Review Economy Jul Feb

8/8/2019 Review Economy Jul Feb

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Reviewof

EconomicSituation

(JulyFebruary200809)

GovernmentofPakistan

FinanceDivision

(EconomicAdviserWing)


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1ReviewofEconomicSituationJulyFebruary200809

1. IntroductionPakistan witnessed major disruptions in its normal economic activities as the fallout of the

war on terror spread into settled areas of Pakistan. The outlook for economic growth more

pessimistic,

import

demand

shriveled,

tax

collection

declined,

and

inflows

of

foreign

investment and privatization dampened. Pakistan economy still faces pressures from higher

inflation driven by spike in food prices, the acute power shortages, a bewildering stock

market, a perceptible slowdown in the manufacturing and services sectors; lower than

anticipatedinflowsand growingfinancingrequirement.

Recent trends in most macroeconomic variables suggest that the disciplined implementation

of the macroeconomic stabilization program is paying dividends. Improvement in fiscal

discipline is complementing the tightening of monetary policy to aggregate demand

compression to a meaningful level which has improved prospects of lower inflation in the

finalquarter

of

the

current

fiscal

year.

The

demand

compression

is

also

manifested

from

fall

in the cumulative JulFebruary FY 09 trade deficit which is the first reduction in the last six

years.The narrowingtradedeficitandrobustremittanceshascausedreductioninthecurrent

account deficit and even for the month of February2009, we have witnessed first surplus in

monthlycurrentaccountsurplussinceJune2007.The improvementallowedfor abuildupof

the countrysforeignexchangereserves. Abriefreviewoftheeconomicsituationduringthe

firsteightmonthsofthe currentfiscalyear200809isgivenbelow:

2. Real SectorNotwithstanding these improvements, the growth outlook is not free of risks as industrial

productionhas

been

badly

affected

by

acute

energy

shortages,

deterioration

in

law

and

order

situation,andconstrictedaccesstofinancebyriskaversebanks.Forthe year200809, 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 agriculturesectorwhereall indicationsarepointingatgoodgrowth.The outlookisbased

upon anticipated record wheat crop and abovetarget growth ofminor crops and reasonably

good outturn by the livestock subsector. The outlook for the services sector is mixed as

finance & insurance sector and fiscal spending on public administration are offset by falling

profits in telecom sector and negative fall out of weaker performance of the manufacturing

sectorand importcompressiononwholesaleand retailtrade.Stillthegrowth intheservices

sector will drive the modest GDP growth. The largescale manufacturing sector is victim of


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2 | ReviewofEconomicSituationJulFebruary200809

energyshortagesand demandcompression inthe exportsectorestimatedtocontractby5

percent.

AgricultureThe 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 200809. However, other two major crops cotton and rice have

registered positive growth of 7.3 percent and 13.5 percent, respectively. The combined

weight of sugarcane and maize in overall agriculture is 6.2 percent while that of cotton and

riceis13.0percent.

The Rabi season started with estimated water shortages of 31.6 percent, however,

widespreadrainfallduringDecember2008toFebruary2009 inmostpartsofthecountryhas

positiveimpactonthe outlookfor the rabicrop.Wheatwithits 12.7percentweightinoverall

agriculture is estimated to post 19.0 percent growth over the last year. The area under

cultivation of wheat crop has surpassed the target of 8.6 million hectares by 5 percent. The

provincial governments and PASSCO has made arrangements for highest ever quantum of

procurementat6.55milliontonsofwheatwhich isfarhigherthan3.9 milliontonsprocured

lastyear.

Fertilizerofftake(bothUreaand DAP)decreasedbyalmost10.5percentduringJulyJanuary

200809 amid weak demand due to higher prices and vague market signals led to shortages.

The disbursementofthe agriculturalcredit isupby8.2 percent inJulyFebruary200809and

stoodatRs.130.3 billion as compared to Rs.120.4 billion disbursed in the comparable period

of lastyear.The cropsector isprojectedtosurpassthe growthtarget.The livestocksector is

growingat normal pace and thusthe target of 3.2 percent willbe achieved. The agriculture

sectorislikelytoachieveits growthtargetof3.3 percentforthe currentyear.

Table1: KharifCropsProduction (MillionTons)

Weightin

Agriculture200708 200809

%

Change

Cotton* 7.48 11.6 12.1 7.3

Sugarcane 4.55 63.9 52.1 18.5

Rice 5.47 5.6 6.5 13.5

Maize 1.63 3.6 3.33 7.5

Table2:RabiCropsProduction (MillionTons)

Weightin

Agriculture200708

200809

Est.

%

Change

Wheat

12.68

21.0

25.0

19.0

Gram 1.19 0.475 0.65 36.2

Potato 2.5 2.5

Onion 1.8 0.9 52.0


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Manufacturing SectorLargescalemanufacturingregisteredanegative

growth of 5.35% in JulyJanuary 200809 as

against reasonable positive growth of 5.7% in

the

comparable

period

of

last

year.

