Pakistan Economic Growth 00-07

8/14/2019 Pakistan Economic Growth 00-07

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THE ECONOMIC GROWTH OFPAKISTAN

During (2000-07)

KHALID KHAWARCOURSE INSTRUCTOR

ECONOMICS

PREPARED BY:

SANAM KHAN

MINHAJ ALAM


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Growth of Pakistans Economy:

With accelerating economic growth, economists are now emphasizing a

different range of problems. According to John Wall, the World BankCountry Director for Pakistan, Now Pakistan faces higher qualityproblemsthe problems of success. Demand has risen faster thansupply. This has shown up in high inflation and a zooming trade deficit.The tight fiscal, easy money formula to get growth going needs to betight fiscal, tight money and credit to sustain rapid growth. Idledomestic production capacity allowed the rising demand to beaccommodated by rising capacity utilization in cement, steel, fertilizer,textiles, automobiles and motorcycles. Now that capacity is more thanfully utilized, resulting in backlogs and imports. Musharraf economicagenda continues to include measures to widen the tax net, privatizepublic sector assets, and improve its balance of trade. Pakistan has madegovernance reforms, privatization, and deregulation the cornerstones ofits economic revival.

Although it received a positive endorsement from international financialinstitutions such as the World Bank, the International Monetary Fundand the Asian Development Bank, as well as improved credit ratingsfrom Standard & Poor's and Moody's.

Pakistan's current account surplus had put upward pressure on thePakistani rupee, which rose from 64 rupees per dollar to 57 rupees perdollar. The State Bank of Pakistan (the central bank) stabilized the rise

by lowering interest rates and buying dollars. After short-term PakistaniT-bond rates fell below 2%, with government borrowing having declined,

banks greatly expanded their lending to businesses and consumers.Construction activity, sales of durable goods such as trucks andautomobiles, and housing purchases have all jumped to record levels.

Private sector credit expanded by 28.5% in 2003, and continues toexpand despite monetary restraints the SBP imposed interest-rateincreases to moderate money supply and prevent "overheating".Pakistan's nominal gross domestic product (GDP) in 1997 was US$ 75.3

billion. Five years later in 2002, the country's nominal GDP came downto US$ 71.5 billion. During this five-year period, the real GDP grew by ameager 3.0 per cent on an average. Pakistan government's debt was 82per cent of its GDP in 2002. Over one-third of the government's revenue

was being used up in making interest payments on the national debt. Thenear stagnant economy suddenly started showing miraculous growth in2002 after lifting of economic sanctions imposed after Pakistan's 1998


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nuclear tests. The economy grew at 5.1 per cent in 2003, 6.4 per cent in2004 and 7.0 per cent in 2005. The US$ 72 billions economy of 2002has swelled into a US$ 108 billion economy in 2005. During 1997-2002Pakistan's average export growth has been 1.2 per cent per year and

increased to 13 per cent per year during 2003-05. Pakistan's debt as apercentage of the GDP came down to 59 per cent in 2005 from 82 percent in 2002. Pakistan government's interest payment as a percentage ofrevenue collection came down to 23 per cent in 2005 as compared to 35

per cent in 2002.

According to the Asian Development Bank, the first half of FY2006 wasmarked by a slowdown in both industry and agriculture in Pakistan.Output of cotton declined by an estimated 10.9 per cent from an all-timehigh of 14.6 million bales harvested in FY2005. Production of sugarcane,another major summer crop, is also estimated lower than last year. Thegrowth of large-scale manufacturing slowed to 8.7 per cent in the firstquarter of FY2006 from 24.9 per cent in the same period of last year,primarily due to capacity constraints and the high-base effect. Amongindividual industries in the first quarter, growth of textiles tumbled to7.2 per cent from 29.6 per cent year on year. Automobile assembly and


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electronics, which have shown the fastest expansion among sub-sectorsin the last 2-3 years, also decelerated. Inflation accelerated in FY2005after five years of price stability. Annual inflation, based on theconsumer price index, more than doubled to 9.3 per cent from 4.6 per

cent, mainly because of higher food prices and rising house rents. Due toa sharp increase in domestic oil prices, transport costs also jumped. Core-- nonfood, non-oil -- inflation also doubled, from 3.7 per cent to 7.4 percent.

Pakistan is a middle income country. Its economy is among the fastestgrowing in the world as its economy has reached the size of $140 billionfrom a mere $70 billion a few years earlier, Federal Advisor on FinanceDr Salman Shah informed the media. Per capita income now stands at$808.

The Economic Survey of Pakistan for 2006-2007 has concluded thecountry's economy recorded 7.3 percent growth. Former Prime MinisterShaukat Aziz said that Pakistan's economy should continue to grow every

year at about seven percent and he also assured that many measures willbe taken to give the economy a further boost. He promised privatizationof companies and he also invested in the economy by allowing freeeducation for under 16's and also came up with a scheme to pay girls two

hundred rupees a month as an incentive to attend school. Also in thenext five years many foreign universities from different Europeannations have announced they will be opening campuses in Pakistan


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Structure of Economy:

From modest beginnings, Pakistani economy has moved successfully to alow-inflation high-growth trajectory since 2000. The central bank has

Controlled inflation at around 3% per annum in recent years - a recordsince 1980.

