SBP Annual Report 2016-17 (State of Economy)

Contents
Chapters
1. Economic Review
1.1 Overview 1
1.2 Assessment of FY17 3
1.3 Outlook for FY18 8
2. Economic Growth
2.1 Overview 11
2.2 Agriculture 14
2.3 Industry 18
2.4 Services 27
3. Monetary Policy and Inflation

3.1 Policy Review 33
3.2 Developments in Monetary Aggregates 35
3.3 Credit to Private Sector 40
3.4 Inflation 44
4. Fiscal Policy
4.1 Overview 47
4.2 Revenue 48
4.3 Expenditure 54
4.4 Provincial Fiscal Operations 55
5. Domestic and External Debt

5.1 Overview 61
5.2 Domestic Debt 62
5.3 External Debt and Liabilities 66
5.4 External Debt Sustainability 68
6. External Sector
6.1 Global Economic Review 69
6.2 Pakistans BoP 71
6.3 Current Account 73
6.4 Financial Account 77
6.5 Trade Account 81
7. Water Sustainability in Pakistan- Key Issues and Challenges

7.1 Overview 93
7.2 Current Situation 93
7.3 Issues in Water Management 95
7.4 Climate Change - a Major Emerging Challenge for Water Sustainability 101
7.5 Need for Policy Reforms 103
Special Sections
Special Section 1: Impact Analysis of Withholding Taxes on Cash Withdrawal and Banking
Transactions 105
Special Section 2: Managing Contingent Liabilities in Pakistan 109
Annexure A: Data Explanatory Notes 113
List of Acronyms 115
Box Items
Box 2.1: Industrial Growth in Pakistan the Role of Liberalization Policy 12

Box 2.2: Why is the Leather Industry Underperforming? 26
Box 2.3: How to Make Services Exportable? 29
Box 4.1: Key Tax Incentives Provided in FY17 48
Box 4.2: Putting the Low Tax-to-GDP Ratio in Perspective 49
Box 4.3: POL Pricing and Sales Tax Collection 52
Box 4.4: Provincial Revenue Mobilization in the Context of 18th Amendment 58
Box 6.1: CPEC Activity Pushes up Machinery, Transport Imports 74
Box 6.2: Portfolio Outflows Amid Rising PSX during FY16 and FY17 80
Box 6.3: The Recovery in EM Exports the Key Driving Factors and Outlook 83
Box 7.1: Water Availability A Regional Comparison 94
Acknowledgment
Analysts:
Chapters:
1. Economic Review Fida Hussain
2. Economic Growth Syed Sajid Ali; Javed Iqbal; Khurram
Ashfaq Baloch; Ahmad Mobeen
3. Monetary Policy and Inflation Asma Khalid; Umer Baloch; Amjad
Ali; Talha Nadeem; Umar Mashood
4. Fiscal Policy Fida Hussain; Dr. Muhammad Omer;
Imtiaz Hussain; Hira Ghaffar
5. Domestic and External Debt Fida Hussain; Muhammad Idrees
6. External Sector Asma Khalid; Syed Ali Raza Mehdi;
Naila Iram; Junaid Kamal; Ruman
Younis
7. Water Sustainability in Pakistan Key Syed Sajid Ali; Khurram Ashfaq
Issues and Challenges Baloch; Saher Masood
Special Sections:
1. Impact Analysis of Withholding Taxes on Dr. Muhammad Omer
Cash Withdrawal and Banking Transaction
2. Managing Contingent Liabilities in Pakistan Muhammad Idrees
Formatting: Muhammad Idrees; Hira Ghaffar
Publication Managers: Fida Hussain

Director: Dr. Omar Farooq Saqib
Publication Review Committees:
PRC of the Management Dr. Saeed Ahmed (Chairman); Inayat Hussain; Syed Irfan Ali;
Muhammad Ali Malik; Syed Samar Husnain; Ali Choudhary;
Muhammad Javaid Ismail; Dr. M. Farooq Arby; and
Dr. Omar Farooq Saqib
PRC of the Board Ardeshir Khursheed Marker (Chairman); and
Mohammad Riaz
The feedback from Research, Monetary Policy and Statistics & Data Warehouse Departments;
and logistic supports by Office of the Corporate Secretary, and External Relations Department
are also appreciated.
For feedback and queries: annual.report@sbp.org.pk
1 Economic Review
1.1 Overview
The pace of expansion in the economy continued to accelerate in FY17 as well. The real GDP growth in
FY17 was the highest during the last ten years. It was led by a rebound in agriculture and a broad-based
increase in value addition by services sector (Table 1.1). Within industry, major support came from
improvement in manufacturing and construction activity. From the demand side, the major contribution
came from a surge in domestic consumption followed by a moderate increase in investment.
Favorable macroeconomic policies continued to Table 1.1: Selected Macroeconomic Indicators

support expansion in the economy. The impetus to
FY17
economic activity particularly came from an FY14 FY15 FY16
Target ActualP
accommodative monetary policy and the
percent growth
consequent increase in private sector credit,
Real GDP1 4.1 4.1 4.5 5.7 5.3
especially for fixed investment; recovery in farm
Agriculture 2.5 2.1 0.3 3.5 3.5
incomes; a steady increase in development
Industry 4.5 5.2 5.8 7.7 5.0
spending; and, continuing work on infrastructure
and energy projects under CPEC. Services 4.5 4.4 5.5 5.7 6.0
CPI inflation1 8.6 4.5 2.9 6.0 4.2
The real economic activity also benefitted from tax percent of GDP
incentives provided by the government during the Current account balance 2 -1.3 -1.0 -1.7 -1.0 -4.0
last two years to support exporting industries, Fiscal balance3 -5.5 -5.3 -4.6 -3.8 -5.8
agriculture and private investment.1 These fiscal Gross public debt3 63.5 63.3 67.6 61.4 67.2
measures, nevertheless, have led to an increase in P: Provisional
Data sources: 1 Pakistan Bureau of Statistics; 2 State Bank of Pakistan;
budget deficit in FY17. 3
Ministry of Finance.
One of the outcomes of an expanding economy was the surge in imports, which together with a decline in
exports and remittances resulted in a widening of the current account deficit. While an increase in capital
and raw material imports bodes well for the future productive capacity of the economy, the persistent
increase in imports for consumption purposes remains a source of concern. These trends have led to
increased reliance on external borrowings and pressure on foreign exchange reserves.
The impact of the increase in domestic demand (as reflected by widening of the twin deficits) on inflation
was somewhat balanced by a limited pass-through of the increase in international commodity prices,
sufficient stocks of key food items (wheat, sugar, and rice), and a stable exchange rate. Therefore, though
inflation trended upward, it continued to be well anchored and remained lower than the target for the third
consecutive year in FY17. The increase in inflation during FY17 was largely due to higher food inflation,
especially increase in prices of perishable food items on account of disruptions in supply chain in the
initial months of the year.
With this background, the report highlights four major challenges that need to be addressed to sustain
expansion in the economy with low and stable inflation: switching away from consumption-led to
investment-cum-export oriented growth; reducing current account deficit to manageable levels;
1
For instance, reduction in duties on import of machinery, lower sale tax on fertilizer, tax credit for investment and employment
generation, and zero-rating facility for export-oriented industries. See Box 4.1 for more details.
State Bank of Pakistan Annual Report 2016-17
alleviating credit constraints for SMEs; and, enlarging the resource envelope and creating the fiscal space
required to fund infrastructure and social development projects.
The share of consumption in Pakistans GDP has increased to nearly 94 percent in FY17, up from around
90 percent during the last 10 years.2 On the other hand, despite a substantial increase in import of
machinery and credit for fixed investment during the last couple of years, the investment-to-GDP ratio
has edged up only slightly. Given the favorable policy environment as well as improved security
situation and reduced energy constraint, further improvement in ease of doing business can help stimulate
strong recovery in private investment.
Though Pakistan has made some progress in ease of doing business in 2017, yet it ranks low amongst the
regional peers that underscores the need to introduce reforms in this regard.3 This is crucial for enhancing
productivity and efficiency in the economy to enable domestic producers to compete both on domestic
and international fronts. At the same time, there is also a need to review the industrial policies which are
currently characterized by semi-liberalized, non-uniform, and escalating tariff structure.4 This has not
only diverted export orientation of the industrial sector but also made it import dependent by hindering
the formation of strong backward linkages in the economy.
Besides further reducing the cost of doing business, Pakistan also needs to expand the export base. In
addition to changes in textile production mix in line with changing world demand pattern5, another
avenue could be by exploiting the export potential of the services sector the largest sector of the
economy. Drawing from the experiences of leaders in global services exports, like Philippines and India,
Pakistan has the potential in exports of ICT related and Business Process Outsourcing services. This is
also worth noting that Pakistan has comparative advantage over regional peers in terms of lower labor
costs and large young, English-speaking talent pool. But this will require policy support for the
development of business skills and linkages with the global market.6
Moreover, the private sector also needs to venture in export of agriculture and dairy products by
generating exportable surplus through enhanced crop yields and reduced cost of production by
encouraging corporate farming. In this regard, the importance of managing water resources and their
efficient utilization in agriculture using latest technologies (like drip irrigation system) can hardly be
overemphasized. In fact, this has become extremely important as the gap between slowly falling water
supply and growing demand especially due to rising population and urbanization has been increasing
steadily.
In addition to increasing the foreign exchange receipts by stimulating exports, there is a need to contain
import of unnecessary and luxury items, meant for consumption, in order to reduce trade deficit and
narrow the current account deficit. As government aims to achieve higher GDP growth in FY18 and
given increased dependence on imported machinery and raw material, the import growth may continue to
2
The share of household consumption increased to 81.8 percent of GDP in FY17, from the average of 80.4 percent during the
last 10 years.
3
The World Banks Ease of Doing Business Report (2017) shows that Pakistans rank improved to 144 in 2017 from 148 in
2016. In regional comparison, Pakistan fares better in terms of resolving solvency (ranks 2 nd among the 8 south Asian countries),
and access to credit (ranked 3rd). However, there is a need for improvement under the heads of starting business, getting
electricity, dealing with construction, paying taxes, and trading across borders.
4
See Box 2.1 for details.
5
See Special Section 3, State Bank of Pakistan Annual Report 2014-15.
6
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Economic Review
remain high. In this context, Pakistan should discourage unnecessary imports to finance those of capital
goods and essential raw materials to strengthen recovery in investment.
Moreover, easing constraints in access to finance in underserved sectors like SMEs and agriculture may
also help in boosting exports and reducing dependence on imports. In particular, the share of SMEs in
total private sector credit has fallen to 5.9 percent during FY17 from around 15.0 percent in FY08. Such
a low exposure of banks to SMEs is despite the fact that these enterprises contribute 30 percent to GDP,
25 percent to exports of manufactured goods, and 35 percent to manufacturing value added. On its part,
SBP has been actively involved in the promotion of SME finance by providing commercial banks strong
regulatory support as well as incentives like refinancing and risk-sharing against SME loans. Currently,
SBP is looking to significantly enhance the share of SMEs in overall bank credit. In this regard, SBP is
working on a roadmap to explore issues and identify the constraints, from both the SME and banks sides.
Regarding revenue generation, the reforms already initiated at the federal level need to be deepened
further, particularly aimed at improving tax administration and broadening the tax net. In addition, the
provinces also need to step up efforts to enhance their own revenue collection.7 This is particularly
important in the context of fiscal decentralization and devolution plan. As provinces get a major share
from tax collection under the 7th NFC Award, this does not leave enough resources with the federal
government to meet debt servicing and defense needs. Therefore, the provinces were expected to
generate surplus by enhancing their own tax collection especially from sales tax on services and income
from real estate and agriculture and thus help keep fiscal deficit at manageable level.
1.2 Assessment of FY17
Real sector
The real GDP growth maintained its upward trajectory, expanding by 5.3 percent during FY17 as
compared to 4.5 percent in FY16. Though the target of 5.7 percent for FY17 was missed, the growth was
the highest recorded during the last decade. All the favorable factors including record low interest rate,
increase in development spending, work on various projects under CPEC gaining further traction,
improving security situation and easing energy supply continued to support expansion in real economic
activity.
The growth was not only the highest during the last decade but also broad-based. The major thrust,
nevertheless, came from the agriculture sector which recorded 3.5 percent growth during FY17 against a
marginal increase of 0.3 percent in FY16. This rebound was enabled by an impressive recovery in the
production of important crops, which grew by 4.1 percent after recording a sharp decline of 5.5 percent in
FY16. The turnaround in crop production was supported by increased access to finance and favorable
government policies, especially the incentives announced under the Kissan Package and continued
support prices for sugarcane and wheat. Livestock, the largest sub-sector that accounts for half of the
value addition by agriculture sector, remained consistent in its contribution with 3.4 percent growth
during FY17, the same as in FY16.
Despite improved performance of Large-scale Manufacturing (LSM) and steady construction activity, the
pace of increase in industrial value addition slowed down slightly compared to last year. It grew by 5.0
percent during FY17 compared to 5.8 percent in FY16 and slower than the 7.7 percent target set for the
year. This was mainly because mining and quarrying and electricity generation and distribution and gas
7
3
distribution could not maintain their last year performance. LSM grew by 5.7 percent during FY17, up
from 3.1 percent last year.8 Significant contribution came from a record increase in sugar production,
accounting for almost half of the LSM growth during FY17. The construction-allied and consumer
durable industries, such as automobile, steel, cement, chemical, etc. particularly benefiting from low
interest rate, increase in development spending, and work on CPEC projects also continued to lend
support to LSM growth.
The services sector maintained its growth momentum, growing by 6.0 percent as compared to 5.5 percent
in last year. With this, the share of services sector steadily increased to almost 60 percent in real GDP. In
line with the recovery in agriculture as well as improved manufacturing activity and rise in trade, the
major contribution to services came from wholesale and retail trade. The other sub-sectors also pushed
their contribution by 0.1 percentage points each to overall services growth. In case of finance and
insurance, a significant increase in banking sector credit as well as deposits contributed to the higher
growth; whereas an increase in teledensity, broadband and 3G/4G mobile internet subscriptions supported
the higher contribution from the transport, storage, and communication sub-sector.
From the expenditures side, the major impetus to growth came from domestic consumption, which grew
by 8.9 percent (and accounted for 94 percent of nominal GDP). Despite a significant increase in import
of machinery and private sector credit (especially for fixed investment) in FY17, the investment as
percent of GDP (in nominal terms) increased only marginally to 15.8 percent from 15.6 percent in FY16.
This uptick was primarily due to an increase in public investment as private investment (as percent of
GDP) declined in FY17. The contribution from net exports also remained negative. These developments
may add to the challenges in sustaining higher growth in future.
Monetary policy and inflation

With a view to consolidate gains from reduction in the policy rate, and striking a balance between
inflation (remaining below the target) and emerging pressures on external accounts, the Monetary Policy
Committee decided to keep the policy rate unchanged at 5.75 percent during FY17. The lagged
transmission and easing liquidity conditions led to a decline in the weighted average lending rate
(incremental) by 57 basis points on average during FY17 to 7.2 percent.
The low interest rate environment, easing energy constraints, improving business confidence, and steady
progress on power and infrastructure projects under CPEC, resulted in an unprecedented expansion of
Rs747.9 billion in private sector credit during FY17. More importantly, a little more than one third of this
credit expansion was meant for fixed investment purposes. A large portion of fixed loans was availed by
textiles under the redefined Long-term Financing Facility (LTFF) for Balancing Modernization and
Replacement (BMR). Sugar and fertilizer industries also borrowed long-term for setting up captive
power plants, while the cement industry borrowed for capacity expansion in view of growing domestic
demand.
Notwithstanding the switch from scheduled banks to SBP, the governments budgetary borrowing from
the banking system was considerably higher during FY17 at Rs 1,045.8 billion (on cash basis) compared
with Rs 791.3 billion in FY16. Moreover, Public Sector Enterprise (PSEs) also borrowed aggressively:
Rs 254.9 billion during FY17against the average borrowing of Rs 72 billion recorded during the last four
8
In provisional National Income Accounts, PBS used estimate of 4.9 percent for LSM growth for arriving at provisional GDP
estimates for FY17.
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Economic Review
years. The bulk of this borrowing was meant for financing of energy-related projects including LNG
pipelines, Dasu dam and the Neelum-Jhelum power project.
All these factors i.e. private sector credit, government borrowing for budgetary support and PSE
borrowing led to a considerable expansion of Rs 2161.5 billion in Net Domestic Assets (NDA) of the
banking system during FY17 compared to Rs 1347.9 billion observed in FY16. SBPs NDA, in
particular, expanded by 37.4 percent during FY17 due to governments increased recourse to SBP
borrowings. Most of the expansion in NDA, however, was offset by a sharp contraction (Rs 405.2
billion) in Net Foreign Assets (NFA) of the banking system. As a result, reserve money expanded at a
slightly lower rate of 22.5 percent during FY17, compared to 26.5 percent last year.
This deterioration from the asset side notwithstanding, the growth in broad money (M2) during FY17 was
same as in FY16 (13.7 percent). The composition of money supply from the liability side, however,
improved considerably. The growth in currency in circulation decelerated to 17.3 percent during FY17
from 30.5 percent increase in FY16. On the other hand, total banking system deposits expanded by 12.4
percent during FY17 against, an 8.7 percent increase recorded in FY16.
While inflation remained lower than the target for the third consecutive year, it trended upward. The
average CPI inflation rose to 4.2 percent during FY17 compared to 2.9 percent in FY16. The increase in
inflation during FY17 was fairly broad-based as the number of items recording: (i) an increase in prices of
more than 5 percent rose to 147 in FY17 from 135 in FY16; (ii) a moderate increase between 0 and 5
percent was 272 in FY17 against 248 in FY16; and (iii) a decline in prices was only 68 in FY17 against
104 in FY16.
Higher inflation in FY17 was an outcome of both an increase in domestic demand and temporary issues in
the supply chain which led to higher food inflation. The pick-up in domestic demand was particularly
reflected in gradually rising core inflation: the NFNE rose by 5.2 percent in FY17 compared to 4.2
percent in FY16. The increase in food inflation was largely due to higher prices of perishable food items
in the beginning of FY17. Some disruptions in border trade with Afghanistan and India affected domestic
prices of fruits and vegetables. Yet, stable exchange rate and a decline in energy prices (despite an
increase in international oil prices) helped to contain inflation well below the target of 6.0 percent.
Fiscal policy
The fiscal deficit rose to 5.8 percent of GDP during FY17 against the target of 3.8 percent, and 4.6
percent in FY16. A large primary deficit, 1.6 percent of GDP the highest during the last four years
indicates that expenditures other than interest payments have increased. As the revenue deficit, 0.8
percent of GDP during FY17, was same as in FY16, this indicates that current expenditures were
managed in line with revenue generation. Together, these reflect a considerable increase in development
expenditure, which has been spearheading improvement in real economic activity for the last couple of
years.
The higher deficit in FY17 was, nevertheless, due to slower growth in revenue collection as well as a
sharp increase in total expenditure. The revenue collection grew by 11.0 percent during FY17, down
from 13.1 percent in FY16. This was despite a sharp recovery in non-tax revenue. Bolstered by a
considerable increase in mark-up income (on lending to PSEs), proceeds from sale of stakes in the
Pakistan Security Printing Corporation and two LNG power plants (acquired under the Pakistan
5
Development Fund), non-tax revenue grew by 23.0 percent in FY17 against a 13.9 percent decline
recorded in FY16.
On the other hand, the pace of tax collection slowed down considerably to 8.4 percent, from 21.3 percent
growth recorded in FY16. Also, this slowdown was broad-based as the growth of FBR and provincial
taxes decelerated. Within FBR taxes, the growth in direct and indirect tax collection decelerated to 10.3
percent and 6.5 percent during FY17 from their respective growth rates of 17.8 percent and 21.8 percent
in FY16. The slower growth in tax collection was partly a consequence of tax incentives provided to
support exporting industries, agriculture and investment in the economy. It is also worth highlighting that
growth in tax collection fell below 9.5 percent growth in the nominal GDP. As a result, the tax to GDP
ratio declined to 12.5 percent after rising consistently to 12.6 percent by FY16 from the low of 9.3 percent
in FY10. The tax to GDP ratio in FY17 was also significantly lower compared to 12.9 percent target for
the year.
In contrast to the slowdown in revenue collection, expenditures grew sharply. The total federal and
provincial expenditures jumped by 17.3 percent during FY17 compared with 7.6 percent increase in
FY16. While growth in expenditures was broad-based, development expenditures grew much sharply by
30.1 percent during FY17, on top of the 16.9 percent growth recorded in FY16. Most of the expansion in
development spending was concentrated in Q4-FY17 when provinces accelerated their spending in a bid
to complete the work on the social and development projects. The total provincial expenditures increased
by almost Rs1.0 trillion in Q4-FY17, about 40 percent of the total provincial expenditure during the year.
The resulting higher financing requirement was largely met through bank borrowing, with increased
recourse to SBP borrowing. Besides, financing from external sources also remained sizeable, most of
which was mobilized towards the end of the fiscal year.
Domestic and external debt

During FY17, the increase in the fiscal and current account deficit created pressure on public debt
accumulation. Yet the pace of debt accumulation was moderate during FY17 due to revaluation gains of
US$ 822.4 million (due to appreciation of US Dollar against major currencies Chapter 6). In particular,
the pace of increase in public debt was lower as compared to the growth in nominal GDP. As a result, the
gross public-debt-to-GDP ratio improved to 67.2 percent by end-June 2017 from 67.6 percent as of end-
June 2016. Within the gross public debt, government debt-to-GDP ratio increased slightly to 61.6 by end-
June 2017 from 61.2 percent as of end-June 2016.9 Nonetheless, it was still higher than the 60 percent
ceiling set for FY18 under the Fiscal Responsibility and Debt Limitation Act, 2005.
Although gross external borrowing also increased, around 70 percent of the increase in public debt was
driven by domestic debt during FY17. Within the domestic debt, ownership structure shifted
disproportionately towards SBP. This was because the government retired maturing PIBs of Rs 1.4
trillion in the year, rejected bids in four out of 12 PIB auctions and met the financing gap through SBP
borrowings. As a result, the share of central bank in domestic debt increased to 20.2 percent during
FY17, from 16.6 percent in FY16.
9
As per Fiscal Responsibility and Debt Limitation Act, 2005 (FRDLA) amended in June 2017, "Total Debt of the Government is
the public debt less accumulated deposits of the Federal and Provincial Governments with the banking system.
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Economic Review
Moreover, the share of short-term debt increased as banks increasingly shifted their investment to short-
term debt instruments. From the governments perspective, it preferred to borrow in short-term, as banks
were demanding higher rates on PIBs. In particular, the government rejected all bids in PIB auctions held
during the second quarter. This combined with retirement of PIBs, led to a fall in the share of long-term
debt, thereby shortening the maturity profile of domestic debt. Thus, the re-profiling of domestic debt
increased the roll-over and interest rate risk.
External sector
The consistent strengthening of external sector buffers during the last few years, could not be sustained in
FY17. As growth picked up pace, the imbalance re-emerged in the external sector. Specifically, the
current account deficit widened to US$ 12.1 billion (4 percent of GDP) in FY17, from US$ 4.9 billion
(1.7 percent of GDP) in FY16. This widening in the current account deficit was primarily driven by trade
deficit, which increased by US$ 7.6 billion to a record high US$ 26.9 billion during FY17. A sharp 17.8
percent growth in imports was mainly responsible while exports also declined by 1.3 percent during
FY17.10 Moreover, for the first time since FY04, workers remittances recorded a decline of 3.1 percent
during FY17.
Within imports, machinery import has been rising for the last two years, which bodes well for the future
productive capacity of the country. However, a 19.1 percent growth in imports (fob) excluding
machinery indicates that a significant contribution to the overall growth in imports is coming from oil and
consumer goods (including food). These trends are in line with the increase in income levels and rising
share of consumption in overall GDP. Nevertheless, the situation is less encouraging when looked from
the context of achieving and sustaining higher growth and maintaining external sector stability, especially
from financing of current account deficit view point.
Exports showed some recovery in the third quarter of FY17, partially offsetting the decline observed in
the first half of FY17. Therefore, the overall exports during the FY17 declined marginally by 1.3 percent
against a much sharper decline of 8.8 percent in FY16. A marginal recovery in H2-FY17 mainly reflects
increase in textile exports, as non-textile exports declined during FY17.
The trends in trade deficit were also mirrored in the services account. Higher growth in imports means
increased requirement for the import of services like freight, finance, insurance, etc. Moreover, the
receipts under Coalition Support Fund (CSF) of US$ 550 million in FY17 were also US$ 387 million
lower compared to that in FY16.
Higher official and private financial inflows helped partially finance the current account deficit. In
particular, net government external borrowing from various bilateral, multilateral and commercial sources
stood at US$ 5.1 billion during FY17 compared to US$ 3.4 billion in FY16. In addition, private financial
inflows also remained strong. FDI was higher by around US$ 100 million (driven mainly by CPEC
inflows), whereas banks offshore borrowings rose to US$ 1.6 billion during FY17, from US$ 406 million
in FY16. Similarly, net incurrence of liabilities of the private sector (mainly power companies involved
in CPEC projects), doubled to US$ 2.4 billion during FY17 from US$ 1.2 billion in FY16. On aggregate,
10
According to PBS data, exports recovered by a modest 0.7 percent in the second half of FY17, partially offsetting the decline
observed in the first half of FY17. Overall exports declined by 1.7 percent in FY17, against a higher drop of 12.2 percent
recorded last year. The marginal recovery in H2-FY17 mainly reflects 1.9 percent increase in textile exports, as non-textile
exports especially non-basmati rice, leather, footwear and cement continued to decline.
7
nevertheless, these inflows fell short of financing the current account deficit. As a result, SBPs liquid
foreign exchange reserves declined by US$ 2.0 billion during FY17.
Water sustainability in Pakistan key issues and challenges

The historical pattern shows that water supply in Pakistan has been limited and remained erratic. Climate
changes and the on-going dispute with India on the Indus Water Treaty are further adding uncertainties
over future water supplies. Moreover, the quality of water has deteriorated due to increasing pollution
and contamination. On the other hand, demand for water is on the rise due to growing population and
urbanization and higher agriculture needs.
The growing water stress is a serious challenge for food security and sustained long-term economic
growth of the country. The stress is not only high (as water supplies are limited and the country relies
heavily on the Indus basin to meet most of its needs), it is growing further due to rising population, rapid
urbanization, and continued economic development. Addressing these concerns would require a national
policy on water with a broader consensus among all the provinces and the federal government. This
policy should focus on minimizing water losses, improving conservation, and strengthening capacity of
regulatory institutions.
1.3 Outlook for FY18

The assessment based on the latest available information presents a mixed picture of macroeconomic
conditions in FY18. The expansion in real economic activity is expected to maintain the momentum and
inflation is likely to remain within the target. The external and fiscal accounts, however, may remain
under pressure expected to emanate from likely elevated import demand and increase in public spending,
by provincial governments in particular, in a bid to complete development projects before the upcoming
general elections in the country (Table 1.2).
The real economic activity is expected to continue Table 1.2: Key Macroeconomic Targets and Projections
benefitting from accommodative macroeconomic FY18
policies, activity related to CPEC, and consistently FY17 SBP
improving domestic energy supply and security Target4 Projections2
situation. The real GDP growth is projected to percent growth
Real GDP 5.3 6.0 5.0 6.0
come close to the 6.0 percent target for FY18. The
CPI (average) 4.2 6.0 4.5 5.5
agriculture sector is expected to repeat its billion US$
performance seen last year with major contribution Remittances 19.3 20.7 19.0 - 20.0
expected from the crop sector, especially cotton Exports (fob) 21.7 23.1 22.0 - 23.0
and rice. Notwithstanding a fall in the area under Imports (fob) 48.6 48.8 53.0 54.0
cotton by 12 percent against the target, cotton percent of GDP
output is expected to remain higher compared to Fiscal deficit 5.8 4.1 5.0 6.0
last year. Current a/c deficit 4.0 2.6 4.0 5.0
Data sources: 1 Pakistan Bureau of Statistics; 2 State Bank of Pakistan;
3
The industry, largely LSM, construction and Ministry of Finance; 4 Planning Commission
electricity generation and electricity and gas distribution, will continue to benefit from the ongoing work
on infrastructure and energy related CPEC projects. Thus, the expected improved performance of the
agriculture and industrial sectors will spillover to the services sector in FY18 as well.
With real economic activity gaining further traction, the import demand, both for machinery and raw
materials as well as consumer goods, is expected to remain strong during FY18 as well. On the other
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hand, growth in exports and workers remittances is expected to recover. The exports are expected to
benefit from a recovery in global commodity prices and ease in energy constraints. This is particularly
indicated by a double-digit growth in exports recorded during the first two months of FY18.
In case of workers remittances, the initiatives under PRI could help in attracting more receipts through
official channel. The key initiatives includes new products for diaspora, extending the tie-up
arrangements as practiced in case of GCC and UK to other sources of remittances like Malaysia, South
Africa and New Zealand, and plans to further reduce the cost of fund transfers. Incorporating these
developments, workers remittances are projected to remain in the range of US$ 19-20 billion during
FY17. Yet, the pace of increase in exports and remittances is likely to be slower compared to increase in
imports. Therefore, the current account deficit is projected to remain around last years level, that is, in
the range of 4.0 to 5.0 percent of GDP.
The FY18 budget envisages fiscal deficit at 4.1 percent of GDP. Given the capital spending requirement
of the government for completing various projects under CPEC and likely increase in provincial spending
during the election year, achieving the target 4.1 in FY18 could be challenging. Moreover, any shortfall
in revenue may keep the fiscal deficit close to FY17 level.
Notwithstanding expected increase in domestic demand, average CPI inflation is projected to remain in
the range of 4.5 to 5.5 percent during FY18. Sufficient food stocks (wheat, rice, and sugar) in the
country, weak domestic oil prices and stable exchange rate are expected to offset the impact of expected
further rise in domestic demand. Moreover, as per IMF projections, the commodity prices, palm oil and
sugar, are also likely to fall in international market over the next few months.
Thus, the assessment shows the economy is likely to continue to expand with low and stable inflation in
FY18. Encouraging trends in private sector credit indicate underlying dynamics in real economic activity.
However, maintaining this momentum going forward would largely depend on addressing emerging
challenges in external and fiscal accounts.
9
2 Economic Growth
2.1 Overview
The real GDP growth gained further Figure 2.1a: Sectoral Growth Figure 2.1b: Contribution in
momentum during FY17, increasing by 5.3 GDP Growth
FY16 FY17 Agriculture Industry
percent compared to 4.5 percent last year
Services Target
(Figure 2.1). This growth was not only the 6 6
highest over the last decade, but also broad- 5
5
percentage points
based. A sharp recovery in agriculture 4
production, healthy value addition in the 4
percent
3
services sector, and continued improvement in 3
the manufacturing sector contributed towards 2
2
this encouraging performance.1 1
0 1
Industry
Agriculture
Services
The agriculture sector not only achieved the 0
FY12
FY13
FY14
FY15
FY16
FY17
targeted growth rate of 3.5 percent during
FY17, but also recorded its highest growth in
Data source: Pakistan Bureau of Statistics
the last five years (owing to a broad-based
improvement in the production of important crops). From policy perspective, the continuation of
price support on wheat and sugarcane protected growers against falling prices of these crops in the
international market. At the same time, fertilizer offtake improved sharply in FY17, as the subsidy
announced under Kissan package led to a decline in its prices.2 This was further supported by
affordable access to credit facilities. As a result, important crops segment posted a growth of 4.1
percent against a contraction of 5.5 percent experienced last year.
Revitalization of the agriculture sector also had a positive spillover into the industrial sector,
particularly the Large-scale Manufacturing (LSM). A surge in sugarcane production led to record
sugar output in the country, which in turn steered LSM to achieve 5.7 percent growth during FY17.3
The manufacturing activities also benefitted from the government policies. For example, support to
the agriculture sector also increased the purchasing power in the rural areas. The real wages,
particularly in urban households, also received support from benign inflation, rising income, and
stable exchange rate. This, coupled with improved availability of electricity, had favorable spillovers
in the consumer durable (e.g. electronics) and pharmaceutical segments (due to increased health
spending) of the industrial sector. Moreover, the increased PSDP spending led to a widespread
growth in construction and infrastructure related activities in the economy, which in effect provided
support to allied industries (such as cement and steel) in the manufacturing sector. Further support to
LSM came from a relaxation in import duties, and decreasing corporate taxes.4
The growth in the services sector surpassed both the target and the last years level. The recovery in
the agriculture sector, an increase in manufacturing output, and a rise in trade related activities largely
explain the outstanding performance of services. Thus, the sector contributed around two-thirds of
1
The GDP estimates for FY17 compiled by National Income Accounts are based on projected LSM growth of 4.9 percent.
2
Although the fertilizer subsidy under Kissan package was announced in November 2015, its sale remained depressed
throughout the fiscal year. This was because growers were anticipating a downward revision in fertilizer prices, whereas the
actual decline came in April 2016 when the government reduced the tariffs for feedstock gas.
3
It may be noted that some of the industries could not perform well due to sector specific issues. For example, fertilizer
industry suffered due to delays in the implementation of subsidy scheme; a hike in the federal excise duty led to decline
cigarettes production; and a move towards sale of high quality motor gasoline slowed down its production growth.
4
See Box 4.1 in Chapter 4 on Fiscal Policy.
the growth in GDP observed during FY17, with wholesale and retail and finance and insurance
leading the performance.
On the expenditure front, the high domestic consumption continued to drive the growth in GDP.
Factors like fiscal expansion, subdued inflation, growing income levels, and higher demand from
expanding middle class population5 bolstered consumer spending in the economy.
Though Pakistans GDP growth of 5.3 percent in FY17 was notable, this still lags behind over 8.0
percent growth target as envisaged in Vision 2025 for 2018 and onwards. Furthermore, the current
consumption led growth poses questions regarding the sustainability of the performance. This is
because (1) the current investment rate, though improving, still remains insufficient to enhance
production capacity to match the fast growing demand;6 and (2) the existing growth structure,
particularly for industries, does not generate sufficient export earnings to ease the balance of payment
constraint one of the most binding impediment to sustainable and high economic growth. In terms
of the latter point, the policy incentives do not encourage industries to look out for competition in the
global markets (Box 2.1). At the same time, achieving sustainable growth in export earnings becomes
increasingly challenging as more of the GDP growth comes from the services sector, which has
limited export potential. The growth strategy should therefore focus on promoting investment in high
value added exporting activities both in industrial and services sectors (Box 2.3).
Box 2.1: Industrial Growth in Pakistan the Role of Liberalization Policy

The industrial sector of Pakistan has achieved encouraging and broad-based growth over the recent years. This has come on
the back of an ease in policy rates and continued efforts of the government to address long-term impediments, such as
inadequate energy supplies, and challenging law and order situation. Meanwhile, the growing domestic consumption
bolstered the production of the manufacturing sector. Despite all these gains, the industrial growth in Pakistan still lags
behind its regional competitors (Figure 2.1.1).
While inadequate level of investment (both in private and public sector) explains the lower industrial growth in Pakistan, the
role of tariff liberalization policies cannot be overlooked. For example, a well designed liberalization policy would
positively impact industries, mainly by promoting technology transfer. At the same time, the resulting gains (e.g., due to
improved efficiency and larger economies of scale in production) would make industrial products competitive in the global
markets. However, in actual settings, most of these gains would depend on how other countries pursue their liberalization
goals. In this backdrop, we have reviewed the tariff liberalization efforts in Pakistans industrial sector and compared our
experience with regional competitors. The analysis offers some interesting insights:
Firstly, the liberalization efforts have been slower in Pakistan (Figure 2.1.2). This is evident from the fact that India,
Bangladesh, and Sri Lanka, all significantly lowered their average tariff rates between FY92 and FY98, while Pakistan
waited till the start of the new millennium to catch up. This had various implications: (a) with our industries relying on
imported machinery for the production of final commodities, higher tariffs meant that the costs were high relative to other
regional players this made the goods less competitive in the global markets; (b) even when Pakistan fairly liberalized its
industrial sector after FY02 (with average rates lower than India and Sri Lanka, for example), the first mover advantage was
lost and market shares to a large extent had already been captured and maintained by our close competitors.
Secondly, the liberalization efforts were not implemented uniformly across the sectors (Figure 2.1.3), with many
maintaining fairly high protection, such as textiles, automobiles, ceramics, essential oils, etc. The imposition of higher
tariffs in selected industries resulted in the local market getting shielded from foreign competition. This further fueled the
anti-export bias in the economy and allowed firms to earn attractive margin by tapping the strong domestic demand. It also
incentivized inefficient production in the domestic market (diverting the focus away from quality control). The auto
5
According to the Household Integrated Expenditure Survey conducted by PBS, the second, third and fourth quartile
population of the economy witnessed an increase of 14.5 percent, 12.6 percent and 16.1 percent respectively in their income,
which led to a rise of 16.7 percent in per capita expenditure for three quartiles during FY14 to FY16.
6
FY17 saw a slight improvement in the investment figures of the economy, mainly on account of increased focus on CPEC
and public infrastructure development projects. At the same time, a low interest rate environment has led to an uptick in the
loans to private sector (particularly for fixed investment). Various firms are investing in capacity expansions, anticipating
higher demand and better margins in the coming years. Increasing investments are a good omen for future growth; however
the current level far below the regional competitors.
12
Economic Growth
industry has been a prime example of this with barriers to entry (until the recent announcement of the new Automotive
Development Policy 2016-2021 that has enticed new players to enter the sector) and high tariffs, it resorted to manufacturing
well below economic scales. This not only hurt the end users but also reduced the competitiveness, further bolstering anti-
export bias amongst the manufacturers. It is pertinent to note that the trend of non-uniformity has been observed in the tariff
structure of the regional competitors as well, however in case of Pakistan the degree of protection has been higher (Figure
2.1.4).
Figure 2.1.1: Industrial Growth- A Regional Comparison Figure 2.1.2: Average Tariff Rates
2010 2011 2012 2013
FY87 FY92 FY98 FY06 FY12
2014 2015 2016 Average
12 120
10 100
8 80
percent
percent
6 60
4 40
2 20
0 0
India Bangladesh Sri Lanka Pakistan India Pakistan Bangladesh Sri Lanka
Data source: World Bank
Data source: Trade Polices in South Asia (2004, WB); UNCTAD
Figure 2.1.3: Trends in Tariff Variation for Industries - Figure 2.1.4: Non-uniformity in Tariff Structure (2014)
Pakistan
Leather Textile Iron and steel Automobiles Pharma
FY00 FY06 FY14
70 40
56 32
42
percent
percent
24
28 16
14 8
0 0
Highest Range Average Pakistan India Bangladesh Sri Lanka
Data source: United Nations Conference on Trade and Development Data source: United Nations Conference on Trade and Development
Finally, and most importantly, the tariff structure has also Table 2.1.1: Tariff Escalation in Pakistan
been applied disproportionately; final goods faced stricter
percent
controls than raw materials and intermediates (Table First Semi-
2.1.1). This encourages low value-addition in the Stage finished Final
production sectors. This is because the skewed tariff
Textile, apparel, and leather 8.9 13.1 16.4
structure restricts evolution of strong backward linkages
(as evidenced by the strong dependence of the industrial Manufactured wood products 7.9 14.5 23.6
sector on imported intermediate capital goods), while high Paper, printing, publishing N/A 14.2 30.9
protection on final products restricts foreign competition. Manufactured chemicals, petroleum,
coal, rubber, plastics 7.5 19.5 18.5
Furthermore, the escalating tariff structure was especially
Manufactured non-metallic minerals
detrimental for the SME sector, which mainly focuses on (except petroleum) 7.5 8.7 15.5
the production of semi-finished and intermediate Basic metal industries, manufactured
commodities. metal products 5.0 22.3 21.3
Machinery and equipment 11.2 10.7 16.6
In retrospect, it can be argued that the semi-liberalized, Other manufacturing N/A 13.5 14
non-uniform, and escalating tariff structure not only
Stage finished 5.0 8.8 18.7
diverted export orientation of the industrial sector but also
Simple average tariff by stages of
made it import dependent by hindering the formation of processing (percent) 9.0 11.3 17.3
strong backward linkages in the economy. This suggests Data source: World Bank (2006): Pakistan Growth and Export
that Pakistan would have to focus on developing an Competitiveness
13
industrial policy that is less intrusive (selective shielding) and more facilitative so as to spur innovation for a broad based
growth on a sustainable basis.
2.2 Agriculture
The overall agriculture sector rebounded Table 2.1: Performance of Agriculture Sector
strongly, as it registered a growth of 3.5 share and growth in percent; contribution in percentage points
percent in FY17 compared to a nominal Contribution to
Share in
increase of 0.3 percent in the previous year GDP Growth agri growth
(Table 2.1). An impressive recovery in FY17 FY16 FY17 FY16 FY17
important crops explains this performance. Crop 7.3 -5.0 3.0 -2.0 1.1
Indeed, this was a notable achievement given Important crops 4.7 -5.5 4.1 -1.4 1.0
that the area under important crops had Other crops 2.2 0.6 0.2 0.1 0.0
Cotton ginning 0.5 -22.1 5.6 -0.7 0.1
declined, and the water availability remained
Livestock 11.4 3.4 3.4 1.9 2.0
lower than expectations. An across the board Forestry 0.5 14.3 14.5 0.3 0.3
increase in crop yields, largely driven by a Fishing 0.4 3.2 1.2 0.1 0.0
considerable rise in fertilizer application and Overall 19.5 0.3 3.5 - -
government support (e.g., subsidy on fertilizer, Data source: Pakistan Bureau of Statistics
attractive support prices on wheat and
sugarcane, and lower tax on pesticides), facilitated the important crops to post a marked recovery in
production. Further support came from livestock (the largest sub-sector within agriculture) that
maintained last years growth of 3.4 percent in FY17 as well.
The price support policy is paying off as both wheat and sugarcane have shown impressive
performance during the year. However, while the subsidy has also been successful in protecting
growers from the impact of low international prices of their produce, this pursuing this policy would
be challenging in the long run. In fact, the country is already experiencing gradual buildup of wheat
and sugar stocks. This is happening when the crop yields in the country have lagged behind the
global benchmarks by wide margins.7
Crop Sector Table 2.2: Performance of Important Crops

