Overview of Pak Economy

8/14/2019 Overview of Pak Economy

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Economic Survey 2008-09

ii

however, export slowdown is a serious cause ofconcern. Going forward the government has topursue aggressive trade diplomacy to augment itsaccess to external markets, beside ignite its effortsto diversify exports to optimal exploitation of

export potential.

DOMESTIC ENVIRONMENT

Pakistans macroeconomic environment is affectedby intensification of war on terror and deepeningof the global financial crisis which penetrated intodomestic economy through the route of substantialdecline in Pakistans exports and a visibleslowdown in foreign direct inflows. Althoughcontraction in export receipts is more thancompensated by massive import compressionemanating from global crash of crude oil andcommodity prices, the external sectorvulnerabilities remain a threat. Pakistans economycontinues to remain exposed to the vagaries ofinternational developments as well as internalsecurity environment. The intensity of the globalfinancial crisis has further added to Pakistanspredicament. Despite support from the IMF andother bilateral and multilateral donors, Pakistansexternal account remains exposed to a host ofuncertainties. The dependence on external inflowsneeds some rationalization and to this endadditional domestic resource mobilization isinstrumental.

Pakistans economy has lost significant momentumin the last few years. One of the prime contributorsto this derailing is Pakistans proactive role in waragainst terror. Pakistan being a front line state hasto bear the fallout of events unfolded after 9/11. Atthe outset of the war, normal trading activitieswere disrupted with substantial increase in the costof international trade because of higher rate ofinsurance cover; economic growth slowed down;import demand compressed with consequential

decline in tax collection; and inflows of foreigninvestment and privatization were adverselyaffected. Pakistan not only lost precious lives andinfrastructure but a very conservative estimate hasplaced economic cost of this war for Pakistan ataround US$ 35 billion since 2001-02. The currentfiscal year has witnessed the height of thisincreased cost. The expenditure overrun has

created many uncertainties for public finances. Theloss in economic opportunity was compounded byexogenous oil and commodity price shocks, whichled to a significant deterioration of themacroeconomic indicators of Pakistan in 2007-08.

The problem was exacerbated in the July-Octoberperiod of the current fiscal year. Major financialinflows dried up during the July-November 2008period. The current account deficit widened withimports rising more than exports with a significantdepletion in SBPs FE reserves which enhancedcountrys default risk. The FDI inflows fell by 21.4percent from July-November 2008 against a 9.8percent decline in the same period of year before.The external account, however, does depict certainpositives. Even in the face of the world economic

downturn, workers remittances have remainedstrong and grew by 19.5 percent. In addition,declines in international commodity and foodprices has helped reduce the countrys import billand thus impact favourably on the large currentaccount deficit.

At the beginning of this fiscal year (2008-09),Pakistan economy was confronted with four majorchallenges which posed threat to Pakistansrecovery and socio-economic growth includingregaining macroeconomic stability, poverty

reduction, fiscal retrenchmentand weaknesses inthe external account. The overall vision is toregain macroeconomic stability and to attain GDPgrowth rate of 6 percent by 2012-13 from 2.0percent in 2008-09. In order to ensure thatmacroeconomic difficulties do not further slowdown the pace of job creation and adversely affectpoverty reduction, the government has recentlyreached an agreement with IMF for a US $7.6billion package with interest rate varying from 3.51to 4.51 percent spread out over a period of 23months. For the first time, IMF has accepted

Pakistans homegrown proposals/programs whichhave two main objectives: (i) to restore theconfidence of domestic and external investors byaddressing macroeconomic imbalances through atightening of fiscal and monetary policies untilvisible signs of demand curtailment; and (ii) toprotect the poor and preserve social stabilitythrough well-targeted and adequately funded socialsafety nets. The governments new broad-based


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Overview of the Economy

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program for economic stabilization was mainlyfocused on rationalization of expenditures, removalof unproductive subsidies to reduce the burden onthe budget; significant cuts in expenditures toreduce budgetary deficit and a tight monetary

policy to fight inflation.

The government adopted the following measures toaddress the above challenges:

a. Strong adjustments in the petroleum priceswere undertaken to reduce the budget deficit;

b. Significant cuts were made in the expendituresto curtail aggregate demand;

c. Tight monetary policy was followed by theState Bank of Pakistan to contain inflationary

spiral;d. Electricity tariffs were periodically adjusted to

rationalize energy prices;

e. Government adopted a Nine-Point Program foreconomic and social recovery encompassingthe following elements:

i. Macroeconomic Stability and Real SectorGrowth

ii. Protecting the Poor and the Vulnerableiii. Increasing Productivity and Value

Addition in Agriculture

iv. Integrated Energy Development Programv. Making Industry Internationally

Competitive

vi. Human Capital Developmentvii.Removing Infrastructure Bottlenecks

through Public Private Partnerships(PPPs)

viii.Capital and Finance for Developmentix. Governance for a Just and Fair System

f. Prioritized the scarce government expendituresavailable for development-related programs;

g. Directed immediate support to the mostvulnerable groups through the Benazir IncomeSupport Programme (BISP). These are small(Rs.1000 per month per family) cash grantschanneled through women to help satisfy the

most fundamental needs of vulnerablehouseholds. Currently reaching 3.5 millionpoor households, the scope of the programmeis expected to expand to 7.0 millionhouseholds in 2009-10;

h. Implemented improved and transparenttargeting of Benazir Income SupportProgramme (BISP) and other programmesaimed at the poor and the vulnerable groups.

i. Intensified public-private partnerships with theobjective of making private investments,including foreign investors, the most importantfunding source for economic development; and

j. Reinforced the importance of soundgovernance, managerial and systemicmechanisms to ensure that investments in thesocial sector are cost-effective and aimed atoutput-oriented service delivery.

Pakistans stabilization programme is supported bythe Stand-By Arrangement (SBA) with the IMFapproved on November 24, 2008. The SBAenvisaged a significant tightening of fiscal andmonetary policies to bring down inflation andstrengthen the external position adopting severalstructural measures in the fiscal and financialsectors including strengthening of the social safetynet. In addition, to stabilize the macroeconomic

situation, the Programme aimed at addressingsome of Pakistans long standing economicproblems. In particular, it called for acomprehensive tax reform to raise budgetaryrevenue and phase out the electricity subsidies tocreate greater fiscal space for public investmentand social spending. Initial developments in theeconomy since the implementation of theProgramme have been positive:

The exchange rate has broadly stabilizedenabling the State Bank of Pakistan (SBP)

to buy foreign exchange on a net basis.

SBP reserves have strengthened from US$3.5 billion at end October 2008 to US$ 7.1billion on end March 2009.

T-Bill auctions have been consistentlyoversubscribed with wide participation of


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banks enabling the government to retiresome of its debt to the SBP.

Headline Consumer Price Index (CPI)inflation is estimated to have declined

from 25.3 percent in August 2008 to 17.2percent in April 2009.

The overall fiscal deficit is estimated tohave been restricted to 4.3 percent in 2008-09.

The government is conscious of the cost beingimposed on poor families from the sharp escalationin food prices. Many of these needs are stronglylinked and need to be addressed holistically unless health services are improved, the incidence

of ill health will continue to rise; unlesseducational retention is improved, children willnever be able to exit from poverty because theywill be concentrated in low-return employment orremain unemployable. It is, therefore, important toaddress primary needs via social protection, whilesimultaneously focusing on the mechanisms thatensure that the exit from absolute poverty ispermanent for the majority of the vulnerable and alarge proportion of the chronically poor. Thenational Poverty Reduction Strategy covers thethree-year PRSP-II period of 2008-09 2010-11

while also providing a framework for thinking wellbeyond this timeframe and is, therefore, to beviewed as an approach to a long-term nationaleconomic strategy that has its main focus onreduction of poverty.

The sharp rise in international oil and food priceslast year and the global financial crisis not onlyadversely impacted the macroeconomic indicatorsin Pakistan but also increased the number of thepoorest of the poor. Recognizing the urgent need toprotect the poor and the vulnerable, the

Government of Pakistan (GoP) launched theBenazir Income Support Programme (BISP) in2008 as its main social safety net programme. Thisprogramme would serve as a platform to providecash transfers to the vulnerable identified on thebasis of a poverty scorecard and would be backedby an exit strategy. This strategy includesimparting training to one member of eachvulnerable family to sustain itself. The Programme

also envisages a workfare initiative through socialmobilization. BISP intends to cover 3.4 millionfamilies or 22.75 million people in the currentyear. In the next year, the government intends to atleast double the allocation for BISP to cover 7

million families. The government would requireadditional resources of US$ 3.05 billion over thenext two years to sustain the above programme.

