06-12-2009, 05:29 AM
KARACHI: The government on Thursday released the Economic Survey 2008-09. The following is the overview of the survey.
Global Environment
The collapse of the US sub-prime market and worst ever global financial crisis has had serious repercussions not only for the developed world’s economy but for the developing markets as well.
The fallout has spread through an extensively interlinked global financial market and resulted in a tightening of credit and general drying up of liquidity. The impact of this crisis on developing and emerging economies is widespread. The crisis is not limited to the meltdown of financial markets, the real economy at the national and international levels, its institutions: its productive structures are also being affected.
The financial meltdown inevitably backlashes on consumer markets, the housing market, and more broadly on the process of investment in the production of goods and services. The new growth power houses China and India are experiencing worst kind of slowdown in economic growth mainly because of the sub-prime meltdown.
The world economy is likely to contract by 1.3 per cent in 2009 with almost all developed countries are to post negative growth. Despite numerous stimulus packages and government action of unprecedented scale and nature, advanced economies are expected to contract by 3.8 per cent in 2009. Notwithstanding, strenuous efforts by the US administration, including buying up of toxic assets and recapitalization of financial institutions and stimulus packages the world’s largest economy US is projected to contract by 2.9 per cent in 2009, further down from positive growth of 1.1 per cent in the previous year. Countries relying on trade as a primary means of boosting economic growth saw trade volumes disappear as contractions starts in trading partners. Growth in world trade volumes fell to 3.3 per cent in 2008, as compared to 7.2 per cent in 2007, and is expected to contract substantially by 11 per cent in 2009.
Exports from developing economies are projected to contract by 6.4 per cent during the same period and developing economies started experiencing substantial slowdown in growth in 2008, with real GDP growing at 6.1 per cent as compared to robust growth of 8.3 per cent in 2007. Growth in these economies is projected to slow down further to 1.6 per cent in 2009.
In emerging economies, the slowdown manifested itself through various channels like volatility in the financial markets led to a flight of capital. Emerging economies have already seen the spread on sovereign and corporate debt widening, and a retreat in equity prices as a result of the global crunch.
East Asian tigers Malaysia, Thailand, Korea, Philippines and Singapore all are prospective candidate for posting negative growth. Pakistan, India, Indonesia, Bangladesh and Sri Lanka are the rare positive growth depicters around the globe. The effects of adverse developments at global level have been felt unevenly and countries with weaker macroeconomic fundamentals taking a bigger hit. The impact from the global meltdown might be compensated to some extent through boosting local demand.
However, vigilance by the policy-markers around the developing countries is needed to lessen the severity of downside risks posed by the current crisis. Pakistan economy also gained from compression of demand for external goods, however, export slowdown is a serious cause of concern. Going forward the government has to pursue aggressive trade diplomacy to augment its access to external markets, beside ignite its efforts to diversity exports to optimal exploitation of export potential.
Domestic Environment
Pakistan’s macroeconomic environment is affected by intensification of war on terror and deepening of the global financial crisis which penetrated into domestic economy through the route of substantial decline in Pakistan’s exports and a visible slowdown in foreign direct inflows. Although contraction in export receipts is more than compensated by massive import compression emanating from global crash of crude oil and commodity prices, the external sector vulnerabilities remain a threat.
Pakistan’s economy continues to remain exposed to the vagaries of international developments as well as internal security environment. The intensity of the global financial crisis has further added to Pakistan’s predicament. Despite support from the IMF and other bilateral and multilateral donors, Pakistan’s external account remains exposed to a host of uncertainties. The dependence on external inflows needs some rationalization and to this end additional domestic resource mobilization is instrumental.
Pakistan’s economy has lost significant momentum in the last few years. One of the prime contributors to this derailing is Pakistan’s proactive role in war against terror. Pakistan being a front line state has to bear the fallout of events unfolded after 9/11. At the outset of the war, normal trading activities were disrupted with substantial increase in the cost of international trade because of higher rate of insurance cover; economic growth slowed down; import demand compressed with consequential decline in tax collection; and inflows of foreign investment and privatization were adversely affected.
Pakistan not only lost precious lives and infrastructure but a very conservative estimate has placed economic cost of this war for Pakistan at around US$35 billion since 2001-02. The current fiscal year has witnessed the height of this increased cost. The expenditure overrun has created many uncertainties for public finances. The loss in economic opportunity was compounded by exogenous oil and commodity price shocks, which led to a significant deterioration of the macroeconomic indicators of Pakistan in 2007-08. The problem was exacerbated in the July-October period of the current fiscal year. Major financial inflows dried up during the July-November 2008 period. The current account deficit widened with imports rising more than exports with a significant depletion in SBP’s FE reserves which enhanced country’s default risk.
The FDI inflows fell by 21.4 per cent from July-November 2008 against a 9.8 per cent decline in the same period of year before. The external account, however, does depict certain positives. Even in the face of the world economic downturn, workers’ remittances have remained strong and grew by 19.5 per cent. In addition, declines in international commodity and food prices has helped reduce the country’s import bill and thus impact favourably on the large current account deficit. At the beginning of this fiscal year (2008-09), Pakistan economy was confronted with four major challenges which posed threat to Pakistan’s recovery and socio-economic growth including regaining macroeconomic stability, poverty reduction, fiscal retrenchment and weaknesses in the external account.
The overall vision is to regain macroeconomic stability and to attain GDP growth rate of 6 per cent by 2012-13 from 2.0 per cent in 2008-09. In order to ensure that macroeconomic difficulties do not further slow down the pace of job creation and adversely affect poverty reduction, the government has recently reached an agreement with IMF for a US$7.6 billion package with interest rate varying from 3.51 to 4.51 per cent spread out over a period of 23 months.
For the first time, IMF has accepted Pakistan’s homegrown proposals/programs which have two main objectives: (i) to restore the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies until visible signs of demand curtailment; and (ii) to protect the poor and preserve social stability through well-targeted and adequately funded social safety nets. The government’s new broad-based program for economic stabilization was mainly focused on rationalization of expenditures, removal of unproductive subsidies to reduce the burden on the budget; significant cuts in expenditures to reduce budgetary deficit and a tight monetary policy to fight inflation.
The government adopted the following measures to address the above challenges: a. Strong adjustments in the petroleum prices were undertaken to reduce the budget deficit; b. Significant cuts were made in the expenditures to curtail aggregate demand; c. Tight monetary policy was followed by the State Bank of Pakistan to contain inflationary spiral; d. Electricity tariffs were periodically adjusted to rationalize energy prices; e. Government adopted a Nine-Point Program for economic and social recovery encompassing the following elements: i. Macroeconomic Stability and Real Sector Growth ii. Protecting the Poor and the Vulnerable iii. Increasing Productivity and Value Addition in Agriculture iv. Integrated Energy Development Program v. Making Industry Internationally Competitive vi. Human Capital Development vii. Removing Infrastructure Bottlenecks through Public Private Partnerships (PPPs) viii. Capital and Finance for Development ix. Governance for a Just and Fair System f. Prioritized the scarce government expenditures available for development-related programs; g. Directed immediate support to the most vulnerable groups through the Benazir Income Support Programme (BISP).
