Sunday, September 20, 2009
Economic growth in fiscal year 2009 likely to remain subdued: ADB report
FAISALABAD (September 17 2008): The Asian Development Bank has observed that the unprecedented increase in global oil and food prices and domestic policy uncertainties in a turbulent political year stressed the Pakistan economy in FY2008, resulting in a slowdown in growth, build-up in inflation, wide fiscal and current account deficits, a weaker currency, and a large drop in foreign reserves.
The 'Asian Development Outlook 2008 Update' (ADO Update) has forecast that the growth in FY2009 is expected to remain subdued at 4.5 percent, with a continued slowdown in commodity producing sectors. Domestic spending will have to rise less than output for the current account deficit to shrink.
Increased risk perception was seen in downgrading of credit ratings, rise in sovereign bond spreads, slide in capital inflows, and declining access to international capital. With continued high oil prices, an ongoing power deficit, and tightened demand management policies to correct macroeconomic imbalances, economic growth in FY2009 is put at only 4.5 percent, ADO Update 2008 said.
The ADO Update 2008 says that high inflation will persist as domestic fuel, food, and power subsidies are rationalised. Although imbalances are expected to shrink, they cannot be eliminated quickly. To move forward, a coherent and credible short- to medium-term economic stabilisation and reform program needs to be adopted and implemented, the ADO Update added.
According to ADO Update, FY2008, ended June 2008, was a tumultuous year, and GDP growth slowed to 5.8 percent in Pakistan. Agriculture in particular suffered as major crops such as cotton and wheat failed to reach targets because of weather conditions, insufficient water, pest attacks, higher costs of fertiliser, and a delayed government announcement of the support price for wheat (which led to a lower sown area).
Manufacturing growth, hit by a listless textile subsector, power shortages, and political disturbances in major industrial towns, fell by half to 5.4 percent, after averaging over 11 percent in the previous 4 fiscal years. Construction maintained relatively strong growth. Services remained the main economic driver, rising by 8.2 percent, backed by thriving wholesale and retail trade, a strong expansion in telecommunications, and robust financial activity.
Real private consumption was the largest contributor to growth from the demand side, underpinned by booming remittances and high food and fuel subsidies. Private investment in contrast stagnated, falling to 14.2 percent of GDP on account of political uncertainty, power shortages, and a downgrade in credit ratings.
National savings as a share of GDP declined even more, widening the savings/investment gap. Net exports once again subtracted from growth as import volumes expanded markedly, with demand bolstered by domestic subsidies on oil and some food commodities.
Some pass-through of the substantial rise in international food and oil prices from March 2008 (when the Government began raising administered prices), together with lower domestic food production, a depreciating currency, and strong consumption led to a surge in inflation in FY2008. It averaged 12.0 percent for FY2008, the first time in 11 years it had hit double digits.
Food inflation year-on-year reached 32 percent in June 2008 as prices of essential food commodities jumped, and inflation accounted for much of the 21.5 percent increase in overall inflation in June. It also fed into core inflation, which rose by 13.0 percent in June 2008, year on year.
The State Bank of Pakistan (SBP), in its Monetary Policy Statement for July-December 2008, estimated that about one-third of inflation came from direct and indirect impacts of higher commodity prices in FY2008. To help protect consumers from the impact of rising inflation, ADO Update observed, Pakistan Government provided large subsidies for oil products, electricity, imported wheat, and fertiliser.
Although actual subsidies in FY2008 were much higher than had been budgeted, many subsidies were not targeted and therefore had only a weak impact in protecting the poorest. The large gap between actual and budgeted subsidies and higher interest payments overrode the impact of lower than targeted development expenditure, and resulted in a significant deterioration in the fiscal deficit, which substantially widened to 7.4 percent of GDP, surpassing the targeted deficit of 4.0 percent.
The budgeted revenue target was achieved, helped by rising non-tax collections. However, revenue growth did not match that of nominal GDP, causing the revenue-to-GDP ratio to fall to 14.3 percent from 14.9 percent in FY2007, while the tax-to-GDP ratio was stagnant at 10.0 percent.
To finance the burgeoning fiscal deficit in FY2008 at a time of dwindling external capital inflows (which covered only 26 percent of the fiscal deficit), and given the reluctance of commercial banks to purchase Treasury Bills, the Government was compelled to borrow Rs 689 billion from SBP, equivalent to almost a third of total government expenditure.
Pakistan Government borrowing from SBP was the single largest contributor to the 15.4 percent growth in broad money supply, which was inconsistent with SBP's effort to contain monetary growth. That would have been higher still had it not been accompanied by a marked drop in net foreign assets of the banking system.
With regard to monetary measures in FY2008, SBP raised the discount rate three times by a cumulative 250 basis points (bps) and increased commercial banks' cash-reserve requirements. Real commercial lending rates stayed negative. Private sector credit grew by 16.5 percent, only slightly less than a year earlier. Nevertheless, high inflation persisted as a result of elevated commodity prices.
The ADO Update said that the fiscal slide, precipitated by the failure to pass on the hike in international oil prices, became intertwined with the corresponding rise in the oil import bill, which was driven higher by both price and quantity increases.
The direct subsidy on diesel and kerosene oil--the Price Differential Claim paid to oil marketing companies as well as the implicit subsidy through a reduction in the Petroleum Development Levy--helped sustain the high oil demand.
The biweekly adjustment mechanism in domestic oil prices to respond to changes in international prices had been suspended in May 2006, and oil price adjustments only restarted in March this year, with five subsequent upward moves through 21 July.
So far, the adjustment to counter the impact of the rise in international prices had been incomplete, although the Government had committed itself to eliminating all subsidies on oil products by December this year.
Oil imports increased by 43 percent in FY2008, and reached $10.5 billion. This was the major cause of the worsening trade deficit, which soared by 57.4 percent to $15.3 billion, even though the annual export target of $19.2 billion was exceeded.
The main reasons for the good export performance were higher rice exports, which increased by 40 percent following sluggish production and export restrictions in the major rice producing countries and higher international prices; the trebling of cement exports resulting from strong demand by Middle East and African countries; and strong growth of exports of chemical products, especially plastic materials.
These categories' robust performance compensated for the continued stagnation of textile exports, which stemmed from strong international competition, domestic production losses due to power shortages, and disruption caused by the political and security situation.
The food import bill swelled by 46 percent and was another key contributor to the trade deficit, driven by $1.52 billion imports of edible oil and $571 million of wheat imports, as domestic consumption outstripped supply.
The overall trade deficit and deterioration in the services and income accounts resulted in a huge $14.0 billion current account deficit, or 8.4 percent of GDP. This deficit would have been even wider had it not been for healthy workers' remittances, which, helped by the oil boom in the Middle East, continued to grow by 17.4 percent to total $6.5 billion in FY2008.
The heavy fiscal and current account deficits struck at a time when capital inflows slowed over anxieties concerning the domestic political and security situation and the turmoil in international credit markets. Led by a significant drop in portfolio investment, foreign private investment fell by 38.4 percent (despite the resilience of foreign direct investment, which was unchanged from a year earlier).
This decline, along with a stall in the privatisation program, was indicative of investors' concern over the weakened fundamentals of the economy. The larger current account deficit thus resulted in a significant drawdown of foreign exchange reserves, as capital inflows slowed. Overall foreign exchange reserves fell by almost a third, from a high of $16.5 billion in October 2007 to $11.3 billion in June and to $9.4 billion as of 22 August 2008 to drop below 10,000 on 4 August, ADO Update said.
It points out that the negative market sentiment was reinforced in May when Standard and Poor's downgraded Pakistan's debt rating from B+ to B and its long-term local currency rating from BB to BB-. Moody's quickly followed suit. This market pessimism translated into a risk premium of 912 basis points on the spread of sovereign bonds by 19 August 2008, and consequently plans to access international capital markets through sovereign bond issuance and global depository receipts were deferred.
Undermined by the current account deficit, the slowdown in capital inflows, and the drop in reserves, the rupee-dollar exchange rate depreciated by 12 percent between 1 July 2007 and 30 June 2008. Subsequently, it depreciated further by about 11 percent through end-August, ADO Update said.
Furthermore, higher interest rates were insufficient to arrest the decline of the rupee and, since end-April this year, SBP adopted administrative measures, including suspending forward booking of imports, reducing advance payments against imports' letters of credit, and requiring foreign exchange companies both to obtain approval for transactions of over $50,000 and to surrender their "surplus" foreign currency to SBP.
The sharp depreciation in the nominal exchange rate overshadowed the upward movement in the relative price index, such that the real effective exchange rate depreciated by 2.3percent over the four quarters of FY2008. According to ADO Update, 'Economic Prospects for FY2009' remain sobering and require steadfast commitment by the Government to implement the various adjustment targets it has set for itself.
It will need to maintain fiscal discipline, persist in cutting down untargeted subsidies and in passing through price increases (while compensating the poor adequately), and reduce reliance on borrowing from SBP. The reform program should also aim for a significant reduction in the current account deficit. Unless export growth picks up, this will require a significant reduction in domestic demand.
In parallel, the Government also needs to generate greater external inflows in order to increase foreign reserves through privatisation, access to capital markets, and support from international development partners, besides pursuing and finalising the Saudi oil facility.
Finally, over the medium term, the Government needs to implement programs that promote upgrading and diversification of the economic base. Potential risks include further increases in political uncertainty and a deterioration in the security situation on the country's western border.
Economic projections for FY2009 are based on following assumptions: political tensions will lessen, leading to a more stable political environment, though uncertainty and security concerns will continue to affect economic decision making and investors' confidence; the stabilisation measures announced in the budget to rationalise subsidies and curb demand will be implemented and overall demand management policies will be tight; international oil prices will remain high (averaging $120 per barrel, as assumed in the baseline for this ADO Update); and the pass-through of price adjustments related to the ending of oil subsidies as well as continued power shortages will increase the cost of doing business and therefore exacerbate inflation, said ADO Update.
On these assumptions, it said, the growth in FY2009 is expected to remain subdued at 4.5 percent, with a continued slowdown in commodity producing sectors. Domestic spending will have to rise less than output for the current account deficit to shrink.
In these circumstances, export growth becomes crucial, as it will help make the current adjustment less painful. The faster the growth in exports the smaller the reduction in growth required to close the deficit.
In agriculture, cotton production is likely to fall short of target due to a reduction in the sown area and to a mealy bug virus attack. (Lower cotton production will hurt the textile industry.) It is too early to predict the winter wheat crop, which will depend on the availability of water and on the supply response of farmers to the expected adjustment in the procurement price to bring it close to international prices.
Robust growth in services is expected to continue, although the sector will be affected by the tax measures announced in the budget and by power shortages. On the demand side, private consumption in FY2009 will be hit by higher prices as food, oil, and power subsidies are rationalised.
Government expenditure will be suppressed by measures announced in the budget to contain current spending. Investment levels will be restrained by uncertainty, low capital inflows, and power shortages. The present power shortages are a result of chronic under-investment in new generation capacity, high operational inefficiencies due to the lack of expansion of the power transmission and distribution infrastructure, and delayed institutional reforms.
Although the Government is undertaking investment and reform in all these areas, the demand-supply gap will remain until new generation capacity comes on stream and the transmission and distribution infrastructure is upgraded. With the Government setting out to progressively rationalise the oil subsidy by passing on higher prices to consumers and by reducing the subsidy between the full-cost producer price and tariffs charged for electricity, average inflation is projected to reach 20.0 percent in FY2009, higher than the government target of 11.0 percent.