Over 1,081 patent applications were filed by non-resident Pakistanis in2004 revealing a new found confidence Sectorial contribution to GDPGrowth. Most of the recent acceleration in GDP growth has come fromthe industrial and service sectors. GDP growth by sector, as a percentageof GDP Sector 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Current SBP projections, based on the limited data availability to date,suggest that the economy will continue to grow strongly during FY08.The growth is anticipated to be broad-based, with the strongcontributions expected from agriculture and the services sector. Also theaggressive monetary tightening should help contain demand pressure inthe economy, with monetary growth forecast to remain within theindicative target published in the Monetary Policy Statement for July-

December FY08.

The slowdown is expected to be reflected mainly through moderate (butadequate) growth in private sector credit, lower government borrowingsfrom SBP, and slower net growth in NFA of the banking system,consequent to changes in the monetary policy framework in FY08. Thisis expected to keep domestic inflation close to the annual target in FY08.

NATIONAL INVESTMENT:

Foreign direct investment (FDI) in Pakistan soared by 180.6 per centyear-on-year to US$2.22 billion and portfolio investment by 276 per centto $407.4 million during the first nine months of fiscal year 2006, theState Bank of Pakistan (SBP) reported on April 24. During July-March2005-06, FDI year-on-year increased to $2.224 billion from only $792.6million and portfolio investment to $407.4 million, whereas it was$108.1 million in the corresponding period last year, according to thelatest statistics released by the State Bank. [41] Pakistan has achievedFDI of almost $7 billion in the financial year 06/07, surpassing thegovernment target of $4 billion.


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Pakistan is now the most investment-friendly nation in South Asia.Business regulations have been profoundly overhauled along liberallines, especially since 1999. Most barriers to the flow of capital andinternational direct investment have been removed. Foreign investors do

not face any restrictions on the inflow of capital, and investment of up to100% of equity participation is allowed in most sectors (local partnersmust be brought in within 5 years and contribute up to 40% of the equityin the services and agriculture sectors). Unlimited remittance of profits,dividends, service fees or capital is now the rule. Business regulations arenow among the most liberal in the region. This was confirmed by a

World Bank report published in late 2006 ranking Pakistan (at 74th)well ahead of neighbors like China (at 93rd) and India (at 134th) basedon ease of doing business.

Tariffs have been reduced to an average rate of 16%, with a maximum of

25% (except for the car industry). The privatization process, whichstarted in the early 1990s, has gained momentum, with most of thebanking system privately owned, and the oil sector targeted to be thenext big privatization operation.

The recent improvements in the economy and the business environmenthave been recognized by international rating agencies such as Moodysand Standard and Poors (country risk upgrade at the end of2003).Although national savings rose sharply by 16.5 percent duringFY06 compared to the 7.5 percent growth in the preceding year,nonetheless this increase is lower than the rise in nominal GDP. As a


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result, the national savings to GDP ratio dropped slightly (by 0.1percentage points) to 16.4 percent during FY06, the lowest level sinceFY01.The total investment to GDP ratio rose to 20.0 percent duringFY06 from 18.1 percent in the preceding year and an average of 17.1

percent in the last five years.

Foreign direct investment in the economy more than doubled for FY06reaching as high as US$ 3.5 billion which suggests the improvedmacroeconomic fundamentals and relative policy stability of theeconomy is attracting investor interest. The sustained high pace ofgrowth in the economy is also reflected in a record level of investmentduring FY07.The total investment to GDP ratio rose to a record level of23 percent in FY07, significantly higher than 21.7 percent seen in thepreceding year as well as the annual target of 21.5 percent. In real terms,total investment witnessed a growth of 20.6 percent, the highest-evergrowth recorded for Pakistan.

NATIONAL SAVING:

National savings at current market prices recorded a marginal increaseof 0.8 percent to Rs 441.09 billion during the year compared with a riseof 27.3 percent in the preceding year. Consequently, the savings to GNP

ratio fell to 12.9 percent in FY01 from 13.9 percent last year. When wecompare the growth of national savings in FY02 with the preceding year,two striking facts emerge: (1) The growth in FY02 is significantly lower;and (2) The source of the FY02 increase is entirely different.

National savings rose sharply to reach a respectable 18.5 percent of GNPin FY03 as compared to 16.8 percent of GDP recorded in FY02. . Incontrast, growth in domestic savings decelerated40 and declined as apercentage of GDP from 16.9 percent in FY02 to 16.2 percent in FY03.

Contrary to a double-digit growth in national savings in the last 10 years,the rise in national savings decelerated to only 9.0 percent during FY04,well below the nominal GDP growth. As a result, the ratio ofnationalsavings to GDPfell to 19.8 percent from a record high of 20.6 percent inFY03.

The national savings deteriorated for the second successive year,recording a 4.5 percentfallin FY05, after witnessing a deceleration ingrowth to 3.2 percent in FY04. Unfortunately, during FY05 not only haveprivate savings continued to decline (albeit at a lesser pace), publicsavings have also declined. As a result, national savings dropped from


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the FY03 peak of 20.8 percent of GDP to 15.1 percent of GDP in FY05.Although national savings rose sharply by 16.5 percent during FY06compared to the 7.5 percent growth in the preceding year, nonethelessthis increase is lower than the rise in nominal GDP.

As a result, the national savings to GDP ratio dropped slightly (by 0.1

percentage points) to 16.4 percent during FY06, the lowest level sinceFY01. During FY07, national savings rose sharply by 19.8 percent,raising its share in GDP to 18 percent, the highest in the last four years.It should be noted that the despite a rise in FY07, Pakistans savings toGDP ratio remains quite low relative to other emerging economies. Tomaintain the growth momentum, there is a need of investment flows inthe economy without putting pressures on external balances. This is onlypossible by a rise in savings in the economy.