Notwithstanding all these stabilization measures,recent trends in most macroeconomic variablessuggest that the disciplined implementation of themacroeconomic stabilization program is startedpaying some dividends. Improvement in fiscaldiscipline is complementing the still relatively tightmonetary policy to aggregate demand compressionto a meaningful level which has improved

prospects of lower inflation in the last two monthsof the current fiscal year (May-June 2009). Thedemand compression is also manifested fromimprovement in the cumulative Jul-April 2008-09trade deficit which is the first reduction in the lastsix years. The narrowing of trade deficit and robustremittances has caused a reduction of over $2billion in the current account deficit and even forthe month of February 2009, we have witnessedfirst surplus in monthly current account surplussince June 2007. The current account deficit islikely to decelerate from as high as 8.5 percent of

GDP to around 5.3 percent of GDP in 2008-09 a reduction of 3.2 percentage points in just oneyear. The improvement allowed for a build-up ofthe countrys foreign exchange reserves beyond$11 billion.

Nevertheless, Pakistans economy still facespressures from uncertain security environment,higher inflation driven by spike in food prices, theacute power shortages, and bewildering stockmarket, perceptible contraction in the large-scalemanufacturing and slowdown in services sector;

lower than anticipated inflows and growingabsolute financing requirements. Abatement ofinflationary pressure remained oblivious and pricesdepicted stubbornness.

REAL SECTORS

In the wake of above mentioned international anddomestic environment the economy lost significant


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growth momentum owing to massive contractionin the industrial sector. The economic growth of2.0 percent achieved during 2008-09 seemsreasonable albeit it implies definite slippageagainst 4.1 percent growth of the last year and this

years target of 4.5 percent. However, it should belooked in the backdrop of global recession wherepositive growth is an exception and internationaldevelopments where real GDP in Pakistans maintrading partners is estimated to contract by almost3 percent on average in 2009, depressing theexternal demand for Pakistans exports. Thedomestic environment was also not supportive tothe growth momentum.

The industrial sector in general and large-scalemanufacturing in particular has contributed to this

slowdown in economic growth by posting dismalperformance. The poor show of the LSM isunderstandable in the context of acute energyshortages and constrained international demand forPakistans manufactured exports. The massivedownward correction in services sectors growth ismainly because of poor show of the financialsector beside saturation level attained in thecommunication sub-sector.

Notwithstanding the challenges of the fertilizeroperations and credit squeeze, agriculture sector is

the saving grace of this years economic growthand performed exceptionally well on the back ofextraordinary performance of major crops (mainlywheat, gram and rice). Livestock, a majorcomponent of agriculture, exhibited slightadjustment from 4.2 percent growth of last year to3.7 percent growth in 2008-09. Construction sectorwitnessed worst growth performance for almost adecade owing to constricted activity in the privatehousing market, shrinkage of spending on physicalinfrastructure due to huge adjustment to rationalizedevelopment expenditure, and slowdown in

reconstruction activities in earthquake affectedareas.

The services sector has compensated some of thelost growth of the industrial sector by growing at3.6 percent and provided much needed sanity toeconomic growth. Barring social services andpublic admn & defence almost all sub-sectors ofservices sector felt the pinch of recessionary trend.

Consumer spending remained strong with realprivate consumption rising by 5.2 percent asagainst negative growth of 1.3 percent attained lastyear. However, gross fixed capital formation couldnot maintain its strong growth momentum and real

fixed investment growth contracted by 6.9 percentas against the expansion of 3.8 percent in the lastfiscal year.

The current slowdown is substantially differentfrom the deceleration of the 1990s or early 2000s.The aggressive monetary tightening posture of theSBP has witnessed a reversal in the last monetarypolicy statement by notional downward adjustmentof policy rate in April 2009 to ensure thatstubbornness of monetary policy might nothaemorrhage the economic activity. The recent

monetary policy has tried to strike a balancebetween sustaining the growth momentum andcontaining the inflation in stabilization mode.

Growth and Investment

Real GDP grew by 2.0 percent in 2008-09 asagainst 4.1 percent last year and growth target ismet 4.5%. The modest growth of just 2.0 percent isshared between Commodity Producing Sector(CPS) (0.08) and services sector (1.92). Within theCPS, agriculture contributed 1.0 percentage pointsor 50.1 percent to overall GDP growth (a

significant increase from its contribution of only5.0 percent last year) while negative performanceof industry dragged 0.92 percentage points or 46.1percent to neutralize positive contribution of theagriculture. In the services sector majorcontributions to GDP growth came from transport,storage & communication (0.3 percentage points or14.6 percent), wholesale & retail trade (0.7percentage points or 27.1 percent) and socialservices (0.8 percentage points or 38.6 percent).

Agriculture sector has depicted a stellar growth of

4.7 percent as compared to 1.1 percent witnessedlast year and target of 3.5 percent for the year. Major crops accounting for 33.4 percent ofagricultural value added registered an impressivegrowth of 7.7 percent as against a negative growthof 6.4 percent last year and a target of 4.5 percent.The livestock sectorgrew by 3.7 percent in 2008-09 as against 4.2 percent last year. Output in the


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manufacturing sector has contracted by 3.3percent in 2008-09 as compared to expansion of4.8 percent in last year and over-ambitious targetof 6.1 percent. Small and medium manufacturingsectormaintained its healthy growth of last year at

7.5 percent. Large-scale manufacturing depictedcontraction of 7.7 percent as against expansion of4.0 percent in the last year and 5.5 percent targetfor the year. The massive contraction is because ofacute energy outrages, security environment andpolitical disruption in March 2009.

Theservices sector grew by 3.6 percent as againstthe target of 6.1 percent and last years actualgrowth of 6.6 percent. Value added in thewholesale and retail trade sector grew at 3.1percent as compared to 5.3 percent in last year and

target for the year of 5.4 percent. Finance andinsurance sector witnessed slowed down to 12.9percent in 2007-08 but registered negative growthof 1.2 percent in 2008-09. The performance of thissector shows that Pakistans financial sector isintegrated in the world economy and feeling theheat of the financial crisis plaguing internationalfinancial markets. The Transport, Storage andCommunication sub-sector depicted a sharpdeceleration in growth to 2.9 percent in 2008-09 ascompared to 5.7 percent of last year.

Pakistansper capita real incomehas risen by 2.5percent in 2008-09 as against 3.4 percent last year.Per capita income in dollar term rose from $ 1042last year to $ 1046 in 2008-09, thereby showingmarginal increase of 0.3 percent. Real privateconsumption rising by 5.2 percent as againstnegative growth of 1.3 percent attained last year.However, gross fixed capital formation could notmaintain its strong growth momentum and realfixed investment growth contracted by 6.9 percentas against the expansion of 3.8 percent in the lastfiscal year.

The total investment has declined from 22.5percent of GDP in 2006-07 to 19.7 percent of GDPin 2008-09. Fixed investmenthas decreased to 18.1percent of GDP from 20.4 percent last year. Private sector investment was deceleratingpersistently since 2004-05 and its ratio to GDP hasdeclined from 15.7 percent in 2004-05 to 13.2percent in 2008-09. Public sector investment to

GDP ratio was rising persistently from 4.0 percentin 2002-03 to 5.6 percent in 2006-07, however,declined to 4.9 percent in 2008-09. The nationalsavings rate has declined to 14.4 percent of GDP in2008-09 as against 13.5 percent of GDP last year.

Domestic savings has also declined substantiallyfrom 16.3 percent of GDP in 2005-06 to 11.2percent of GDP in 2008-09.

INFLATION

As inflationary pressures across the globe continueto dissipate, sparking deflationary concerns in evensome countries like Thailand and India whichshared pain of galloping inflation with Pakistan afew months ago, Pakistan still faces high double-digit inflation. Although all the price indices likethe CPI including core inflation, WPI and SPI haveshown a downward trend in recent months, thedecline has been subject to stiff downward rigidity.The month on month increase in food and non-food inflation in the last three months (February-April) has been especially disappointing. Goingforward the government has to rationalizeelectricity tariff which will be inflationary innature.

Notwithstanding difficult domestic environment,the inflation rate as measured by the changes inConsumer Price Index (CPI) showed an easing

trend beginning in November 2008, touching 17.2percent in April 2009 after reaching a record levelof 25.5 percent in August 2008. While the foodgroup was the major source of inflation in Pakistanduring the first ten months of 2008-09, the non-food component of the CPI has also beenpersistently high, resulting in overall stubbornnessof the inflation. The CPI inflation averaged 22.3percent during July-April 2008-09 as against 10.3percent in the comparable period of last year.Given current trends and barring any adverseshocks, it is expected that the average inflation for

the year (2008-09) as measured by CPI will beclose to 21 percent. The core inflation whichrepresents the rate of increase in cost of goods andservices excluding food and energy prices alsowent up from 7.1 percent to 18.0 percent.


