27104280 Pakistan Economy 21

8/8/2019 27104280 Pakistan Economy 21

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PAKISTAN ECONOMY

SUBMITTED TO:

SIR Hisham Tariq

SUBMITTED BY:

Naveed Mehmood

Shoaib Tariq

Shehzad Ahmed


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ECONOMY OF PAKISTAN

Population : 164.7 (July 2007 est.)

GDP growth rate: 7.0%

GDP per capita: US$3,004 (2007)

Country Rating: S&P B+/Positive, Moodys Ba3

FX Reserves (2007): US$ 13.1 billion

Stock Market Cap. (July 27th

2006): US$49.6bn Primary exports: textiles, leather, rice

Primary imports: petroleum, machinery, chemicals

Industrial

25%Services

60%

Agriculture

15%

Components of FY07 GDP Demographics

Source: Economic Survey 2005-06

81%


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INTRODUCTION

Pakistans economy continues to gain traction as itexperiences the longest spell of its strongest growth inyears. The outcomes of the outgoing fiscal yearindicate that Pakistans upbeat economic momentumremains on track.

Economic growth accelerates to 7.0 percent in 2006-07at the back of robust growth in agriculture,manufacturing and services.

Average real GDP growth during 2003-07 was the best

performance since many decades, and it now seemsthat Pakistan has decisively broken out of the lowgrowth rut that it was in for more than one decade.Economic growth has been notably stable and resilient


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OVERVIEW

Pakistans economy turned in a strong performance for the FY07 with areal GDP growth of 7% which remains higher than the desired long termaverage of 6.6%.

This was supported by growth in exports and private investments andalso contributed a little to poverty reduction.


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MAJOR REFORMS HAVE BEEN

DELIVERED

GovernanceReforms

Capital Market Reforms

Industry &Investment

Reforms

MajorEconomicReforms

Tax Reforms Fiscal Transparency

Agriculture SectorReforms

Financial SectorReforms

Deregulation,liberalization

&Privatisation

Fiscal Responsibility & DebtLimitation Act Consistency & Continuity InPolicies


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MACROECONOMIC OBJECTIVES

The government set forward four major policyobjectives on the economic front:

Stabilize the countrys debt situation

Revive economic growth

Arrest the rising trends in poverty and

Improve governance


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Pakistan's new government, which assumed office underPresident Musharraf in October 1999, was faced with four mainchallenges:

Heavy indebtedness

High fiscal deficit

Rising poverty and unemployment

Weak balance of payments

MAJOR CHALLENGES FOR THE NEW

GOVERNMENT


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CHANGES IN KEY ECONOMIC

INDICATORS

2006 2007

GDP Growth Rate 6.6% 7.0%

Inflation 7.9% 7.5%

Monetary Assets M2 15.2% 14%

As a percentage of GDP

Fiscal deficit 4.2% 4.0%

Foreign Debt 30% 27.1%

In Billions of Dollars

Exports $16.5 billion $13.9 billion

Imports $24.9 billion $40.4 billion


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AN INCREASINGLY ATTRACTIVE MARKET

Regional Comparison - 2005-06

Population

0

50

100

150

200

250

300

Indon

esia

Pakis

tan

Philip

pines

Vietn

amEg

ypt

Turke

y

Malay

sia

GDP in US$ bn (2005

0

50100

150

200

250

300

350

Turke

y

Indon

esia

Pakis

tan

Malay

siaEg

ypt

Philip

pines

Vietn

am

GDP Grow th

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Turke

y

Pakis

tan

Indon

esia

Malay

sia

P

hilipp

ines

Egypt

Public Debt % of GD

0%

20%

40%

60%

80%

100%

Egypt

India

P

hilipp

ines

Vietn

amTu

rkey

Pakis

tan

Indon

esia

Malay

sia

Source : Economic Survey 2004-05, 2005-06, IMF Annual Report 2006 Chapter 1: Prospects for world growth

*Annual estimates taken from IMF Annual Report 2006

Population bigger than Vietnam, Egypt and Malaysia GDP bigger than Vietnam, Egypt and Malaysia

Growth unparalleled* More fiscal space than others


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SECTRAL GROWTH RATE

Year GDP Agriculture Manufacturing ServicesSector

99-00 3.9 6.1 1.5 4.2

00-01 2.2 -2.7 8.2 4.7

01-02 3.1 0.1 4.5 4.8

02-03 4.8 4.1 6.9 5.2

03-04 7.5 2.2 14.0 5.9

04-05 8.6 6.7 12.6 8.0

05-06 6.6 2.5 8.6 8.8

Source: SBP annual report


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GDP GROWTH Real GDP growth accelerated to 7.0 percent in 2006-07

as against the revised estimates of 6.6 percent last yearand the 7.0 percent target for the year