FY17 was the first time after 1991 that all % Growth
FY15 FY16 FY17
important crops recorded a positive growth in a FY16 FY17
year. In particular, sugarcane and maize Area (in thousand hectares)
reached their record harvest, and cotton crop Cotton 2,961 2,902 2,489 -2.0 -14.2
recovered from low output in the previous year Rice 2,891 2,739 2,724 -5.3 -0.5
(Table 2.2). The improved showing by the Sugarcane 1,141 1,131 1,217 -0.9 7.6
Wheat 9,204 9,224 9,052 0.2 -1.9
three crops, which together account for 47.2
Maize 1,142 1,191 1,334 4.3 12.0
percent of important crops, steered the Production (in thousand tons; for cotton, thousand bales)
impressive recovery in the crop sector. The Cotton 13,960 9,917 10,671 -29.0 7.6
production of other crops (mainly oil seeds, Rice 7,003 6,801 6,849 -2.9 0.7
pulses, condiments, fruits and vegetable) Sugarcane 62,826 65,482 73,607 4.2 12.4
remained below expectations however, as key Wheat 25,086 25,633 25,750 2.2 0.5
crops in this group (e.g., barley, onion, and Maize 4,937 5,271 6,130 6.8 16.3
potatoes) missed their target by a wide margin. Yield (kilograms per hectare)
Cotton 802 582 730 -27.4 25.4
Rice 2,422 2,483 2,514 2.5 1.2
The availability of agriculture input also
Sugarcane 55,062 57,897 60,482 5.1 4.5
remained favorable during FY17. The sizeable Wheat 2,726 2,779 2,845 1.9 2.4
support from the government on urea and DAP Maize 4,323 4,426 4,595 2.4 3.8
lowered their prices in the domestic market, Data source: Pakistan Bureau of Statistics
7
For example, global average yields during 2010-2014 for sugarcane, rice, wheat and maize crops exceeded those realized in
Pakistan by a wide margin of more than 20 percent.
14
Economic Growth
and consequently increased their sale by 15.1 and 24.1 percent respectively (Table 2.3).8
Furthermore, this policy proved quite effective in protecting growers against the rising global prices
of fertilizer during the rabi season.9
The water situation, on the other hand, came Table 2.3: Fertilizer Off-take
under stress, particularly for rabi crops. The million tons
prolonged dry spell in early rabi season led to a Kharif Rabi Total
significant drop of 9.8 percent in water 2016 2.4 4.9 7.3
availability compared to previous year.10 Urea 2017 2.7 5.6 8.3
However, its adverse impact was limited to Growth 12.5 14.3 13.7
Potohar region where crops suffered due to lack 2016 0.4 1.9 2.3
of soil moisture; growers in the irrigated areas DAP 2017 0.7 2.3 3
resorted to groundwater extraction to overcome Growth 75 21.1 30.4
supply shortages. In contrast, the situation was Data source: National Fertilizer Development Center
comforting for kharif crops as water supplies Figure 2.2a: Growth in Agri - Figure 2.2b: Contribution to
surged by 9 percent compared to previous year. finance Growth in Agri -finance
Production FY16 FY17
Keeping up with its momentum, agriculture Development
Total
credit increased by 17.8 percent (Rs 106.2 60 12
percentage points
billion) in FY17, following 16.0 percent (Rs 9
82.4 billion) rise recorded in previous year. 40
percent
6
Impressive gains by Microfinance Banks and 20 3
Institutions (MFBIs), mainly due to inclusion of 0
Microfinance Institutions (MFIs) in agri 0 -3
Islamic Banks
Other Comm Banks
Large 5 Banks
ZTBL & PPCBL
MFIBs
finance, explains this encouraging performance -20
(Figure 2.2a & b).
FY13
FY14
FY15
FY16
FY17
Another encouraging shift was the recovery in

financing for development purpose (e.g., Data source: State Bank of Pakistan
purchase of tractors, tubewell, farm machinery
and land improvement). Such loans increased by 6 percent in FY17 against a contraction of 15.6
percent in FY16. Moreover, production loans, which are extended to meet short term requirements of
farmers for seeds, fertilizer and pesticides, also showed an expansion of 18.8 percent, on top of 20.1
percent growth realized last year (Figure 2.2a &b).
Rice
Rice posted a marginal growth of 0.7 percent (6.9 million tons) in FY17, as higher yields more than
offset the impact of reduced area under the crop (Table 2.2). This is the second consecutive year
when the crop area fell. However, unlike FY16 when area under rice had declined for all varieties, it
was non-basmati variety (e.g., irri), particularly in Punjab, which experienced a contraction in area
during FY17.
8
The government provided a cash subsidy of Rs 300 per 50 kg bag on DAP. In the case of urea, subsidy amounted to Rs
390 per 50 kg bag (this included the impact of Rs 50 due to voluntary price reduction by domestic manufacturers; benefit of
Rs 184 on account of GST reduction from 17 percent to 5 percent; and a cash subsidy of Rs 156). These subsidies led to a
decline of 21.4 percent and 23.8 percent in the prices of urea and DAP. The government also allowed subsidy on NP, NPK
and SSP. Although the government allocated Rs 28 billion in the budget for this subsidy scheme, the actual expense
exceeded the initial allocation.
9
During September 2016 to March 2017, prices of urea and DAP in the international market increased by 20 percent and 8
percent respectively. In comparison, domestic prices remained stable (in the case of urea) or declined (for DAP).
10
Water availability during rabi 2016-17 remained at 29.7 million acre feet (MAF), compared to 32.9 MAF during the
corresponding season previous year.
15
The rice cultivation in Punjab has been witnessing some interesting trends. For example, the area
under non-basmati rice has almost halved over last five years, whereas that of basmati has risen by 36
percent (351 thousand hectare) during the same period.11 Within basmati, southern districts (e.g.,
Sahiwal, Multan, DG Khan and Bahawalpur) are gaining share against Gujranwala and Lahore (which
traditionally have remained stronghold for basmati). The frequent setbacks with cotton crop in recent
years largely explain this shifting of southern districts to rice cultivation.
Cotton
Cotton crop showed a marked recovery as the output reached 10.8 million bales in FY17, from 9.9
million bales a year earlier (when the crop suffered from pest attack). This performance is notable
given a decline of 14.2 percent in area under the crop, as the high risk of infestation and low prices in
early months of FY17 led farmers to go for more profitable crops (e.g., maize, rice and sugarcane).
However, favorable price in the later months attracted more farmers and encouraged them to use more
inputs and take better care of crop against pest attacks, which in turn helped in achieving higher
yields. Nonetheless, the cotton crop still appears under stress as the output remained way below the
average of 13.3 million bales for three years preceding FY16.
Wheat
Wheat production recorded a rise of 0.5 percent to reach 25.8 million tons in FY17. The crop suffered
setbacks in rain-fed areas owing to scanty showers in the first half of rabi season. The resultant losses
however were more than offset by strong performance in the irrigated regions. In particular, the
attractive procurement prices not only encouraged additional area under wheat cultivation, but also
induced growers to apply more fertilizer compared to previous rabi.12
FY17 was the fourth consecutive year when the

wheat harvest crossed 25 million tons mark. Figure 2.3: Wheat Stocks and Price Differential
Since the harvest exceeds the domestic Domestic and global differential Stocks (rhs)
consumption, this impressive performance over 100 6
the years has also led to a sharp buildup of
50 5
domestic wheat stocks to record 5.7 million
tons by June 2017 (from just 1.2 million tons in 0 4
million tons
US$ per ton
June 2014) (Figure 2.3). We expect this stock -50 3

to increase further in FY18 due to better
harvest and large procurement target (7.05 -100 2
million tons) for the current season. -150 1
-200 0
Maintaining such high level of stocks involves
2015
2010
2011
2012
2013
2014
2016
2017
certain costs. As the government has kept the

procurement prices at significantly high level, Data source: Pakistan Bureau of Statistics and World Bank
particularly when the global prices are facing
persistent decline over the past few years, this has made offloading surplus wheat in the global market
difficult without incurring losses. In addition, as the unsold wheat reserves have been rising over
time, the outstanding loans taken by the government for its procurement are also growing.13 More
importantly, the policy challenge is likely to continue going forward, as the wheat prices in the
international market are likely to remain sluggish due to better harvest in major wheat exporting
countries.
11
Non-basmati area fell from 716.3 thousand hectare in FY13 to 383.6 thousand hectare in FY17.
12
The government maintained the procurement prices to Rs 1350 per 40 kg for FY17, despite a downtrend in global wheat
prices.
13
The outstanding loan against wheat procurement has soared to Rs 600 billion in FY17, from Rs 100 billion a decade
earlier.
16
Economic Growth
Sugarcane
Sugarcane production grew by 12.4 percent in FY17 to reach a record high of 73.6 million tons. This
was the first time in the past 6 years that sugarcane output growth reached double figures. The
improvement was achieved on the back of both the larger area under crop as well as better yields. The
continued low cotton prices (along with frequent pest attacks) and changing weather pattern marked
by excessive rains have driven growers towards more resilient sugarcane crop that yields stable and
attractive returns.14 In addition, relocation and capacity enhancement of some sugar mills spurred
growers interest in the crop.
The policy of keeping indicative prices at Figure 2.4: Sugar Stocks and Price Differential
attractive level has led to an increase of 25 Domestic and global differential Stocks (rhs)
percent in sugarcane production over a period
300 3.0
of last five years, with a corresponding increase
in the sugar output by the industry. Since the 200 2.5
domestic consumption is growing at a moderate
million tons
US$ per ton
pace, the country has been building up the 100 2.0
unsold stock of sugar (Figure 2.4). This
surplus sugar cannot be exported without a 0 1.5
large subsidy from the government, as the high
indicative prices of sugarcane made the -100 1.0
industry uncompetitive in the global market.
-200 0.5
2010
2011
2012
2013
2014
2015
2016
2017
Maize
The maize production increased to 6.1 million Data source: Pakistan Bureau of Statistics and World Bank
tons in FY17, showing a higher growth of 16.3
percent compared to 6.3 percent last year. Though the crop yields improved by 3.8 percent, the higher
production was more due to larger area under cultivation (up 12 percent).
More than 80 percent of maize is produced in Punjab; of that, more than 70 percent is concentrated in
the mid-eastern districts of Punjab (e.g., Kasur, Okara, Pakpattan, Sahiwal and Vehari). These
districts produce 69.3 percent more maize per hectare of land than the rest of Punjab. In addition to
being blessed with fertile soils, productivity differential owes much to the work of the seed research
companies that have developed new seed varieties in conjunction with their work with maize growers
in these areas. Companies like Cargill, Monsanto, ICI, Rafhan, and Pioneer have penetrated the maize
seed market. The preference for maize in this region is a result of better farm yields bringing in higher
returns. As the work of these companies expanded, more growers jumped on the bandwagon
converting mid eastern Punjab into a maize stronghold.
Thus, maize is gradually replacing traditional Table 2.4: Share of Area under Kharif Crops (Mid Eastern
cash crops (such as cotton and sugarcane) in Punjab)1
these districts (Table 2.4). The switch away percent
from sugarcane is understandable, as sugar Maize Cotton Rice Sugarcane
FY07 21.4 39.3 28.3 11.0
mills have generally moved southwards in
FY11 26.9 37.5 27.5 8.1
search of better recovery rates. Similarly,
FY17 46.1 19.7 27.9 6.3
volatility of cotton prices, high sensitivity of Data source: Crop Reporting Centre, Government of Punjab
crop towards climatic conditions and 1.
Mid-eastern Punjab includes districts Okara, Sahiwal, Pakpattan,
occasional pest attacks may have played a Vehari and Kasur
crucial role in swinging the balance in favor of the maize crop in this region.
14
The provincial governments set the indicative price of sugarcane at the start of each crushing season which serves as a
benchmark for both the buyers and the sellers. The current sugarcane price of around Rs 4,500 per ton has been in place for
the past three years.
17
2.3 Industry
The industrial sector recorded a growth of 5.0 Figure 2.5: Growth in Industry
percent in FY17, which was lower than the Target Actual
target of 7.7 percent for the year (Figure 2.5). 8
This was mainly due to a drag from mining and
quarrying (on the back of decline in natural
6
gas, which has a weight of about 66 percent in
percent
the mining sector) and electricity generation &
distribution and gas distribution subsectors 4
(mainly due to non completion of ongoing
projects) (Table 2.5). These subsectors had 2
mainly driven industrial growth last year by
contributing almost one-third of the industrial
0
performance. Similarly, the growth in FY13 FY14 FY15 FY16 FY17*
construction moderated, but this was expected *Provisional
as it had recorded a strong growth of 14.6 Data source: Pakistan Economic Survey
percent last year. In contrast, manufacturing
Table 2.5: Growth in Industry
experienced a significant improvement over growth in percent and contribution in percentage points
last year (especially LSM, although higher
Contribution
sugar production dominated by contributing Growth
in growth
almost half of the growth).
Share FY16 FY17 FY16 FY17
Industry 20.9 5.8 5.0 5.8 5.0
Large Scale Manufacturing Mining & quarrying 2.9 6.9 1.3 1.0 0.2
The large scale manufacturing witnessed a Manufacturing 13.4 3.7 5.3 2.4 3.4
growth of 5.7 percent during FY17, compared Large scale 10.7 2.9 4.9 1.6 2.5
to 3.1 percent observed during last year the Small scale 1.8 8.2 8.2 0.7 0.7
Slaughtering 0.9 3.6 3.6 0.2 0.2
highest growth achieved during the last 10 Electricity gen. & distt and
15
years. More importantly, this growth is broad gas distribution 1.8 8.4 3.4 0.7 0.3
based, as a number of industries (e.g., textile, Construction 2.7 14.6 9.0 1.7 1.1
food, POL, paper, electronics, pharmaceuticals, Data source: Pakistan Bureau of Statistics
and steel) performed better this year. However, the dominant contribution came from sugar, which
recorded a steep rise of 37.8 percent in FY17, partly reflecting a record harvest of sugarcane crop
(Table 2.6). Excluding sugar, the LSM grew by 3.4 percent during FY17 unchanged from last
years level.
In overall terms, manufacturing activities benefited from improved energy supplies, low interest rates,
better security situation, and increased spending on construction and infrastructure. Despite the
favorable macroeconomic environment, some sectors showed deceleration or contraction due to
various regulatory issues (for example in leather; and cigarettes) and supply side constraints (in
fertilizer; vegetable ghee and cooking oil; and chemicals).
Automobile
The automobile industry, continuing on the momentum achieved last year, grew by 11.2 percent
during FY17. The performance was commendable, considering that the conclusion of Apna Rozgar
Scheme led to a steep contraction of 32.3 percent in the Light Commercial Vehicle (LCV) segment
(as opposed to a growth of 27.1 percent during the corresponding previous period). The healthy
performance of passenger vehicles, tractors, trucks, and buses helped offset this impact of LCV
production decline.
15
The Quantum Index of Manufacturing, which has a base year of FY06, has reached 139.4 in June 2017. This means that
LSM has recorded a cumulative growth of 39.4 percent over the last 11 years.
18
Economic Growth
The low interest rate environment for auto Table 2.6 : Growth in LSM
financing, coupled with the introduction of new growth in percent; contribution in percentage points
models of popular vehicles, helped maintain Growth
Contribution
in growth
consumers interest in jeeps and cars (having
Weight FY16 FY17 FY16 FY17
the highest weight in the automobile sector). LSM 70.3 3.1 5.7
Further impetus to demand for passenger cars Textile 20.9 0.4 0.8 0.12 0.23
stemmed from the launch of online cab services Cotton yarn 13.0 1.4 0.7 0.26 0.12
in major urban areas. Thus, production and Cotton cloth 7.2 0.2 0.4 0.02 0.04
sales of this segment grew by 5.4 percent and Jute goods 0.3 -41.3 8.1 -0.14 0.02
Food 12.4 0.6 11.5 0.12 2.33
4.0 percent respectively during FY17 (Table
Sugar 3.5 -0.7 37.8 -0.05 2.50
2.7). On parallel terms, higher purchasing Cigarettes 2.1 -14.6 -35.8 -0.34 -0.69
power of farmers, increase in agri lending and a Vegetable ghee 1.1 4.8 5.7 0.06 0.08
reduction in the sales tax led to a turnaround in Cooking oil 2.2 3.7 3.2 0.13 0.11
the production of tractors, as it recovered from Soft drinks 0.9 6.4 10.4 0.17 0.29
a decline of 28.6 percent last year to post a POL 5.5 -2.6 2.8 -0.17 0.17
Steel
growth of 54.6 percent during FY17.16 Lastly, 5.4 -9.3 20.5 -0.36 0.70
Non-metallic minerals 5.4 10.0 4.4 1.03 0.49
progress in construction and infrastructure Cement 5.3 10.1 4.5 1.03 0.49
related activities bolstered the production Automobile 4.6 16.1 11.2 0.93 0.73
figures of trucks and buses (the segments grew Jeeps and cars 2.8 17.6 5.4 0.52 0.18
by 36.1 percent and 4.5 percent, respectively). Fertilizer 4.4 13.9 1.7 0.77 0.10
Pharmaceutical 3.6 6.7 9.1 0.54 0.76
Paper 2.3 -1.5 7.2 -0.05 0.24
Going forward, both demand and supply side Electronics 2.0 -1.8 21.6 -0.03 0.35
factors would help keep the growth momentum Chemicals 1.7 8.1 -2.3 0.19 -0.06
strong in the sector. The rising income levels; Caustic soda 0.4 22.5 -0.6 0.09 0.00
availability of affordable bank financing; and Leather products 0.9 6.9 -16.5 0.13 -0.32
low motorization rate would help push the LSM excl. sugar 66.8 3.4 3.4 - -
demand upwards.17 On the supply side, the
sector would benefit from the proposed Punjab
Table 2.7: Performance of Automobile Industry
governments Orange Cab scheme, which growth
entails distribution of 50,000 cars to FY16 FY17
unemployed youth. Further support would Weight Output Sales Output Sales
emanate from the recent introduction of Corolla Tractors 0.5 -28.6 -27.4 54.6 61.8
facelift with de- bottlenecking18 which is to Trucks 0.21 40.3 33.8 36.1 35.1
ease concerns of capacity constraints. The Buses 0.16 86.1 78.7 4.5 11.1
Jeeps and cars 2.82 17.6 19.4 5.4 4.0
entry of new players and the associated foreign
L.C.V.s 0.33 27.1 29.3 -32.3 -33.4
investment would also contribute in continuing Scooters/motorcycles 0.61 78.0 77.2 20.7 20.0
the growth momentum of the auto industry on a Data source: Pakistan Bureau of Statistics and Pakistan Automotive
sustainable basis.19 Manufacturers Association
Electronics
Improved availability of electricity, increasing consumer appetite for durable goods (backed by rising
purchasing power) led the demand for home appliances in the country. On the supply side, stability in
16
The purchasing power of growers improved on the back of stable crop prices and lower input cost, whereas General Sales
Tax on tractors was reduced to 5 percent from 10 percent in the Federal Budget for FY17.
17
Pakistan has a low motorization rate of 18 vehicles per 1000 persons compared to a global average of 341 (source: Board
of Investment Pakistan).
18
Indus Motors debottlenecking in expected to add about 10,000 units annual capacity.
19
The government has allowed Kia-Lucky Motors Pakistan Limited (bringing in investment of US$ 190 million), Nishat
Group (US$ 164 million) and United Motors Private Limited (US$ 18.1 million), to set up units for assembly and
manufacturing of vehicles under the Greenfield investment category, while renowned Swedish heavy commercial vehicles
manufacturer. Scania is set to introduce its premium trucks, tractors, buses and coaches through a local distributor.
19
exchange rate and lower raw material prices (e.g., steel and copper) encouraged manufacturers to
increase production in a favorable business environment.20
Resultantly, the electronics industry rebounded strongly during FY17, growing by 21.6 percent after
facing a contraction of 1.8 percent during FY16. The performance was fairly broad based amongst
the consumer durable products, with refrigerators, deep freezers, and air conditioners, all posting
double digit growth rates (Figure 2.6).
Figure 2.6: Growth in Electronic Subsegments Figure 2.7: Growth in Production and Exports of
Refrigerators Deepfreezers Pharmaceuticals
Air conditioners Electric motors Exports-quantum Production
40 10
30 5
0
20
percent
percent
-5
10
-10
0
-15
-10 -20
-20 -25
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17
Data source: Pakistan Bureau of Statistics Data source: Pakistan Bureau of Statistics
The production growth of electronics has been historically volatile in Pakistan. However, continuity
in aforementioned factors coupled with sustained rise in rural incomes on the back of better
agriculture performance could bolster sales in future and help bring stability to the segment.
Pharmaceutical
Manufacturing of pharmaceuticals posted a growth of 9.1 percent in FY17, on top of 6.7 percent
observed during last year. This performance was encouraging given the steep decline in its export
since FY10 (Figure 2.7).
A number of developments explain this acceleration in growth. For example, stable exchange rate
(that reduced uncertainty regarding input prices); higher health spending under PSDP; crackdown on
counterfeit and substandard products (especially in Punjab) 21; and launch of new products (such as
the introduction of Rotavirus vaccine in Punjab).
The demand for pharmaceutical products is also likely to stay strong in FY18, following an 80 percent
rise in the budgetary allocation for health spending by the provincial governments.22 From the supply
side, more new products are expected going forward as the local players are expanding their R&D
operations following the checks on counterfeit products.
Cement
Despite continued decline in exports, the cement production managed to grow by 4.5 percent during
FY17 to 37.1 million tons (following 10.1 percent rise in FY16), main aided by higher local
20
Gross profit margins of the electronics industry have increased on average by about 20 percent in FY17.
21
The Drug Regulatory Authority of Pakistans (DRAP) campaign against spurious, fake and counterfeit drugs in FY17
resulted in sealing of hundreds of sales outlets, illegal and non-compliant manufacturing units throughout the country.
22
Rs 8 billion have been allocated for the Prime Ministers Program for New Hospitals (Phase-I), Rs 1.3 billion have been
marked to build 46 other hospitals, and around Rs 7.6 billion have been earmarked to fight polio under Expanded Program
on Immunization.
20
Economic Growth
dispatches (Table 2.6).
On external front, the imposition of anti- Table 2.8: Cement Sales

dumping duties by importing countries and stiff Growth
Share in
competition from regional players largely sales FY17 FY14 FY15 FY16 FY17
explain the continued decline in exports (Table Domestic sales 88.4 4.3 8.0 17.0 8.0
2.8). 23, 24 The industry is still able to sustain Punjab & KP 69.6 6.5 8.2 15.4 7.7
growth in production due to high domestic Sind & Baluchistan 15.3 -5.2 6.5 24.9 9.5
Exports 11.6 -2.8 -11.6 -18.4 -20.6
demand and attractive margins on local sales.25
Afghanistan 4.3 -17 -21.4 -15.1 -29.6
India 3.1 40.5 2.8 42.5 26.3
The industry is benefiting from economies of Rest of the world 4.2 9.1 -4.7 -32.7 -30.6
scale (due to higher capacity utilization), while Total growth - 2.5 3.3 9.8 3.7
the international coal prices (the chief raw Data source: All Pakistan Cement Manufacturers Association
material) are also low.26 Further efficiency is being achieved by the continuing efforts of the players
to use byproducts as power source, and install waste heat recovery units (WHR), refused-derived fuel
(RDF), and tyre-derived fuel (TDF) facilities. 27 Interestingly, manufacturers continued to earn
healthy margins during the year due to robust domestic demand and some decline in the production
cost.28
More importantly, the manufacturers are Table 2.9: Cement Industry Expansion
aggressively investing in capacity expansions Expansion Investment
Completion
(by adding about 60 percent additional Company (metric tons) (US$ million)
capacities) in anticipation of strong domestic Lucky 3.0 270 FY17
demand (Table 2.9). The increase in total ACPL 1.1 120 FY17
PSDP allocation with higher allocation for CHCC 4.7 315 FY17-FY19
DGKC 2.6 200 FY18
hydropower projects (e.g., Diamer, Basha, Suki Fecto 1.0 100 FY18
Kinari); major infrastructure projects under Gharibwal 2.4 200 FY18
CPEC; and ongoing mega housing projects in Bestway 1.8 190 FY19
the private sector would keep the domestic PIOC 2.4 245 FY19
demand strong.29 At the same time, POWER 2.5 235 FY19
MLCF 2.3 225 FY19
manufacturers are exploring new markets (such
KOHC 2.3 125 FY19
as Philippines, Qatar, Yemen and Sri Lanka) to Data source: Companies Financials/Pakistan Stock Exchange notices
boost their exports.
Steel:
Steel production recovered sharply with a strong growth of 20.5 percent in FY17, compared to a
contraction of 9.3 percent in previous year. The imposition of anti-dumping duties on Chinese steel
23
Slowdown in construction activities in China has forced its cement producers to resort to international markets to export
their surplus. Chinese producers, with large advantage from economies of scale, are posing challenge for Pakistani
manufacturers. Furthermore, lifting of sanctions has also opened up room for Iran to return to cement exports market, with
ample surplus capacity available. In fact, Pakistani players have already lost a substantial share of Afghanistan market to
Iranian producers.
24
For example, the levy of anti dumping duties (in the range of 15-70 percent) curtailed cement exports to African countries.
25
Domestic sales fetch substantially higher margins than exports sales due to 20 percent regulatory duty protection, besides
freight cost savings.
26
Although, higher from last year, Australian coal prices remained below US$ 80 per MT significantly lower than the prices
prevailing two years ago.
27
Almost all the cement manufacturers have installed WHR Units that reduce energy cost by more than 10 percent.
28
Recently, cement manufacturers in the northern regions of the country have slashed prices by around Rs 10-25 per 50 kg.
This was probably the result of both, a decline in exports to Afghanistan as well as capacity expansions.
29
Planned low cost housing scheme of 50,000 units has the potential to create additional demand of 0.6-0.7 million tons.
21
products; increasing demand (Figure 2.8); better availability of electricity; and favorable prices of
raw material (scrap) helped enhance the economies of scale and improve margins. 30
The outlook for the industry remains encouraging in view of expected strong growth in the allied
industries, such as automobile (especially the two/three wheelers which depend mostly on local
vendors for the supply of raw materials such as steel), and construction (where a focus on higher
infrastructure spending would increase the demand for steel pipes and other related construction
products). Furthermore, the trend of rising income levels would have a direct impact on the sales of
consumer durables (of which steel is an intermediate material). Anticipating this future demand hike
(Figure 2.8), manufacturers are investing heavily in capacity expansion.31
Figure 2.8: Dynamics of Steel Sector Figure 2.9: Growth in Domestic Fertilizer Production
Imports Domestic production
Total demand
12 16
9 12
million tons
percent
6 8
3 4
0 0
FY13 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17
Fertilizer
The fertilizer industry experienced a slowdown in FY17 as large inventory carried over from previous
year limited the production growth to just 1.7 percent from 13.9 percent in FY16 (Figure 2.9). This
was despite a strong recovery in domestic demand due to subsidy on domestic sales.32 Though the
offtake increased by 35.8 percent from a contraction of 14.3 during last year, this was not enough to
offload the excess stocks.
The industry also could not export surplus stocks as high production costs made their products less
competitive in the foreign markets. Although the government offered export subsidy, the delays in its
announcement and some logistic constraints (e.g., inadequate facilities for bulk loading and shipment)
restricted the industry from taking advantage of the export allowance announced by the government (a
quantum equating to only 14 percent of the allowance could be exported during FY17).
Going forward, the availability of imported LNG, cheap bank financing, and tariff concessions on gas
supplies to some of the plants would continue to benefit the fertilizer sector. The industry would also
gain from recent improvement in subsidy scheme which has been made more transparent and its
30
In early February 2017, the National Tariff Commission (NTC) imposed anti-dumping duties on imports of steel products
(e.g., galvanized steel coils and sheets) in the range of 6 to 40.5 percent.
31
International Steels is expanding its capacity by 0.4 million tons to 1.0 million tons; Aisha Steel SL is also doubling its
production capacity, while Mughal Steel is replacing current re-bar facilities with 0.43 million tons plant, alongside the 0.3
million girder facility.
32
The Federal Government has reduced the rates of GST on different fertilizers to bring down their price. Furthermore, in
order to keep urea prices below Rs 1,400 per bag, the government provided a cash subsidy of Rs 100 per bag. The scheme
will remain in force during FY18.
22
Economic Growth
implementation more effective.33 Despite all these positives, the outlook for the industry would
depend on whether the agriculture sector is able to sustain its growth momentum, as export avenues
are hindered by ample logistics constraints.
Food
Contributing around 40 percent to the overall LSM performance, the growth in the food sector
accelerated remarkably from 0.6 percent in FY16 to 11.5 percent in FY17. Sugar industry
spearheaded this recovery, posting record production figures at a growth rate of 37.8 percent.
Several developments can help explain this increase in sugar production. On growers side, the clarity
on support prices encouraged them to sell more of their produce to mills for crushing.34 In addition,
the reallocation of some sugar mills reduced cost of transporting sugarcane for some growers. From
the perspective of sugar mills, the increased availability of low cost bank financing improved their
liquidity situation, and allowed them to make early payments to growers.35 Furthermore, sugar
recovery rates have continued to improve over the past 10 years, as growers are shifting to sugarcane
varieties with higher sugar content. Despite all these positive developments, the sugar production
volume is unusually high as it recorded an increase of about 38 percent, which was considerably
higher than the increase of 12.4 percent in sugarcane crop.36
According to Pakistan Sugar Mills Association Figure 2.10: Sugarcane Usage

(PSMA), a total of 71.4 million tons cane was Other purposes* Sugar production
crushed during FY17, yielding a utilization rate
100
of about 97 percent for the year (Figure 2.10).
This leaves only 2.2 million tons of sugarcane 80
for other purpose (such as seeding and making
percent
gur and juices), which is considerably lower 60

than the past trends. In fact, the use of 40
sugarcane for purposes other than crushing has
varied in the range of 10 to 17 million tons 20
during the last 10 years.37
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
In the beverages industry, the impact of
capacity expansions during the past few years *Calculated as residual
has started to materialize, as the production Data source: Pakistan Sugar Mills Association
grew by 10.4 percent on top of the 6.4 percent increase witnessed during last year. This performance
was supported by continued strong demand in the local market on the back of rising incomes.38
The cigarette industry suffered when a hike in Federal excise duty under the FY17 budget (Figure
2.11) encouraged the sale of counterfeit and smuggled products. Resultantly, the local production
recorded a contraction of 35.8 percent, in addition to 14.6 percent decline suffered during last year.
33
Finance ministry has improved the subsidy disbursement process as the companies were facing severe delays in receipt of
subsidy claims.
34
Growers margins increased for sugarcane crop on the back of subsidized inputs mainly fertilizer.
35
During Nov-Apr FY17, sugar sector availed bank financing of Rs 146.4 billion compared to Rs 87.2 billion during same
period last year.
36
While the sugarcane crop increased by 12.4 percent to reach historic high of 73.6 million tons, sugar production rose from
5.1 million tons in FY16 to 7.1 million tons in FY17.
37
The increase in gur production is also evident from a rise of 33 percent in its exports during FY17.
38
According to Household Income Expenditure Survey (HIES), average expenditures on hotels and non-alcoholic beverages
have increased. The share of food items in total consumption of an average household is close to 40 percent.
23
Figure 2.11: Food Sector - Growth in Selected Segments

40
30
20
10
percent
0
-10
-20
-30
-40
Sugar Cigarettes Vegetable ghee Cooking oil Tea Soft drinks
The growth in vegetable ghee and edible oil Figure 2.12: Growth in Domestic Cooking Oil Production and
production during FY17 remained marginally International Palm Oil Price
lower than last year, mainly due to large Palm oil price Growth in domestic production (rhs)
inventories accumulated over the last year. 850 5
Specifically, a sharp decline in palm oil (the 4
US$ per million ton
main raw material) prices in the international 800

3
market during FY16 encouraged manufacturers 2
750
to import this key input in large quantities,
percent
1
increase their output, and build stocks during 700 0
the previous year (Figure 2.12).
-1
650
The growth decelerated also due to volatility in -2
the global palm oil prices during the first three 600 -3
quarters which added to uncertainty regarding FY14 FY15 FY16 FY17
the manufacturing decisions. The production Data source: Pakistan Bureau of Statistics and Bloomberg
slowed down further due to the suspension of
operation units of a number of oil and ghee manufacturers.39
Chemicals
Chemicals production fell by 2.3 percent during FY17 (against a rise of 8.1 percent in FY16) despite a
continued strong demand for construction and its allied industries in the country. The continued
absence of a Naphtha Cracker Plant (and the resulting high dependence of the industry on imported
chemicals) is one major reason that hinders the sustainable growth of the sector.40
Subdued growth in leather and textile sectors also impacted the performance of the chemical industry
as manufacturers in the former segments use the products of the latter as raw materials in their
production processes (e.g. use of soda ash for cleansing and treatment).
The challenge for the industry compounded in FY17 due to cheaper imports. Specifically, China's
39
During November, 2016, the Punjab Food Authority (PFA) declared various cooking oil and ghee brands unfit for human
consumption due to rancidity (unpleasant odour), absence of Vitamin A, and inclusion of artificial flavor and other acid
values.
40
Naphtha is an important feed used for the manufacturing of various polymers (using gasification of coal, for example),
including PVC, which is mainly imported in Pakistan. According to Pakistan Chemical Manufacturers Association (PCMA)
a feasibility report is under process for the establishment of first such plant in the country.
24
Economic Growth
slowing construction activities is causing accumulation of large stockpiles of chlorine in the region,
which is not only dragging down chemical prices across Asia, but also increasing supply in the local
market through imports.41 At the same time, the slump in petrochemicals prices also discouraged
production.
Textile
The textile sector managed to marginally improve its performance by recording a growth of 0.8
percent during FY17, as compared to 0.4 percent during last year. Robust domestic demand
continued to compensate for the stagnant exports.42 The export package by the government has
started to impact the performance of textile sector albeit with a slower pace than anticipated. It may
be highlighted that only sufficient investment by textile players in BMR, efforts to concentrate on
value-added products, and increased focus on improving operational efficiency could broaden the
export potential of the products and stimulate its performance on sustainable basis. Encouragingly,
the textile segment also borrowed for BMR purposes during FY17 (refer to Chapter 3 for more
details).
The jute subsector recorded a turnaround by showing a growth of 8.1 percent during FY17 compared
to a huge decline of 41.3 percent during the previous year. The ban on the import of raw materials
from Bangladesh imposed by the country during FY16 following a setback in its own production
kept on affecting the production cycle of the Pakistani manufacturers till H1-FY17. However, with
the lifting of the aforementioned ban, the sector experienced some respite in H2-FY17. Going
forward, the availability of cheap alternatives, dependence on imported raw material, and inefficient
technology would constrain the full recovery of domestic jute industry.43 Exacerbating the problem is
the fact that financial constraints have forced five of the ten remaining jute goods producing mills to
suspend their operations.
POL
The POL industry could not gain from the Figure 2.13: Sales and Domestic Production of Petroleum Products
growing demand for petroleum products in the Domestic production Total demand
country (Figure 2.13). Specifically, against a
26
rise of 9 percent in overall sale of petroleum
products in the country, the POL industry 23
managed to increase production by only 2.8
million tons
percent. The domestic industry does not fully 20

meet the regulation requiring RON 92 grade 17
petroleum to be sold in the domestic market.44
Resultantly, import dependence increased to 14
bridge the growing demand-supply gap.45
11
Encouragingly, National Refinery Limited 8

(NRL) has already adopted higher quality fuel FY13 FY14 FY15 FY16 FY17
standards.46 While the conversion of other Data source: Oil Companies Advisory Council
41
For example, other paints and varnishes imports from China increased by about 36 percent in FY17.
42
Historically, the lack of sufficient R&D and reliance on low-value added products has contributed towards less than
optimal level of exporting revenues, breeding stagnancy in the sector.
43
Jute bags are costlier compared to their substitute (e.g., polypropylene / polyethylene), if a plastic bag is available at Rs 60,
the same 100kg capacity jute bag costs more than Rs 100.
44
Most of local refineries produce RON 90 Premium Motor Gas (PMG).
45
During FY17, import quantum of petroleum products increased by 39.2 percent over last year (source: Pakistan Bureau of
Statistics).
46
NRL also revealed that Naphtha Isomerization (ISOM) Unit is in start-up phase whereas its Auxiliary Units (Naphtha
Splitter and Naphtha Hydrotreater) have already been commissioned.
25
refineries to high grade POL would take some time and require a substantial investment to acquire
compatible technology, the industry would see a healthy rise in production following the resumption
of operations of Byco.47
Leather
Leather manufacturing suffered a contraction of 16.5 percent during FY17, compared to a 6.9 percent
growth achieved last year. Increasingly, the industry is facing pressures from the supply side which is
resulting in a decline in exports as well. Box 2.2 highlights the various issues faced by the sector and
steps taken by both the government and the industry players to address the worrisome trend.
Box 2.2: Why is the Leather Industry Underperforming?