These are small (Rs1,000 per month per family) cash grants channeled through women to help satisfy the most fundamental needs of vulnerable households. Currently reaching 3.5 million poor households, the scope of the programme is expected to expand to 7.0 million households in 2009-10; h. Implemented improved and transparent targeting of Benazir Income Support Programme (BISP) and other programmes aimed at the poor and the vulnerable groups.
i. Intensified public-private partnerships with the objective of making private investments, including foreign investors, the most important funding source for economic development; and j. Reinforced the importance of sound governance, managerial and systemic mechanisms to ensure that investments in the social sector are cost-effective and aimed at output-oriented service delivery.
Pakistan’s stabilization programme is supported by the Stand-By Arrangement (SBA) with the IMF approved on November 24, 2008. The SBA envisaged a significant tightening of fiscal and monetary policies to bring down inflation and strengthen the external position adopting several structural measures in the fiscal and financial sectors including strengthening of the social safety net. In addition, to stabilize the macroeconomic situation, the Programme aimed at addressing some of Pakistan's long standing economic problems.
In particular, it called for a comprehensive tax reform to raise budgetary revenue and phase out the electricity subsidies to create greater fiscal space for public investment and social spending. Initial developments in the economy since the implementation of the programme have been positive: The exchange rate has broadly stabilized enabling the State Bank of Pakistan (SBP) to buy foreign exchange on a net basis. SBP reserves have strengthened from US$3.5 billion at end October 2008 to US$7.1 billion on end March 2009.
T-Bill auctions have been consistently oversubscribed with wide participation of banks enabling the government to retire some of its debt to the SBP. Headline Consumer Price Index (CPI) inflation is estimated to have declined from 25.3 per cent in August 2008 to 17.2 per cent in April 2009.
The overall fiscal deficit is estimated to have been restricted to 4.3 per cent in 2008- 09. The government is conscious of the cost being imposed on poor families from the sharp escalation in food prices. Many of these needs are strongly linked and need to be addressed holistically, unless health services are improved, the incidence of ill health will continue to rise; unless educational retention is improved, children will never be able to exit from poverty because they will be concentrated in low-return employment or remain unemployable.
It is, therefore, important to address primary needs via social protection, while simultaneously focusing on the mechanisms that ensure that the exit from absolute poverty is permanent for the majority of the vulnerable and a large proportion of the chronically poor. The national Poverty Reduction Strategy covers the three-year PRSP-II period of 2008-09 ñ 2010-11 while also providing a framework for thinking well beyond this timeframe and is, therefore, to be viewed as an approach to a long-term national economic strategy that has its main focus on reduction of poverty.
The sharp rise in international oil and food prices last year and the global financial crisis not only adversely impacted the macroeconomic indicators in Pakistan but also increased the number of the poorest of the poor. Recognizing the urgent need to protect the poor and the vulnerable, the Government of Pakistan (GoP) launched the Benazir Income Support Programme (BISP) in 2008 as its main social safety net programme. This programme would serve as a platform to provide cash transfers to the vulnerable identified on the basis of a poverty scorecard and would be backed by an exit strategy. This strategy includes imparting training to one member of each vulnerable family to sustain itself.
The programme also envisages a workfare initiative through social mobilization. BISP intends to cover 3.4 million families or 22.75 million people in the current year. In the next year, the government intends to at least double the allocation for BISP to cover 7 million families.
The government would require additional resources of US$3.05 billion over the next two years to sustain the above programme. Notwithstanding all these stabilization measures, recent trends in most macroeconomic variables suggest that the disciplined implementation of the macroeconomic stabilization program is started paying some dividends.
Improvement in fiscal discipline is complementing the still relatively tight monetary policy to aggregate demand compression to a meaningful level which has improved prospects of lower inflation in the last two months of the current fiscal year (May-June 2009). The demand compression is also manifested from improvement in the cumulative Jul-April 2008-09 trade deficit which is the first reduction in the last six years.
The narrowing of trade deficit and robust remittances has caused a reduction of over $2 billion in the current account deficit and even for the month of February 2009, we have witnessed first surplus in monthly current account surplus since June 2007. The current account deficit is likely to decelerate from as high as 8.5 per cent of GDP to around 5.3 per cent of GDP in 2008-09 a reduction of 3.2 percentage points in just one year.
The improvement allowed for a build-up of the country’s foreign exchange reserves beyond $11 billion. Nevertheless, Pakistan’s economy still faces pressures from uncertain security environment, higher inflation driven by spike in food prices, the acute power shortages, and bewildering stock market, perceptible contraction in the large-scale manufacturing and slowdown in services sector; lower than anticipated inflows and growing absolute financing requirements. Abatement of inflationary pressure remained oblivious and prices depicted stubbornness.
Real Sectors
In the wake of above mentioned international and domestic environment the economy lost significant growth momentum owing to massive contraction in the industrial sector.
The economic growth of 2.0 per cent achieved during 2008-09 seems reasonable albeit it implies definite slippage against 4.1 per cent growth of the last year and this year’s target of 4.5 per cent. However, it should be looked in the backdrop of global recession where positive growth is an exception and international developments where real GDP in Pakistan’s main trading partners is estimated to contract by almost 3 per cent on average in 2009, depressing the external demand for Pakistan’s exports. The domestic environment was also not supportive to the growth momentum. The industrial sector in general and large-scale manufacturing in particular has contributed to this slowdown in economic growth by posting dismal performance. The poor show of the LSM is understandable in the context of acute energy shortages and constrained international demand for Pakistan’s manufactured exports.
The massive downward correction in services sector’s growth is mainly because of poor show of the financial sector beside saturation level attained in the communication sub-sector. Notwithstanding the challenges of the fertilizer operations and credit squeeze, agriculture sector is the saving grace of this year’s economic growth and performed exceptionally well on the back of extraordinary performance of major crops (mainly wheat, gram and rice).
Livestock, a major component of agriculture, exhibited slight adjustment from 4.2 per cent growth of last year to 3.7 per cent growth in 2008-09. Construction sector witnessed worst growth performance for almost a decade owing to constricted activity in the private housing market, shrinkage of spending on physical infrastructure due to huge adjustment to rationalize development expenditure, and slowdown in reconstruction activities in earthquake affected areas. The services sector has compensated some of the lost growth of the industrial sector by growing at 3.6 per cent and provided much needed sanity to economic growth. Barring social services and public admn & defence almost all sub-sectors of services sector felt the pinch of recessionary trend. Consumer spending remained strong with real private consumption rising by 5.2 per cent as against negative growth of 1.3 per cent attained last year.
However, gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 per cent as against the expansion of 3.8 per cent in the last fiscal year. The current slowdown is substantially different from the deceleration of the 1990s or early 2000s.
The aggressive monetary tightening posture of the SBP has witnessed a reversal in the last monetary policy statement by notional downward adjustment of policy rate in April 2009 to ensure that stubbornness of monetary policy might not haemorrhage the economic activity. The recent monetary policy has tried to strike a balance between sustaining the growth momentum and containing the inflation in stabilization mode.