This

implies

that largescale manufacturing sector is

exhibiting signs of moderation on the one hand

and acute power shortages along with several

other factors like rising cost of doing business,

demand compression in the export sector,

deteriorating law and order situation in the

country.The negativegrowthof8.9percentinthemonthofJanuary2009maybelookedinto

the backdrop of impressive growth rate of 9.5 percent in January 2008 which placed a high

base effect. Going forward the negative growth 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 factors.

Therewasnegativegrowthall aroundinallmajorgroupswithoneortwoexceptions.

Servicessectorhas exhibitedresiliencetofluctuationsinthe economicactivityand FDI inthe

services sector witnessed healthy increases. The FDI inflows in the services sector provide

some anecdotal evidence regarding growth performance. The FDI inflows in the

telecommunications, financial businesses and personal services are up by 6.7 percent, 75.3

percent and 3.0 percent respectively in the first eight months (JulyFebruary) of the current

fiscalyear.Similarly, improvedprospects intransportation&storagesubsectorsonthe back

ofrelatively

better

production

in

major

crops,

strong

contribution

by

finance

and

insurance

sector and augmented administrative and defence related spending will provide support to

adequate levelofgrowth inthe servicessector.Theseprospectsofthe servicessectorwould

be neutralizedto someextentbynegative growth inthe LSM, importscontraction,shrinking

profits in the telecommunication sector. Leading indicators pertaining to the major sector

wholesale and retail trade points towards a reasonable growth in this subsector. The

targetedgrowthof4.1 percentisalreadyalmosthalfoflastyearsactual8.2 percent.

InflationIn sheer contrast to significant abatement in the inflationary pressures across the globe, the

inflation

in

Pakistan

has

depicted

downward

rigidity.

All

price

indices

like

CPI,

WPI

and

SPI

witnessedacleardowntrendinrecentmonths.The inflationrateasmeasuredbythe changes

Table3:GrowthinLSM(%)

200708 200809

July 5.29 4.47

August 8.546.86

September 7.69 6.41

October 8.08 2.17

November 4.22 7.57

December 4.00 1.64

January 9.45 8.91

JulyJanuary 5.71 5.35


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in Consumer Price Index (CPI) after reaching peak at 25.3 percent in August 2008, showing

easing since November 2008 but bounced back to 21.1 percent in February 2009 mainly

because of spike in the prices of some food items like onion, chicken farm, sugar etc. WPI

inflationisfollowinginternationaldecliningtrendbut nonfoodcomponentofthe CPI showed

some stubbornness till February 2009. The CPI inflation averaged 23.5 percent in July

February2008

09

as

against

8.9

percent

in

the

comparable

period

of

last

year

[See

Table

4].

Table4: InflationSituationinPakistan (%)

CPI WPI SPI CoreInflation

July 24.3 34.0 33.0 14.7

August 25.3 35.7 33.9 16.4

September 23.9 33.2 31.1 17.3

October 25.0 28.4 32.7 18.3

November 24.7 19.9 29.8 18.9

December 23.3 17.6 25.8 18.8

January 20.5 15.7 20.8 18.91

February 21.1 15.0 23.4 18.85

The food inflation is estimated at 28.9 percent in JulyFebruary 200809 as against 13.0

percent in the comparable period of last year. The relative slowdown in domestic inflation

sinceSeptember2008ismainlydrivenbythe decelerationinfoodinflationwhereasnonfood

component has generally remained stubborn. Notwithstanding recent downward trajectory,

the foodinflationisstillquitehighand isattributabletostubbornnessofpricesofedibleoil,

pulses, rice, milk, sugar, poultry, meat, wheat, wheat flour, fresh vegetables and fruits. The

nonfood inflation stood at 19.3 percent, against 5.9 percent in the corresponding period of

last year. The nonfood inflation is also high because of hike in transport group, fuel and

lighting group and house rent index. The downward adjustment of petroleum prices in the

month of November isneutralized byfrequent hikes in electricityand gas prices.On current

trends and barring any adverse shocks, it is expected that the average inflation for the year

(200809) asmeasuredbyCPI willbecloseto20percent.

The core inflation which represents the rate of increase in cost of goods and services

excludingfoodandenergypricesalsowentupfrom5.7 percentto17.8percentinthisperiod.

Notwithstanding,all demandcompression,thecoreinflationresistedall downwardpressures

and remained sticky at around 18.9 percent for the last four consecutive months.

Notwithstanding all monetary tightening during May 2007 to December 2008, the core

inflationhas

also

depicted

first

deceleration

since

May

2007

in

December

2008

but

hovered

around18.9percent.The monthofFebruarywitnessedfractionaldeclineinthe coreinflation.


