Professional Documents
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PAKISTAN
During (2000-07)
KHALID KHAWAR
COURSE INSTRUCTOR
ECONOMICS
PREPARED BY:
SANAM KHAN
MINHAJ ALAM
Growth of Pakistan’s Economy:
According to the Asian Development Bank, the first half of FY2006 was
marked by a slowdown in both industry and agriculture in Pakistan.
Output of cotton declined by an estimated 10.9 per cent from an all-time
high of 14.6 million bales harvested in FY2005. Production of sugarcane,
another major summer crop, is also estimated lower than last year. The
growth of large-scale manufacturing slowed to 8.7 per cent in the first
quarter of FY2006 from 24.9 per cent in the same period of last year,
primarily due to capacity constraints and the high-base effect. Among
individual industries in the first quarter, growth of textiles tumbled to
7.2 per cent from 29.6 per cent year on year. Automobile assembly and
electronics, which have shown the fastest expansion among sub-sectors
in the last 2-3 years, also decelerated. Inflation accelerated in FY2005
after five years of price stability. Annual inflation, based on the
consumer price index, more than doubled to 9.3 per cent from 4.6 per
cent, mainly because of higher food prices and rising house rents. Due to
a sharp increase in domestic oil prices, transport costs also jumped. Core
-- nonfood, non-oil -- inflation also doubled, from 3.7 per cent to 7.4 per
cent.
NATIONAL INVESTMENT:
Foreign direct investment in the economy more than doubled for FY06
reaching as high as US$ 3.5 billion which suggests the improved
macroeconomic fundamentals and relative policy stability of the
economy is attracting investor interest. The sustained high pace of
growth in the economy is also reflected in a record level of investment
during FY07.The total investment to GDP ratio rose to a record level of
23 percent in FY07, significantly higher than 21.7 percent seen in the
preceding year as well as the annual target of 21.5 percent. In real terms,
total investment witnessed a growth of 20.6 percent, the highest-ever
growth recorded for Pakistan.
NATIONAL SAVING:
As a result, the national savings to GDP ratio dropped slightly (by 0.1
percentage points) to 16.4 percent during FY06, the lowest level since
FY01. During FY07, national savings rose sharply by 19.8 percent,
raising its share in GDP to 18 percent, the highest in the last four years.
It should be noted that the despite a rise in FY07, Pakistan’s savings to
GDP ratio remains quite low relative to other emerging economies. To
maintain the growth momentum, there is a need of investment flows in
the economy without putting pressures on external balances. This is only
possible by a rise in savings in the economy.
Chickpea (2nd), Apricot (4th), Cotton (4th), Sugarcane (4th), Milk (5th),
Onion (5th) Date Palm (6th), Mango (7th), Tangerines, mandarin
orange, Clementine (8th), Rice (8th) Wheat (9th), Oranges (10th)
Pakistan's principal natural resources are arable land and water. About
25% of Pakistan's total land area is under cultivation and is watered by
one of the largest irrigation systems in the world. Pakistan irrigates three
times more acres than Russia. Agriculture accounts for about 23% of
GDP and employs about 44% of the labor force. The decline in the FY06
production of sugarcane and cotton, together with the modest (below
target) growth in wheat was the principal reason for the net 3.6 percent
decline in the value addition by major crops, in sharp contrast to the
17.8 percent growth in the preceding year.
The 1.6 percent growth by minor crops during FY06 was lower than the
3.0 percent rise in output seen during FY05 and consequently the
aggregate production of the crops sub-sector fell by 2.3 percent in FY06,
compared to the growth of 13.7 percent in FY05. Thus, the aggregate
growth in agriculture during FY06 was contributed almost entirely by
the exceptionally strong growth recorded by the livestock sub-sector,
handsomely rewarding the increased policy focus in the area in recent
years. The 8.0 percent growth recorded by the sub-sector in the period is
strongest for the last decade; substantially outstripping the 2.3 percent
growth seen in FY05.Agricultural growth witnessed a recovery in FY07.