NATIONAL PRODUCTION OF AGRICULTURAL, INDUSTRIALAND SERVICES SECTOR


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Agriculture:

Pakistan is one of the world's largest producers and suppliers of thefollowing according to the 2005 Food and Agriculture Organization of

The United Nations and FAOSTAT given here with ranking:

Chickpea (2nd), Apricot (4th), Cotton (4th), Sugarcane (4th), Milk (5th),Onion (5th) Date Palm (6th), Mango (7th), Tangerines, mandarinorange, Clementine (8th), Rice (8th) Wheat (9th), Oranges (10th)

Pakistan ranks fifth in the Muslim world and twentieth worldwide infarm output. It is the world's fifth largest milk producer.

Pakistan's principal natural resources are arable land and water. About25% of Pakistan's total land area is under cultivation and is watered byone of the largest irrigation systems in the world. Pakistan irrigates threetimes more acres than Russia. Agriculture accounts for about 23% ofGDP and employs about 44% of the labor force. The decline in the FY06production of sugarcane and cotton, together with the modest (belowtarget) growth in wheat was the principal reason for the net 3.6 percentdecline in the value addition by major crops, in sharp contrast to the17.8 percent growth in the preceding year.

The 1.6 percent growth by minor crops during FY06 was lower than the3.0 percent rise in output seen during FY05 and consequently theaggregate production of the crops sub-sector fell by 2.3 percent in FY06,compared to the growth of 13.7 percent in FY05. Thus, the aggregategrowth in agriculture during FY06 was contributed almost entirely bythe exceptionally strong growth recorded by the livestock sub-sector,handsomely rewarding the increased policy focus in the area in recent

years. The 8.0 percent growth recorded by the sub-sector in the period isstrongest for the last decade; substantially outstripping the 2.3 percent

growth seen in FY05.Agricultural growth witnessed a recovery in FY07.

A sharp rise in value addition by crops, in turn, centered essentiallyaround three major crops, i.e., wheat, sugarcane and gram, all of whichrecorded exceptionally strong growth during FY07, comfortablyoffsetting the disappointing growth in two other cash crops (cotton andrice). The growth of the livestock sub-sector in FY07 is one of thestrongest in a decade (exceeded only by the exceptional FY06 growth).

In recent years, agriculture credit disbursement has increasedsubstantially reflecting improvements in access (as banks have


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aggressively expanded activities in the sector), and sustained demand (asfarmers were encouraged by strong commodity prices, supportive policesand reasonable weather). This was also seen in FY07, when the annualtarget was exceeded by 5.5 percentage points to reach Rs 168.8 billion

against Rs 137.5 billion disbursed in FY06.

Livestock:

According to the Economic Survey of Pakistan, the livestock sectorcontributes about half of the value added in the agriculture sector,amounting to nearly 11 per cent of Pakistan's GDP, which is more thanthe crop sector.

The leading daily newspaper Jang reports that the national herd consistsof 24.2 million cattle, 26.3 million buffaloes, 24.9 million sheep, 56.7million goats and 0.8 million camels. In addition to these there is a

vibrant poultry sector in the country with more than 530 million birdsproduced annually. These animals produce 29.472 million tons of milk(making Pakistan the 5th largest producer of milk in the world), 1.115million tons of beef, 0.740 million tons of mutton, 0.416 million tons ofpoultry meat, 8.528 billion eggs, 40.2 thousand tons of wool, 21.5thousand tons of hair and 51.2 million skins and hides.

The Food and Agriculture Organization reported in June 2006 that inPakistan, the world's fifth largest milk producing country, governmentinitiatives are being undertaken to modernize milk collection and toimprove milk and milk product storage capacity.

The Federal Bureau of Statistics provisionally valued this sector atRs.758, 470 million in 2005 thus registering over 70% growth since2000.

Industry:

Pakistan ranks forty-first in the world and fifty-fifth worldwide in factoryoutput. Pakistan's industrial sector accounts for about 24% of GDP.Cotton textile production and apparel manufacturing are Pakistan'slargest industries, accounting for about 66% of the merchandise exportsand almost 40% of the employed labor force. [21] Other major industriesinclude cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals,machinery, and food processing.


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The government is privatizing large-scale prostates units, and the publicsector accounts for a shrinking proportion of industrial output, whilegrowth in overall industrial output (including the private sector) hasaccelerated.

Government policiesaim to diversify thecountry's industrial

base and bolsterexport industries. Theprovisional number forFY06 indicates thatindustrial growthstood at 5.9 percent

Yo, substantially lowerthan the 11.4 percent

Yo growth recordedduring the preceding

year. However, theindustrial growthestimates based on full

year data is expected to be a little higher than the provisional number. Inparticular, 9.0 percent growth in large-scale manufacturing (LSM) could

reach 10.7

Percent during FY06, The only sub-group of industry to record negativegrowth during FY06 was electricity and gas distribution, with valueaddition declining by 8.4 percent during FY06, in contrast to the 3.5percent rise registered in the preceding year. Finally, the overall capacityutilization during FY06 (adjusted for capacity in steel industry whichfell sharply due to temporary technical faults at Pakistan Steel), rose to66.6 percent, exhibited an improvement of 1.8 percentage points during

FY06. The industrial sector witnessed a moderate recovery, with 6.8percent growth during FY07 compared with 5.0 percent in FY06.