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The WholesalePrice Index (WPI) during first eight months of 200809 has increased by 24.7

percent,asagainst11.7percentinthecomparableperiodoflastyear.Ithasdeclinedfromas

high as 35.7 percent in August 2008 to 15.0 percent in February 2009, reflecting a marked

downward correction in the last six months. This downturn is contributed by both food and

nonfood components. The nonfood component fell more steeply from 37.4 percent in

August

2008

to

9.8

percent

in

February

2009.

Food

component

has

decelerated

from

33.5

percentinAugust2008to22.0percentinFebruary2009.

The SensitivePriceIndicator(SPI)has recordedanincreaseof26.1percentduringthisperiod

(JulFebruary200809) asagainst9.9 percent inthe sameperiodof lastyear.Goingforward,

the pricesofedibleslikesugar,wheat,meets,onionswillbecrucialindeterminingthe fateof

the SPI. Going forward, the prices of edibles like sugar, wheat, ghee/ cooking oil will be

crucialindeterminingthe fateofthe SPI.

3. Monetary PolicyThe

SBP

has

kept

its

tight

monetary

policy

stance

in

the

period

July

01,

2008

March

14,

2009.

The policyratewasadjustedupwardinNovember2008toshaveoffsomeaggregatedemand

from the economy and kept constant in January 2009. During July 01, 2008March 14, 2009,

money supply (M2) expanded by 2.9 percent against the target of expansion of 8.0 percent

for the yearand lastyearexpansionof7.6 percent inthe comparableperiodoflastyear.The

reserve money contracted by 0.3 percent against the expansion of 10.9 percent in the

comparableperiodoflastyear.

Table5: CausativeFactorsinMonetaryGrowth

FlowsDuring

the

Period

(Rs.

Billion)

200708

1stJulyto

15Mar08 14Mar09

NetForeignAssets(NFA) 317.4 232.3 283.5

NetDomesticAssets(NDA) 941.4 541.7 418.2

- NetGovernmentBorrowing 583.8 308.4 430.1

- FromSBP 688.7 367.0 320.5

CredittoPrivateSector 408.4 315.5 103.8

BroadMoney 624.0 309.4 134.7

ReserveMoney 270.0 131.4 4.26

GrowthinM2

Reserve

Money

Growth

15.35%

22.28%

7.61%

10.85%

2.87%

0.29%


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Net domestic assets (NDA) have increased by Rs.418.2 billion as compared to increase of

Rs.541.7 billion in last year, thereby showing an increase of 10.4 percent in this period

whereas, lastyearthe growth inthe comparableperiodwas17.6percent.Net foreignassets

(NFA) have recorded a contraction of Rs.283.5 billion against the contraction of Rs.232.3

billioninthecomparableoflastyear[SeeTable5].

Governmentborrowingfor budgetarysupporthasrecordedan increaseofRs.430.1billionas

comparedtoRs.308.0billioninthe comparableperiodofthe lastyear.The SBP financinghas

shownanet increaseof Rs.320.5billionand financingfromscheduledbankswitnessedanet

increaseofRs.99.3billionduringJuly01, 2008March14, 2009.

Credit toprivate sector witnessed a net increase of Rs.103.8 billion during July 01, 2008

March 14, 2009 as compared to Rs.315.5 billion in the comparable period of last year. The

stocksstillwentupby9.6 percent.SBP undertookaggressivemonetarytighteningduringthe

period, further increasing the policy rate by 300 bps in two rounds. On a cumulative basis,

this means a 550 bps increase during the last 18 months. These policy measures were in

response to carryover of macroeconomic stresses of the preceding year and increase in real

aggregatedemand.

Weightedaverage lending rate have witnessed slight decline from 15.5 percent in October

2008to15.3percent inJanuary2009.Weightedaveragedepositrateonthe otherhandhas

increased from 6.2 percent in October 2008 to 8.8 percent in January 2009 which implies

narrowing

of

the

spread

amidst

intensive

deposit

mobilization

efforts

on

the

part

of

the

banks. The weighted average yields on 6 months Tbill has declined by almost 100 basis

Fig-1: Trends in Interest Rate

Deposit Rate

Lending Rate

Spread

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

Jun-01

Mar-02

Jul-02

Sep-02

Nov-02

Jan-03

Mar-03

May-03

Jul-03

Sep-03

Nov-03

Jan-04

Mar-04

May-04

Jul-04

Sep-04

Nov-04

Jan-05

Mar-05

May-05

Jul-05

Sep-05

Nov-05

Jan-06

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

(Percent)


8/17


points to 13.0 percent in February 2009 as against 14 percent in November and December

2008.

Capital Market: The period under review (July08February08) has witnessed global

economy meltdown and less than satisfactory security environment increasing investors

anxiety.