Livestock:
The leading daily newspaper Jang reports that the national herd consists
of 24.2 million cattle, 26.3 million buffaloes, 24.9 million sheep, 56.7
million goats and 0.8 million camels. In addition to these there is a
vibrant poultry sector in the country with more than 530 million birds
produced annually. These animals produce 29.472 million tons of milk
(making Pakistan the 5th largest producer of milk in the world), 1.115
million tons of beef, 0.740 million tons of mutton, 0.416 million tons of
poultry meat, 8.528 billion eggs, 40.2 thousand tons of wool, 21.5
thousand tons of hair and 51.2 million skins and hides.
Industry:
Government policies
aim to diversify the
country's industrial
base and bolster
export industries. The
provisional number for
FY06 indicates that
industrial growth
stood at 5.9 percent
Yo, substantially lower
than the 11.4 percent
Yo growth recorded
during the preceding
year. However, the
industrial growth
estimates based on full
year data is expected to be a little higher than the provisional number. In
particular, 9.0 percent growth in large-scale manufacturing (LSM) could
reach 10.7
Within the industrial sector, the highest growth was observed in the
construction sub-sector with value-addition rising by 17.2 percent in
FY07, compared with only 5.7 percent in FY06. The FY07 growth is not
only higher than the 7.0 percent target, it is also the second highest
growth recorded by this sub-sector since FY07Mining & quarrying
sector witnessed 5.6 percent Yo growth during FY07 LSM growth
remained a significant contributor to GDP growth during FY07 with
value-addition rising by 8.8 percent, down from the 10.7 percent growth
in the preceding year.
Construction:
Major reserves of copper and gold in Balochistan Recedes area have been
discovered in early 2006. The Recedes mining area has proven estimated
reserves of 2 billion tons of copper and 20 million ounces of gold.
According to the current market price, the value of the deposits has been
estimated at about $65 billion, which would generate thousands of jobs.
The discovery has ranked Recedes among the world's top seven copper
reserves. The Recedes project is estimated to produce 200,000 tons of
copper and 400,000 ounces of gold per year, at an estimated value of
$1.25 billion at current market prices. The copper and gold are currently
traded at about $5,000 per ton and $600 per ounce respectively in the
international market.
North West Frontier Province accounts for at least 78% of the marble
production in Pakistan. The Federal Bureau of Statistics provisionally
valued this sector at Rs.211,851 million in 2005 thus registering over
99% growth since 2000.
Services Sector:
The cellular base in Pakistan is growing at around 14% per year and
already the cellular customer has out passed the fixed line customers.
Wireless revolution has swept Pakistan, and the competitions among the
mobile operators are pulling the prices down. It’s as cheap as Rs.2 to call
to USA per minutes (that is 3-4 cents per minutes). Sony Ericsson, Nokia
and Motorola along with Samsung and LG remains to be the popular
brands among customers. Though Nokia has a strong market
presence[citation needed], which has been somewhat taken over by Sony
Ericsson, through aggressive marketing and advertisement.[citation
needed]
A private sector airline in Pakistan includes Air blue, Aero Asia and
Shaheen Air International. Many private airlines are in pipeline which
includes Air Mahreq, Dewan Air and Pearl Air.
Air blue is using the state of the art A-320 and A-321 aircraft for flying
across Pakistan and will soon commence UK operation. Air blue has
recently ordered 6 New A-321 aircraft, while 2 aircraft will be taken on
lease which will be added to the existing fleet of 4-5 aircraft, making it
the second biggest fleet behind PIA which has 42 aircraft.
The Government of Pakistan has, over the last few years, granted
numerous incentives to technology companies wishing to do business in
Pakistan. Pakistan saw an increase in IT export cash inflows of 50% from
2003-4 to 2004-5, with total export cash inflows standing at $48.5
million. In 2005-6 export cash inflows increased to greater than $73
million. This year the government has set a goal of $108 million. Exports
account for 11% of the total revenues of the IT sector in Pakistan.
