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Economic Survey of Pakistan 2010 to 2011

Economic Survey of Pakistan 2010 to 2011

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Economic Survey Of Pakistan 2010 To 2011
Economic Survey Of Pakistan 2010 To 2011

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Published by: Khawaja Naveed Haider on May 17, 2012
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07/09/2014

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i
Overview of the Economy
 
I
.
Introduction
The economy of Pakistan has been undergoing astabilization phase since the last three years. Therestoration of macroeconomic stability isimportant and necessary to provide the platformfor generating growth, jobs, and improving thequality of life of the people.This period has been marked by the continuing --and intensified --security challenges the countryhas confronted since 2001. In addition, thecountry faced multiple adverse shocks of commodity and oil prices and the fallout of theglobal financial crisis. The year under review sawthe unprecedented calamity of the great floods.These floods wiped out about 2 percentage pointsfrom the growth as well as inflicted a massivedamage of $10 billion on country’s economicstructure. Some 20 million people were displacedas more than 50,000 Sq. Km area was submergedin water. During the year oil prices also shot upfrom $70/barrel to $125/barrel creating a newthreat to the macro framework.Viewed in this background the growth rate of 2.4percent registered during the year 2010-11 seemsreasonable. Although much below its potential,the performance signifies the enormous resiliencein the economy as it was tested several times byone crisis after another beginning with theearthquake of 2005. With some reprieve andcontinuing effort, there is reason to believe thatthe country will revert to its potential growthtrajectory.The destruction of major crops, particularly riceand cotton, led to a negative growth of 4% in thissector. The manufacturing sector growth wasadversely affected --and was negligible --due toreduced output in the textiles and petroleumproducts (affected by submersion of refineriesunder flood waters and the circular debt problem).Inevitably, the overall quantum of economicactivities, captured by services sector was alsoaffected, with a growth of 4.1 percent, originallytargeted at 5.4%.The challenges posed by exogenous shocksaffected the pace of the reforms process as thegovernment was forced to make difficult trade-offs and cater to unexpected demands for floodrehabilitation and the impacts of increasing oilprices. The government, while pursuing a regimeof deregulation of pricing of key products wasnevertheless forced to intervene in the energy andcommodity markets to keep prices from gettingcompletely out of the reach of the public. Thisburden of subsidies, though significantly reducedfrom previous years, exerted continuing pressureon the fiscal system and the adjustment path wasaffected. In the second half of the year, due to acombination of austerity, resource mobilizationmeasures and bold decisions on pricing themacro-framework was stabilized and theanticipated damage to the overall fiscal positionwas avoided. However, more work will berequired to rebuild the reforms programs, and toremain engaged with the development partners.The most significant development during the yearwas the historic performance of the externalsector, which is heading to register a surplus in thecurrent account. First, exports registered a growthof 28 percent in the first 10 months of the yearcompared to same period last year. Crossing the$20 billion mark for the first time, exports are setto exceed $24 billion. Second, the remittanceshave also recorded a strong performance bycrossing the double digit mark and are set to reachthe historic level of more than $11.2 billion. Third--and this is partly attributable to moderateddemand for imports --the current account shows a
 
Economic Survey 2010-11iisurplus of nearly $748 million. Finally, thecombined effect of these positive developmentswas reflected in the growth of external reserveswhich also touched a historic high of $17.1 billionat the end of April, 2011.Pakistan has enjoyed sustained period of exchangerate stability since December 2008. The RealEffective Exchange Rate (REER) depictedunprecedented appreciation of 10 percent in 2009-10 and marginally appreciated in the first tenmonths of the current fiscal year. The SBP is notintervening in the foreign exchange markets andexchange rate is market determined.The situation regarding inflation remained a keyconcern for the economy. For most of last fiscalyear, inflation was coming down, but the shocksof floods and oil price have reversed the decliningtrends. It should be noted that with risingcommodity and oil prices, inflation has affectedall countries both regionally and globally.However, in the second half of the year, the risinginflationary trend has been stemmed and inflationis now hovering around 14 percent. With fiscalconsolidation and abetment of some pressuresfrom international prices, the inflation outlook looks better than in the earlier part of the year.Inflationary pressures inevitably brought pressureon the interest rate, and with much of the creditflowing in the government sector, private credit,despite some growth over the previous yearremained weak. With development resourcespreempted by unanticipated expenditures on floodrelief and power and petroleum subsidies, fiscaldiscipline required the government to reduce itspublic investment to a low level in many years.Accordingly, the overall investment in the yearwas also below its level in the recent past.The overall monetary survey indicated modestgrowth in monetary aggregates. The reservesmoney grew by 17.1 percent in the period July-May 21, 2010-11as against 13.6 percent growth inthe comparable period of last year on the back of strong growth of 73.1 percent in the NFA of theSBP. The NDA component grew steadily at 11.6percent in the period. Broad money expansionby11.7 percent in the period July-May 21, 2010-11 is mainly drive by phenomenal growth 57.3percent in the Net Foreign Assets (NFA) which isreflective of the positive developments in theexternal sector. The NDA of the banking systemhas expanded by 9.4 percent in the period. Thetight monetary policy stance adopted by SBP isreflected in the rise in the policy rate whichregistered an increase of 150 bases points sinceJuly 2010 in the increments of 50 bases points.The year was the first in the implementation of theNFC Award. The award represented a radicalbreak from the past as it transferred a larger shareof divisible poor revenues to the provinces. Anestimated additional amount of Rs.325 billion willbe transferred to the provinces compared to thelast year. Since many of the primary publicservices are provided by the provinces, greateravailability of resources will facilitate both theimprovement in quality as well as scale of suchservices. The passage of 18
th
ConstitutionalAmendment has led to the devolution of additional subjects to the provinces, especiallythose in the social sectors. It is hoped thatundivided responsibility of provinces in socialsectors and availability of enhanced resources willlead to much improvement the quality of socialsector indicators that have been lagging behind forsome time.Despite many challenges, the overall performanceof the economy has been moderately satisfactory.The recent measures announced for fiscalcorrection should contribute to a faster recoveryand resumption of growth. It was felt by someobservers, that the budget deficit --the keyindicator of economic stability--will reachunprecedented levels due to the difficultcircumstances. However, due to sound economicmanagement and fiscal discipline, the deficit hasbeen contained and is estimated at 5.3% of GDP.To settle the circular debt and get more productionout of the existing energy plants, the governmenthas decided to pay additional Rs. 120 billionsubsidies from for previous years. This will addan additional 0.6 percent to the deficit, bringing itto 5.9%. However, the outlook for the next yearlooks bright on this account as the year has fullyaccounted for the subsidies falling due during theyear and substantial correction in such burdens islikely to be made in the years ahead.
 
