Pakistans Current Economic Situation

THE TOPICS
Economic Outlook Agriculture Sector Large Scale Manufacturing Services External Sector Trade Account Fiscal Developments Looking Forward

ECONOMIC OUTLOOK

ECONOMIC OUTLOOK
Moderate but fragile recovery is underway followed by improvement in key Macroeconomic indicators. LSM activity is gathering pace despite energy shortages and production costs. Fluctuations in inflation, reached 13.0% by Feb 2010. Forex reserves rose to US$ 14.8 billion by end Feb2010 from US$ 6.8 billion in Oct 2008.

ECONOMIC OUTLOOK
Fiscal deficit increased to 2.7% H1-FY10 due to.
Strong buildup of internal and external debt. Rising military spending to counter terrorism. To suppress energy sector circular debt logjam. Weak revenue generation. Lags in the receipts of coalition support funds.

Development spending increased by 69.6% during H1-FY10.

ECONOMIC OUTLOOK
External account balance shows improvement during Jul-Feb 2010 period. Current account deficit dropped from 6.8 to 2.2%. Core inflation has not decreased as much. Remittances saw a 17.7% YoY rise.

ECONOMIC OUTLOOK
Inflationary pressures strengthened in the economy in recent months. All price indices exhibited sharp rise since Oct 2009. Increase is due to
Rise in oil prices. Exchange rate pass through. Relatively higher international commodity prices of sugar, tea, pulses, rice and crude oil.

ECONOMIC OUTLOOK
Consumer Price Index (CPI) inflation first decreased to 8.9% in Oct 2009 then increased to 13.0% in Feb 2010. Whole Sale Price Index (WPI) inflation rose to 19.3% YoY during Feb 2010 compared with 15.0 in Feb 2009. Sensitive Price Indicator (SPI) has shown sharp increase after dipping to the lowest level

AGRICULTURE

AGRICULTURE
Growth prospects remain weak as compared to strong growth seen last year. Negative contribution by two major crops Rice and Sugarcane in FY2010. Expected decline in wheat harvest. Less area is being brought under cultivation due to power outages and realization of lower prices of major crops.

LARGE SCALE MANUFACTURING

LSM sector continued its upward trend in Q2-FY10 due to rise in domestic demand. Automobiles and allied industries have sharply increased production despite increase in prices. Demand for steel and cement increased as construction activities revived. Resource based industries like Textile and Sugar industry presented a mixed picture.

LARGE SCALE MANUFACTURING

Major recovery was seen in consumer vehicle sector in Jul-Jan FY10. Reduction in import of cars further strengthened the local industry during Oct-Jan FY10. The growth in textile manufacturing emanated from
Good cotton crop. Increased export opportunities due to weaker crop in US and China. Recovery in textiles related sales in advanced economies.

LARGE SCALE MANUFACTURING

But sugar industry suffered heavily from raw material shortages for the consecutive second year. Energy imbalances are a great threat to consistent LSM growth. Increase in the prices of electricity and gas increased cost of production and sales can be greatly effected. Manufacturers trying to reduce cost so that the burden is not thrown to the consumers. Fertilizer production likely to remain strong in remaining months of FY10 as two new plants will start working by the year end.

SERVICES

SERVICES
Like manufacturing and agriculture sector, services sector appears well geared to achieve annual target of 3.9%. Whole sale and retail trade activities are likely to benefit from recovery seen in commodity producing sector. Transport sector also benefited from domestic and international trade of commodities.

SERVICES
Finance and insurance sub-sector is likely to rebound following the recovery in loan demand from private sector. Telecom earnings increased. PTCL showed an increase of 1% in profit. Cellular companies benefited from increase in cellular subscribers, 3.4% increase.

EXTERNAL SECTOR
Improvement in overall external accounts recorded during Q1-FY10 could not be sustained in ensuing months. Current account deficit decreased but financial inflows have reduced as well. External account deficit reduced due to lower quantum of imports and related freight costs.

EXTERNAL SECTOR
Workers remittances shows remarkable increase of 17.7%. Net Foreign Investment has decreased NFI recorded 45.9% YoY fall during Jul-Feb 2010 as compared to 33.5% last year. Direct Foreign Investment has decreased by 52.8% during Jul-Feb 2010. Financial inflows revived to some extent following the availability of IMF support for Pakistans macroeconomic stabilization program in November FY09

EXTERNAL SECTOR
Import bill reduced to 27.6% during Nov-Feb FY09 against 37.6% during Nov-Feb FY08. Rise in remittances reduced current account deficit. Current account deficit reduced to 13.8% Financial inflows revived to some extent following the availability of IMF support for Pakistans macroeconomic stabilization program in November FY09

TRADE ACCOUNT

19.5%

Trade Deficit

Recorded during Jul-Feb, FY10

TRADE ACCOUNT
Trade account deficit decreased due to. 8.2% YoY fall in import growth. Also there is a slight improvement in exports during JulFeb FY10. Exports posted a modest growth of 2.7% YoY during JulFeb10. Compression in import bill is attributed to decline in POL and non-POL imports. Import growth contracted by 8.2% during Jul-Feb Fy10 as compared to 1.5% YoY fall during the same period last year.

TRADE ACCOUNT
Imports are likely to grow faster than exports in the remaining months of FY10, thus keeping trade deficit under pressure. External debt has increased as US$ 4.7billion were further added. Total external debts stands at US$ 55.8billion by the end of H1-FY10.

TRADE ACCOUNT
However some believe
Contraction may be moderated because of weakening of exports
Due to.. International demand (decrease ) Global Economic Recession Domestic Problems

FISCAL DEVELOPMENTS
Fiscal performance in second quarter better then first quarter but overall fiscal position in H1-FY10 is poor. This is due to increase in expenditure in power sector subsidies and security related expenses. Revenue balance deficit increased by 1% of GDP. Primary balance as percent of GDP turned into deficit of 0.7 percent in H1-FY10 from a surplus of 0.4 percent during H1-FY09.

FISCAL DEVELOPMENTS
Fiscal performance in second quarter better then first quarter but overall fiscal position in H1-FY10 is poor. This is due to increase in expenditure power sector subsidies and security related expenses. Revenue balance deficit increased by 1% of GDP. Primary balance as percent of GDP turned into deficit of 0.7 percent in H1-FY10 from a surplus of 0.4 percent during H1-FY09.

FISCAL DEVELOPMENTS
Total revenue in H1 - F Y10 stood at Rs 909.9 billion; with a YoY increase of 9.0 percent compared to 33.4 percent rise in H1 - F Y09. Deceleration due to fall in tax and non - tax revenue collection. Expenditures have increased due to defense spending and power sector subsidies. Current expenditure increased to Rs 1058.6 billion during H1 FY10, a 15.2% increase. Current military spending Rs166.0 billion.

LOOKING FORWARD
Anticipated decline in value addition by major crops. Expected recovery in manufacturing, strong rebound by construction sector to sustain growth. Services sector will show further improvement. No ease in inflation and improvement in exchange rate in near future. Current account deficit will further reduce due to improved exports and remittances.

LOOKING FORWARD
Fiscal deficit to remain high due to extraordinary defense related spending and weak revenue collection. Prospects of real GDP growth are better relative to preceding year. People specially women are taking on jobs thus improving growth in labor force.