Growth and Investment
Real GDP grew by 2.0 per cent in 2008-09 as against 4.1 per cent last year and growth target is met 4.5pc. The modest growth of just 2.0 per cent is shared between Commodity Producing Sector (CPS) (0.08) and services sector (1.92).
Within the CPS, agriculture contributed 1.0 percentage points or 50.1 per cent to overall GDP growth (a significant increase from its contribution of only 5.0 per cent last year) while negative performance of industry dragged 0.92 percentage points or 46.1 per cent to neutralize positive contribution of the agriculture. In the services sector major contributions to GDP growth came from transport, storage & communication (0.3 percentage points or 14.6 per cent), wholesale & retail trade (0.7 percentage points or 27.1 per cent) and social services (0.8 percentage points or 38.6 per cent).
Agriculture sector has depicted a stellar growth of 4.7 per cent as compared to 1.1 per cent witnessed last year and target of 3.5 per cent for the year. Major crops accounting for 33.4 per cent of agricultural value added registered an impressive growth of 7.7 per cent as against a negative growth of 6.4 per cent last year and a target of 4.5 per cent. The livestock sector grew by 3.7 percent in 2008- 09 as against 4.2 per cent last year.
Output manufacturing sector has contracted by 3.3 per cent in 2008-09 as compared to expansion of 4.8 per cent in last year and over-ambitious target of 6.1 per cent. Small and medium manufacturing sector maintained its healthy growth of last year at 7.5 per cent. Large-scale manufacturing depicted contraction of 7.7 per cent as against expansion of 4.0 per cent in the last year and 5.5 per cent target for the year.
The massive contraction is because of acute energy outrages, security environment and political disruption in March 2009. The services sector grew by 3.6 per cent as against the target of 6.1 per cent and last year’s actual growth of 6.6 per cent. Value added in the wholesale and retail trade sector grew at 3.1 per cent as compared to 5.3 per cent in last year and target for the year of 5.4 per cent. Finance and insurance sector witnessed slowed down to 12.9 per cent in 2007-08 but registered negative growth of 1.2 per cent in 2008-09. The performance of this sector shows that Pakistan’s financial sector is integrated in the world economy and feeling the heat of the financial crisis plaguing international financial markets.
The Transport, Storage and Communication sub-sector depicted a sharp deceleration in growth to 2.9 per cent in 2008-09 as compared to 5.7 per cent of last year. Pakistan’s per capita real income has risen by 2.5 per cent in 2008-09 as against 3.4 per cent last year. Per capita income in dollar term rose from $1042 last year to $1046 in 2008-09, thereby showing marginal increase of 0.3 per cent. Real private consumption rising by 5.2 per cent as against negative growth of 1.3 per cent attained last year.
However, gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 per cent as against the expansion of 3.8 percent in the last fiscal year. The total investment has declined from 22.5 percent of GDP in 2006-07 to 19.7 percent of GDP in 2008-09. Fixed investment has decreased to 18.1 per cent of GDP from 20.4 per cent last year. Private sector investment was decelerating persistently since 2004-05 and its ratio to GDP has declined from 15.7 per cent in 2004-05 to 13.2 per cent in 2008-09. Public sector investment to GDP ratio was rising persistently from 4.0 per cent in 2002-03 to 5.6 per cent in 2006-07, however, declined to 4.9 per cent in 2008-09.
The national savings rate has declined to 14.4 per cent of GDP in 2008-09 as against 13.5 per cent of GDP last year. Domestic savings has also declined substantially from 16.3 per cent of GDP in 2005-06 to 11.2 per cent of GDP in 2008-09.
Inflation
As inflationary pressures across the globe continue to dissipate, sparking deflationary concerns in even some countries like Thailand and India which shared pain of galloping inflation with Pakistan a few months ago, Pakistan still faces high double digit inflation.
Although all the price indices like the CPI including core inflation, WPI and SPI have shown a downward trend in recent months, the decline has been subject to stiff downward rigidity. The month on month increase in food and nonfood inflation in the last three months (February- April) has been especially disappointing. Going forward the government has to rationalize electricity tariff which will be inflationary in nature. Notwithstanding difficult domestic environment, the inflation rate as measured by the changes in Consumer Price Index (CPI) showed an easing trend beginning in November 2008, touching 17.2 per cent in April 2009 after reaching a record level of 25.5 per cent in August 2008.
While the food group was the major source of inflation in Pakistan during the first ten months of 2008-09, the nonfood component of the CPI has also been persistently high, resulting in overall stubbornness of the inflation. The CPI inflation averaged 22.3 per cent during July-April 2008-09 as against 10.3 per cent in the comparable period of last year. Given 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 21 per cent.
The core inflation which represents the rate of increase in cost of goods and services excluding food and energy prices also went up from 7.1 per cent to 18.0 per cent.
Monetary Policy
The SBP has kept its tight monetary policy stance in the period July 01, 2008-April 20, 2009. The policy rate was adjusted upward in November 2008 to shave-off some aggregate demand from the economy and kept constant in January 2009. However, noticing visible signs of demand compression enabled the SBP to reduce 100 basis points on April 20, 2009.
During July 01, 2008- May 16, 2009, money supply (M2) expanded by 4.6 per cent against the target of expansion of 9.3 per cent for the year and last year expansion of 8.1 per cent in the comparable period of last year. The reserve money witnessed growth of 2.4 per cent in this period as against expansion of 13.2 percent in the comparable period of last year. Net domestic assets (NDA) have increased by Rs.443.8 billion as compared to increase of Rs702.5 billion in last year, thereby showing an increase of 11.0 per cent in this period whereas, last year the growth in the comparable period was 22.8 per cent.
Net foreign assets (NFA) have recorded a contraction of Rs227.3 billion against the contraction of Rs322.8 billion in the comparable of last year. Government borrowing for budgetary support has recorded an increase of Rs332.2 billion as compared to Rs361.0 billion in the comparable period of the last year.
The SBP financing has shown a net increase of Rs198.2 billion and financing from scheduled banks witnessed a net increase of Rs134.0 billion during July 01, 2008-May 16, 2009. Credit to private sector witnessed a net disbursement of Rs.26.8 billion as compared to Rs.369.4 billion in the comparable period of last year. Weighted average lending rate have witnessed decline from 15.5 per cent in October 2008 to 14.3 per cent in March 2009. Weighted average deposit rate on the other hand has decreased from 9.5 per cent in October 2008 to 8.0 per cent in March 2009 which implies increase in the spread amidst intensive deposit mobilization efforts on the part of the banks.
The weighted average yields on 6 months T-bill has declined by almost 250 basis points to 11.5 percent in March 2009 as against 14 per cent in November 2008 but inched up to 12.4 percent in April 2009.
Fiscal Policy
The government has decided in the economic stabilization program to adhere to the fiscal deficit target reverently and during the first nine months (July-March) the fiscal deficit hovered around 3.1 per cent of the projected GDP for 2008-09 which is consistent with annual fiscal deficit target of 4.3 per cent.