Leather industry not only fulfills the needs of domestic downstream industry, it is also a source of valuable foreign exchange
earnings for the country. Despite its significance, the industry has been going through a difficult phase: the leather output
fell by 17.0 percent in FY17, whereas exports have declined for the third consecutive year (Figure 2.2.1).48 A host of factors
explain this sharp decline:
Firstly, the high rate of smuggling of live animals to Afghanistan is not only reducing the supply of hides and skin in the
domestic economy, this is also disrupting the breeding process of the livestock.
Secondly, inefficient supply chains result in wastage of raw materials, as skins and hides are to be treated in a timely manner
to make them useful for tanning purposes. During the FY17 Eid season, large quantities of raw material were damaged due
to high temperatures and inadequate preservation mechanisms. 49 This negatively impacted the production potential of the
industry and increased its dependence on imports.
Thirdly, the absence of advance technology and shortage of semi-skilled and skilled workers (that could process the different
categories of raw leather) is constraining the industrys ability to cater to the needs of its consumers. At the same time,
continued levy of custom duties on various machines (used for fleshing, stacking, shaving, tanning, and buffing, etc) largely
explain the lack of modern technology in this segment.50
Fourthly, the industry is facing high cost of doing business. For example, electricity tariffs, gas charges, and workers wages
are higher in Pakistan relative to global competitors (Table 2.2.1). Furthermore, according to Pakistan Tanners Association,
the rates of duty drawbacks and rebates have been considerably low in Pakistan (Figure 2.2.2), and the considerable delay in
their payment adds to their manufacturing cost. Thus, the industry is finding it difficult to compete against exporters from
India, Vietnam, and Bangladesh.
Figure 2.2.1: Trends in Leather Industry Production Figure 2.2.2: Duty Drawback Rates
Production of upper leather (000 sq m)
Production of leather footwear (no. of pairs) Pakistan India China Bangladesh
Growth (lhs)
12 65 14
7 55 12
10
2 45
thousands
8
percent
percent
-3 35 6
-8 25 4
2
-13 15
0
-18 5 Finished Leather Leather gloves Leather
leather garments footwear
-23 -5 (cow/buff
FY 13 FY 14 FY 15 FY 16 FY 17 hides)
Data source: Pakistan Bureau of Statistics Data source: Pakistan Tanners Association
47
One of the plants of Byco refinery with a capacity of 85,000 barrels a day has resumed its operations in July 2017 (after
remaining closed for almost two years due to a fire), and is gradually improving on its capacity utilization.
48
In particular, export quantum of leather garments, which had declined by 6.5 percent during FY16, recorded another steep
fall of 16.8 percent during FY17. Similarly leather gloves showed a contraction of 5.1 percent after experiencing a decline
of 28.6 percent last year.
49
Eid season accounts for around 40 percent of the total raw material accumulated from the domestic economy.
50
In addition to 4 percent custom duty, the machines are subjected to an average of 17 percent sales tax.
26
Economic Growth
Lastly, it appears that the domestic demand has been increasingly catered to by imported low-cost Chinese products.51
In sum, the leather industry is finding it challenging to compete in the global markets due to reasons mentioned above.
However, some improvement is expected in this sector as:
(1) The federal government has announced removal Table 2.2.1: Cost of Doing Business in Leather Industry
of the custom duty on imports of raw materials
US dollar
(raw hides & skins/pickled and wet blue) in the
Pakistan Bangladesh India Vietnam
FY18 budget.
(2) Moreover, the government has promised to Electricity ( per KWh) 0.1 0.09 0.09 0.08
release all pending sales tax claims of the Gas (Industrial
Captive Power) (per
manufacturers at the earliest.
MMBTU) 7.7 3.0 4.7 6.0
(3) The government has announced an export Minimum wages (per
promotion package that targets the export- month) 135.0 68.0 115.0 113.5
oriented sectors of the economy, including Data source: Pakistan Tanners Association, and Council for Leather
leather. A rebate of 7 percent on selected Exports (India).
leather products would be provided in order to
stimulate the industry.52
(4) Knowledge sharing efforts have intensified in Punjab, where the tanners are running advertisements to educate the
general public and hides collectors on the accurate procedures of preservation.
Bangladeshs leather sector observed a healthy growth last year, and is increasingly gaining momentum in the global market.
With its supply chain disturbed due to ban on cow slaughtering in India, the manufacturers in Pakistan are expecting to
exploit this opportunity to provide raw and low-value added leather to Bangladesh as raw material.
2.4 Services
The growth in services sector contributed more than two-third of the increase in overall GDP. The
performance of services sector was fairly broad based, with wholesale and retail (the dominant
subsector) posting 6.8 percent increase in value addition compared to 4.3 percent in the previous year
(Table 2.10). This was on the back of strong increase in imports (that more than offset the decline in
exports) and growth in both the commodity producing sectors (agriculture and industry).
Table 2.10: Performance of Services

share and growth in percent; contribution in percentage points
Share in Contribution to
Growth
GDP growth
FY17
target
Wholesale and retail trade 18.5 4.3 5.5 6.8 1.9 2.1
Transport, storage and communication 13.3 4.8 5.1 3.9 0.8 0.9
Finance and insurance 3.4 6.1 7.2 10.8 0.5 0.6
Housing services 6.6 4.0 4 4.0 0.4 0.5
General government services 7.6 9.7 7 6.9 0.8 0.9
Other private services 10.2 6.8 6.7 6.3 1.0 1.1
Services 59.6 5.5 5.7 6.0 5.5 6.0
Data Source: Pakistan Bureau of Statistics
Given the constantly rising share of services in the economy (Figure 2.14) and constrained
merchandise exports, efforts are needed to enhance quality of services in the country to make it
competitive in international markets in line with other developing economies (Box 2.3).
51
Leather and related items are produced in broadly four quality variants in Pakistan. With Pakistan being a low-income
economy, domestic market demand is predominantly for the lower quality products, while higher quality goods serve the
export markets.
52
Initially, the leather products included in the package did not adequately cover the manufacturing base of the local
industry. In this regard, the association had asked for 8 other HS codes to be included, and they have now been made part of
the package.
27
Finance and Insurance recorded an Table 2.11: Finance and Insurance

encouraging growth of 10.8 percent compared percent
to 6.1 percent growth observed during FY16 Share in Growth
(Table 2.11). Scheduled banks, the largest FY17 FY16 FY17
Central banking 2.4 -3.2 8.8
component, spearheaded the performance by Other monetary intermediation 84.9 6.9 10.6
contributing 73 percent to the segments Scheduled banks 82.0 6.4 9.6
growth. Low interest rates affected the Non-scheduled banks 2.8 31.5 50.2
profitability of commercial banks, which Other financial services 1.5 2.3 5.0
contracted by 3.9 percent as opposed to a 2.7 Insurance, reinsurance and pension fund 3.3 9.7 -4.0
Activities auxiliary to financial services 7.9 -0.5 23.1
percent increase observed during FY16.
Finance and insurance 100 6.1 10.8
However, the impact of this was more than Data source: Pakistan Bureau of Statistics
offset by a healthy rise in advances (18.1
percent) and deposits (14.1 percent). Figure 2.14 : Share of Services and Commodity Producing
Encouragingly, not only was this increase Sectors in GDP
broad-based (with intake by almost all the Commodity producing Services
segments and sectors of economy, including 60
textile, sugar, energy, cement etc), it came with
56
decreasing infection ratios (from 11.1 to 9.3
percent) amongst most categories. Thus 52
percent
finance and insurance segment posted a 9.8

percent increase in value addition, compared to 48
a growth of 5.9 percent in FY16.
44
Transport, storage, and communication also 40

FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
continued to grow albeit with a slower pace in
FY17, registering a growth of 3.9 percent
against 4.8 percent during FY16. This Data source: Pakistan Bureau of Statistics
deceleration in growth can be mainly attributed to steep decline in gross value addition by railways
and PIA, and continued contraction in water and pipeline transport (Figure 2.15).
Road transport, however, improved marginally in tandem with improvement in trade activities in the
country as evident from increase in cargo handling activities. The increase in sales of HCVs (trucks
and buses) in the country also point towards growing value addition by the road transport sector.
During FY17, the economy witnessed a rise in total Teledensity on top of the recovery achieved last
year, after a steep decline in FY15, due to the SIM verification campaign (Figure 2.16). Similarly,
Figure 2.15: Sub-sectors of Transport, Storage and Figure 2.16: Teledensity in Pakistan
Communication
Railways Water transport Air transport Total teledensity Growth (rhs)
Pipeline transport Communication Storage
Sim
Road transport verification
60 90 drive 16
45 72 8
percent
percent
30
percent
54 0
15
36 -8
0
18 -16
-15
-30 0 -24
FY16 FY17 FY13 FY14 FY15 FY16 FY17
Data source: Pakistan Bureau of Statistics Data source: Pakistan Telecommunication Authority
28
Economic Growth
the number of broadband users increased to 44.6 million; an addition of around 11 million over the
course of just one year. A major increase in 3G/4G subscriptions was the most dominant contributor
to this performance as the number of mobile broadband customers rose substantially while other
segments (such as DSL and WiMax) showed stagnation or contraction.
Box 2.3: How to Make Services Exportable?

While the share of services in GDP of Pakistan has been on a rising trend in line with the experiences of other developing
economies, the services exports have remained stagnant over time. This is worrisome as Pakistan needs exports to fund the
growing import of intermediate and capital goods, which are essential for the expansion of its industrial base and achieving a
sustained increase in economic growth. More importantly, services exports have a potential of generating higher and more
lucrative returns in the external markets relative to the low value-added industrial goods Pakistan is currently exporting.
Thus, a high share of exports from the services sector could lower the burden on already constrained merchandise industrial
base.
Figure 2.3.1: Comparison of Services Sector

1970s 1980s 1990s 2000s 2010s
70
60
50
percent
40
30
20
10
Share of services in Share of service Share of services in Share of service Share of services in Share of service
GDP exports in total GDP exports in total GDP exports in total
exports exports exports
Pakistan India Philippines
Data source: World Bank
In terms of policy initiative, the government has devised a National Roadmap in 2007 with a view to enhance the quality of
services and make them exportable. The strategy not only highlighted key impediments to services exports but also assigned
priority to segments like Business Process Outsourcing (BPO), IT, and consultancy in their roadmap to harness their
potential competitive advantage. A decade after, however, it is fair to say that palpable gains have not been achieved. This
is evident by the fact that the share of services in total export earnings of the country has shown a marginal decline over time
(Figure 2.3.1).53 The regional competitors, on the other hand, have significantly increased their exports over time, and the
earnings are not concentrated in a few areas but span a
variety of services. Figure 2.3.2: Services Location Index 2016
Financial attractiveness People skills and availability
Business environment
A review of Service Location Index provides some
interesting insights on major obstacles to services Pakistan 3.3 1.3 0.6
exports. In overall terms, Pakistan ranks low at 28th in the
Services Location Index 2016, compared to India (ranks Bangladesh 3.3 1.1 0.9
1st), Philippines (7th), Vietnam (11th), and Bangladesh
(22nd).54 Despite such low ranking, Pakistan fares better Sri Lanka 3.4 1.0 1.1
in terms of labor and operational costs: its financial
attractiveness score is higher than that of India (Figure Vietnam 3.2 1.3 1.2
2.3.2). In comparison, the areas where Pakistans
Philippines 3.2 1.4 1.3
performance remained weak include business
environment and people skills and availability. Hence,
China 2.3 2.7 1.5
any strategy to improve services exports should focus on
skill development, and (in the case of business India 3.2 2.6 1.2
environment) protection of intellectual property rights and
ensuring policy consistency. Data source: A.T. Kearney
53
Most of these inflows include foreign exchange receipts of the government on account of coalition support fund. The
contribution from the private sector remained very low.
54
Source: Survey ranking of A.T. Kearmey a global management consultancy firm.
29
More lessons can be drawn from the success of developing countries, which have been able to increase their services
exports. For example, in terms of IT exports, India has been very successful and offers some important insights:
(1) The role of the policy support has been crucial, both in terms of design and timeliness. For example, the
relaxations and exemptions that Pakistan offered for the import of software and hardware appears comparable to
that of India, but these were implemented with a considerable delay, which amounted to an opportunity lost to
make inroads earlier.55 Similarly, India incentivized the exports of IT by allowing import reliefs and subsidies,
whereas in case of Pakistan, such incentive structures have mostly been absent and, where available, have not
reaped the desired upticks in exports.56
(2) The low computer literacy is another factor that placed Pakistan at a disadvantage, whereas in India, a policy focus
on improving computer-related skills mainly explain the success of Software Technology Park (STP) as export
growth from STP units increased at an average annual rate of 30 percent from 2000-2009.57,58
(3) The role of expatriates in boosting the IT knowledge of the domestic population also remained significant. 59 In
order to tap the potential of knowledge transfer from expatriates, the government introduced various skill transfer
programs such as the Transfer of Knowledge through Expatriate Nationals (TOKTEN).
(4) The imposition of credible intellectual property laws in India has been a distinctive feature to attract foreign IT
firms and nurture emerging domestic ones.60 Though Pakistan has also introduced copyright laws against software
piracy, their implementation has remained far behind the desired level.
In the field of Business Process Outsourcing, Philippines is the third biggest provider behind India and Canada. Success of
Philippines came on the back of low labor costs, presence of English speaking talent pool, support from the government, and
a strong role of the private sector.
Low labor costs: The labor costs constitute 50 percent of the total operating expense of a BPO firm. Thus, low
wages in Philippines relative to international standards has made this country attractive for outsourcing.
Encouragingly, Pakistan fares even better in terms of costs of doing business, especially in the labor-intensive
niche of the BPO sector. This is evident by the fact that the labor costs in the economy are lower than that of
Philippines and even India.
Young, English proficient talent pool: US firms are by far the largest outsourcing parties in the Philippines. A
strong, English speaking pool of skilled graduates, coupled with the similarity of the countries accounting and
legal structures, has resulted in Philippines attracting service provisions such as legal transcription outsourcing and
financial and accounting outsourcing. In comparison, Pakistan also has a pool of young English speaking labor
supply. However, their involvement is restricted to low value added services such as conventional customer care
call centers. The high value added avenues like consultancy and data keeping analysis become difficult to target
due to limited technology and inadequate skills in the workforce.
Government support: As of 2014, there were 300 operating special economic zones in the Philippines under the
supervision of Philippine Economic Zone Authority (PEZA). The firms focusing on export-oriented service
provision are offered various fiscal incentives such as exemptions from local government imports, fees, licenses,
and taxes. For example, a zero duty on operations-related imports is also granted. Similarly, taxable income
deduction incentives are available if a minimum capital to labor ratio (with a focus on local workforce
participation) is maintained, and this deductible amount is doubled if the firm is situated in a less developed area.
In comparison, Pakistan does not have a similar export-oriented focus and even the latest incentive provisions are
limited. The start-up initiatives (see below) for instance, allow exemptions and duty free imports for three years
relative to the minimum of ten years in case of Philippines.
55
India reduced tariffs on computer and software imports for educational purposes as far back as 1970s. In 1984, this policy
was enhanced to make procedures for importing related machineries easier.
56
In India, 1984 policy allowed 50 percent of services export revenues to be used to import required associated inputs. In
1993, the Export Promotion Scheme was extended to the services sector and import duties on software were reduced to 10
percent in 1995.
57
India initiated a program, alongside others, called Human Resource development in IT, under which it aims to make the
populace computer literate, to increase access to internet, and to improve the quality of IT education.
58
In 1986, India formed an export processing zone solely focusing on software-exporting firms. The STP aimed to promote
innovation and exports by allowing duty-free imports of inputs, providing tax exemptions, and permitting repatriation of
investments and royalties. By 2009, around 8455 firms were operating under the umbrella of STP. Pakistan, on the other
hand, has experimented with the concept of IT parks before but has not been very successful in increasing the quality of the
services and, hence, exports.
59
The Indian diaspora constituted around 24 percent of the workers in Silicon Valley.
60
In India, the Copyright Act was extended in 1985 to include software, and piracy was subjected to hefty fines and
punishment. It further encouraged innovation in the sector by safeguarding the rights of investors and publishers.
30
Economic Growth
The role of private sector: The distinctive feature of the Philippines services sector has been the spearheading role
of the private sector. The IT and Business Process Association of the Philippines (IBPAP) has been at the
forefront of the research, analysis, and promotional activities related to the services exports. It participates in
various road shows, campaigns, conferences (such as the World Congress on Information and Communication
Technology and World BPO Forum). It also drafted a Roadmap 2010 to increase the share of Philippines service
exports in the world and another Roadmap 2016 was drafted to highlight, among other things, the next avenues
that the country could focus on to enhance its share of exports (namely, healthcare, information management, and
outsourcing management). In contrast, Pakistans private sector lags behind in such measures and is constrained
by various regulatory and entrepreneurial issues, as evidenced by the very low rating in the World Bank Ease of
Doing Business Report.
In sum, Pakistan can benefit from low wages and the presence of English speaking pool of workforce. However, there is a
need to focus on improving labor skills, and providing the private sector with a suitable business environment where they
can explore growth opportunities. This is important so that the country can take advantage from forthcoming export
opportunities provided by a few positive developments under CPEC. For example, the construction of Technology and
Commerce Park in Islamabad would benefit the IT firms, while the development of Special Economic Zones (SEZs) would
help spur interest and competition in complementary services sectors such as accounting, consultancy, hospitality, catering,
etc. Furthermore, exposure to potential export-oriented firms and competition from Chinese counterparts would encourage
innovation and a focus towards value addition.
Healthcare is another area which is growing rapidly in developing countries, especially the Asian market that includes India,
Thailand, Philippines, and Singapore.61 Pakistan can also strive to become a medical tourism destination. It may be noted
that a number of expatriates already visit Pakistan to benefit from low cost medical services (e.g., dental checkups and
surgical treatment).
The government has already been providing appropriate policy support to exploit the aforementioned opportunities. In
particular, the recent introduction of incentives for start-up under the new budget is a step in the right direction as it promotes
entrepreneurship and incentivizes the private sector to take initiative in shaping the export orientation of the service sector.62
Secondly, the establishment of various technology centers and internship programs are to ensure the minimization of
prevalent skill differential between labor demand and supply.63 However, such programs need time before they would
materialize in the shape of increasing export revenues. This is evidenced by the fact that it has taken Indias effective policy
mix close to three decades to result in global dominance; similarly Philippines export zone initiatives focused on long-term
incentive structures.
Reference: Goswami, Arti Grover; Mattoo, Aaditya; Sez, Sebastin (2012), Exporting Services: A Developing Country
Perspective World Bank Report.
61
Over the years, due to rising cost and time restraints of the medical system in the developed countries, now, their nationals
are visiting the developing countries for treatment at affordable prices in countries.
62
The label would, among other things, provide tax exemptions and subsidies on withholding taxes for up to three years.
Importantly, these start-ups are envisaged to enter predominantly in the technology sector, hence potentially paving way for
a much needed improvement in services sector.
63
The government is focusing on addressing the skill building in various segments, such as FinTech (focusing on payment
sector and P2P lending facilities, etc), Internet of Things Innovation Centre (to enable start-ups in the up and coming IoT
domain), and Robotics Innovation centre (to encourage investment and focus on automations and capital goods
enhancement) and the continued focus on training programs such as Digital Skills Training Program for Freelancing, ICT for
Girls, and National ITC Internship Program.
31
3 Monetary Policy and Inflation
3.1 Policy Review

Monetary policy in FY17 was centered on consolidating the gains from favorable interest rates set
earlier at a historic-low level of 5.75 percent.1 The objective was to capitalize on the conducive
macroeconomic environment and push forward the private investment recovery in the country. While
keeping the policy rate unchanged, SBP proactively intervened in the interbank market to ensure
sufficient liquidity at banks disposal, and to keep the overnight rates close to the target rate (Figure
3.1). This was facilitated by net retirements to commercial banks by the government, as well as
diversion of budgetary borrowing towards SBP; this freed up commercial banks resources for private
lending.2 Consequently, overnight rates declined further and weighted average lending rates
(incremental) remained 57 basis points lower on average during FY17 than the last year, and reached
a 12-year low of 7.2 percent.
The continued spell of low interest rates in Pakistan represents a situation that, at least for now, is
common across major emerging market (EM) economies especially in Asia (Figure 3.2): at a time
when global trade remains sluggish, domestic demand has to take the lead in bringing the output
levels close to respective potentials. Therefore, in many EMs including Pakistan, interest rates are
currently hovering at record low levels. However, despite subdued inflation and a modest growth
outlook, central banks in these countries cannot pursue drastic policy rate cuts. This is because
notwithstanding the recent decoupling with Fed rates, EMs financial markets remain strongly
integrated with those in advanced economies; therefore, excessively low rates run the risk of spiking
volatility in currency markets.3
In Pakistans case, however, the reason for maintaining the current rate is different in nature. The key
concern for SBP is the deterioration in the external account, as a strong growth in imports is turning
the balance of trade further against Pakistan. In the past, declining comfort on the external front had
tended to limit the scope for accommodative monetary policy. In hindsight, FY17 was no exception.
Figure 3.1: Weighted Average Overnight and Lending Rates Figure 3.2: Policy Rate s and Average Inflation in
Emerging Markets during FY17
Lending rates Overnight rates
Policy rate Average inflation
12 12
10 10
percent
percent
8 8
6 6
4 4
2 2
0 0
Indonesia
Malaysia
Turkey
India
Russia
Bangladesh
S. Africa
Thailand
Pakistan

Vietnam
China
Brazil
Data source: State Bank of Pakistan Data source: Haver Analytics
1
In September 2015 and May 2016, the Monetary Policy Committee (MPC) cut the policy rate by 50 basis points and 25
basis points respectively.
2
Typically, the borrowing from central bank is considered to have inflationary impact in the economy. However, the growth
of reserve money in recent years, does not pose any significant risk for the already low inflation environment in Pakistan.
3
The impact of the taper tantrum episode of 2013 is an obvious case in point, when even the suggestion that the Federal
Reserve might gradually roll back monetary expansion in the US sparked capital outflows from emerging markets.
State Bank of Pakistan Annual Report 201617
For most of the year, the challenge for monetary policy making was to strike a balance between a
below-target economic growth and subdued inflation on the one hand, and widening current account
deficit on the other.
The trend in these competing indicators went through significant changes during the course of the
year. For instance, in the initial months of FY17, though supply-driven pressures began to emerge on
CPI, the overall inflation was benign, especially compared to the target set for the year. Meanwhile,
the current account deficit was following an increasing trend but the overall external position
remained manageable on the back of official financial inflows. Nonetheless, the MPC exercised
caution and refrained from cutting the policy rate further.
By the time the MPC convened for the final meeting of the year, though, conditions in the external
sector had become even more challenging. Not only had the current account deficit tripled for the
review period compared to a year earlier, capital and financial inflows had also fallen short of
expectations (Chapter 6).4 Tellingly, while previous MPC meetings had typically seen members
debating one of two possible policy courses (i.e. status quo or cut), the May 2017 decision to maintain
the status quo was unanimous.
Nonetheless, the positive response of Figure 3.3: Trends in Private Credit and Investments
businesses to low interest rates was indeed Private gross fixed capital formation Private credit
comforting. Private sector credit increased by 30
an unprecedented Rs 747.9 billion during the
year, inching up to a 5-year high in terms of 25
GDP. More than a third (40 percent) of the
percent of GDP
borrowings by private businesses was meant 20

to finance fixed investments. Manufacturing
15
concerns remained the major beneficiaries,
taking financing both for fixed investment as 10
well as working capital requirements. In case
of working capital, the increasing prices of 5
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
inputs such as cotton and coal contributed;
whereas, in case of fixed investment loans, the
enhanced coverage of SBPs refinance Data source: State Bank of Pakistan and Pakistan Bureau of Statistics
schemes factored in. That said, anecdotal
evidence suggests that the boost in capital expenditures in manufacturing sector mainly represented
investments in balancing, modernization and replacement (BMR), as a visible pick-up in fresh
investments still eludes. In the non-manufacturing sectors also, private contractors in construction
and power sectors are taking long-term loans primarily for the completion of public projects.
Together, these factors help explain, to a certain extent, why private investment has not picked up as
yet (Figure 3.3).
It is expected that with investor confidence gradually being restored, capital expenditures firming up
and imported machinery flowing into the country, the rate of private investment would gather pace
soon. A bigger challenge for SBP has been the limited progress on the inclusion front. Commercial
banks are still overly devoted to big corporate clients and their exposure on underserved segments
such as SMEs and agriculture is quite low in comparison.5 In this context, microfinance banks hold
promise as these institutions are catering to financial needs of a number of microenterprises in the
4
The current account deficit for Jul-Apr 2017 was US$ 7.2 billion, compared to US$ 2.4 billion deficit in Jul-Apr 2016.
This was the latest available data for the May 2017 meeting, as documented in MPC minutes.
5
Although SME credit posted a recovery in FY17, growing by Rs 78.5 billion over the last year, these comprise only 5.9
percent of total bank advances.
34
Monetary Policy and Inflation
country as well as small-scale agriculture activities. Islamic finance too is taking leaps as supportive
regulatory measures have helped broaden the access of Shariah-compliant financial products. In
FY17, nearly a third of banks lending to the private sector was by Islamic banks and Islamic bank
branches of conventional banks.
In short, improvements emanating from monetary policy and regulatory measures are being felt at
both macro and micro levels, as private sector credit is expanding at a fast pace, and a notable
vibrancy is observed in real sector activities. However, from the perspective of private investments
and financial access, the progress is too slow for comfort. A sense of urgency stems from the fact that
the direction of macroeconomic policies is set only after a careful balancing of often-competing
objectives. Specifically, volatility in global commodity prices (especially crude and palm oil) has
increased, which has a significant bearing on the outlook of both the countrys balance of payments as
well as inflation. Furthermore, the impact of domestic demand on headline inflation appears modest
so far, but these pressures are steadily firming up, as an exceptional growth in the countrys imports
and a rise in core inflation would indicate.
These pressures notwithstanding, SBP will continue to monitor the risks to the economy to better
guard macroeconomic stability in the country. In the meantime, the large corporate sector must come
forward and take charge of capital formation in the country, either by using resources of the banking
industry, issuing debt instruments in the capital market, or by deploying its own funds. Side by side,
commercial banks must deepen their partnership with marginalized segments of the economy and
develop more innovative products and services that address their financial constraints. Without
engaging the micro, small and medium entrepreneurs, the objective of a more inclusive and
sustainable economic growth will be hard to achieve.
3.2 Developments in Monetary Aggregates

On the surface, broad money (M2) grew at a similar rate during FY17 compared to a year earlier
(Table 3.1). However, two features of the M2 growth in FY17 are quite peculiar: first, having
increased by 13.7 percent during the year, the outstanding stock of M2 has reached to the historic high
level as percent of GDP (Figure 3.4). And second, its composition presented a great deal of variation.
On the liability side, the growth in deposit mobilization remained much higher than last year, whereas
currency growth eased to 17.3 percent as compared to a sizable expansion of 30.5 percent in FY16.
Table 3.1: Key Monetary Indicators

Flows in billion rupees Growth rate (percent)
FY11-15 FY11-15
FY16 FY17 FY16 FY17
(Average) (CAGR)
Money supply (M2) 1,101.0 1542.7 1,756.2 14.3 13.7 13.7
Currency to deposit ratio 28.5 35.2 36.7 - - -
Currency 251.9 779.0 577.4 14.6 30.5 17.3
Total deposits 847.7 758.7 1,174.9 14.3 8.7 12.4
of which
Non-financial public sector enterprises 32.1 81.0 143.3 8.9 16.9 25.5
Non-bank financial institutions 18.4 90.1 118.1 14.9 47.1 42.0
Private sector (business) 237.6 29.1 341.0 13.7 1.2 13.4
Personal 487.8 470.9 439.3 16.2 10.2 8.6
Data source: State Bank of Pakistan
Encouragingly, businesses deposits that were affected significantly by the imposition of withholding
tax last year, showed an impressive recovery in FY17 (Table 3.1). However, it appears that the
impact of withholding tax is still prevalent on personal deposits. In addition to households, this
category also includes bank accounts of unregistered businesses, and the continued deceleration
35
represents their inclination towards cash-based Figure 3.4: Money Supply

transactions.6 In fact, these businesses are
switching to alternate modes of payment, e.g., 50
larger denomination prize bonds.7 As a result,
40
the currency to money supply ratio in Pakistan,
percent of GDP
which was already quite high compared to
30
other EMs, increased further during the year
(Figure 3.5a & b). 20
On the asset side also, the composition of M2 10

went through significant changes; while the
contribution of net domestic assets continued to 0
FY63
FY66
FY69
FY72
FY75
FY78
FY81
FY84
FY87
FY90
FY93
FY96
FY99
FY02
FY05
FY08
FY11
FY14
FY17
dominate, the net foreign assets of the banking
system recorded a trend reversal and posted a
contraction of 40.2 percent during the year. Data source: State Bank of Pakistan and Pakistan Bureau of Statistics
Figure 3.5a: Currency in Circulation to Money Supply Figure 3.5b: Currency in Circulation to GDP*
Jul-May16 Jul-May17 FY15 FY16
Hong Kong Chile
Korea Brazil
China Indonesia
Malaysia Turkey
Chile Korea
Turkey Philippines
Mexico Mexico
Brazil Argentina
Philippines Malaysia
Indonesia Georgia
Thailand Bangladesh
Bangladesh Thailand
India Russia
Egypt China
Hungary Azerbaijan
Russia India
Pakistan Pakistan
Ukraine Egypt
Georgia Hungary
Argentina Tajikistan
Azerbaijan Kyrgyz Republic
Kyrgyz Republic Hong Kong
Tajikistan Ukraine
0 20 40 60 80 0 5 10 15 20 25 30 35
percent percent
*Time period for GDP differs for countries as per their practices.
Data source: Haver Analytics GDP data is not available for many countries for FY17.
Net Foreign Assets

In contrast to last years expansion, the NFA of the banking system declined considerably during
FY17 (Figure 3.6). The trend reversal of SBP NFA stood out in particular, which resulted from the
external account deficit and corresponding US$ 2 billion drawdown in SBPs foreign exchange
6
In contrast, a few emerging economies managed to contain this phenomenon. In particular, Indias demonetization decision
was behind the significant decline in currency to money supply ratio. Likewise, Egypts currency to money supply slightly
improved in favor of a cashless economy; one possible reason may be the increase in opportunity cost for holding cash, since
interest rates in Egypt currently stands at historically high level. Furthermore, in case of Russia, the central banks efforts
towards financial inclusion have shown some improvement.
7
In continuation of trend that emerged in FY16, investments in large-denomination prize bonds increased considerably in
FY17 as well. During the year, investments in Rs 40,000 denomination posted an increase of 18.1 percent, whereas the same
in Rs 25,000 denomination grew by 26.7 percent over last year.
36
reserves during the period (Chapter 6). This

Figure 3.6: Net Foreign Assets of the Banking System
development was compounded by a continuing SBP Scheduled banks Total
decline in NFA of scheduled banks, the bulk of 450
which owed to incurrence of higher FX
liabilities, such as loans. Consequently, NFA 300
flow in billion Rs
of the banking system made a negative (-3.2 150
percentage points) contribution to M2 growth,
compared to positive contributions in each of 0
the earlier three years.8 -150
Net Domestic Assets -300

The NDA of the banking system expanded -450
significantly during FY17 compared to a year
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
earlier (Table 3.2). This expansion was
triggered by (a) higher budgetary borrowings Data source: State Bank of Pakistan
from the banking system; (b) an unprecedented
flow of credit to the private sector; and (c) sharp increase in credit to PSEs.
Budgetary borrowing shifted gears

With decelerating revenue collection creating Table 3.2: Monetary Aggregates
fiscal strain, budgetary borrowing from the flow in billion rupees; growth in percent
banking system during FY17 was considerably Flows Growth
FY16 FY17P FY16 FY17 P
higher than last year. Moreover, there was a
Reserve Money 831.6 894.2 26.5 22.5
notable shift in its composition: in contrast to M2 (A+B) 1,542.7 1,756.2 13.7 13.7
FY16 when the government had retired SBP A. NFA 194.9 -405.2 24.0 -40.2
debt and borrowed heavily from commercial SBP 310.6 -204.1 43.0 -19.8
banks, the bulk of budgetary funding in FY17 Scheduled banks -115.8 -201.1 NA NA
was arranged by SBP (Figure 3.7). B. NDA 1,347.9 2,161.5 12.9 18.3
Government borrowing 861.3 1,135.8 12.4 14.5
Consequently, reserve money grew by 22.5
Budgetary borrowing 791.3 1,087.1 12.4 15.1
percent during the year, with the substantial SBP -486.6 907.7 -25.2 62.9
rise in NDA of SBP (i.e. more than double the Scheduled banks 1,277.9 179.4 28.6 3.1
flow compared to last year) overshadowing the Commodity operations 72.1 49.9 12.8 7.8
drag on reserve money created by declining Non-government borrowing 556.6 1,107.1 12.5 22.1
NFA of the central bank.9 Private sector 446.5 747.9 11.2 16.8
Private businesses 340.0 625.5 11.3 18.6
PSEs and other financial
The governments reliance on scheduled banks institutions* 110.1 359.1 24.3 63.8
was quite modest this year. This phenomenon Other items net -70.1 -81.4 NA NA
was more pronounced in H1-FY17, during OMO impact 870.9 -0.3 NA NA
P
:Provisional; Monetary statistics will be revised after the finalization
which, two noteworthy developments occurred of Annual Financial Statement of SBP for the year 2016-17.
in PIB auctions. First, the highest-ever *Credit to PSEs includes Rs 100 billion SBP investment in Pakistan
maturity (in a single quarter) of the bonds fell Security Printing Corporation during FY17.
NA: not applicable
due in Q1-FY17, the bulk of which was not Data source: State Bank of Pakistan
rolled over. And second, the government
scrapped all the three auctions of Q2-FY17, as banks were looking forward to higher interest rates and
offered volumes lower than Q1-FY17. Therefore, all the budgetary requirements were met through
borrowing from SBP during this period.
8
The contribution of NFA of the banking system to M2 growth was 3.7, 2.2 and 1.7 percentage points in FY14, FY15, and
FY16 respectively.
9
NDA of SBP increased by Rs 1,098.3 billion during FY17, compared to Rs 521 billion a year earlier. Meanwhile, NFA of
SBP declined by Rs 204.1 billion during the year, compared to an increase of Rs 310.6 billion during FY16.
37
In H2-FY17, however, the government altered Figure 3.7: Budgetary Borrowings from the Banking System
its approach and reverted to borrowing from
SBP Scheduled banks Banking system
scheduled banks. This happened not only
because banks increased offered amounts in T- 1500
bill and PIB auctions, but also aligned their bid 1200
rates with cut-offs in last successful auction.
flow in billion Rs
900
As a result, on aggregate, the government
600
borrowed Rs 649.9 billion from scheduled
banks during H2-FY17, and retired Rs 7.5 300
billion to SBP. 0
-300
In terms of instruments, budgetary borrowing
-600
from scheduled banks was concentrated in T-
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
bills during FY17, as opposed to the
predominance of PIBs last year. This was Data source: State Bank of Pakistan
evident from the amounts accepted (net of
maturity) against each class of security, as well as the higher acceptance-to-offered ratio for T-bills
during the year (Table 3.3). From scheduled banks perspective, the anticipation that interest rates
had bottomed out, coupled with narrower spread between PIBs and T-bill yields, prompted more
placements in shorter tenor securities. On the whole though, the year was characterized by a
relatively low appetite for government securities on the part of scheduled banks, as indicated by the
lower offered-to-target ratios for FY17 compared to a year earlier.
Table 3.3: Auction Profile of Government Papers

billion rupees
Total Net of maturity Offered/ Accepted/
Target Maturity*
Offered Accepted** Target Offered Accepted target offered
Market treasury bills
FY16 5,100 4,470 8,975 4,909 630 4,505 439 1.76 0.55
FY17 7,200 6,431 11,351 7,734 769 4,920 1,303 1.58 0.68
Pakistan investment bonds
FY16 775 197 2,560 964 578 2363 767 3.30 0.38
FY17 800 1,427 1,758 894 -627 331 -533 2.20 0.53
* Maturity excludes PIB coupon payments.
** Only Market Treasury-bills offered amount does not include non-competitive bids.
OMOs were instrumental

The shifting pattern of budgetary borrowing Figure 3.8: Outstanding Level of OMO Injections (Average)
had implications for the interbank market and
1,750
SBP liquidity management. In the first half, the
1,500 1,383
heavy retirements made to scheduled banks 1,267
were almost entirely offset by equivalent 1,250
billion Rs
reduction in OMO injections. However, during

1,000
H2-FY17, temporary liquidity pressures could
have emerged on account of the governments 750
reversion to borrowing from scheduled banks. 500
To prevent this, SBP duly stepped up its OMO
250
injections especially during the fourth quarter
with the aim of keeping overnight rates close 0
to the target rate (Figure 3.8). As a result, the Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
weighted average overnight rates remained (on FY15 FY16 FY17
average) 7 basis points above the policy rate Data source: State Bank of Pakistan
38
during H2-FY17.10 In addition, commercial banks availed SBPs reverse repo facility on fewer days
and availed lower volume of funds from the SBP window during FY17, compared to a year earlier. 11
Moreover, the coefficient of variation of overnight interest rates also declined compared to last year.12
Taken together, these findings reflect smoother implementation of monetary policy.
Meanwhile, retail rates declined during FY17 from a year earlier. The weighted average lending rate
(WALR) on incremental basis fell to 7.2 percent, from what was already a decade-low 7.8 percent in
FY16. This dip occurring in the absence of a policy rate cut stemmed from: (a) higher deposit
generation; (b) the lower yields on offer from PIBs, which motivated banks to extend loans to
creditworthy private borrowers instead; and (c) increased competition among conventional banks and
Islamic banks.
PSE borrowings increased sharply

As compared to earlier years, credit to PSEs witnessed rapid expansion during FY17 (Figure 3.9); 13
the bulk of the flow is related to energy sector entities. Various public projects have been funded
using banks resources like the development of LNG pipelines, construction of Dasu dam and
Neelum-Jhelum power project.
It is also important to highlight that the bulk of Figure 3.9: Expansion in Credit to PSEs
PSE borrowing is associated more with their Stock (rhs) Growth
cash flow management than financing their 100 798.6 900
development outlays. Firstly, circular debt 800
80
issue seems to be a major contributing factor, 700
60
which led: (a) Power Holding Private Limited 543.8 600
billion Rs
40
to borrow primarily for the settlement of power
percent
500
sector payables to IPPs and fuel suppliers; and 20
400
(b) PSO to acquire short-term loans to manage 0
300
its liquidity constraints. Secondly, WAPDA -20 200
approached banks not just to finance -40 100
expenditure related to Neelum-Jhelum and -60 0
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Dasu projects, but also to finance payments due Jun-17

to the Punjab government with regard to hydel
profits accumulated during the period 2005-16. Data source: State Bank of Pakistan
And thirdly, borrowings by Government
Holdings (Pvt.) limited represented its liquidity needs for dividend payments to its shareholders.
Having said that, it appears that some PSEs could have done without borrowing additional funds from
commercial banks. Specifically, these entities are sitting on a large volume of unutilized funds, and
their continued borrowing from the banking system is only adding to their financial costs (to the tune
of spread they are paying). On aggregate, PSEs deposits amounted to Rs 705.0 billion at end June
2017, which equals 87 percent of their outstanding advances from the banking system. Moreover,
10
For reference, weighted average overnight rates remained 6 basis points above the policy rate during FY17, compared to 7
basis points a year earlier.
11
Commercial banks availed SBPs reverse repo facility on only 35 occasions during FY17, compared to 52 visits in
FY16. Similarly, the volume of borrowing from the SBP window was also lower, amounting to Rs 935.1 billion during
FY17 compared to Rs 2.8 trillion last year.
12
Specifically, the coefficient of variation of weighted average overnight repo rates declined from 6.8 percent in FY16 to 3.3
percent in FY17.
13
In Figure 3.9, the stock and growth in credit to PSEs excludes the Rs 100 billion SBP investment in Pakistan Security
Printing Corporation (PSPC) during FY17. For further details regarding PSPC, see SBP Press Release titled SBP acquires
Pakistan Security Printing Corporation, dated 5 July, 2017.
39
some PSEs have deposited a large volume of funds in fixed deposits to ensure a regular stream of
income. Anecdotal evidence suggests that some institutions seem hesitant in drawing from their
deposits to meet operational expenses, in order to avoid penalties associated with premature
withdrawals.
3.3 Credit to Private Sector

Credit to private sector witnessed a historic Figure 3.10: Non-performing Loans as Percent of Advances
expansion of Rs 747.9 billion during FY17. Gross Net
The robust lending is a reflection of favorable 16
supply as well as demand conditions in the
economy. On the supply side, the most helpful
12
factor was a healthy deposit growth during the
year, which significantly improved liquidity of
the banking system. Banks were willing to 8
scale up their exposure on private sector also
because of a steady improvement in their 4
perceived credit risk; over the past 5 years,
non-performing loans as percent of advances
has been declining (Figure 3.10). Recent laws 0
Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17
and regulatory measures to clean bad loans
from the books of banks, higher recovery rates
and better economic growth prospects of the
Figure 3.11: Loans to Private Business -Type of Financing
economy explain these falling infection ratios.
Fixed investment Working capital Trade finance
On the demand side, low financing costs 700