According to ADO Update, the planned adjustment of the domestic procurement wheat price will contribute to higher food inflation. SBP has increased the discount rate several times since June 2007, taking it from 9.5 percent to 13.0 percent, and yet inflation has climbed.
Moreover, the ensuing increase in the Karachi interbank offered rate has led to a rise in bank lending rates. SBP's interest rate tightening should increase the attractiveness of Treasury bills for commercial banks, and this would help reduce the Government's dependence on borrowing from SBP.
An efficient way to achieve this objective, as recognised by SBP in the Monetary Policy Statement for July-December 2008, would be to limit the amount that the Government can borrow from SBP and encourage long-term non-bank borrowings. Achieving that statement's target of a 14 percent increase in money supply in FY2009, which is lower than in FY2008, would require strict limits on budget access to SBP credit, observed the ADO Update.
To the extent that inflation in Pakistan is driven by high commodity prices, ADO Update stated that monetary tightening will have a limited impact on inflation and will most likely aggravate the economy's other structural problems.
Excessive dependence on higher interest rates to stabilise prices will make firms reluctant to use debt financing and therefore push them to rely more heavily on self-financing, which might lead to less efficient capital allocation. Moreover, unless interest rates are raised significantly, it will probably take a long time for monetary policy to have an impact on the economy and inflation.
Although the tightening of expenditure policies, such as fiscal discipline, helps keep inflation in check, it also acts as a deflationary force resulting in underused production capacity and higher unemployment. A more effective anti-inflation tool would be identifying and eliminating fiscal programs that induce an inflationary bias in the economy, combined with pushing through moderate increases in interest rates to limit excessive credit expansion.
Finally, to prevent a wage-price spiral, the authorities might consider implementing policies that link nominal wage increases to productivity increases and that limit increases in firms' mark-ups through, for example, tripartite (state, employer, worker) agreements.
The Government expects a significant reduction in the fiscal deficit as a result of the measures adopted in the FY2009 federal budget. These aim to reduce subsidies, curtail general government expenditure, and boost revenues. A rationalisation of the large public sector development program announced in the budget will help contain public spending.
However, the difficulties in achieving a planned increase in tax revenues of almost 25 percent, a 20 percent increase in public sector salaries and pensions, and the projected slowdown in growth imply that the fiscal deficit will likely exceed the government target of 4.7 percent of GDP. But the outcome should, though, be much better than in FY2008.
Despite the need to reduce the budget deficit, a crucial requirement is protecting the poor from the impact of high oil and food prices. In this regard, the social protection programs announced by the Government in the budget need to be implemented quickly. As part of this effort, the Government has launched the Rs 34 billion Benazir Income Support Program, under which qualified beneficiaries will receive Rs 1,000 a month.
Despite possible reduced oil consumption as a result of ending domestic subsidies, international oil prices are expected to remain relatively high. This will result in a continued heavy oil import bill. However, the projected slowdown in the economy, tight monetary policy, SBP's administrative steps to stabilise the exchange rate, and higher customs duties imposed in the budget on nonessential items will discourage non-oil imports particularly.
As a result, imports are projected to grow at the relatively slow pace of 9.5 percent (in nominal US dollars) in FY2009. The Government's trade policy has set an export target of $22.1 billion, 10 percent higher than FY2008's exports. Even if this target is met, with slower growth in industry and weak global demand conditions, projected import growth will still result in a large trade deficit.
Taking account of continued growth in remittances, the current account deficit is projected to be marginally smaller than in FY2008, at 8.0 percent of GDP. The financing of the large fiscal and current account deficits will remain major challenges. If Pakistan's request to, for example, Saudi Arabia to grant a deferred-payment facility for oil is granted, this will help reduce pressure to finance the current account deficit. The long-term solution to the external deficits, however, involves a substantial upgrading and diversification of the export base.
Apna Karobar: Intel, PTA and NADRA join hands
LAHORE: Intel Pakistan Corporation in collaboration with Pakistan Telecommunication Authority (PTA) and National Database and Registration Authority (NADRA) on Wednesday launched a programme to provide employment opportunities to the unemployed people and increase IT awareness and computer penetration in the country.
Successes and failures on the development front
Reasons for poverty in Pakistan
In Pakistan, currently more than 20% people are living below the poverty line. People in the rural areas are poorer than in the urban areas. Pakistan and foreign economists have different criteria to describe poverty. According to some foreign economists, if a person’s daily income is less than one dollar a day
Pakistan’s share in global trade shrinks
By Mansoor Ahmad
LAHORE: Pakistan has been losing its share in global markets which experts blame on the limited range of products and dependence on a small number of markets resulting in a constant decline in the country’s share in global trade.
They say India has increased its share in global trade after diversification of export products [...]
Each Pakistani evaded Rs 4,800 tax in FY07-08
Pakistan rupee exchange rates and gold prices: 21-July-09
Dollar gains strength vs rupee
The dollar gained up grounds against the rupee in the interbank market, dealers said on Monday.
The dollar commenced the day’s trading at Rs 82.04 for buying and after incurring gains was changing hands at Rs 82.12 for buying and at Rs 82.17 for selling. Therefore, the rupee incurred a loss of [...]
06
Jul
Jul
Pakistan rupee exchange rates & gold prices: 6-July-09
Treasury Management Division of National Bank of Pakistan (NBP) Monday issued the following Exchange rates:
21
May
May
Pakistan rupee regains strength vs dollar-20-May-09
KARACHI: The national currency regained strength against the dollar in the interbank market, dealers said on Wednesday.
The dollar commenced the day’s trading at Rs 81.07 for buying, registered loss and was changing hands at Rs 80.91 for buying and Rs 81.11 for selling at the close of the day’s trading. Thus, the national currency incurred [...]
16
May
May
Pakistani Gold finds new way into foreign markets
By Faryal Najeeb
KARACHI: Gold dealers have found a perfectly tax-free legal way to ship the precious metal into another country with an intention to sell them for a profit. Have women wear them as jewellery and travel to the desired destination.
Gold rates in Pakistan are considerably stable now than few months ago. However, it continues [...]
13
May
May
Pakistan rupee exchange rates and gold prices 13-May-09
KARACHI: The rupee moved upward against the dollar in the interbank market, dealers said Tuesday.
The dollar started the day’s trading at Rs 80.54 for buying and closed at Rs 80.48 for buying and Rs 80.53 for selling. Therefore, the national currency gained six paisas.
02
May
May
Historical chart of Pakistan rupee exchange rate vs. US dollar
Following is the chart of rupee exchange rates against US dollar. It is interesting to see that between 2001 and 2007, the exchange rate remained almost the same but with the start of rise in oil prices and lawyers movement in Pakistan, the rupee totally collapsed.
30
Apr
Apr
Pakistan rupee exchange rates and gold prices- 29-Apr-09
KARACHI, April 29 (APP): Following are the closing rates of Foreign Currencies (F.C) in kerb currency market,issued here on Wednesday by Forex Association of Pakistan.
12
Apr
Apr
Pakistan rupee exchange rates and gold prices 10-Apr-09
Following are interbank rupee exchange rates and gold prices on 10th April, 2009.
02
Apr
Apr
Urge to hold gold is global
SARAH MARSH AND JAN HARVEY
ARTICLE (April 01 2009): In the heart of Vienna in a Biedermeier building commissioned by Emperor Franz I, a man wearing a khaki uniform and beret exchanges a wad of euro notes across the counter for a few sparkling gold coins. Guenther Fuchssteiner, 59, is a military doctor who for [...]
27
Mar
Mar
Pakistan rupee exchange rates and gold prics on 26-Mar-09
Dollar dominates rupee
KARACHI: The dollar continued to dominate the rupee in the interbank market, dealers said on Wednesday.
The greenback was up by seven paisas against the rupee during the day. The dollar started the day’s trading at Rs 80.51 for buying and after gaining strength closed at Rs 80.58 for buying and Rs 80.63 for [...]
Building a knowledge-based economy in Pakistan?
Some of the contents of the approach paper for Pakistan’s tenth 5-year plan were recently published by a Lahore based newspaper. The approach paper recognises the key role of “knowledge” in economic growth and prosperity of Pakistan and will help set the direction for the country’s Planning Commission. It emphasises on building a “knowledge economy” by investing in education, vocational, technical and scientific training.
It also emphasises investments in R&D and communication infrastructure in Pakistan. The afore-mentioned, indisputably, are some of the essential elements of building a knowledge economy. But this list is by no means complete. A host of economists have come out with their views on how such an economy can come about. Almost all are agreed that a high literacy rate, internet connectivity, R&D spending, an effective judicial system and an entrepreneurial environment are important pre-requisites of a knowledge economy.
Twenty years ago the economies of Ireland and Australia were showing weak growth and were unexciting. Then we saw the emergence of both these countries as economic powerhouses. This was principally, on the back of a strong knowledge foundation that was laid by their respective governments.
According tothe World Bank, the four pillars of a knowledge economy are as follows: 1. Education and training: Producing a steady flow of skilled workers capable of creating, using and sharing knowledge.
2. Information infrastructure: Communication is the life blood of a knowledge economy. A well developed information infrastructure makes it possible for innovation to spread rapidly.This in turn leads to business growth.
3. Economic incentive and institutional regime: Presence of commercial law, patents, and a fair judiciary give entrepreneurs the incentive to create innovative technologies.
4. Innovative systems: Knowledge is a public good because all society stands to benefit from it. But economic theory holds that societies tend to underinvest in public goods. Therefore, an innovative system is required to direct societies resources to the creation and sharing of knowledge. A network of universities and research centers is a pre-requisite. Private enterprise and the government has to invest in R&D.
It is clear that building a knowledge economy is a tall order. A major re-allocation of resources has to take place. Pakistans economic problems are serious and our resources scarce. Our priorities have to be somewhat different. Our level of poverty is over 40%; direct economic intervention is required to subsidise food for the very poor. Secondly, our budgetary allocation for health and education is 3 % of the GDP.
These ratios have to be brought up to a respectable level to provide the basic necessities to the people. Other expenditures of the government have to be rationalised. PSDP’s allocation of Rs 646 billion in the current budget is a big improvement over last year. What remains to be seen is if this amount actually gets spent. Usually as the budgetary deficit increases the development budget becomes one of the first casualities.
For some strange reason, Pakistan’s population of 160 million is projected as an asset by our leaders and policy-makers.Half of our population is under the age of 25 years and our literacy rate, according to international standards is not even 60%.
We have to improve our literacy rate on a war footing. If we are not able to educate and train our workforce and provide employment opportunities, our huge population of young people will become a liability. This can lead to severe socio-economic problems and a political upheaval can ensue. The issue of literacy needs a lot of planning and a lot of time before we see any progress.
Only when these very serious issues relating to poverty and literacy have been addressed, can we start talking about making Pakistan a knowledge-based economy. At that point we will have to give priority to developing our communication infrastructure and increasing our R&D spending. And of course, a very important pre-requisite of a knowledge-based economy is an effective judicial system for which a lot needs to be done.
