Pakistan Economy Update

During the last fiscal year the stress on macroeconomic stability mainly emanated from unsustainable balance of payments position and the falling value of rupee, escalating food and non-food inflation, and structural problems like power shortages resulting in perceptible slowdown in economic activity. The domestic socio political upheavals and rapidly changing global economic environment added to multifaceted problems. After endorsement of Economic Stabilization program by the IMF, the economy got confidence back. By February 2009, early signs of improvement in economic variables such as inflation, foreign exchange reserves, import growth, and government borrowings from the SBP are evident.

The fiscal deficit target of 4.2 percent of GDP and the current account deficit of 5.9 percent of the GDP is now achievable. However, recent global financial crisis and extremely vulnerable security environment added risks to the economy. The trade data for the month of February 2009 though not representative for months to come, still provide food for thought about imminent risks to the external sector. If the trade data in the month of March 2009, follow the same trend then it will be taken very seriously. The two extremes in the remittances data like massive growth in remittance inflow from UAE and negative growth in US again need some assessment because if somebody has lost a job in UAE, he has to return with retained savings immediately while a person in similar situation in US can wait for the better tomorrow by consuming part of his retained savings. The external data for the March 2009 will provide ample evidence of the impact of global financial crisis on our external sector.

The economic growth target at around 2.5-3.0 percent is still getable in the given circumstances. The massive negative growth in the LSM for the month of January 2009 may be purely a base effect because the growth in the sector for January 2008 was huge one. The coming month may witness lower intensity of negative growth because the base effect will be favourable in the coming month. Similarly, the surge in inflation for the month of February 2009 was again not representative because February 2008 had witnessed rare deceleration in the CPI index for the last one and half year. The persistent negativity in the SPI during the month of March 2009 reinforces the optimism that the CPI inflation for March onward will be sharply decelerating. In this backdrop it is most likely that average CPI inflation for the fiscal year will be around 20 percent with end-year inflation of around 10 percent. The most optimistic estimate for the next year inflation will be around 6 percent.

The pressure on monetary, fiscal and exchange rate policy will be mitigated by lowering financing needs emanating from lower fiscal and current account deficits as envisaged in the Stabilization Program. Elimination of subsidies, partial transfer of oil payments to the foreign exchange market, and fall in the international oil prices will provide great help on this count. The downside risk to the stabilization program may come from slippages on account of FBR revenue collection and slowdown in exports neutralizing to some extent steep fall in import growth. The negative large-scale manufacturing (LSM) growth and falling credit to the private sector are indication of falling real economic activity, however, still better growth prospects in the agriculture and the services sector will keep hope of real GDP growth at the targeted level in 2008-09.