Less working capital
encouraged private businesses to leverage 600 requirement due to low
flow in billion Rs
further; an added impetus came from CPEC- 500 commodity prices

related activity and higher PSDP expenditure,
400
which triggered the demand for fixed
investment loans by private businesses. 300
Moreover, a higher capacity utilization and 200
recovery in input prices (specifically cotton 100
and coal) increased working capital
0
requirements of manufacturing firms (Figure
FY14
FY15
FY16
FY17
3.11).14
Businesses dominated as usual
Over 60 percent of the loans to private businesses were availed by manufacturing concerns, within
which the most active borrowers were the producers of sugar, grain milling (wheat and rice), dairy,
textiles, and cement (Table 3.4).
In case of working capital loans, the bulk of the demand came from food manufacturers. Sugar
industry stood out in particular as they were to procure an all-time high crop during the year;
meanwhile, the presence of unsold sugar stocks also increased their dependence on bank borrowing.
Funds availability at low cost helped sugar mills to raise their capacity utilization and increase
production levels by 37.8 percent YoY. In addition to sugar industry, grain millers and dairy firms
14
Coal prices rose 50.4 in the international market during the period July 2016 to June 2017, compared with fall of 15.9
percent in the corresponding period last year. Coal registered the highest inflation in FY17 in prices of 52 global
commodities available from IMF. Domestic cotton (cotton yarn) recorded inflation of 14.7 percent in FY17, compared with
fall of 4.1 percent last year. International cotton prices rose 18.5 percent during Jul 2016 to June 2017, compared with fall of
2.9 percent in the same period last year.
40
too borrowed heavily this year to scale up their production levels in order to cater to the demands of
growing clientele.
Table 3.4: Loans to Private Sector Businesses (Flow)

billion rupees
Total loans Working capital Fixed investment Trade financing
FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17
Total 321.9 624.9 110.9 286.6 171.7 253.0 39.3 85.4
Of which:
1. Manufacturing 210.9 384.3 132.4 177.7 31.0 132.7 47.5 74.0
Food products and beverages 46.7 151.3 26.6 104.6 10.9 35.7 9.2 11.0
i. Sugar 8.6 82.1 6.1 63.6 5.7 14.6 -3.2 3.8
ii. Grain mills products 15.8 25.8 13.2 22.7 -0.7 -0.3 3.4 3.3
iii. Dairy products -9.3 20.4 -4.0 12.2 -6.3 8.0 1.0 0.3
Textiles 62.7 82.8 33.7 25.2 13.1 36.7 15.9 20.8
Cement -4.3 21.4 4.4 6.1 -7.8 10.6 -0.9 4.8
Coke, refined petroleum products 9.1 15.6 9.1 12.8 -5.3 1.3 5.3 1.5
Fertilizers 51.7 9.8 42.2 -5.7 9.0 10.8 0.5 4.6
2. Electricity, gas and water supply 38.0 60.1 13.5 25.2 31.1 29.6 -6.7 5.3
3. Commerce and trade 28.5 42.7 20.7 36.6 8.6 3.4 -0.1 2.8
4. Construction 31.6 41.0 1.2 17.8 31.2 24.3 -0.8 -1.1
5. Transport, storage and communications 35.3 29.2 0.9 0.2 34.9 28.1 -0.5 0.8
6. Real estate, renting & business activities 16.4 18.3 8.0 2.3 3.9 11.0 4.5 5.0
7. Mining and quarrying 5.7 13.7 -1.0 -0.4 3.8 13.8 3.0 0.4
Fixed investment includes long terms loans + government self-employment schemes
Working capital includes short term loans + bills purchased and discounted, but excludes foreign bills
Trade financing includes export financing and import financing
Data Source: State Bank of Pakistan
As for the fixed investment loans, earlier changes in SBPs refinance schemes aimed at reducing the
cost and extending their coverage paid off. SBP had reduced the end-user mark-up rate for Long-
term Financing Facility (LTFF) scheme from 7.5 percent to 6 percent for all sectors in July 2015. For
textiles, further concessions included: (i) reduction in the end-user mark-up rate for LTFF from 6
percent to only 5 percent in November 2015 which is even lower than the target rate and (ii)
expanded provision of 100 percent refinancing for the entire spinning and ginning sub-sectors
(compared to only 50 percent refinancing for 6 eligible spinning processes earlier).15 These measures
proved quite effective in enhancing the credit off-take by textiles, which availed almost 85 percent of
loans under the LTFF during FY17. 16 Apart from textiles, fertilizer and sugar sectors also took long-
term loans from the banking system, as a number of firms are setting up captive power plants.
Finally, the impact of CPEC related activities was reflected in increased credit off-take by cement,
infrastructure, and energy-related entities. Borrowings by energy sector were particularly strong as a
number of coal-based power projects began commercial operation. This, together with a steep rise in
coal prices in FY17, helps explain a higher off-take of working capital loans by the sector.17 In
15
SBP is now refinancing 100 percent of the loans extended by banks/DFIs for imported and locally manufactured new
plant/machinery to be used by the export oriented projects of (the entire) spinning and ginning sectors under the LTFF
scheme. Earlier, it was refinancing only 50 percent, and that too for only 6 specified processes of spinning sector (for
details, see IH&SMEFD Circular No 18 of 2015, dated October 30, 2015).
16
This subsidized credit scheme helped the textile sector to maintain the increasing momentum of import of textile related
machinery whose imports rose by 20.2 percent in FY17, compared to only 2.7 percent a year early. Moreover, the
government also provided a number of tax incentives to the textile sector, one of which was an exemption of sales tax on
import of machinery.
17
Generation of electricity from coal rose to 1013 Gw/h in FY17 from only 105 Gw/h in FY16. It is worth to note that few
CPEC related power projects started contributing electricity to national grid lately in FY17 as out of the 1013 Gw/h
generation from coal in FY17, more than 60 percent was only generated in June 2017 alone.
41
addition to CPEC, the ongoing infrastructure projects in the public sector and initiation of mega
housing schemes in urban areas further supported construction activity in the country. Not only did
the credit appetite of cement manufacturers increase, the realtors and private contractors too borrowed
actively from banks.
Consumer loans firming up

Given the low interest rate environment during the year, banks strategized to boost their bottom lines
by taking exposure in sectors that promise higher returns; consumer financing was an obvious choice
(Figure 3.12). Consumer loans kept up their momentum and increased by Rs 70.5 billion in FY17
period, compared to Rs 43.7 billion in FY16. This flow mainly emanated from auto financing, which
held 54.3 percent share in consumer financing during FY17. In addition to low interest rates, the
introduction of new models of passenger cars and increasing popularity of ride-hailing services played
a significant role in auto- financing uptick. 18 The rest of the expansion in consumer lending is largely
explained by financing in segments like personal and housing loans, which increased by Rs 14.2
billion and Rs 12.5 billion respectively.
Figure 3.12: Sector-wise WALR and their Shares in Total Credit of Scheduled Banks in (December 2016)
Share in total credit WALRs
Consumer durables Consumer durables
Credit cards Credit cards
Mining Mining
House finance House finance
Construction Construction
Real estate Real estate
Auto loans Auto loans
Personal loans Personal loans
NBFIs NBFIs
Transport/comm Transport/comm
Commerce/Trade Commerce/Trade
Agriculture Agriculture
Power and gas Power and gas
PSEs PSEs
Manufacturing Manufacturing
0 10 20 30 40 0 10 20 30
percent percent
Data Source: State Bank of Pakistan
From institutional perspective, the impetus to consumer financing is lately coming from Islamic
banking institutions (IBIs), especially in the areas of housing and car financing. In case of car
financing, the share of IBIs has increased to 43.1 percent at end FY17. Their penetration in housing
finance is even more encouraging and they now dominate this segment with 60.9 percent share in the
overall portfolio of the banking industry. The majority of housing finance was taken for outright
purchase, followed by construction, and lastly renovation; this pattern was applicable in case of both
Islamic and conventional loans.
In case of housing finance, a weak valuation mechanism for real estate and legal glitches faced by
commercial banks in exercising their right to collateral has been one of the major restrictive factors in
Pakistan. In the absence of a strong non-judicial foreclosure framework in the country, it takes a huge
amount of time and money for the banks to take possession of, and sell the collateralized properties
upon borrowers default. To address this, amendments have been made in the Financial Institutions
(Recovery of Finances) Ordinance, which ensures collateral foreclosure for banks without recourse to
courts. The judicious application of these amendments is expected to bring positive impact on credit
expansion to households, especially mortgage loans. Further impetus to domestic mortgage financing
18
The auto industry has introduced a range of new models in FY17, particularly of Suzuki (Vitara and Ciaz), Toyota
(Fortuner and Hilux Revo) and Honda (City, Accord and Civic, BR-V).
42
would be provided by the Pakistan Mortgage Refinancing Company (PMRC), which is expected to
become operational in 2017.19
Depth and access is still low

The penetration and depth of private credit in Figure 3.13: Pakistan's Relative Standing in Credit-to-GDP
Pakistan is still low relative to comparative Ratio (2010-16 Average)
countries (Figure 3.13).20 Drawing on such China 137
comparisons is useful because it drives home Malaysia 118
Thailand 110
the potential contribution that private credit can Vietnam 101
make in moving a country rapidly up the Chile 76
development ladder; it is no coincidence that, in S. Africa 68
Brazil 64
general, the economies where credit-to-GDP Turkey 63
ratio is higher have shown more robust growth Nepal 59
over time. India 52
Russia 49
Oman 48
That said, there is no single, correct approach to Cambodia 46
accelerate credit expansion, and referring to the Bangladesh 43
policies and experience of other regional and S.Arabia 42
Colombia 40
emerging market economies simply helps Philippines 36
develop a sense of what has (and has not) Sri Lanka 36
worked in broadly similar economies in recent Indonesia 31
years. Ultimately, Pakistan needs to continue Egypt 28
Mexico 22
formulating and tweaking its own customized Pakistan 16
mix of policies based on the countrys distinct Argentina 14
comparative advantages and limitations. 0 50 100 150
Moreover, it must be borne in mind that Data source: World Development Indicators
achieving a higher credit-to-GDP ratio is just a
means to an end: the prime objective is to Figure 3.14: Segment-wise Advances of Scheduled Banks
expand access to finance so that all deserving Staff loans
2% Others
entrepreneurs and households can avail credit Commodity 3%
financing
on equitable terms. This would empower them 9%
to expand their businesses and improve their Consumer Corporate
sector sector
living standards, and simultaneously help the 6% 69%
country to make progress against its
Agriculture
development agenda. sector
5%
Therefore, the concept of financial inclusion SMEs
sector
has appeared in mainstream policy thinking. In 6%
Pakistan, the state of inclusion is quite low with
only 23 percent of the adult population served
by the formal financial sector.21 Although
private credit is expanding rapidly over the last Data source: State Bank of Pakistan
couple of years, it still remains heavily concentrated in corporate sector (Figure 3.14). By contrast,
19
The PMRC was incorporated in 2014 with the objective of promoting mortgage finance. Facilitated by SBP, the PMRC
aims to develop the primary mortgage market by: (i) providing financial resources so that primary mortgage lenders can
grant more loans to households at fixed/hybrid rates for longer tenure; (ii) reducing the mismatch between house loan
maturities and source of funds; and (iii) ensuring loan standardization across primary lending institutions. Simultaneously, it
would also help develop capital markets by providing more private debt securities and asset backed securities to raise
funds and create a benchmark yield curve.
20
For a detailed discussion, see Khalid, A., and Nadeem, T (2017), Bank Credit to Private Sector: A Critical Review in the
Context of Financial Sector Reforms; SBP Staff Note 03/17; July 2017.
21
Source: Access to Finance Survey 2015.
43
the progress on expanding access to finance for agriculture and SME sector has been mixed during
this period. The upside was that, in absolute terms, credit to these segments increased in FY17
compared to a year earlier; however, their share in total bank credit is quite low relative to their needs
and contribution to GDP.
There was some expectation that IBIs might take the initiative to cater to previously underserved
segments of the economy. Indeed, Islamic financing kept up its growing momentum in FY17 and
credit extended by these institutions went up by another 32.9 percent; however, their exposure in SME
and agriculture financing remained low. Instead most of their lending went to food manufacturers and
textile firms. To be fair though, Islamic banking faces its own unique set of challenges, which may be
holding IBIs back from venturing any deeper into SME and agri-financing territory.22
Figure 3.15: Trend and Composition of CPI Inflation
3.4 Inflation Food Non-food Target
FY17 marked the third consecutive year when
20
the headline CPI inflation remained lower than
the annual target (Figure 3.15). The general
15 11.6
trend was nonetheless increasing: after reaching percent
the multi-decade low level at 2.9 percent during 6.4
10
FY16, the average CPI inflation inched up to 5.5
6.4
5.0
4.2 percent during FY17. 4.8
5 4.1 4.4
9.1
6.5 7.3 3.1 2.6
5.1 4.6 2.0
This trend was spread across a large number of 3.7 3.0 3.8
1.5 0.9 1.6
0
items under the CPI basket.23 As shown in
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Figure 3.16, over half of the items posted a
higher inflation in FY17 compared to last year, Data source: Pakistan Bureau of Statistics and Planning Commission
of Pakistan
and fewer items recorded deflation. This is in
sharp contrast to FY16 when nearly 70 percent Figure 3.16: CPI Prices
of the items showed either deflation or a fall in FY16 FY17
inflation over the preceding year. 300
251
As for the causative factors, domestic demand 250 227
number of CPI items
and supply side factors alike contributed to the 200 168

increase in inflation during FY17: 156
150
(i) The bulk of this increase has stemmed 104
100 68
from food items (Figure 3.17).24 In case of
food, most of the price pressures were seen in 50
case of perishables; stricter controls for 0
import payments delayed shipments of fresh Deflation
Inflation less than Inflation more
vegetables and fruits into the country in the last year than or equal to
last year
initial months of FY17.25 Meanwhile, crop Data source: Pakistan Bureau of Statistics
22
For instance, because of limited availability of Shariah-compliant sovereign instruments, it becomes challenging for IBIs
to meet SLR requirements. And for the same reason, IBIs operate at a higher financing-to-deposit ratio, which also implies
that their risk-weighted assets are higher in proportion to their capital, compared to conventional banks.
23
As compared to FY16, the 7 out of 12 sub indices of CPI index showed higher inflation during FY17.
24
The contribution of energy items in inflation during FY16 and FY17 was negligible.
25
In order to strengthen payment systems and facilitate stakeholders, the customs authorities and SBP jointly introduced the
system of Electronic Import Form (EIF) as an integral part of the goods clearance system (for details, see FE Circular No. 05
of 2016, dated August 09, 2016). In order to import goods into Pakistan, all importers shall be required to submit EIF
request through their Web-based-one-customs (WeBOC) User ID to any authorized dealer of their choice in Pakistan. As
per new requirements, no consignment without the proper filing of the EIF form will be processed. This move will also help
curb informal and illegal transfer of FX across border: since transactions used to get processed manually earlier and it was
not possible to keep record of all transactions, there was a possibility of using informal payment modes to their settlement.
44
damages emanating from heavy rains in July and August 2016 in India also resulted in fewer
supplies of some vegetables in the country. Furthermore, due to security-related measures, cross-
border movement of goods was generally limited during the year.
Figure 3.17: Contribution to Headline CPI Inflation Figure 3.18: Unit Value of Imports, Consumer Price Index and
Wholesale Price Index
NFNE (excl HRI) HRI Food and energy
UVM* CPI WPI
14 10
12
percent growth
5
10
0
percent
8
-5
6
-10
4
-15
Q2-FY14
Q4-FY14
Q1-FY15
Q3-FY15
Q4-FY15
Q2-FY16
Q3-FY16
Q1-FY17
Q2-FY17
Q4-FY17
Q3-FY14
Q2-FY15
Q1-FY16
Q4-FY16
Q3-FY17
2
0
*UVM: Unit value of imports
(ii) A higher inflation in FY17 represents Table 3.5: Average CPI Inflation
stabilization in prices of some of the percent
heavyweight items. For instance, average Average Contribution
prices of potato, rice, cooking oil and ghee inflation in inflation
Weight FY16 FY17 FY16 FY17
had posted a fall in the last year, but posted a
General 100 2.9 4.2 2.9 4.2
nominal increase in FY17. Therefore, the A. Food 37.5 2.1 3.8 0.9 1.6
absence of their negative contribution to i. Food and beverages 34.8 1.0 3.3 0.4 1.2
inflation was prominent in explaining a ii. Tobacco 1.4 22.0 12.0 0.4 0.3
higher headline number this year. For iii. Restaurant 1.2 5.0 5.1 0.1 0.1
B. Non-Food 62.5 3.4 4.4 2.0 2.6
instance, in case of potato, the bumper crop i. Clothing 7.6 4.8 4.1 0.4 0.3
during FY16 had led to a drastic fall in its ii. Housing group* 29.4 5.1 4.9 1.3 1.3
price from an average of Rs 43 to Rs of which: house rent 21.8 5.6 6.5 1.0 1.2
25/kg;26 in FY17, however, the price posted iii. Household equipment 4.2 4.2 3.0 0.2 0.1
iv. Health 2.2 3.7 10.5 0.1 0.2
some recovery and stabilized at Rs 33/kg. v. Transport 7.2 -6.9 -0.8 -0.5 0.0
Similarly in case of rice, the slump in vi. Communication 3.2 0.4 0.9 0.0 0.0
international prices led to a decline in vii. Recreation 2.0 2.1 1.1 0.0 0.0
domestic price of the commodity during viii. Education 3.9 8.5 10.6 0.3 0.4
ix. Misc. 2.8 3.2 5.3 0.1 0.2
FY16. However, during FY17, prices *Housing group includes: house rent, construction inputs,
steadily increased resulting in marginal construction, wage rate, water supply, electricity, gas, kerosene oil,
inflation of 2.8 percent on YoY basis, which and firewood.
Data source: Pakistan Bureau of Statistics and State Bank of Pakistan
was in tandem with global trend.
(iii) A similar phenomenon was seen in prices of imported goods. The deflation in unit values of
imports which was evident throughout FY16, fizzled out completely in FY17 (Figure 3.18); from
Q3-FY17 onwards, there has been a YoY increase in import prices. Most significant impact was
seen in transport group, in which the prolonged spell (27 months) of deflation almost ended in
FY17. This group, which comprised primarily of motor fuels like petrol and high speed diesel,
recorded quite a modest fall in average prices during FY17, compared to 6.9 percent fall during
26
During FY14 and FY15, potato prices show an abnormal trend because of both lower domestic production and high-cost
import of the commodity from China and India during the former year.
45
FY16. In fact, from December 2016 to April 2017, the government increased the prices of motor
fuels in response to an uptick in global oil prices.
(iv) Finally, the increase in core inflation (NFNE) during FY17 was reflected primarily in house
rent, education and health (Table 3.5). Estimates for house rent are revised every quarter based on
surveys in urban areas.27 Having said this, the gradual increase in NFNE inflation is coming from
inflation in education and health related components; their contribution to headline inflation inched
up in FY17.
For the next year, the government has set the target for CPI inflation at 6 percent; SBP foresees the
average CPI inflation to remain within this target. Main assumptions include expectations of better
supply conditions of food items, limited pass-through of international oil prices to domestic market,
steady increase in domestic demand, and improving consumer confidence in the economy, as reflected
in results of IBA-SBP's Consumer Confidence Survey for July-2017.
27
For brief explanation of the house rent inflation see SBPs Third Quarterly Report on The State of Pakistans Economy for
the year 2016-17.
46
4 Fiscal Policy
4.1 Overview
The fiscal deficit was recorded at 5.8 percent of GDP in FY17, against the target of 3.8 percent and
4.6 percent recorded in FY16. The primary deficit, which excludes interest payments, increased to
1.6 percent of GDP from 0.3 percent in FY16. The revenue deficit, which excludes development
expenditure, was 0.8 percent of GDP in FY17, the same as in FY16 (Figure 4.1).
The contained revenue deficit shows that Figure 4.1: Fiscal Indicators
current expenditure grew in line with the Fiscal balance Revenue balance Primary balance
growth in revenues. Thus, from the 0.0
expenditure side, the fiscal deficit in FY17 was
driven largely by an increase in development -2.0
percent of GDP
expenditures.
-4.0
The consolidated development expenditures
maintained the momentum observed during the -6.0
last three years. Within these, provincial
development expenditures increased sharply, -8.0
likely reflecting efforts by provinces to
complete various social and infrastructure uplift -10.0
projects before the upcoming elections. The
capital spending by the federal government was Data source: Ministry of Finance and SBP calculations
already high because of ongoing work on a number of infrastructure projects under CPEC. The
relatively contained interest payment during the last three years, in the prevailing low interest rate
environment, created additional fiscal space to increase its development spending. However,
maintaining these trends in development spending, and supporting general economic activity going
forward, would require revenue generation at a much faster pace than what was observed during
FY17.
Meanwhile, the pace of revenue collection slowed considerably during FY17 compared to last year.
This was largely due to a sluggish growth in tax revenue while non-tax revenue recovered sharply
during FY17. The slower growth in tax collection, particularly by the FBR , was partially due to
various tax incentives announced to support exporting industries and agriculture and for encouraging
investment and employment generation (Box 4.1). In addition, the government absorbed some of the
increase in international oil prices by reducing the sales tax on domestic POL prices, which had
significant impact on sales tax collection.1 These measures added to the FBRs challenges in
achieving even the revised target of Rs 3,550 billion for FY17.
Provincial revenue mobilization also slowed down from the impressive growth achieved during the
last couple of years. The provinces continued to depend on GSTS, motor vehicle tax and stamp duty.
In fact, the growth in provincial revenue during the previous two years was bolstered by GSTS. As a
result of a slower growth in FBR and provincial tax collection, the tax to GDP ratio declined
marginally during FY17, after steadily rising during FY14 to FY16 (Box 4.2). This is not an
encouraging situation for keeping the fiscal deficit low and, at the same time, creating space for
growth-oriented capital spending. It underscores the need to address structural issues in the taxation
1
For details, see Sales tax in the Section Indirect taxes.
system, such as the still narrow base and heavy reliance on withholding taxes on industrial and trade
sectors and salaried individuals.
Box 4.1: Key Tax Incentives Provided in FY172

Several tax incentives were provided to support exporting industries and the agriculture sector. The government also
incentivized investment and employment generation by allowing firms tax credits. The important incentives are summarized
below:
Exporting industries
Five major export-oriented sectors (textiles, leather, sports goods, surgical goods and carpets) exempted from sales tax
(zero-rating) on purchase of raw material.
Under the Prime Ministers Package of Incentives for Exporters, the government: (i) allowed duty draw back up to 7.0
percent on the export of garments, home textiles, processed fabric, Greige fabric and yarn manufacturing cum exporters
units3; exempted customs duty on the import of raw material for textile4 and; exempted sales tax on the import of textile
machinery. 5
Agriculture
Abolished seven percent sales tax on pesticides.
Off peak electricity tariff rates were reduced to Rs 5.35 per unit from Rs 8.85 per unit.
Custom duty on incubators, brooders and on machinery for animal feed-stuff was reduced from 5.0 percent to 2.0
percent.
Custom duty on import of fish feed pellet machines and water aerators was also reduced from 5.0 percent to 2.0 percent.
Custom duty on fish feed and live baby fish was abolished.
Industrial raw material
Customs tariff slabs for import of industrial raw material were reduced from 5 to 4, by merging 2.0 and 5.0 percent slab
to a new 3.0 percent slab, 10.0 and 15.0 percent slabs were substituted with 11.0 percent and 16.0 percent slabs and the
20.0 percent slab was kept unchanged.
To provide incentive to local tyre manufacturers, bead wires were exempted from custom duty.
Custom duty on import of LED lights was reduced to 5 percent; and solar panel was exempted.
Investment and employment generation
Facility of 1.0 percent tax credit for industrial undertaking employing every 50 persons was increased to 2.0 percent,
and the setting up period was extended till June 30, 2019,
Tax credit facility for investment in Balancing Modernization and Replacement was revised upward to 20.0 percent
from the existing 10.0 percent and period to avail this facility was extended till June 30, 2019.
The condition of 100.0 percent of fresh equity raised through shares to avail 100.0 percent tax credit was relaxed up to
70 percent fresh equity raised with proportionate tax credit facility and, the time period for this measure was extended
till June 30, 2019;
The exemption period for investment in green-field industrial undertakings was extended up to June 30, 2019.
Others
The corporate tax rate was further reduced to 31.0 percent.
Tax credit for making sales to registered sales persons was increased to 3.0 percent from existing 2.5 percent.
Tax credit facility of 20.0 percent for enlistment on the stock exchange was extended up to two years.
In the backdrop of a higher fiscal deficit, the governments financing requirements also increased.
While borrowings from external sources increased considerably during FY17, the bulk of financing
was raised from domestic sources. The composition of domestic borrowing also changed, both in
terms of source and maturity: the government switched its borrowing away from scheduled banks to
SBP; and, most of the borrowing from scheduled banks was concentrated in short-term T-bills.
4.2 Revenue
The growth in revenues decelerated to 11.0 percent in FY17 from 13.1 percent in FY16. This was
largely due to sluggish growth in tax revenue, as non-tax revenue recovered strongly in FY17 against
a sharp decline seen in FY16 (Table 4.1). However, despite a substantial increase in non-tax
revenues due to one-off revenue receipts like sale proceeds from the Pakistan Security Printing
Corporation and LNG power plants (acquired under the Pakistan Development Fund), these remained
2
Source: Budget Speech of Minister of Finance; Finance Bill FY17
3
Vide Ministry of textile SRO No. 1(42) TID/17-RDA.
4
Vide FBR S.R.O. No. 39(I)/2017.
5
Vide FBR S.R.O. No.36 (I)/2017.
48
Fiscal Policy
short of the target due to lower than expected SBP profit and receipts under the Coalition Support
Fund (CSF).
Table 4.1: Summary of Fiscal Operations

billion rupees
Actual Percent of GDP
Budget FY17
FY16 FY17 FY16 FY17
A. Total revenue 5347.0 4,447.0 4,936.7 15.3 15.5
Tax revenue 4,306.0 3,660.4 3,969.2 12.6 12.5
Non-tax revenue 1,041.0 786.6 967.5 2.7 3.0
B. Total expenditure 6,623.0 5,796.3 6,800.5 19.9 21.3
Current 5,198.0 4,694.3 5,197.9 16.1 16.3
Interest payments 1,360.0 1,263.4 1,348.4 4.3 4.2
Defence 860.2 757.7 888.1 2.6 2.8
Development 1,435.0 1,301.5 1,693.5 4.5 5.3
Net lending -10 12.6 -12.8 0.0 0.0
C. Statistical discrepancy 0 -212.1 -78.0 -0.7 -0.2
Fiscal balance (A-B-C) -1,276.0 -1,349.3 -1,863.8 -4.6 -5.8
Revenue balance 149.0 -247.3 -261.1 -0.8 -0.8
Primary balance 84.0 -85.9 -515.4 -0.3 -1.6
Financing 1,276.0 1,349.3 1,863.8 4.6 5.8
External sources 234.0 370.5 541.4 1.3 1.7
Domestic sources 1,042.0 978.9 1,322.4 3.4 4.2
Banks 453.0 787.0 276.6 2.7 0.9
Non-bank 539.0 191.8 1,045.8 0.7 3.3
Privatization 50.0 0.0 0.0 0.0 0.0
Percent Growth
Total Revenue 13.1 11.0
Tax revenue 21.3 8.4
Non-tax revenue -13.9 23.0
Total Expenditure 7.6 17.3
Current 6.1 10.7
Development 16.9 30.1
Data source: Ministry of Finance and SBP Calculations
The sluggishness in tax collection was broad-based as the pace of both FBR taxes and provincial taxes
was significantly slower in FY17. Tax revenue grew by 8.4 percent during FY17 about half the rate
envisaged in the budget (17.6 percent), and around one-third of the impressive 21.3 percent growth
achieved in FY16. This was despite release of fewer sales tax refunds against advance tax payments
during FY17.6
Box 4.2: Putting the Low Tax-to-GDP Ratio in Perspective
The tax and administrative reforms implemented during the last few years led the growth in tax collection to remain
consistently higher than the growth in nominal GDP. This resulted in the tax-to-GDP ratio rising to 12.6 percent in FY16
from the low of 9.3 percent in FY11. This performance, however, could not be sustained in FY17. Despite the improvement
in recent years, Pakistans tax-to-GDP ratio still remains one of the lowest in the region, only better than Bangladeshs
(Figure 4.2.2).
Notwithstanding the improvement in general economic activity, the-tax to-GDP ratio fell to 12.5 percent in FY17 from 12.6
percent in FY16. This is also significantly lower compared to 13.6 percent target for the year. Moreover, it fell far short of
6
According to FBR data, sales tax refunds declined by 48.7 percent in FY17, partly due to deceleration in sales tax
collection and presence of unsettled refunds. FBR settled the tax refunds in two stages: claims up to Rs 1.0 million were
settled by mid-July, while claims worth over Rs 1 million were settled in mid-August through direct electronic transfer
(source: http://www.fbr.gov.pk/Press-Release).
49
the 15.0 percent benchmark envisioned in the National Finance Commission (NFC) Award 2009 (Figure 4.2.1).7
Although the NFC Award expected both the federal and provincial governments to step up efforts to increase the tax-to-GDP
ratio to 15.0 percent by FY15, it specifically emphasized that the provinces initiate steps for mobilizing revenue effectively
through taxing agriculture and real estate sectors. However, the performance of provincial tax authorities has been below
par: the combined provincial tax revenues increased to Rs 321.7 billion in FY17 from Rs 54.8 billion in FY10. Against this,
federal tax collection increased from Rs 1.42 trillion to Rs 3.38 trillion. Moreover, provincial revenue collection under
agricultural tax has remained stagnant.
Figure 4.2.1: Tax to GDP Ratio for Pakistan Figure 4.2.2: Tax to GDP Ratio in Neighboring Countries
Tax to GDP ratio NFC 2009
18
18
15
15
12
12
percent
percent
9
9
6 6
3 3
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Ban'desh Pakistan Srilanka Nepal India
Data source: World Bank, International Monetary Fund and the
Data source: Ministry of Finance Central banks
Nevertheless, the low tax-to-GDP ratio indicates the countrys low capacity to make involuntary savings; these savings are
essential for resource redistribution and economic development. The situation warrants a deepening of structural reforms,
both by the federal and provincial governments. As the tax on agriculture and services sectors has become a provincial
matter following the 18th Amendment, provincial governments need to bring the largest contributors to GDP, having equally
large tax potential, under the tax net.
FBR taxes
The growth in FBRs tax collection fell to 8.0 Table 4.2: FBR Tax Collection
percent in FY17 from 20.2 percent achieved last billion rupees; growth in percent
year (Table 4.2). The deceleration was broad- Budget Collections Growth
based, as growth in both direct and indirect tax FY17 FY16 FY17* FY16 FY17
collection was much lower as compared to Direct taxes 1,558.0 1,217.5 1,343.2 17.8 10.3
FY16. The pace of direct tax collection was Indirect taxes 2,063.0 1,895.0 2,017.8 21.8 6.5
affected by a decline in corporate profitability Customs duty 413.0 404.6 496.0 32.1 22.6
Sales tax 1,437.0 1,302.4 1,323.3 19.7 1.6
especially profitability of the banking sector as
FED 213.0 188.1 198.6 15.9 5.6
well as reductions in tax rates and
Total taxes 3,621.0 3,112.5 3,361.0 20.2 8.0
announcement of tax incentives (Box 4.1). The Total tax (% of GDP) 10.8 10.7 10.5 - -
growth in indirect tax collection, on the other Data Source: Federal Board of Revenue and SBP calculations
hand, was dragged by a considerable fall in *Estimated data
sales tax collection, which remained subdued due to reduction in sales tax rates on POL products in a
bid to protect domestic consumers from rising international oil prices.
7
Clause 2 of Article 9 of Presidents order No.5 of 2010 (No. F. 2(2)/2010-Pub) dated 10th May 2010, states;
The NFC recommended that the Federal Government and Provincial Government should streamline their tax collection
systems to reduce leakages and increase their revenues through efforts to improve taxation in order to achieve a 15% tax to
GDP ratio by the terminal year i.e., 2014-15. Provinces would initiate steps to effectively tax the agriculture and the real
estate sectors. Federal Government and Provincial Government may take necessary administrative and legislative steps
accordingly.
50
Fiscal Policy
Importantly, the focus of direct taxes continues to remain narrow, largely relying on withholding tax
from salaried class and corporate sector, despite several rounds of reforms. Therefore, the burden of
increasing tax collection disproportionally falls on compliant tax payers. The situation becomes even
more complicated when existing tax payers have to share the additional burden of foregone taxes due
to tax incentives.
Direct taxes
Direct tax collection grew by 10.3 percent Table 4.3: Break-up of Direct Taxes*
against 28.0 percent growth target envisaged in billion rupees; growth in percent
the budget for FY17 and 17.8 percent growth Growth
FY16 FY17
achieved in FY16 (Table 4.3). This slowdown FY 16 FY 17
was also broad-based as the growth in all the Voluntary payments 340.8 370.5 29.8 8.7
components voluntary payments, collection Collection on demand 87.9 92.8 9.0 5.6
on demand, and withholding tax was lower Withholding tax 831.6 940.6 45.5 13.1
during FY17 as compared to last year. Imports and exports 204.6 221.3 36.2 8.1
Contracts 208.9 259.5 60.8 24.3
Salary 86.9 111.2 34.5 28.0
The growth in withholding tax, which
Interest & securities 48.2 42.6 18.4 -11.6
contributes about two-thirds to the direct tax
Cash withdrawal 28.6 30.8 49.8 7.7
collection, fell to 13.1 percent during FY17 Dividends 42.0 49.5 73.7 17.7
from 45.5 percent in FY16. Within Electric bills 25.5 25.8 28.9 1.2
withholding taxes, collection under all sub- Telephone 47.7 51.8 -8.4 8.6
heads witnessed either a deceleration in growth Others 10.4 6.5 158.3 -37.6
or a decline. The growth in collection on Total direct taxes 1,270 1,410 38.2 11.0
demand (CoD) and voluntary payments (VP) *Based on gross receipts which may not match with those reported in
Table 4.2
decelerated to 5.6 percent and 8.7 in FY17 Data source: Federal Board of Revenue and SBP Calculations
compared to their respective growth rates of 9.0
percent and 29.8 percent in FY16. The Figure 4.2: Composition of Direct Taxes in Pakistan
slowdown in CoD, in particular, is despite CoD VP WHT
increased audit by tax authorities to push 3.2
evaders to file returns.
2.4
In this backdrop, direct tax collection continues
percent of GDP
to remain dependent on withholding taxes

(Figure 4.2). Too much dependence on 1.6
withholding taxes is considered undesirable due
to their regressive nature. These have strong 0.8
implications for the low income group.
Moreover, though differential withholding tax
0
rates for filers and non-filers have proved FY11 FY12 FY13 FY14 FY15 FY16 FY17
helpful in encouraging more individuals to file
income tax returns. However, it had some Data source: Federal Board of Revenue and SBP Calculations
unintended consequences: for instance, the
withholding tax on financial transactions has led to increased use of currency and a decline in bank
deposits since its introduction in 2015 (Special Section 1).
Indirect taxes
The impact of fiscal incentives was even more pronounced in case of indirect tax collection, which
grew by 6.5 percent in FY17, compared to a hefty 21.8 percent increase registered in FY16.8 The
major drag came from slowdown in the sales tax and lower than expected FED collection.
8
FBR has estimated a revenue loss of around Rs 170 billion: Rs 111 billion from petroleum items; Rs 16.5 billion from
51
Sales tax
Sales tax collection, which accounts for two-thirds of indirect taxes, grew by merely 1.6 percent
during FY17, compared to around 20 percent increase in FY16 (Table 4.2). While sales tax
collection from imports grew marginally, it declined in case of domestic sales. Mainly the fall in
collections from POL, fertilizer and cigarettes reduced the overall sales tax collection.9 Specifically,
the decline in collection from POL can be attributed to the governments decision to reduce sales tax
rate to keep domestic POL prices stable (Box 4.3). Lower collection in case of fertilizer was due to
reduction in sales tax rate under the Kissan Package, whereas collection from cigarettes was affected
by substantial decline in production and sale of domestically manufactured cigarettes following an
increase in FED.
Box 4.3: POL Pricing and Sales Tax Collection

Though POL product prices have been deregulated since 2011, when oil refineries and marketing companies were allowed to
fix and announce ex-refinery and ex-depot prices of POL products (including motor spirit, HOBC, light diesel oil, and jet
fuels). Yet, the government has a considerable control over the fixing of retail prices through changes in sales tax rates.10
The ex-refinery or ex-depot prices of POL products for regular consumers consists of ex-refinery import parity price or PSO
weighted average cost of purchases, inland freight equalization margin (IFEM), distribution margin of oil marketing
companies, dealers commission, petroleum levy (PL) and general sales tax on depot price.
The government separately notifies the sales tax rates for POL products at varying rates. For example, sales tax on the motor
spirit was 20 percent on June 30 2017, while the same was levied at the rate of 14.5 percent and 33.5 percent on HOBC and
HSD (Figure 4.3.1). Moreover, the government keeps changing the sales tax rates over time, depending on its policy and/or
revenue objectives. For example, to provide relief to low income segments, sales tax rate on kerosene and LDO was brought
down, from almost 30 percent in August 2015, to zero by December 2016 (Figure 4.3.2).
Besides sales tax, the government can also indirectly influence POL product prices through adjustment in the petroleum
levy. The petroleum levy, which was originally designed to finance development and up gradation activities of the
petroleum sector, had been used actively in the past to finance the fiscal deficit, and it continues to contribute significantly to
the exchequer; in FY17, it yielded revenues of almost Rs 167 billion. The IFEM, which is supposed to maintain equalized
prices at the 29 depots located across the country, can also be employed to influence retail prices.
More recently, the government has used the sales tax on POL products more actively to keep domestic retail prices stable.
During FY16, when international oil prices were declining (Figure 4.3.1), the government raised sales tax rates on POL
Figure 4.3.1: Crude Oil Prices and MoM Growth in Sales Tax Figure 4.3.2: SaleTax Rate on POL Products
ST growth (MoM) Crude oil prices (rhs) Kerosene Motor spirit
50 60 HOBC HSD oil
Light diesel oil
40 55 60
30 50 50
rupees per liter
20
percent
45 40
US$
10
40 30
0
35 20
-10
-20 30 10
-30 25 0
May-16
May-17
Mar-17
Mar-16
Sep-15
Feb-16
Feb-17
Sep-16
Jan-16
Jan-17
Aug-15
Nov-15
Aug-16
Nov-16
Jul-15
Jul-16
Apr-17
Apr-16
Jun-16
Jun-17
Dec-15
Dec-16
Oct-15
Oct-16
May-16
May-17
Mar-16
Mar-17
Feb-16
Feb-17
Sep-15
Sep-16
Jan-16
Jan-17
Aug-15
Aug-16
Nov-15
Nov-16
Jul-15
Jul-16
Apr-16
Apr-17
Jun-16
Jun-17
Dec-15
Dec-16
Oct-15
Oct-16
Data source: Federal Board of Revenue and World Bank Data source: Federal Board of Revenue and World Bank
fertilizer; Rs 11.5 billion from the textile package; Rs 28 billion from zero-rating and Rs 3 billion from relief on pesticides.
9
The reduction in GST rates on fertilizer from 17 to 5 percent under the Prime Ministers Kissan package, coupled with the
cut in feedstock prices to lower the per bag cost of fertilizer, led to lower GST collection from the commodity. Lower sales
tax collection from cigarettes was due to the decline in demand for locally manufactured cigarettes following the increase in
FED rates on the commodity, which induced brand substitution with counterfeit alternatives.
10
The Oil and Gas Regulatory Authority (OGRA) only notifies kerosene oil prices.
52
Fiscal Policy
products instead of fully passing-on the impact of lower international prices to domestic consumers (Figure 4.3.2). As a
result, collection from POL increased to Rs 275 billion, raising its contribution to 40.3 percent in overall domestic sales tax
collection during FY16.
During FY17, the government absorbed most of the increase in international oil prices (which had bottomed out by Q3-
FY16) by reducing the sales tax on POL products. While some upward adjustments to the tax rates has been made, for full-
year FY17, the sales tax collection from POL declined sharply by 17.7 percent to Rs 226.6 billion, from Rs 275.3 billion in
FY16.
Federal excise duty

FED grew by 5.6 percent during FY17, compared to 15.9 percent growth witnessed last year (Figure
4.3). This increase was notable despite 27.1 percent decline in collection from cigarettes (which
accounts for one-third of total collection under this head). In fact, following an increase in FED rates,
cigarettes production fell significantly as people switched to non-duty paid counterfeit brands
available in the market.
In response, FBR set up a task-force to confiscate illicit brands and impose penalty on businesses
making illegal sales. This measure brought some recovery in the falling FED revenue from cigarettes.
Moreover, a system of online tracking and monitoring of e-stamped cigarettes has been introduced to
discourage the use of duty unpaid brands.
However, the decline in FED on cigarettes was more than offset by a significant rise in FED on
beverages. Meanwhile, the cement sector contributed 12.6 percent to FED growth during FY17.
Higher collection from cement reflects both higher dispatches (on the back of increased domestic
demand, especially from ongoing CPEC-related infrastructure projects), and an increase in FED rates.
Similarly, FED collection from beverages registered a 24.6 percent growth, contributing 2.6 percent in
growth in FY17. This was an outcome of upward revision in duty structure, as well as, an increase in
consumption of aerated water.11
Custom duty
Custom duty collection surged by 22.6 percent in FY17 on top of the 32 percent growth observed last
year. This rise can be attributed to a sharp increase in imports, coupled with upward revision in duty
structure. Yet the slower growth compared to last year was due to relaxation allowed in duty on
machinery imports (see Box 4.1). Consequently, the ratio of customs duty to total imports flattened in
FY17. In other words, a wedge was created between growth in duty collection and growth in the total
Figure 4.3: Contribution in Growth of FED Figure 4.4: Trends in Custom Duty
Beverages Cigarettes Cement Natural gas CD/FBR revenues CD/Total Imports
POL products Air travel Other Total 16
24
12
16
percent
15.9
5.6
8 8
percent
0
FY16 FY17 4
-8
0
-16 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Data source: Federal Board of Revenue and SBP Calculations Data source: Federal Board of Revenue and SBP Calculations
11
Federal excise duty on aerated water was revised to 11.5 percent in FY17 from 10.5 percent.
53
imports (Figure 4.4). Table 4.4: Non-tax Revenues

billion rupees
Budget Actual
Non-tax revenues FY17 FY16 FY17
Bolstered by one-off receipts including Rs Mark-up (PSEs & others) 81.1 57.7 99.7
100 billion from disinvestment of government Dividends 85.0 88.5 69.7
stakes in the Pakistan Security Printing SBP profits 280.0 227.9 227.8
Corporation and Rs 64 billion from the sale of Defense (including CSF) 171.0 107.0 67.8
two LNG power plants under the Pakistan Profits from post office/PTA (3G) 81.0 34.3 33.6
Development Fund non-tax revenue grew by Royalties on gas & oil 43.0 57.7 53.0
23 percent in FY17 after declining sharply by Passport & other fees 25.0 20.8 20.1
Discount retained on crude oil 10.0 9.1 9.1
13.9 percent in FY16 (Table 4.4). Besides, the
Windfall levy against crude oil 10.0 1.6 1.6
increase in markup from PSEs, royalties Other 254.9 181.8 385.1
received on oil and gas also contributed sizably Total non-tax revenue 1,041.0 786.6 967.5
to non-tax revenues. The revenue collections Data source: Ministry of Finance
from other heads mostly remained below target
for the year. Figure 4.5: Non-Tax Revenues
Excluding SBP profit and defense Overall
Adjusting for one-off revenue items, non-tax
revenues were significantly lower compared to 5
last year, as SBPs profit was almost same as in
FY16, and CSF inflows had declined from last 4
percent of GDP
year. In fact, non-tax revenue collection has

become volatile over time due to increased 3
dependence on these two sources (Figure 4.5).
Thus, non-tax revenues remain a constant 2
source of uncertainty in achieving the overall
revenue target. In this backdrop, there is a 1
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
need to diversify the revenue resources for
non-tax collection, which may help bring down
the effective rate for taxpayers. Data source: Ministry of Finance and SBP Calculations
4.3 Expenditure Table 4.5: Consolidated Fiscal Spending

Total expenditure grew by 14.5 percent in billion rupees; growth in percent
Spending Growth
FY17, compared to 8.0 percent in FY16 (Table
FY16 FY17 FY16 FY17
4.5). Although growth in both current and
Current expenditures 4,694 5,198 6.1 10.7
development expenditure was higher during Federal 3,144 3,472 3.5 10.4
FY17, current expenditure contributed the Interest payment 1,263 1,348 -3.1 6.7
most. The current expenditure grew by 10.7 Defense 758 888 8.6 17.2
percent (to 16.3 percent of GDP) in FY17 Public order and safety 96 128 15.6 32.7
compared to 6.1 percent increase in FY16. Others 1,027 1,108 7.8 7.9
Encouragingly, development expenditure grew Provincial 1,550 1,726 11.7 11.3
much faster by 30.1 percent, compared to 16.9 Development expenditures 1,302 1,693 16.9 30.1
PSDP 1,186 1,578 20.0 33.1
percent last year.
Federal 593 726 21.4 22.3
Provincial 592 852 18.8 43.9
This sharp rise in total expenditure indicates Others (including BISP) 116 116 -8.0 0.2
that fiscal consolidation efforts seen during the Net lending 13 -13 -54.0 -201.7
last few years have lost some steam. Since Statistical discrepancy -212 -78 19.4 -63.2
FY13, the growth in expenditure, in terms of Total expenditure* 6,008 6,879 8.0 14.5
GDP, remained subdued compared to growth in * Excludes statistical discrepancy but includes net lending
Data source: Ministry of Finance
revenue (Figure 4.6). The ratio of total
54
Fiscal Policy
expenditure to revenue sharply declined from Figure 4.6: Comparative Expenditure Growth
161.5 percent in FY13 to 130.3 percent in Revenue (lhs) Expenditure (lhs)
FY16, indicating the impact of fiscal Expenditure/revenue
consolidation efforts. However, this trend 20 165
reversed in FY17, as the expenditure-to- 15 160
revenue ratio increased to 137.8 percent
percent of revenue
10 155
(Figure 4.6).
percent
5 150
Within current expenditure, interest payments 0 145
increased by 6.7 percent in FY17 compared to -5 140

the 3.1 percent decline witnessed last year -10 135
(Chapter 5). Yet, its share in total expenditure -15 130
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
fell below 20 percent in FY17, from the peak of
24.2 percent in FY15. This lower share of
interest payment in total spending provided Data source: Ministry of Finance and SBP Calculations
some fiscal space for higher development
expenditure (Figure 4.7). Figure 4.7: Share of Interest Payments and Development
Expenditure in Total Expenditure
The development expenditure edged above five Interest payment Development expenditure
percent of GDP for the first time since FY07. 26
Both the federal and the provincial
governments accelerated work on development
23
projects in the wake of upcoming general
percent
elections (Figure 4.8).