The

floor

imposition

on

KSE

100

index

for

about

four

months

(August

27,

2008

December12, 2008) resulted in a virtual halt of the stock market and shattered the

confidence of local and foreign investors badly. These gloomy events coupled with domestic

security environment have had an adverse impact on the performance of Pakistans equity

market.The stockmarkethasalsoreceivedbacklashofthe internationalfinancialmeltdown.

The benchmarkKarachiStockExchangehas undergoneasharp reversal in the risingtrendof

its leadingKSE100 indexinyear2008.The indexunderwentagiganticlossof58.3percentto

closearound5,800pointsbyendFebruary2009againstFebruary2008.Likewise,the market

capitalizationhasobservedahugefallofRs2,471billion(US$47billion)sinceDecember31,

2007. The aggregate market capitalization (AMC) closed at Rs 2,043 billion (US$ 23.5 billion)

on March 31, 2009, down by 50.8 percent (in Rupee) and 57.4 percent (in US Dollar) when

compared to the value of Rs 3,777.7 billion or US$ 55.2 billion on June 30, 2008. The AMC

reachedits highestlevelofRs4,791billiononApril18, 2008.Sincethen,ithas beenenduring

asetbackandincessantlyexhibitingadescendinginclination.

The price discovery process started post removal of stock price floor seems to be routing

towards its finishing point after more than 37 percent decline in the KSE100 index to date.

Put anotherway,the marketwillsoonfind its equilibrium.The marketbreached7,000points

psychologicalbarrieronMarch31, 2009inanticipationofpoliticalstabilityand restorationof

judiciary. The positivereports like possible inclusion of KSE in MSCI Frontier Index, expected

incentivedriven

petroleum

policy

and

encouraging

prospects

on

aid

front

are

the

supporting

factorsthatareguidingtheKSE inthe positivedirection.

4. Fiscal PolicyThe government has decided in the economic stabilization program to adhere to the fiscal deficit

target reverently and during the first half the fiscal deficit hovered around 1.9 percent of the

projected GDP for 200809 which is consistent with annual fiscal deficit target of 4.2 percent. The

fiscal improvement in the first half has largely based on reduction of oil subsidies and a cut in

developmentspending.Allmeaningfuleffortstoexpandrevenuesparticularlybybroadeningthetax

basewill

only

work

in

the

medium

term.

The

faster

growth

of

35.5

percent

in

the

total

revenues

is

morethanoffsetbyevenfastergrowthof25.2percentinthecurrentexpenditure.


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Thefinancingpatternsoffiscaldeficitremaineddominatedbythebankingsystemwhichfinanced85

percent of the fiscal deficit and only 15 percent were financed by the nonbank sources. The

government remained well ahead of the SBP financing limit allowed by the Economic Stabilization

Program. 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 on account of to finance the deficit

remainednegligible

at

Rs.12

billion

only.

TaxRevenuecollectedbytheFederalBoardofRevenue(FBR)stoodatRs.704.2billion(net)during

thefirsteightmonths(JulyFebruary)ofthecurrentfiscalyear(200809)ascomparedtoRs.585.4

billioninJulyFebruary,200708postingahealthyincreaseof20.0%.Directtaxes,whichaccounts

for36.9percentoftotaltaxcollectionoftheFBRhaveregisteredagrowthof18.3percent.Indirect

taxes,ontheotherhand,exhibitedagrowthof21.0percent.Withinindirecttaxes,salestaxwhich

accounts for roughly 63.6 percent of indirect taxes and 40.1 percent of total taxes grew by 24.3

percent (Rs. 283.4 billion). The custom duty collection is up by 7.3 percent and the collection of

federal excise duty (FED) has recorded a note worthy increase of 29.1 percent (collected Rs. 69.7

billion)during

the

period

under

review

[See

Table

6].

Table6: FBRTaxCollectioninJulyFebruary (BillionRs.)

RevenueHeadTarget JulyFebruary Change

200809 200708 200809 (%)

A) DirectTaxes 496.0 216.7 256.3 18.3

B) IndirectTaxes 754.0 368.7 446.1 21.0

1. SalesTax 472.0 228.1 283.4 24.3

2. FederalExcise 112.0 54.01 69.7 29.1

3.

Customs

170.0 86.6 93.0 7.3

TotalNetCollection 1250 585.4 702.5 20.0

Source:FBR

Despiteadeclineinfiscaldeficitinthefirsthalfof200809,thegrowthindomesticdebtaccelerated

reflectingnonavailabilityoffinancingthroughexternalsources.Thestockofdomesticdebtgrewby

Rs.341billionbyendJanuary2009.Thisstronggrowthinthedomesticdebtreflectsnonrealization

of privatization proceeds and reduced availability of net external financing due to increase in

externaldebtrepaymentsonmaturingstockofforeigncurrencybonds.Themaincontributioncame

from 16.3 percent rise in floating debt but this rise is lower than 21.2 percent increase in floating

debtin

the

comparable

period

of

last

year.