Overview of the EconomyiiiA brief review of the economic situation duringfirst three quarters and prospects for next quarteris given below:
 II.
 Real GDP Sectoral Growth:
The Real GDPgrowth is estimated to remain at around 2.4percent compared to the target of 4.5 percent. Theset back was due to the agriculture sector whichwas badly affected by floods. However, the strongperformance of services sector which grew at 4.1percent has kept the overall growth in areasonable range. The sector-wise estimates arediscussed in subsequent paragraphs:Agriculture sector recorded modest growth of 1.2percent in 2010-11 against the target of 3.8percent but provided much needed support toboost exports, revival of manufacturing sector andresponsible for upbeat in the consumption. Giventhe enormous price inducement, the agriculturesector is likely to spearhead economic growth inthe next fiscal year as well. The lower growthowing to recent floods necessitated downwardadjustments in the estimates of some of majorcrops like rice, and cotton. The rice cropproduction unexpectedly went down to 4.8 milliontons which will be lowest ever production since1994-95. The wheat production stood at 24.2million tons as against last year’s actualproduction of 23.8 million tons. The importantthing is better yield as area under cultivation fellby around 3 percent. Sugarcane is estimated at 55million tons which will be highest in the last threeyears. Minor crops are estimated at 4.1 percentmainly because of enormous price incentiveavailable and its shock resistant nature. Theestimate for growth in the livestock sector is 3.7percent as against 4.2 percent last year. Lowergrowth is because of the adverse impact of devastating flood destroying some of thelivestock. However, recent surge in prices of livestock products and incentives provided forlivestock may help in improving the valueaddition in the sector in the medium-term. Withchanging patterns of consumption, theconsumption of livestock products has increasedsignificantly. There are indications that priceincentive might work for more livestock growth.The
 fertilizer off-take
declined by 11.3 percent,thereby representing less usage by the farmers.One reason might be higher prices as urea pricessoared by 25.8 percent and DAP is expensive by46.5 percent in the first nine months of the currentfiscal year. Domestic production is up by 2.7percent but import of fertilizer is down by 50.4percent.
 Disbursement of credit for agriculture sector 
hasincreased marginally by 1.4 percent in July-March2010-11. This fall in disbursements is largely dueto substantial decline of 23.7 percent seen in onespecialized bank (ZTBL) which more than offsetthe 9.5 percent rise in disbursements made bycommercial banks. The sluggish creditperformance is partially contributed by risk-aversebehavior of commercial banks and weaker activityin the aftermath of floods.
 Large-scale manufacturing
remained victim of power outages and lower domestic demand.Slowdown in large-scale manufacturing fromearlier projected 4.9 percent to 1.7 percent (July-March 2010-11) reflects the impact of the severityof energy shortages and electricity tariff -hikeleading to cost escalation. The positive terms of trade shock has helped improve competitivenessfor textile sector in particular and otherconventional exports based small and mediummanufacturing sectors. We expect it to pick-up inmonths to come and improve growth performancefurther mainly because of capacity enhancementin some industries like fertilizer, and steel, andlikely improvement in the sugar production to 4.1million tons this year. The impact of thesepositive developments will feed into the growthduring the period January-June 2011. Notably, thebase effect will work adversely up to March 2011,and thereafter it may support growth momentum.
III. Inflation:
As noted earlier Inflation hasreared its head in the first half of the year andposed a challenge for economic management.Two price indices like CPI and SPI witnessed aclear downtrend in recent months; however, WPIremained on upward trajectory. The inflation rateas measured by the changes in Consumer PriceIndex (CPI) after reaching peak at 25.3 percent inAugust 2008, showing easing since November2008 with slight variations. However, followingmassive supply disruptions in the aftermath of devastating floods, food inflation became sole

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