Agriculture enhanced its contribution to real GDP growth

of 15 percent The manufacturing sectors contribution to this years

real GDP growth declined to 23 percent The construction and banking & insurance sectors grew

by17.2 percents and 18.2 percent respectively The banking and financial sector grew at an average rate

of 27 percent per annum over the last three years

The electricity and gas sectors registered a negative

growth of 15.2 percent


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THE SERVICES SECTOR

The service sector continued to performstrongly for third year in a row and grewby 8.0 percent in 2006-07 as against 9.6

percent last Services sector has grown at an average

rate of 8.7 percent per annum

Almost 60 percent contribution to this

years growth has come from servicessector.


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AGRICULTURE

Overall agriculture grew by 5.0 percent in 2006-07 from 1.6percent last year

The major crops witnessed strong recovery by growing at 7.6percent against a negative growth of 4.1 percent last year

Wheat production was up by 10.5 percent to 23.5 milliontons Sugarcane production, likewise, Improved by 22.6 percent

last year to 54.8 million tons Cotton production at 13.0 million bales remained at last

years level

Rice and maize registered negative growth rates of 2.0percent and 4.5 percent Gram pulse exhibited an impressive growth of 75.4percent in

2006-07 to 0.842 million tons compared with 0.480 milliontons last year


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AGRICULTURE


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PER CAPITA INCOME

Per capita income, defined as GNP at market price indollar terms divided by the countrys population, grewby 11 percent this year to US$925 up from US$833 lastyear

The per capita income in dollar terms has grown at anaverage rate of 13 percent per annum during the lastfive years, rising from US$ 586 in 2002-03 to US$ 925in 2006-07.

Per capita income grew at a much slower pace of 1.4percent per annum in the 1990s.

Real per capita GDP grew by 5.2 percent in 2006-07 and5.5 percent on average during the last four years asagainst 1.4 percent in decade of the nineties.


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CONSUMPTION

Pakistans economy is undergoing structural shiftthat are fueling rapid changes in consumerspending patterns

Pakistans real per capita GDP has increased at an

average rate of 5.5 percent per annum over thelast four years, giving rise to the average incomeof the people

As opposed to an average annual increase of 1.4percent during 2000-03, the real private

consumption expenditure has grown at anaverage rate of 7.4 percent per annum during thelast four years.


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INVESTMENT During the fiscal year 2006-07, the real gross fixed

capital formation (real investment) grew by 20.6 percentas against 17.6 percent last year

Over the last three years, real fixed investment grew atan average rate of 17.3 percent

As percentage of GDP, total investment reached newheights touching 23 percent in 2006-07 increasing from21.7 percent last year

Over the last four years, total investment has increased

6.4 percentage points of GDP, rising from 16.6 Percent in2003-04 to 23 percent this year Real private investment grew by 19.6 percent this year

as against 20.0 percent last year Public sector investment grew by 31.7 percent this year

as against 7.3 last year


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INFLATION

During the past few years with a pick-up in growth, inflation has also started to rise sharply. Thereare several internal and external factors which have contributed to the recent pick up in inflation inPakistan.

These factors include: a sharp economic recovery resulting in a rise in the rise in the levels ofincome with the consequential increase in domestic demand; the effect of the rise in internationaloil prices; and a sharp pick up in the international prices of essential commodities.

Continuously upward adjustments in the administered prices, such as the prices of wheat, as wellas lower than expected production of essential perishable (vegetable and fruits) and non-perishable (pulses, sugar, chilies etc) commodities also contributed to inflation.

The government has been vigilant about inflation and has taken various steps to augmentsupplies of essential commodities by liberalizing import regime and allowing imports of severalessential items with a view to increasing the supply of those items.


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INFLATION AND MONETARY

FLEXIBILITY

Recent pressure in inflation is being managed carefully to ensure monetary

flexibility

Inflation

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

FY01 FY02 FY03 FY04 FY05 FY06

%

YoY

Source : Economic Survey 2004-05, 2005-06


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ANNUAL INFLATION RATE OF

PAKISTAN

INFLATIO

N

RA

YEARS


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MONETARY POLICY

Monetary policy stance of the SBP has undergone considerable changesover the last several years switching from an easy (2000-03) to abroadly accommodative stance (2003-04) and then from a gradualtightening (2004-05) to an aggressive tightening stance till date.

During the fiscal year 2006-07, the SBP also raised the discount rate(policy rate) from 9 percent to 9.5 percent.

The increase in interest rates was in conformity with the internationalrising trends also taken to curtail the lending ability of the commercialbanks to the private sector.