In the first instance there has to be an agreement amongst all political parties to make our judiciary independent. To start a public debate, at this juncture, as to how we can become a knowledge economy is somewhat premature. The Planning Commission’s efforts need to be directed at more immediate and pressing issues.
Courtesy: Business Recorder
Investment
Foreign direct investment (FDI) in Pakistan soared by 180.6 per cent year-on-year to US$2.22 billion and portfolio investment by 276 per cent to $407.4 million during the first nine months of fiscal year 2006, the State Bank of Pakistan (SBP) reported on April 24. During July-March 2005-06, FDI year-on-year increased to $2.224 billion from only $792.6 million and portfolio investment to $407.4 million, whereas it was $108.1 million in the corresponding period last year, according to the latest statistics released by the State Bank.[51] Pakistan has achieved FDI of almost $8.4 billion in the financial year 06/07, surpassing the government target of $4 billion.[52]
Pakistan is now the most investment-friendly nation in South Asia. Business regulations have been profoundly overhauled along liberal lines, especially since 1999. Most barriers to the flow of capital and international direct investment have been removed. Foreign investors do not face any restrictions on the inflow of capital, and investment of up to 100% of equity participation is allowed in most sectors. Unlimited remittance of profits, dividends, service fees or capital is now the rule. Business regulations are now among the most liberal in the region. This was confirmed by the World Bank's Ease of Doing Business Index report published in September 2009 ranking Pakistan (at 85th) well ahead of neighbours like China (at 89th) and India (at 133rd). [37]
Pakistan is attracting an increasingly large amount of private equity and was the ranked as number 20 in the world based on the amount of private equity entering the nation. Pakistan has been able to attract a large portion of the global private equity investments because of economic reforms initiated in 2003 that have provided foreign investors with greater assurances for the stability of the nation and their ability to repatriate invested funds in the future.[53]
Tariffs have been reduced to an average rate of 16%, with a maximum of 25% (except for the car industry). The privatisation process, which started in the early 1990s, has gained momentum, with most of the banking system privately owned, and the oil sector targeted to be the next big privatisation operation.
The recent improvements in the economy and the business environment have been recognised by international rating agencies such as Moody’s and Standard and Poor’s (country risk upgrade at the end of 2003).
Imports
Pakistan's imports stood at $30.54 billion in the financial year 2006-2007, up by 8.22 percent from last year's imports of $28.58 billion.
Pakistan's single largest import category is petroleum and petroleum products. Other imports include: industrial machinery, construction machinery, trucks, automobiles, computers, computer parts, medicines, pharmaceutical products, food items, civilian aircraft, defense equipment, iron, steel, toys, electronics, and other consumer items.
Sales tax is levied at 15 percent both on imports and domestically produced products. The income withholding tax is levied at 6 percent on imports and at 3.5 percent on the sales of domestic taxpayers
Exports
Pakistan's exports increased more than 100% from $7.5 billion in 1999 to stand at $18 billion in the financial year 2007-2008.[56] [38]
Pakistan exports rice, furniture, cotton fiber, cement, tiles, marble, textiles, clothing, leather goods, sports goods (renowned for footballs/soccer balls), surgical instruments, electrical appliances, software, carpets, and rugs, ice cream, livestock meat, chicken, powdered milk, wheat, seafood (especially shrimp/prawns), vegetables, processed food items, Pakistani assembled Suzukis (to Afghanistan and other countries), defense equipment (submarines, tanks, radars), salt, marble, onyx, engineering goods, and many other items. Pakistan now is being very well recognized for producing and exporting cements in Asia and Mid-East. Starting August 2007, Pakistan will be exporting Cement to India to fill in the shortage there caused by the building boom
Income distribution
- Gini Index: 41
- Household income or consumption by percentage share:
- lowest 10%: 4.1%
- highest 10%: 27.7% (1996)
- lowest 20% : 27.7% (2006)
Foreign acquisitions and mergers
With the rapid growth in Pakistan's economy, foreign investors are taking a keen interest in the corporate sector of Pakistan. In recent years, majority stakes in many corporations have been acquired by multinational groups.
- PICIC by Singapore based Temasek Holdings for $339 million
- Union Bank by Standard Chartered Bank for $487 million
- Prime Commercial Bank by ABN Amro for $228 million
- PakTel by China Mobile for $460 million
- PTCL by Etisalat for $1.8 billion
- Additional 57.6% shares of Lakson Tobacco Company acquired by Philip Morris International for $382 million
The foreign exchange receipts from these sales are also helping cover the current account deficit
Services
Services sector has exhibited
resilience to fluctuations in
economic activity in recent
years. This is also evident in
continued strong growth of
FDI in the services sector,13
despite slowdown in overall
economic activities in the
country. At present, while
sentiments regarding
performance of commodity
producing sector are bleak,
indicators of services sector
present a mixed scenario.
While, some sectors such as
wholesale & retail trade and
transportation & communication are likely to show a weaker performance relative
to the preceding year, community & social services, finance & insurance as well
as public administration & defence are estimated to exhibit a strong growth for yet
another year.
Key indicators of wholesale & retail trade indicate a clear fall in trading activities
during the first quarter of FY09 mainly due to a significant decline in
manufacturing activities and relative softening demand for imported consumer
goods (see Figure 2.16).14 A slowdown in the latter also reflects the impact of
substantial depreciation of rupee, as well as a substitution effect as people
prioritize their consumption of essential goods given high inflation and
unfavorable environment for employment creation in the economy. Anecdotal
evidence also suggests a relative moderation in Eid-shopping during FY09
compared with the preceding year. A part of this moderation is due to above
mentioned economic factors and partially it was a result of disturbed law & order
situation in some parts of the country during Ramadan and afterwards.
resilience to fluctuations in
economic activity in recent
years. This is also evident in
continued strong growth of
FDI in the services sector,13
despite slowdown in overall
economic activities in the
country. At present, while
sentiments regarding
performance of commodity
producing sector are bleak,
indicators of services sector
present a mixed scenario.
While, some sectors such as
wholesale & retail trade and
transportation & communication are likely to show a weaker performance relative
to the preceding year, community & social services, finance & insurance as well
as public administration & defence are estimated to exhibit a strong growth for yet
another year.
Key indicators of wholesale & retail trade indicate a clear fall in trading activities
during the first quarter of FY09 mainly due to a significant decline in
manufacturing activities and relative softening demand for imported consumer
goods (see Figure 2.16).14 A slowdown in the latter also reflects the impact of
substantial depreciation of rupee, as well as a substitution effect as people
prioritize their consumption of essential goods given high inflation and
unfavorable environment for employment creation in the economy. Anecdotal
evidence also suggests a relative moderation in Eid-shopping during FY09
compared with the preceding year. A part of this moderation is due to above
mentioned economic factors and partially it was a result of disturbed law & order
situation in some parts of the country during Ramadan and afterwards.
Irrigation
Rabi FY09 season started with the IRSA forecast of 32 to 39 percent water
shortage; potentially making a negative impact on the key season crop plantation
and watering schedules. Less than expected rains in the period and low availibility
of glacial melt meant that agricultural activity was mainly dependent upon the
canal operations from the fast depleting water reservoirs or any surprise westerly
rain bearing system. Rainfall in wheat sowing season has however helped the
farmers towards greater acreage.
The water situation has been further worsened by low levels in Chenab river
primarily impacting agricultural activity in Punjab (see Box 2.1). To cope with
the shortages of irrigation water, some urgent measures are needed including: (1)
speedup work on projects under construction, (2) adoption of technological means
to increase efficiency of available resources ( see Box 2.2), (3) measurses to
reduce irrigation water losses, and (4) plantation of drought resisting seeds.
It may be mentioned here that traditionally rabi is a dry period with greater
dependence upon winter rains than on canal operations. Over the years, possibily
reflecting global warming, the winter rains have been sparse and insufficient for
any sowing activity in the key crop areas. In order to preserve the depleting
reservoirs for key wheat watering sessions; canal operations are likely to be
rationed towards the end of the calendar year 2008.
shortage; potentially making a negative impact on the key season crop plantation
and watering schedules. Less than expected rains in the period and low availibility
of glacial melt meant that agricultural activity was mainly dependent upon the
canal operations from the fast depleting water reservoirs or any surprise westerly
rain bearing system. Rainfall in wheat sowing season has however helped the
farmers towards greater acreage.
The water situation has been further worsened by low levels in Chenab river
primarily impacting agricultural activity in Punjab (see Box 2.1). To cope with
the shortages of irrigation water, some urgent measures are needed including: (1)
speedup work on projects under construction, (2) adoption of technological means
to increase efficiency of available resources ( see Box 2.2), (3) measurses to
reduce irrigation water losses, and (4) plantation of drought resisting seeds.
It may be mentioned here that traditionally rabi is a dry period with greater
dependence upon winter rains than on canal operations. Over the years, possibily
reflecting global warming, the winter rains have been sparse and insufficient for
any sowing activity in the key crop areas. In order to preserve the depleting
reservoirs for key wheat watering sessions; canal operations are likely to be
rationed towards the end of the calendar year 2008.
Agricultural Credit
Agricultural credit target for FY09 set at Rs 250 billion compared with Rs 211.6
billion actual disbursement during FY08, up by 18.1 percent. However, during
Jul-Oct FY09, agri credit
disbursements registered an
increase of 16.2 percent (see
Table 2.2),9 significantlly
lower than the 27 percent in
the same period last year.
The relative slowdown is also
evident from a decline in
agri-credit disbursement
during Jul-Oct FY09 relative
to the annual target ratio
being the lowest in five years
(see Figure 2.7).
However, this is not a source
of concern given the
slowdown appears to be a temporary phenomenon; fertilizer off-take is expected
to rise from November onward for wheat crop cultivated in an extended area. In
addition, even at this moderated growth rate, FY09 agri credit disbursement target
is estimated to be met comfortably.
A disaggregated analysis suggests that the deceleration in agri-credit growth is
entirely attributed to a weaker rise in production related loans during Jul-Oct
FY09, as disbursements for developmental purposes increased strongly. In fact, a
weak disbursement of production related loans is also a reflection of weak
fertilizer demand in this period. An institution-wise break-up shows that a sharp
increase in these loans by the specialized banks help offset the impact of weaker
growth in disbursement by the commercial banks during Jul-Oct FY09.
The breakup between the farm and non-farm borrowing showed a steady increase
in the share of non-farm sector, rose to 34.3 percent in Jul-Oct FY09 from 27.9
percent in Jul-Oct FY08.
billion actual disbursement during FY08, up by 18.1 percent. However, during
Jul-Oct FY09, agri credit
disbursements registered an
increase of 16.2 percent (see
Table 2.2),9 significantlly
lower than the 27 percent in
the same period last year.
The relative slowdown is also
evident from a decline in
agri-credit disbursement
during Jul-Oct FY09 relative
to the annual target ratio
being the lowest in five years
(see Figure 2.7).
However, this is not a source
of concern given the
slowdown appears to be a temporary phenomenon; fertilizer off-take is expected
to rise from November onward for wheat crop cultivated in an extended area. In
addition, even at this moderated growth rate, FY09 agri credit disbursement target
is estimated to be met comfortably.
A disaggregated analysis suggests that the deceleration in agri-credit growth is
entirely attributed to a weaker rise in production related loans during Jul-Oct
FY09, as disbursements for developmental purposes increased strongly. In fact, a
weak disbursement of production related loans is also a reflection of weak
fertilizer demand in this period. An institution-wise break-up shows that a sharp
increase in these loans by the specialized banks help offset the impact of weaker
growth in disbursement by the commercial banks during Jul-Oct FY09.