Within the industrial sector, the highest growth was observed in theconstruction sub-sector with value-addition rising by 17.2 percent inFY07, compared with only 5.7 percent in FY06. The FY07 growth is notonly higher than the 7.0 percent target, it is also the second highestgrowth recorded by this sub-sector since FY07 Mining & quarryingsector witnessed 5.6 percent Yo growth during FY07 LSM growthremained a significant contributor to GDP growth during FY07 with


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value-addition rising by 8.8 percent, down from the 10.7 percent growthin the preceding year.

Construction:

After the devastating 2005 Kashmir earthquake Pakistan has institutedstricter building codes. The cost of construction in Pakistan will increase30 to 50% due to implementation of a new building code which requiresstrengthening of structures to withstand earthquake of 8 to 8.5magnitudes. The demand for cement has increased due to reconstructionafter the earthquake. The price of cement has increased by 50% andPakistan government

banned export of cement to lower theprices and thereconstruction costs.

Dubai Ports Worldannounced on June 1,2006 that it will spend$10 billion to developtransportinfrastructure and real

estate in Pakistan.Dubai Ports World isalso discussing thepossibility of thecompany taking overoperational management of Gwadar port in Balochistan.

Emaar Properties announced on May 31, 2006 three real estatedevelopments in the cities of Islamabad and Karachi in Pakistan. The

projects, with a total investment of $2.4 billion, will include a series ofmaster planned communities that will set new benchmarks incommercial, residential and retail property within Pakistan.

In addition the conglomerate signed an unprecedented $43 billion dealto develop two island resorts - Bundal Island and Buddo Island - over thenext decade. The Federal Bureau of Statistics provisionally valued thissector at Rs.178,819 million in 2005 thus registering over 88% growthsince 2000.


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Manufacturing:

In FY 2002-03, real growth in manufacturing was 7.7%. In the twelvemonths ending 30 June 2004, large-scale manufacturing grew by more

than 18% compared to the previous twelve-month period. The textile andgarment industry's share in the economy along with its contribution toexports, employment, foreign-exchange earnings, investment and valueadded make it Pakistans single largest manufacturing sector. Theindustry is comprised of 453 textile mills: 50 integrated units; and 403spinning units, with 9.33 million spindles and 148,000 rotors, thecapacity utilization was 83% for spindles and 47% for rotors during2003.

The Federal Bureau of Statistics provisionally valued large-scalemanufacturing at Rs.981,518 million in 2005 thus registering over 138%growth since 2000[31] while small-scale manufacturing was valued atRs.356,835 million in 2005 thus registering over 80% growth since2000.


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Mining and Quarrying:

Important minerals found in Pakistan are gypsum, limestone, chromites,iron ore, rock salt, silver, gold, precious stones, gems, marble, copper,

coal, graphite, sulphur, fire clay, silica. The salt range in Punjab Provincehas large deposits of pure salt. Balochistan province is a mineral richarea having substantial mineral, oil and gas reserves which have not

been exploited to their full capacity. The province has significantquantities of copper, chromites and iron, and pockets of antimony andzinc in the south and gold in the far west. Natural gas was discoverednear Sui in 1952, and the province has been gradually developing its oiland gas projects over the past fifty years.

Major reserves of copper and gold in Balochistan Recedes area have beendiscovered in early 2006. The Recedes mining area has proven estimatedreserves of 2 billion tons of copper and 20 million ounces of gold.

According to the current market price, the value of the deposits has beenestimated at about $65 billion, which would generate thousands of jobs.

The discovery has ranked Recedes among the world's top seven copperreserves. The Recedes project is estimated to produce 200,000 tons ofcopper and 400,000 ounces of gold per year, at an estimated value of$1.25 billion at current market prices. The copper and gold are currently

traded at about $5,000 per ton and $600 per ounce respectively in theinternational market.

North West Frontier Province accounts for at least 78% of the marbleproduction in Pakistan. The Federal Bureau of Statistics provisionally

valued this sector at Rs.211,851 million in 2005 thus registering over99% growth since 2000.

Services Sector:

Pakistan's service sector accounts for about 53.3% of GDP.[35]Transport, storage, communications, finance, and insurance account for24% of this sector, and wholesale and retail trade about 30%. Pakistan istrying to promote the information industry and other modern serviceindustries through incentives such as long-term tax holidays.

The government is acutely conscious of the immense job growthopportunities in service sector and has launched aggressive privatizationof telecommunications, utilities and banking despite union unrestServices sector performed remarkably well, witnessing 8.8 percent


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growth during FY06, surpassing its annual target for the year and well asthe 8.0 percent growth registered in FY05. Growth in both wholesale &retail trade, and finance & insurance slowed during FY06, it wasnonetheless well above the target for both sectors. Transport, storage &

communication sub-sector has witnessed acceleration, with growthrising to 7.2 percent during FY06 against 3.6 percent in FY05, mainly onThe back of improved performance of road transport. Services sectorgrowth remained well above target; the 8.0 percent increase in value-addition during FY07 was substantially above the 7.1 percent target.

Finance & insurance, and social & community services proved to bemuch better than forecast. The sustained strong growth by the servicessector for the last six successive years has contributed to a structuralshift in the economy, with services contributing over half of GDP inFY07.Transport, Storage and Communication:

Pakistan Telecommunication Company Ltd has emerged as a successfulForbes 2000 conglomerate with over $1 billion in sales in 2005. Cell

phone market has exploded almost fourteen fold since 2000 to reach a


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subscriber base of over 60 million in 2007. In addition, there are over 6million landlines in the country. As a result, Pakistan won the prestigiousGovernment Leadership award of GSM Association in 2006.