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MONETARY POLICY

The SBP has kept its tight monetary policy stancein the period July 01, 2008-April 20, 2009. Thepolicy rate was adjusted upward in November

2008 to shave-off some aggregate demand fromthe economy and kept constant in January 2009.However, noticing visible signs of demandcompression enabled the SBP to reduce 100 basispoints on April 20, 2009. During July 01, 2008-May 16, 2009, money supply (M2) expanded by4.6 percent against the target of expansion of 9.3percent for the year and last year expansion of 8.1percent in the comparable period of last year. Thereserve money witnessed growth of 2.4 percent inthis period as against expansion of 13.2 percent inthe comparable period of last year.

Net domestic assets (NDA) have increased byRs.443.8 billion as compared to increase ofRs.702.5 billion in last year, thereby showing anincrease of 11.0 percent in this period whereas, lastyear the growth in the comparable period was 22.8percent.Net foreign assets (NFA)have recorded acontraction of Rs.227.3 billion against thecontraction of Rs.322.8 billion in the comparableof last year. Government borrowing for budgetarysupport has recorded an increase of Rs.332.2billion as compared to Rs.361.0 billion in thecomparable period of the last year. The SBPfinancing has shown a net increase of Rs.198.2billion and financing from scheduled bankswitnessed a net increase of Rs.134.0 billion duringJuly 01, 2008-May 16, 2009.

Credit to private sector witnessed a netdisbursement of Rs.26.8 billion as compared toRs.369.4 billion in the comparable period of lastyear. Weighted average lending rate havewitnessed decline from 15.5 percent in October2008 to 14.3 percent in March 2009. Weighted average deposit rate on the other hand has

decreased from 9.5 percent in October 2008 to 8.0percent in March 2009 which implies increase inthe spread amidst intensive deposit mobilizationefforts on the part of the banks. The weightedaverage yields on 6 months T-billhas declined byalmost 250 basis points to 11.5 percent in March2009 as against 14 percent in November 2008 butinched up to 12.4 percent in April 2009.

FISCAL POLICY

The government has decided in the economicstabilization program to adhere to the fiscal deficittarget reverently and during the first nine months

(July-March) the fiscal deficit hovered around 3.1percent of the projected GDP for 2008-09 which isconsistent with annual fiscal deficit target of 4.3percent. The fiscal improvement in the first ninemonths (July-March 2008-09) has largely based onreduction of oil subsidies and a cut in developmentspending. All meaningful efforts to expandrevenues particularly by broadening the tax basewill only work in the medium-term.

The financing patterns of fiscal deficit remaineddominated by the banking system which financed85 percent of the fiscal deficit and only 15 percentwere financed by the non-bank sources. Thegovernment remained well ahead of the SBPfinancing limit allowed by the EconomicStabilization Program.

The overall FBR tax collectionremained less thansatisfactory and actually witnessed deceleration inreal term. Resultantly, the FBR tax collection toGDP ratio is likely to deteriorate around 9 percentof GDP as against the target of bringing it in to thevicinity of 10 percent of GDP. Tax Revenuecollected by the FBR amounted to Rs.898.6 billion

during the first ten months (July-April) of thecurrent fiscal year, which is 17.7 percent higherthan the net collection of Rs.763.6 billion in thecorresponding period of last year. The net Directtax collection was estimated at Rs. 332.5 billionagainst the target of Rs 496 billion which implies agrowth of 16.9 percent during Jul-April 2008-09.

Indirect taxes grew by 18.2 percent during Jul-April 2008-09 and accounted for 62 percent ofstake in overall tax revenue. The sales taxcollections grew by 22.2 percent and stood at

Rs.358.9 billion as against Rs.293.6 billion incomparable period last year. The net customs dutycollection has inched up from Rs.114.9 billion in2007-08 to Rs.117.2 billion in 2008-09, therebyshowing modest growth of 2.1 percent. The netcollection offederal excise stood at Rs 90.0 billionduring Jul-April 2008-09 as against Rs. 70.6


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billion in the corresponding period of last year,thereby, showing an increase of 27.5 percent.

Despite a decline in fiscal deficit in the first ninemonths of 2008-09, the growth in domestic debt

accelerated reflecting non-availability of financingthrough external sources. The stock of domesticdebt grew by Rs.484.1 billion during July-March2008-09. This strong growth in the domestic debtreflects non-realization of privatization proceedsand reduced availability of net external financingdue to increase in external debt repayments onmaturing stock of foreign currency bonds. Themain contribution came from 17.5 percent rise infloating debt which increased by Rs.286 billion.The stock of permanent debt has increased byRs.44 billion. Unfunded debt witnessed a growth

of 15.1 percent or Rs.154.2 in Jul-March 2008-09mainly because of uncertainty in the financialmarket and very attractive rates offered by NSSschemes.

EXTERNAL SECTOR

The external sector has shown definite signs ofimprovement. The current and trade accountbalance has improved but there is some slippageson account of current transfers. The buoyancy inremittances is more than off-set by substantialdeclining trend in inflows through exchange

companies. There is a substantial decline of around$2 billion in services trade deficit during the firstten months of the current fiscal year because oftapering off in the demand pressures on the onehand and lower freight and insurance payments onthe other. The financial account witnessedslackening of capital inflows by staggering $ 2.7billion mainly on account of lower FDI inflows,higher portfolio outflows, lower disbursements ofloan and higher amortization payments. Theworsening of external account in the period ofJuly-October 2008-09 is compensated by

substantial improvement in the external account inthe period November-April 2008-09.

Exports were targeted at $ 19.0 billion or 6.9percent lower than last year. Exports started to faceheat of global financial crisis since November2008 and the contraction of world over demand hasexacerbated export contraction. The exports

witnessed negative growth of 2.6 percent declining from $ 16.4 billion last year to $ 16.0billion in July-April 2008-09. Imports registered anegative growth of 9.8 percent in July-April 2009.The imports stood at $26.77 billion as against

$28.715 billion in the comparable period of lastyear. The growth in imports reflects impact ofsubstantial fall in oil and food imports in monetaryterms and these two items were responsible for 80percent of additional imports bill last year. Importcompression measures coupled with massive fall ininternational oil prices have started payingdividends and imports witnessed markedslowdown during the last two months.

Trade Balance The merchandise trade deficitimproved by 12.3 percent and declined from $10.7

billion in July-April 2008-09 to $ 12.3 billion inJuly-April 2008-09. The substantial decrease of 9.8percent in imports outstripped otherwisesignificant decrease of 3.0 percent in exportgrowth, which caused the trade deficit to improveby 12.3 percent. Workers Remittances totaled $6.4 billion in July-April 2008-09 as against $ 5.3billion in the comparable period of last year,depicting an increase of 19.5 percent. Deeprecession in the US economy, which constituteclose to one-third of Pakistans remittances startedtaking its toll and witnessed negative growth of 1.9

percent. The trend will be expected to continue inthe months to come, however, overall outlook ofremittances from other source countries is positive.

Current Account Balance Pakistans currentaccount deficit shrank by 23.5 percent during July-April 2008-09. Current account deficit shrank to $8.5 billion as against $ 11.2 billion last year. In themonth of February 2009, the current accountwitnessed a surplus which is a rare development inPakistan economy. This was first monthly surplussince June 2007. It turned to deficit in March and

April 2009. Exchange rate after remaining stablefor more than 4 years, lost significant value againstthe US dollar and depreciated by 21% duringMarchDecember 2008. Most of the depreciationof rupee against dollar was recorded in postNovember 2007 owing to combination of factorslike political uncertainty, trade related outflowsand speculative activities. With successful signingof Standby arrangements with the IMF, the rupee


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got back some of its lost value. With substantialimport compression and revival of external inflowsfrom abroad in the coming months of the fiscalyear, the exchange rate will remain stable ataround Rs.80-82 per dollar.

The overall foreign investment during the first tenmonths (July-April) of the current fiscal year hasdeclined by 42.7 percent and stood at $ 2.2 billionas against $3.9 billion in the comparable period oflast year. Foreign direct investment (private)shown some resilience and stood at $3205.4million during the first ten months (July-April) ofthe current fiscal year as against $3719.1 millionin the same period last year thereby showing adecline of 13.8 percent. If viewed in the massivefall in capital flows to emerging economies, even

this decline in FDI seems to be reasonably good. Private portfolio investment on the other handshowed an outflow of $451.5 million as against aninflow of $98.9 million during the comparableperiod of last year.

The hemorrhage to the foreign exchange reserveshave been arrested in the post-November periodand over $ 3 billion are added to the SBP reservesinspite of $500 million Eurobond payment inFebruary 2009. Notwithstanding, improvement inthe external sector outlook remain hostage to

expected inflows in the last quarter. ForeignExchange Reserves declined substantially in theinitial months of 2008-09 dropping from $11.4billion at end-June 2008 to a low of $6.4 billion byNovember 25, 2008. This depletion of reserves inthe five months (July-November 2008) was muchhigher than fall in forex reserves for the entirefiscal year 2007-08. The subsequent partialrecovery since November 25, 2008 onward owedessentially to the inflow of $ 3.1 billion from theIMF following Pakistans entry into amacroeconomic stabilization program. The import

coverage ratio declined to an uncomfortable levelof 9.1 weeks as of end-October 2008 from 16.8weeks of imports as of end-June 2008 but itimproved to 18 weeks of imports by end-April2009.

