Review of Pakistan's Economic Situation July-February 2008-09

Review of Economic Situation July-February 2008-09: Services sector to drive growth, fiscal & CAD targets would be met ISLAMABAD: Growth in the services sector would drive the GDP growth in 2008-09 while fiscal deficit target of 4.2 percent of GDP and current account deficit of 5.9 percent would be achieved, stated Review of Economic Situation July-February 2008-09 released by Ministry of Finance here on Wednesday. Recent global financial crisis and extremely vulnerable security environment added risks to the economy. Real Sector: The growth outlook is not free of risks as industrial production has been badly affected by acute energy shortages, deterioration in law and order situation, and constricted access to finance by risk averse banks. For the year 2008-09, given domestic and international economic pressures especially high inflation and macroeconomic imbalances, the GDP growth has been envisaged at 2.5% on the back of positive outlook of the agriculture sector where all indications are pointing at good growth. Agriculture: The agriculture has been facing acute irrigation water shortages and the water intensive crops sugarcane and maize fell short of the target and depicted negative growth of 18.5 percent and 7.5 percent in 2008-09. However, other two major crops cotton and rice have registered positive growth of 7.3 percent and 13.5 percent, respectively. Wheat, with its 12.7 percent weight in overall agriculture, is estimated to post 19.0 percent growth over the last year. The livestock sector is growing at normal pace and thus the target of 3.2 percent will be achieved. Manufacturing Sector: Large-scale manufacturing registered a negative growth of 5.35 percent in July-January 2008-09 against reasonable positive growth of 5.7 percent in the comparable period of last year. Services sector: Improved prospects in transportation and storage sub-sectors on the back of relatively better production in major crops, strong contribution by finance and insurance sector and augmented administrative and defence related spending will provide support to adequate level of growth in the services sector. Inflation: All price indices like CPI, WPI and SPI witnessed a clear downtrend in recent months. On current trends and barring any adverse shocks, it is expected that the average inflation for the year (2008-09) as measured by CPI will be close to 20 percent. The month of February witnessed fractional decline in the core inflation.

Monetary Policy: Net domestic assets (NDA) have increased by Rs 418.2 billion as compared with increase of Rs 541.7 billion in last year, thereby showing an increase of 10.4 percent in this period whereas, last year the growth in the comparable period was 17.6 percent. Net foreign assets (NFA) have recorded a contraction of Rs 283.5 billion against the contraction of Rs 232.3 billion in the comparable of last year. Weighted average lending rate have witnessed slight decline from 15.5 percent in October 2008 to 15.3 percent in January 2009. The weighted average yields on 6 months T-bill has declined by almost 100 basis points to 13.0 percent in February 2009 as against 14 percent in November and December2008. Capital Market: The market breached 7,000 points psychological barrier on March 31, 2009 in anticipation of political stability and restoration of judiciary. The positive reports like possible inclusion of KSE in MSCI Frontier Index, expected incentive driven petroleum policy and encouraging prospects on aid front are the supporting factors that are guiding the KSE in the positive direction. Fiscal Policy: The stock of domestic debt grew by Rs 341 billion by end-January 2009. This strong growth in the domestic debt reflects non-realisation of privatization proceeds and reduced availability of net external financing due to increase in external debt repayments on maturing stock of foreign currency bonds. Foreign direct investment (FDI) has reached $ 2794.4 million during July-February 2008-09 as against $2789 million in the comparable period of last year, thereby, depicting a marginal increase of 0.2 percent. If privatisation proceeds of $133 million received in the comparable period of last year is excluded, then FDI inflows witness an increase of 5.2 percent. http://www.dailytimes.com.pk/default.asp...2009_pg5_6

Review of Economic Situation 2008-09: External account remains vulnerable

By Sajid Chaudhry ISLAMABAD: The Ministry of Finance (MoF) said on Monday the fiscal deficit target of 4.3 percent of GDP and the current account deficit target of 5.9 percent of GDP were achievable. However, recent global financial crisis and extremely vulnerable security environment added risks to the economy. The external sector data for the last quarter (April-June 2009) would give a real reflection of the impact of global financial crisis on Pakistans external sector. In a report on July-March period of 2008-09, MoF stated that the global economic slowdown was making inroads into real economy through contraction in demand in the export sector and as well as shrinkage of external inflows. Pakistans economy continues to remain