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. All meaningful efforts to expand revenues particularly by broadening the tax base will only work in the medium-term. The financing patterns of fiscal deficit remained dominated by the banking system which financed 85 per cent of the fiscal deficit and only 15 per cent were financed by the non-bank sources. The government remained well ahead of the SBP financing limit allowed by the Economic Stabilization Program.
The overall FBR tax collection remained less than satisfactory and actually witnessed deceleration in real term. Resultantly, the FBR tax collection to GDP ratio is likely to deteriorate around 9 per cent of GDP as against the target of bringing it in to the vicinity of 10 per cent of GDP. Tax Revenue collected by the FBR amounted to Rs898.6 billion during the first ten months (July-April) of the current fiscal year, which is 17.7 per cent higher than the net collection of Rs763.6 billion in the corresponding period of last year.
The net Direct tax collection was estimated at Rs332.5 billion against the target of Rs496 billion which implies a growth of 16.9 per cent during Jul-April 2008-09. Indirect taxes grew by 18.2 per cent during Jul- April 2008-09 and accounted for 62 per cent of stake in overall tax revenue. The sales tax collections grew by 22.2 per cent and stood at Rs358.9 billion as against Rs293.6 billion in comparable period last year. The net customs duty collection has inched up from Rs114.9 billion in 2007-08 to Rs117.2 billion in 2008-09, thereby showing modest growth of 2.1 per cent.
The net collection of federal excise stood at Rs90.0 billion during Jul-April 2008-09 as against Rs70.6 billion in the corresponding period of last year, thereby, showing an increase of 27.5 per cent. Despite a decline in fiscal deficit in the first nine months of 2008-09, the growth in domestic debt accelerated reflecting non-availability of financing through external sources.
The stock of domestic debt grew by Rs484.1 billion during July-March 2008-09. This strong growth in the domestic debt reflects non-realization of privatization proceeds and reduced availability of net external financing due to increase in external debt repayments on maturing stock of foreign currency bonds.
The main contribution came from 17.5 per cent rise in floating debt which increased by Rs286 billion. The stock of permanent debt has increased by Rs44 billion. Unfunded debt witnessed a growth of 15.1 per cent or Rs154.2 in Jul-March 2008-09 mainly because of uncertainty in the financial market and very attractive rates offered by NSS schemes.
External Sector
The external sector has shown definite signs of improvement. The current and trade account balance has improved but there is some slippages on account of current transfers.
The buoyancy in remittances is more than off-set by substantial declining trend in inflows through exchange companies. There is a substantial decline of around $2 billion in services trade deficit during the first ten months of the current fiscal year because of tapering off in the demand pressures on the one hand and lower freight and insurance payments on the other.
The financial account witnessed slackening of capital inflows by staggering $2.7 billion mainly on account of lower FDI inflows, higher portfolio outflows, lower disbursements of loan and higher amortization payments. The worsening of external account in the period of July-October 2008-09 is compensated by substantial improvement in the external account in the period November-April 2008-09.
Exports were targeted at $ 19.0 billion or 6.9 per cent lower than last year. Exports started to face heat of global financial crisis since November 2008 and the contraction of world over demand has exacerbated export contraction.
The exports witnessed negative growth of 2.6 per cent, declining from $16.4 billion last year to $16.0 billion in July-April 2008-09. Imports registered a negative growth of 9.8 per cent in July-April 2009.
The imports stood at $26.77 billion as against $28.715 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 per cent of additional imports bill last year. Import compression measures coupled with massive fall in international oil prices have started paying dividends and imports witnessed marked slowdown during the last two months.
Trade Balance The merchandise trade deficit improved by 12.3 per cent and declined from $10.7 billion in July-April 2008-09 to $12.3 billion in July-April 2008-09. The substantial decrease of 9.8 per cent in imports outstripped otherwise significant decrease of 3.0 per cent in export growth, which caused the trade deficit to improve by 12.3 percent. Workers Remittances totaled $6.4 billion in July-April 2008-09 as against $5.3 billion in the comparable period of last year, depicting an increase of 19.5 per cent.
Deep recession in the US economy, which constitute close to one-third of Pakistan’s remittances started taking its toll and witnessed negative growth of 1.9 per cent.
The trend will be expected to continue in the months to come, however, overall outlook of remittances from other source countries is positive. Current Account Balance Pakistan’s current account deficit shrank by 23.5 per cent during July- April 2008-09. Current account deficit shrank to $8.5 billion as against $11.2 billion last year. In the month of February 2009, the current account witnessed a surplus which is a rare development in Pakistan economy. This was first monthly surplus since June 2007. It turned to deficit in March and April 2009.
Exchange rate after remaining stable for more than 4 years, lost significant value against the US dollar and depreciated by 21pc during MarchñDecember 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 compression and revival of external inflows from abroad in the coming months of the fiscal year, the exchange rate will remain stable at around Rs80-82 per dollar.
The overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 42.7 per cent and stood at $2.2 billion as against $3.9 billion in the comparable period of last year. Foreign direct investment (private) shown some resilience and stood at $3205.4 million during the first ten months (July-April) of the current fiscal year as against $3719.1 million in the same period last year thereby showing a decline of 13.8 per cent. If viewed in the massive fall in capital flows to emerging economies, even this decline in FDI seems to be reasonably good. Private portfolio investment on the other hand showed an outflow of $451.5 million as against an inflow of $98.9 million during the comparable period of last year. The hemorrhage to the foreign exchange reserves have been arrested in the post-November period and over $3 billion are added to the SBP reserves inspite of $500 million Eurobond payment in February 2009. Notwithstanding, improvement in the external sector outlook remain hostage to expected inflows in the last quarter.
Foreign Exchange Reserves declined substantially in the initial months of 2008-09 dropping from $11.4 billion at end-June 2008 to a low of $6.4 billion by November 25, 2008. This depletion of reserves in the five months (July-November 2008) was much higher than fall in forex reserves for the entire fiscal year 2007-08. The subsequent partial recovery since November 25, 2008 onward owed essentially to the inflow of $3.1 billion from the IMF following Pakistanís entry into a macroeconomic stabilization program.
The import coverage ratio declined to an uncomfortable level of 9.1 weeks as of end-October 2008 from 16.8 weeks of imports as of end-June 2008 but it improved to 18 weeks of imports by end-April 2009. The external debt & liabilities recovered in the third quarter and actually fell in absolute as well as relative terms between end-December 2008 and end-March 2009, mainly because of lower than anticipated net disbursements and positive translation impact of appreciation of dollar versus yen, SDR and euro.
External debt and liabilities (EDL) stood at US$50.1 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.
It implies that EDL grew both in absolute and relative terms during July-December period but witnessed some correction in the third quarter. Almost all categories of EDL barring Paris Club, Eurobond and military, have witnessed increase; however, highest increase in absolute term was recorded in debt stock owed to the IMF as a result of inflow of $3.1 billion on account of Stand by Arrangements (SBA) signed with the IMF in end- November 2008. On the liabilities side $500 million are added by Bank of China.