The external debt & liabilities recovered in thethird quarter and actually fell in absolute as well asrelative terms between end-December 2008 and

end-March 2009, mainly because of lower thananticipated net disbursements and positivetranslation impact of appreciation of dollar versusyen, SDR and euro. External debt and liabilities(EDL) stood at US$ 50.1 billion or 30.7 percent of

the projected GDP for the 2008-09 at the end ofMarch 2009 which is higher than end-June 2008stock of $46.3 billion or 27.6 percent of GDP. Itimplies that EDL grew both in absolute andrelative terms during July-December period butwitnessed some correction in the third quarter.Almost all categories of EDL barring Paris Club,Eurobond and military, have witnessed increase;however, highest increase in absolute term wasrecorded in debt stock owed to the IMF as a resultof inflow of $3.1 billion on account of Stand byArrangements (SBA) signed with the IMF in end-

November 2008. On the liabilities side $500million are added by Bank of China.

EXECUTIVE SUMMARY

01. GROWTH AND INVESTMENT

The economy has lost significant growthmomentum owing to massive contraction in theindustrial sector. The lowest real GDP growth rateof 2 percent attained in the last eight years shouldbe taken in the backdrop of major disruptions ofextraordinary nature like political uncertainty

hovering around for most part of the year,intensification of war on terror, acute energyshortage and extremely high inflation by Pakistansstandard, massive adjustment efforts to regainstability from a highly disruptive year (2007-08) ofexceptionally high macroeconomic imbalances,and above all significant demand compression bothon domestic and external front, the economicgrowth seemed to be satisfactory under thecircumstances. Real GDP grew by 2.0 percent in2008-09 as against 4.1 percent last year and growthtarget of 4.5%. The commodity producing sector

witnessed marginal positive growth of 0.2 percentwhich is the lowest ever in the last eighteen years.

The modest growth of just 2.0 percent is sharedbetween Commodity Producing Sector (CPS)(0.08) and services sector (1.92). Within the CPS,agriculture contributed 1.0 percentage points or50.1 percent to overall GDP growth (a significant


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increase from its contribution of only 5.0 percentlast year) while industry dragged 0.92 percentagepoints or 46.1 percent to neutralize positivecontribution of the agriculture. In the servicessector major contributions to GDP growth came

from transport, storage & communication (0.3 percentage points or 14.6 percent), wholesale &retail trade (0.7 percentage points or 27.1 percent)and social services (0.8 percentage points or 38.6percent).

Agriculture sector has depicted a stellar growth of4.7 percent as compared to 1.1 percent witnessedlast year and target of 3.5 percent for the year. Major crops accounting for 33.4 percent ofagricultural value added registered an impressivegrowth of 7.7 percent as against a negative growth

of 6.4 percent last year and a target of 4.5 percent.The livestock sector grew by 3.7 percent in 2008-09 as against 4.2 percent last year. Output in the manufacturing sector has contracted by 3.3percent in 2008-09 as compared to expansion of4.8 percent in last year and over-ambitious targetof 6.1 percent. Small and medium manufacturingsector maintained its healthy growth of last year at7.5 percent. Large-scale manufacturing depictedcontraction of 7.7 percent as against expansion of4.0 percent in the last year and 5.5 percent targetfor the year. The massive contraction is because of

acute energy out-ages, security environment andpolitical disruption in March 2009. The mining and quarrying sector witnessed lowest evergrowth in almost one decade and grew by 1.3percent in 2008-09 as against 4.4 percent growthlast year and target of 5.0 percent.

Theservices sector grew by 3.6 percent as againstthe target of 6.1 percent and last years actualgrowth of 6.6 percent. Value added in thewholesale and retail trade sector grew at 3.1percent as compared to 5.3 percent in last year and

target for the year of 5.4 percent. Finance andinsurance sector witnessed slow down of 1.2percent compared with an expansion of 12.9% in2007-08. The performance of this sector shows thatPakistans financial sector is integrated in theworld economy and feeling the heat of thefinancial crisis plaguing international financialmarkets. The Transport, Storage andCommunication sub-sector depicted a sharp

deceleration in growth to 2.9 percent in 2008-09 ascompared to 5.7 percent growth of last year.

Pakistansper capita real income has risen by 2.5percent in 2008-09 as against 3.4 percent last year.

Per capita income in dollar term rose from $ 1042last year to $ 1046 in 2008-09, thereby showingmarginal increase of 0.3 percent. Real privateconsumption rising by 5.2 percent as againstnegative growth of 1.3 percent attained last year.However, gross fixed capital formation could notmaintain its strong growth momentum and realfixed investment growth contracted by 6.9 percentas against the expansion of 3.8 percent in the lastfiscal year.

The total investment has declined from 22.5

percent of GDP in 2006-07 to 19.7 percent of GDPin 2008-09. Fixed investment has decreased to18.1 percent of GDP from 20.4 percent last year. Private sector investment was deceleratingpersistently since 2004-05 and its ratio to GDP hasdeclined from 15.7 percent in 2004-05 to 13.2percent in 2008-09. Public sector investment toGDP ratio was rising persistently from 4.0 percentin 2002-03 to 5.6 percent in 2006-07, however,declined to 4.9 percent in 2008-09. The nationalsavings rate has increased to 14.4 percent of GDPin 2008-09 from 13.5 percent of GDP last year.

Domestic savings has declined substantially from16.3 percent of GDP in 2005-06 to 11.2 percent ofGDP in 2008-09.

The overall foreign investment during the first tenmonths (July-April) of the current fiscal year hasdeclined by 42.7 percent and stood at $ 2.2 billionas against $3.9 billion in the comparable period oflast year. Foreign direct investment (private)showed some resilience and stood at $3205.4million during the first ten months (July-April) ofthe current fiscal year as against $3719.1 million in

the same period last year thereby showing adecline of 13.8 percent. Private portfolioinvestment on the other hand showed a net outflowof $451.5 million as against a net inflow of $98.9million during the comparable period of last year.

US kept its distinction of being a largest investor inPakistan with 23.2 percent stake in the FDI. Otherbig investors originated from Mauritius (10.0


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percent), Singapore (7.7 percent), UK (6.9percent), Switzerland (6.6 percent), UAE (5.3percent) and Hong Kong (3.9 percent). Thecommunication sector (including Telecom)spearheaded the FDI inflows by accounting for

27.3 percent stake during July-April 2008-09followed by financial business (22.4 percent),energy including oil & gas and power (22.7percent), and trade (4.9 percent). The current waveof uncertainty in the global demand and economicactivity in the country has a major backlash on FDIinflows.

02. Agriculture

Inspite of structural shift towards industrialization,agriculture sector is still the largest sector of theeconomy with deep impact on socio-economic setup. It is the source of the livelihood of almost 44.7percent of the total employed labour force in thecountry. With the present contribution to GDP at21.8 percent, agriculture sector is the mainstay ofthe rural economy around which socio-economicprivileges and deprivations revolve. Thus given forits stretched distinct forward and backwardlinkages particularly with the industrial sector, alarge impact on balance of payments and highestshare in employment, agriculture sector hasassumed an added significance in backdrop ofglobal food crunch and food security. No strategyof economic reforms can be realized withoutsustained and broad based agriculturaldevelopment which is critical for raising livingstandards, alleviating poverty assuring foodsecurity, generating buoyant market for expansionof industry and services, and making substantialcontribution to the national economic growth.

Agriculture has grown at an average rate of 4.1percent per annum since 2002-03 with variations,from 6.5 percent to 1.1 percent. The fluctuation inagriculture has largely stemmed from a fluctuation

in major crops which in turn is the result of thebehaviour of Mother Nature, pest attacks on crops.

The performance of agriculture sector has beenstronger than expected during 2008-09 as againstthe target of 3.5 percent and last yearsperformance of 1.1 percent, overall agriculture thisyear is estimated to grow by 4.7 percent on account

of bumper wheat, rice and maize crops estimatedas 23.42, 6.9 and 4.0 million tons respectively.Hence major crops accounting for 33.4 percent ofagricultural value added registered stellar growthof 7.7 percent as against negative 6.4 percent last

year. Minor crops contributing 12.0 percent tooverall agriculture grew by 3.6 percent as against10.9 percent last year. The performance oflivestock the single largest contributor to overallagriculture (51.8 percent) grew by 3.7 percent in2008-09 as against 4.2 percent last year. Thefisheries sub sector performed positively at 2.3percent though the previous years growth stood at9.2 percent. Forestry has been experiencingnegative growth since 2003-04 and this year toohas posted negative growth of 15.7 percent in arow.