It aimed to curb strong domestic demand that was one of the maindriving forces for fueling inflation


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CAPITAL MARKET

Pakistans stock market is benchmarked through theKarachi Stock Exchange 100-index (KSE-100). Thisindex stood at 9989 points at the end of the fiscal year2005-06.

Aggregate market capitalization also increased by 35.0percent from Rs 2801 billion in June 2006 to Rs 3781billion ($ 62.3 billion) as of 31st May 2007.

Foreign portfolio investment in Pakistans stock marketduring the first ten months of the current fiscal yearamounted to $ 1.82 billion, which is the highest everinflow of portfolio investment in Pakistans history, asagainst $ 1.011 billion in the corresponding period oflast year, thereby registering an increase of 80 percent.


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FISCAL POLICY A sound fiscal position is an essential prerequisite

for achieving macroeconomic stability which isincreasingly recognized as a critical ingredient forpromoting strong and sustained economic growthand lasting poverty reduction

Pakistan has succeeded in reducing fiscal deficitfrom an average of 7 percent of GDP in the decadesof 1980s and 1990s to an average of 3.5 percentduring the last seven years.

The associated public debt also declined sharplyfrom over 100 percent of GDP to 53 percent byend-March 2007

During the last six years from 2000-01 to 2006-07, taxcollection by the CBR increased by 112.8%.


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FISCAL POLICY The revenue deficit was at a deficit of 0.2% of GDP in 2005-06

compared to a deficit of 2.2% in 2000- 01 It has further progressed towards a targeted revenue surplus

of 0.6 percent of GDP in 2006-07 The structure of taxation has undergone considerable changes

since the 1990s the share of direct taxes in total taxes increased from 18% to

over 38.5% (July-April 2006-07) The share of indirect taxes declined from 82 percent to 61.5

percent (July-April 2006-07) The total expenditure remains more or less stable in a narrow

band of 17 to 18.8 percent of GDP during the last seven years

Total revenues are budgeted at Rs. 1163.1 billion in 2006-07compared to Rs. 1087.0 billion in 2005-06, showing anincrease of 7.0%.

The Central Board of Revenue (CBR) is targeted to collect Rs.835 billion in 2006-07, which is 17.1% higher than last yearscollection.


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EXPORTS Exports were targeted at $ 18.6 billion or 12.9 percent higher than last year.

Exports during the first ten months (July-April) of the current fiscal year areup by 3.4 percent rising from $ 13.46 billion to $ 13.9 billion in the sameperiod last year.

In absolute term the overall exports posted an increase of $ 452.1 million inthe first ten months of the current fiscal year over the same period last year

Pakistan's exports are highly concentrated in a few items namely, cotton,leather, rice, synthetic textiles and sports goods

These five categories of exports account for 77.2 percent of total exportsduring the first nine months of 2006-07 with cotton 61.5%, followed byleather 4.5%, rice 6.6%, synthetic textiles 3.0% and sports goods 1.6%

Pakistans exports are highly concentrated in few countries including the US,

UK, Germany, Japan, Hong Kong, Dubai and Saudi Arabia


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EXPORTS


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IMPORTS Imports were targeted to decline by 2.1 percent in 2006-07 to $ 28.0 billion

from last years level of $ 28.6 billion Growth in import decelerated to 8.9 percent during the first ten months (July-

April) of the current fiscal year as against hefty increase of 40.4 percent in thesame period last year

Disaggregating of total imports suggests that food imports grew by 5.3 percent- up from $ 2241.5 million to $ 2360.6 million.

Imports of machinery rose by 18.6 percent up from $ 3303 million to $ 3916million Imports of petroleum products registered sharp increase of 38.6 percent Imports of electrical machinery & appliances registered a heavy increase of 35

percent. Imports of raw materials registered a marginal (2.4%) decline mainly on

account of 49.4 percent decline in the import of fertilizer Imports of telecom (cell phone as well as equipments, towers etc.) grew by

17.3 percent Pakistan's imports are also highly concentrated in few items namely,

machinery, petroleum & petroleum products, chemicals, transport equipments,edible oil, iron & steel, fertilizer and tea

These eight categories of imports account for 75.5 percent of total importsduring 2006-07.

Over 40 percent of them continue to originate from just seven countriesnamely, the USA, Japan, Kuwait, Saudi Arabia, Germany, the UK and Malaysia.


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IMPORTS


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TRADE BALANCE

The merchandise trade deficit widen to$11.1 billion in the first ten months (July-April) of the current fiscal year as against$9.5 billion in the same period last year.

However, as percentage of GDP, tradedeficit is likely to be 9.0 percent in 2006-07 as against 9.5 percent last year.