The

stock

of

permanent

debt

increased

by

Rs.44.5

billion

whileunfundeddebtwitnessedamoderategrowthof7.2percentinJulJanuary200809.


10/17


5. External SectorExportsmanagedpositivegrowthamidsthostileinternationalenvironmentandgrewby4.3percent

risingfrom$11.7billionlastyearto$12.2billioninJulyFebruaryFY09.However,exportsfellby

17.7percent inFebruary2009overFebruary2008which isreallyworryingthingfortheeconomy.

The

exports

growth

of

4.3

percent

may

be

regarded

as

good

performance

in

the

wake

of

extremely

difficult international and domestic environment. However, we must consider the fact that rice

alonehascontributed114.7percentoftheadditionalamountmobilizedfromexportsandwithout

rice the growth could have been negative 0.7 percent. It implies that positive growth is mainly

becauseofricealone. Thishasagainraisesquestionsregardingstructureofexportsandreinforces

the need to resort to diversification of exports. Although the international price of rice has fallen

fromitspeaklevelattainedlastyear,theunitvalueofriceisstillupby83.4percent.Inquantitative

termstheexportsofricehaswitnessed8percentnegativegrowth[Table7].

Table7: StructureofExports($Million)

ParticularsJuly

February

Change

AbsoluteIncrease/

Decrease

%Contribution

to

Increasein

Exports200708 200809 (%)

A.FoodGroup 1,425.1 2,099.3 47.3 674.3 136.2

B.TextileGroup 6,854.0 6,470.4 5.6 383.6 77.5

C.PetroleumGroup 730.8 589.2 19.4 141.6 28.6

D.OtherManufacturer 2,232.7 2,444.4 9.5 211.7 42.7

E.AllOtherItems 417.9 552.4 32.2 134.5 27.2

Total 11,660.5 12,155.7 4.2 495.2 100.0

NonTextile 4,806.5 5,685.3 18.3

ShareofTextile 58.8 53.2

ShareofNonTextile 41.2 46.8

Source:FBS

Thetextileindustrywhichhasremainedthemajordriveroftheexportgrowthonceagaindepicted

sluggishperformanceanditregisterednegativegrowthof5.6percent.Thisdownwardtrendinthe

textilesectoriscontributedbybothsignificantfallintheunitvalueofalmostallmajortextileitems

and supply constraints reflected through negative growth even in quantity terms. The nontextile

exportsgrewby18.3percent onthebackofstrongperformers likechemicals and pharmaceutical

(14.5%), engineering goods (70.1%), cement (75.7%). These items have very low weight and thus

their huge growth could not impact overall quantum of the exports. The export of petroleum

productsfeltthepinchoffallingpetroleumpricesandtheydeclinedby19.4percent.

Theshare

of

textile

sector

has

declined

from

58.8

percent

last

year

to

53.2

percent

this

year

and

it

is

persistently posting negative growth for some time. On the other hand nontraditional items are


11/17


inchinguptheirsharebypostinghealthygrowth.Weneedtofurtherexploreareaswherewecan

excel.Theproductandmarket wise diversification isthe need ofthe hour.Notwithstanding,good

growth in nontraditional sector, we still need to look into the structural problems of the textile

industry.TheJanuaryfigureofexportsisnotrepresentativeasthepassthroughofglobalmeltdown

isyettobeseen.

Importsregisteredanegativegrowthof1.5percent inJulyFebruary2009.The importsstoodat$

23.8 billion as against $ 24.1 billion in the comparable period of last year. The growth in imports

reflects impact of substantial fall in oil and food imports in monetary terms and these two items

were responsible for 80 percent of additional imports bill last year. Import compression measures

coupled with massive fall in international oil prices have started paying dividends and imports

witnessedmarkedslowdownduringthelasttwomonths.

Table8:StructureofImports($Million)

JulyFebruary Absolute

Increase

% Cont. of

absolute

increaseParticulars 200708 200809 %Change

TotalImports 24,137.9 23,770.5 1.5 367.4 100.0

A FoodGroup 2,511.3 2,749.6 9.5 238.4 64.9

WheatUnmilled 369.0 838.0 127.1 469.0 127.7

B MachineryGroup 3,497.9 3,698.0 5.7 200.1 54.5

PowerGen.Machine 647.9 1083.1 67.2 435.2 118.5

C PetroleumGroup 6,340.2 6,921.2 9.2 581.0 158.1

D TextileGroup 1604.7 1037.4 35.4 567.3 154.4

E AgriChemicalsGroup 3,653.6 3,528.9 3.4 124.7 33.9

Fertilizer 625.5 365.7 41.5 259.8 70.7

F ConsumerDurables 3,259.2 2,026.5 37.8 1,232.7 335.5

RoadmotorVehicles 855.8 622.8 27.2 233.0 63.4

G

Telecom

1,427.9

716.3

49.8

711.6

193.7

H RawMaterials 2,192.2 2,096.3 4.4 95.9 26.1

I. Others 1,862.4 2,165.0 16.2 302.6 82.4

NonFood,NonOil 15,286.4 14,099.7 7.8 1186.7 258.1

NonOilImports 17,797.7 16,849.3 5.3 948.3 323.0 Source:FBS

Notwithstandingtherecentdramaticfall inthepricesofcrudeoilintheinternationalmarkets,the