Compared to India, Pakistan's IT sector is relatively small, but recent
growth has been extremely high leading economists to be optimistic
about the IT industries future prospects in Pakistan.
Paging and mobile (cellular) telephone were adopted early and freely.
Cellular phones and the Internet were adopted through a rather laissez-
faire policy with a proliferation of private service providers that led to
fast adoption. Both have taken off and in the last few years of the 1990s
and first few years of the 2000s. With a rapid increase in the number of
internet users and ISPs, and a large English-speaking population,
Pakistani society has seen major changes.
PRICES:
The record low inflation rates realized in FY00 could not be sustained.
As of end-June 2001, the annualized average CPI inflation had risen
from 3.6 percent last year to 4.4 percent. The sharpest increase was
posted in WPI, which increased from 1.8 percent last year to 6.2 percent
in FY01. This increase was driven by retail petroleum prices, utility
charges, the depreciation of the Rupee and pre-emptive steps taken by
After bottoming out at all-time low of 1.4 percent in July 2003, marginal
(YoY) CPI inflation witnessed a steep rise through most of FY04 to close
at 8.5 percent, taking the average CPI inflation for the year to 4.6
percent. The CPI food inflation witnessed a sharp rise of 13.4 percent
(YoY) in June 2004 as compared to a quite subdued 0.9 percent in June
2003, taking annualized food inflation to 6.0 percent for FY04. On the
other hand, CPI non-food sub-group witnessed a YoY increase of 5.3
percent in June 2004, while annualized non-food inflation recorded a
rise of 3.6 percent in FY04. In H2-FY05 however, the influence of these
INFLATION
Looking ahead, the federal budget FY07 has taken various measures to
increase the tax-to-GDP ratio and broadening of the tax base (for
example, by subjecting certain financial services to the sales tax and
federal excise duty, and the marginal increase in the CVT on capital
gains).
Foreign Trade and Exchange Rate:
Past external imbalances left Pakistan with a large foreign debt burden.
Principal and interest payments in FY 1998-99 totaled $2.6 billion, more
than double the amount paid in FY 1989-90. Annual debt service peaked
at over 34% of export earnings before declining.
In the late 1990s Pakistan received about $2.5 billion per year in
loan/grant assistance from international financial institutions (e.g., the
IMF, the World Bank, and the Asian Development Bank) and bilateral
donors. All new U.S. economic assistance to Pakistan was suspended
after October 1990, and additional sanctions were imposed after
Pakistan's May 1998 nuclear weapons tests. The sanctions were lifted by
President George W. Bush after Pakistani president Musharraf allied
Pakistan with the U.S. in its war on terror. The government is also
reducing tariff barriers with bilateral and multilateral agreements.
While the country has a current account surplus and both imports and
exports have grown rapidly in recent years, it still has a large
merchandise-trade deficit. The budget deficit in fiscal year 2004-2005
was 3.4% of GDP. The budget deficit in fiscal year 2005-06 is expected to
be over 4% of GDP. Economists believe that the soaring trade deficit
would have an adverse impact on Pakistani rupee by depreciating its
value against dollar (1 US $ = 60 Rupees (March 2006) ) and other
currencies.
One of the main reasons that contributed to the increase in trade deficit
is the increased imports of earthquake relief related items, especially
tents, tarpaulin and plastic sheets to provide temporary shelter to the
survivors of earthquake of October 8, 2005 in Azad Jammu and Kashmir
and parts of the NWFP, an official said. The rise in the trade gap was also
fuelled by high oil import prices, food items, machinery and
automobiles.
The Petroleum Ministry says that this year, the bill of oil imports was
expected to reach $6.5 billion against $4.6 billion in the last fiscal year,
which is the main reason behind the all-time high trade deficit.