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Global Environment
The collapse of the US sub-prime market and worst ever global financial crisis has had serious repercussions not only for the developed world’s economy but for the developing markets as well.
The fallout has spread through an extensively interlinked global financial market and resulted in a tightening of credit and general drying up of liquidity. The impact of this crisis on developing and emerging economies is widespread. The crisis is not limited to the meltdown of financial markets, the real economy at the national and international levels, its institutions: its productive structures are also being affected.
The financial meltdown inevitably backlashes on consumer markets, the housing market, and more broadly on the process of investment in the production of goods and services. The new growth power houses China and India are experiencing worst kind of slowdown in economic growth mainly because of the sub-prime meltdown.
The world economy is likely to contract by 1.3 per cent in 2009 with almost all developed countries are to post negative growth. Despite numerous stimulus packages and government action of unprecedented scale and nature, advanced economies are expected to contract by 3.8 per cent in 2009. Notwithstanding, strenuous efforts by the US administration, including buying up of toxic assets and recapitalization of financial institutions and stimulus packages the world’s largest economy US is projected to contract by 2.9 per cent in 2009, further down from positive growth of 1.1 per cent in the previous year. Countries relying on trade as a primary means of boosting economic growth saw trade volumes disappear as contractions starts in trading partners. Growth in world trade volumes fell to 3.3 per cent in 2008, as compared to 7.2 per cent in 2007, and is expected to contract substantially by 11 per cent in 2009.
Exports from developing economies are projected to contract by 6.4 per cent during the same period and developing economies started experiencing substantial slowdown in growth in 2008, with real GDP growing at 6.1 per cent as compared to robust growth of 8.3 per cent in 2007. Growth in these economies is projected to slow down further to 1.6 per cent in 2009.
In emerging economies, the slowdown manifested itself through various channels like volatility in the financial markets led to a flight of capital. Emerging economies have already seen the spread on sovereign and corporate debt widening, and a retreat in equity prices as a result of the global crunch.
East Asian tigers Malaysia, Thailand, Korea, Philippines and Singapore all are prospective candidate for posting negative growth. Pakistan, India, Indonesia, Bangladesh and Sri Lanka are the rare positive growth depicters around the globe. The effects of adverse developments at global level have been felt unevenly and countries with weaker macroeconomic fundamentals taking a bigger hit. The impact from the global meltdown might be compensated to some extent through boosting local demand.
However, vigilance by the policy-markers around the developing countries is needed to lessen the severity of downside risks posed by the current crisis. Pakistan economy also gained from compression of demand for external goods, however, export slowdown is a serious cause of concern. Going forward the government has to pursue aggressive trade diplomacy to augment its access to external markets, beside ignite its efforts to diversity exports to optimal exploitation of export potential.
Domestic Environment
Pakistan’s macroeconomic environment is affected by intensification of war on terror and deepening of the global financial crisis which penetrated into domestic economy through the route of substantial decline in Pakistan’s exports and a visible slowdown in foreign direct inflows. Although contraction in export receipts is more than compensated by massive import compression emanating from global crash of crude oil and commodity prices, the external sector vulnerabilities remain a threat.
Pakistan’s economy continues to remain exposed to the vagaries of international developments as well as internal security environment. The intensity of the global financial crisis has further added to Pakistan’s predicament. Despite support from the IMF and other bilateral and multilateral donors, Pakistan’s external account remains exposed to a host of uncertainties. The dependence on external inflows needs some rationalization and to this end additional domestic resource mobilization is instrumental.
Pakistan’s economy has lost significant momentum in the last few years. One of the prime contributors to this derailing is Pakistan’s proactive role in war against terror. Pakistan being a front line state has to bear the fallout of events unfolded after 9/11. At the outset of the war, normal trading activities were disrupted with substantial increase in the cost of international trade because of higher rate of insurance cover; economic growth slowed down; import demand compressed with consequential decline in tax collection; and inflows of foreign investment and privatization were adversely affected.
Pakistan not only lost precious lives and infrastructure but a very conservative estimate has placed economic cost of this war for Pakistan at around US$35 billion since 2001-02. The current fiscal year has witnessed the height of this increased cost. The expenditure overrun has created many uncertainties for public finances. The loss in economic opportunity was compounded by exogenous oil and commodity price shocks, which led to a significant deterioration of the macroeconomic indicators of Pakistan in 2007-08. The problem was exacerbated in the July-October period of the current fiscal year. Major financial inflows dried up during the July-November 2008 period. The current account deficit widened with imports rising more than exports with a significant depletion in SBP’s FE reserves which enhanced country’s default risk.
The FDI inflows fell by 21.4 per cent from July-November 2008 against a 9.8 per cent decline in the same period of year before. The external account, however, does depict certain positives. Even in the face of the world economic downturn, workers’ remittances have remained strong and grew by 19.5 per cent. In addition, declines in international commodity and food prices has helped reduce the country’s import bill and thus impact favourably on the large current account deficit. At the beginning of this fiscal year (2008-09), Pakistan economy was confronted with four major challenges which posed threat to Pakistan’s recovery and socio-economic growth including regaining macroeconomic stability, poverty reduction, fiscal retrenchment and weaknesses in the external account.
The overall vision is to regain macroeconomic stability and to attain GDP growth rate of 6 per cent by 2012-13 from 2.0 per cent in 2008-09. In order to ensure that macroeconomic difficulties do not further slow down the pace of job creation and adversely affect poverty reduction, the government has recently reached an agreement with IMF for a US$7.6 billion package with interest rate varying from 3.51 to 4.51 per cent spread out over a period of 23 months.
For the first time, IMF has accepted Pakistan’s homegrown proposals/programs which have two main objectives: (i) to restore the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies until visible signs of demand curtailment; and (ii) to protect the poor and preserve social stability through well-targeted and adequately funded social safety nets. The government’s new broad-based program for economic stabilization was mainly focused on rationalization of expenditures, removal of unproductive subsidies to reduce the burden on the budget; significant cuts in expenditures to reduce budgetary deficit and a tight monetary policy to fight inflation.
The government adopted the following measures to address the above challenges: a. Strong adjustments in the petroleum prices were undertaken to reduce the budget deficit; b. Significant cuts were made in the expenditures to curtail aggregate demand; c. Tight monetary policy was followed by the State Bank of Pakistan to contain inflationary spiral; d. Electricity tariffs were periodically adjusted to rationalize energy prices; e. Government adopted a Nine-Point Program for economic and social recovery encompassing the following elements: i. Macroeconomic Stability and Real Sector Growth ii. Protecting the Poor and the Vulnerable iii. Increasing Productivity and Value Addition in Agriculture iv. Integrated Energy Development Program v. Making Industry Internationally Competitive vi. Human Capital Development vii. Removing Infrastructure Bottlenecks through Public Private Partnerships (PPPs) viii. Capital and Finance for Development ix. Governance for a Just and Fair System f. Prioritized the scarce government expenditures available for development-related programs; g. Directed immediate support to the most vulnerable groups through the Benazir Income Support Programme (BISP).