The breakup between the farm and non-farm borrowing showed a steady increase
in the share of non-farm sector, rose to 34.3 percent in Jul-Oct FY09 from 27.9
percent in Jul-Oct FY08.
Fertilizers Prices
Despite high demand in rabi09 sowing season, urea prices fell to Rs 744 per 50kg
bag in October, 2008 after touching a record high of Rs 790 per 50kg bag in
September 2008. This decline is a direct impact of fall in the international urea
prices. Surprisingly, despite a downtrend in DAP price in international market,
domestic prices did not see a correction, probably due to the presence of stocks at
old (higher) prices (see Figure 2.5 & 2.6). Admittedly, a part of decline in
international prices will be offset due to depreciation of rupee, but some benefits
of falling international prices need to be passed on to farmers as well.
The decline in international
fertilizers prices is attributed
to slowdown in demand ,
decrease in fuel prices and
fears of global recession.
Other factors include, (1)
falling food prices8 and (2)
resumption of fertilizer
exports from China ,
previously reduced owing to
high export taxes. In
addition, fall in fertilizer
prices also reflected by the
slowing global credit crunch
that has slowed down the
entire fertilizer supply chain,
bag in October, 2008 after touching a record high of Rs 790 per 50kg bag in
September 2008. This decline is a direct impact of fall in the international urea
prices. Surprisingly, despite a downtrend in DAP price in international market,
domestic prices did not see a correction, probably due to the presence of stocks at
old (higher) prices (see Figure 2.5 & 2.6). Admittedly, a part of decline in
international prices will be offset due to depreciation of rupee, but some benefits
of falling international prices need to be passed on to farmers as well.
The decline in international
fertilizers prices is attributed
to slowdown in demand ,
decrease in fuel prices and
fears of global recession.
Other factors include, (1)
falling food prices8 and (2)
resumption of fertilizer
exports from China ,
previously reduced owing to
high export taxes. In
addition, fall in fertilizer
prices also reflected by the
slowing global credit crunch
that has slowed down the
entire fertilizer supply chain,
Fertilizers off-take
Fertilizers off-take, (both urea
and DAP), decreased during
Jul-Nov FY097 amid weak
demand due to higher prices
and vague market signals.
Urea off-take decreased by
16.1 percent YoY during this
period. DAP fertilizer offtake
declined by 11.7 percent
during Jul-Nov FY09 on top
of 12.6 percent fall seen in
the same period last year (see
Figure 2.4 ). Lower off-take
probably reflects cautious
purchases by the farmers in
anticipation of a reduction in
price following the collapse of international DAP prices. However, impact of an
ease in international prices is yet to be seen in the domestic market.
It is estimated that fertilizer
supply will be lower than its
demand entirely due to
shortages in the availability
of urea, while availability of
DAP estimated at 985
thousand tons (comprising
655 thousand tons of opening
inventory and 330 thousand
tons of local production)
against an estimated demand
of 885 thousand tons,
showing a comfortable
supply and will leave 135
thousand tons for kharif
FY10 consumption.
and DAP), decreased during
Jul-Nov FY097 amid weak
demand due to higher prices
and vague market signals.
Urea off-take decreased by
16.1 percent YoY during this
period. DAP fertilizer offtake
declined by 11.7 percent
during Jul-Nov FY09 on top
of 12.6 percent fall seen in
the same period last year (see
Figure 2.4 ). Lower off-take
probably reflects cautious
purchases by the farmers in
anticipation of a reduction in
price following the collapse of international DAP prices. However, impact of an
ease in international prices is yet to be seen in the domestic market.
It is estimated that fertilizer
supply will be lower than its
demand entirely due to
shortages in the availability
of urea, while availability of
DAP estimated at 985
thousand tons (comprising
655 thousand tons of opening
inventory and 330 thousand
tons of local production)
against an estimated demand
of 885 thousand tons,
showing a comfortable
supply and will leave 135
thousand tons for kharif
FY10 consumption.
Kharif Crops
Rice crop primarily benefitted from increase in area on the back of record high
rice prices at sowing time. Farmers switched over from cotton and sugarcane as
realized prices for both the crops in the previous season had been lower than
expected. Besides this, other factors also contributed in remarkable growth of rice
harvest; (1) higher monsoon rains facilitated the irrigation requirements, (2)
efficient use of inputs, and (3) employing yield boosting technology like
plantation of hybrid rice, inter-culture practices and effective pesticide practice.
Out of total FY09 rice
production, approximately
4.0 million tonnes will be
available for exports.
However, a domestic supply
glut has coincided with ease
in international prices; as a
result, downward pressures
on domestic rice prices and
export unit value are
visible.2
Encouragingly, cotton
harvest, which had declined
1 The highest wheat harvest achieved is 23.3 million tonnes in FY07 so far. Given a substantial rise
in area, timely rains, it is likely that FY09 wheat harvest will be a new record high.
2 Domestic rice (basmati) prices declined by 21.7 percent in November 2008 from their peak in June
2008. International prices fell by about 44.5 percent in November 2008 from their peak levels in
April this year.
0
700
1400
2100
2800
3500
FY05
FY06
FY07
FY08
FY09
Estimate
rice prices at sowing time. Farmers switched over from cotton and sugarcane as
realized prices for both the crops in the previous season had been lower than
expected. Besides this, other factors also contributed in remarkable growth of rice
harvest; (1) higher monsoon rains facilitated the irrigation requirements, (2)
efficient use of inputs, and (3) employing yield boosting technology like
plantation of hybrid rice, inter-culture practices and effective pesticide practice.
Out of total FY09 rice
production, approximately
4.0 million tonnes will be
available for exports.
However, a domestic supply
glut has coincided with ease
in international prices; as a
result, downward pressures
on domestic rice prices and
export unit value are
visible.2
Encouragingly, cotton
harvest, which had declined
1 The highest wheat harvest achieved is 23.3 million tonnes in FY07 so far. Given a substantial rise
in area, timely rains, it is likely that FY09 wheat harvest will be a new record high.
2 Domestic rice (basmati) prices declined by 21.7 percent in November 2008 from their peak in June
2008. International prices fell by about 44.5 percent in November 2008 from their peak levels in
April this year.
0
700
1400
2100
2800
3500
FY05
FY06
FY07
FY08
FY09
Estimate
Agriculture-sector Performance
Initial data suggests that agricultural growth in the current fiscal year could be
significantly better than in FY08, notwithstanding a sharp fall in sugarcane
harvest. This expectation is based on a record rice harvest of 6.5 million tonnes,
and a small improvement in cotton production during kharif FY09 (see Table 2.1)
supported by the possibility of a record wheat harvest.1 Initial information also
2.1: Performance of Major Crop
Area under cultivation (000 hectares)
Crops FY07 FY08T FY08P FY09T FY09E % change in FY09
over FY08
Cotton 3,075 3,250 3,055 3,220 2,850 -7
Sugarcane 1,029 1,040 1,241 1,040 1,043 -16
Rice 2,581 2,594 2,516 2,594 2,916 16
Wheat 8,578 8,578 8,550 8,610 4,729* 9.3**
Gram 1,052 1,120 782 1,012 - -
Maize 1,017 1,001 1,037 1,001 - -
Production (000 tons; cotton in 000 bales of 170.09 kg each)
Cotton 12,856 14,140 11,655 14,110 12,060 3.5
Sugarcane 54,742 55,871 63,920 56,516 53,689 -16.0
Rice 5,438 5,721 5,561 5,721 6,543 17.7
Wheat 23,295 24,045 20,959 25,000 - -
Gram 838 707 554 652 - -
Maize 3,088 3,221 3,109 3,279 - -
Yield (Kg/hectare)
Cotton 711 740 649 750 720 10.9
Sugarcane 53,199 53,722 51,507 54,342 51,476 -0.1
Rice 2,107 2,205 2,210 2,205 2,244 1.5
Wheat 2,716 2,803 2,451 2,904 - -
Gram 797 631 708 644 - -
Maize 3,036 3,218 2,998 3,276 - -
P: Provisional,
T: Target, E: Estimates
Source: MINFAL
(*) Up to Nov-15, 2008; (**) Change over the corresponding period of 2007
significantly better than in FY08, notwithstanding a sharp fall in sugarcane
harvest. This expectation is based on a record rice harvest of 6.5 million tonnes,
and a small improvement in cotton production during kharif FY09 (see Table 2.1)
supported by the possibility of a record wheat harvest.1 Initial information also
2.1: Performance of Major Crop
Area under cultivation (000 hectares)
Crops FY07 FY08T FY08P FY09T FY09E % change in FY09
over FY08
Cotton 3,075 3,250 3,055 3,220 2,850 -7
Sugarcane 1,029 1,040 1,241 1,040 1,043 -16
Rice 2,581 2,594 2,516 2,594 2,916 16
Wheat 8,578 8,578 8,550 8,610 4,729* 9.3**
Gram 1,052 1,120 782 1,012 - -
Maize 1,017 1,001 1,037 1,001 - -
Production (000 tons; cotton in 000 bales of 170.09 kg each)
Cotton 12,856 14,140 11,655 14,110 12,060 3.5
Sugarcane 54,742 55,871 63,920 56,516 53,689 -16.0
Rice 5,438 5,721 5,561 5,721 6,543 17.7
Wheat 23,295 24,045 20,959 25,000 - -
Gram 838 707 554 652 - -
Maize 3,088 3,221 3,109 3,279 - -
Yield (Kg/hectare)
Cotton 711 740 649 750 720 10.9
Sugarcane 53,199 53,722 51,507 54,342 51,476 -0.1
Rice 2,107 2,205 2,210 2,205 2,244 1.5
Wheat 2,716 2,803 2,451 2,904 - -
Gram 797 631 708 644 - -
Maize 3,036 3,218 2,998 3,276 - -
P: Provisional,
T: Target, E: Estimates
Source: MINFAL
(*) Up to Nov-15, 2008; (**) Change over the corresponding period of 2007
Economy of Pakistan 1
Pakistan ranks as one of the fastest growing economies in Asia. With the exception of the 50s and 70s, Pakistan's
annual GDP growth rates have usually exceeded six percent reaching as high as 8.7% during the 1980s. A brief of
economic situation in year 2004 is given below.
Real GDP growth in the fiscal year 2003-04, once again, surpassed the target (5.3%) with a headline number of 6.4
percent compared to last year's 5.1 percent rate. This buoyant growth was aided by a 13.1 percent and 5.2 percent
growth in the manufacturing and services sectors, respectively. When compared with other developing countries in
general and East and Southeast Asian countries in particular, Pakistan's growth performance has been quite impressive.
Development nations grew, on average, by 6.1 percent while East and Southeast Asian countries like Hong Kong,
Singapore, Korea, Indonesia, Malaysia, Philippines, Bangladesh and Sri Lanka registered growth rates ranging from 1.1
percent to 5.5 percent in 2003-04.
Total investment rose to 18.1 percent of GDP in 2003-04 against 16.7 percent last year. Most importantly, fixed
investment rose sharply to 16.4 percent of GDP against 14.8 percent last year. What is highly encouraging is the
significant rise in private sector investment - from 11.2 percent to 11.7 percent of GDP. This year's growth is
overwhelmed by massive investment in large-scale manufacturing by the private sector which grew by 25.4 percent
during the year.