The EU is the single largest trading partner of Pakistan absorbing over
one-third of the exports in 2003.Pakistan’s trade deficit almost doubled
to US$ 12.1 billion during FY06 relative to the FY05 level. The
exceptionally high deficit was the outcome of higher increase of 38.8
percent in imports as compared to a moderate increase of 14.4 percent in
exports during the period. Specifically, while import of machinery and
raw material together contributed almost 42 percent in the additional
import bill, oil imports alone accounted for 33.5 percent or one third of
the rise in imports (of which, around 87 percent was due to rise in the oil
prices).imports growth slowed to 27.8 percent in the latter half of FY06
from 53.1 percent during the first half of the year. With oil prices
declining substantially in recent months, and aggregate demand being
constrained by the tight monetary policy, it is hoped that import growth
will decelerate significantly in FY07.
Exports:
Imports:
Country’s total stock of debt and liabilities (TDL) rose by 10 percent YoY
in FY07 to reach Rs 5,023.6 billion. The major causative factors for this
increase in TDL were the rising level of country’s current account deficit
and a large fiscal deficit that raised the financing needs of the country.
Encouragingly, despite this increase in the TDL stock, the ratio of total
debt & liabilities to GDP continued to decline which shows country’s
improved debt servicing potential. The TDL to GDP ratio for FY07
remained significantly below the target of 60 percent set for the country
in the “Fiscal Responsibility and Debt Limitation Act 2005” to be
achieved in FY13. Pakistan’s domestic debt stock increased sharply
during FY07, registering a growth of 11.9 percent – much higher than the
average growth of 7.7 percent during the preceding four year. Share of
short term debt continued to rise and reached 43 percent during FY07.
Pakistan’s external debt and liabilities (EDL) rose to US$ 40.1 billion
during FY07, representing a US$ 2.9 billion increase over the stock in
FY06. Pakistan also witnessed an improvement in the maturity profile of
its external debt stock in FY07.
Capital Markets:
For the first time in its history, Pakistan was able to show a current
account surplus this year. However, this did not create easier conditions
in the foreign exchange markets, as the Rupee experienced tremendous
pressure during the course of the year. The current account deficits for
FY00 and FY01 were US$ 2,641 and US$ 2,509 million, respectively.
Despite this marginal narrowing of the external gap, there was a great
deal of pressure on the foreign exchange market; the main reason was
the IMF stabilization program that was in place. Although, the current
account has been steadily improving over the last three years amid
higher kerb purchases, FY02 surplus of US$ 2.7 billion is the first that is
broad-based – all the sub-categories contributed to the out-turn.
The country witnessed highest ever current account deficit of US$ 5.0
billion during FY06 as compared to deficit of US$ 1.5 billion in the
previous year. The expansion in the trade deficit was primarily due to a
significant 31.3 percent YoY growth in imports that outpaced the 14
percent growth in exports. The exceptional import growth and
accompanying rise in services account payments contributed to a sharp
widening of the country’s current account deficit, from a relatively
manageable 1.4 percent of GDP in FY05, to a more threatening 4 percent
of the GDP in FY06. This is the fifth successive year that the debt to GDP
ratio has improved. More significantly, this is the first time in more than
two decades that the ratio has fallen below 60 percent. Pakistan’s
external account surplus improved substantially to US$ 3.7 billion
during FY07 as compared to US$ 1.3 billion in FY06. However, the
impact of lower import growth (8.1 percent)6 in FY07 on the trade deficit
was lost due to the unanticipated weakness in exports. Export growth fell
from 14.3 percent in FY06 to only 3.2 percent in FY07. Pakistan’s
domestic debt stock increased sharply during FY07, registering a growth
of 11.9 percent – much higher than the average growth of 7.7 percent
during the preceding four year. The share of short term debt continued
to rise and reached 43 percent during FY07. An important feature for
FY07 is the sharp rise of 57.1 percent in interest payments on domestic
debt.