The cellular base in Pakistan is growing at around 14% per year andalready the cellular customer has out passed the fixed line customers.Wireless revolution has swept Pakistan, and the competitions among themobile operators are pulling the prices down. Its as cheap as Rs.2 to callto USA per minutes (that is 3-4 cents per minutes). Sony Ericsson, Nokiaand Motorola along with Samsung and LG remains to be the popular

brands among customers. Though Nokia has a strong marketpresence[citation needed], which has been somewhat taken over by SonyEricsson, through aggressive marketing and advertisement.[citationneeded]

Pakistan is on the verge of Telecom revolution and it is by far the mostattracted sector in Pakistan in terms of Foreign Direct investmentcoming in Pakistan. It s estimated alone that this year 2006-07, FDIattracted by Telecom will be US$ 2 Billion out of the total FDI of US$ 6Billion, the highest in Pakistan history.

Pakistan International Airlines, the flagship airline of Pakistan's civilaviation industry, has turnover exceeding $1 billion in 2005. The

government announced a new shipping policy in 2006 permitting banksand financial institutions to mortgage ships. A massive rehabilitation


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plan worth $1 billion over 5 years for Pakistan Railways has beenannounced by the government in 2005.

A private sector airline in Pakistan includes Air blue, Aero Asia and

Shaheen Air International. Many private airlines are in pipeline whichincludes Air Mahreq, Dewan Air and Pearl Air.

Air blue is using the state of the art A-320 and A-321 aircraft for flyingacross Pakistan and will soon commence UK operation. Air blue hasrecently ordered 6 New A-321 aircraft, while 2 aircraft will be taken onlease which will be added to the existing fleet of 4-5 aircraft, making itthe second biggest fleet behind PIA which has 42 aircraft.

The Government of Pakistan has, over the last few years, grantednumerous incentives to technology companies wishing to do business inPakistan. Pakistan saw an increase in IT export cash inflows of 50% from2003-4 to 2004-5, with total export cash inflows standing at $48.5million. In 2005-6 export cash inflows increased to greater than $73million. This year the government has set a goal of $108 million. Exportsaccount for 11% of the total revenues of the IT sector in Pakistan.Compared to India, Pakistan's IT sector is relatively small, but recentgrowth has been extremely high leading economists to be optimisticabout the IT industries future prospects in Pakistan.

Paging and mobile (cellular) telephone were adopted early and freely.Cellular phones and the Internet were adopted through a rather laissez-faire policy with a proliferation of private service providers that led tofast adoption. Both have taken off and in the last few years of the 1990sand first few years of the 2000s. With a rapid increase in the number ofinternet users and ISPs, and a large English-speaking population,Pakistani society has seen major changes.

Pakistan has more than 20 million internet users as of 2005. Thecountry is said to have a potential to absorb up to 50 million mobilephone Internet users in the next 5 years thus a potential of nearly 1million connections per month. Almost all of the main governmentdepartments, organizations and institutions have their own websites.The use of search engines and instant messaging services is also

booming. Pakistanis are some of the most ardent chatters on theInternet, communicating with users all over the world. Recent years haveseen a huge increase in the use of online marriage services, for example,leading to a major re-alignment of the tradition of arranged marriages.


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As of 2007 there were 6 cell phone companies operating in the countrywith nearly 60 million mobile phone users in the country. Wireless localloop and the landline telephony sector has also been liberalized and

private sector has entered thus increasing the tele-density rate from lessthan 3% to more than 10% in span of two years. The Federal Bureau ofStatistics provisionally valued this sector at Rs.982,353 million in 2005thus registering over 91% growth since 2000.

PRICES:

The record low inflation rates realized in FY00 could not be sustained.As of end-June 2001, the annualized average CPI inflation had risenfrom 3.6 percent last year to 4.4 percent. The sharpest increase wasposted in WPI, which increased from 1.8 percent last year to 6.2 percentin FY01. This increase was driven by retail petroleum prices, utilitycharges, the depreciation of the Rupee and pre-emptive steps taken by

suppliers to pass on the imposition of sales tax. Consumer Price Index


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(CPI), decelerated during FY03, to 3.1 percent compared to 3.5 percentin FY02. While bothfoodand non-foodcomponents of inflation saw a

visible decline during FY03. Wholesale Price Index (WPI) recorded an

annual increase of 5.9 percent in FY03 as compared to 2.1 percent lastyear. Similarly, Sensitive Price Indicator (SPI) though recorded asubdued rate of increase of 3.5 percent during FY03 but marginallyhigher than the 3.4 percent increase recorded during FY02. However, in

WPI, the marginal rate declined steadily through H2-FY03.

After bottoming out at all-time low of 1.4 percent in July 2003, marginal(YoY) CPI inflation witnessed a steep rise through most of FY04 to closeat 8.5 percent, taking the average CPI inflation for the year to 4.6percent. The CPIfoodinflation witnessed a sharp rise of 13.4 percent(YoY) in June 2004 as compared to a quite subdued 0.9 percent in June2003, taking annualizedfoodinflation to 6.0 percent for FY04. On theother hand, CPI non-foodsub-group witnessed a YoY increase of 5.3percent in June 2004, while annualized non-food inflation recorded arise of 3.6 percent in FY04. In H2-FY05 however, the influence of these

factors was compounded somewhat by the impact of the hike in domesticprices of petroleum, oil and lubricant (POL) as well as the associated rise


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in inflationary expectations.6 As a result, annualizedaverage CPIinflation rose to 9.3 percent by end-June 2005 the highest level since1997.