Pakistans agricultural output is closely linked withthe supply of irrigation water. As against thenormal surface water availability at canal heads of103.5 million-acre feet (MAF), the overall (both for Kharif and Rabi) water availability has beenless in the range of 2.5 percent (2005-06) to 20.6percent (2004-05) against the normal availability.Relatively speaking, Rabi season faced moreshortage of water than Kharif during these years.

During the current fiscal year (2008-09), the

availability of water for Kharif 2008 (for the cropssuch as rice, sugarcane and cotton) has been 0.3percent less than the normal supplies and 5.5percent less than last years Kharif. The wateravailability during Rabi season (for major cropsuch as wheat), is, however, estimated at 24.9MAF, which is 31.6 percent less than the normalavailability, and 10.7 percent less than last yearsRabi.

The domestic production of fertilizers during thefirst nine months (July - March 2008-09) of the

current fiscal year was up by 3.6 percent ascompared with corresponding period last year. Onthe other hand, the import of fertilizer decreased by51 percent, the total availability of fertilizer alsodecreased by 11.9 percent during the same periodlast year. Agricultural loans amounting to Rs.151.9 billion were disbursed during (July-March,2008-09) as against Rs.138.6 billion during the


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corresponding period last year, thereby registeringan increase of 9.6 percent.

03. MANUFACTURING AND MINING

Manufacturing sector is the second largest sectorof the economy having 18.4 percent contribution toGDP. This sector has recorded its weakest growthin a decade during current fiscal year. Overallmanufacturing posted a negative growth rate of 3.3percent during the current fiscal year against thetarget of 6.1 percent and 4.8 percent of last year.Large-scale manufacturing (LSM) accounting foralmost 70 percent of overall manufacturing,witnessed a broad-based decline of 7.7 percentagainst the revised growth target of negative 5.0percent during July-Mar 2008-09. Maincontributors towards this broad based decline werethe impact of severe energy shortages,deterioration in domestic law and order situation,sharp depreciation in rupee vis--vis US dollar andmost importantly, weak external demand on theback of global recession coupled with slowdown indomestic demand. The increasing trend in inflationalso affected consumers to curtail expenditure ondurable goods.

Textile sector being an export oriented industry ofPakistan and more prone to international demandshocks has been under severe stress amid a global

recession, however, textile production has declinedslightly, by 0.7 percent over the same period lastyear.

The sustained growth in recent years in cementindustry is an outcome of increase in its productioncapacity and exploitation of export markets. Thecement sector posted a growth rate of 4.71 percentduring the current fiscal year. Cement exportsincreased by 48.8 percent. Fertilizer industry alsoposted a positive growth due to increase inproduction. The performance of steel mill was

unsatisfactory during the current fiscal year. Theproduction value slid down from Rs.11133 millionin 2007-08 to Rs. 9971 million in the currentfinancial year, witnessing a decrease of 10.44percent.

Mineral potential of Pakistan though recognized tobe excellent is inadequately developed as itscontribution to GDP at present stands at 2.4

percent. During the current fiscal year (July-Mar2008-09), the mining and quarrying sector hasregistered almost flat growth rate i.e. 1.31 percentas against a target of 4.5 percent and 3.0 percent oflast year. The growth rate of this sector declined

sharply due to substantial diminishing trend in theproduction of Magnesite (51.3%), Sluphere(10.3%) and Dolomite (4.6%).

During the current fiscal year, the privatizationcommission completed the transaction of Hazaraphosphate fertilizer limited (HPFL) fetching anamount of Rs.1340.02 million. SMEDA plays avital role in creating market oriented economicgrowth, employment opportunities and reducingpoverty. As many as 16 projects amounting toRs.1680 million have been approved for

implementation by SMEDA.

04. FISCAL DEVELOPMENT

The severity of the macroeconomic imbalances inthe last fiscal year once again reinforces theimportance of fiscal prudence for sustainableeconomic growth. The overhang from 2007-08continued to haunt adjustment efforts. The fiscalconsolidation efforts faced headwinds likedeteriorating security environment, domesticpolitical uncertainties along with the deepening ofthe global financial crisis and overall depressed

macroeconomic environment. The unanticipatedpersistence of inflationary pressures on theeconomy kept fiscal policy options limited. Theshrinking revenues constrict governments abilityto pursue counter cyclical policy.

There has been significant improvement in fiscalperformance during 2008-09 due to the policyshift, with the overall fiscal deficit estimated tohave dropped to 4.3 percent of annual GDP. Thefiscal improvement in 2008-09 has largely basedon reduction of oil subsidies and a slash on

development spending. Going forward Pakistanneeds a substantial increase in resource base toaugment its development efforts and fiscalconsolidation efforts has to come from enhancedrevenue base because we have already exhaustedoptions for expenditure cuts. Pakistans futureeconomic development crucially hinges uponadditional resource mobilization and for this end


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extending the tax base to unexplored sectors isvery crucial.

The expenditure of the government in relation toGDP exhibited replica of the past performance and

showing an overall decline since the beginning ofthe 1990s. However, in 2008-09 total revenue aspercentage of GDP slightly recovered, due to amarginal improvement in non-tax revenues aspercent of GDP. Total revenue is expected to reachat Rs. 1910 billion, as compared to Rs. 1499.5billion during the 2007-08.

The FBR revenue collection for the fiscal year2008-09 was targeted at Rs.1250 billion at the timeof presentation of the Federal Budget 2008-09. Taxcollection during the first ten months (July-April)

of the current fiscal year amounted to Rs.898.6billion, which is 17.7 percent higher than the netcollection of Rs.763.6 billion in the correspondingperiod of last year. The tax collection performancereflects the heat of slowing economy and fallingimports. The customs duty collection deviatedfrom its recent past track record of high growthmainly because of the fact that dutiable importshave undergone negative growth. The overall FBRtax collection remained less than satisfactory andactually witnessed deceleration in real term.Resultantly, the FBR tax collection to GDP ratio is

likely to deteriorate around 9 percent of GDP asagainst the target of bringing it in to the vicinity of10 percent of GDP. Tax revenue from all sourcesexhibited a decline in tax-GDP ratio from 10.3percent in 2007-08 to around 10 percent in 2008-09.

The budgeted total expenditure for the fiscal year2008-09 was Rs.2391 billion, which is 4.9 percenthigher than the last years revised estimate. On theother hand current expenditures were envisaged toremain more or less stagnant at Rs.1876 billions.

The share of federal government in the currentexpenditure was to the extent of Rs.1359 billionsand the remaining Rs. 517 billions were earmarkedfor provincial governments. Developmentexpenditure (after adjusting for net lending) wastargeted at Rs.396 billion in 2008-09 which is upby 7 percent than last year. On the basis of revenueand expenditure projections, the overall fiscal

deficit is estimated at Rs.562 billion or 4.3 percentof GDP as against 7.4 percent last year.

The current expenditure over run has become anorm because of intensification of war on terror

and spike in security related expenditure in the lasttwo years. This is feeding into a significant gapbetween budgeted and estimates in currentexpenditure. The current year has witnessed somedeceleration in non-interest, non-defenceexpenditure, however, to follow fiscal deficitreligiously, the government has to go an extra mileby development expenditure cutbacks.Notwithstanding this downturn, the growth incurrent expenditure remained strong. Pakistansfiscal adjustment experience over the yearssuggests downward rigidity in current expenditure

and much of the effort has to come from eitheradditional revenue mobilization or developmentexpenditure cutbacks. In case of any eventuality ofrevenue shortfall the development expenditure isthe prospective candidate to bore the brunt ofadjustment.

05. MONEY & CREDIT

In the light of continued inflationary buildup andincreasing pressures in the foreign exchangemarket, the SBP announced a package of monetarymeasures on May 21, 2008 that included;(i) an

increase of 150 bps in discount rate to 12 percent;(ii) an increase of 100 bps in CRR and SLR to 9percent and 19 percent, respectively for bankinginstitutions (iii) introduction of a marginrequirement for the opening of letter of credit forimports (excluding food and oil) of 35 percent, and(iv) establishment of a floor of 5 percent on therate of return on profit and loss sharing and savingaccounts. Following a slight reversal in themounting inflation, the SBP announced a declineof 100 bps on April 20, 2009. SBPs tightmonetary policy and rationalization of fiscal

subsidies and expenditure controls are the keyfactors that contributed a reasonable progresstowards macroeconomic stability. Although thefiscal and external current account deficit reducedduring the last year, still it remains high along withthe risk of slippages.


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The YoY growth in broad money (M2) declinedsharply to 4.59 percent as on 9th May FY09 against8.96 percent in the corresponding period last year.The money supply was limited to Rs 215.0 billionas the Net Foreign Assets (NFA) of the banking

system recorded a decline of over Rs 227.1 billionduring the first ten months of the current fiscalyear to May 9th.