These are small (Rs1,000 per month per family) cash grants channeled through women to help satisfy the most fundamental needs of vulnerable households. Currently reaching 3.5 million poor households, the scope of the programme is expected to expand to 7.0 million households in 2009-10; h. Implemented improved and transparent targeting of Benazir Income Support Programme (BISP) and other programmes aimed at the poor and the vulnerable groups.
i. Intensified public-private partnerships with the objective of making private investments, including foreign investors, the most important funding source for economic development; and j. Reinforced the importance of sound governance, managerial and systemic mechanisms to ensure that investments in the social sector are cost-effective and aimed at output-oriented service delivery.
Pakistan’s stabilization programme is supported by the Stand-By Arrangement (SBA) with the IMF approved on November 24, 2008. The SBA envisaged a significant tightening of fiscal and monetary policies to bring down inflation and strengthen the external position adopting several structural measures in the fiscal and financial sectors including strengthening of the social safety net. In addition, to stabilize the macroeconomic situation, the Programme aimed at addressing some of Pakistan's long standing economic problems.
In particular, it called for a comprehensive tax reform to raise budgetary revenue and phase out the electricity subsidies to create greater fiscal space for public investment and social spending. Initial developments in the economy since the implementation of the programme have been positive: The exchange rate has broadly stabilized enabling the State Bank of Pakistan (SBP) to buy foreign exchange on a net basis. SBP reserves have strengthened from US$3.5 billion at end October 2008 to US$7.1 billion on end March 2009.
T-Bill auctions have been consistently oversubscribed with wide participation of banks enabling the government to retire some of its debt to the SBP. Headline Consumer Price Index (CPI) inflation is estimated to have declined from 25.3 per cent in August 2008 to 17.2 per cent in April 2009.
The overall fiscal deficit is estimated to have been restricted to 4.3 per cent in 2008- 09. The government is conscious of the cost being imposed on poor families from the sharp escalation in food prices. Many of these needs are strongly linked and need to be addressed holistically, unless health services are improved, the incidence of ill health will continue to rise; unless educational retention is improved, children will never be able to exit from poverty because they will be concentrated in low-return employment or remain unemployable.
It is, therefore, important to address primary needs via social protection, while simultaneously focusing on the mechanisms that ensure that the exit from absolute poverty is permanent for the majority of the vulnerable and a large proportion of the chronically poor. The national Poverty Reduction Strategy covers the three-year PRSP-II period of 2008-09 ñ 2010-11 while also providing a framework for thinking well beyond this timeframe and is, therefore, to be viewed as an approach to a long-term national economic strategy that has its main focus on reduction of poverty.
The sharp rise in international oil and food prices last year and the global financial crisis not only adversely impacted the macroeconomic indicators in Pakistan but also increased the number of the poorest of the poor. Recognizing the urgent need to protect the poor and the vulnerable, the Government of Pakistan (GoP) launched the Benazir Income Support Programme (BISP) in 2008 as its main social safety net programme. This programme would serve as a platform to provide cash transfers to the vulnerable identified on the basis of a poverty scorecard and would be backed by an exit strategy. This strategy includes imparting training to one member of each vulnerable family to sustain itself.
The programme also envisages a workfare initiative through social mobilization. BISP intends to cover 3.4 million families or 22.75 million people in the current year. In the next year, the government intends to at least double the allocation for BISP to cover 7 million families.
The government would require additional resources of US$3.05 billion over the next two years to sustain the above programme. Notwithstanding all these stabilization measures, recent trends in most macroeconomic variables suggest that the disciplined implementation of the macroeconomic stabilization program is started paying some dividends.
Improvement in fiscal discipline is complementing the still relatively tight monetary policy to aggregate demand compression to a meaningful level which has improved prospects of lower inflation in the last two months of the current fiscal year (May-June 2009). The demand compression is also manifested from improvement in the cumulative Jul-April 2008-09 trade deficit which is the first reduction in the last six years.
The narrowing of trade deficit and robust remittances has caused a reduction of over $2 billion in the current account deficit and even for the month of February 2009, we have witnessed first surplus in monthly current account surplus since June 2007. The current account deficit is likely to decelerate from as high as 8.5 per cent of GDP to around 5.3 per cent of GDP in 2008-09 a reduction of 3.2 percentage points in just one year.
The improvement allowed for a build-up of the country’s foreign exchange reserves beyond $11 billion. Nevertheless, Pakistan’s economy still faces pressures from uncertain security environment, higher inflation driven by spike in food prices, the acute power shortages, and bewildering stock market, perceptible contraction in the large-scale manufacturing and slowdown in services sector; lower than anticipated inflows and growing absolute financing requirements. Abatement of inflationary pressure remained oblivious and prices depicted stubbornness.
Real Sectors
In the wake of above mentioned international and domestic environment the economy lost significant growth momentum owing to massive contraction in the industrial sector.
The economic growth of 2.0 per cent achieved during 2008-09 seems reasonable albeit it implies definite slippage against 4.1 per cent growth of the last year and this year’s target of 4.5 per cent. However, it should be looked in the backdrop of global recession where positive growth is an exception and international developments where real GDP in Pakistan’s main trading partners is estimated to contract by almost 3 per cent on average in 2009, depressing the external demand for Pakistan’s exports. The domestic environment was also not supportive to the growth momentum. The industrial sector in general and large-scale manufacturing in particular has contributed to this slowdown in economic growth by posting dismal performance. The poor show of the LSM is understandable in the context of acute energy shortages and constrained international demand for Pakistan’s manufactured exports.
The massive downward correction in services sector’s growth is mainly because of poor show of the financial sector beside saturation level attained in the communication sub-sector. Notwithstanding the challenges of the fertilizer operations and credit squeeze, agriculture sector is the saving grace of this year’s economic growth and performed exceptionally well on the back of extraordinary performance of major crops (mainly wheat, gram and rice).
Livestock, a major component of agriculture, exhibited slight adjustment from 4.2 per cent growth of last year to 3.7 per cent growth in 2008-09. Construction sector witnessed worst growth performance for almost a decade owing to constricted activity in the private housing market, shrinkage of spending on physical infrastructure due to huge adjustment to rationalize development expenditure, and slowdown in reconstruction activities in earthquake affected areas. The services sector has compensated some of the lost growth of the industrial sector by growing at 3.6 per cent and provided much needed sanity to economic growth. Barring social services and public admn & defence almost all sub-sectors of services sector felt the pinch of recessionary trend. Consumer spending remained strong with real private consumption rising by 5.2 per cent as against negative growth of 1.3 per cent attained last year.
However, gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 per cent as against the expansion of 3.8 per cent in the last fiscal year. The current slowdown is substantially different from the deceleration of the 1990s or early 2000s.
The aggressive monetary tightening posture of the SBP has witnessed a reversal in the last monetary policy statement by notional downward adjustment of policy rate in April 2009 to ensure that stubbornness of monetary policy might not haemorrhage the economic activity. The recent monetary policy has tried to strike a balance between sustaining the growth momentum and containing the inflation in stabilization mode.