petroleumisstilldepictingpositivegrowthof9.2percentandadding$581milliontotheadditional

importbillover lastyearspetroleum import.Themonthly importbillonaccountofpetroleumhas

lost onethird of its value. The additional import bill during the period JulyFebruary 200809 on

accountofpetroleumandwheatwasjustabovethe$1.0billion.Thismassiveadditionisneutralized

bymassivenegativecontributionsfromnonfoodandnonoilimports.Otherpositivecontributorsto


12/17


additionalimportbillarepowergeneratingmachineswhichhaveadded$435.2million,agricultural

chemicals otherthanfertilizer($213.4 million),and electrical machines & appliances($92 million).

Thenonfoodandnonoil importsshowednegativegrowthof7.8percentwhich impliesondrastic

importcompression.

Theunit

value

of

import

of

crude

oil

is

still

depicting

45

percent

increase

in

the

period

July

February

200809.Theunitvalueofsoyabeenandpalmoilarealsoshowingmassiveincreasesof62.9%and

22.8%, respectively in this period [See Table8]. This clearly reflects the time lag involved in

translating the benefit of lowering of prices in the international market into the import bill. The

consumer durables, transport group and telecom sectors are responding positively to the import

compression measures. The current growth in imports is coming from only a narrow range of

products and corrective measures are needed accordingly in these items. Pakistan needs more

measures to cut on its petroleum imports either through looking into alternative fuel sources or

demandmanagement.Theimportofediblesalsoneedstobelookedintocarefullyandmaybegiven

priorityfordomesticsubstitution.

Trade Balance The merchandise trade deficit improved by 6.9 percent and declined from $12.5

billioninJulyFebruaryFY08to$11.6billioninJulyFebruaryFY09.Thesubstantialdecreaseof42.0

percentinimportsoutstrippedotherwisesignificantdeclineof17.9percentinexportgrowth,which

caused the trade deficit to improve by 6.9 percent. This is the first ever improvement in the last

threeyearsorso.

Workers Remittances totaled $ 4.9

billion in JulyFebruary FY09 as against $

4.1 billion in the comparable period of

last year, depicting an increase of 19.2

percent. The remittances fell by 19.7

percent in October 2008 over October

2007 amidst difficult global environment

and uncertainties surrounding domestic

economy, however, they recovered to

their normal high double digit growth

since November 2008. Deep recession in the US economy, which constitute close to onethird of

Pakistansremittancesstartedtakingitstollandwitnessedmarginalnegativegrowthof0.3percent.

The trend will be expected to continue in the months to come, however, overall outlook of

remittancesfromothersourcecountriesispositive[SeeTable9].

CurrentAccount Balance shrank by 13.7 percent during JulyFebruary FY09. Current account

deficit shrankto $ 7.5billion as against $ 8.6 billion last year. In themonth of February 2009, the

Table9:WorkersRemittances

$Million

JulyFebruary

200708 200809 %Change

Total 4,126 4,919 19.2

USA 1,160 1,157 0.3

SaudiArabia 762 962 26.3

UAE 682 1,035 51.9

OtherGCCCountries 619 783 26.6

U.K 293 344 17.5

EUCountries 116 150 29.2

OtherCountries 494 488 1.2


13/17


current account witnessed a surplus which is a

rare development in Pakistan economy. This is

first monthly surplus since June 2007. Drastic

reduction in imports growth as well as better

performanceoftheprivate inflows iscontributing

to

improvement

in

the

current

account

deficit.

Going forward, Pakistan is likely to show

significant improvement against the target of

currentaccountdeficit[SeeTable10].Developing

countrieslikePakistanneedsomecurrentaccount

deficittoaugmenttheirdevelopmentefforts.The

current account surplus gave rise to the false

notion that Pakistan is a capital exporting country while Pakistan needs to import capital to

supplementitsmeagersavings.

Foreign direct investment (FDI) has reached $ 2794.4 million during JulyFebruary 200809 as

against$2789millioninthecomparableperiodoflastyear,thereby,depictingamarginalincrease

of 0.2 percent. If privatization proceeds of $133 million received in the comparable period of last

year are excluded, then FDI inflows witness an increase of 5.2 percent. The communication group

spearheaded the healthy rise in the FDI inflows with 28.3% stake in overall FDI and followed by

financial business (23.2%) and oil and gas exploration (17.3%). The power sector after remaining

oblivion for some period has witnessed amassivegrowth of103.4 percentbut its share remained

below3percentinFDI[SeeTable11].