20
4.4 Provincial Fiscal Operations
The provincial fiscal position weakened 17
considerably during FY17 as compared to the
previous few years. Against a targeted surplus 14
of Rs 339 billion, the provinces posted a deficit 2011 2012 2013 2014 2015 2016 2017
of Rs 15.9 billion. This was largely due to a Data source: Ministry of Finance and SBP Calculations
significant increase in provincial expenditures,
with own revenue collection growing at a Figure 4.8: Federal and Provincial Share in Development
slower rate (Table 4.6). Expenditure
Federal Provincial Others
It is also worth noting that weakening in the 5
provincial fiscal position was concentrated in
Q4-FY17. The fiscal operations up to Q3- 4
percent of GDP
FY17 indicated that the provinces were well

on-course to achieve the annual surplus target 3
(Figure 4.9). However, in the last quarter, the 2

expenditures jumped by Rs 992.9 billion,
largely due to higher development spending 1
(Figure 4.10). In fact, all the provinces posted
deficits in Q4, with the largest contribution 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
coming from Sindh (Figure 4.9). Similar to the
trends in expenditure, against improved Data source: Ministry of Finance and SBP Calculations
revenue position witnessed up to Jul-Mar FY17, the growth in provincial revenue mobilization also
deteriorated during Q4-FY17.
55
Figure 4.9: Provincial Surplus Figure 4.10: Provincial Revenue and Expenditure
Punjab Sindh KP Total revenue Total expenditure
Balochistan All Provinces
1000 ..............
150
75 900
Rs 992.9 billion or 72%
increase in Q4-FY17
billion Rs
0 800
billion Rs
-75 700
-150 600
-225 500
-300 400
Q1-FY17 Q2-FY17 Q3-FY17 Q4-FY17 Q1-FY17 Q2-FY17 Q3-FY17 Q4-FY17
Data source: Ministry of Finance and SBP Calculations Data source: Ministry of Finance and SBP Calculations
Provincial expenditures
The provincial expenditures grew by 20 percent during FY17 as compared to 13.3 percent in FY16
(Table 4.6). The major contribution came from development expenditures which grew by 43.8
percent, while current expenditures almost maintained their last years growth. The break-up of
development expenditure shows that general public administration and economic affairs accounted for
most of the share in total provincial expenditures.12
Table 4.6: Provincial Fiscal Operations

billion rupees; growth in percent
Punjab Sindh KP Balochistan Total Growth
FY 17
A. Total revenue 1,149.5 692.6 361.8 224.3 2428.2 5.9
Provincial share in federal revenue 928.8 516.9 315.2 204.9 1965.8 5.6
Provincial revenues (I+II) 187.7 153.1 49.7 10.9 401.3 6.6
I. Taxes 155.4 144.5 15.7 6.3 321.8 13.6
II. Non-tax revenues 32.3 8.6 34.0 4.6 79.5 -14.8
Federal loans and grants 33.0 22.7 -3.1 8.6 61.2 11.0
B. Total expenditure 1,154.5 754.1 436.7 246.2 2591.5 20.4
Current 716.1 550.9 299.0 173.3 1,739.3 11.5
Development 438.4 203.2 137.7 73.0 852.2 43.8
Gap (A-B) -5.0 -61.5 -74.9 -21.9 -163.2 -215.2
Financing (overall balance)* -15.7 39.0 -13.5 6.0 15.9 -107.7
FY 16
A. Total revenue 1,091.5 641.2 364.3 196.8 2,293.9 20.6
Provincial share in federal revenue 901.5 488.7 302.1 170.0 1,862.2 21.0
Provincial revenues (I+II) 174.2 132.2 58.9 11.3 376.6 33.8
I. Taxes 142.9 123.0 13.1 4.3 283.3 37.6
II. Non-tax revenues 31.3 9.2 45.8 7.0 93.3 23.4
Federal loans and grants 15.8 20.4 3.4 15.6 55.1 -33.0
B. Total expenditure 990.3 590.7 359.8 211.5 2,152.2 13.3
Current 705.5 456.3 246.9 151.0 1,559.8 11.4
Development 284.8 134.4 112.8 60.4 592.4 18.8
Gap (A-B) 101.2 50.6 4.6 -14.7 141.7 3,951.0
Financing (overall balance)* -76.1 -84.0 -74.1 26.9 -207.4 137.6
* Negative sign means surplus.
Data source: Ministry of Finance and SBP Calculations
12
General Public Administration includes the management of executive and legislative organs, financial and fiscal affairs,
transfers, and general public services. Economic affairs include expenditures by the government mainly on the following
items: (i) general economic affairs (commercial, labor and state trading); (ii) agriculture, irrigation, food, forestry and
fishing; (iii) fuel & energy; (iv) construction and transport; and (v) communication and storage.
56
Fiscal Policy
This trend is not limited to development expenditures. The provincial current expenditures also
remained skewed in the same fashion. Even when looked in the context of fiscal federalism and
devolution after the 18th Amendment, there is hardly any change in the pattern of provincial spending.
After the 18th Amendment, health, education and public order and safety affairs were made provincial
subjects. However, since then, provincial spending on health and education has remained quite
negligible (Figure 4.11).13 However, Balochistan and Sindh have increased the share of education
and health related spending in their total expenditure while it fell in case of Punjab and KP (Figure
4.12).
Figure 4.11: Provincial Expenditure Preferences -Post 18th Amendment (Shares in Total)
FY10
80 FY10
Education 80
FY17 60 FY11 60
FY17 FY11
40 Health 40
Development
Current
20 20
Economic affairs
FY16 0 FY12 FY16 0 FY12
General public
administration
FY15 FY13 Public order and FY15 FY13
safety affairs
FY14 FY14
Data source: Provincial Budget Documents and SBP Calculations
Moreover, the allocations for education have been more inclined towards infrastructure development
rather than improving educational quality, which ought to be the ultimate objective for better human
capital in the long run.14 Given that Pakistan ranks low at 118 out of 130 countries in the Human
Capital Index, the provincial governments should invest more resources in education and health to
produce effective human capital.15
Provincial revenue
The trends in provincial revenue mirrored those of federal revenue. The growth in provincial revenue
decelerated to 5.9 percent in FY17, after persistently rising for the last two years. This was largely
due to declining growth in provincial non-tax revenue, while growth in tax revenue also tapered off.
General Sales Tax on Services (GSTS), motor vehicle tax, and stamp duties were the major
contributors to provincial revenue during FY17 (Figure 4.13). Property taxes also posted a growth
which is due to the revenue efforts by provinces (Box 4.4) such as Land Automation Systems and
Invoice Monitoring System on various services.16,17 However, revenue from excise duties and other
sources of provincial tax collection registered a decline as compared to last year.
13
In the second and third phases of devolution under the 18th Amendment, the ministries of education and health were
devolved respectively.
Source: Status of Implementation of Eighteenth Amendment in KP in Health, Education and Agriculture sector; a study
conducted by USAID and Centre for Peace and Development Initiatives (CPDI).
14
Fatima Khaliq and Waqas Ahmad, Quality and Effectiveness of Public Spending on Education in Pakistan, SBP Staff
Notes 02/16.
15
Source: Human Capital Report (2016), World Economic Forum.
16
The Punjab government, in collaboration with the Punjab Information Technology Board (PITB), has launched the Invoice
Monitoring System on various services, especially restaurants and beauty parlors (source: Notification
No.PRA/Orders.06/2012, Dated January 13th, 2015).
57
Meanwhile, the provincial non-tax revenue declined sharply by 14.8 percent during FY17 against a
23.4 percent growth witnessed in FY16. This contraction was due to diminution in profits from
hydroelectricity, the main source of non-tax revenue of KP (Table 4.6).
Figure 4.12 : Province-wise Expenditure Preferences (Shares in Total)
Education Health Economic affairs General public administration Public order and safety affairs
Balochistan
FY17
KP
Sindh
Punjab
Balochistan
FY16
KP
Sindh
Punjab
Balochistan
FY15
KP
Sindh
Punjab
Balochistan
FY14
KP
Sindh
Punjab
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Data source: Provincial Budgetary Documents and SBP Calculations

Figure 4.13: Contribution of Revenue Spinners during FY17
Property taxes Sales tax on services Interest
Excise duties Stamp duties Profits from hydro electricity
Motor vehicle tax Others Irrigation (Irrigation receipts only)
Others
2%
0%
Non-tax revenue
24%
Tax revenue
30%
7%
53%
12% 67%
3%
2%
The size of pie shows the weight of Tax and Non-Tax Revenue. Bigger the pie, higher is the share in provincial tax collection.
Box 4.4 Provincial Revenue Mobilization in the Context of 18th Amendment

Under the provincial autonomy and fiscal decentralization introduced after 18th Amendment in 2009, the provinces were
allowed to collect sales tax on services, and to tax real estate and agriculture income. As a result, the provinces own tax
revenue started to increase both in terms of GDP and total provincial revenue with the introduction General Sales Tax on
Services (GSTS), first by Sindh in 2011 and then by Punjab in 2012. The provincial revenue further received impetus from
reforms and tax measures introduced by Punjab and Sindh during the last two years. 18,19
Notwithstanding some improvement in recent years, the progress in provincial own tax collection has been less encouraging
when looked in the context of its contribution to overall tax collection (Figure 4.4.1). Since FY11, the provincial own tax
revenue increased by 0.5 percentage points to 1.2 percent of GDP in FY17.
17
Land Administration and Revenue Management Information System (LARMIS), Board of Revenue, Government of
Sindh.
18
Computerization of Land Record under LARMIS Order No. 1298-2013/568-LR-(I) Board of Revenue, Punjab. Land
Administration and Revenue Management Information System (LARMIS), Board of Revenue, Government of Sindh.
19
The Government of Punjab, in collaboration with PITB, has launched Invoice Monitoring System on various services
especially restaurants and beauty parlors (Source: Notification No.PRA/Orders.06/2012, Dated January 13th, 2015).
58
Fiscal Policy
Within this, the large part of the increase was Figure 4.4.1: Provincial Own Revenue
contributed by GSTS, about 0.4 percentage points in
Percent of total provincial revenue
the provincial tax collection. This is very small
Percent of GDP (rhs)
compared to close to 60 percent share of services in
GDP. Thus, there is a large potential of raising revenue 18 1.5
from certain sectors. The collection from property and
agriculture continues to remain insignificant (Figure 16 1.3
4.4.2). Provincially, the share of tax collection from
agriculture income has in fact remained somewhat
stagnant. 14 1.0
The reasons for this below par performance can be 12 0.8

traced to delayed implementation (of tax initiatives) due
to lack of institutional structure and capacity
constraints. In fact, the provinces started to establish 10 0.5
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
provincial tax authorities well after the announcement
of devolution and 18th Amendment. Sindh was the first
to establish its revenue board immediately after the Data source: Ministry of Finance and SBP Calculations
constitutional amendment. The Punjab Revenue
Authority was established in 2012, followed by KP in 2013 and Balochistan in 2015. Moreover, there are multiple
revenue departments within the provinces with overlapping authorities for revenue collection.
Figure 4.4.2: Contribution of Revenue Spinners in Figure 4.4.3: Share of Agricultural Taxation in Provincial
Provincial Tax Collection Own Tax Revenue
Property taxes Excise duties Punjab Sindh KP
Stamp duties Motor vehicles tax
Balochistan Total
Tax on immoveable property GSTS
100
40
80
Percent
Percent
60 30
40 20
20 10
0 0
FY10
FY13
FY16
FY17
FY11
FY12
FY14
FY15
FY10
FY12
FY13
FY15
FY17
FY11
FY14
Data source: Ministry of Finance , Provincial Budgetary Data source: Ministry of Finance and SBP Calculations FY16
Documents, and SBP Calculations
The other major reason has been lack of documentation, which has created difficulties in authorities access to potential
taxpayers. This has been particularly true in case of tax on services. However, in case of agriculture, tax collection has
fallen even after computerization of land record in KP, Punjab and recently in Sindh. It can be reasoned that the
difficulties in gauging agricultural income, due to both the nature of income (which is mostly informal) and the lack of
expertise on the part of authorities, remains the main hurdles (Figure 4.4.3).
Besides operational constraints on raising revenue by the provinces, the increase in provincial share in federal divisible pool
from 47.5 to 57.5 percent in the 7th NFC Award, which constitute about 80 percent of total provincial revenue, has also
created a sense of complacency. This brings us to conclude that the effective resource mobilization at provincial level
cannot be overlooked especially when it comes to macroeconomic stability and containment of overall fiscal deficit.
59
5 Domestic and External Debt
5.1 Overview
Gross public debt-to-GDP ratio improved Figure 5.1: Debt Indicators
marginally to 67.2 percent by end-June 2017 Government debt Public debt Total debt and liabilities
from 67.6 percent of GDP in FY16. This 90
improvement, despite higher fiscal and current
account deficits, reflects that growth in 75
nominal GDP outpaced the growth in public
percent of GDP
60
debt during FY17. Within the gross public
debt, the government debt stood at 61.6 percent 45
of GDP as on end-June 2017 compared with 30
61.2 percent in June 2016.1 Nonetheless, total
15
debt and liabilities (TDL) of the country stood
at 78.7 percent of GDP by end-June 2017, 0
FY11
FY12
FY13
FY14
FY15
FY16
FY17
slightly higher than 77.6 percent as of end-June
2016 (Figure 5.1).
In absolute terms, the gross public debt
increased by Rs 1.7 trillion, which was Figure 5.2: Change in Public Debt Composition
significantly lower than the Rs 2.3 trillion External Domestic
increase recorded in FY16. About 70 percent 2500
of the increase in public debt was contributed
flows in billion Rs
by domestic debt and 30 percent by external 2000

debt. Despite substantial external inflows, the 1500
net addition to the public external debt (in Pak
rupees) was lower during FY17, mainly due to 1000
US$ 822.4 million revaluation gains on account 500
of appreciation of US dollar against Japanese
Yen.2 0
-500
However, the composition of public debt in FY11 FY12 FY13 FY14 FY15 FY16 FY17
terms of maturity structure, changed in FY17. Data source: State Bank of Pakistan
Around eighty percent of new borrowing was
through short-term debt instruments. With these, the share of short-term debt reached 31.0 percent in
total public debt in FY17 from 26.3 percent in FY16. Encouragingly, the large part of the borrowing
was from the domestic sources which, unlike external debt, are not prone to exchange rate fluctuations
(Figure 5.2).
Both demand and supply factors were behind the change in composition of public debt. From the
lenders standpoint, the demand for long-term government securities was relatively lower due to
prevailing low interest rates, while the government was concerned about the debt servicing cost, as
banks were asking for higher rates on long-term securities. Specifically, the PIBs maturity worth Rs
1.4 trillion due in the first quarter of FY17 was partially rolled over by the government and remaining
was retired through borrowing from SBP.
1
As per FRDL Act, 2005 amended in June 2017, "Total Debt of the Government is the public debt less accumulated deposits
of the Federal and Provincial Governments with the banking system.
2
The Japanese Yen depreciated by 8.9 percent against US dollar during FY17.
From governments perspective, the current

low interest rate environment provided an Figure 5.3: Yield Curve
opportunity to reduce the interest rate and the 30-Jun-14 30-Jun-15

30-Jun-16 30-Jun-17
rollover risk through lengthening the maturity
profile of the public debt. As shown in Figure 14
5.3, the yield curve relatively flattened during
12
last two years, which implied lower cost of
percent
long-term borrowing and rollover risk. On the 10
contrary, the governments short-term
8
borrowings increased its exposure to rollover
and interest rate risks. 6
However the government borrowings from 4

3M 6M 1Y 3Y 5Y 10Y
external sources during FY17 were of
relatively longer tenor, compared with short- Data source: State Bank of Pakistan
term commercial borrowings in FY16.
Moreover, the large portion of this borrowing was contracted at floating rates that has made the debt
servicing burden vulnerable to movements in short-term interest rates in the global markets.
Importantly, these developments have increased the interest rate risk, but liquidity and the rollover
risk improved somewhat during FY17.
Table 5.1: Summary of Pakistan's Debt and Liabilities
billion rupees; unless mentioned otherwise
Stock Absolute change Percent of GDP
A. Total debt and liabilities (sum I to IX) 19,849.4 22,577.1 25,062.1 2,727.8 2,486.9 77.6 78.7
B. Total Gross public debt (sum I to III) 17,380.2 19,676.6 21,408.7 2,296.5 1,732.0 67.6 67.2
Total Debt of the Government(I+II+III-X) 15,986.0 17,823.2 19,635.4 1,837.1 1,812.2 61.2 61.6
I. Government domestic debt 12,192.5 13,625.9 14,849.2 1,433.4 1,223.2 46.8 46.6
II. Government external debt 4,770.0 5,417.6 5,918.7 647.6 501.1 18.6 18.6
III. Debt from IMF 417.6 633.1 640.8 215.4 7.7 2.2 2.0
IV. External liabilities 377.6 377.1 373.8 -0.4 -3.3 1.3 1.2
V. Private sector external debt 539.2 709.1 1145.7 169.9 436.7 2.4 3.6
VI. PSEs external debt 252.7 294.0 283.8 41.3 -10.2 1.0 0.9
VII. PSEs domestic debt 458.7 568.1 822.8 109.3 254.7 2.0 2.6
VIII. Commodity operations 564.5 636.6 686.5 72.1 49.9 2.2 2.2
IX. Intercompany external debt 276.6 315.6 340.7 39.1 25.0 1.1 1.1
X. Deposit with banking system 1,394.1 1,853.5 1,773.3 459.4 -80.2 NA NA
NA: not applicable
Apart from the public component in TDL, the borrowing by PSEs was also higher (Table 5.1). The
borrowing by the PSEs was partly for investment in various energy and infrastructure projects. It is
important to note here that a part of the PSEs debt is guaranteed by the government that helps in
smooth execution of investment but could have implications for fiscal accounts, if realized. Thus
these guarantees need to be managed in order to minimize the associated fiscal cost and the debt
burden (Special Section 2).
5.2 Domestic Debt

Despite increase in external finance, the onus of relatively large fiscal deficit fell mainly on domestic
sources, funding around two-third of the incremental financing requirement during FY17. Yet, the
pace of domestic debt accumulation slowed down, recording 9.0 percent increase in FY17 compared
62
Domestic and External Debt
to 11.8 percent in FY16. This was due to drawdown in the government deposits held with the
banking system during FY17. In FY16, government had borrowed more than its financing needs and
kept it as deposits with the banking system.3
As discussed earlier, there was a shift in the Table 5.2: Position of Government Domestic Debt
financing structure from long to short-term billion rupees
during FY17. Importantly, the increase in Stock Flow
short-term debt was even higher than the FY15 FY16 FY17 FY16 FY17
overall change in domestic debt, as government Domestic debt 12,192.5 13,625.9 14,849.2 1,433.4 1,223.1
Permanent 5,008.2 5,935.9 5,528.4 927.6 -407.7
retired long-term debt during FY17 (Table
o/w
5.2). In fact, the PIBs maturity during first
PIBs 4,155.2 4,921.4 4,391.8 766.2 -529.6
quarter was partially rolled over by the 326.4 363.9 385.4 37.6 21.5
Ijara Sukuk
government and financed remaining through Prize bonds 522.5 646.4 747.1 123.9 100.7
borrowing from SBP. However, the reliance on Floating debt 4,609.4 5,001.7 6,550.9 392.3 1,549.2
SBP borrowing was reduced in the subsequent o/w
quarters of FY17. Bai Muajjal 212.6 0.0 212.6 -212.6
MTBs 2,148.9 2,771.4 4,082.0 622.5 1,310.5
Looking at the composition of domestic debt, MRTBs 2,281.4 2,017.6 2,468.9 -263.8 451.3
the government largely borrowed through T- Unfunded 2,570.3 2,683.7 2,765.3 113.3 81.6
Foreign currency 4.6 4.7 4.7 0.1 0.0
bills during FY17, almost double the amount,
borrowed in FY16. With these developments,
the share of T-bills in domestic debt stock Figure 5.4: Share in Domestic Debt
reached 27.5 percent by end June 2017 from PIBs MTBs MRTBs
20.3 percent last year. On the contrary, the 40
share of PIBs fell to 29.6 percent by end June
34
2017 from 36.1 percent in June 2016 (Figure
5.4). 28
percent
The auction profile of the government 22

securities shows that the bidding pattern by the
16
commercial banks continue to change during
FY17, depending on their perception about 10
Nov-16
Apr-17
Jun-16
Jun-17
Dec-16
Oct-16
May-17
Mar-17
Sep-16
Feb-17
Jan-17
Aug-16
Jul-16
future interest rate changes, inflation, liquidity

and the external sector situation. In this
context, following points are worth noting:
In start of the year, the government announced a pre-auction target of Rs 300.0 billion for PIBs in
the first quarter. The banks offered almost 3 times higher than the target amount but well below
the maturities during the quarter. However, the offered amount in T-bills crossed Rs 3 trillion,
which was significantly higher than both the target and maturity. At the same time, the
government accepted higher than the target amount in both T-bills and PIBs auctions (Table 5.3).
In Q2-FY17, the activity in PIBs auction remained anemic due to some rise in CPI inflation. The
offered amount in PIBs was just about a quarter of the amount offered during Q1. At the same
time, the offered amounts were huge in T-bills auction. On the other end, the government rejected
all PIB bids; while adhered to pre-auction target in case of T-bills.
During the second half of FY17, the commercial banks interest for PIBs somehow recovered but
still T-bills remained a preferred choice. Specifically, the offered amount in T-bills crossed 4
3
The government deposit with baking system went down by Rs 80 billion during FY17compared with increase of Rs 459.3
billion in FY16.
63
trillion during Q3, against the pre-auction target of Rs 2.5 trillion, which simply aims rolling over
the maturities. In case of PIBs, the government mopped-up less than its pre-auction targets, as
banks were demanding higher rates. Consequently, the government relied on T-bills for Q3 and
the external finance for Q4.
Table 5.3: Auction Profile of Government Securities

billion rupees
T-bills* PIBs**
Target Maturity Offer Accepted Target Maturity Offer Accepted
Q1 1,450 1,178 3,066 1,680 300 1,427 995 646
Q2 1,300 1,058 1,711 1,048 200 235 0
FY17 Q3 2,550 2,522 4,320 2,889 150 324 132
Q4 1,900 1,672 2,255 1,840 150 204 115
Total 7,200 6,431 11,351 7,458 800 1,427 1,758 894
Q1 1,200 863 1,387 1,261 200 808 218
Q2 1,225 1,146 2,061 946 150 447 183
FY16 Q3 1,650 1,589 3,108 1,534 225 803 382
Q4 1,025 872 2,419 903 200 34 502 181
Total 5,100 4,470 8,975 4,644 775 34 2,560 964
*Competitive bids only **Principal only
Within T-bills, the banks offers were almost entirely concentrated in 3 and 6- month T-bills, as they
were reluctant to rollover maturing 12-month T-bills. In this backdrop, the stock of 3 and 6 month T-
bills reached about 78 percent in total T-bills stock (Figure 5.5).
Figure 5.5: Tenor-wise Share in Outstanding T-bills
12M 6M 3M
100%
80%
60%
40%
20%
0%
13-Oct-16
8-Jun-17
27-Oct-16
11-May-17
25-May-17
30-Mar-17
16-Mar-17
8-Dec-16
29-Sep-16
16-Feb-17
15-Sep-16
21-Jul-16
11-Jul-16
2-Mar-17
13-Apr-17
27-Apr-17
2-Feb-17
1-Sep-16
22-Jun-17
5-Jan-17
4-Aug-16
22-Dec-16
19-Jan-17
24-Nov-16
18-Aug-16
10-Nov-16
In terms of ownership, around ninety percent of outstanding T-bills are held by the commercial banks,
while the rest are acquired by non-bank entities through secondary market trading (Table 5.4). In
absolute terms, the non-bank holding of tradable government securities increased by Rs 166 billion
during FY17 compared to only nominal increase in FY16. Similar to commercial banks, the entire
increase in non-bank investment was observed in T-bills, whereas there was a net retirement in PIBs.
Importantly, the non-bank investment in T-bills was observed after a gap of almost 5 years and this
was made possible due to retirement of high yielding PIBs. As shown in the Figure 5.6, large
investment in T-bills came soon after the retirement of PIBs in July 2016.4
4
Moreover, the quarterly retirement of T-bills reflect that the non-bank preferred to invest in 3-month T-bills in the
subsequent quarters (Figure 5.6).
64
Table 5.4: Owner-wise Holding of Tradable Government Securities (Outstanding Stock Face Value)*
billion rupees
FY12 FY13 FY14 FY15 FY16 FY17
A. PIBs 974.7 1,321.9 3,223.5 4,158.3 4,925.0 4,391.8
Banks 510.5 727.6 2,170.5 2,992.7 3,687.0 3,173.6
Non-banks** 464.2 594.3 1,053.1 1,165.7 1,238.0 1,218.2
Insurance companies 231.7 267.4 409.9 493.4 566.7 612.2
Funds 173.1 147.3 344.8 284.5 293.2 262.6
Corporations/Others 59.5 179.6 298.4 387.8 378.0 343.3
B. T-bills 2,592.1 3,151.0 1,878.9 2,470.4 2,909.8 4,213.5
Banks 1,942.1 2,681.5 1,603.3 2,205.2 2,710.3 3,826.1
Non-banks** 650.0 469.4 275.6 265.2 199.5 387.4
C. Ijara Sukuk 383.6 459.2 326.4 326.4 363.9 363.4
Banks 340.9 413.0 293.6 302.1 339.5 363.4
Non-banks** 42.7 46.2 32.8 24.2 24.4 22.0
Insurance companies 1.4 1.5 0.9 3.4 2.6 3.3
Funds 38.4 38.0 24.6 15.8 18.3 15.4
Corporations/Others 2.8 6.7 7.3 5.1 3.5 3.3
Grand total (A+B+C) 3,950.4 4,932.0 5,428.8 6,955.1 8,198.7 8,990.7
Total non-banks 1,156.9 1,109.9 1,361.5 1,455.1 1,461.9 1,627.6
*The information in this table may not match with Table 5.2, which includes investment in government securities by residents only.
Moreover, in case of T-bills, the difference also stems from the accounting treatment: Table 5.2 is based on realized value of T-bills,
whereas Table 5.4 is based on face value of these securities. ** Includes non-resident holding
In case of PIBs, the investment by insurance

Figure 5.6: Non-Bank Investment in Government Securities
companies increased, while both corporate and
PIBs T-bills
the mutual funds recorded net retirement
during the period. Given the nature of their 250
200
business, insurance sector continued to have
150
largest share in NBFIs holdings of PIBs. 100
billion Rs
Despite healthy growth in the assets of the 50

insurance sector, its investment in PIBs did not 0
increase much; as the sector allocated more -50
assets in equity due to prevailing low interest -100
rate environment.5 -150
-200
Nov16
Apr17
Jun17
Dec16
Oct16
May17
Mar17
Sep16
Feb17
Jan17
Aug16
Jul16
To sum up, the overall re-profiling of domestic

debt toward short-term maturity bodes well in
terms of servicing cost; it increases the Data source: State Bank of Pakistan
governments exposure to rollover and re-
pricing risks. In contrast to long-term re-profiling targeted in the MTDS 2016-19, the maturity profile
of domestic debt shortened. As a result, the indicators measuring interest rate and refinance risk
deteriorated over last two years.6 Yet, these indicators remained in the ranges specified in MTDS.
NSS inflows declined

The net inflows in National Savings Schemes (NSS) declined to RS 104.1 billion in FY17 from 109
billion in FY16 (Figure 5.7). The decline in NSS flows was possibly due to higher WHT for non-
filers; enforced from FY16 onward. Moreover, despite some upward revision in profit rates during
5
The assets of the insurance sector grew quite significantly in the recent periods. Better marketing strategies and increase in
the bancassurance resulted in healthy growth in the assets of the industry (For detail; see section 3.6 in Financial stability
Review 2016)
6
Debt re-fixing in one year declined to 53.6 percent in December 2016 from 67.2 in 2013. Similarly, the average time to
maturity (ATM) increased to 2.1 years in December 2016 from 1.8 years in 2013 (Source: Public Debt Management Risk
Report released by the Debt Policy Coordination Office).
65
FY17, these were still lower compared to that

Figure 5.7: Net inflow in NSS and Prize Bond
in FY16. In terms of composition, major
NSS Prize bond
increase was seen in SSA followed by BSC,
while other major schemes recorded net 350
retirement during the period. Specifically, the
280
SSA is for both individuals and institutional
investors, having relatively shorter tenor and
billion Rs
210
automatic reinvestment facility. In addition,
the net mobilization from the prize bonds also 140
witnessed decline during FY17. Unlike NSS,
the government increased WHT rate on prize 70
money for non-filer for third consecutive year.7
0
5.3 External Debt and Liabilities FY11 FY12 FY13 FY14 FY15 FY16 FY17
Pakistans total external debt and liabilities Data source: Central Directorate of National Savings (CDNS)
(EDL) increased by US$ 9.0 billion during the
year, to reach US$ 83.0 billion by end June 2017 (Table 5.5). Despite substantial gross
disbursements, the growth in public external debt slowed to 10.3 percent in FY17 from 13.3 percent in
FY16, mainly due to higher debt servicing and the revaluation gains during the period. Specifically,
the external debt benefitted by US$ 822.4 million due to appreciation of US$ against Japanese Yen.
The increase in the public external debt primarily came from disbursements from IFIs, China, foreign
commercial banks and the Sukuk bond proceeds issued during FY17. Importantly, around 88 percent
of the increase was concentrated in Q4-FY17, mainly due to borrowing from commercial banks and
the bilateral loans from China.
Table 5.5: Pakistan's External Debt and Liabilities

billion US dollars
End-June Stock Absolute change
FY17
Q1 Q2 Q3 Q4
Total external debt & liabilities (sum 1 65.2 73.9 83.0 8.8 9.0 1.8 -0.1 2.0 5.3
to 7) debt & liabilities (1+2+3)
Public 54.7 61.4 66.1 6.7 4.7 1.0 -0.9 0.5 4.2
Public debt (1+2) 51.0 57.8 62.5 6.8 4.8 1.1 -0.8 0.4 4.1
1. Government external debt 46.9 51.7 56.4 4.9 4.7 1.0 -0.6 0.4 4.0
i) Long term (>1 year) 45.8 50.0 55.5 4.2 5.5 0.9 0.0 0.4 4.2
of which
Paris club 11.7 12.7 12.0 1.0 -0.7 0.1 -1.2 0.3 0.1
Multilateral 24.3 26.4 27.6 2.1 1.2 -0.2 -0.4 0.2 1.7
Other bilateral 3.9 4.4 5.8 0.5 1.4 0.3 0.4 0.1 0.6
Commercial loans/credits 0.3 0.9 4.8 0.6 3.9 0.7 0.3 0.4 2.6
Euro/Sukuk global bonds 4.6 4.6 4.8 0.0 0.3 0.0 1.0 0.0 -0.8
ii) Short term (<1 year) 1.0 1.7 0.9 0.7 -0.8 0.1 -0.6 0.0 -0.3
2. From IMF 4.1 6.0 6.1 1.9 0.1 0.1 -0.2 0.1 0.1
3. Foreign exchange liabilities 3.7 3.6 3.6 -0.1 0.0 0.0 -0.1 0.0 0.1
4. Public sector enterprises (PSEs) 2.5 2.8 2.7 0.3 -0.1 -0.03 0.0 -0.05 -0.03
5. Commercial banks 2.3 2.7 4.5 0.4 1.8 0.3 0.2 0.4 0.7
of which: Borrowing 1.3 1.6 3.3 0.3 1.7
6. Private sector 3.0 4.1 6.4 1.1 2.3 0.4 0.6 1.0 0.3
7. Debt liabilities to direct investors 2.7 3.0 3.2 0.3 0.2 0.1 0.0 0.1 0.1
Data source: State Bank of Pakistan and Economic Affairs Division
7
Specifically, the government imposed WHT of 17.5 percent on profit payment on NSS schemes for non-filer in Finance
Act 2015 and kept same in subsequent years. However, the WHT on prize money was increased - from 17.5 percent in FY16
to 20 percent in FY17 and then to 25 percent for FY18.
66
Encouragingly, multilateral debt has still the largest component in overall external debt. These loans
are concessional in nature and also add to the repayment capacity of the country through reform
process.
Gross disbursements
Gross external disbursements stood at US$ 10 billion during FY17 compared with US$ 6.9 billion in
FY16 (Figure 5.8). This increase owes to project financing by multilateral agencies, CPEC related
financing by China, and the government borrowings from the foreign commercial banks.
Specifically, multilateral donor extended loans for public sector projects, while China was engaged in
infrastructure and energy projects.
Figure 5.8: Gross Disbursement of External Loans Figure 5.9: Cost Structure of External Loans*
Others Commercial banks Bonds China ADB IBRD Commercial banks China ADB Others
10
8
Floating
billion US$
Fixed Rate (67%

6 Rate share)
(33%
4
0
FY14 FY15 FY16 FY17
*Based on Jul-Mar data
Data source: Economics Affairs Division Data source: Economic Survey of Pakistan
In addition, Pakistan issued US$1.0 billion 5- Table 5.6: Maturity Profile of New Loans Contracted (# of Years)
year Sukuk bond against the target US$ 500 FY14 FY15 FY16 FY17*
million. The bond was issued at a return of 5.5 Paris Club Countries 20-40 20-40 40
percent, which was lower compared to similar Non-Paris Club
tenor bonds issued in 2014 and 2015. The China 28-30 20 18-20 12
investor base was also quite broad 38 percent Saudi Arabia 6-25 - - -
from Europe, 27 percent from North America, Others - - 20 -
Middle East and North Africa, 6 percent from Multilateral
Asia and 2 percent investor from other ADB 30 30 6-24 19-24
IDA 30 30 24 24
regions.8
IBRD - - 18 19-21
IDB 25 - 16 -
A noteworthy aspect of the external borrowing IDB-ST 1 1 1 -
during FY17 was that around two-thirds of new Others 1-30 - 1-8 2-19
loans were contracted at floating interest rates- Commercial Banks 1 4 1 2-3
which are prone to interest rate movements SUKUK - 5 - 5
(Figure 5.9). The rising share of floating rate Euro 5 & 10 10
debt could have implications for future debt Memorandum Item
servicing, particularly the commercial Share of Loans in Total having maturity
borrowings. <3 Y 9.8 15.3 16.2 22.5
<5 Y 16.7 41.3 16.2 39.0
*based on Jul-Mar Data
Another development was the increased share
Data source: Economic Survey of Pakistan
of short to medium terms loan in total inflows.
As shown in Table 5.6, the share of loan maturing within three years has increased to 22.5 percent in
8
Source: Ministry of Finance Press Release dated 6th October 2016 (//finance.gov.pk/releases_oct_16.html).
67
FY17 from 9.8 percent in FY14. Most of these borrowings were from foreign commercial banks. In
addition to relatively high cost associated with these borrowings, it adds up to amortization in the
medium term.
External debt servicing