Growth and Investment
Real GDP grew by 2.0 per cent in 2008-09 as against 4.1 per cent last year and growth target is met 4.5pc. The modest growth of just 2.0 per cent is shared between Commodity Producing Sector (CPS) (0.08) and services sector (1.92).
Within the CPS, agriculture contributed 1.0 percentage points or 50.1 per cent to overall GDP growth (a significant increase from its contribution of only 5.0 per cent last year) while negative performance of industry dragged 0.92 percentage points or 46.1 per cent to neutralize positive contribution of the agriculture. In the services sector major contributions to GDP growth came from transport, storage & communication (0.3 percentage points or 14.6 per cent), wholesale & retail trade (0.7 percentage points or 27.1 per cent) and social services (0.8 percentage points or 38.6 per cent).
Agriculture sector has depicted a stellar growth of 4.7 per cent as compared to 1.1 per cent witnessed last year and target of 3.5 per cent for the year. Major crops accounting for 33.4 per cent of agricultural value added registered an impressive growth of 7.7 per cent as against a negative growth of 6.4 per cent last year and a target of 4.5 per cent. The livestock sector grew by 3.7 percent in 2008- 09 as against 4.2 per cent last year.
Output manufacturing sector has contracted by 3.3 per cent in 2008-09 as compared to expansion of 4.8 per cent in last year and over-ambitious target of 6.1 per cent. Small and medium manufacturing sector maintained its healthy growth of last year at 7.5 per cent. Large-scale manufacturing depicted contraction of 7.7 per cent as against expansion of 4.0 per cent in the last year and 5.5 per cent target for the year.
The massive contraction is because of acute energy outrages, security environment and political disruption in March 2009. The services sector grew by 3.6 per cent as against the target of 6.1 per cent and last year’s actual growth of 6.6 per cent. Value added in the wholesale and retail trade sector grew at 3.1 per cent as compared to 5.3 per cent in last year and target for the year of 5.4 per cent. Finance and insurance sector witnessed slowed down to 12.9 per cent in 2007-08 but registered negative growth of 1.2 per cent in 2008-09. The performance of this sector shows that Pakistan’s financial sector is integrated in the world economy and feeling the heat of the financial crisis plaguing international financial markets.
The Transport, Storage and Communication sub-sector depicted a sharp deceleration in growth to 2.9 per cent in 2008-09 as compared to 5.7 per cent of last year. Pakistan’s per capita real income has risen by 2.5 per cent in 2008-09 as against 3.4 per cent last year. Per capita income in dollar term rose from $1042 last year to $1046 in 2008-09, thereby showing marginal increase of 0.3 per cent. Real private consumption rising by 5.2 per cent as against negative growth of 1.3 per cent attained last year.
However, gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 per cent as against the expansion of 3.8 percent in the last fiscal year. The total investment has declined from 22.5 percent of GDP in 2006-07 to 19.7 percent of GDP in 2008-09. Fixed investment has decreased to 18.1 per cent of GDP from 20.4 per cent last year. Private sector investment was decelerating persistently since 2004-05 and its ratio to GDP has declined from 15.7 per cent in 2004-05 to 13.2 per cent in 2008-09. Public sector investment to GDP ratio was rising persistently from 4.0 per cent in 2002-03 to 5.6 per cent in 2006-07, however, declined to 4.9 per cent in 2008-09.
The national savings rate has declined to 14.4 per cent of GDP in 2008-09 as against 13.5 per cent of GDP last year. Domestic savings has also declined substantially from 16.3 per cent of GDP in 2005-06 to 11.2 per cent of GDP in 2008-09.
Inflation
As inflationary pressures across the globe continue to dissipate, sparking deflationary concerns in even some countries like Thailand and India which shared pain of galloping inflation with Pakistan a few months ago, Pakistan still faces high double digit inflation.
Although all the price indices like the CPI including core inflation, WPI and SPI have shown a downward trend in recent months, the decline has been subject to stiff downward rigidity. The month on month increase in food and nonfood inflation in the last three months (February- April) has been especially disappointing. Going forward the government has to rationalize electricity tariff which will be inflationary in nature. Notwithstanding difficult domestic environment, the inflation rate as measured by the changes in Consumer Price Index (CPI) showed an easing trend beginning in November 2008, touching 17.2 per cent in April 2009 after reaching a record level of 25.5 per cent in August 2008.
While the food group was the major source of inflation in Pakistan during the first ten months of 2008-09, the nonfood component of the CPI has also been persistently high, resulting in overall stubbornness of the inflation. The CPI inflation averaged 22.3 per cent during July-April 2008-09 as against 10.3 per cent in the comparable period of last year. Given 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 21 per cent.
The core inflation which represents the rate of increase in cost of goods and services excluding food and energy prices also went up from 7.1 per cent to 18.0 per cent.
Monetary Policy
The SBP has kept its tight monetary policy stance in the period July 01, 2008-April 20, 2009. The policy rate was adjusted upward in November 2008 to shave-off some aggregate demand from the economy and kept constant in January 2009. However, noticing visible signs of demand compression enabled the SBP to reduce 100 basis points on April 20, 2009.
During July 01, 2008- May 16, 2009, money supply (M2) expanded by 4.6 per cent against the target of expansion of 9.3 per cent for the year and last year expansion of 8.1 per cent in the comparable period of last year. The reserve money witnessed growth of 2.4 per cent in this period as against expansion of 13.2 percent in the comparable period of last year. Net domestic assets (NDA) have increased by Rs.443.8 billion as compared to increase of Rs702.5 billion in last year, thereby showing an increase of 11.0 per cent in this period whereas, last year the growth in the comparable period was 22.8 per cent.
Net foreign assets (NFA) have recorded a contraction of Rs227.3 billion against the contraction of Rs322.8 billion in the comparable of last year. Government borrowing for budgetary support has recorded an increase of Rs332.2 billion as compared to Rs361.0 billion in the comparable period of the last year.
The SBP financing has shown a net increase of Rs198.2 billion and financing from scheduled banks witnessed a net increase of Rs134.0 billion during July 01, 2008-May 16, 2009. Credit to private sector witnessed a net disbursement of Rs.26.8 billion as compared to Rs.369.4 billion in the comparable period of last year. Weighted average lending rate have witnessed decline from 15.5 per cent in October 2008 to 14.3 per cent in March 2009. Weighted average deposit rate on the other hand has decreased from 9.5 per cent in October 2008 to 8.0 per cent in March 2009 which implies increase in the spread amidst intensive deposit mobilization efforts on the part of the banks.
The weighted average yields on 6 months T-bill has declined by almost 250 basis points to 11.5 percent in March 2009 as against 14 per cent in November 2008 but inched up to 12.4 percent in April 2009.
Fiscal Policy
The government has decided in the economic stabilization program to adhere to the fiscal deficit target reverently and during the first nine months (July-March) the fiscal deficit hovered around 3.1 per cent of the projected GDP for 2008-09 which is consistent with annual fiscal deficit target of 4.3 per cent.