Controlled inflation has also been one of the hallmarks of this government's macroeconomic policies. The rate of
inflation as measured by changes in the Consumer Price Index (CPI) averaged 3.9 percent during the first ten months of
the current fiscal year against 3.3 percent in the same period last year.
Another landmark achievement of the outgoing fiscal year has been impressive growth in the share index of the Karachi
Stock Exchange (KSE) - rising form 3403 points on June 30, 2003 to 5430 points on April 30, 2004 - an increase of 2027
points or 59.6 percent during the period. In terms of US dollars the market capitalization of the KSE surged to $25 billion
from $12.92 billion during the period. A number of factors have contributed to the persistence of the bullish trend in the
stock market which include: continuation of pro-growth economic policies; stable macroeconomic environment;
accelerated economic growth; stable exchange rate; brisk pace of privatization through the capital market; visible
improvement in the Pakistan - India relationship; availability of adequate liquidity in the market; good operating and
financial results from the majority of blue chip companies and appropriate reforms.
Pakistan also succeeded in attracting $760 million in Foreign Direct Investment (FDI) during July - April 2003-04 against
$696 million in the same period last year, thereby registering an increase of 9.3 percent. The bulk of the FDI has come
in the oil and gas, telecom, transport and communication, and banking sectors.
annual GDP growth rates have usually exceeded six percent reaching as high as 8.7% during the 1980s. A brief of
economic situation in year 2004 is given below.
Real GDP growth in the fiscal year 2003-04, once again, surpassed the target (5.3%) with a headline number of 6.4
percent compared to last year's 5.1 percent rate. This buoyant growth was aided by a 13.1 percent and 5.2 percent
growth in the manufacturing and services sectors, respectively. When compared with other developing countries in
general and East and Southeast Asian countries in particular, Pakistan's growth performance has been quite impressive.
Development nations grew, on average, by 6.1 percent while East and Southeast Asian countries like Hong Kong,
Singapore, Korea, Indonesia, Malaysia, Philippines, Bangladesh and Sri Lanka registered growth rates ranging from 1.1
percent to 5.5 percent in 2003-04.
Total investment rose to 18.1 percent of GDP in 2003-04 against 16.7 percent last year. Most importantly, fixed
investment rose sharply to 16.4 percent of GDP against 14.8 percent last year. What is highly encouraging is the
significant rise in private sector investment - from 11.2 percent to 11.7 percent of GDP. This year's growth is
overwhelmed by massive investment in large-scale manufacturing by the private sector which grew by 25.4 percent
during the year.
Controlled inflation has also been one of the hallmarks of this government's macroeconomic policies. The rate of
inflation as measured by changes in the Consumer Price Index (CPI) averaged 3.9 percent during the first ten months of
the current fiscal year against 3.3 percent in the same period last year.
Another landmark achievement of the outgoing fiscal year has been impressive growth in the share index of the Karachi
Stock Exchange (KSE) - rising form 3403 points on June 30, 2003 to 5430 points on April 30, 2004 - an increase of 2027
points or 59.6 percent during the period. In terms of US dollars the market capitalization of the KSE surged to $25 billion
from $12.92 billion during the period. A number of factors have contributed to the persistence of the bullish trend in the
stock market which include: continuation of pro-growth economic policies; stable macroeconomic environment;
accelerated economic growth; stable exchange rate; brisk pace of privatization through the capital market; visible
improvement in the Pakistan - India relationship; availability of adequate liquidity in the market; good operating and
financial results from the majority of blue chip companies and appropriate reforms.
Pakistan also succeeded in attracting $760 million in Foreign Direct Investment (FDI) during July - April 2003-04 against
$696 million in the same period last year, thereby registering an increase of 9.3 percent. The bulk of the FDI has come
in the oil and gas, telecom, transport and communication, and banking sectors.
Trade Account
During Jul-Nov FY09, strong growth in imports, mainly due to higher import
prices, outpaced the otherwise substantial improvement in export growth causing
the trade deficit for the period to widen by US$ 1.4 billion compared to the same
period last year. Interestingly, this rise in the deficit accrued entirely during Q1-
FY09; while still large, the monthly deficit saw a YoY decline in each of the next
two months.
The fact that (1) a large share of the overall import increase was contributed by
price impact, while the share of quantum impact in the total import increase was
negative and (2) growth of non-food & non-oil imports recorded a sharp
deceleration during Jul-Nov FY09, both point toward easing of demand pressures
during Jul-Nov FY09. The combined impact of lower commodity prices and
easing of domestic demand pressure are likely to reduce the trade deficit going
forward.
prices, outpaced the otherwise substantial improvement in export growth causing
the trade deficit for the period to widen by US$ 1.4 billion compared to the same
period last year. Interestingly, this rise in the deficit accrued entirely during Q1-
FY09; while still large, the monthly deficit saw a YoY decline in each of the next
two months.
The fact that (1) a large share of the overall import increase was contributed by
price impact, while the share of quantum impact in the total import increase was
negative and (2) growth of non-food & non-oil imports recorded a sharp
deceleration during Jul-Nov FY09, both point toward easing of demand pressures
during Jul-Nov FY09. The combined impact of lower commodity prices and
easing of domestic demand pressure are likely to reduce the trade deficit going
forward.
Balance of Payments
Pakistan’s external account remained under stress through Jul-Nov FY09, as
acceleration in the growth of the current account deficit, and sharply reduced
financial & capital account inflows drew the country’s foreign currency reserves
to perilously low levels. Not surprisingly, the rupee also weakened substantially
in the period, depreciating by as much as 16.3 percent against the US dollar by
end-October 2008, before recovering somewhat after Pakistan gained IMF support
for a macroeconomic stabilization program.
Although there were indications of slowdown in domestic demand, higher import
prices during Jul-Nov FY09 continued to propel import growth. It was only when
the slowdown in the domestic demand was complemented by lower import prices
in November 2008 that the import bill declined 23.9 percent YoY. Lower import
bill combined with the rise in remittances in November narrowed the current
account deficit somewhat for the Jul-Nov 2008 period.
On the financing side, deteriorating macro economic imbalances, sharp
depreciation in Pak rupee against US dollar, and substantial fall in stock market
and consequential increase in the country’s default risk along with downward
revision by the credit rating agencies, deterred foreign exchange inflows during
the period under review. As a result, surplus in financial account recorded
significant 62.0 percent fall during Jul-Nov FY09 in contrast to an increase in the
corresponding periods of last three successive years.
acceleration in the growth of the current account deficit, and sharply reduced
financial & capital account inflows drew the country’s foreign currency reserves
to perilously low levels. Not surprisingly, the rupee also weakened substantially
in the period, depreciating by as much as 16.3 percent against the US dollar by
end-October 2008, before recovering somewhat after Pakistan gained IMF support
for a macroeconomic stabilization program.
Although there were indications of slowdown in domestic demand, higher import
prices during Jul-Nov FY09 continued to propel import growth. It was only when
the slowdown in the domestic demand was complemented by lower import prices
in November 2008 that the import bill declined 23.9 percent YoY. Lower import
bill combined with the rise in remittances in November narrowed the current
account deficit somewhat for the Jul-Nov 2008 period.
On the financing side, deteriorating macro economic imbalances, sharp
depreciation in Pak rupee against US dollar, and substantial fall in stock market
and consequential increase in the country’s default risk along with downward
revision by the credit rating agencies, deterred foreign exchange inflows during
the period under review. As a result, surplus in financial account recorded
significant 62.0 percent fall during Jul-Nov FY09 in contrast to an increase in the
corresponding periods of last three successive years.
Fiscal Developments
The large fiscal deficit in FY08 and the adverse economic consequences of its
financing from SBP placed fiscal consolidation at the top of government’s
macroeconomic stabilization agenda for FY09.
First Quarterly Report for FY09
9
Not surprisingly, the Q1-FY09 fiscal performance improved consequent to the
policy shift, with the overall fiscal deficit estimated to have dropped to 1 percent
of annual GDP. This is consistent with the annual fiscal deficit target set under
the IMF stabilization program. The reduction in fiscal deficit in Q1-FY09 was
brought about mainly by a drastic cut in development expenditures.
financing from SBP placed fiscal consolidation at the top of government’s
macroeconomic stabilization agenda for FY09.
First Quarterly Report for FY09
9
Not surprisingly, the Q1-FY09 fiscal performance improved consequent to the
policy shift, with the overall fiscal deficit estimated to have dropped to 1 percent
of annual GDP. This is consistent with the annual fiscal deficit target set under
the IMF stabilization program. The reduction in fiscal deficit in Q1-FY09 was
brought about mainly by a drastic cut in development expenditures.
Money and Banking
SBP undertook aggressive monetary tightening during FY09, further increasing
the policy rate by 300 bps in two rounds. On a cumulative basis, this means a 550
bps increase during the last 18 months. These policy measures were in response to
The State of Pakistan’s Economy
8
carryover of macroeconomic stresses of the preceding year, which had grown in
size during the current year. For example;
(1) Although YoY CPI inflation declined from its peak, domestic inflation has
remained high. While the surge in food prices have retreated somewhat,
non-food inflation shows little effect of the sharp decline in international
commodity prices.
(2) Furthermore, external current account deficit, which was mainly reflecting
domestic demand pressures, increased sharply during FY09. There is a
risk that possible weakening of exports and remittance inflows may even
offset the anticipated relief in overall import bill for the country due to
recent broad-based decline in international commodity prices.
(3) Moreover, continuing monetization of the deficit was not only providing a
stimulus to domestic demand but has also greatly diluted the impact of
earlier monetary tightening. Government budgetary borrowings from the
central bank during Jul-Nov 2008 reached Rs 356.4 billion, as compared
to Rs 169.4 billion in the same period last year.
The excessive government borrowings from central bank posed difficulties in
liquidity management, which became more complex due to (1) a substantial drain
of the rupee liquidity from the inter-bank market by October 2008 following
substantial pressure on external account; (2) a heavy withdrawal of deposits owing
to seasonal cash demand around Eid, and (3) rumor-induced panic withdrawal of
deposits in October 2008. This induced SBP to announce a number of temporary
measures to accommodate liquidity shortfalls.
In terms of monetary aggregates, the YoY growth in M2 decelerated steeply to
10.7 percent by end-November 2008 – the lowest growth seen during the last
seven years. Indeed, an extraordinarily strong contraction in net foreign assets
(NFA) of the banking system more than offset a sharp rise in budgetary
borrowings from the central bank and continued strong demand for credit (both
from public sector enterprise and private sector).
the policy rate by 300 bps in two rounds. On a cumulative basis, this means a 550
bps increase during the last 18 months. These policy measures were in response to
The State of Pakistan’s Economy
8
carryover of macroeconomic stresses of the preceding year, which had grown in
size during the current year. For example;
(1) Although YoY CPI inflation declined from its peak, domestic inflation has
remained high. While the surge in food prices have retreated somewhat,
non-food inflation shows little effect of the sharp decline in international
commodity prices.
(2) Furthermore, external current account deficit, which was mainly reflecting
domestic demand pressures, increased sharply during FY09. There is a
risk that possible weakening of exports and remittance inflows may even
offset the anticipated relief in overall import bill for the country due to
recent broad-based decline in international commodity prices.