Table11:FDIInflowsbyEconomicGroup(JulFebruary)$Million

200708 200809 %Change

Textiles 20.5 27.6 34.7

Chemicals&PetroChemicals 67.5 63.6 5.8

PetroleumRefining 56.1 74.0 31.9

Oil&GasExplorations 418.2 483.1 15.5

Cement 86.0 30.9 64.1

TransportEquipment(Automobiles) 67.0 58.5 12.7

Power 39.3 79.8 103.4

Trade 123.9 121.5 2.0

Communications 828.1 790.7 4.5

FinancialBusiness 714.8 647.2 9.5

PersonalServices 68.0 63.2 7.1

Others

299.7 354.3

18.2AllGroups 2789.1 2794.4 0.2

Table10: MonthWiseCAD$Million

JulyFebruary

Months 200708 200809

July 816 1039

August

754

1533September 700 1267

October 723 2172

November 1752 800

December 1308 551

January 1580 279

February 1010 146

JulyFebruary 8,645 7,455


14/17


ForeignExchangeReservesdeclinedsubstantiallyintheinitialmonthsofFY09droppingfrom$11.4

billionatendJune2008toalowof$6.4billionbyNovember25,2008.Thisdepletionofreservesin

the five months was lower than fall in foreign exchange reserves for the whole of FY08. The

subsequent recovery in November 2008 owed essentially the inflow of $ 3.1 billion from the IMF

following Pakistans entry into a macroeconomic stabilization program. The foreign exchange

reserves

stood

at

$10.3

billion

as

of

March

27,

2009.

The

import

coverage

ratio

declined

to

an

uncomfortablelevelof9.1weeksasofendOctober2008from16.8weeksofimportsasofendJune

2008butitimprovedto12.4weeksofimportsbyendFebruary2009[SeeFig2].

6

8

10

12

14

16

18

Jan2005

April

July

October

Jan2006

April

July

October

Jan2007

April

July

October

Jan2008

April

Jun16

Jul03

31Aug

31Oct

31Dec

22Jan

4Feb

16Mar

(BillionU

S$)

Fig2:ForeignExchangeReserves

March 16, 2009

$ 10.29 Bln

Exchange rate after remaining stable for more than 4 years, lost significant value against the US

dollar and depreciated by 21% during MarchDecember 2008. Most of the depreciation of rupee

against dollar was recorded in post November 2007 owing to combination of factors like political

uncertainty,

trade

related

outflows

and

speculative

activities.

With

successful

signing

of

Standby

arrangements with the IMF, the rupee got back some of its lost value. With substantial import

compressionandrevivalofexternalinflowsfromabroadinthecomingmonthsofthefiscalyear,the

exchange rate will remain stable at around Rs.8082 per dollar. Pak rupee recovered some of its

earlier lossesagainsttheUSdollarandregisteredanetdepreciationof13.5percentfortheperiod

JulFebruary200809[SeeFig3].


15/17


Theexternaldebt&liabilitiesrecovered inthefirstquartersandactuallyfell inabsoluteaswellas

relativetermsmainlybecauseoflowerthananticipatednetdisbursementsandpositivetranslation

impactof

appreciation

of

dollar

versus

yen

and

euro.

External

debt

and

liabilities

(EDL)

stood

at

US$

50.9billionor31.2percentoftheprojectedGDPfortheFY09attheendofDecember2008whichis

higher than endJune 2008 stock of $46.3 billion or 27.6 percent of GDP. It implies that EDL grew

bothinabsoluteandrelativeterms.AlmostallcategoriesofEDLhavewitnessedincrease;however,

highestincreaseinabsolutetermwasrecordedindebtstockowedtotheIMFasaresultofinflowof

$3.1billiononaccountofStandbyArrangements(SBA)signedwiththeIMFinendNovember2008.

However,theEDLaspercent of foreignexchangeearningsdecreasedfrom125.3percentto112.2

percent.

The countrys debt burden defined as a ratio of external debt and liabilities to GDP declined from

50.9percent

at

the

end

of

2001

02

to

27.6

percent

of

GDP

by

end

June

2008;

however,

it

increased

to27.9percentbyendSeptember2008.Similarly,theEDLwere236.8percentofforeignexchange

earnings but declined to 125.3 percent by endJune 2008 and further to 112.2 percent by end

September2008.

6. ConclusionDuring the last fiscal year the stress on macroeconomic stability mainly emanated from

unsustainablebalanceofpaymentspositionandthefallingvalueofrupee,escalatingfoodandnon

food inflation, and structural problems like power shortages resulting in perceptible slowdown in

economic activity. The domestic socio political upheavals and rapidly changing global economic

environment

added

to

multifaceted

problems.