External debt servicing increased by 37.4 percent to US$ 5.0 billion in FY17 (Table 5.7), compared
to 5.4 percent decline in FY16. The higher repayment to multilateral donors, commercial lenders,
China and the maturity of US$ 750 million Eurobond (issued in FY07) led to increase in overall debt
servicing. In addition, the government repaid China SAFE deposits worth USD 500 million in FY17
and also started repayment of rescheduled Paris Club debt under Official Development Assistance.
Table 5.7: External Debt Servicing (Principal and Interest)

million US dollars
FY12 FY13 FY14 FY15 FY16 FY17
1. Public external debt 3,580.9 5,204.8 5,738.5 3,863.2 3,605.3 5,047.0
Paris club 480.6 463.6 472.4 444.7 463.7 653.8
Multilateral 1,307.7 1,371.8 1,527.7 1,400.1 1,460.5 1,550.5
Other Bilateral 199.5 177.7 336.6 342.5 346.6 476.7
Euro/Sukuk global bonds 110.9 110.8 110.8 299.6 854.0 1,116.4
Commercial loans /credits 0.0 0.0 3.6 8.9 258.3 554.8
SAFE China Deposits 3.9 14.3 11.8 3.9 10.1 510.3
Others 1478.4 3066.6 3275.6 1363.5 212.6 184.5
2. External liabilities 111.8 111.6 124.3 89.7 87.2 86.6
3. PSEs debt 248.9 280.6 232.8 274.8 303.2 324.0
4.Scheduled banks' borrowing 21.4 17.4 56.7 25.8 11.1 23.2
5. Private sector debt 349.5 364.0 415.0 418.1 415.4 592.3
6. Total external debt and liabilities (sum 1 to 5) 4,312.4 5,978.3 6,567.3 4,671.2 4,421.1 6,073.1
5.4 External Debt Sustainability

The debt sustainability, assessed through standard indicators of liquidity and solvency, show a mixed
picture. All the three measures of liquidity ratio of short-term public external debt to total public
external debt, country reserves and the SBP reserves recorded improvement during FY17, as
government switched to relatively long-term borrowing. On the other hand, all the solvency
indicators weakened to some extent during FY17 (Table 5.8). This was largely due to substantial
borrowings from external sources. Moreover, countrys reserves also fell moderately. Similarly, the
indicators related to debt servicing also deteriorated, mainly due to increase in debt servicing and fall
in foreign exchange earnings.
Table 5.8: Indicators of External Debt Sustainability

percent
Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Solvency indicators
Total external debt and liabilities/GDP 31.2 30.9 27.0 25.7 24.1 26.1 27.3
Public external debt/GDP 26.0 25.2 21.3 20.3 18.9 20.4 20.6
Total reserves/total external debt & liabilities 27.5 23.3 18.1 21.7 28.7 31.2 25.8
SBP reserves/total external debt & liabilities 22.3 16.5 9.9 13.9 20.8 24.5 19.5
External debt servicing/FX earnings 8.3 9.3 12.9 13.7 10.2 10.3 15.9
External debt servicing/export earnings 12.7 15.2 20.6 23.0 18.1 19.4 29.9
Liquidity indicators
Short-term public external debt/TPEDL 1.1 0.7 0.5 1.3 1.9 2.8 1.3
Short-term external public debt/total reserves 3.5 2.5 2.4 5.3 5.4 7.3 4.1
Short-term public external debt/SBP reserves 4.3 3.5 4.4 8.0 7.5 9.3 5.5
Data source: State Bank of Pakistan Calculations
68
6 External Sector
6.1 Global Economic Review
Risks to economic globalization emanating from a prolonged spell of subdued growth and modest job
creation in advanced economies, were accentuated further by major changes in political regimes
during FY17. The presidential elections in the US installed an administration that not only pulled out
of the 12-nation Transatlantic Pacific Partnership, but has constantly been holding its largest trade
partners as diverse as Germany and China responsible for a skewed trade balance. Meanwhile, the
survival of the European Union, which had sailed through a feared exit of debt-ridden countries just
two years ago, was put into question again, with the planned withdrawal of its 2nd largest economy
the UK. In Asia, polarization within the Middle East increased further, as the new Saudi regime took
a stern position against Qatar. With deepening stakes of Turkey and Russia in the region,
reconfiguration of global alliances is underway; this will ultimately shape future economic blocs. In
the middle of this paradigm shift, China progressed steadily on its One-Belt-One-Road initiative,
engaging a number of Asian, African and European countries in developing the largest network of
trade routes.
Amid such a challenging environment, global Figure 6.1: Consumer and Business Confidence in Major
Economies
GDP is estimated to post a steady growth in Business confidence - US
2017, on the back of a rebound in global Consumer confidence -US
manufacturing and rising trade volumes.1 A Business confidence- EU(19)
Consumer confidence (EU-19)
modest recovery in investment is also in sight, 102
which can be traced to a continuation of highly
accommodative monetary policies in European 101
and Asian economies, coupled with improving 100
business sentiments (Figure 6.1). Following
the pick-up in economic activity, global 99
commodity prices posted a recovery (average
98
prices remained 11.9 percent higher than last
Nov-14
Nov-15
Nov-16
May-14
May-15
May-16
May-17
Mar-14
Mar-15
Mar-16
Mar-17
Sep-14
Sep-15
Sep-16
Jan-14
Jan-15
Jan-16
Jan-17
Jul-14
Jul-15
Jul-16
year), with particularly sharp increases noted in

crude oil and metal prices.2
Data source: Organization of Economic Cooperation and Development
As crude prices recovered, shale investments bounced back in the US, providing impetus to GDP
growth; a fall in these investments had lent a substantial drag to 2016 growth.3 Consumption demand
also remained strong in the wake of healthier job growth, rising household wealth, and perceptions of
a business friendly regime following the November 2016 elections. Further, exports gained from a
depreciating dollar (since the beginning of 2017) and strong external demand.4 These indicators,
along with the unemployment rate dropping below its longer term median and inflation floating above
its target (up till March 2017), led the Fed to increase the federal funds rate by 25 bps each in
1
Global GDP is estimated to grow by 3.5 percent in 2017, up from 3.3 percent on average during 2015-16 (source: IMF
World Economic Outlook, July 2017).
2
Average crude oil prices (WTI, Brent and Dubai Fateh) and IMFs Commodity Metals Price Index during July-June 2017
remained 16.3 percent and 17.2 percent respectively higher than the same period last year.
3
Shale investments in the US are projected to increase 53 percent in 2017 over last years levels (source: World Energy
Investment Report 2017, International Energy Agency).
4
The US exports grew by 6.7 percent YoY during Jan-Jun 2017, after declining by a nominal 0.2 percent in Jul-Dec 2016
(source: US Census Bureau). The US Dollar Index (which indicates the value of the USD against a basket of 10 major
currencies) declined 6.4 percent in H2-FY17 (source: Bloomberg).
December 2016 and March 2017.5
In contrast to the US, the economic situation in the euro area did not favour an increase in interest
rates; the ECB kept the policy and the deposit facility rates at their historic lows of zero and negative
0.40 percent, respectively. Moreover, despite initial plans of winding down the Asset Purchase
Program (APP) in March 2017, the ECB decided to continue it until the end of 2017.6 The region is
still struggling with financial system stress, as reflected in high debt levels and a sizable presence of
bad loans in banks balance sheets. Growth in the euro area is estimated to have inched up to 1.9
percent in 2017 from 1.8 percent a year earlier; however, it is expected to weaken again in 2018.7
Among other advanced economies, growth prospects have been mixed. In the six months following
the Brexit referendum, the UK economy performed better than initially expected. However, since the
start of 2017, growth began to taper, and the Jan-Jun 2017 period saw the lowest first-half growth
since 2012. These developments coincided with a weaker pound, rising inflation and a fall in
business investment. This was in line with expectations as firms face an uncertain future, with the
Kingdom navigating through the complexity of negotiating new international trade agreements with
both EU and non-EU partners.
In the emerging market (EM) and developing world, India is expected to continue on a high growth
path on the back of strong domestic demand. The economy is estimated to grow by around 7.2
percent in 2017, which is the highest among EMs. Timely and heavy monsoon this year proved
extremely beneficial for the agriculture sector, with positive spillover on overall consumption demand
as farm incomes bounced back. This probably offset to a large extent the impact of the
demonetization initiative (in November 2016), which had led to payment disruptions and contributed
significantly to the reduction in 2016 GDP growth.8 Going forward, a set of structural reforms,
comprising a new bankruptcy law, Goods and Services Tax (GST), and a new inflation targeting
framework along with gradual lifting of fuel subsidies are likely to spur private investment in the
country.
Meanwhile in China, regulators are facing a Figure 6.2: Composition of China's Real GDP Growth
delicate situation, where they are trying to Investment Consumption Net exports
deleverage the economy on one hand, while 12
preventing any further drop in the growth rate,
9
on the other. Real GDP growth is finally
expected to hold steady at 6.7 percent in 2017,
percent
6
after declining consistently for the past six
years. This was mainly enabled by a recovery 3
in exports, which more than offset the drag 0
coming from a slowdown in investment
spending (Figure 6.2). Yet, going forward, -3
Q4-2010
Q2-2011
Q4-2011
Q2-2012
Q4-2012
Q2-2013
Q4-2013
Q2-2014
Q4-2014
Q2-2015
Q4-2015
Q2-2016
Q4-2016
Q2-2017
challenges linger for the economy. First, the

countrys export outlook remains uncertain,
amid fears of adoption of a protectionist stance Data source: Haver Analytics
by the US. And second, the country has to deal
5
The US unemployment rate fell from 4.7 percent in December 2016 to 4.4 percent in June 2017 (source: US Bureau of
Labor Statistics).
6
From April 2017, the asset purchases have been reduced to 60 billion per month from 80 billion. The ECB intends to
carry on with these purchases until a sustained adjustment in inflation, below but close to the target rate of 2 percent, is
observed.
7
The IMF estimates the growth to drop to 1.7 percent in 2018.
8
Real GDP growth in India dropped sharply to 7.1 percent in 2016, from 8.0 percent in 2015 (source: IMF World Economic
Outlook, July 2017).
70
External Sector
with its huge debt burden, built up over the years as local governments and state-owned enterprises
(SOEs) relied heavily on borrowings to finance their growth. This dynamic was a major factor behind
Moodys decision to downgrade Chinas sovereign rating for the first time since 1989.9
In the Middle East, subdued earnings from oil continued to weaken fiscal and external account
positions, bringing the overall economic growth down to a level the Gulf Cooperation Council (GCC)
countries are not accustomed to. The decision by OPEC (and Russia) to cut oil production in
December 2016, along with cuts in infrastructure spending in some member countries, led to squeezed
growth numbers. To strengthen their fiscal positions, governments in Saudi Arabia and UAE are
introducing new taxes; scaling back energy subsidies; and also resorting to external funding. The
growth outlook for the Middle East hinges significantly upon a recovery in oil prices, progress on the
domestic reform process, and stable geo-political conditions.
So, in short, the global economy at the moment is characterised as much by its stability as it is by its
fragility. The recovery remains uneven, with considerable downside risks. For the past 2-3 years, the
modest growth in advanced countries has meant fledgling demand for imports from developing
countries like Pakistan, and this has been a major contributing factor behind declining exports of the
country.10 Moreover, rising global prices have had an exacerbating impact on the trade balances of
net commodity importers like Pakistan. Table 6.1: Pakistans Balance of PaymentsP
billion US dollars
Furthermore, growth in remittances, which had
FY15 FY16 FY17
been strong in recent years, has dropped as Current account balance -2.8 -4.9 -12.1
economic slowdown and political volatility Trade balance -17.3 -19.3 -26.9
affect the remitting countries. Exports 24.1 22.0 21.7
Imports 41.4 41.3 48.6
6.2 Pakistans BoP11 POL 12.3 8.4 10.6
As the economys growth momentum picked Non-POL 29.0 32.9 37.9
Services balance -3.0 -3.4 -3.6
up pace, imbalances re-emerged in Pakistans CSF 1.5 0.9 0.6
external account. All the encouraging trends in Primary income balance -4.6 -5.3 -4.8
the real sector, like improvement in energy Repatriations on FDI 1.3 1.5 1.7
supplies, industrial expansion, and rising Reinvested earnings 0.3 0.7 0.2
consumer spending, triggered a surge in Interest payments (net) 1.0 1.2 1.5
Secondary income balance 22.0 23.2 23.2
demand for imports, which grew by 17.8
Worker remittances 18.7 19.9 19.3
percent and reached a record US$ 48.6 Capital account balance 0.4 0.3 0.3
billion.12 Additional stress on the import bill Financial account balance -5.1 -6.8 -9.6
came from steady progress on CPEC-related Direct investment in Pakistan 1.0 2.3 2.4
power and road construction projects. With Portfolio investment in Pakistan 1.8 -0.3 -0.3
tapering foreign exchange (FX) earnings during Net incurrence of liabilities 2.2 5.0 8.9
General government 1.4 3.4 4.8
the year and lower-than-expected financial
Private sector (excl. banks) -0.2 1.2 2.4
inflows, the rise in the import burden created a Banks 0.5 0.4 1.6
deficit in the balance of payments. As a result, SBP liquid reserves (end-period) 13.5 18.1 16.1
the countrys FX reserves declined by US$ 1.7 Total liquid reserves (end-period) 18.7 23.1 21.4
billion during FY17, after rising for 3 years in a P
Provisional
row (Table 6.1). Data source: State Bank of Pakistan
9
The IMF projects Chinas government and corporate debt to rise to 300 percent of GDP by 2020, from 242 percent in 2016.
Such a high debt burden, along with questions about the efficacy of recent government efforts to deleverage the economy,
led Moodys to downgrade Chinas credit rating in May 2017 to A1 from Aa3.
10
However, demand for commodities and certain products, particularly hi-tech electronics items and components, has risen
in FY17, and contributed positively to export growth of some Asian EMs (Box 6.3).
11
This analysis is based on provisional BoP estimates.
12
Capital goods contributed 48.1 percent to the total YoY increase in imports during Jul-May FY17 (source: Pakistan
Bureau of Statistics).
71
This situation is partially explained by the fact that the recent spurt in Pakistans economy has come at
a time when global economic conditions are not supportive: (i) the price impact was still negative for
many traditional export items during the year, like cotton yarn, bed-wear, readymade garments,
tanned leather and fruits; this depressed their values despite an increase in their export quantum; (ii) a
reversal in international commodity prices (especially palm oil), which inflated food imports; and (iii)
the impact of cuts in infrastructure spending and labour indigenization measures in the Gulf countries,
which reduced their demand for migrant workers. As a result of these developments, Pakistans
exports declined for the third consecutive year, with receipts dropping 1.3 percent in FY17. In case of
remittances, inflows declined 3.1 percent during the year, with major drag coming from the GCC
countries.13 These trends in two major sources of FX earning exports and remittances do not bode
well for financing of imports required to achieve the targeted higher GDP growth, without tapping on
existing FX buffers.
The implications of decline in exports and remittances on the overall BoP has been evident in US$ 1.7
billion drop in the countrys FX reserves in FY17, against a current account gap of over US$ 12
billion (Figure 6.3). Two factors were particularly helpful. First, the government was able to
mobilize US$ 10.1 billion in gross financing from various bilateral, multilateral and commercial
sources, effectively leveraging its multi-year progress on the reform agenda and the countrys stable
credit ratings. Second, CPEC-related inflows were on-hand in FY17, as represented by the 38.5 and
49.2 percent share of China in total gross official inflows (both bilateral and commercial) and FDI
respectively during the year. In addition to these, the availability of sizable FX buffers that had been
built up over the past three years, enabled the country to withstand rising imbalances.
Figure 6.3: Current Account Deficit Financing (by source)
FDI FPI-debt FPI-equity Net incurrence of liabilities BoP support from IMF Current account deficit*
15
10
billion US$
-5
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
*: +ve indicates deficit .
However, some concerns emerged with regards to the composition of financial inflows. In FY17,
since both FDI and portfolio investment inflows fell short of the governments expectations and were
less than sufficient to finance the current account gap, the country had to scale up external borrowings
(Figure 6.4). Most of these borrowings comprised commercial loans, including short-term ones,
which exposed the economy to both rollover and re-pricing risks.14
Therefore, the strategy for moving forward comprises measures that would revive the countrys
exports and worker remittances, and attract more equity inflows. In case of exports, it is encouraging
to note that quantum exports of a number of traditional items posted an increase in FY17 (though a
13
The pounds depreciation following the Brexit vote also pulled down the dollar value of remittances sent from the UK.
14
These risks are represented by a high amount of both short-term gross disbursements and amortization during the year.
Gross short-term loan disbursements to the government amounted to US$ 1,663 million in FY17, whereas gross amortization
of short-term loans reached US$ 1,607 million.
72
External Sector
negative price impact depressed their export Figure 6.4: Financial Inflows - Expected vs. Actual
values). On the global front, a pick-up in Projected Actual
consumer spending in European countries 5
figured prominently in boosting quantum textile
exports, and on the domestic level, a visible
3
improvement in industrial power supplies and
billion US$
availability of low-cost financing to exporting
industries (i.e. SBPs refinancing schemes), 1
were helpful.
-1
The policy focus now is on consolidating this FPI FDI Private sector* Government
momentum: the government has started Foreign investment Net incurrence of liabilities
working on removing the cash-flow constraints
*: Including banks
faced by exporting businesses by clearing Data source: Annual Plan 2016-17 (Planning Commission), State
stuck-up refunds of exporters. Moreover, Bank of Pakistan.
timely disbursements under the incentive-based
Rs 180 billion export package will also be ensured.
As for boosting workers remittances, the Pakistan Remittance Initiative (PRI) has now moved
beyond shifting the inflows from informal to formal channels, and towards introducing new financial
products to encourage expats to repatriate their savings to the country. It is now also taking its tried
and tested model of building tie-up arrangements in the GCC and UK, and implementing the same in
non-traditional corridors, like Malaysia, South Africa and New Zealand. Moreover, both SBP and
PRI are encouraging wider usage of the mobile banking channel in the remittance business; currently,
remittance transfers have a fairly small share in overall transactions through this mode. Lastly, the
PRI is constantly working to ensure that the cost of remitting funds to Pakistan remains manageable
for emigrants, and that they do not switch to illegal and informal modes to transfer funds back home.
While these efforts are ongoing, it may take some time before they lead to a significant uptick in the
countrys forex earnings. The same is true for proposed non-power CPEC projects (like Special
Economic Zones), whose benefits will become visible over the long-term, when Pakistani exporters
utilise these facilities to enter new markets and diverisfy their products. In the interim period, the
country has to mainly rely on external borrowings; however, stopgap measures to contain the trade
deficit might be taken, if deemed necessary.
6.3 Current Account Imports primary reason for the widening deficit
The increase in the current account deficit was
Figure 6.5: Growth in Import Payments in FY17
mainly due to a 17.8 percent surge in the
countrys import bill, which shot up to a record Petroleum products
US$ 48.6 billion in FY17. This rise mainly Machinery
Textiles
represents: (i) progress on CPEC-related power LNG
and infrastructure development projects, which Road motor vehicles
has stimulated the demand for machinery, Other chemicals
Pulses
heavy vehicles and fuel (Box 6.1); (ii) growing Others food items
energy needs of the domestic manufacturing Crude oil
and consumer transport sectors; (iii) a rise in Palm oil
Iron & steel
global palm oil prices; and (iv) production Tyres & tubes
losses in the minor crop sector, which led to Plastic
higher imports of pulses and other food items Fertilizer
(Figure 6.5). -500 0 500 1,000 1,500
million US$
With export receipts falling for the third
73
Figure 6.6: Trend of Growth in Remittances to Pakistan

consecutive year, the trade deficit increased to a
record-high US$ 26.9 billion in FY17. The 25
impact of higher imports was also reflected in 20
the services account, as freight charges
15
increased substantially. A sharp fall in inflows
percent
under the Coalition Support Fund (CSF) put 10
additional pressure on the services account. 5
The impact of these developments on the
0
current account would have been contained, had
worker remittances followed their previous -5
growth trajectory; instead, inflows fell for the -10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
first time in 13 years to US$ 19.3 billion
(Figure 6.6).
Box 6.1: CPEC Activity Pushes up Machinery, Transport Imports

The CPEC agreement was reached between Pakistan and China at a time when the power shortfall was having a crippling
effect on local industry. This, together with existing backlog in countrys infrastructure especially logistics had
contributed in putting Pakistan behind other EMs in terms of ease of doing business.15 Therefore, when a large number of
power and transport infrastructure projects were announced under the agreement, it was expected that businesses concerns
will be addressed to a large extent. So far, a few early harvest CPEC power projects have either already been completed or
are nearing completion, and work is continuing at a brisk pace on multiple highways, including Karakoram and the
Peshawar-Karachi Motorway.16
But this progress has only been made possible by hefty imports of capital goods, including power generation machinery and
assorted equipment; heavy commercial vehicles (to transport raw materials from ports of entry to project sites); and fuel
(mainly HSD) to run these vehicles. Cumulatively, imports of POL, transport and machinery grew by 22.0 percent YoY to
US$ 21.1 billion in FY17 accounting for 43.5 percent of total imports.
In case of machinery, imports of equipment related to power generation, like gas and steam turbines, solar panels,
compressors, and auxiliary plants, all remained strong (Section 6.5). Besides, most of these imports have been sourced from
China: the import of machinery items (HS Codes 84 and 85) from China had grown 31.1 percent YoY in the Jul-Mar FY17
period. Meanwhile, with progress on multiple CPEC power and infrastructure projects continuing, the required (imported)
heavy machinery had to be transported to these sites. This, in turn, led to higher demand for commercial vehicles, which
was mostly met through CKD and CBU imports of buses and other heavy vehicles.17
This surge in imports from China is not a new Table 6.1.1: Pakistans Trade and Financial Transactions with
phenomenon: Pakistans imports from the country have China
witnessed a 50 percent increase in a span of just three million US dollars
years (FY15-17), in-line with the onset of CPEC FY15 FY16 FY17
activities. China has the highest share in Pakistans
Exports to China 2,321 1,905 1,622
imports, at 22 percent in FY17; moreover, this share has
been rising consistently since FY09, when it was just 9 Imports from China 7,025 8,824 10,531
percent. In the wake of Pakistans declining exports to Trade balance -4,704 -6,919 -8,909
the country, the trade balance has tilted further in favour FDI (net) 319 1,064 1,186
of China (Table 6.1.1). Portfolio investment 11 6 48
Official bilateral loan disbursements
Yet, it must also be pointed out that a part of the CPEC- (gross)1 1,161 1,042 1,594
related imports is being financed by financial inflows Official commercial loans by
- -
Chinese banks (gross)1 2,300
from China. Private firms operating in the power and
construction sectors, have seen sizable levels of financing Data source: State Bank of Pakistan, 1: Economic Affairs Division
15
Pakistan ranked 144th out of 190 economies in the Ease of Doing Business 2017. Emerging market peers like South Korea
(5), Malaysia (23), Vietnam (82), Indonesia (91) and India (130) were ranked much higher (source: World Bank).
16
The Sahiwal coal-fired plant (two units of 660MW each), and a couple of wind power farms in Sindh, have been
completed under CPEC and are operational (source: Planning Commission of Pakistan).
17
The domestic production of trucks & buses, pick-ups and tractors has risen at CAGRs of 39.8 percent, 11.6 percent and
16.1 percent respectively (source: Pakistan Automobile Manufacturers Association).
74
External Sector
from their Chinese sponsors and commercial banks either in the form of equity injections (FDI), or commercial loans from
Chinese banks. In addition, Chinese banks and DFIs are also lending FX support to the government of Pakistan as well as to
Chinese banks operating in Pakistan.
Worker remittances- decline most prominent from the GCC

Worker remittances could not maintain their Table 6.2: Worker Remittances (by source)
growth momentum in FY17, as inflows Value in US dollar; growth in percent
dropped 3.1 percent in the year. The decline Values Growth
was concentrated in the six oil-rich Gulf FY15 FY16 FY17 FY16 FY17
Cooperation Council (GCC) countries; lower GCC 12,035 12,756 12,104 6.0 -5.1
inflows from both the US and the UK Saudi Arabia 5,630 5,968 5,470 6.0 -8.3
UAE 4,232 4,365 4,310 3.1 -1.3
exacerbated this decline (Table 6.2). Kuwait 748 774 764 3.5 -1.3
Oman 686 819 761 19.4 -7.1
The hit to remittances from the GCC can be Bahrain 389 448 395 15.2 -11.8
traced to oil price recession which had set in Qatar 350 381 404 8.9 6.0
from mid-2014 onwards. The demand for fresh USA 2,703 2,525 2,444 -6.6 -3.2
UK 2,376 2,580 2,338 8.6 -9.4
migrant workers by the Gulf economies has
EU 364 418 483 14.8 15.6
slowed down considerably over the course of Others 1,242 1,638 1,935 31.9 18.1
two years. In the wake of burgeoning budget Total 18,720 19,917 19,304 6.4 -3.1
deficits, the GCC countries have responded by Data source: State Bank of Pakistan
slashing their infrastructure spending, which
has particularly affected construction activities Table 6.3: No. of South Asian Workers Going to Saudi Arabia &
UAE
in the region.18 This was especially true in H1- in thousands
FY17 (basically the entire CY-16), as the fiscal 2014 2015 2016
crunch forced governments to delay payments S. Arabia UAE S. Arabia UAE S. Arabia UAE
to contractors, who, in turn, withheld salaries of Pakistan 313 351 523 327 463 296
workers and slowed down their fresh India 330 224 307 226 165 164
recruitment drives. The labor nationalization Bangladesh 11 24 58 25 144 8
drives in many of these economies have also Data source: Bureau of Emigration and Overseas Employment
Pakistan, Ministry of Expatriates' Welfare & Overseas Employment
contributed to the underlying challenging Bangladesh, and Ministry of External Affairs India
environment, particularly for aspiring white-
collar emigrants.19
Pakistan and India have been particularly affected by these developments. These two countries have
traditionally supplied the bulk of low-skilled laborers who work on construction projects or become a
part of maintenance crews at office towers, airports etc in the Gulf. As shown in Table 6.3, the
number of emigrants from both Pakistan and India going for work to Saudi Arabia and the UAE has
seen significant drops in 2015 and 2016. However, Pakistani emigrants have not been impacted to the
extent that their Indian peers may have been in the kingdom.
At the same time, it is also possible that firms in Saudi Arabia are meeting part of their demand for
migrant workers from Bangladesh now, at the expense of those from Pakistan and India. The number
of Bangladeshis going to Saudi Arabia for work, though much smaller than Pakistanis, has been rising
steadily since 2014. The upsurge in 2016 can be partly traced to the lifting of a six-year ban on the
18
The overall fiscal balance (as percent of GDP) of the GCC countries went from a surplus of 3.1 percent in CY 2014, to a
deficit of 9.4 percent in CY 2015, which worsened further to 12.0 percent in CY 2016. However, the deficit is projected to
decline to 6.5 percent of GDP in CY 2017, as the impact of fiscal consolidation measures introduced in 2015-16 start to kick
in; the slight recovery in oil prices from late 2016 onwards will also lend support (source: IMF Regional Economic Outlook
for MENAP, April 2017).
19
For instance, the unemployment rate in Saudi Arabia rose to 12.3 percent in 2016, from 11.5 percent in 2015 (source:
Haver Analytics).
75
recruitment of male Bangladeshi workers by the kingdom, after intense diplomatic efforts by Dhaka.20
This underscores the need for Pakistan to also become more proactive diplomatically to ensure a
favourable working environment and employment prospects for its citizens.21 Nonetheless, despite the
higher export of manpower to Saudi Arabia, remittances to the country from the kingdom fell more
sharply than they did for Pakistan (Figure 6.7).
Meanwhile, remittances from the US to Figure 6.7: Remittances to Pakistan and Bangladesh from Key
Pakistan declined 3.2 percent YoY to US$ 2.4 GCC Countries
billion in FY17; this represented a YoY decline Saudi Arabia UAE
in inflows for the second straight year. As we 0
have highlighted before, the combination of
percent growth
more stringent regulations regarding global -10
cross-border money transfers, coupled with a
special emphasis on due diligence requirements -20
for institutions involved in remitting funds to
and from the MENAP region, have constricted -30
Bangladesh
Bangladesh
Bangladesh
Bangladesh
Pakistan
Pakistan
Pakistan
Pakistan
remittances from the country.
Primary income - Lower oil and gas

repatriation offset higher interest payments Q1-FY17 Q2-FY17 Q3-FY17 Q4-FY17
The primary income account improved Data source: State Bank of Pakistan, Bangladesh Bank
significantly in FY17 over last year, with the
deficit declining by US$ 592 million. The Table 6.4: Profit and Dividend Repatriation on FDI
better performance was almost entirely due to million US dollars
a sizable reduction in the FX repatriated as oil FY15 FY16 FY17
and mineral proceeds from the country (Table Total repatriations 3,327 3,807 3,007
6.4). Savings realized on this front were more of which
than sufficient to offset higher repatriations Oil and mineral proceeds 1,734 1,546 1,042
from other sectors, as well as an increase in Profit and dividends 1,328 1,512 1,734
interest payments during the year. Food 112 129 266
Financial business 337 364 262
Oil and gas firms could not recover from Telecom 254 175 177
heavy losses incurred in FY16, as crude prices Power 100 158 152
remained range-bound throughout FY17. In
Beverages 60 45 79
contrast, strong domestic demand and healthy
Others 447 583 757
sales led to higher profitability of fast-moving
consumer goods (FMCG) companies in the
country; this was reflected in a more than doubling of profit and dividend repatriations by the food
sector in FY17.22 In fact, food emerged as the top source of FX outflows through this mode, with its
repatriations exceeding those by the banking industry for the first time in six years.23
20
Ministry of Foreign Affairs Bangladesh, press release dated 11th August 2016.
21
The government is mulling over measures to capture the manpower market of UAE, especially in the context of Expo
2020-related infrastructure spending in Dubai. Expecting an increase in the demand for skilled labour, the Bureau of
Emigration and Overseas Employment (BEOE) is working in close coordination with the National Vocational and Technical
Training Commission (NAVTTC) and Technical Education and Vocational Training Authority (TEVTAs) to upgrade
curriculums for skill development as per international standards. Moreover, BEOE is also involved in highlighting the issues
faced by Pakistani migrant workers at various international platforms including International Labour Organization,
International Organization of Migration, Colombo Process, Abu Dhabi Dialogue, Global Forum on Migration and
Development, World Health Organization and Budapest Process, etc.
22
All indicators suggest that the sectors profitability increased this year; importantly, the food sector posted a strong YoY
production growth of 11.5 percent in FY17. Leading sub-sectors like soft drinks and juices posted double-digit rises in
production (9.8 percent and 12.1 percent respectively). The food sector in the country enjoys strong foreign investor
participation; in fact, it was the second-highest recipient of FDI in the country in FY17, courtesy a major merger and
76
External Sector
Meanwhile, in line with the low interest rate environment and a shift in the governments borrowings
away from commercial banks, profits of the banking sector declined during FY17; subsequently, a
YoY drop in profit repatriations by financial firms was noted in the year. Yet, the industry was still
the second-highest source of repatriation outflows from the country.
With regards to interest payments, the US$ 1.5 billion YoY net outflow in FY17 is in tandem with the
rise in the external debt stock during the year (Chapter 4). The fall in payments on Eurobonds/Sukuk
was more than offset by higher payments on other longer term government debt.24 Interest payments
by the non-financial private sector also increased over FY16.
Services account Improved IT exports overshadowed by lower CSF

The services deficit increased by a marginal
Table 6.5: Services Account
US$ 167 million YoY and reached US$ 3.6
million US dollars
billion in FY17. This slight worsening was
FY15 FY16 FY17
entirely due to a US$ 387 million decline in
Services balance -2,970 -3,406 -3,573
CSF inflows in the year; excluding these, the
Government services 1,768 1,476 1,177
services account improved by US$ 220 million
o/w CSF 1,452 937 550
over last year (Table 6.5).
Telecom, computer & info services 425 412 555
The deficit in transportation which has the Transport -2,843 -2,160 -2,574
highest share in the services account rose o/w Freight -2,622 -1,638 -1,944
19.2 percent to US$ 2.6 billion in FY17, Air transport (passenger) -245 -513 -517
mainly because of an 18.7 percent increase in Travel -1,216 -1,516 -1,438
the freight deficit. This was somewhat Insurance & pension services -195 -202 -132
expected, given that the freight deficit tends to Financial services -122 -93 -119
track the direction of the merchandize import Other business services -592 -1,056 -814
bill. Higher average crude prices in the year Data source: State Bank of Pakistan
25
also contributed to the increase in freight charges.
The impact of the lower CSF and higher freight on the services account overshadowed the
improvements recorded in telecom services during the year. Net telecom exports increased almost
five times to US$ 173.3 million, which pushed overall telecom, computer and information services
exports to US$ 554.6 million up 34.6 percent from FY16s level of US$ 411.9 million.
6.4 Financial Account Commercial borrowings remained strong

The surplus in the financial account rose to US$ 9.6 billion in FY17 the second-highest level ever
and was 41.2 percent higher than last years surplus. These higher inflows proved helpful in partially
financing the current account deficit, and therefore moderated the decline in the countrys FX
reserves. Most of the inflows were debt-creating in nature, as government, banks, and private firms
all borrowed heavily from external creditors to meet their financing needs.
(i) Net incurrence of liabilities

The net inflow of foreign loans into the country reached US$ 8.9 billion in FY17, compared to US$
5.0 billion in the preceding year. The government had a dominant share (around 54.2 percent),
acquisition transaction. By end-Dec 2015 (latest data available), outstanding FDI in Pakistans food sector amounted to US$
2.7 billion, or 7.9 percent of the total stock of FDI in the country at the time.
23
From FY12 to FY16, the banking sector repatriated the highest amount of FX in the form of profit and dividend
repatriation on FDI on an annual basis.
24
Interest payments on sovereign bonds dropped US$ 66 million in FY17. However, these were offset by a US$ 208 million
YoY increase in payments on long-term government debt.
25
In FY17, average crude prices (Brent, WTI and Dubai Fateh) were 16.3 percent higher than FY16 (source: IMF).
77
followed by the private sector (mostly power companies), and banks. Most of these borrowings were
commercial in nature, and were sourced from foreign banks.
In the case of the government, commercial Table 6.6: Sources of Official Commercial Borrowings*
borrowings emerged as the top source of million US dollars
official FX inflows in FY17 (Table 6.6). A Q4-FY17 FY17
sizable share of these borrowings was short- China Development Bank 1,000.0 1,700.0
term in nature, entailing important implications Bank of China 300.0 300.0
Industrial and Commercial Bank of China 0.0 300.0
in terms of rollover and re-pricing risk of the
Standard Chartered Bank, London 697.9 697.9
countrys external debt.26 The share of short- Consortium financing (local + foreign) 650.0 650.0
term loans in the governments overall debt Noor Bank, UAE 130.0 445.0
servicing also rose: in FY17, amortization of Citi Bank 275.0 275.0
short-term loans accounted for 36.7 percent of Total commercial borrowings 3,052.9 4,367.9
overall amortization of government loans, up Total official loans 5,053.8 10,123.9
* These figures are provisional, gross disbursements.
from 27.0 percent last year. Data source: Economic Affairs Division, Ministry of Finance
Moreover, the timing and magnitude of these borrowings indicate that they were meant to stabilize
FX liquidity levels in the interbank market, particularly in the last few months of FY17. Official
external borrowings surged in Q4, just as the current account deficit hit a record high.27 In fact, 79.1
percent of net loans to the government, and almost half of gross official commercial loan inflows in
full-year FY17, were recorded in the fourth quarter (Table 6.6).
Meanwhile, commercial banks continued to receive short-term FX support from their offshore
branches and parent companies, though the magnitude of this support was considerably higher than
last year: these borrowings rose to US$ 1.6 billion in FY17, from just US$ 295 million in FY16.
(ii) Foreign direct investment

At the start of the year, the government had envisaged net FDI of US$ 4.5 billion for FY17.28 The
key assumption was that CPEC-related power projects would receive the bulk of this higher foreign
investment. However, as it turned out, the actual inflow of FDI into the power sector declined 31.4
percent in the year (Table 6.7). Moreover, the sectors share within total FDI, as well as in overall
FDI received from China, declined significantly over last year.29 Most of the power firms that had
received Chinese FDI in FY16 continued to receive investment from the country in FY17, albeit in
lower volumes.
These trends do not imply that funding for CPEC projects is drying up. In fact, a large portion of the
envisaged financing for CPEC power projects came into the country, but in the form of direct
borrowings from Chinese banks (i.e. FX coming in the interbank market). 30 That said, in most cases,
26
This can be judged from the fact that gross short-term loan disbursements to the government amounted to US$ 1,663
million in FY17, whereas gross amortization of short-term loans reached US$ 1,607 million. While the net inflow was a
nominal US$ 56 million, the sizable amounts of gross disbursements and amortization recorded in the year is a bit worrying,
and might indicate the countrys rising susceptibility to rollover risk.
27
Net debt flows to the government (excluding Eurobond/Sukuks) amounted to US$ 3.8 billion in Q4-FY17, against the full-
year flows of US$ 4.8 billion. The Q4 current account deficit stood at US$ 4.4 billion.
28
Source: Annual Plan 2016-17, Planning Commission
29
In FY16, 82.8 percent of net FDI from China had gone into the power sector; in FY17, the sector received a relatively
lower 50.6 percent of net FDI from the country.
30
For instance, in their application for a generation license to NEPRA, the foreign sponsors of the Sahiwal coal-fired power
project mentioned the projects total cost as US$ 1.8 billion. Of this, the sponsors were expected to inject US$ 356.4 million
as equity (20 percent), with the remaining 80 percent (US$ 1.4 billion) coming in the form of a loan from ICBC (source:
http://www.nepra.org.pk/Licences/Licence percent20Application/2015/Generation percent20License percent20App
percent20of percent20Hunaneg percent20Shdong percent20RUYI.PDF)
78
External Sector
offshore borrowings were used to purchase power generation machinery to be sent to Pakistan, and to
pay foreign contractors working on the CPEC projects (i.e. import of goods and services).
Table 6.7: Sector-wise Inflow of Foreign Direct Investment in Pakistan

million US dollars
FY15 FY16 FY17
Inflow Outflow Net FDI Inflow Outflow Net FDI Inflow Outflow Net FDI
Power 333 51 282 1,217 58 1,159 815 20 795
Thermal 94 51 44 438 57 382 207 14 194
Hydro 178 0 178 244 1 243 213 6 207
Coal 61 - 61 535 - 535 395 - 395

Oil & gas exploration 305 5 301 267 18 249 162 5 158
Telecommunication 948 882 66 378 131 247 106 115 -9
Information technology 36 62 -25 19 30 -11 38 0 38
Financial business 407 151 256 392 103 289 100 36 64
Construction 56 2 54 50 3 47 472 4 468
Food 49 51 -2 33 89 -56 493 0 493
Electronics 32 32 0 50 16 34 171 28 143
Total 2,797 1,809 988 3,165 860 2,305 2,814 403 2,411
The information on such imports was not initially available, as neither did the payment burden fall on
domestic commercial banks nor did SBP have details of transactions of the firms involved. As a
result, import payments as well as financial account inflows remained grossly underreported in the
balance of payments. Importantly, the discrepancy between customs data and payments records
increased.
To align the trends in two data sets, and also to get a better handle on the subject, SBP instructed
banks to collect additional information regarding offshore foreign currency accounts (FCAs) of their
power sector client firms banks were also told to submit revised information from July 2015 onwards.
In July 2017, after receiving and compiling the detailed data regarding transactions in offshore FCAs
of power companies, SBP issued revised backdated (from July 2015 onwards) balance of payments
statistics.31 As expected, data for imports, FDI and loans to other sectors were all revised upwards.
Meanwhile, FDI (as well as official loans from China) into the construction sector spiked this year, as
work progresses on multiple road projects under the CPEC umbrella.32 Among other sectors, food
and electronics stood out, mainly because of completion of stake sales of two local companies to
foreign investors. On the other hand, a net outflow was noted from the telecom sector in FY17,
against an inflow US$ 246.8 million last year. It is worth noting that net FDI into the sector last year
was higher as a result of telecom firms borrowing from their parent companies abroad to either
purchase a 4G license (Telenor), or to acquire a smaller competitor (Mobilink); such activity was
largely absent in FY17.
31
The instructions were issued via EPD Circular Letter No. 14 of 2016. As mentioned before, the need for the measure had
risen because of a widening differential between import payments data available with SBP and imports reported by Customs
authorities to PBS. Definitional and operational factors (like cost of freight and insurance; import of cars under the baggage
scheme; gold imports etc.), could only partially explain the differences. For further details, see Box 5.1 titled Financing of
CPEC imports: Addressing gaps in data in SBPs Second Quarterly Report on the State of Pakistans Economy 2016-17.
32
Projects receiving bilateral official loans from China included the realignment of Karakoram Highway (US$ 11.3 million);
the Havelian-Thaikot section of KKH (US$ 290.7 million); the Sukkur-Multan section of the Peshawar-Karachi Motorway
(US$ 676.4 million); and the Orange Line project in Lahore (US$ 269.7 million). Source: Economic Affairs Division.
79
(iii) Foreign portfolio investment