exposed to the vagaries of international developments as well as internal security environment, it said. Despite support from the IMF and other bilateral and multilateral donors, Pakistans external account remains exposed to a host of uncertainties, it said. The outlook for economic growth remained pessimistic as import demand shriveled, tax collection declined, and inflows of foreign investment and privatization dampened. Real Sector: Notwith-standing the vulnerabilities, the economy is set to post economic growth in the range of 2.5 percent to 3.5 percent, far lower than its historical average, but relatively satisfactory in the given international environment. The real GDP growth outlook drew strength from positive outlook of the agriculture sector, which has given all indications of a healthy growth. The outlook is based upon anticipated high wheat crop and above target growth of minor crops and reasonably good outturn by the livestock sub-sector. Manufacturing Sector: Large-scale manufacturing depicted negative growth of 5.73% during July-February 2008-09 as against 5.27% positive growth in the comparable period of last year. Going forward the situation may improve to some extent because of lower base effect and some improvement in energy supplies. The LSM growth is adversely impacted by a sharp reduction in demand from both domestic and international buyers. Services sector has exhibited resilience to fluctuations in the economic activity. The FDI inflows in the telecommunications, financial businesses and personal services have reached a level of saturation in the first nine months (July-March) of the current fiscal year. There are enough anecdotal evidence that financial sector is set to provide substantial growth. Inflation: Pakistan still faces high double-digit inflation. The dirty work of extra-market forces kept fruits of falling inflation away from Pakistans consumers. Given current trends and barring any adverse shocks, it is expected that the average inflation for the year (200809) as measured by CPI will be close to 20 percent. Capital Market: The local bourse remained buoyant throughout the month of March 2009 thanks to encouraging developments on the political and economic fronts. The recovery phase of the premier stock exchange after floor removal has been hopeful and this outstanding performance has made it one of the best performing markets of the world in 2009. Fiscal Policy: The fiscal improvement in the first nine months (July-March 2008-09) has largely based on reduction of oil subsidies and a cut in development spending. The government received Rs 141.1 billion in gross external inflows against outflow of Rs 104.1 billion which means net availability of Rs 37 billion. Tax Collection: Tax revenue collected by the Federal Board of Revenue (FBR) stood at Rs 813.6 billion (net) during the first nine months (July-March) of the current fiscal year (200809) compared with Rs 679.9 billion in July-March, 2007-08 posting a healthy increase of

19.7%. Given these developments, the tax revenue target of Rs 1250 billion seems a herculean task. External Sector: The external sector has shown definite sign of improvement. The current and trade account balance has improved but there were some slippages on account of current transfers. However, buoyancy in remittances is more than offset by substantial declining trend in inflows through exchange companies. CAB: Current Account Balance (CAB) shrank by 20.8 percent during July-March 2008-09. Current account deficit shrank to $7.6 billion during this period as against $9.6 billion during the same period of last year. Pakistan need investment driven current account deficit neutralized to some extent by rising savings level. External Debt: External debt and liabilities (EDL) stood at $49.7 billion or 30.7 percent of the projected GDP for the 2008-09 at the end of March 2009 which is higher than end-June 2008 stock of $46.3 billion or 27.6 percent of GDP.

A critical review of the economic situation in Pakistan 2008-09

By Mehmood-Ul-Hassan Khan There is a general perception in the country that the economy is on the road to recovery. But on the other hand, the ongoing global economic and financial crisis, also, with the deteriorating law and order situation, and furthermore, the continuous energy shortages in the country can be concluded as the real risks to macro-economic situation. The latest report by the ministry of finance stated, that the fiscal deficit target, 4.3 per cent of GDP (Gross Domestic Product), and the current account deficit target of 5.9 per cent of GDP were achievable. This can also be verified from the current studies undertaken by the IMF (International Monetary Fund) and the World Bank. It also stated that the global economic recession was affecting our economy in various ways, such as the volumes of exports and FDIs declined substantially, which can also be verified in the current reports by the State Bank of Pakistan. Despite the financial support from the IMF and other bilateral and multilateral donors, Pakistans external account remains dire. Other reasons for why economic growth remained weak was because of the declining ratios of tax collection, low inflows of foreign direct investments and the delayed and diminishing privatisation process.
Signs of recovery

The report also shows some signs of improvement in economic variables such as the stabilisation in the inflation rate, also, a significant increase in the build-up of foreign exchange reserves, which recovered from a low of $3.5 billion on October 31, 2008 to $7.8 billion on April 17, 2009. Furthermore, import compression and net zero government borrowings from the State Bank of Pakistan by the end of April are evident. The IMF, satisfied with the progress made by the government in stabilising the economy, agreed to release the second tranche of its $7.6

billion assistance programme. There were also some indications that the amount/assistance available to Pakistan could be increased further, if the country continues to proceed on the track it has been following. Other variables in the economy which have also shown various signs, they include the following:
(a) GDP growth

As stated in the report the GDP will be in range of 2.5 per cent to 3.5 per cent. Agriculture ratio to GDP will be positive which is based upon anticipated high wheat crop and above target growth of minor crops including a reasonably good outturn by the livestock sub-sector.
(b) LSM

It is projected that large-scale manufacturing (LSM) ratios will be negative due to many local and international reasons. It depicted a negative growth of 5.73 per cent during July-Feb 2008-09 as against 5.27% positive growth last year. The economic recession and cost of production has deficiently affected the LSM growth.
(c) Agriculture sector