(3) Moreover, continuing monetization of the deficit was not only providing a
stimulus to domestic demand but has also greatly diluted the impact of
earlier monetary tightening. Government budgetary borrowings from the
central bank during Jul-Nov 2008 reached Rs 356.4 billion, as compared
to Rs 169.4 billion in the same period last year.
The excessive government borrowings from central bank posed difficulties in
liquidity management, which became more complex due to (1) a substantial drain
of the rupee liquidity from the inter-bank market by October 2008 following
substantial pressure on external account; (2) a heavy withdrawal of deposits owing
to seasonal cash demand around Eid, and (3) rumor-induced panic withdrawal of
deposits in October 2008. This induced SBP to announce a number of temporary
measures to accommodate liquidity shortfalls.
In terms of monetary aggregates, the YoY growth in M2 decelerated steeply to
10.7 percent by end-November 2008 – the lowest growth seen during the last
seven years. Indeed, an extraordinarily strong contraction in net foreign assets
(NFA) of the banking system more than offset a sharp rise in budgetary
borrowings from the central bank and continued strong demand for credit (both
from public sector enterprise and private sector).
Prices
Inflationary pressures remained strong in the economy during the first five months
of FY09. In particular, consumer price index (CPI) and the sensitive price
indicator (SPI) have seen strong YoY increases in the period. However after
recording strong growth (YoY) during the first two months of FY09, a significant
decline in WPI inflation has been observed during the later months.
Core inflation, measured by both non-food non-energy (NFNE) and 20% trimmed
mean, strengthened during the first five months of FY09. Strength in core
inflation is indicating the persistence of inflationary pressures.
of FY09. In particular, consumer price index (CPI) and the sensitive price
indicator (SPI) have seen strong YoY increases in the period. However after
recording strong growth (YoY) during the first two months of FY09, a significant
decline in WPI inflation has been observed during the later months.
Core inflation, measured by both non-food non-energy (NFNE) and 20% trimmed
mean, strengthened during the first five months of FY09. Strength in core
inflation is indicating the persistence of inflationary pressures.
Services
Services sector has exhibited resilience to fluctuations in economic activity in
recent years. This is also evident in continued growth in FDI in the services
sector, despite slowdown in overall economic activities in the country.
Key indicators of services sector during Q1-FY09 present a mixed scenario.
While, some sectors such as wholesale & retail trade and transportation &
communication are likely to show a weak performance relative to the preceding
year, community & social services, finance & insurance as well as public
administration & defence are estimated to exhibit a strong growth for yet another
year.
recent years. This is also evident in continued growth in FDI in the services
sector, despite slowdown in overall economic activities in the country.
Key indicators of services sector during Q1-FY09 present a mixed scenario.
While, some sectors such as wholesale & retail trade and transportation &
communication are likely to show a weak performance relative to the preceding
year, community & social services, finance & insurance as well as public
administration & defence are estimated to exhibit a strong growth for yet another
year.
Large Scale Manufacturing
Large scale manufacturing (LSM) continued to decline, as it registered a negative
growth of 6.2 percent in Q1-FY09 as against a reasonable growth of 7.3 percent in
Q1-FY08. This decline in LSM production is broad-based. Seven sub-sectors
(having 72.4 percent weight) out of fifteen registered decline, while three (having
15.3 percent weight) registered a growth of less than one percent.
This disappointing outcome is a result of a number of factors including: severe
energy shortages, deterioration in domestic law & order situation, impact of pass
through of international oil prices, sharp depreciation in rupee - US dollar parity
and most importantly, weak external demand on the back of global recession and
slowdown in domestic demand
growth of 6.2 percent in Q1-FY09 as against a reasonable growth of 7.3 percent in
Q1-FY08. This decline in LSM production is broad-based. Seven sub-sectors
(having 72.4 percent weight) out of fifteen registered decline, while three (having
15.3 percent weight) registered a growth of less than one percent.
This disappointing outcome is a result of a number of factors including: severe
energy shortages, deterioration in domestic law & order situation, impact of pass
through of international oil prices, sharp depreciation in rupee - US dollar parity
and most importantly, weak external demand on the back of global recession and
slowdown in domestic demand
Agriculture
Initial data suggests that agricultural growth in the current fiscal year could be
significantly better than in FY08, notwithstanding a sharp fall in sugarcane
harvest. This expectation is based on a record rice harvest of 6.5 million tones, a
small improvement in cotton production during Kharif FY09, supported by the
possibility of a record wheat harvest. Initial information also raises the possibility
of a very good showing by minor crops and reasonable growth in the livestock
sub-sectors. The improvement in the kharif crops is remarkable given continued
water shortages. It suggests that better prices and credit availability may have
encouraged farmers to increase investment in crops. Further, widespread rains
during mid-December 2008, raise hopes for higher rabi plantation and harvesting.
Some important policy measures announced in the FY09 budget (and later) to
encourage farmers may have played important role. These include: (1) increase in
support prices of wheat for FY09 crop, (2) a 25 percent higher agri-credit target
for FY09 compared with the FY08 target, with enhancement in indicative per acre
credit limit for major and minor crops, orchards and fishery by an average 70
percent, (3) increase in subsidy for DAP, (4) starting of crop insurance scheme,
and (5) exemption of GST on fertilizers and pesticides etc.
significantly better than in FY08, notwithstanding a sharp fall in sugarcane
harvest. This expectation is based on a record rice harvest of 6.5 million tones, a
small improvement in cotton production during Kharif FY09, supported by the
possibility of a record wheat harvest. Initial information also raises the possibility
of a very good showing by minor crops and reasonable growth in the livestock
sub-sectors. The improvement in the kharif crops is remarkable given continued
water shortages. It suggests that better prices and credit availability may have
encouraged farmers to increase investment in crops. Further, widespread rains
during mid-December 2008, raise hopes for higher rabi plantation and harvesting.
Some important policy measures announced in the FY09 budget (and later) to
encourage farmers may have played important role. These include: (1) increase in
support prices of wheat for FY09 crop, (2) a 25 percent higher agri-credit target
for FY09 compared with the FY08 target, with enhancement in indicative per acre
credit limit for major and minor crops, orchards and fishery by an average 70
percent, (3) increase in subsidy for DAP, (4) starting of crop insurance scheme,
and (5) exemption of GST on fertilizers and pesticides etc.
1.2 Looking Forward
It is evident that Pakistan’s
economy needs effective
policies and implementation of
reforms in FY09 to regain
macroeconomic stability in the
midst of a challenging year.
Real GDP growth is likely to
be significantly lower than the
annual target and inflation will
breach its target with a wide
margin (see Table 1.2). On a
positive note, both fiscal and
current account deficits are
estimated to improve in FY09.
Amongst the biggest
challenges for the government will be to ensure the pass through of decline in
international commodity prices to consumers. In this background, while recent
downward adjustments in the administered prices of key fuels3 is appreciable, the
reversal in transport fares and goods transportation charges is almost negligible.
This behavior is not unexpected given (1) when prices moves upward quickly,
they generally do not come down as fast; and (2) inflationary expectations remain
strong. Moreover, while commodity price shock was quite strong, it was believed
that these prices will remain stubbornly high for at least a decade or so.4
However, these prices have unexpectedly plummeted dramatically due to
deepening global recession. Firms and traders would like to take some time to
adjust their prices and margins in these circumstances. Consumer awareness, role
3 Petrol, diesel, kerosene oil and LPG.
4 http://www.fao.org/newsroom/en/news/2008/1000849/index.html
Table 1.2: Projections of Major Economic Indicators
FY09
FY08 Annual plan
targets Projections
growth rates in percent
GDP 5.8 5.5 3.5 - 4.5
Average CPI Inflation 12.0 11.0 20.0 - 22.0
Monetary assets (M2) 15.3 14.0 11.0 - 12.0
billion US dollars
Workers’ remittances 6.5 7.7 7.5
Exports (fob-BoP data) 20.1 22.9 20.5 - 22.0
Imports (fob- BoP data) 35.4 37.2 33.5 - 35.0
percent of GDP
Fiscal deficit 7.4 4.7 4.3 – 4.8
Current account deficit 8.4 7.2 6.2 - 6.8
Note: Targets of fiscal and current account deficit to GDP ratios
are based on Nominal GDP in the Budget document for FY09,
while their projections are based on projected (higher) nominal
GDP for the year.
The State of Pakistan’s Economy
6
of media, quicker settlement of import duties and other taxes may be required to
accelerate disinflationary process in the economy.
Similarly, global recession and risk averse behavior of investor would likely to
severely impact international trade and level of forex inflows in the economy.
SBP estimates for both imports and exports have been revised downwards, with a
more pronounced effect on imports. At the same time in the event of shortfall of
external financing, the burden of financing fiscal deficit will disproportionately
fall on the domestic commercial banks, since government has committed not to
borrow incrementally from the central bank. In addition, FDI inflows may be
substantially lower than in recent years, in which case, pressures on forex reserves
could remain strong. Both possible developments indicate continuing risk on
interest rates and exchange rate, and thus the need for continued vigilance by
policymakers.
economy needs effective
policies and implementation of
reforms in FY09 to regain
macroeconomic stability in the
midst of a challenging year.
Real GDP growth is likely to
be significantly lower than the
annual target and inflation will
breach its target with a wide
margin (see Table 1.2). On a
positive note, both fiscal and
current account deficits are
estimated to improve in FY09.
Amongst the biggest
challenges for the government will be to ensure the pass through of decline in
international commodity prices to consumers. In this background, while recent
downward adjustments in the administered prices of key fuels3 is appreciable, the
reversal in transport fares and goods transportation charges is almost negligible.
This behavior is not unexpected given (1) when prices moves upward quickly,
they generally do not come down as fast; and (2) inflationary expectations remain
strong. Moreover, while commodity price shock was quite strong, it was believed
that these prices will remain stubbornly high for at least a decade or so.4
However, these prices have unexpectedly plummeted dramatically due to
deepening global recession. Firms and traders would like to take some time to
adjust their prices and margins in these circumstances. Consumer awareness, role
3 Petrol, diesel, kerosene oil and LPG.
4 http://www.fao.org/newsroom/en/news/2008/1000849/index.html
Table 1.2: Projections of Major Economic Indicators
FY09
FY08 Annual plan
targets Projections
growth rates in percent
GDP 5.8 5.5 3.5 - 4.5
Average CPI Inflation 12.0 11.0 20.0 - 22.0
Monetary assets (M2) 15.3 14.0 11.0 - 12.0
billion US dollars
Workers’ remittances 6.5 7.7 7.5
Exports (fob-BoP data) 20.1 22.9 20.5 - 22.0
Imports (fob- BoP data) 35.4 37.2 33.5 - 35.0
percent of GDP
Fiscal deficit 7.4 4.7 4.3 – 4.8
Current account deficit 8.4 7.2 6.2 - 6.8
Note: Targets of fiscal and current account deficit to GDP ratios
are based on Nominal GDP in the Budget document for FY09,
while their projections are based on projected (higher) nominal
GDP for the year.
The State of Pakistan’s Economy
6
of media, quicker settlement of import duties and other taxes may be required to
accelerate disinflationary process in the economy.