Private sector outflows weighed on overall portfolio investment in the year, and exceeded a net inflow
of US$ 250 million into public sector securities.33 In terms of destinations, Luxembourg, the UK and
Hong Kong were the major recipients of portfolio outflows from Pakistan. This is likely due to the
strong presence of equity desks of global banks and foreign funds in these countries.
The trend of net private FPI outflows from Pakistan has now stretched on for two straight years;
foreign investors pulling out funds from a Pakistan Stock Exchange (PSX) that has been giving decent
returns, is a bit paradoxical. The fact that the PSXs performance relative to other emerging markets
(as measured by the performance of the MSCI Emerging Markets Index) has also been strong during
this time, adds to the perplexity of why foreign investors are pulling out from the domestic market
(Box 6.2). Moreover, a hefty net portfolio outflow immediately following Pakistans reclassification
into the MSCI EM Index in June was contrary to expectations.
Three major reasons explain these unmet expectations. First, large, actively managed foreign funds
looking to exit the PSX utilized the huge liquidity available in the market on May 31 (as inflows from
passive funds came in) to offload their positions. Relatively speaking, PSX is still a shallow market,
with daily turnover averaging US$ 102 million over the 12 months leading to the eve of the MSCI
upgrade. However, on May 31, turnover surged to US$ 475 million, offering big foreign funds a
chance to offload their holdings.
Figure 6.8: PSX's P/E Discount to MSCI EM Index
Second, Pakistani equities had become 8
relatively overvalued. The price-to-earnings
(p/e) discount at which the PSX was trading 7
As upgrade nears, p/e
price-to-earnings ratio
discount shrinks further

against the MSCI EM Index had consistently 6
narrowed till December 2016, because of
5
strong local investor activity. While the p/e
discount then started to widen from January 4
2017 onwards as the PSXs rise moderated 3 MSCI announces PSX's upgrade,
effective June 2017; market rallies and
(mainly on account of local developments), it discount shrinks
was still higher on the eve of the MSCI upgrade 2
10/1/2016
11/1/2016
12/1/2016
1/1/2016
2/1/2016
3/1/2016
4/1/2016
5/1/2016
6/1/2016
7/1/2016
8/1/2016
9/1/2016
1/1/2017
2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
than it was at the time of the original MSCI
announcement in June 2016 (Figure 6.8).34
Data source: Bloomberg
Third, Pakistan was originally supposed to have
a weightage of around 0.2 percent in the MSCI
EM Index, which was later lowered to slightly over 0.1 percent. This reduction likely had a direct
impact on gross inflows coming from passive funds that track the MSCI EM Index.
Box 6.2: Portfolio Outflows amid Rising PSX during FY16 and FY17
The domestic stock market has performed quite well over the past two years, giving a return of 6.8 percent in US Dollar
terms in FY16, and 23.1 percent in FY17. In the same two-year period, FPI outflows from Pakistani equities have amounted
to a sizable US$ 850 million. This box attempts to explain the factors behind this dynamic, where foreign investors are
seemingly unconcerned by the performance of the PSX (which has tended to be better than that of other emerging markets),
and have instead been pulling out their funds from Pakistan. For this analysis, we can divide the PSXs performance and the
direction of FPI flows into four distinct phases (Figure 6.2.1).
33
The government had issued a US$ 1.0 billion Sukuk in October 2016, and repaid a maturing Eurobond of US$ 750 million
in June 2017; this led to a net public portfolio inflow of US$ 250 million.
34
The PSXs p/e discount to the MSCI EM Index on June 10, 2016, stood at 6.5 percent. (The original MSCI announcement
was made on June 14, 2016). On May 30, 2017 (i.e. the day before the actual reclassification), the discount stood at 4.8
percent (source: Bloomberg). (Note: the lower the PSXs p/e discount to MSCI EM Index, the less attractive Pakistani
stocks are relative to their peers in other countries, in the eyes of foreign investors).
80
External Sector
Phase I: The performances of both the PSX and the MSCI EM Index generally remained subdued in this period, with
consistent net FPI outflows noted from Pakistani equities and funds; similar capital outflows were reported by other EMs as
well. The key factor was the culmination of the seven-year-long quantitative easing in the US (in December 2015), which
prompted global funds to readjust their portfolios accordingly. The Chinese yuans abrupt and sizable devaluation (in
August 2015), and geo-political tensions between Russia and Turkey, also contributed to the tough situation for EM capital
flows.
Phase II: Local equities outperformed the MSCI EM Index almost throughout this period, mainly because local investors
seemed to be building up positions while increasingly factoring in the PSXs impending upgrade into the MSCI EM Index.
Net FPI also turned positive in anticipation of, and immediately following the upgrade announcement (in mid-June 2016).
Phase III: FPI outflows resumed, this time in response to expectations of further monetary tightening in the US (with the
Fed rate hike materializing in December 2016). The outflows then accelerated during November-January, as global
investors started factoring in the results of the US presidential elections; the initial expectation was that the policy proposals
of the new administration would trigger inflationary pressures in the country, pushing the Fed to raise interest rates more
rapidly. EMs across the board faced capital outflows during this time, and Pakistan was no different.
Interestingly, as FPI outflows gathered steam in Pakistan, local investors went on a buying spree (particularly in November
and December 2016), partly buoyed by the diffusion of political uncertainty as the apex court decided to hear petitions
related to the Panama Papers case. This local buying not only completely absorbed the selling by foreign investors, but
pushed the PSX-100 index to new highs.
Figure 6.2.1: PSX-100 Index's Relative Return and FPI into Pakistani Stocks and Funds
PSX return (USD) MSCI EM return Net FPI into PK equity (rhs)
15 100
10 50
5 0
% change, MoM
million US$
0 -50
-5 -100
Phase I Phase II Phase III Phase IV
-10 -150
-15 -200
Nov-15
Nov-16
Apr-16
Apr-17
Jun-17
Jun-16
Dec-15
Dec-16
Oct-15
Oct-16
May-17
May-16
Mar-16
Mar-17
Sep-16
Sep-15
Feb-16
Feb-17
Jan-17
Jan-16
Aug-16
Aug-15
Jul-15
Jul-16
Data source: Bloomberg, State Bank of Pakistan
Phase IV: A consolidation phase set in at the PSX, with the benchmark index declining by 3.0 percent during Jan-Apr FY17.
Domestic investors adopted a cautious stance, and market liquidity was said to have become a bit tight. The investors
cautiousness reportedly stemmed from a couple of brokers fleeing the country with their clients funds; and the capital
market regulator launching investigations against multiple brokers for market manipulation, while simultaneously working
on introducing a new margin financing product and related regulations. The magnitude of FPI outflows fell sharply, though
fresh inflows were scant on net basis.
These factors, coupled with concerns about the countrys external account position and unfolding political developments,
likely reduced the attractiveness of Pakistani stocks relative to their peers in other emerging markets for foreign investors,
thereby deterring them from taking sizable fresh positions. Going forward, it is increasingly likely that the absolute returns
(in dollar terms) offered by the PSX, in and of itself, might no longer be attractive enough for foreign investors. Conversely,
it also seems that the extent to which the local equity markets performance is determined by foreign investors, has lessened
considerably.
6.5 Trade Account35

In line with the pick-up in real GDP growth to a decade high of 5.3 percent in FY17, on the back of a
favourable policy mix and higher CPEC and PSDP related spending, the countrys imports increased
by 18.5 percent to a record US$ 53.0 billion. While some comfort may be drawn from the fact that
35
This section is based on customs data reported by the PBS. The information in this section does not tally with the
payments record data, which is reported in Section 6.1. To understand the difference between these two data series, please
see Annexure on data explanatory notes.
81
more than half of the increase in imports has Figure 6.9: Pakistan's Trade Performance
come from capital goods, these also contributed Trade deficit (rhs) Export Import
significantly in taking the countrys trade
deficit to an all-time high of US$ 32.5 billion in 20 12
FY17. At the same time, declining exports
both in terms of absolute value as well as in 15 9
percent of GDP pose a clear challenge for the
external sectors stability (Figure 6.9). 10 6
The drop in Pakistans exports looks 5 3

particularly concerning when seen in the
0 0
context of the recent recovery in exports of
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
multiple emerging markets. However, it
appears that more than competitiveness issues,
the divergence in this trend mainly reflects Data source: Pakistan Bureau of Statistics
product mismatch: items that are driving the Table 6.8: Growth in Exports
recent export growth of EMs primarily percent
comprise high-tech items, such as electronics, H1 H2 FY17
components for consumer electronics, Food group -11.2 -3.3 -7.0
machinery items etc, and commodities (Box Basmati rice -22.6 19.3 -1.9
6.3). Non-basmati -16.4 -18.1 -17.3
Seafood 10.3 32.6 21.2
Exports Textile group -1.8 1.9 0.03
Raw cotton -49.9 52.2 -43.1
Pakistans exports declined by 1.7 percent in
Cotton yarn -6.3 4.1 -1.7
FY17, compared to a much bigger fall of 12.2
Cotton fabrics -3.9 -3.1 -3.5
percent recorded in FY16. The drop was Knitwear -1.2 1.0 -0.1
concentrated in H1-FY17, which more than Bed wear 6.2 5.4 5.8
offset a marginal growth of 0.5 percent during Towels -6.2 5.6 -0.4
H2-FY17. The overall export performance Readymade garments 5.8 5.5 5.6
largely mirrored that of the textile group, Other manufactures group -5.9 -2.6 -4.3
whose exports grew by 1.9 percent in H2, after Leather -7.9 -1.4 -4.7
dropping by 1.8 percent in H1 (Table 6.8). Leather manufactures -4.4 -8.8 -6.5
However, exports of major non-textile, Foot wear -6.4 -18.1 -13.2
Plastic 14.8 14.1 14.5
especially non-basmati rice, leather, footwear
Pharmaceutical 3.1 4.3 3.7
and cement, declined throughout the year.
Cement -14.6 -38.9 -26
Total exports -4.0 0.5 -1.7
Non-textile exports depict mixed performance Data source: Pakistan Bureau of Statistics
Overall food exports fell 7.0 percent in FY17,
mainly due to lower shipments of non-basmati rice, meat, and fruits & vegetables; these more than
offset the growth noted in exports of seafood, spices and tobacco. In case of non-basmati rice, the
decline is evident mainly in the Chinese market, where a glut-like situation has been developed due to
excessive stockpiling over the past two years.36 Not only has China reduced its import of the
commodity, it has also started offloading its stocks in some African countries (particularly Cte
d'Ivoire, Zimbabwe, Mozambique, and Malawi), which were earlier sourcing this product from
Pakistan.37 In addition to this, increased domestic rice production in Ghana, Guinea, Nigeria and
Senegal reduced their demand for Pakistani varieties.38
36
Rice stocks in China are projected to rise to a nearly two-decade high of 75.7 million tons by the end of the 2017-18
season (source: US Department of Agriculture Rice Outlook July 2017).
37
On aggregate, these four countries imported 176,841 MT in Jul-May FY17, compared to 332,873 MT in the same period
last year.
38
In Nigeria, initiatives such as the Growth Enhancement Support Scheme (GESS) and the Presidential Initiative on
Fertilizers, are aimed at promoting growth and helping the country attain self-sufficiency in rice. Similarly, state
82
External Sector
Box 6.3: The Recovery in EM Exports the Key Driving Factors and Outlook39
As the global commodity price recession set in from FY15 onwards, exports of many Asian emerging market economies
started to decline (Figure 6.3.1). Quantum exports also suffered, as demand for imported goods from the developed
economies (which were going through a phase of sub-par growth), and from China (which was trying to strategically exit
low valued product segments and graduate into more hi-tech production), remained subdued.
While the drop in commodity prices (like crude and palm oil) hurt the export performances of EMs such as Malaysia and
Indonesia, the tepid demand from key western markets and China impacted many Asian exporting economies (except
Vietnam and Bangladesh). Pakistan was not immune from these external developments, and the countrys export earnings
declined by 3.9 percent in FY15 and then by 8.8 percent in FY16.40
Figure 6.3.1: Export Performance of Emerging Market Economies
FY11-14* FY15-16* FY17
30
20
percent growth
10
-10
-20
Indonesia
Bangladesh
Pakistan
Thailand
Singapore
Hong Kong
Vietnam
Malaysia
China
Turkey
India
Korea
Taiwan
*: Compounded annual growth rate
Data source: Haver Analytics
Nonetheless, the rebound in global commodity prices in Figure 6.3.2: Breakdown of Export Performance of Asian
FY17 came as a relief for many EMs, whose exports Economies (excluding Japan)
generally started to recover from Q2-FY17 onwards.41 Export volume index Export value index
This price rebound also coincided with a healthy recovery
140 115
in demand from major importers like China and the
European Union: resultantly, a visible uptick in quantum
exports of many Asian economies was noted (Figure
index 2005=100
index 2005=100
6.3.2). The combined result was a double-digit growth in 130
exports of many countries in H2-FY17 (Table 6.3.1). 105
In this backdrop, Pakistans export performance looks 120

unsatisfactory: after declining consistently, exports
recovered by 1.3 percent YoY in Q2-FY17, then turned
negative (1.7 percent) in Q3, before again turning positive 110 95
Apr-15
Apr-16
Apr-17
Oct-14
Oct-15
Oct-16
Jan-15
Jan-16
Jan-17
Jul-14
Jul-15
Jul-16
(3.0 percent) in Q4. But before attributing this relatively

lacklustre performance entirely to domestic factors, it is
necessary to look at the drivers of the rebound in export
Data source: Haver Analytics
performances of other EMs.
Looking at recent trends in purchases by China the worlds second-largest importer offers some interesting insights. The
substantial recovery in Chinas imports in FY17 is mainly driven by commodities, machinery items and electrical
interventions in Ghana, including the recently launched Planting for Food and Jobs Campaign, have been undertaken to
increase the area under cultivation of major crops (i.e. maize and rice).
39
The information and analysis presented in this box has been gleaned from a research note by Nomura Global Research,
titled Asias steep but short-lived export up-cycle.
40
Pakistans exports receipts from China dropped by 13.6 percent in FY15, and by a further 17.9 percent in FY16.
41
The average IMF All Commodity Price Index rose by 11.9 percent YoY in FY17, after declining 30.0 percent in FY16 and
23.6 percent in FY14.
83
components i.e. products that are not exported by Pakistan.42 During Jan-Jun FY17, the top three contributors to the rise in
Chinas overall imports were POL, iron ore, and electrical components (semiconductor chips, etc), which accounted for
nearly84 percent of the increase in the countrys imports during the period.43 In contrast, Chinas imports of knitted or
crocheted fabrics, which Pakistan supplies, went up by a negligible 0.05 percent during the period.
In this regard, current trends in global tech component exports deserve some special attention here. It is clearly apparent that
these are currently driven by higher demand from China. First, according to foreign market research analysts, tech and
telecom companies in the country have been encouraging customers since 2016 to switch to 4G handsets from the prevalent
2/3G ones, which has led to a sizable increase in demand for new smartphone variants in the country. This, in turn, has
contributed to higher demand for associated electrical components such as semiconductors which was met by South Korea,
Taiwan, Malaysia and Thailand. Second, the global Table 6.3.1: Export Growth of EMs in FY17
electronics supply chain also got a boost in the lead-up to percent
the launch of Apples latest iPhone series (which came on
Q1 Q2 Q3 Q4
the market in September 2017); given that Chinese
companies are one of the major assemblers of the Bangladesh 4.1 4.7 3.1 -4.4
smartphone, their demand for electrical parts and China -7.0 -5.3 8.1 9.2
components has risen. In addition to tech items, demand India -0.8 6.0 18.5 10.0
for commodities like iron ore and manganese from China Indonesia -4.9 14.0 20.7 7.8
has also been increasing, largely because businesses in the Korea -5.0 1.8 14.7 16.8
country are building up their inventories (Figure 6.3.3a). Malaysia -2.1 1.9 14.4 11.5
This has contributed to the rise in international metal Taiwan -0.3 11.2 15.8 10.2
prices (Figure 6.3.3b), and therefore contributed
Thailand 1.0 3.8 4.9 10.9
positively to the export performances of major suppliers,
including Malaysia, Indonesia and India. However, from Pakistan -9.0 1.3 -1.5 2.8
Q3-FY17 onwards, Chinas commodity imports have Vietnam 9.1 14.7 15.2 22.6
slowed down, and a corresponding dip in metal prices has Data source: Haver Analytics
been noted as well.
Figure 6.3.3a: China's Iron Imports and Inventory Figure 6.3.3b: Global Metal Price Index
Imports Inventory (rhs)
21,000 15,000 160
18,000 150
10,000 index points
index, 2005=100
12,000
10,000 tons
140
15,000
130
12,000
9,000 120
9,000 110
6,000 6,000 100

Nov-15
Nov-16
May-15
May-16
May-17
Mar-16
Mar-17
Sep-15
Sep-16
Jan-16
Jan-17
Jul-15
Jul-16
Nov-15
Nov-16
May-15
May-16
May-17
Feb-16
Feb-17
Aug-15
Aug-16
Data source: Bloomberg Data source: IMF
This basically leads to the following conclusion: the factors that are driving the recent export growth of many EMs are
ostensibly cyclical in nature. Demand for tech components is unlikely to extend its current strong momentum in 2018, as the
strong base effect kicks in and retail sales of new electronics ebb after initial consumer enthusiasm for devices peaks. 44
Second, as indicated in Figure 6.3.3a and in the section on rice exports below, commodity stockpiling in China appears to
have peaked, as inventory levels have risen sizably over the past year. These two factors will conceivably ensure that the
strong export growth notched by EMs exporting commodities and high value added tech items, will be short-lived.
42
In value terms, Chinas overall imports in FY17 were up 8.2 percent over last year, after declining 11.9 percent in FY16.
Similarly, imports of EU-28 countries rose 4.1 percent YoY in FY17, after dropping 9.0 percent in FY16 in dollar terms
(source: Haver Analytics, Eurostat).
43
Source: China Customs Statistics, accessed through http://china-trade-research.hktdc.com/business-news/article/Facts-
and-Figures/China-Customs-Statistics/ff/en/1/1X000000/1X09N9NM.htm
44
This point has also been highlighted by Nomura Global Markets Research in a note titled Asias steep but short-lived
export up-cycle.
84
External Sector
In Pakistans case, the net impact of these developments is likely to be negligible. This is simply because the country does
not export products that are driving the current export rebound in Asian economies. Clearly, this lack of product
diversification and sophistication entails serious implications for the long-term viability of the export industry. However, in
the current scenario, it will also ensure that the countrys export performance will not be affected when a likely reversal in
cyclical factors driving the current export growth of other EMs takes place.
Meanwhile, Pakistans basmati rice exports declined 1.9 percent in FY17, after dropping by a
relatively larger magnitude of 25.6 percent last year. Encouragingly, even this decline was observed
only in the first half of FY17, as exports recorded recovered significantly in the second half on the
back of heavy purchases from UAE and Qatar. It appears that Pakistani rice exporters have outpriced
their counterparts in these markets.
Here, a comparison of Pakistans quantum rice exports with those of India offers some interesting
insights. First, Middle Eastern economies seem to be evenly divided in sourcing the commodity from
the two South Asian producers (Figure 6.10a,b). In the big Saudi Arabia market, Pakistan has been
continuously losing its share to India. However, demand for Pakistani basmati seems to have risen
from both the UAE and Iran during Jul-May FY17, likely at Indias expense.
Figure 6.10a: YoY change in Quantum of Basmati Exports by Figure 6.10b: YoY change in Quantum of Basmati Exports by
India (Jul-May-FY17) Pakistan (Jul-May-FY17)
120 30
thousand tons
80
thousand tons
20
40
10
0
0
-40
-80 -10
-120 -20
Kuwait
S.Arabia
Iraq
Iran
Qatar
UAE
Bahrain
Oman
UK
USA
S.Arabia
Bahrain
Oman
Kuwait
USA
UK
Iran
Iraq
Qatar
UAE
Data source: Agricultural and Processed Food Products Export

Development Authority, India Data source: Pakistan Bureau of Statistics
Going forward, Pakistan might also be able to

Figure 6.11: Composition of Pakistan's Cement Export Volumes
at least partially capture Indias share in the EU
Afghanistan India Others
market, as the bloc has banned Indian basmati
over quality concerns, after imposing stricter 10
rules on fungicide application.45 Pakistan
8
generally exports the super variety of basmati
million tons
rice to the EU, which is not prone to pest 6

attacks. The fact that the EUs quantum rice
imports are on the rise (up 2.0 percent in 2016), 4
puts Pakistani rice exporters in a position to 2
expand their reach in the bloc. Yet, doing so
will only be possible if they invest more in 0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
researching new varieties and improving crop

yields, and devote more time and resources to
building their brand image, in order to better Data source: All Pakistan Cement Maufacturers Association
compete with their traditional competitors.
45
EU has reduced the maximum residue limit (MRL) level for Trizole, a fungicide used against blast pest on paddy, to
0.01 mg per kg from 0.03 mg per kg, effective from July 2017.
85
Among other key non-textile items, seafood exports rebounded strongly in FY17, growing 21.2
percent after declining for the last two years. This encouraging development can be traced to a rise in
domestic fish production (up 3.8 percent YoY during Jul-Mar FY17). A phenomenal volumetric
increase was visible in exports of crabs, shrimps and squids to China, Vietnam and Thailand.
With regards to cement, the downtrend that had Figure: 6.12: Share in Total Cement Export Volumes* - Major
set in from FY14 onwards, continued in FY17 Markets
as well (Figure 6.11). Exports to the top Afghanistan
destination Afghanistan fell for the sixth India
Madagascar
straight year, whereas those to South Africa
South Africa
have become unviable since late 2015 due to
Sri Lanka
imposition of anti-dumping duties.46 In Tanzania
contrast, exports to India, which began in 2010, FY FY FY FY FY FY Jul-May
have grown by a strong 26.3 percent in FY17; 11 12 13 14 15 16 FY17
India has now become the second-largest
lowest
market for Pakistani cement exporters, with a share Highest share
27 percent share in their total exports (Figure *: Ranging from 1 to 60 percent, red color indicates lowest value and
green represents highest value
6.12). In certain cities in the Indian Punjab
(like Amritsar, Ludhiana, etc), Pakistani Data source: Pakistan Bureau of Statistics
cement is relatively cheaper than the local Table 6.9:Textile Exports Price and Quantum Impact in FY17
manufactured one. This is because importing Abs. change
(million US
from plants located in Pakistans northern Quantum Price dollar)
region entails lower transportation cost Textile group 4.0
compared to those in South India, where a third of which
of Indian cement capacities are installed. Low value-added -65.8 -74.4 -140.3
Raw cotton -37.0 4 -33.1
At the same time, given the ongoing public- Cotton yarn 96.3 -117.5 -21.2
and private sector-led activity in power, road Cotton fabrics -115.7 38.3 -77.4
development and real estate projects, local High value-added 134.5 49.2 183.6
demand for cement is likely to stay strong.47 Knitwear -131.8 129.6 -2.2
Bed wear 161.0 -44.4 116.6
Under these dynamics, it is hard to imagine a
Towels 37.5 -40.5 -2.9
forceful push by many companies to expand Tarpaulin 32.8 15.9 48.7
their reach abroad, despite the fact that there Readymade garments 167.8 -44.0 123.7
are markets where demand for cement has been Synthetic textiles -132.9 32.6 -100.3
growing.48 Others -39.3
Recovery in EU demand supports textile
exports
After declining for the past couple of years, textile exports recovered from Q2-FY17 (Table 6.9).
This was mainly a result of a sharp turnaround in the EU market of clothing and home textile
products.49 In terms of volumes, EUs overall clothing and textile imports have increased by 3.5
46
Anti-dumping duty on different Pakistani cement manufacturers, ranging from 14 percent to 77 percent, was imposed by
South Africa in December 2015; these will be in place for a period of five years.
47
Domestic cement dispatches increased by 8.03 percent YoY in FY17 (source: All Pakistan Cement Manufacturer
Association).
48
According to the World Cement Report 2016-17, construction activity in Sri Lanka is expected to grow at an annual
average of 8 percent over the next few years, driven by increasing homeownership, large government infrastructure projects
and surging demand for high-rise buildings.
49
The recovery in demand in the EU is not just reflected in its higher textile imports, but also its overall imports from the
world. Specifically, the blocs total imports grew by 4.2 percent in FY17, after declining by 8.8 percent last year (source:
Eurostat). Vietnam, India, Bangladesh and Pakistan have all benefited from this rebound.
86
External Sector
percent YoY in FY17. Encouragingly, the growth in EUs imports from Pakistan of both clothing and
home textiles was the highest among Asian countries (Table 6.10).
Table 6.10: EU Import of Clothing and Home Textiles from Major Countries
growth and share in percent
Clothing Home textiles
FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17
Quantum Value Share in value Quantum Value Share in value
China -10.7 1.7 -10.2 -6.3 35.4 33.9 1.5 6.7 -2.2 0.1 41.3 41.0
Bangladesh 8.1 5.9 6.0 4.1 17.6 18.7 4.5 5.3 -9.7 4.9 3.3 3.4
India -1.5 3.2 -4.0 -3.9 6.3 6.2 7.7 5.9 -5.6 1.6 10.9 11.0
Pakistan 7.5 8.9 6.0 6.4 2.9 3.2 10.4 5.6 0.7 5.0 15.6 16.2
Vietnam 3.7 2.6 9.1 1.6 3.6 3.8 1.7 5.3 -2.0 6.0 2.1 2.2
Total -1.5 2.8 -2.8 -2.1 100.0 100.0 3.0 5.2 -2.2 1.0 100.0 100.0
Data source: Eurostat
Share in US market declined

In contrast to the EU, the US textiles market grew modestly. The US quantum imports of textile and
apparel grew by only 0.7 percent in FY17, whereas its clothing purchases from abroad fell by 0.4
percent (Figure 6.13a). In case of clothing, all major suppliers (Bangladesh, China, India and
Indonesia) saw their exports to the country decline.50
Figure 6.13a: US Total Textile Import (Growth) Figure 6.13b: Share of Products in Total US Textile Import
Cotton Man-made fiber
8 100
6 80
percent
percent
4
60
2
40
0
-2 20
-4 0
FY13
FY14
FY11
FY12
FY15
FY16
FY17
FY13
FY14
FY15
FY11
FY12
FY16
FY17
Figure 6.13c: Share of Pakistan in Total US Textile Figure 6.13d: Share of Pakistan in US Textile Imports
Imports (Cotton only)
5.0 12.2
12.0
4.5
11.8
percent
percent
4.0 11.6
11.4
3.5
11.2
3.0 11.0
FY12
FY14
FY16
FY11
FY13
FY15
FY17
FY11
FY15
FY16
FY17
FY12
FY13
FY14
Data source: Office of Textile and Apparel, USA
50
Apparel exports of Bangladesh and China to the US fell 2.9 and 0.1 percent respectively during FY17, after rising 11.8
and 3.1 percent last year. A similar slowdown was noted by Indian and Indonesian exporters as well: apparel exports from
these countries to the US grew by 1.0 and 0.01 percent respectively in FY17, compared to an increase of 4.2 and 2.5 percent
recorded last year (source: OTEXA).
87
However, Vietnam was an exception, as it leveraged its relatively low-cost production of man-made
fiber into producing synthetic garments that are in demand in the US; understandably, its share in the
US textile market has been growing as a result.51 For some time now, US consumers have gradually
been moving away from cotton-based items, which is why the share of cotton products in total US
textiles has decreased from 40 percent in FY10 to 29.7 percent in FY17 (Figure 6.13b).
This changing behavior of US consumers has strongly impacted Pakistans textile exports to the
country, which are still excessively focused on cotton-based textile and apparel products.
Consequently, Pakistan lost its share further in the US textile market in FY17 (Figure 6.13c,d). The
situation is compounded by the absence of a strong domestic polyester industry, with demand for
man-made fibres by exporters being largely met by imports.
Imports
An overview of import composition suggests that over the past two years, a shift towards capital
goods has been taking place. In fact, the share of capital goods in total imports has been growing
continuously; whereas the share of raw materials for the production of capital goods has also
increased during the last two years (Figure 6.14).
Figure 6.14: Composition of Imports (YoY change in absolute Figure 6.15: Import Growth in FY17 (absolute changes -million
values during Jul-May) - billion US$ US$)
Consumer goods Raw materials Capital goods Machinery
3200
Textile 2400 Petroleum
1.1
0.3 1600
1.7 Metal 800 Food

0
3.9 FY16
-3.2 3.1 Transport LNG
FY17 Agri &

Others
chemical
Imports grew by 18.5 percent in FY17 and Figure 6.16: Machinery Imports Within Total Imports (billion
reached US$ 53.0 billion; in terms of GDP, it US$)
represents a three-year high (Table 6.11). The Total imports Power gen. Office Textile
increase was most prominent in machinery and Construction Electrical Others
petroleum groups, and mainly reflected the
Machinery imports
impact of ongoing CPEC- and public sector-
related activity in power and road construction;
higher demand for petrol and HSD by the 4.8
2.3
transportation sector, and of furnace oil by the 53.0 11.8
power sector; and industrial expansions 0.5
pursued by textile and cement industries 0.6 3.0
(Figure 6.15). Some recovery in global 0.5
commodity prices also contributed towards the
import growth during the year. Data source: Pakistan Bureau of Statistics
51
In case of Vietnam, the unit value of clothing was 3.2 US$/SME, in comparison with 3.4 US$/SME for the rest of the
world in 2016. The share of Vietnams exports in total US textiles imports has increased to 12.4 percent in 2016, compared
to 9.0 percent in 2012 (source: Emerging textiles).
88
External Sector
Machinery imports
Machinery imports continued their upward trajectory, growing 37.1 percent YoY in FY17 to US$
11.8 billion; this compares with a growth of 15.6 percent registered last year. Most of the increase in
FY17 was evident in power generating machinery and related items, in tandem with the progress on
various power and infrastructure projects under CPEC and PSDP (Figure 6.16). Within power
generating machinery, imports of gas and steam turbines, solar panels, compressors, and auxiliary
plants were the strongest.52 In addition, capacity expansions by cement manufacturers led to a
significant increase in the import of grinding and crushing machinery during the year.53
Table 6.11: Import Performance -Major Commodities

million US dollars
Items FY16 FY17 Abs. change Quantum impact Price impact
Milk 278.8 258.7 -20.1 21.9 -42.0
Dry fruits 171.9 180.5 8.6 -2.7 11.3
Tea 513.0 523.9 10.8 65.1 -54.3
Spices 147.3 138.6 -8.7 -24.4 15.7
Soybean oil 182.9 122.8 -60.1 -62.4 2.3
Palm oil 1,689.4 1,905.1 215.7 -73.2 288.9
Pulses 595.1 952.3 357.1 221.0 136.0
Machinery 8,572.8 11,754.8 3,182 n.a n.a
Transport 2,962.2 3,313.7 351.5 n.a n.a
POL products 5,337.2 6,835.0 1,497.8.0 2,032.3 -534.4
Crude oil 2,295.8 2,547.1 251.3 945.3 -693.7
LNG 567.1 1,312.7 745.6 n.a n.a
Textile 3,146.9 3,357.8 210.9 n.a n.a
Fertilizer 726.4 640.6 -85.7 103.5 -293.5
Plastic 1,814.3 1,919.3 105.0 398.5 -293.5
Medicine 921.5 975.3 53.8 -31.8 85.6
Steel 3,093.2 3,238.2 145.1 204.9 -59.9
Rubber 146.4 174.8 28.4 35.3 -6.8
Tyers &tubes 313.9 350.8 36.9 113.7 -76.7
Total imports 44,684.8 52,957.9 8,273.1 - -
Demand-driven rise in transport, POL imports

Transport imports increased by 11.8 percent in FY17, compared to a rise of 9.7 percent recorded last
year. Imports of CKD/SKD for both motor cars and commercial vehicles (buses and trucks) remained
strong, rising by 24.4 percent YoY.
The higher commercial vehicle imports correspond with power- and infrastructure development-
related activities all over the country, which often require transporting imported machinery and other
raw materials etc from the ports to the project sites.54 In other transport equipment, the import of
railway locomotives and their parts, railway track fixtures, and special equipped containers, also
increased (Table 6.12).
52
As per payments data, imports of gas turbines exceeding 5,000KW, the top item in the machinery group, increased by
US$348 million during FY17. These turbines are widely used in gas-based electricity generation plants.
53
According to latest available detailed PBS data, 21,148 units of grinding and crushing machinery for cement plants were
imported during Jul-May FY17, against only 628 units purchased in the same period last year. China, Germany and the
USA were the major exporting countries (Chapter 2).
54
Sales of heavy vehicles (trucks and buses) increased from 5,550 and 1,017 units in FY16 to 7,499 and 1,130 units in FY17
(source: Pakistan Automobile Manufacturers Association). The higher sales of buses might reflect efforts to address pent-up
demand for public transportation in the country.
89
As for passenger cars, the import demand was Table 6.12: Composition of Transport Group Imports
strengthened by: (i) the growing ride-hailing million US dollars FY15 FY16 FY17
business in the country; (ii) the launch of new Road motor vehicles 1,610.40 1,932.80 2515.2
models; and (iii) a sharp increase in car CBU 406.7 546 751.3
financing by commercial banks. The increase Busses &trucks 129.8 217.4 316.2
Motor cars 275.1 325.6 431.5
was visible in both CBU and CKD imports.55 Motor cycles 1.7 2.9 3.6
CKD/SKD 775.2 827.3 1004.3
Growing energy requirements led to higher Busses &trucks 201.6 214.4 252.3
imports Motor cars 483 519 659.9
Motor cycles 90.5 93.9 92.1
Petroleum imports rose 22.8 percent YoY in Parts 320.3 381 500.4
FY17, after declining consistently for the past Others 108.2 178.5 259.3
four years. This increase mainly represents a Aircrafts, ships and boats 862.6 973.9 509.4
sharp increase in thermal generation in the Other transport equipment 226.6 55.5 287.4
Transport group 2,699.70 2,962.20 3312.1
country, which led to higher demand for Data source: Pakistan Bureau of Statistics
furnace oil and LNG (Table 6.13).56 Notably,
the use of coal also increased in thermal
Table 6.13: Pakistans Quantum POL Imports
generation, which led to an increase in its Quantity Growth
imports.57,58 (thousand million tonnes) (percent)
High speed diesel 3,185 3,081 3,890 -3.3 26.3
In case of LNG, the higher imports in FY17 Furnace oil 6,170 5,990 6,612 -2.9 10.4
reflected its increased usage in power, Crude oil 8,254 8,492 8,708 2.9 2.5
transportation (by its conversion into CNG), Petrol 3,125 4,193 4,885 34.2 16.5
and certain industries (including power and Other 49 118 119 141.8 0.8
Total* 20,782 21,874 24,214 5.3 10.7
fertiliser). For instance, four new power plants LNG ** - 989 3216 - 225.0
based on imported RLNG became operational *Data sources: Oil Companies Advisory Council; ** For Jul-May
during FY17 (Chapter 2). Better RLNG (latest data available) Pakistan Bureau of Statistics
supplies to the fertilizer sector also helped
optimize and smoothen the production process Figure 6.17: Breakdown of Change in Palm Oil Imports
to meet the domestic demand for the raw Quantum impact Price impact
material, which, in turn, contributed to an 11.8 Total change International price - rhs
percent decline in fertilizer imports in the year. 400 900
US $ / million tons
200 800
million US $
Palm oil: Price impact is dominant

Imports of palm oil, which has an over 30 0 700
percent share in overall food purchases from
abroad, grew by12.8 percent YoY in FY17, -200 600
after declining 8.0 percent, on average, in the
past four years. This entire increase was an -400 500
outcome of higher unit values, which reflected
-600 400
the strong recovery in global prices of the FY13 FY14 FY15 FY16 FY17
commodity; quantum palm oil imports declined Data source: Pakistan Bureau of Statistics, International Monetary
during the year (Figure 6.17).59 Fund, and SBP Calculations
55
According to latest available detailed customs data, the import of cars less than 800CC (i.e. CBUs) increased from 15,267
units in Jul-May FY16 to 18,134 units in Jul-May FY17.
56
Of the 5,936 GWh increase in power generation during FY17, 28 percent rise came from furnace oil (source: National
Electric Power Regulatory Authority).
57
According to detailed customs data, the import of coal increased from 4.3 million MT during Jul-May FY16 to 6.2 million
MT in Jul-May FY17.
58
Power generation from coal increased from just 105 GWh in FY16 to 1,013 GWh in FY 17 (source: National Electric
Power Regulatory Authority).
59
Average global palm oil prices were 17.2 percent higher in FY17 than last year. In contrast, average prices in FY16 were
12.0 percent lower than they were in FY15 (source: IMF).
90
External Sector
However, international prices have somewhat stabilized after January 2017, on the back of
comfortable supplies: in Indonesia, a major producer, the harvested area increased by 2.6 percent YoY
in FY17, and the yield has also improved due to favourable weather conditions, according to the
USDA. In addition, the demand for biodiesel has been dwindling in Indonesia as the government
minimized the financial support for domestic use of biodiesel.
91
7Water Sustainability in Pakistan Key Issues and
Challenges
7.1. Overview
Water is a crucial resource for the livelihood of people and sustained development of any economy.
For Pakistan, it takes on more significance, as the economy is agrarian in nature and depends on a
single source, the Indus basin, to meet most of its water needs. Hence, water availability and its
efficient utilization lie at the heart of any strategy aimed at ensuring food security and achieving a
sustained long-term economic growth.
In this backdrop, this chapter provides an overview of water availability in Pakistan; identifies key
issues and constraints to efficient water management; and highlights future challenges to water
sustainability. In our view, the widening gap between water demand and supply has now become a
major social and economic concern that requires a comprehensive national policy, formed with the
consensus of all provinces and the federal government. The focus of reforms should be on improving
efficiency in water consumption and management, and building the capacity of relevant regulatory
institutions.
Undoubtedly, designing a reform agenda that is acceptable to all stakeholders may appear
challenging, as people are generally sensitive to any forced change in their water usage rights.
However, any delay in reforms would only compound the concerns, as the water deficit would expand
on account of growing demand (stemming from
population growth, urbanization, and economic Table 7.1: River Flows and Water Availability (1979-2015)
million acre feet
development) and a decline in available
Average
supplies (owing to pollution and climate
Total river inflows (a) 143.3
change). Ground water available (b) 50.0
Total water supply (a+b) 193.3
7.2 Current Situation Average withdrawal through canals 101.0
The current water supply in Pakistan is not only Escapage below Kotri 26.7
limited, but also quite erratic in nature. More Evaporation and other losses 15.6
importantly, the overall availability faces Water availability (agriculture)
significant risks from increasing pollution and Average withdrawal through canals 101.0
climate change. The water demand, on the Losses (from canal head to farm gate) 24.3
Water available at farm gate (c) 76.7
other hand, is rising rapidly on account of
Groundwater withdrawal (d) 47.0
growing population and urbanization. Thus,
Overall water availability (c+d) 123.7
the resulting imbalance is pushing the country
Data source: Water and Power Development Authority
towards severe water shortage.
Water supplies are vulnerable and suffer from extensive losses

Being a semi-arid country, Pakistan relies heavily on the Indus River and its tributaries (Kabul,
Jhelum, Chenab, Ravi, and Sutlej) for water supplies, which together contribute over 140 million acre
feet (MAF) per annum (Table 7.1).1 This reflects the countrys vulnerability to a single basin, which
itself is subject to insecurity due to continuing water disputes with India. The high dependence
compares unfavorably with other regional countries that either rely on multiple basins or receive
sufficient rainfall (Box 7.1).
1
Approximately 90 percent of Pakistans land area is classified as semi-arid. The overall volume of rainfall is low, with
large seasonal and regional variations. While the average rainfall remained at 494 mm per annum for the period 1962-2014,
it varied from less than 150 mm in Sindh and Baluchistan to 1,500 mm in Gilgit-Baltistan. In addition, around two-thirds of
the annual rainfall is concentrated in the three summer months, i.e., July to September.
State Bank of Pakistans Annual Report 2016-17
Figure 7.1: Water Inflow at Rim Stations - Historical Trend

Total river inflows 5-year moving average
200
160
million acre feet
120
80
40
0
1925-26
1928-29
1931-32
1946-47
1949-50
1952-53
1964-65
1967-68
1970-71
1973-74
1985-86
1988-89
1991-92
2006-07
2009-10
2012-13
1922-23
1934-35
1937-38
1940-41
1943-44
1955-56
1958-59
1961-62
1976-77
1979-80
1982-83
1994-95
1997-98
2000-01
2003-04
Data source: Water and Power Development Authority
Vulnerability to erratic water supplies is further compounded as variation in rainfall and melting of
snow result in wide seasonal changes in river runoff during the year. Indeed, more than 80 percent of
the annual inflow is realized during the April-September period. Another important factor adding to
the uncertainty in river inflows is the multi-year cyclical weather pattern, which affects the intensity
of wet and dry seasons (Figure 7.1). These patterns, which are quite significant for Pakistan, explain
a very large gap between the minimum river inflow of 98.6 MAF (realized in 2001-02) and the
maximum inflow of 186.8 MAF (in 1959-60).2 The concerns on water flows have recently increased
due to climate change, which has exacerbated the seasonal river fluctuations, and may even reduce the
overall supply of water to the country in the future.
Box 7.1: Water Availability A Regional Comparison

A comparison with South Asian countries reveals that
Table 7.1.1 Water Availability in South Asia (2011)
Pakistan, being an arid country, derives most of its water
supplies from river flows. Other South Asian countries Precipitation Ground water River flow
are comforted with tropical monsoon climate, receiving (millimeters) (million acre feet)
average annual rainfall exceeding 1,000 mm. Pakistan, on India 1,083 350 1,515
the other hand, receives rainfall of less than 500 mm per Bangladesh 2,666 17 978
annum. Nepal 1,500 16 170
Sri Lanka 1,712 6 42
To add to Pakistans water constraints, the country solely Bhutan 2,200 6 63
relies on the Indus River and its tributaries. In
Maldives 1,972 0.02 0
comparison, India relies on several river basins, such as
Pakistan 494 45 194
the Ganges River, Godavari River, included in the 12
major river basins and hence has a comfortable annual Data source: Human Development in South Asia 2013 Issue of
river flow supply. Similarly, Bangladeshs river flow Water from the Perspective of Human Development (MHHDC 2013)
supplies are derived from 3 major basins.
The challenge to water resource management becomes more difficult, as not all of the water supply is
available for consumption. Besides inevitable evaporation losses and the required flows into the
Arabian Sea (to prevent intrusion into the delta region), there are extensive system leakages due to
limited storage and weak irrigation infrastructure.
Groundwater pumping, another crucial source that contributes 40 percent to total supplies at farm
gate, also faces sustainability concerns. A greater control on timing and the available amount has
2
The Water Resource Institute computes interannual variability indicator, which is the standard deviation of annual total
water divided by the mean of total water from 1950 to 2010. This index ranges from 0-5, where 0 represents the lowest
variability and 5 the highest. The index for Pakistan is 2.37, which is considerably higher than that for China (1.97), India
(1.72), Sri Lanka (1.59) and Bangladesh (0.07).
94
Water sustainability in Pakistan Key Issues and challenges
encouraged reliance on extraction of groundwater. While this is beneficial where fields are
waterlogged or salinized, the over-exploitation in certain areas has led to depletion of this valuable
resource. In a few areas, the excessive use has resulted in the intrusion of saline (brackish)
groundwater into the fresh aquifers, thereby making it then unusable.3,4
Stress on water resources is high, and going to worsen

The extent of stress on water resources in the
country is evident from the high pressure on its Table 7.2: Indicators for Demand Pressure on Water Resources
percent
renewable freshwater resources and the low Pressure on water Dependency Access to safely
number of people with access to drinking water resources1 ratio2 managed water
and sanitation facilities (Table 7.2). According 2015
Malaysia 2 0 92
to a more broad-based indicator, Pakistan is
Bangladesh 3 91 56
categorized as being close to water scarcity, 5 6 27
Nepal
level with per capita availability of 1017 cubic 13 49 --
Thailand
meters (Figure 7.2) 5. In comparison, India is Maldives 16 0 --
in the group of water stress countries with Sri Lanka 25 0 --
water availability of 1,600 cubic meters per India 34 31 --
capita. Iran 68 7 91
Pakistan 74 78 36
More importantly, the stress is going to Data source: FAO-AQUASTAT database, March 2013; and WHO/
UNICEF Joint Monitoring Program (JMP) for Water Supply and
increase further due to growing demand, Sanitation (http://www.wssinfo.org/)
mainly coming from rising population, rapid 1.
Proportion of total actual renewable freshwater resources
urbanization, and adverse impact of climate withdrawn;
2.
Dependency ratio is the share of water originating outside the
change, and the continuing degradation of country;
3.
water quality. This pressure will push the Safely managed water services accessible on premises, available
when needed, and free from contamination.
country very close to the threshold for absolute
water scarcity. According to The World Figure 7.2: Water Stress Level in Pakistan
Resource Institute, Pakistan is going to face a
6
high level of water stress by 2020.6 By 2030,
the ranking will worsen further to extremely
000 cubic meters per capita
5
high level, thus pushing Pakistan to the list of Water stress
(<1700)
top 33 countries under extreme water stress. 4 Water scarcity
(<1000)
7.3. Issues in Water Management 3
Absolute water
scarcity (<500)
2
Limited storage capacity resulting into canal
water shortages and excessive losses to the 1
Arabian Sea
The current storage capacity is inadequate as 0
1951
1961
1971
1981
1991
2000
2013
2025
the three major water reservoirs in Pakistan, i.e.