After

endorsement

of

Economic

Stabilization

program by the IMF, the economy got confidence back. By February 2009, early signs of


16/17


improvement in economic variables such as inflation, foreign exchange reserves, import

growth,andgovernmentborrowingsfromthe SBP areevident.

The fiscaldeficittargetof4.2 percentofGDP and the currentaccountdeficitof5.9 percentof

the GDP is now achievable. However, recent global financial crisis and extremely vulnerable

securityenvironmentaddedriskstothe economy. Thetradedataforthe monthofFebruary

2009 though not representative for months to come, still provide food for thought about

imminent risks to the external sector. If the trade data in the month of March 2009, follow

the sametrendthenitwillbetakenveryseriously.The twoextremesinthe remittancesdata

like massive growth in remittance inflow from UAE and negative growth in US again need

some assessment because if somebody has lost ajob in UAE, he has to return with retained

savingsimmediatelywhileapersoninsimilarsituationinUScanwaitfor the bettertomorrow

byconsumingpartofhis retainedsavings.The externaldatafortheMarch2009willprovide

ampleevidenceofthe impactofglobalfinancialcrisisonour externalsector.

The economic growth target at around 2.53.0 percent is still getable in the given

circumstances. The massive negative growth in the LSM for the month of January 2009 may

bepurelyabaseeffectbecausethegrowthinthe sectorfor January2008washugeone.The

comingmonthmaywitnesslowerintensityofnegativegrowthbecausethe baseeffectwillbe

favourable in the coming month. Similarly, the surge in inflation for the month of February

2009wasagainnot representativebecauseFebruary2008had witnessedraredecelerationin

the CPI index for the last one and half year. The persistent negativity in the SPI during the

monthofMarch2009reinforcesthe optimismthattheCPI inflationfor Marchonwardwillbe

sharplydecelerating. Inthisbackdrop it ismost likelythataverageCPI inflationfor the fiscal

year will be around 20 percent with endyear inflation of around 10 percent. The most

optimistic

estimate

for

the

next

year

inflation

will

be

around

6

percent.

The pressure on monetary, fiscal and exchange rate policy will be mitigated by lowering

financingneedsemanatingfrom lowerfiscaland currentaccountdeficitsasenvisaged inthe

StabilizationProgram.Eliminationofsubsidies,partialtransferofoil paymentstothe foreign

exchangemarket,andfall inthe internationaloil priceswillprovidegreathelponthiscount.

The downside risk to the stabilization program may come from slippages on account of FBR

revenue collection and slowdown in exports neutralizing to some extent steep fall in import

growth.The negativelargescalemanufacturing(LSM)growthandfallingcredittothe private

sector are indication of falling real economic activity, however, still better growth prospects

in the agriculture and the services sector will keep hope of real GDP growth at the targeted

levelin200809.

_____________________


17/17


KeyEconomicIndicatorsJulyFebruary

Items Unit 200708 200809 %Change

Large

scale

Manufacturing@

%

5.2

5.4

Inflation % 8.9 23.5

Food % 13.0 28.9

NonFood % 5.9 19.3

CoreInflation* % 6.8 17.8

TaxCollection(FBR)

- DirectTax

- IndirectTax

- SalesTax

ImportRelated

Domestic

-Customs

Duty

- CentralExcise

Rs.Billion

585.4

216.7

368.7

228.1

126.1

102.0

86.6

54.0

702.5

256.3

446.1

283.4

133.0

150.4

93.0

69.7

20.0

18.3

21.0

24.3

6.0

47.0

7.3

29.0

Exports(FOB) $Million 12,482 13,015 4.3

Imports(FOB) $Million 21,776 21,878 0.5

TradeBalance $Million 9,294 8,863

4.6

Improvement

Remittances $Million 4,126.0 4,919.0 19.2

CurrentAccountDeficit $Million 8,645.0 7,455.0 13.8

ForeignInvestment(Total) $Million 2,873.4 1,892.1 34.2

FDI(Private) $Million 2,789.1 2,794.4 0.2

Portfolio(Private)** $Million 113.8 367.0 422.5

PublicInvestment** $Million 29.5 535.3 1714.6

FOREXReserves(EndFeb.) $Billion 14.1 10.1

ExchangeRate(Avg.Feb.) Rs/US$ 62.6 79.621.4

(Depreciation)

LendingRate(Avg.Jan.) % 11.3 14.1

@DataavailableforJulyJan.**PublicInvestmentismainlyinOGDCLGDRsanddebtequitieswhileMCBGDRsareincludedinPrivatePortfolioinvestment

*CoreInflation iscalculatedbyexcludingfoodgroupandenergygroupconsistsofkerosen,electricity,naturalgas,petrol

anddiesel.

Documents

Review Economy Jul Feb