Similarly, global recession and risk averse behavior of investor would likely to
severely impact international trade and level of forex inflows in the economy.
SBP estimates for both imports and exports have been revised downwards, with a
more pronounced effect on imports. At the same time in the event of shortfall of
external financing, the burden of financing fiscal deficit will disproportionately
fall on the domestic commercial banks, since government has committed not to
borrow incrementally from the central bank. In addition, FDI inflows may be
substantially lower than in recent years, in which case, pressures on forex reserves
could remain strong. Both possible developments indicate continuing risk on
interest rates and exchange rate, and thus the need for continued vigilance by
policymakers.
THE STATE OF PAKISTAN’S ECONOMY
THE STATE OF PAKISTAN’S ECONOMY
First Quarterly Report for FY09
1.1 Economic Outlook
The sense of crisis gripping Pakistan’s economy in the initial months of FY09 has
visibly eased by November 2008, as the government moved to address the most
immediate risks, and entered into a macroeconomic stabilization program to
support medium-term reforms under the aegis of the IMF. The disbursement of
the first tranche of US$ 3.0 billion by end-November 2008 under the program
meant that any immediate risk of default on external obligations receded, with a
substantial improvement in foreign exchange reserve adequacy indicators. Also,
exports growth has strengthened and imports growth moderated somewhat (see
Table 1.1). This lent strength to the rupee, reducing the impact of an important
generator of inflationary pressures.
The gain on the external account was helped by a sharp decline in international
commodity prices that is expected to substantially lower the country’s import bill,
offering the possibility of a decline in the country’s very large current account
deficit, and lower inflation. This supply-side improvement has been reinforced by
the reasonably good performance of crops during kharif FY09 cropping season.
These factors appear to have already halted the persistent uptrend in inflationary
pressures in the economy. Together, they could also help support a very modest
improvement in the growth outlook for FY09.
There is also substantial progress on containing fiscal imbalances, with the
government moving bravely to reduce subsidies, contain growth in other spending
and increase revenues. The result has been an encouraging improvement in some
fiscal indicators, including a sharp fall in the fiscal deficit from 1.5 percent of
GDP during Q1-FY08 to 1 percent of GDP in Q1-FY09. This figure appears
consistent with the annual target embedded in the macroeconomic stabilization
program framework.
Notwithstanding the relative positives, there is no room for complacency. While
many of the country’s macroeconomic indicators may no longer be worsening, the
imbalances are nonetheless still quite large. Resolving them will require
disciplined efforts over an extended timeframe. This challenge is all the greater
because of the difficult international economic environment, which has restricted
the country’s ability to tap international capital markets and carries risks for other
external receipts (exports, remittances, FDI, etc.).
The State of Pakistan’s Economy
2
Containing and bringing down
the persistent high inflation in
the economy will not be easy.
The November 2008 CPI
inflation of 24.7 percent YoY
is only a little lower than the
record high of 25.3 percent
seen in August 2008, and both
core inflation measures persist
at, or close to, their record
highs. This persistence, and
the evidence of excess
domestic demand, reflected in
high government borrowings
from the central bank and
widening current account
deficit, underpinned the central
bank’s decision to further
tighten monetary policy in
November 2008 by raising the
policy rate by 200 basis points.
It is also important to note that domestic commodity prices did not decline in
tandem with the sharp fall in international prices. A part of this apparent
disconnect is explained by the significant depreciation of the Pakistani rupee1
since June, which offset some gains from the large decline in international prices.
The downward stickiness of prices probably also owes to market structure and
other issues, which may be amenable to administrative and policy interventions by
the government. Transportation costs, which have substantial impacts on prices
of other products and that had been increased disproportionately more when fuel
prices rose, provide a case in point; transport fares of the railways, airlines,
commercial vehicles, most inter-city bus services, etc. were either not adjusted
downwards or saw small changes, after the decline in domestic fuel prices.
Anecdotal evidence suggests that this also holds true for trucking costs in many
regions of the country.
Government interventions however must tread a fine line, encouraging market
driven solutions while avoiding degeneration into price setting or the provision of
subsidies. In particular, broad price subsidies often prove wasteful, and in any
1 Pak rupee depreciated by 13.4 percent during Jul-Dec 22, 2008.
Table 1.1: Selected Economic Indicators
FY07 FY08 FY09
Growth rate (percent)
LSM Jul-Sep 11.3 7.3 -6.2
Exports (fob) Jul-Nov 4.5 6.5 12.7
Imports (cif) Jul-Nov 10.3 18.4 16.5
Tax revenue (FBR) Jul-Nov 19.1 14.8 24.4
CPI (12 month MA) Nov 7.9 7.6 19.1
Private sector credit Jul-Nov 7.0 5.4 5.1
Money supply (M2) Jul-Nov 3.9 4.0 -0.2
billion US dollars
Total liquid reserves1 end-Nov 12.3 15.7 9.1
Home remittances Jul-Nov 2.1 2.6 3.0
Net foreign investment Jul-Nov 2.0 1.8 1.4
percent of GDP2
Fiscal deficit Jul-Sep 1.0 1.6 1.0
Trade deficit Jul-Nov 3.1 4.6 4.9
Current a/c deficit Jul-Nov 2.8 2.8 3.9
1. With SBP & commercial banks.
2. Based on full-year GDP in the denominator. For FY09
estimated full-year GDP has been used.
First Quarterly Report for FY09
3
case, entail fiscal costs which the budget can ill afford. A key test could come
with the wheat harvest. The generous support price offered earlier may not be
sustainable as international prices have collapsed. Extensive government
purchases to support prices at this level would entail fiscal costs, lead to wastage
(as millers would prefer lower, market-driven, prices) and potentially, raise
imports.
The data available so far shows that the government has made a fine start to
containing the fiscal deficit. However, the fiscal improvement in Q1-FY09
appears largely based on reduction of oil subsidies and a cut in development
spending. This is understandable since (1) any meaningful effort to expand
revenues (particularly by broadening the tax base) will only work in an extended
time frame, and (2) given fiscal rigidities in current expenditures (especially
interest payments) the gains will not be available in the short term. In the medium
term, such measures must be supplemented by policies to discipline growth in
non-development expenditures and broaden the revenue base. This will provide
the necessary fiscal space to ensure appropriate levels of public spending on social
and infrastructure projects in the future.
A change in mind-set is also required in fiscal planning. Expenditure growth must
be kept consistent with a realistic assessment of revenues, and appropriate
adjustments made as the year progresses. This will ensure that the government will
not crowd-out private sector investment, as the domestic banking sector would
then have the space to meet the requirements of the private sector.
Simultaneously, it is also imperative that the temptation for government to seek
unlimited financing from the central bank be strictly restricted by law. Empirical
international studies, and evidences from recent history in Pakistan, clearly
demonstrate the dangers to macroeconomic stability resulting from heavy recourse
to inflationary borrowings by governments from the central bank.
Acknowledging this, the government had already committed to zero additional
budgetary borrowings from the central bank, and this has now been incorporated
into the IMF supported macroeconomic stabilization program. The resulting
elimination of the fiscal demand stimulus, a contractionary monetary policy, and
declining international commodity prices will hopefully also shrink the large
current account deficit.
Provisional data indicates that the growth of the current account deficit may have
halted in November 2008. If as expected, a declining trend takes hold in
succeeding months, this will significantly boost prospects for regaining
macroeconomic stability. It must be kept in mind that the slide of the rupee value
The State of Pakistan’s Economy
4
during Jul-Nov FY09 was mainly a function of continued deterioration in external
balances, which resulted in depletion of forex reserves and also generated liquidity
problems for the domestic financial markets.
This weakness of the rupee also contributed to the decline in investment inflows,
and capital flight by investors. However, a crackdown on illegal forex transfers,
and the near simultaneous entry into a stabilization program with the IMF, has
helped the rupee recoup some of its earlier losses. A further boost to confidence in
the local currency came from signs of slowing import growth.
The weakening in import growth is attributed to both, the substantial downtrend in
international commodity prices as well as a relative ease in domestic demand.2
However, lower commodity prices could also hit export prospects. The sharp fall
in international rice prices means that in H2-FY09 it is likely that export quantum
will grow but values may decline, relative to H2-FY08. The improvements in
external sector are expected to be more visible during H2-FY09 and coupled with
fiscal prudence could potentially have impacts on monetary policy.
First, an improvement in external accounts would enhance credibility and
minimize the speculation of crisis, which would help SBP to manage liquidity in
the banking system. Second, government’s commitment not to resort to
borrowings from the central bank would make it easier for the SBP to focus on
eliminating earlier overhang created by monetization of the fiscal deficit. Third,
absence of government borrowings from the central bank would help improve
monetary policy transmission mechanism through reflecting true cost of funds in
the money market. Finally, a relative contraction in fiscal deficit would help
contain aggregate demand pressures, which would supplement monetary policy.
The stabilization efforts were underway even before the initiation of IMF program
as government passed through the impact of higher international oil prices to
domestic prices of key fuels Q4-FY08 onwards; fiscal consolidation during the
first quarter of FY09 and monetary tightening by the central bank in May and July
2008 are examples of these efforts. In particular, the fiscal consolidation program
of the government for FY09 consists of (1) substantial reduction in overall budget
deficit, as a percent of GDP, through a mix of cut in expenditures (as a share of
GDP) and a rise in tax revenues (as a share of GDP), and (2) a gradual elimination
of government budgetary borrowings from SBP.
2 For example, import quantum of crude oil, palm oil, soybean oil, fertilizers, iron & steel, rubber
tyres and tubes declined during Jul-Nov FY09.
First Quarterly Report for FY09
5
Despite these efforts, temporary liquidity shortages with the commercial banks
were viewed as signs of financial crisis in the country. This led to a fresh round of
speculative attack on domestic currency. Unfortunately, these developments
coincided with the global financial and liquidity crises, thus it was perceived that
the domestic crisis was also triggered due to the same reasons as faced by western
financial institutions. The central bank assessed the situation and took important
measures to ease liquidity in the financial system and stabilize the domestic
currency.
First Quarterly Report for FY09
1.1 Economic Outlook
The sense of crisis gripping Pakistan’s economy in the initial months of FY09 has
visibly eased by November 2008, as the government moved to address the most
immediate risks, and entered into a macroeconomic stabilization program to
support medium-term reforms under the aegis of the IMF. The disbursement of
the first tranche of US$ 3.0 billion by end-November 2008 under the program
meant that any immediate risk of default on external obligations receded, with a
substantial improvement in foreign exchange reserve adequacy indicators. Also,
exports growth has strengthened and imports growth moderated somewhat (see
Table 1.1). This lent strength to the rupee, reducing the impact of an important
generator of inflationary pressures.
The gain on the external account was helped by a sharp decline in international
commodity prices that is expected to substantially lower the country’s import bill,
offering the possibility of a decline in the country’s very large current account
deficit, and lower inflation. This supply-side improvement has been reinforced by
the reasonably good performance of crops during kharif FY09 cropping season.
These factors appear to have already halted the persistent uptrend in inflationary
pressures in the economy. Together, they could also help support a very modest
improvement in the growth outlook for FY09.
There is also substantial progress on containing fiscal imbalances, with the
government moving bravely to reduce subsidies, contain growth in other spending
and increase revenues. The result has been an encouraging improvement in some
fiscal indicators, including a sharp fall in the fiscal deficit from 1.5 percent of
GDP during Q1-FY08 to 1 percent of GDP in Q1-FY09. This figure appears
consistent with the annual target embedded in the macroeconomic stabilization
program framework.
