged 15+.
Social class E
Social Class E presents data referring to the number of individuals with a gross income less than 50.0% of an average gross income of all individuals aged 15+.