However, NFA has improved by Rs 130 billions ason 9th May, 2009 after contracting by Rs 357billion on 6 December, 2008. This improvementmainly came towards end March 2009 as thegovernment received $ 500 million each from theWorld Bank and the Bank of China. Theimprovements in external account and hence inNFA are mainly owed to a rise in workers

remittances; increase in external financial inflowsfrom multilateral and bilateral sources andsubstantial retirement of foreign currency loans tocommercial banks.

On the other hand Net Domestic Assets (NDA) ofthe banking system decelerated sharply during Jul-May FY09 to 10.99 percent as compared to 21.3percent during the same period last year. The sharpdeceleration in NDA growth of banking systemwas mainly contributed by decrease in governmentborrowings and credit to non-government sector

during Jul-May FY09. The credit of Rs 138.4billion to the public sector enterprise (PSEs), andgovernment borrowings worth Rs 119.8 billion forcommodity operations has significantly contributedRs 258.2 billion in NDA during Jul-MayFY09compared to an expansion of Rs 105.2 billion inthe same period last year. Credit to PSEs increasedby Rs 138.4 billion during July-May FY09 againstan increase of Rs 44.3billion in same period lastyear. The demand for credit from private sectordecelerated. As it declined to Rs. 21.8 billionduring July May FY09 compared to Rs 369.8

billion in the corresponding period of the last year.This sharp decline in private sector credit duringJuly-May FY09 was mainly due to theexceptionally low demand for working capital thathas witnessed the lowest growth in the recent past.

According to the distribution of credit to theprivate sector, the manufacturing sector althoughdeclined to Rs 89.4 billion, still continued to be the

largest recipient of bank credit during Jul-March2008-09. The overall manufacturing sectoraccounted for almost 85 percent of the credit toprivate sector business. The structure of loanportfolio of the banks has changed significantly as

by end December 2008, 78 percent of the totalbank advances were lent at the rate of 12 percentand above as compared to the 70 percent of bankadvances were extended at rates between 9 to 12percent during the same month last year. The bankhave followed more strict credit criteria due torising NPLs. Banks are focusing to finance thoseprojects which are able to generate cash flows.

The impact of tight monetary stance and liquiditymanagement began to translate into a rise in otherinterest rates, with varied magnitude, at different

stages of the economy. For instance, 6-months T-bills cutoff witnessed an increase of 169 basispoints to 13.2 percent during Jul-May FY09.However, 6-months and 12-months KIBORdecreased by 26 bps and 39 bps to 13.68 percentand 13.83 percent respectively at end May 2008 inview a cut of 100 bps in the policy rate in April2009.

6. CAPITAL MARKETS

The beginning of the fiscal year 2008 appearedpromising for Pakistans capital markets regardless

of the sub-prime crisis intensifying its grip onfinancial systems all over the globe. The stockmarkets in Pakistan posted good gains and theKSE-100 index gained 11.6 percent by mid ofApril 2008 and touched the highest level of 15,676points on April 18, 2008 with a gain of 1,747points over the level of index as at start of the year2008. Subsequent to this high time, however, theequity market has seen an episode of precipitousdecline: the KSE-100 index has fallen by over 62percent (as on December 31, 2008) since touchingits peak in April 2008. While issues related to the

macroeconomic scenario and a shaky politicalenvironment fuelled anxiety among the investorcommunity and contributed to the fall in value, adearth of adequate corporate governance measuresaggravated the situation. Supplementing theextensive weakness was the diminishing foreigninterest in the equity markets of Pakistan.


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Notwithstanding, equity investors have embarkedon a fractional recovery of their fortunes with anupsurge in the KSE-100 index of a fine 22.5percent since the commencement of the calendaryear 2009, driven up chiefly by signs of returning

economic stability. A timely loan from theInternational Monetary Fund (IMF) approved inNovember 2008 and a materialization of pledgesby Friends of Democratic Pakistan are collectivelyexpected to help out the economy sail throughwhat could be a tumultuous era. It goes withoutsaying that the government's success in managingthe economy has, without a doubt, served to builda soothing outcome.

The stock market observed gigantic foreignoutflows owing to the removal of price floor

mechanism in the middle of December 2008. Theprospects of healthy foreign interest becomedoubly depressing by looking at the figure offoreign equity investment during the first ninemonths of the current fiscal year 2008-09. It standsat a negative $418.4 million till March 2009. Withno fresh merger and acquisition activity in the year2008-09, the international investors remained keento increase their ownership share.

Pakistans debt market has witnessed an issuanceof long term government securities amounting to

about Rs. 49 billion and revision in deposit rates ofNational Savings Schemes on a quarterly basis in2008-09. Three new TFCs have been issued.Interestingly, the non-bank market remained theprincipal issuers this time with no floatation relatedto the financial sector. Recent regulations by SECPthat emphasize on increasing the minimum capitalbase and strict requirements for the classificationof non-performing loans are anticipated to augmentthe strength of the NBFC sector.

Capital market reforms are an integral component

of the structural reforms being supported by thegovernment to restore macroeconomic stability andto build up the banking system, while developing amore contributing incentive regime for financialindustry. Significant progress has been made oncapital market reforms, including adoption ofinternational standards and market practices andthe streamlining of regulatory infrastructure toenhance surveillance and enforcement.

The government is keen to maintain themomentum to strengthen, deepen and broaden thebase of capital markets. As a further step to fulfillthis objective, the SECP has revived theConsultative Group on Capital Markets to act as an

independent think tank for important policydecisions in relation to the development of capitalmarkets in Pakistan.

07. INFLATION

Inflation rate as measured by the change inConsumer Price Index (CPI), averaged at 22.3percent during the first ten months (July-April)2008-09 as against 10.3 percent in the same periodlast year. Food and non-food inflation have beenestimated at 26.6 percent and 19.0 percent against15.0 percent and 6.8 percent in the same period oflast year. This year inflation accelerated at rapidpace mainly because of food prices whichincreased as result of high prices of widelyconsumable items such wheat, wheat flour, sugarand meat etc, owing to their supply shortage. Othermajor factors that effected domestic prices includephasing out of subsidies on petroleum products,upward revision of support prices of wheat byabove 50 percent thus pushing up the retail pricesof wheat and wheat flour across the country.

Core Inflation, which represents the rate of

increase in cost of good and services excludingfood and energy prices, core also went up from14.7 percent in July 2008 to 17.8 percent in April2009. After hovering around the 18 percent sinceOctober 2008, core inflation came down slightly to18.5 percent in March 2009 and further to 17.8percent in April 2009. The demand supply gap incase of meat, the extreme shortage of onion in themarket and decline in sugar production has beenthe most significant contributors to the pick-up infood inflation during 2008-09. Based on the trendof prices of these items, the contribution of food

inflation to the overall inflation has increased to48% and that of non-food at 50.7 percent.

To contain inflation within desirable limits, thegovernment took various measures such ascurtailing government expenditure throughstringent fiscal discipline, supply augmentarrangements through imports and smooth


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distribution network of essential commodities.Throughout the year, the Economic CoordinationCommittee (ECC) keep a constant watch overprices and supply of essential commodities in theirfortnightly meetings And come up with

recommendations to improve supply.

08. TRADE AND PAYMENTS

The external sector developments in 2008-09followed a rollercoaster ride patterns: started withhighest ever oil prices and unbearable commodityprices, punctuating the highs in October 2008when current account crossed $2 billion mark onthe back of soaring energy prices and uncertainties,gradually caught into the financial crisis andaccentuating the lows in February 2009 with acurrent account surplus. The year started with firstquarter current account deficit of $3.8 billion andreached to third quarter deficit of just $0.3 billion.Notwithstanding this positive development, theexternal sector is still prone to some downside risk.

Overall exports recorded a negative growth of 3.0percent during the first ten months (July-April) ofthe current fiscal year against positive growth of10.2 percent in the same period of last year. Inabsolute terms, exports have decreased from $15,222.9 million to $ 14762.2 million in the period.

Imports during the first ten months (July-April) ofthe current fiscal year (2008-09) decline by 9.8percent compared with the same period of lastyear, reaching to $ 28.92 billion. Importcompression measures lowering domestic demandcoupled with massive fall in international oil priceshave started paying dividends and importswitnessed slowdown. Beside that depreciation ofrupee had also played a significant role for lowerimports during current fiscal year.

Imports of the petroleum group registered

declining growth of 7.6 percent and reached to$8012.7 million. The petroleum group accounts for27.7 percent of total imports but contributed 21.0percent in the overall growth of imports for theyear. The decline in imports of the petroleumgroup has been due to massive fall in oil prices inthe international market. The imports of telecomdecline by 54.8 percent during July-April 2008-09.This is followed by imports of consumer durables

group which exhibits negative growth of 16.4percent. Petroleum group, Raw Materials and foodgroups witnessed a negative growth of 7.6 percent,5.2 percent and 3.1 percent respectively. Import ofmachinery remained the only group which showed

a nominal growth of 0.5 percent during July-April2008-09.