Notwithstanding the relative positives, there is no room for complacency. While
many of the country’s macroeconomic indicators may no longer be worsening, the
imbalances are nonetheless still quite large. Resolving them will require
disciplined efforts over an extended timeframe. This challenge is all the greater
because of the difficult international economic environment, which has restricted
the country’s ability to tap international capital markets and carries risks for other
external receipts (exports, remittances, FDI, etc.).
The State of Pakistan’s Economy
2
Containing and bringing down
the persistent high inflation in
the economy will not be easy.
The November 2008 CPI
inflation of 24.7 percent YoY
is only a little lower than the
record high of 25.3 percent
seen in August 2008, and both
core inflation measures persist
at, or close to, their record
highs. This persistence, and
the evidence of excess
domestic demand, reflected in
high government borrowings
from the central bank and
widening current account
deficit, underpinned the central
bank’s decision to further
tighten monetary policy in
November 2008 by raising the
policy rate by 200 basis points.
It is also important to note that domestic commodity prices did not decline in
tandem with the sharp fall in international prices. A part of this apparent
disconnect is explained by the significant depreciation of the Pakistani rupee1
since June, which offset some gains from the large decline in international prices.
The downward stickiness of prices probably also owes to market structure and
other issues, which may be amenable to administrative and policy interventions by
the government. Transportation costs, which have substantial impacts on prices
of other products and that had been increased disproportionately more when fuel
prices rose, provide a case in point; transport fares of the railways, airlines,
commercial vehicles, most inter-city bus services, etc. were either not adjusted
downwards or saw small changes, after the decline in domestic fuel prices.
Anecdotal evidence suggests that this also holds true for trucking costs in many
regions of the country.
Government interventions however must tread a fine line, encouraging market
driven solutions while avoiding degeneration into price setting or the provision of
subsidies. In particular, broad price subsidies often prove wasteful, and in any
1 Pak rupee depreciated by 13.4 percent during Jul-Dec 22, 2008.
Table 1.1: Selected Economic Indicators
FY07 FY08 FY09
Growth rate (percent)
LSM Jul-Sep 11.3 7.3 -6.2
Exports (fob) Jul-Nov 4.5 6.5 12.7
Imports (cif) Jul-Nov 10.3 18.4 16.5
Tax revenue (FBR) Jul-Nov 19.1 14.8 24.4
CPI (12 month MA) Nov 7.9 7.6 19.1
Private sector credit Jul-Nov 7.0 5.4 5.1
Money supply (M2) Jul-Nov 3.9 4.0 -0.2
billion US dollars
Total liquid reserves1 end-Nov 12.3 15.7 9.1
Home remittances Jul-Nov 2.1 2.6 3.0
Net foreign investment Jul-Nov 2.0 1.8 1.4
percent of GDP2
Fiscal deficit Jul-Sep 1.0 1.6 1.0
Trade deficit Jul-Nov 3.1 4.6 4.9
Current a/c deficit Jul-Nov 2.8 2.8 3.9
1. With SBP & commercial banks.
2. Based on full-year GDP in the denominator. For FY09
estimated full-year GDP has been used.
First Quarterly Report for FY09
3
case, entail fiscal costs which the budget can ill afford. A key test could come
with the wheat harvest. The generous support price offered earlier may not be
sustainable as international prices have collapsed. Extensive government
purchases to support prices at this level would entail fiscal costs, lead to wastage
(as millers would prefer lower, market-driven, prices) and potentially, raise
imports.
The data available so far shows that the government has made a fine start to
containing the fiscal deficit. However, the fiscal improvement in Q1-FY09
appears largely based on reduction of oil subsidies and a cut in development
spending. This is understandable since (1) any meaningful effort to expand
revenues (particularly by broadening the tax base) will only work in an extended
time frame, and (2) given fiscal rigidities in current expenditures (especially
interest payments) the gains will not be available in the short term. In the medium
term, such measures must be supplemented by policies to discipline growth in
non-development expenditures and broaden the revenue base. This will provide
the necessary fiscal space to ensure appropriate levels of public spending on social
and infrastructure projects in the future.
A change in mind-set is also required in fiscal planning. Expenditure growth must
be kept consistent with a realistic assessment of revenues, and appropriate
adjustments made as the year progresses. This will ensure that the government will
not crowd-out private sector investment, as the domestic banking sector would
then have the space to meet the requirements of the private sector.
Simultaneously, it is also imperative that the temptation for government to seek
unlimited financing from the central bank be strictly restricted by law. Empirical
international studies, and evidences from recent history in Pakistan, clearly
demonstrate the dangers to macroeconomic stability resulting from heavy recourse
to inflationary borrowings by governments from the central bank.
Acknowledging this, the government had already committed to zero additional
budgetary borrowings from the central bank, and this has now been incorporated
into the IMF supported macroeconomic stabilization program. The resulting
elimination of the fiscal demand stimulus, a contractionary monetary policy, and
declining international commodity prices will hopefully also shrink the large
current account deficit.
Provisional data indicates that the growth of the current account deficit may have
halted in November 2008. If as expected, a declining trend takes hold in
succeeding months, this will significantly boost prospects for regaining
macroeconomic stability. It must be kept in mind that the slide of the rupee value
The State of Pakistan’s Economy
4
during Jul-Nov FY09 was mainly a function of continued deterioration in external
balances, which resulted in depletion of forex reserves and also generated liquidity
problems for the domestic financial markets.
This weakness of the rupee also contributed to the decline in investment inflows,
and capital flight by investors. However, a crackdown on illegal forex transfers,
and the near simultaneous entry into a stabilization program with the IMF, has
helped the rupee recoup some of its earlier losses. A further boost to confidence in
the local currency came from signs of slowing import growth.
The weakening in import growth is attributed to both, the substantial downtrend in
international commodity prices as well as a relative ease in domestic demand.2
However, lower commodity prices could also hit export prospects. The sharp fall
in international rice prices means that in H2-FY09 it is likely that export quantum
will grow but values may decline, relative to H2-FY08. The improvements in
external sector are expected to be more visible during H2-FY09 and coupled with
fiscal prudence could potentially have impacts on monetary policy.
First, an improvement in external accounts would enhance credibility and
minimize the speculation of crisis, which would help SBP to manage liquidity in
the banking system. Second, government’s commitment not to resort to
borrowings from the central bank would make it easier for the SBP to focus on
eliminating earlier overhang created by monetization of the fiscal deficit. Third,
absence of government borrowings from the central bank would help improve
monetary policy transmission mechanism through reflecting true cost of funds in
the money market. Finally, a relative contraction in fiscal deficit would help
contain aggregate demand pressures, which would supplement monetary policy.
The stabilization efforts were underway even before the initiation of IMF program
as government passed through the impact of higher international oil prices to
domestic prices of key fuels Q4-FY08 onwards; fiscal consolidation during the
first quarter of FY09 and monetary tightening by the central bank in May and July
2008 are examples of these efforts. In particular, the fiscal consolidation program
of the government for FY09 consists of (1) substantial reduction in overall budget
deficit, as a percent of GDP, through a mix of cut in expenditures (as a share of
GDP) and a rise in tax revenues (as a share of GDP), and (2) a gradual elimination
of government budgetary borrowings from SBP.
2 For example, import quantum of crude oil, palm oil, soybean oil, fertilizers, iron & steel, rubber
tyres and tubes declined during Jul-Nov FY09.
First Quarterly Report for FY09
5
Despite these efforts, temporary liquidity shortages with the commercial banks
were viewed as signs of financial crisis in the country. This led to a fresh round of
speculative attack on domestic currency. Unfortunately, these developments
coincided with the global financial and liquidity crises, thus it was perceived that
the domestic crisis was also triggered due to the same reasons as faced by western
financial institutions. The central bank assessed the situation and took important
measures to ease liquidity in the financial system and stabilize the domestic
currency.
Saturday, September 12, 2009
Structure of economy
Structure of economy
The economy of the Islamic Republic of Pakistan is suffering with high inflation rates well above 26%.
Over 1,081 patent applications were filed by non-resident Pakistanis in 2004 revealing a new-found confidence.
Agriculture accounted for about 53% of GDP in 1947. While per-capita agricultural output has grown since then, it has been outpaced by the growth of the non-agricultural sectors, and the share of agriculture has dropped to roughly one-fifth of Pakistan's economy.
In recent years, the country has seen rapid growth in industries (such as apparel, textiles, and cement) and services (such as telecommunications, transportation, advertising, and finance).
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Currency system
Currency system
Main article: Pakistani Rupee
Rupee
The Pakistani Rupee was pegged to the US Dollar until 1982. When the government of General Zia-ul-Haq, changed it to managed float. This has been regarded as the best decision by Zia. As a result, the rupee devalued by 38.5% between 1982/83 and 1987/88 and the anti-export bias in the economy was reduced. The basic unit of currency is the Rupee, ISO code PKR and abbreviated Rs, which is divided into 100 paisas. Currently the newly printed 5,000 rupee note is the largest denomination in circulation. Recently the SBP has introduced all new design notes of Rs. 5, 10, 20, 50, 100, 500, 1000, and 5000 denomination, while the design work of Rs.10,000 note is in progress which will help the banking industry in keeping few notes in saving accounts. The new notes have been designed using the euro technology and are made in eye-catching bright colours and bold, stylish designs.
Foreign exchange rate
- 1 Pakistani Rupee (PKR) = 100 Paisa
The Pakistani rupee depreciated against the US dollar until the turn of the century, when Pakistan's large current-account surplus pushed the value of the rupee up versus the dollar. Pakistan's central bank then stabilized by lowering interest rates and buying dollars, in order to preserve the country's export competitiveness
- Exchange rates: Pakistani rupee (PKR) per US$1
| Year | Highest ↑ | Lowest ↓ | ||||
|---|---|---|---|---|---|---|
| Date | Rate | Date | Rate | |||
| 1995 | PKR 30.930 | |||||
| 1996 | PKR 35.266 | |||||
| 1997 | PKR 40.185 | |||||
| 1998 | PKR 44.550 | |||||
| 1999 | PKR 51.90 | |||||
| 2000 | PKR 53.6482 | |||||
| 2001 | PKR 61.9272 | |||||
| 2002 | PKR 59.7238 | |||||
| 2003 | PKR 57.752 | |||||
| 2004 | PKR 58.000 | |||||
| 2007 | Aug 05 | PKR 60.75 | Nov 01 | PKR 60.50 | ||
| 2008 | October 10 | PKR 80.00 | Apr 01 | PKR 63.50 | ||
| Source: PKR exchange rates in USD, SBP | ||||||
Foreign exchange reserves
By October 2007, at the end of Prime Minister Shaukat Aziz’s tenure, Pakistan raised back its Foreign Reserves to $16.4 billion. Pakistan's trade deficit was at $13 billion, exports grew to $18 billion, revenue generation increased to become $13 billion and the country attracted foreign investment of $8.4 billion[26].
On October 11, 2008 State Bank of Pakistan reported that country's foreign exchange reserves had gone down by $571.9 Million to $7749.7 Million.The foreign exchange reserves had declined more by $10 billion to an alarming rate of $6.59 billion.
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