Consumer Price Index (CPI) witnessed a deceleration from a peak of 9.3percent (average annual inflation) in FY05 to 7.9 percent during FY06,mainly due to monetary tightening to soften demand pressures as well asadministrative measures to counter supply shocks. The major impetus to

WPI inflation stemmed from the raw materialand energy subgroups.Similarly, the rise in the GDP deflator also witnessed primarily due toincrease in industrialsub-index following a surge in the cost of energyand raw materials. Given (1) high levels of CPI inflation and coreinflation, (2) resilience in non-food inflation, which is still at high levels,(3) acceleration in broader measures of inflation and (4) a lower inflationtarget of 6.5 percent for FY07, SBP is likely to continue with its tightmonetary policy in months ahead. In this background, citrus paribus,current SBP forecasts suggests that CPI inflation is likely to be in therange of 6.5 7.5 percent during FY07, a little above the annual target.

INFLATION

Inflation remains the biggest threat to the economy, jumping to more

than 9% in 2005 before easing to 7.9% in 2006. The central bank is


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pursuing tighter monetary policy while trying to preserve growth.Foreign exchange reserves are bolstered by steady worker remittances,

but a growing current account deficit - driven by a widening trade gap asimport growth outstrips export expansion - could draw down reserves

and dampen GDP growth in the medium term.

PUBLIC FINANCE & FISCAL POLICY:

In FY01, the fiscal consolidation drive of the government produced asecond consecutive year that tax revenues have posted double digitgrowth, which signals an increase in real terms. The focus remains onsales tax, and despite the replacement of certain excise duties by salestax, the combined growth of these two revenue heads was still 17.1percent this year. Furthermore, direct taxes also showed strong growth(12.8 percent) compared to the mild increase of 2.5 percent last year. InFY02, overall budget deficit swelled to 6.6 percent of GDP, significantlyhigher than both the budget target as well as that in the previous year.This was largely driven by increased defense spending (Rs 17.4 billion),and three one-off expenditures a grant to CBR to clear accumulatedincome tax refunds (Rs 22 billion), a substantial investment in KESC toprepare it for privatization

(Rs 30 billion) and a settlement of WAPDA arrears (Rs 5 billion). Fiscalaccounts showed a marked improvement during FY03 as fiscal deficitfell to 4.4 percent of GDP compared to 5.24 percent during FY02. This isthe first time in more than 25 years that the fiscal deficit has moved

below 5 percent of GDP. Encouragingly, the larger part of theimprovement stemmed from a sharp jump in revenues - consolidated taxreceipts in particular depicted a 16.2 percent (Rs 77.7 billion) YoYincrease during FY03, considerably higher than the 8.3 percent (Rs 36.5

billion) growth recorded in FY02. The non tax revenues also recorded a

healthy growth of 13 percent (Rs 18.9 billion). Consequently, leading toboost the total-revenue-to-GDP ratio to 17.7 percent in FY03 comparedwith 17.2 percent in FY02. Total expenditures witnessed relativelymodest growth of 8.7 percent i.e., lower than the growth in the nominalGDP and as such reduced the total-expenditure-to-GDP ratio to 22.1percent in FY03 compared with 22.8 percent in FY02.

In FY04, the fiscal consolidation drive of the government produced asecond successive reduction in the budgetary deficit. It not onlymanaged higher revenue collection but was also able to contain


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expenditures to bring down the fiscal deficit to 3.9 percent of GDP from4.5 percent in FY03. The consolidated revenue receipts in FY04 stood atRs 798.8 billion, showing an increase of Rs 81.5 billion over FY03 largelydue to higher tax collections and larger non-tax receipts. Developmental

expenditures again showed under utilization of Rs 5.6 billion duringFY04. Since development expenditures are important for generatingfuture economic growth and employment, it is imperative that their fullutilization must be ensured. The Central Board of Revenue (CBR)achieved its revenue targets for the third successive year in FY05,helping to raise the aggregate revenues slightly above the Rs 590 billionrevised target. However, expenditure exceeded the target substantially,pushing the overall budgetary deficit to 3.3 percent of GDP, which wasslightly above the target of 3.2 percent of GDP, and higher than thedeficit of 3.0 percent of GDP realized in FY04. Finally, while it isencouraging to note that a strong contribution to the FY05 expendituregrowth is through a large rise in development spending, the apparentsharp (21.7 percent YoY) increase in the FY05 current expenditure needsto be contained.

In the wake of 19.6 percent growth in revenue collection, unprecedentedin the recent years, the government continued to pursue pro-cyclicalfiscal policy for yet another year pushing the fiscal deficit to 4.2 percentof the GDP as compared to the previous years 3.3 percent. The above-

target CBR tax collection of Rs.712.6 billion, owing much to the strongeconomic activity and extraordinary growth of imports, enabled thegovernment to follow an expansionary fiscal policy. As a result of this,development spending witnessed an exceptional growth of 60.3 percent.

Although the current expenditure grew by nearly 19 percent YoY, thiswas principally owed to the rehabilitation activities in the earth-quakehit areas. Adjusting for this expenditure of Rs 65.8 billion, the totaldeficit stands at 3.4 percent of the GDP. The analysis of provincialfinance depicts weakness in their revenue mobilization efforts as their

overall contribution to the GDP is not more than 0.8 percent in FY06.Also the tax collecting capacity of the provinces needs to be strengthenedto improve the overall tax-to-GDP ratio of Pakistan.