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. All meaningful efforts to expand revenues particularly by broadening the tax base will only work in the medium-term. The financing patterns of fiscal deficit remained dominated by the banking system which financed 85 per cent of the fiscal deficit and only 15 per cent were financed by the non-bank sources. The government remained well ahead of the SBP financing limit allowed by the Economic Stabilization Program.
The overall FBR tax collection remained less than satisfactory and actually witnessed deceleration in real term. Resultantly, the FBR tax collection to GDP ratio is likely to deteriorate around 9 per cent of GDP as against the target of bringing it in to the vicinity of 10 per cent of GDP. Tax Revenue collected by the FBR amounted to Rs898.6 billion during the first ten months (July-April) of the current fiscal year, which is 17.7 per cent higher than the net collection of Rs763.6 billion in the corresponding period of last year.
The net Direct tax collection was estimated at Rs332.5 billion against the target of Rs496 billion which implies a growth of 16.9 per cent during Jul-April 2008-09. Indirect taxes grew by 18.2 per cent during Jul- April 2008-09 and accounted for 62 per cent of stake in overall tax revenue. The sales tax collections grew by 22.2 per cent and stood at Rs358.9 billion as against Rs293.6 billion in comparable period last year. The net customs duty collection has inched up from Rs114.9 billion in 2007-08 to Rs117.2 billion in 2008-09, thereby showing modest growth of 2.1 per cent.
The net collection of federal excise stood at Rs90.0 billion during Jul-April 2008-09 as against Rs70.6 billion in the corresponding period of last year, thereby, showing an increase of 27.5 per cent. Despite a decline in fiscal deficit in the first nine months of 2008-09, the growth in domestic debt accelerated reflecting non-availability of financing through external sources.
The stock of domestic debt grew by Rs484.1 billion during July-March 2008-09. This strong growth in the domestic debt reflects non-realization of privatization proceeds and reduced availability of net external financing due to increase in external debt repayments on maturing stock of foreign currency bonds.
The main contribution came from 17.5 per cent rise in floating debt which increased by Rs286 billion. The stock of permanent debt has increased by Rs44 billion. Unfunded debt witnessed a growth of 15.1 per cent or Rs154.2 in Jul-March 2008-09 mainly because of uncertainty in the financial market and very attractive rates offered by NSS schemes.
External Sector
The external sector has shown definite signs of improvement. The current and trade account balance has improved but there is some slippages on account of current transfers.
The buoyancy in remittances is more than off-set by substantial declining trend in inflows through exchange companies. There is a substantial decline of around $2 billion in services trade deficit during the first ten months of the current fiscal year because of tapering off in the demand pressures on the one hand and lower freight and insurance payments on the other.
The financial account witnessed slackening of capital inflows by staggering $2.7 billion mainly on account of lower FDI inflows, higher portfolio outflows, lower disbursements of loan and higher amortization payments. The worsening of external account in the period of July-October 2008-09 is compensated by substantial improvement in the external account in the period November-April 2008-09.
Exports were targeted at $ 19.0 billion or 6.9 per cent lower than last year. Exports started to face heat of global financial crisis since November 2008 and the contraction of world over demand has exacerbated export contraction.
The exports witnessed negative growth of 2.6 per cent, declining from $16.4 billion last year to $16.0 billion in July-April 2008-09. Imports registered a negative growth of 9.8 per cent in July-April 2009.
The imports stood at $26.77 billion as against $28.715 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 per cent of additional imports bill last year. Import compression measures coupled with massive fall in international oil prices have started paying dividends and imports witnessed marked slowdown during the last two months.
Trade Balance The merchandise trade deficit improved by 12.3 per cent and declined from $10.7 billion in July-April 2008-09 to $12.3 billion in July-April 2008-09. The substantial decrease of 9.8 per cent in imports outstripped otherwise significant decrease of 3.0 per cent in export growth, which caused the trade deficit to improve by 12.3 percent. Workers Remittances totaled $6.4 billion in July-April 2008-09 as against $5.3 billion in the comparable period of last year, depicting an increase of 19.5 per cent.
Deep recession in the US economy, which constitute close to one-third of Pakistan’s remittances started taking its toll and witnessed negative growth of 1.9 per cent.
The trend will be expected to continue in the months to come, however, overall outlook of remittances from other source countries is positive. Current Account Balance Pakistan’s current account deficit shrank by 23.5 per cent during July- April 2008-09. Current account deficit shrank to $8.5 billion as against $11.2 billion last year. In the month of February 2009, the current account witnessed a surplus which is a rare development in Pakistan economy. This was first monthly surplus since June 2007. It turned to deficit in March and April 2009.
Exchange rate after remaining stable for more than 4 years, lost significant value against the US dollar and depreciated by 21pc during MarchñDecember 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 compression and revival of external inflows from abroad in the coming months of the fiscal year, the exchange rate will remain stable at around Rs80-82 per dollar.
The overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 42.7 per cent and stood at $2.2 billion as against $3.9 billion in the comparable period of last year. Foreign direct investment (private) shown some resilience and stood at $3205.4 million during the first ten months (July-April) of the current fiscal year as against $3719.1 million in the same period last year thereby showing a decline of 13.8 per cent. If viewed in the massive fall in capital flows to emerging economies, even this decline in FDI seems to be reasonably good. Private portfolio investment on the other hand showed an outflow of $451.5 million as against an inflow of $98.9 million during the comparable period of last year. The hemorrhage to the foreign exchange reserves have been arrested in the post-November period and over $3 billion are added to the SBP reserves inspite of $500 million Eurobond payment in February 2009. Notwithstanding, improvement in the external sector outlook remain hostage to expected inflows in the last quarter.
Foreign Exchange Reserves declined substantially in the initial months of 2008-09 dropping from $11.4 billion at end-June 2008 to a low of $6.4 billion by November 25, 2008. This depletion of reserves in the five months (July-November 2008) was much higher than fall in forex reserves for the entire fiscal year 2007-08. The subsequent partial recovery since November 25, 2008 onward owed essentially to the inflow of $3.1 billion from the IMF following Pakistanís entry into a macroeconomic stabilization program.
The import coverage ratio declined to an uncomfortable level of 9.1 weeks as of end-October 2008 from 16.8 weeks of imports as of end-June 2008 but it improved to 18 weeks of imports by end-April 2009. The external debt & liabilities recovered in the third quarter and actually fell in absolute as well as relative terms between end-December 2008 and end-March 2009, mainly because of lower than anticipated net disbursements and positive translation impact of appreciation of dollar versus yen, SDR and euro.
External debt and liabilities (EDL) stood at US$50.1 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.
It implies that EDL grew both in absolute and relative terms during July-December period but witnessed some correction in the third quarter. Almost all categories of EDL barring Paris Club, Eurobond and military, have witnessed increase; however, highest increase in absolute term was recorded in debt stock owed to the IMF as a result of inflow of $3.1 billion on account of Stand by Arrangements (SBA) signed with the IMF in end- November 2008. On the liabilities side $500 million are added by Bank of China.
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