Pakistans current account deficit (CAD) movedback o US$ 8.5 billion during Jul-April 2008-09against US$ 11.2 billion in the comparable periodof last year, showing an improvement of 23.5percent. The improvement in current account arisesduring November-April 2008-09 when it declinedby 74 percent over the corresponding period lastyear on the back of reduction in trade deficit andimprovement in invisible account. While on the

other hand, current account balance worsened by100.8 percent during the first four months of thecurrent fiscal year 2008-09 compared with thesame period last year owing to increased importpayments on account of higher import prices andfood imports. Trade deficit decelerated by 12.3percent during July-April 2008-09.

Services account deficit shrank by 41.3 percentduring Jul-April Fiscal Year 2008-09 to reach $ 3.2billion. This deterioration was contributed byfactors like receipt from logistic support,

deceleration in freight related charges and sharpfall in outflows from foreign exchange companiesthe result of action against undocumented fundtransfer.

Financial account contracts from $ 6,224 million to$ 3,476 million during July-April 2008-09 againstcorresponding period last year. This decline was aresult of variety of reasons which discourage theinvestment flows to Pakistan during July-April2008-09, mainly weakening economicfundamentals, deteriorating law and order

situation, slack functioning of stock market, lack ofprivatization proceeds and in the presence ofglobal financial crises the foreign investorsdeclined to invest as expectations of the lowerdegree of profitability.

Workers remittances amounted to $ 6355.6million in July-April 2008-09 as against $ 5319.1in corresponding period last year, thereby showing


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technological advancement. Hence, it plays apivotal role in human capital formation and anecessary tool for sustainable socio-economicgrowth. Education also combats unemployment,confirms sound foundation of social equity,

awareness, tolerance, self esteem and spread ofpolitical socialization and cultural vitality.

Public expenditure on education as a percentage toGDP is lowest in Pakistan due to fiscal resourcesconstraint. The trend of investment on Education interms of GDP has been 2.50 % and 2.47 % in theyears 2006-07 and 2007-8 respectively whereas itis estimated to be 2.10 % during the 2008-09. It ison the lower side compared with requirementsgiven the importance of the sector. The budgetallocation has increased by 8.6 % in 2008-09 as

against an increase of 17 % in 2007-08.

According to Pakistan Social and LivingMeasurement (PSLM) Survey data (2007-08), theoverall literacy rate (age 10 years and above) is56% (69% for male and 44% for female) in 2007-08 compared to 55% (67% for male and 42% forfemale) in 2006-07. Literacy remains higher inurban areas (71%) than in rural areas (49%) andmore in men (69%) compared to women (44%).When analyzed provincially, literacy rate in Punjabstood at 59 % followed by Sindh (56%), NWFP

(49%) and Balochistan at 46%. The literacy rate ofPunjab and Balochistan has improved considerablyduring 2006-07 to 2007-08. The overall schoolattendance (age 10 years and above) is 58% (71% for male and 46% for female) in 2007-08compared to 56% (68 % for male and 44% forfemale) in 2005-06.

According to the Ministry of Education, there arecurrently 227,243 educational institutions in thecountry. The over all enrolment is recorded at34.49 million with teaching staff of 1.27 million.

11. HEALTH & NUTRITION

The government attaches a very high priority to theimprovement of health facilities so as to translatethe economic success into social benefits. InPakistan, the coverage of health facilities hasimproved over the years. The existing network ofmedical services consists of 948 hospitals, 4794dispensaries, 5310 basic health units (BHUs), 561

rural health centres (RHCs) and the availability of103037 hospital beds. Besides, there are 133956doctors, 9012 dentists and 65387 nurses in thecountry. During the calendar year 2008, thepopulation medical facilities ratio in terms of

doctor works out 1212 person per doctor, 18010person per dentist, 2478 person per nurse andavailability of one hospital bed for 1575 persons.

The total outlay on health during 2008-09 isestimated at Rs.74 billion which shows an increaseof 23 percent over last year and works out to be 0.5percent of GNP. The new health facilities added tothe overall health services system during 2008-09,include the construction of 48 new facilities (35BHUs and 13 RHCs), up-gradation of 890 existingfacilities (850 BHUs and 40 RHCs), addition of

4300 hospital beds and training of 4500 doctors,400 dentists, 3200 nurses and 5000 paramedicsbeside training of 96000 LHVs. To control thecommon diseases and to alleviate their pain andsuffering, various health programmes like TB,Malaria and AIDS Control Programmes werecarried out. The caloric intake per person has beenestimated as 2363 per day in 2008-09 and percapita protein availability has increased from 69.5gram last year to 70.0 gram in the 2008-09.

12. POPULATION, LABOUR AND

EMPLOYMENTThe population of Pakistan stood at 163.67 in mid2008-09. If the existing trend remains unchanged,it will reach 167 million by the year 2010 and 194million by 2020 (NIPS). The density of populationper person is 185 (2003).According to 2007province wise demographic estimates of theplanning and development division, Punjab has55.46 percent of the total population of Pakistan.Sindh has 22.92 percent of entire populationNWFP has 13.73 percent population. Baluchistanis the least populous with 5.15 percent of

population while Islamabad has 0.7 percentpopulation and Federally administered TribalAreas have 2.37 percent of entire population.

Crude birth rate (CBR) measures the growth andcrude death rate (CDR) measures the decline of apopulation. These also give the birth and deathrates among a population of 1000. CBR in Pakistan


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is estimated at 25 while 10 years ago it was 31.7which is a good trend, similarly CDR is 7.7 andabout a decade ago it was 9. Both of these indicatethat improvement on the population front isevident. This also shows that health statistics are

gradually improving. Infant mortality rate was 81.1in 1998 while it is 70.2 per thousand live birthsnow. The decline explains that certain diseaseshave been controlled and there has been greateraccess to health care for the people.

Pakistan has a labour force of 51.78 millionpeople. Women labour force has increased; whichstood at 10.96 million that is 0.1 million more thanthe previous year. The total number of peopleemployed was 49.09 that is 1.44 million more thanthe previous year. The supply of labour force in the

economy and the composition of the countryshuman resource is determined by the labor forceparticipation rate (LFPR). Crude activity rate is thecurrently active population expressed as apercentage of the total population in Pakistan.Crude activity has increased negligibly in 2007-08;it is 32.2 percent. Agriculture dominates thedistribution of employed persons among all themajor sectors leading at (44.65%) during 2007-08,manufacturing has the share of (12.99%). TheOthers category has the combined distributionof employed persons in several industries of

(0.1%). During the period 1999-2000 to 2005-06,11.33 million work opportunities were created, duemainly to the strong economic growth. However,in the subsequent year i.e. 2007-08, an increase of1.44 million employed persons was seen.

13. POVERTY

The main objectives of government policies are toraise the standard of living and improve the socio-economic conditions of the people and thus reducethe incidence of poverty in the country.

Food prices have a significant bearing on povertyincidence. A review of price trends of essentialitems during 2007-08 indicates that the majorportion of food inflation during this periodstemmed from hike in the prices consumed by thepoor household such as wheat, flour, rice, edibleoil, vegetables and pulses. Since April 2007, theeconomy has witnessed over 200 percent increase

in the price of palm oil; and an increase of 150percent in wheat prices, while over 100 percentincrease in the price of oil in the internationalmarket.

Moreover, economic growth has slowed downconsiderably during the last three years. Theindustry and construction sectors have contracteddue to the domestic slowdown and energy shortageand also due to global recession. Thus jobabsorbing capacity of the economy shrank.

Based on the Federal Bureau of Statistics PSLMdata, the Centre for Poverty Reduction and SocialPolicy Development (CPRSPD), Planning andDevelopment Division estimated a sharp decline inthe headcount poverty ratio for 2007-08. However,

these findings appear to contradict otherassessments conducted subsequently, and whichbetter reflect global and domestic pricedevelopments after June 2008. These subsequentassessments point towards a strong likelihood of asharp increase in the poverty incidence in Pakistanas a result of unprecedented food inflation andtransmission of international energy prices todomestic consumers.

The Report of a UN Inter Agency AssessmentMission fielded during June-July 2008 found that

food security in Pakistan in 2007-08 hadsignificantly worsened as a result of food pricehike. The total number of households falling intothis category was estimated to be seven millionhouseholds or about 45 million people in 2008.The survey further indicates that more than 40percent of households reported no change inincome in 2008 since last year. Forty five percentof the population working as employees witnesseddecrease in their real wages. The Report shows anincrease in the share of severely food insecurepopulation, from 23 percent in 2005-06 to 28

percent in 2008. The main findings indicate thatthe high food prices are undermining povertyreduction gains, as food expenditures comprise alarge share of the poors total expenditures andfood price hike has severely eroded poorhousehold purchasing power.