Looking ahead, the federal budget FY07 has taken various measures toincrease the tax-to-GDP ratio and broadening of the tax base (forexample, by subjecting certain financial services to the sales tax andfederal excise duty, and the marginal increase in the CVT on capitalgains).


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Foreign Trade and Exchange Rate:Pakistani exports in 2005

Pakistan is a member of the World Trade Organization, and has bilateraland multilateral trade agreements with many nations and internationalorganizations.

Fluctuating world demand for its exports, domestic political uncertainty,and the impact of occasional droughts on its agricultural productionhave all contributed to variability in Pakistan's trade deficit. In the sixmonths to December 2003, Pakistan recorded a current account surplusof $1.761 billion, roughly 5% of GDP. Pakistan's exports continue to bedominated by cotton textiles and apparel, despite governmentdiversification efforts. Exports grew by 19.1% in FY 2002-03. Majorimports include petroleum and petroleum products, edible oil,chemicals, fertilizer, capital goods, industrial raw materials, andconsumer products.

Past external imbalances left Pakistan with a large foreign debt burden.Principal and interest payments in FY 1998-99 totaled $2.6 billion, more


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than double the amount paid in FY 1989-90. Annual debt service peakedat over 34% of export earnings before declining.

With a current account surplus in recent years, Pakistan's hard currency

reserves have grown rapidly. Despite the country's current accountsurplus and increased exports in recent years, Pakistan still has a largemerchandise-trade deficit. The budget deficit in fiscal year 1996-97 was6.4% of GDP. The budget deficit in fiscal year 2003-04 is expected to bearound 4% of GDP.

In the late 1990s Pakistan received about $2.5 billion per year inloan/grant assistance from international financial institutions (e.g., theIMF, the World Bank, and the Asian Development Bank) and bilateraldonors. All new U.S. economic assistance to Pakistan was suspendedafter October 1990, and additional sanctions were imposed afterPakistan's May 1998 nuclear weapons tests. The sanctions were lifted byPresident George W. Bush after Pakistani president Musharraf alliedPakistan with the U.S. in its war on terror. The government is alsoreducing tariff barriers with bilateral and multilateral agreements.

While the country has a current account surplus and both imports andexports have grown rapidly in recent years, it still has a large

merchandise-trade deficit. The budget deficit in fiscal year 2004-2005was 3.4% of GDP. The budget deficit in fiscal year 2005-06 is expected tobe over 4% of GDP. Economists believe that the soaring trade deficitwould have an adverse impact on Pakistani rupee by depreciating itsvalue against dollar (1 US $ = 60 Rupees (March 2006) ) and othercurrencies.

One of the main reasons that contributed to the increase in trade deficitis the increased imports of earthquake relief related items, especially

tents, tarpaulin and plastic sheets to provide temporary shelter to thesurvivors of earthquake of October 8, 2005 in Azad Jammu and Kashmirand parts of the NWFP, an official said. The rise in the trade gap was alsofuelled by high oil import prices, food items, machinery andautomobiles.

The Petroleum Ministry says that this year, the bill of oil imports wasexpected to reach $6.5 billion against $4.6 billion in the last fiscal year,

which is the main reason behind the all-time high trade deficit.


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The EU is the single largest trading partner of Pakistan absorbing overone-third of the exports in 2003.Pakistans trade deficit almost doubledto US$ 12.1 billion during FY06 relative to the FY05 level. Theexceptionally high deficit was the outcome of higher increase of 38.8

percent in imports as compared to a moderate increase of 14.4 percent inexports during the period. Specifically, while import of machinery andraw material together contributed almost 42 percent in the additionalimport bill, oil imports alone accounted for 33.5 percent or one third ofthe rise in imports (of which, around 87 percent was due to rise in the oilprices).imports growth slowed to 27.8 percent in the latter half of FY06from 53.1 percent during the first half of the year. With oil pricesdeclining substantially in recent months, and aggregate demand beingconstrained by the tight monetary policy, it is hoped that import growth

will decelerate significantly in FY07.

Exports:

Pakistan's exports stood at $17.011 billion in the financial year 2006-2007, up by 3.4 percent from last year's exports of $16.451 billion.Pakistan exports rice, furniture, cotton fiber, cement, tiles, marble,textiles, clothing, leather goods, sports goods (renowned forfootballs/soccer balls), surgical instruments, electrical appliances,software, carpets, and rugs, ice cream, livestock meat, chicken, powdered

milk, wheat, seafood (especially shrimp/prawns), vegetables, processedfood items, Pakistani assembled Suzuki (to Afghanistan and othercountries), defense equipment (submarines, tanks, radars), salt, marble,onyx, engineering goods, and many other items. Pakistan now is being

very well recognized for producing and exporting cements in Asia andMid-East. Starting August 2007, Pakistan will be exporting Cement toIndia.

Imports:

Pakistan's imports stood at $30.54 billion in the financial year 2006-2007, up by 8.22 percent from last year's imports of $28.58 billion.Pakistan's single largest import category is petroleum and petroleumproducts. Other imports include: industrial machinery, constructionmachinery, trucks, automobiles, computers, computer parts, medicines,pharmaceutical products, food items, civilian aircraft, defenseequipment, iron, steel, toys, electronics, and other consumer items.


