Global Research Insight for Development

Pakistan Economic Outlook

[April-May 2011]

GRID Pvt Ltd Office no.19, ground floor, Pacific center, F-8 Markaz Islamabad, Pakistan. Web: www.grid-international.net Email: info@grid-international.net Phone: (92) 51-2287355 Fax: (92) 51-2287355

REAL SECTOR In the context of year 2010 flood in Pakistan which have negatively affected agriculture output, transport and communication sectors, Pakistans growth in large-scale manufacturing sector which is centered on textiles, food processing, and petroleum products, is expected to remain modest during fiscal year 2011. Growth in Leather and Automobile industry give support to overall growth of LSM in the month of March. During July-April 2010-11 a positive growth is observed in Textile, Food Beverages and Tobacco, Paper and board, Chemicals, Leather products, Pharmaceuticals and Automobile industry while on the other hand Petroleum Products, Non Metallic Minerals, Metal industries, Fertilizers, Electronics and Engineering items grew negatively. There is a significant growth of 16.2 % and 17.5% in Leather products and Automobile industry respectively in the period between July-April 2010-11. However negative growth of (12.1%) in Non-metallic Minerals, (8.2%) in Fertilizers and (8.8%) in Metal Industries effects the overall growth of LSM. A decline in growth of services sector of Pakistan was witnessed in the month of April as the total services export in the month of April stated an amount of $ 457.07 million as compare to $ 623,175 million of the same month last year. However in between the period July 2010 to April 2011 total exports of service sector shows an amount of $ 4.6 billion as compare to $ 3.75 billion of the same period last year. This comparative growth in exports occurs because of growth in transportation, travel, construction, computer and information and insurance services. However there is a decline in export of communication services, financial services royalties and license fees.

BALANCE OF PAYMENT

Pakistans growth in exports of goods and services showed a steady increase as total goods exported for the month of April were $ 2590 million and services credited were $ 457 million which are some how greater then the figures of March in which total goods exported were $ 2507 million and services credited were $ 367 million. This also helped in maintaining the Current Account of Pakistan in surplus of $ 748 million in the period between July-April 201011 shows as compared to a deficit of $ 3456 millions during the same period last year.

Total exports as per BOP for the period of July-April 2010-11 were $ 20.53 billion as compared to $ 16.17 billion of the same period last year. Food group (Rice, fish, fruits, vegetable, tobacco, wheat and meat) ,Textile group (Raw cotton, Knit Wear, Readymade Garment and other textile materials , Petroleum group, manufacturing group, chemical and pharmaceutical group, Engineering goods and jewelry contributed in the growth of exports in this period. Total exports through banks were about $ 19.67 million. Total imports as per BOP for the period of July-April 2010-11 were $ 28.81 billion as compared to $ 25.46 billion of the same period last year. Food group (Milk and Cream, Tea, Wheat, Spices, Palm oil ,Soya bean oil and sugar), Transport group (Motor cars, Motor cycles and parts), Textile Group (Raw Cotton and synthetic silk yarn) mainly contributed in the growth of imports in this period. Import of Textile machinery in this period was $ 360.6 million as compare to $ 270 million during the same period last year. The remittances account also showed a growth to that of same period previous year. As shown in the Fig 01 total remittances for the month of April were $ 1030.4 million as compared to $ 755.7 million of the same month last year. We can easily observe the difference between Pakistans incomes though remittances in the current and previous fiscal year by looking at the trends of remittances received month wise in 2010 and 2011. Highest remittances were received from Saudi Arabia that is $ 263 million, U.A.E contributes with 232.1 million dollars and rests of the major countries are USA, UK and Kuwait.

Fig 01: Remitances Received during FY 2010 and FY 2011

1200 1000 800 600 400 200 0 FY 10 FY 11

Amount in US Million

The capital account of Pakistan during the period July-April this fiscal year shows a balance of $ 86 million as compared to $ 154 million of the same period last year. Net inflow of investment in reported economy remained $ 1534.1 millions in the period between July-April 2010-11 as compared to $ 1678.3 million of the same period last year. FDI remain $ 1232 million in this period as compare to the $ 1724.8 million of the same period last year. A negative growth of (28) % can be observed during this period in FDI. Western Europe, European Union, Netherlands, UK, U.S.A and Australia hence all big names invested comparatively very low to that of their investment in the same period last year. The FDI growth in important sectors was: -62.3 % in food, -119 % in petroleum sector -95.4 % in fertilizers, - 87% in metal products, -75 % in electronics, -69.9% in transport equipment and 105 % in communication sector. An overall balance of Pakistan financial account was reported $ 1210 million in current period from July-April which is again quite better to that of $ 730 million of the same period previous year. The foreign currency reserves of Pakistan are $ 13389 million US on April 30th 2011 which were $ 14017 million at same date last year. Currently US $ buying is reported as Rs 85.80 whereas it is selling at Rs 85.98