The Planning Commissions constituted Panel ofEconomists in its Interim Report based on 2004-05


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poverty head count number of 23.9 percentsuggested an increase of around 6 percentagepoints in poverty incidence for the year 2008-09.Similarly, the Task Force on Food Security basedon the World Bank estimates of head count ratio of

29.2 percent in 2004-05 poverty estimated thatpoverty head count increased to 33.8 percent in2007-08 and 36.1 percent in 2008-09 or about 62million people in 2008-09 were below the povertyline.

Subsequent to the poverty estimates of 2007-08produced by CPRSPD, a validation exercise wasconducted by the World Bank. In its analysis, theWorld Bank disaggregated the full year estimateinto quarterly estimated HCR and found an almost4 to 5 percentage point increase in the last quarter

of 2007-08, to around 21 percent.

The World Bank has estimated, using methodologyconsistent with that used by CPRSPD in its povertyestimation, and taking current projections of realGDP growth, that the poverty Head Count Ratiocould rise to over 25 percent by 2009-10.

Given the flux produced by large changes in foodand energy prices since late 2007, the governmentintends to commission a rapid household incomeand expenditure survey to better assess the current

position regarding poverty incidence andvulnerability in the country. This survey isexpected to be conducted shortly.

Second generation poverty reduction strategypaper (PRSP-II) built up on nine pillars has beenfinalized with an aim to reduce poverty byregaining macroeconomic stability. Social sectorand poverty related expenditures are projected tobe Rs 760 billion during 2008-09, constituting 5.86percent of GDP which is in line with the fiscalresponsibility and Debt Limitation Act 2005,

stipulating that expenditures on social sectorsshould not be less than 4.5 percent of GDP in anygiven year.

During year 2008-09, government took variousinitiatives to combat poverty which includedPPAF, micro finance SME operations, BenazirIncome Support programme, Peoples Worksprogramme, Pakistan Bait-ul-Mal and Punjab

Government initiatives including tractor subsidy,sasti roti and Punjab food support scheme; whichwill help enhance absolute per capita income, andwiden the scope to earn livelihood.

14. TRANSPORT AND COMMUNICATION

Transportation network of any country is of vitalimportance to its development and affects allsectors through economic linkages. It ensures safeand timely traveling, encourages business activitiesand cuts down transportation costs while grantingaccess to producers for marketing their goods.Pakistans economic development partly dependson improvement/modernization of its transportsector accounting for 11 percent of GDP & 16percent of fixed investment.

Pakistan has a vast road network covering 258,350kilometers including 176,589 KM of high typeroads and 81,761 KM of low type roads. Totalroads network which were 229,595 Km in 1996-97, increased to 258,350 Km by 2008-09indicating an increase of 12.5 percent. During theout-going fiscal year, the length of the highoutgoing type road network increased by 1.3percent but the length of the low type road networkdeclined by 2.7 percent because most of the lowtyped roads have been converted to high typeroads.

An effective railway system facilitates commerceand trade, reduces transportation cost and promotesrural development and national integration whilereducing the burden on commuters. PakistanRailway carried 63.0 million passengers and 5.4million tons of freight during current fiscal yearand its earning stood at Rs. 17442 million.

The outgoing year (2009) was also exceptionallydifficult for PIA, as the airline was equally affectedby the unprecedented increase in fuel cost coupled

with weaker Pakistani-Rupee which severely hurtPIA and eventually it had to bear huge loss on itsUS $ loans. PIA international passenger traffic,excluding Hajj traffic registered an increase of 3.5percent (passengers despite the seat (capacity)reduction of 2.3 percent. On domestic routespassenger traffic also registered an increase of 3.6percent passengers, despite the seat (capacity)reduction of 7.4 percent. Hence in terms of


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capacity utilization, overall Passenger Seat Factor(excluding Hajj) increased to 74.5 percent duringthe year 2008 as compared to 70.3 in 2007although Airline was constrained to mount lessASKs (Available Seat Kilometers) by 5.7 percent.

Similarly, though Cargo capacity was also loweredby 13.8 percent during the year 2009. load factorcompared to the year 2008 improved by 2.7percent.

Karachi Port Trust (KPT) is contributing to theeconomic growth of the country, by its recordcargo handled at KPT. During the first sevenmonths of the current fiscal year, it posted aremarkable increase of 44.3 percent in exportshandled at Karachi Port Trust during first ninemonths of current financial year 2008-09, Port

Qasim Authority handled 18.01 million tonescargo depicting a shortfall of 9 percent over Jul 07-Mar 08 owing to global economic crisis. PakistanNational Shipping Corporation (PNSC) lifted5762.2 million tones of liquid cargo and 865.0million tons of dry cargo during the current fiscalyear. The consolidated revenues of the Group forthe quarter ending March 31, 2009 were Rs.9503million during the period under review as againstRs.7,471 million for the corresponding period lastyear showing an increase of 27 percent.

Telecom sector of Pakistan exhibited positive butslow growth in terms of revenue, subscribers andteledensity. During the current fiscal year totalteledensity reached to 60.6 percent. However,cellular segment leads the share in total teledensityby 93.7 percent followed by Fixed Local Loop(FLL) 3.8 percent and Wireless Local Loop (WLL)2.5 percent. During the first 9 months of 2008-09,cellular Market added 3,422,599 subscribers withaverage of 0.3 million per month and totalsubscribers reached 91.4 million. Total fixed linesubscribers in Pakistan stand at a total of 3.7

million as of March, 2009, yielding totalteledensity of 2.3 percent. Total WLL subscribersstood at 2.5 million and density in the countrytouched 1.5 percent in March, 09. There arecurrently more than 12,000 cities/ towns/villagescovered by WLL services.

15. ENERGY

The outgoing year has witnessed number ofinternal and external challenges in Pakistanseconomy and shortfall in energy sector is among

the major problems. During the current year,supply and consumption of energy remained lowerthan previous years. The consumption of energyremained low due to overall slow down ofeconomy. While the major cause behind the lesserenergy supplies remained circular debt issue in theenergy sector. Energy shortages dragged theperformance of economy especially large scalemanufacturing.

The consumption of petroleum products, gas andcoal during the first nine months (July-March2008-09) of the current fiscal year decreased by3.4 percent, 2.5 percent and 26.5 percent,respectively over the corresponding period of lastyear. On the other hand, supply of crude oil,petroleum products, coal, and electricity during thefirst nine months of the outgoing fiscal year 2008-09 decreased by 5.5 percent, 2.8 percent, 26.5percent and 17.9 percent, respectively over thecorresponding period of last year

Production of crude oil per day has decreased to66,531 barrels per day during July-March 2008-08from 70,165 barrels per day during the same period

last year, showing a decrease of 5.2 percent. Onaverage, the transport sector consumes 51.6percent of the petroleum products, followed bypower sector (33.1 percent), industry (10.3percent), household (1.7 percent), othergovernment (2.1 percent), and agriculture (1.1percent) during last 10 years i.e. 1998-99 to 2007-08.

The average production of natural gas per daystood at 3,986.5 million cubic feet during July-March, 2008-09, as compared to 3,965.9 million

cubic feet over the same period last year, showingan increase of 0.52 percent. On average, the powersector consumes 37.2 percent of gas, followed byindustrial sector (20.4 percent), household (16.8percent), fertilizer (19.8 percent), Transport (2.0percent), commercial sector (2.7 percent) andcement (1.0 percent) during last 10 years i.e. 1998-99 to 2007-08.


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The total installed generation capacity hasincreased to 19.754 MW during July-March 2008-09 from 19,566 MW during the same period lastyear, showing a marginal increase (1.0 percent).Total installed capacity of WAPDA stood at

11,454 MW during July-March 2008-09 of which,hydel accounts for 57.2 percent or 6,555 MW,thermal accounts for 42.8 percent or4, 899 MW.The number of villages electrified increased to133,463 by March 2009 as compared to 126,296by March 2008, showing an increase of 5.7percent. Presently, some 2.700 CNG stations areoperating in the country. By March 2009 about 2.0million vehicles were converted to CNG ascompared to 1.70 million vehicles during the sameperiod last year, showing an increase of 17.6percent. With these developments Pakistan has

now become the largest CNG using country.

16. ENVIRONMENT

The Government of Pakistan has declared 2009 asthe National Year of Environment. In this regardthe current year was kicked off with a Regionallevel workshop on Climate Change, which wasinaugurated by the Prime Minister of Pakistan. AMedium Term Development Framework 2005-2010 (MTDF) adopted by the GoP in mid-2005coincided with the approval of a new and far-reaching National Environmental Policy (NEP),with the goal to protect, conserve and restorePakistans environment in order to improve the

quality of life of the c

Overview of Pak Economy

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