EMBASSY OF PAKISTAN 1

EMBASSY OF PAKISTAN

ECONOMIC DIVISION

JUNE 20, 2008

Highlights of the Economy: Fiscal Year 2008

I. REAL SECTORS

The FY2008 has been a challenging and difficult year for Pakistan’s

economy. It showed signs of stress owing to severe external and internal shocks

combined with policy inaction of the previous governments. These shocks include:

soaring oil [$ 66/barrel in June 2007 to $ 139 per barrel in June 2008] and

commodity prices wheat from $ 223/mt to $ 425/mt, DAP $ 435/mt to $ 828/mt],

turbulence in the international financial market [because of subprime crisis and

liquidity crunch, investors are getting increasingly risk averse, with a reduction in

liquidity flows to emerging economies making the financing of deficits more

challenging.], softening of external demand because of slow down in major trading

partners’ economies, and continued political uncertainty during the year. The

impact of oil and commodity prices is estimated around 6.9 percent of GDP. The

policy inaction by the previous governments to make necessary adjustments,

decline in external inflows and excessive borrowing from the Central Bank has

adversely affected most macroeconomic fundamentals during 2007-08.

Notwithstanding these extraordinary events, Pakistan’s economy is

expected to post a robust growth of 5.8 percent against 6.8 percent last year and

growth target of 7.2 percent. On the average, real GDP has been growing at 6.6

percent per annum over the last 5 years [2004-08] reflecting resilience of the

economy gained as a result of sustained structural as well as liberalization

measures over the last 17 years. Clearly, this suggests that a policy focus on

regaining macroeconomic stability through corrective measures and further

reforms can reinvigorate the growth momentum of the economy.

The new government has indicated its intention for much needed

adjustments, rein-in expenditure growth, broadening the tax base and to diversify

the financing of deficit in support of macroeconomic stability. Removal of

excessive fiscal stimulus, reversal to automated adjustment of energy prices

effective July 1, 2008, recent exchange rate adjustments and continued tight

monetary stance over time is also expected to correct country’s trade deficit.