FISCAL AND MONITORY POSITION

Ministry of finance reported total revenue of Rs 1495.25 billion for the period July-March 201011 out of which total tax revenue is Rs 1117.6 billion (Fig 02) and non tax revenue is Rs 377.7 billion. Total tax revenue is equal to 6.5 % of the G.D.P .Total Government expenses are reported as Rs 2278.5 billion for the period of July-March and these are 13.2 % of the GDP in total. This huge amount of expenses leads to a budget deficit of Rs 783.25 billion. This budget deficit was then met by using domestic and external financing. Domestic financing participate with Rs 700 billion and for rest of Rs 83.132 billion, external financing was utilized. Budget deficit that occurs in this particular time is equal to 4.5 % of the GDP.

Fig 02: Tax collected on monthly basis

180,000 160,000

(Million Rupees)

140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Jul-10 Aug-10 Direct Taxes Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

Indirect taxes

Total Tax Collected

A fig 02 shows the total portion of direct and indirect taxes in the total taxes collected on monthly basis. A growth of 9.6 % is broad money is reported on April 30th 2011 which equals to Rs 555651 millions. This growth was 8.1 % at this date last year. The factors that affect the broad money quite weightily includes Increase in net foreign assets of banks which were reported last year as negative Rs 31285 million on April 31 2010 are showing a positive amount of Rs 153156 million as on April 31 2011. Borrowing for budgetary support as on April 31 2011 were Rs 472234 million. This amount was Rs 361827 million on the same date last year. Credit to private sector (including investment in securities and shares of private sector, Agriculture, hunting and forestry, Mining and Quarrying, Manufacturing, Textiles) also increased to a sum of Rs 156705 million as on April 31 2011 which was reported Rs 144201 million on the same date previous year. Interest rate is reported 13.6 % as on April 20 2011 which was 13.65 % at the same date previous year.

In July to April 2010-11 CPI, SPI & WPI have increased over the same period of 2009-10 by 14.1%, 18.5% and 23.3%, respectively. In July to April 2010 CPI, SPI and WPI had increased over same period 2008-09 by 11.5%, 13% and 11.3% respectively.

RECENT DEVEOPMENTS

The government currently planning to devolve the ministry following provisions of 18th Amendment, must take into consideration creating a well-co-ordinate federal agriculture department, instead of spreading its functions to other ministries, a top officials told this scribe. The devolution of the agriculture ministry would create serious food security, international cooperation and agriculture research problems, as the provinces except Punjab do not have complete agri infrastructure along with different topography and soil structure. The most import aspect is that agriculture may be a provincial subject but provision of food, research and professional/higher education are federal subjects and are part of Federal Legislative List of the Constitution. According to an official document with Business Recorder, agriculture is a federal subject across the globe; therefore, the government should not completely devolve the ministry. A federal agriculture department should be created to deal with the abovementioned areas and keep ourselves abreast with international research and development in agriculture. The Securities and Exchange Commission of Pakistan (SECP) registered 338 companies in April, whereas 342 companies were incorporated last month and 322 in the corresponding month of last year. The private companies have a major share in new incorporation totaling 306 companies. In addition, 22 single-member companies, 2 public unlisted companies, 5 non-profit associations and 3 foreign companies have been registered.

WHAT TO EXPECT IN BUDGET 2011/12 Pakistan is due to announce its budget for the 2011/12 (July-June) fiscal year on June 3. Following are some targets that could be announced: Pakistans economy is expected to grow 4.2 percent in the coming financial year According to reports, the government is targeting tax revenue at 1.95 trillion rupees ($22.7 billion) in the next fiscal year, compared with the Federal Board of Revenues estimate of revenues of 1.59 trillion rupees ($18.56 billion) this fiscal year. Analysts said there is hardly any room to cut on the expenditure side as 75 percent of the Federal Board of Revenues tax revenue goes on debt servicing or interest repayments and security related expenditure.

According to finance officials, Pakistan is budgeting 495 billion rupees ($5.78 billion) for defense, an 11.7 percent increase from last year. Analysts said that was a realistic increase and was less than the annual rate of inflation which is at 13.04 percent. Pakistan is likely to allocate 280 billion Pakistani rupees ($3.3 billion) for development spending in 2011/12 fiscal year. Inflation is being projected to come in at 12 percent next year while the fiscal deficit is expected to be contained to 4 percent of GDP. According to media reports, the government may decide to remove the capital gains tax. A 10 percent capital gains tax is imposed on stocks held for six months or less, 7.5 percent on stocks held between 6 months to a year.

RESEARCH TEAM

DESIGNATION

Mr. Abdul Wahab Mr. Wajahat Sufian

Director Training & Capacity Building Training Coordinator

REFERENCE: www.sbp.org.pk www.finance.gov.pk http://www.statpak.gov.pk/fbs/ http://www.thenews.com.pk