The agriculture sector is likely to achieve its growth target of 3.3 per cent for the current year. According to the report, all livestock products witnessed an increase in prices and thus the target of 3.2 per cent would be achieved as the demand for livestock products was growing at a phenomenal pace. Moreover, disbursement of credit to the agriculture sector by commercial and specialised banks has increased by Rs13.3 billion (9.6 per cent) on a yearly basis to Rs151.9 billion during nine months of the current fiscal year from Rs138.6 billion from the corresponding period of the last fiscal year which is instrumental to achieve macro-economic goals.
(d) Services sector

The service sector showed some resilience in the current fiscal year. The banking and financial sectors of the country showed substantial growth which would contribute a positive impact on the economy in the near future.
(e) Inflation

The ongoing global inflationary pressures continue to affect the economies of Thailand, India and Pakistan. Despite the diversified but integrated efforts of the government and SBP the country still faces a high double-digit inflation rate. The manipulators, weak regulatory bodies, poor execution of laws and the withdrawal of subsidies were the main causes of high inflation ratios in the country. It is expected that the average inflation for the year (2008-09) as measured by the CPI will be close to 20 per cent.

(f) Capital market

It seems that the stock exchanges of the country are on the road to recovery but their sustainability factor is still questionable. The local bourse remained buoyant throughout the month of March 2009. The recovery phase of the premier stock exchange after floor removal has been hopeful and an outstanding performance has made it one of the best performing markets of the world in 2009, as in the past six weeks Pakistani capital markets value has improved by 20 per cent.
(g) Fiscal management

Due to many internal adjustments (cut in development spending), integrated financial policies/reforms (reduction of oil subsidies) and other external factors such as loan facilities from the IMF, pledges from the friends of Pakistan forum and record worker remittances. The fiscal health of the country is improving and the government received Rs141.1 billion in gross external inflows against outflow of Rs104.1 billion which means net availability of Rs37 billion. Pakistan is geared up to keep trade deficit to 4.3 per cent of GDP and current account deficit within the range of 5.9 per cent.
(h) Tax collection

Tax revenue collected by the Federal Board of Revenue (FBR) stood at Rs813.6 billion (net) during the first nine months of the current fiscal year (2008-09) compared with Rs679.9 billion in July-March (2007-08) posting a healthy increase of 19.7 per cent. But it is again seemed that the tax revenue target of Rs1250 bn may not be achieved during the current fiscal year, as the federal government has already lowered its targets of tax collection in the ongoing fiscal year.
(i) External sector

According to the report the external sector has shown some signs of improvement. The current and trade account balance has improved. Worker remittances (according to the SBP in April, the overseas workers sent the highest ever amount of $739.43 million surpassing the December 2008 record of $673.50 million. The remittances were also higher by 22.79 per cent over the previous month) were on the peak despite the substantial decrease in the ratios of FDI and FPI. (j) Current account balance The CAB decreased by 20.8 per cent during July-March 2008-09. Current account deficit shrank to $7.6 billion during this period as against $9.6 billion during the same period of last year. What Pakistan probably needs is an investment driven current account deficit neutralised to some extent by rising savings level. (k) External debt

External debt and liabilities (EDL) stood at $49.7 billion or 30.7 per cent of the projected GDP for the 2008-09 at the end of March 2009 which is higher than end-June 2008 stock of $46.3 billion or 27.6 per cent of GDP. (l) Rise in public debt According to the ministry of Pakistan our public debt is expected to increase by over Rs2 trillion by the end of 2008-09, the highest ever in a single year. Public debt is estimated to cross Rs7,931 billion by end June 30, up by 34 per cent from Rs5,901 billion in 2007-08 because of massive depreciation in the value of the rupee, and external loans obtained for budgeting the balance of payments. Furthermore, foreign currency debt will reach Rs4,811 billion and domestic currency debt to Rs3,120 billion by the end of June 2009. Public debt share as percentage of GDP will rise to 59 per cent during the year ending June 2009 from 56.3 per cent in the last financial year. It will be in violation of the fiscal responsibility and debt limitation (FRDL) act 2005, which calls for gradual reduction in public debt. The rupee depreciation in the first quarter has an impact of Rs447 billion on the stock of public debt. The significance of this depreciation effect is highlighted by the fact that even though the stock of foreign currency debt has gone down in dollar terms by $400 million, there has been an increase in rupee terms of Rs414 billion in the first quarter. The depreciation of the rupee against the dollar has been responsible for approximately 66 per cent of the total increase in public debt, as stated in a debt policy report submitted to the National Assembly.
Concluding remarks

The review of economic situation for the first nine months of the current fiscal year released by the ministry of finance can be a wakeup call for the policy makers, as the present review reflects an objective assessment of the macro-economic situation. For a sustainable growth, the government needs to pursue the permanent reform processes and resist in slowing them for shortterm political gains. http://jang.com.pk/thenews/jun2009