Thus, trade deficit is expected to improve

this year despite less than satisfactoryperformance of exports.


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TRADE BALANCE


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EXTERNAL DEBT

The external debt and liabilities aspercentage of GDP which stood at around 52percent in end-June 2000, declined to 26.3percent in end-March 2007.

The external debt and liabilities aspercentage of foreign exchange earningswas reduced from 236.8% to 119.7%during the same period.

Across all measures of vulnerability toexternal shocks, Pakistans debt profile hasimproved significantly over the last seven

/eight years.


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POVERTY AND UNEMPLOYMENT

Poverty and unemployment are posing serious challenges to thepolicy makers.

The government of Pakistan has launched a poverty alleviationstrategy with the help of the IMF and the World Bank; still, 23.9percent of the people live below the poverty line.

The rising population and lack of employment opportunities createpersistent unemployment problems in the country.

There is a need to devise a comprehensive employment strategy totackle this gigantic problem.

I t t Hi hli ht Att ti


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Investment Highlights: AttractivePolicy & Regulatory Fundamentals

Government Strategy Infrastructure being brought up to international

standard: power, water, telecom and transportnetworks being overhauled

Increasing expenditure on education: literacy rates

rising with increasing enrollment in higher education Business environment being made conducive:

liberalization and deregulation policies

Access to capital: increasing focus on providingfinance to SMEs

Leveraging physical location: Pakistan being convertedinto Asias trade, energy and transport corridor


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GDP and Per Capita IncomeGrowthPakistans GDP grew 6.6%YoY in FY06, while per capita income in current dollarterms grew by 14.2%YoY to US$846 in FY06

Source : Economic Survey 2004-05, 2005-06 * At current dollar prices

Per Capita Income*GDP Growth

442424

526501 503

579

669

742

847

0

100

200

300

400

500

600

700

800

900

98 99 00 01 02 03 04 05 06

US

D

3.5%

4.2%3.9%

2.0%

3.1%

4.7%

7.5%

8.6%

6.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

98 99 00 01 02 03 04 05 06

C St bili ti R fl t


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Currency Stabilization ReflectsOptimism in the Pakistan Economy

Exchange Rate (PKR/USD)

55

56

57

58

59

60

61

62

63

64

65

Mar-01

Jul-01

Nov-01

Mar-02

Jul-02

Nov-02

Mar-03

Jul-03

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06



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Foreign Investment andRemittances Surging

Foreign Direct Investment (US$ million)

322485

798949

1,524

3,521

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


1,087

2,390

4,237

3,871

4,168

4,600

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


Remittances (US$ million)



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PRIVATISATION POLICY

The Governments Role should be confined to:

Making Policy and providing good governance

Providing a sound and effective regulatory framework, to

ensure social equity and economic justice

Providing an enabling environment, including physical andtechnical infrastructure and social services

Privatisation Policy to encourage and promote private sector asengine of growth to increase investment and introduce new

technology, improve management and increase productivity

To ensure better quality, lower cost and higher profits andincreased dividends and tax revenues

The Government has no Business to do Business

Broad Based Privatisation Programme


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Broad Based Privatisation Programme

Financial

Institutions

United Bank

Habib BankNational Bank

ICP

Strategic Sale and IPO

Strategic SaleIPO and Secondary Offering

Sale of management rights

Telecommunicatio

n

Pakistan Telecommunication

Co

Strategic Sale

Oil & Gas

Working interest in 9 fieldsNational Refinery

Oil & Gas Development Co

Pakistan Petroleum

Sui Southern Gas Co

Strategic SaleStrategic Sale

IPO

IPO

Secondary Offering

Power Karachi Electric Supply Corp

Kot Addu Power Co

Strategic Sale

IPO

Fertilizer Pak Saudi Fertilizer

Pak Arab Fertilizer

Pak American Fertilizer

Strategic Sale

Strategic Sale

Strategic Sale

Key Recent Privatisations

To date the current government has realised over US$5.3bn


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CONCLUSION

In the recent years there has been a considerable improvement in themacroeconomic indicators.

External debt burden has been reduced as a proportion of GDP, from 52.6% to30% from the year 1999 to 2006. The exchange rate has been stabilized, andworker remittances have been improved significantly.

Pakistan has also managed to reach to a significant debt reduction in theprevious years.

The manufacturing and agriculture sectors emerged as the main engines ofgrowth, experiencing 8.6% and 2.5% growth rates respectively over the year withthe services sector growth rate being 8.8%.Manufacturing growth was led by a sharp increase in cotton cloth and cotton yarnproduction, while the best agricultural performers were wheat and sugarcane.

Pakistans economy is still at a takeoff stage and faces many challenges ahead.

27104280 Pakistan Economy 21

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