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Sales tax is levied at 15 percent both on imports and domesticallyproduced products. The income withholding tax is levied at 6 percent onimports and at 3.5 percent on the sales of domestic taxpayers. Thedeceleration in the imports growth was expected in the wake of falling oil

prices, improved domestic production of some key food items andoverall slowdown in capacity expansion. However, the impact of lowerimport growth (8.1 percent)6 in FY07 on the trade deficit was lost due tothe unanticipated weakness in exports. Export growth fell from 14.3percent in FY06 to only 3.2 percent in FY07. Nevertheless, an impressiverise in the foreign private investment continued to moderate the impactof growing current account deficit in FY07. Specifically, financial accountsurplus increased substantially from US$ 5.8 billion in FY06 to a recordsurplus of US$ 10.1 billion during FY07.

Domestic & External Debt:

Countrys total stock of debt and liabilities (TDL) rose by 10 percent YoYin FY07 to reach Rs 5,023.6 billion. The major causative factors for this

increase in TDL were the rising level of countrys current account deficitand a large fiscal deficit that raised the financing needs of the country.Encouragingly, despite this increase in the TDL stock, the ratio of total


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debt & liabilities to GDP continued to decline which shows countrysimproved debt servicing potential. The TDL to GDP ratio for FY07remained significantly below the target of 60 percent set for the countryin the Fiscal Responsibility and Debt Limitation Act 2005 to be

achieved in FY13. Pakistans domestic debt stock increased sharplyduring FY07, registering a growth of 11.9 percent much higher than theaverage growth of 7.7 percent during the preceding four year. Share ofshort term debt continued to rise and reached 43 percent during FY07.Pakistans external debt and liabilities (EDL) rose to US$ 40.1 billionduring FY07, representing a US$ 2.9 billion increase over the stock inFY06. Pakistan also witnessed an improvement in the maturity profile ofits external debt stock in FY07.

Capital Markets:

Pakistans capital markets have shown mixed sentiments during thecourse of the year. In terms of the equity markets, the Karachi StockExchange (which is the leading indicator) posted no perceptible trend,

while the bond market showed improvement. The floating of thePakistan Investment Bond (PIB) posted lower long-term interest ratesthan the benchmark provided by NSS instruments, which encouragedlocal corporate and leasing companies to issue bonds. The need for long-

term corporate. Funding was spearheaded by the increasing popularityof leasing consumer durables (cars, motorcycles, kitchen appliances,etc.), which resulted in a large number of leasing companies issuingTerm Finance Certificates (TFCs). As of now, of the 24 corporate bondsthat currently exist in the market, 14 have been floated since July 2000.During FY02, capital market exhibited better performance compared tothe previous year.

Although the country underwent various economic and non-economic

shocks, both the equity and fixed income securities markets remainedbuoyant. The benchmark KSE-100 index gained 29.5 percent, in sharpcontrast to a 10.1 percent fall during the previous year. As a result, 17new TFC issues were launched during the FY02 as compared to 10during the preceding year.

The capital market in Pakistan maintained its upward momentumduring the most of FY03 and emerged as one of the best performingequity markets in the world. The strength was visible in the substantialincrease of both, the average daily traded volume and the turnover ratio.KSE-100 Index broke its previous all-time high6 to reach as high as


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current account balance to GDP ratio improved from 4.8 percent inFY02 to 5.9 percent in FY03. Even excluding the non-structuralflows,the ratio is a healthy 3.7 percent. . The trade deficit narrowed for thethird successive year in FY03, falling to a 10-year low of US$ 1.1 billion.

Unlike FY02, the 12 percent reduction in the trade deficit was largely dueto the strong export growth. The resulting rise in the countrys tradedeficit, and a sharp slowdown in non-structural inflows12 contributedmost of the 55 percent YoY decline in the FY04 current accountsurplus. ), the overall balance, fell by 80.7 percent YoY to US$ 887million during FY04. Adjusting for this one-off pre-payment, the overall

balance posted a US$ 2,424 million surplus in FY04. The major highlightof Pakistans external sector is the record high trade deficit of US$ 4.5

billion during FY05 compared to a deficit of US$ 1.3 billion during thepreceding year. . The burden of debt and its servicing has significantlydeclined in FY04 Specifically, overall debt to GDP ratio has dipped to72.3 percent by end-FY04 from 79.3 percent.

The country witnessed highest ever current account deficit of US$ 5.0billion during FY06 as compared to deficit of US$ 1.5 billion in theprevious year. The expansion in the trade deficit was primarily due to asignificant 31.3 percent YoY growth in imports that outpaced the 14percent growth in exports. The exceptional import growth and

accompanying rise in services account payments contributed to a sharpwidening of the countrys current account deficit, from a relativelymanageable 1.4 percent of GDP in FY05, to a more threatening 4 percentof the GDP in FY06. This is the fifth successive year that the debt to GDPratio has improved. More significantly, this is the first time in more thantwo decades that the ratio has fallen below 60 percent. Pakistansexternal account surplus improved substantially to US$ 3.7 billionduring FY07 as compared to US$ 1.3 billion in FY06. However, theimpact of lower import growth (8.1 percent)6 in FY07 on the trade deficit

was lost due to the unanticipated weakness in exports. Export growth fellfrom 14.3 percent in FY06 to only 3.2 percent in FY07. Pakistansdomestic debt stock increased sharply during FY07, registering a growthof 11.9 percent much higher than the average growth of 7.7 percentduring the preceding four year. The share of short term debt continuedto rise and reached 43 percent during FY07. An important feature forFY07 is the sharp rise of 57.1 percent in interest payments on domesticdebt.

Pakistan Economic Growth 00-07

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