Mangla (1967), Tarbela (1978) and Chashma Data source: Draft National Water Policy
(1971), have a total designed capacity of 15.75
MAF, which has been reduced to 13.1 MAF due to sedimentation. These reservoirs can store water
3
The withdrawals from groundwater account for 83 percent of total renewable groundwater available.
4
Under normal situation, intrusion of saltwater to inland areas is limited due to pressure from higher level of freshwater.
However, lowering of freshwater levels due to its excessive abstraction allows denser saltwater to move into inland aquifers.
5
Prof Malin Falkenmark, who proposed the indicator, defined three thresholds for per capita water availability on the basis of
consumptive needs for an economy with decent growth; i.e., water stress ( less than 1,700 cubic meter per capita); water
scarcity (less than 1,000); and absolute water scarcity (less than 500).
6
The World Resource Institute has ranked countries after considering a wide range of variables (such as temperature,
precipitation, and wind speed and soil moisture absorption from supply side; and water withdrawals from municipal,
industrial and agricultural sources from demand side). For details, see World Resources Institute
http://www.wri.org/publication/aqueduct-projected-water-stress-country-rankings
95
equivalent to 30 days of consumption, whereas Figure 7.3: Water Storage Capacity - A Country Comparison
the standard minimum requirement is 120 days; 7
most of the advanced countries have capacities 6
of 1-2 years.7 Furthermore, Pakistans live 6
5
storage capacity is 150 cubic meters per person,
thousands cubic meter

5
with Ethiopia the only country that has a lower 4
per person live storage (Figure 7.3).8 The
3
storage capacity is also low in terms of 2.2
available water, as the countrys reservoirs can 2 1.45
store less than 10 percent of the annual river 1 0.46 0.22 0.15 0.09
average flows against the standard of 40
0
percent.
Ethiopia
Pakistan
Morocco
China
India
Spain
USA
Australia
The continued excess flows to the Arabian Sea
also suggest that the country requires additional Data source: World Bank (2006)
storage capacity. The below Kotri escapages
averaged around 28 MAF during 1978-2015, Figure 7.4: Escapage Below Kotri Barrage
which is considerably higher than the 100
downstream Kotri requirement of 8.6 MAF
(5,000 cusecs year around) Figure 7.4.9 The 80
key reason for such high flows in the sea is the
million acre feet
limited storage capacity and seasonality in river Average 1978-2015

60
flows, as around 80 percent of the flow in the
upper Indus occurs July to September. The 40
average flows to sea increase significantly
during floods.10 The water losses are likely to 20
increase further as climate change may hasten
the glacial melting. 0
FY78
FY80
FY82
FY84
FY86
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
The current storage capacity is also inadequate
to provide provincial canal diversions in line Data source: Handbook on Water Statistics of Pakistan
with the Water Apportionment Accord 1991, which assumed average annual water availability of
114.35 million acre feet. This included 10 MAF of water to be derived from future construction of
storage dams. While the additional storage did not materialize, the continuing sedimentation, as
mentioned earlier, continued to eat into the existing capacity. As a result, the canal withdrawal that
reached 106 million acre feet after construction of Tarbela is now averaging 99.58 MAF. Thus,
additional storage is needed to ensure canal withdrawal, in accordance with The Indus Water
Apportionment Accord 1991.
Transboundary disputes intensifying river supply vulnerability

The Indus System Rivers flowing into Pakistan originate in India;11 hence, for peaceful water
management, the Indus Water Treaty of 1960 prevails between the two countries. According to the
treaty, the western rivers (Indus, Jhelum, Chenab) are reserved for Pakistan, whereas the eastern rivers
are reserved for India. Despite its sole dependence on The Indus basin, Pakistan was allocated 75
7
In comparison, India has a capacity for over 120 days, whereas Egypt has the capacity of 1000 days.
8
Source: Pakistan Water Resources Sector Strategy (2006) by World Bank. The data is based on comparison of Semi-arid
countries.
9
Source: Fernando J Gonzalez, Thinus Basson, Bart Schultz (2005), Final Report by International Panel of Experts, For
Review of Studies on Water Escapages Below Kotri Barrage.
10
Human Development in South Asia 2013, Issue of Water for the perspective of Human Development; published by
Mahbub ul Haq Human Development Centre Lahore; available at http://mhhdc.org/?p=40
11
Indus and Sutlej originate in China and flow through India, whereas Ravi, Jehlum, Chenab and Beas originate in India.
96
percent of Indus water. Moreover, the treaty allows India some limited use of water in western rivers
for irrigation, storage and for generating hydroelectric power, but under a condition that the use would
neither affect the quantity of water in rivers, nor alter the natural timing of flows.
However, in the past disputes have emerged over the treaty when India started developing a number
of power projects on the western rivers, e.g., Baglihar dam and Ratle Project on the Chenab, and
Kishanganga Project, on tributary of Jhelum.12 Pakistan claims that these projects do not follow the
specifications and criteria provided in the treaty, and would therefore affect the hydrology and
ecology of western rivers flowing into Pakistan. For example, the Kishanganga dam is expected to
divert 10-33 percent of river flows from Neelam River and hence affect water availability for the
Neelum-Jhelum hydropower plant. Pakistan has been pursuing its legitimate objections to a number
of such Indian projects on western rivers at platforms defined under the treaty.
As for Afghanistan, (Pakistan also derives water from the Kabul River), the construction of
hydropower projects on the river has also raised concerns. Being the lower riparian state in this case,
Pakistan reserves certain rights; however, no such water sharing agreement exists between the two
neighbors. Construction of storages and hydropower projects is expected to lead to decrease of
around 17 percent in the annual river flows.13 Hence, there is a need for an official agreement
between the two countries that defines the terms of sharing and construction of hydropower and other
water storing facilities on the Kabul River.
Outdated distribution system results in low productivity and inequitable distribution of water
The inefficient distribution system (also known as warabandi) has resulted into low water productivity
in Pakistan. For instance, over 90 percent of total annual water available in the country goes to
agriculture. Furthermore, the supply of water is linked to the canal command area, and farmers are
required to consume water even when it is not required. Thus, the output produced against a unit of
water remains extremely low.14
This unreliable and rigid water distribution

Table 7.3: Water Productivity Comparison (kg/ )
system also explains the low productivity of Water productivity Water productivity
water (defined as the average crop product per Country for cereal crops for wheat crop
unit of water consumed). According to a study, Pakistan 0.13 0.5
water productivity for cereal crops in Pakistan India 0.39 1.0
is almost one-third of that in India, and one- China 0.82 -
sixth of the productivity realized in China USA(California) - 1.5
(Table 7.3). Data source: Kumar, M. D. (2003). Food Security and Sustainable
Agriculture In India: The Water Management Challenge. Colombo,
International Water Management Institute (Working Paper 60); and
International Water Management Institute (2000), Water Issues for
Furthermore in the current irrigation system, 2025, A Research Perspective. Colombo Sri Lanka.
the proximity of the land to the water course is crucial for adequate supply of water. Thus, farmers at
the tail-end remain at a disadvantage, whereas those at the head benefit. The growers near the canal-
head sometimes apply water 4-5 times each season as compared to tail-end farmers. 15 16 This places
12
Shaheen Akhtar, Emerging Challenges to Indus Waters Treaty: Issues of Compliance and Transboundary Impacts of
Indian Hydoprojects on the Western River, Institute of Regional Studies Islamabad, Focus 28, no. 3 (2010).
13
Iffat Pervaz & Dr. M. Sheharyar Khan (2014), Brewing Conflict over Kabul River; Policy Options for Legal
Framework, Institute for Strategic Studies and Research Analysis Papers (The Journal of Governance and Public Policy),
Volume VI, Issue No. II.
14
Under this system, irrigation department officials record the cultivable command area, and the water is then provided to
one-third of this area during a year. A farmer receives and utilizes water for 10 days before yielding flow to the next grower.
As mentioned in the Canal and Drainage Act 1873, this provides key legal framework for distribution of water at canal level
and allocates a fixed rotational period of distribution.
15
Latif, Muhammad (2007), Spatial Productivity along a Canal Irrigation System in Pakistan, Irrigation and Drainage 56
(5): 509-521.
97
tail-end farmers at a disadvantage, adversely affecting the crop quality and yields. Hence, such
inequity leads to reliance on groundwater pumped through private tube-wells, which is costly. As a
result, tail-end farmers pay up to 30 times more for water access.
Domestic water distribution is also characterized by inequity and several inefficiencies. In the
countrys largest province, Punjab, only 18 percent of the population in rural areas relies on tap water
as source of water and rest utilizes groundwater, as compared to 51 percent of urban population with
access to tap water.17 This indicates that a large number of households have to rely on other
expensive sources of water,such as underground water and tankers.
Groundwater resource depleting rapidly due to over-pumping

Due to the unpredictability associated with Figure 7.5: Number of Tube wells
canal water supplies, farmers have turned to 1,400
groundwater pumping. Thus, the number of
1,200
tubewells installed has increased sharply over
the years (Figure 7.5), and groundwater has
number in thousands
1,000
now become a significant source of water, as its 800
contribution to irrigated agriculture has doubled
600
in the last 40 years from (25.6 to 50.2 MAF).
This is equivalent to 50 percent of overall canal 400
water withdrawal for irrigation. Industries and 200
domestic sector also relies on groundwater
0
resources for water supply.
FY12
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY13
FY14
FY15
Even in the domestic sector, unmonitored Data source: Agriculture Statistics of Pakistan, Ministry of National
groundwater exploitation is on the rise due to Food Security and Research
improper water provision. In Faisalabad for
instance, households have turned to groundwater due to inefficient supplies and non-monitoring by
local WASA.18
It is true that precipitation and river flows Table 7.4: Average Annual Rate of Groundwater Decline in
constantly recharge most of these groundwater Lahore
aquifers a process that enables people to have Rate of Decline
Period Feet/year Meter/year
reliable access to this key water resource even 1960-1967 0.98 0.30
for a very long period. However, no matter 1967-1973 1.80 0.55
how large these aquifers may be, excessive 1973-1980 1.97 0.60
1980-2000 2.13 0.65
pumping would also deplete this valuable 2007-2011 2.60 0.79
resource. This is what is happening in many 2011-2013 3.00 0.91
Data source: S.Kanwal, H.F. Gabriel, K. Mahmood, R.Ali, A.Haider,
regions across Pakistan, where unregulated and T.Tehseen. Lahores Groundwater Depletion-A Review of Aquifer
excessive use of groundwater is leading to Susceptibility to Degradation and its Consequences, Technical Journal
falling water tables and reduced quality. For UET Taxila Pakistan, Vol.20 No.I-2015
instance, Lahore has seen reduction in water tables at 0.5 meters annually for past 30 years (Table
7.4).19 This is despite the fact that Lahore is provided water by the river Ravi and has an extensive
canal system. The situation is a lot worse in Balochistan where there are no major rivers or canals to
16
World Bank (2005), Pakistan Country Water Resources Assistance StrategyWater Economy: Running Dry, South
Asia Region, Agriculture and Rural Development Unit, Report No. 34081-PK.
17
Asif M. Bhatti and Seigo Nasu (2010) Domestic Water Demand Forecasting and Management Under Changing Socio-
Economic Scenario, Society for Social Management System.
18
Shabbir Ahmed, Saleem H. Ali, M.Usman Mirza and Hina Lotia (2017), The Limits of Water Pricing in Developing
Country Metropolis: Empirical Lessons from an Industrial City of Pakistan, International Growth Center,
19
World Bank (2005), Pakistan Country Water Resources Assistance StrategyWater Economy: Running Dry. South
Asia Region, Agriculture and Rural Development Unit Report No. 34081-PK. Washington, DC: The World Bank
98
recharge the water table. Thus, water tables in Pishin district have receded down to 1,000 feet.20 In
Sindh, cities like Hyderabad and Benazirabad are also facing decline in groundwater levels on a
similar scale.21
The unsustainable pumping rate has even led to intrusion of brackish water into fresh water resources,
thereby reducing the availability of quality ground water as per the standards of World Health
Organization (WHO). In KP, Kohat, Bannu and D.I Khan are some regions where over pumping has
lowered water tables and resulted in contamination from deep saline groundwater. In Balochistan,
there are reports of intrusion of saline water into aquifer zones in coastal areas.
Extremely low water tariffs are distorting incentives for water conservation
Ideally, water prices should reflect the value that users generally place on their consumption. In this
way, a proper pricing strategy can be used as a tool not only to recover the cost of operation and
maintenance of the system, but also to contain water losses and promote conservation.
In Pakistan, canal water charges, also called abiana, are very low, as the canal irrigation cost stands
negligible when compared to its close alternate, say tube well irrigation.22 Furthermore, abiana rates
have no link with the amount of water being consumed. Currently, provincial governments charge a
flat rate as abiana on the basis of cropped area. As a result, once the cropped area has been
determined, the incremental cost of applying extra water falls to zero. Similarly, the tariffs are
unreflective of the water intensity of various crops. For example, rice and cotton on average are
charged at Rs 85 per acre; even though rice consumes 60 percent more water than cotton.
The prevailing pricing structure, which has no link with consumption, discourages water conservation.
Thus, in agriculture, where farmers do not have an incentive to invest in simple and cheap technology
(e.g., laser leveling of land and bed-furrowing), the use of more advanced technologies (e.g., drip
irrigation and sprinkler) becomes out of question.23 Thus, large quantities of water are allowed to flow
in the fields allowing for wastages through evapo-transpiration.24
Low recovery and underfunded water infrastructure contributing to high water losses
Water tariffs are also extremely insufficient to maintain the water infrastructure, which is already in
precarious condition.25 To put this in perspective, even if we assume the maintenance cost at around
one percent of the value of the stock of infrastructure, this would translate into water charges of Rs
1,800 per hectare. In comparison, the abiana rate varies in the range of Rs 85 per hectare in Punjab to
Rs 617.8 in KP.26,27
More importantly, the recovery remains considerably short of the assessed amount (Table 7.5). One
reason is the absence of any legislation to penalize defaulters. The revenue recovered also remained
20
Pakistan Water Resources Sector Strategy (2004)
21
The depletion in groundwater also increases the abstraction cost to users.
22
The canal cost in Sindh in FY16 was Rs 181.9 per acre whereas tubewell cost was Rs 1,837.5 per acre. Similarly in KP,
the canal cost was Rs 836 per acre and private tubewell cost was Rs 1,827 per acre.
23
Drip irrigation is the application of small amounts of water at the base of plants (surface drips) or directly at the roots. This
is an efficient method for water application which reduces labor, saves water, involves less soil erosion, and results in
increased productivity.
24
Even in the domestic and industrial sector, there is unplanned water exploitation. Water is generally not saved and used
inefficiently in cooking, cleaning and sanitation uses.
25
In most developing economies, water charges hardly recover operation & maintenance (O&M) costs, whereas in advanced
economies (e.g., Austria, Denmark, Finland, and New Zealand), water charges cover capital costs besides the interest on
capital.
26
Canal Water Pricing for Irrigation in Pakistan: Assessment, Issues and Options. A report by Planning Commission,
Government of Pakistan, June 2012
27
In Punjab, a full recovery in water charges of Rs 135 annually would generate revenues equivalent to less than 45 percent
of the O&M costs of the system.
99
lower than the cost of operation and Table 7.5: Abiana Assessment and Recovery
maintenance (O&M) of the irrigation system, Recovery to
Assessed amount (million rupees)
which led to its heavy dependence on assessment
government support for its functioning.28 Often FY01 FY10 % change ratio
Punjab 2,260 1,662 -26.5 63.4
the budgetary constraints resulted in
Sindh 453 261 -42.4 89.3
maintenance delays; sometimes maintenance KP 197 229 16.2 63.6
work suffered as a large share of O&M Balochistan 45 200 344.4 15.1
expenditure was made on operational heads Data source: Canal Water Pricing for Irrigation in Pakistan:
such as salaries.29 Assessment, Issues, and Options; Planning Commission, Government
of Pakistan June 2012.
The gradual crumbling of water infrastructure contributes to extensive conveyance losses. According
to estimates, canal conveyance efficiency is 78 percent, i.e., over one-fifth of canal water is lost before
reaching the farm gate; an additional one-fourth of the water is wasted during its application in the
field.
An almost similar situation prevails in water delivery to households, where the operating cost is
significantly higher than the revenue. For example, operating expenses of The Karachi Water and
Sewerage Board (KWSB) in Karachi were 13 percent higher than its revenue. The revenue bill
collection is also very dismal: the average recovery is around 64 percent, and it ranges between 21
percent for Quetta and 98 percent for Lahore.
This situation results in a vicious circle where insufficient funds deteriorate the quality of water
delivery service, which means that users are less willing to pay, and leading to fewer funds being
available for maintenance. Large investment to upgrade the water infrastructure and recovering its
maintenance cost from users is one of the possible options. It may be noted that farmers already pay
exorbitant amounts on diesel pump for tubewells, as this ensures them reliable supplies of water and
results in higher productivity.
Waste discharge into drains and rivers has resulted into deteriorating water quality
According to a study, 50 million people in the country are at risk of arsenic poisoning from
contaminated groundwater.30, 31 Specifically, the underground water samples had arsenic level of over
200 micrograms per liter, which was considerably higher than the WHOs recommendation of 10
micrograms and the Governments limit of 50 micrograms. Another source of pollution stems from
direct discharge of waste from households and industries into nearby rivers, drains, streams and ponds
and the unregulated and heavy use of chemical, fertilizers, and pesticides in agriculture. For example,
around 90 percent of industrial and municipal waste, which is largely untreated and toxic, is dumped
into open drains and filtrated into aquifers.32 The waste water does not stay in fresh water bodies but
is also seeped into the groundwater aquifers. Hence, this pollution is directly affecting the quality of
drinking water, and in turn adding to health concerns.33 There is absence of monitoring of adequate
waste disposal to water bodies or facilities to treat waste water. Finally, the overexploitation of
groundwater has also resulted in an increase in arsenic content in areas where groundwater pumping is
a source of clean drinking water.34
28
Abiana revenue as percentage of O&M cost hovers at an average of 20 percent in Punjab, 36 percent in Sindh for the
period from 2000-2001 to 2009-2010.
29
For example, in Punjab, only 33 percent of O&M spending was used for maintenance; a large part was spent on salaries.
30
Joel E. Podgorski, et al. (2017), Extensive Arsenic contamination in high-ph unconfined aquifers in Indus Valley,
Science Advances, Vol.3, No.8.
31
Arsenic ingested over time causes thickening of skin and lesions, leading to skin cancer.
32
Daanish Mustafa, Majed Akhter, and Natalie Nasrallah (2013), Understanding Pakistans Water Security Nexus,
Peaceworks No. 88. eISBN:978-1-60127-184-6, 2013 by the United States Institute of Peace.
33
According to World Health Organization, Pakistan ranks 80 among 122 nations in terms of drinking water quality.
34
Weak water provision infrastructure through Public Health Engineering Department(PHED) departments has resulted into
reliance of households to turn to groundwater extraction.
100
Gaps in governance leading to inefficient management

The overall governing structure of the water sector in Pakistan is characterized by multiple authorities
with overlapping responsibilities and duplication of work. Such a structure is mainly the result of
unsuccessful reform in the past. For example, as part of a major institutional reform in water, the new
Provincial Irrigation and Drainage Authorities (PIDA) were setup. The broader aim was to replace
the provincial irrigation departments and decentralize the irrigation system management through
public and private partnership. The private participation was ensured through the establishment of the
Farmer Organization and Water Area Board.
Besides other responsibilities, PIDA was tasked with assessing and collecting water charge (abiana)
a function previously performed by provincial irrigation departments. Furthermore, as the
implementation of reforms remained incomplete, provinces could not phase out their irrigation
departments. As a result, at the moment, two irrigation management bodies exist simultaneously,
with overlapping responsibilities and unclear demarcation of areas of management. Punjab offers an
interesting case where the irrigation department assesses abiana in certain areas but other areas are
managed by the Punjab Irrigation and Drainage Authority.
Interprovincial disputes continue to dominate the policy debate on water reforms. Although the Water
Accord 1991 divides water among provinces as per a given formula, the disagreement prevails on
sharing shortages.35 Indus River System Authority (IRSA), the implementing body for the accord,
lacks its own telemetry system to gauge surface flows on continuous basis and hence has to rely on
provinces for information regarding river flows. This absence of own monitoring system erodes
IRSAs ability to act as a mediator between provinces in the event of water-related disputes.36 Hence,
grievances among provinces have persisted over time and even postponed the development of new
major water storages on the Indus River.37
Besides this, the management of domestic and industrial water supply also faces shortcomings. The
issue in fact is not of the availability of water rather the system of governance. One such example of a
major city facing erratic supplies is Karachi, where at least half the population relies on tankers for
water supply. The issue is less of availability and more of water management and governance.
Governance issues are also widespread in the domestic sector, particularly in major urban centers.
For example, Karachi, the biggest metropolitan city of the country, faces serious issues related to
water supply and quality. In fact, the outdated and deficient supply infrastructure, weak
administration, and limited financial resources, have led to a situation where shortages are common.
Unfortunately, these shortages are often plugged by supplies from illegal hydrants, which charge
exorbitant rates from the end-consumers. As a result, the underprivileged suffer the most, as they are
unable to get adequate and affordable water due to limited financial and infrastructure support.
Finally, the weak governance also results in the poor quality of water being supplied to the masses.
7.4 Climate Change a Major Emerging Challenge for Water Sustainability

The long-term water sustainability in Pakistan is also vulnerable to shifts in the weather pattern.
According to the task force on climate change in Pakistan, the average temperature has risen by 0.6 0C
over the period 1901-2000. Similarly, mean precipitation has also increased by 25 percent over the
previous century. More importantly, the pace of warming is increasing with each passing year,
35
For example, one disagreement is on the use of historical data for the period 1977-82 as a basis for water sharing. Sindh
argues this period favors provinces that already had water infrastructure by 1977. Sindh also raises concerns on the transfer
of water by Punjab from Indus to tributary zone. While Punjab claims that the Water Accord establishes its right to transfer
water from Indus, Sindh argues that Punjab cannot draw water from Indus as long as there is shortage in Sindh.
36
IUCN (2014), Institutional Analysis in the Water Sector of Pakistan
37
IUCN (2010), Pakistan Water Apportionment Accord for Resolving Inter-provincial Water Conflicts Policy Issues and
Options.
101
further going forward in line with the global trends.38 In addition, climate change will increase the
variability of monsoon rains and enhance the incidence and severity of extreme events such as floods
and droughts.
Keeping in view the countrys vulnerability to climate change, the Global Climate Risk Index of 2017
ranked Pakistan at 7th out of 181 countries (in 2015, the country ranked 11th).39 Similarly, Maplecroft
Index of Climate Change Vulnerability (2017) has placed Pakistan in the extreme risk category by
ranking it at 16th out of 170 countries (in 2010, Pakistan ranked at 29th position).
The climate change will impact the water situation in the country through multiple channels. For
example:
Climate change will enhance the demand for water: while a number of factors (e.g., rising
population, rapid urbanization, increase in income, etc.) will push up the demand for water in
the country, a strong impetus would come from the climate change. Specifically, the rise in
temperature would require more water for irrigation due to prolonged dry and warmer season;
for farm animals to meet their hydration needs; for individuals to cope with higher
atmospheric temperature; for industries to take care of increased cooling requirements; and
for discharge into the sea so that intrusion of saline water into delta regions could be
prevented.
Climate change is expected to affect the ice and snow accumulation patterns in the zones that
supply Indus basin with its flows. The overall river supplies would come under pressure as
rising temperatures would increase evaporation losses in the system. At the same time, the
climate change would shift the peak flow points in time.40 Rising mercury levels in the upper
Indus basin would result in earlier seasonal melting of the glacial ice sheet. This effect would
lead to a shift in peak river runoff towards winter and early spring.41
Another impact of climate change is the unpredictable future water outcomes in the Upper
Indus Basin due to precipitation variability.42 Specifically for South Asia, El Nino-Southern
Oscillation (ENSO) events are likely to disrupt monsoon patterns and may cause extreme
weather events.43 El Nino events of 1997-98 triggered heavy rainfalls throughout Pakistan
followed by extreme dry condition in its later phase. The 2014-16 El Nino episode triggered
similar effects. These oscillations have become more frequent and intense in recent history.
Heightened rainfall variability in the catchment areas of the Indus Basin is expected to affect
groundwater resources.44,45 Variability in spatial distribution and intensity of precipitation
under rising mercury levels will alter the recharge and discharge patterns. This will affect the
38
This change is broadly in line with the global trends, as average temperatures in 2016 were higher by 1 0C when compared
to twentieth century mean. This made 2016 the warmest year on record, breaking the previous record for the third
successive time in each of the past three years (Source: NASA, NOAA).
39
The Global Climate Risk Index (CRI) reflects the level of exposure of a countrys vulnerability to extreme events.
40
Yu et al. (2013), The Indus Basin of Pakistan The impact of Climate Risk on Water and Agriculture, Washington DC:
World Bank
41
Barnett, Adam & Lettenmaier (2005), Potential Impacts of a Warming Climate on Water Availability in Snow-dominated
Regions. Nature 438, 303-309.
42
Lutz et al. (2016), Climate Change Impacts on the Upper Indus Hydrology: Sources, Shifts and Extremes, available at
http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0165630
43
World Bank (2016),High and Dry: Climate Change, Water, and the Economy
44
Almost one-third of overall surface availability percolates into groundwater resource of Indus Plains.
45
The country depends on groundwater as much as its surface water diversions. Almost 40 percent of irrigation needs are
fulfilled through groundwater resource in Pakistan (Source: World Bank 2005, Pakistan Country Water Resources
Assistance StrategyWater Economy: Running Dry. South Asia Region, Agriculture and Rural Development Unit Report
No. 34081-PK.
102
quality of the water due to salt intrusion in Indus Basin Aquifer.46 For example, in times of
low surface flows, there would be less recharge available which would increase the demand
for ground water, creating an imbalance. Net discharge would deteriorate quality of water
through intrusion of saltwater into freshwater areas.
7.5 Need for Policy Reforms

Water resource management requires policies to ensure more productive, equitable, and sustainable
uses through reallocation across sectors. However, Pakistan is still awaiting its first National Water
Policy despite the fact that its draft was formulated in 2003. The task of structuring a policy became
more complicated after the 18th amendment when water distribution for agriculture, domestic and
industrial purposes became a provincial subject. Accordingly, the draft water policy is awaiting
approval from the Council of Common Interest. In comparison, neighboring countries such as India,
Bangladesh, Nepal and Sri Lanka all have water policy in place for more than a decade, which defines
the goals regarding water conservation, storage and distribution at the federal and other levels.
The delay in announcing this policy is a major setback as the current policies are inadequate in
addressing the upcoming water challenges. Further delays would only damage the long-term growth
prospects of the economy. Any policy on water should focus on measures to augment supplies and
manage demand. This would require reforms in multiple directions, e.g., to revamp the pricing
mechanism; to develop institutional capacity; and or invest in infrastructure.
Raising water rates to bring at par with the operation and maintenance cost: Within the
pricing structure, focus needs to be on raising abiana rates within agriculture and tariffs
within domestic and industrial sector to bring them at par with the cost required to operate
and maintain the water supply system. Besides, it would help in encouraging a more rationale
use of water. At the same time, regulatory policies are needed to ensure sustainability of
underground aquifers.
Developing supply infrastructure through metering and ensuring connections so as to charge

volumetric pricing:
o Urgent lining, repair and maintenance of canals are required to minimize the most
extensive source of water losses in the system.
o There is a need to charge volumetric pricing that is to charge each crop and area as
per the unit of water consumed. This would be possible through separating the charge
of water from the land area and connecting it to the quantity of water consumed.
o Within the domestic and industrial sectors, proper provision of water connections to
households and industrial units, along with metering devices, is also crucial to
regulate the quantity consumed and charge rates accordingly. This would also
regulate the use of water and reduce issues of equity between households. In
addition, the unregulated use of groundwater needs to be contained.
Revamping the system of water rights (Warabandi): A system of water rights should be
introduced which allows for trading of water rights, as a result head end farmers could sell
their right to tail end farmers and increase productivity and efficiency.
46
Even the current levels of groundwater mining are unsustainable due to lack of regulatory oversight, which may result in
degradation of natural buffer to climate change. Pakistan is pumping 58 MAF water from its aquifers in the basin whereas
the sustainable threshold is estimated to be 50 MAF.
103
Strengthening the role of IRSA as a mediator to ensure development of storages: The role of
IRSA as a mediator between provinces needs to be strengthened through provision of proper
telemetry system to the organization and enhance its conflict resolution capacities. Conflict
resolution is compulsory for development of future storages.
Proper waste management and regulation: Focus on proper disposal of household, industrial
and agriculture waste is crucial to ensure adequate quality of water. Penalties and fines shall
be imposed for non-compliance.
Disseminate awareness regarding the rising stress on water resources: Since water is a
sensitive issue in the country, there is a need to focus on raising awareness about the
importance of conservation.
104
Special Section 1: Impact Analysis of Withholding Taxes on Cash Withdrawal and Banking
Transactions
Over the last few years, the government has undertaken several reforms in its efforts to increase tax
revenue by expanding the tax base. One of these was the introduction of withholding tax (WHT) on
non-cash banking transactions.1 Earlier, the government had imposed a withholding tax on cash
withdrawal in order to discourage the cash economy.2 In essence, these measures increased the
transaction cost for non-filers, as filers can reclaim the amounts paid as advance taxes. It was
expected that this tax would help expanding the tax base by encouraging more people to file income
tax returns and come under the tax net.
The introduction of the transaction tax led to some increase in the number of income tax filers but not
to sales tax filers. The reason is that many salaried persons who were already paying income tax but
were not filling tax returns started to do so to qualify for the adjustment against the advance tax
payments. Despite this, the number of non-filers as a percent of the registered income tax payers
remained high around 70 percent in FY16 (Figure S1.1a).
Though the incentive of tax adjustment is also available for sales tax payers, delays in processing of
refund claims may have discouraged potential and current sales tax filers from filing their returns. As
Figure S1.1a suggests, the non-filers witnessed a secular increase in FY16, even when this tax
became effective.
Figure: S1.1a: Impact of WHT on Banking Transactions on Figure S1.1b: Revenue Collection under WHTs
Number of Registered Tax Payers and Filers
IT non-filers ST non-filers Cash withdrawal Banking transactions
IT registered (rhs) ST registered (rhs)
90 60 9
80 50 8
non-filers in percent
70 40 7
billion rupees
60 30 6
percent
50 20 5
40 10 4
30 0 3
20 -10 2
1
10 -20
0
0 -30
May-13
Mar-12
Feb-08
Sep-08
Sep-15
Feb-15
Jan-11
Jul-07
Nov-09
Aug-11
Jul-14
Nov-16
Apr-16
Apr-09
Jun-10
Dec-13
Oct-12
FY01
FY03
FY07
FY10
FY13
FY16
FY02
FY04
FY05
FY08
FY09
FY11
FY12
FY14
FY15
Data source: Federal Board of Revenue
Moreover, the contribution of these direct taxes to the national exchequer remains meagre (Figure
S1.1b). The WHT on cash withdrawals and on banking transactions respectively has contributed on
average 0.9 percent and 0.6 percent annually to the FBR tax revenue, since July 2015.
While the WHT on non-cash banking transactions seems to have had a negligible impact on revenue
collections and incentivizing tax filing, it instead led to an increase in currency in circulation and a
decline in private business deposits. Currency in circulation grew by 21.5 percent on average during
July 2015 to June 2017 against an average growth of 14.0 percent recorded in the past 11 years prior
1
The government imposed a withholding tax on non-filers of income tax returns through the Finance Bill 2015, initially at
the rate of 0.6 percent on all non-cash banking transactions. Later, the tax rate was lowered to 0.4 percent after opposition
from some section of society.
2
Through the Finance Act, 2005, the government imposed withholding tax, initially at the rate of 0.1 percent, on cash
withdrawals from banks exceeding Rs.25, 000 in a day. Both tax rate and cash withdrawal limit have changed since then. For
FY18, a WHT of 0.3 percent and 0.6 percent applies on filers and non-filers respectively on cash withdrawal exceeding
Rs.50, 000 per day. However, filers can claim for refund of the amount paid in this tax.
to its imposition that is, between July 2004 to June 2015.
Private business deposits as a percentage of

Figure S1.2: Trend in Stock of Currency in Circulation and
total deposits, on the other hand, declined from Private Business Depsoits
27.6 percent to 25 percent after imposition of CIC Deposits
the WHT on banking transactions (Figure 4000
S1.2).3 This shows that the imposition of the 3500
WHT on banking transactions apparently 3000
billion rupees
defeated the very purpose for which it was 2500
imposed that is, to discourage the cash 2000
economy. 1500
1000
Though the likely impact on the behaviour of 500
currency and deposits has been flagged earlier, 0
May-05
May-10
May-15
Mar-06
Mar-11
Mar-16
Sep-08
Sep-13
Jan-07
Jan-12
Jan-17
Nov-07
Nov-12
Jul-04
Jul-09
Jul-14
the lack of information prevented any early
impact assessments of these taxes on the
financial sector.
To determine whether there is a structural shift coinciding with the introduction of advance tax on
banking transaction, structural break tests were applied on both currency and deposit series. The
results show that these have experienced structural shifts: growth in currency in circulation since June
2015 in and deposit from November 2015 onwards, instead of July 2015 when WHT on banking
transaction became effective. In case of the latter, there was considerable uncertainty following the
imposition of WHT, as the business community was strongly resisting imposition of the tax. Perhaps
by November 2015, they might have realized that the tax was not going to be withdrawn, and adjusted
their behaviour accordingly.
To draw reliable economic inferences, this analysis has used first unit roots tests and then rudimentary
ordinary least square regressions: with focus on growth in currency in circulation, deposit ratio and
FBR tax revenue.4 The results of the unit root tests suggest that all the variables involved in this
analysis are following mean reverting process.5
Therefore, a simple Ordinary Least Square regression can safely be used for drawing economic
inferences. Two dummies were introduced for this purpose. These assume unit value from July 2005
and July 2015, representing imposition of WHT on cash withdrawal and on non-cash banking
transactions, and zero otherwise. Specifically, the dummy representing WHT on the non-cash
banking transaction in the model for deposits assumes unit value from November 2015, instead of
July 2015 as this series experienced shift from November 2015.
3
For this special section, the private sectors deposits with the banking system have been used since tax on financial
transaction is unlikely to impact government deposits.
4
The widely used generic unit root tests are Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) test. The null
hypotheses of these tests are that the series is not following a mean reverting process. Moreover, this study also used Perron
and Vogelsang (1992) unit root test which incorporates structural break. This test distinguishes structural break in two
categories: an additive outlier and an innovative outlier. The additive outlier test checks if there is a sudden change in the
mean, while the innovative outlier test assesses if the change is gradually taking place. The null hypothesis of these tests is
that the series is not mean reverting.
5
All variables, except the deposit ratio, show mean-reverting behaviour when subjected to generic (i.e., ADF and PP) unit
root tests. Deposit ratio also shows mean-reverting behaviour once the structural shift of November 2015 is incorporated
using the Perron and Vogelsand (1992) unit root test. The strong presence of structural shift in deposit ratio suggests that
some of the agents may have left the deposit market permanently after the imposition of WHT on non-cash banking
transactions. This tax, therefore, may have promoted financial exclusion, against the current policy objective of encouraging
financial inclusion.
106
Impact Analysis of Withholding Taxes on Cash Withdrawal and Banking Transactions
Table S1.1 shows the estimation results. Both currency in circulation (growth in CiC) and deposit
ratio, show significant persistence, as past values have considerable impact on current values of these
variables.
The result of the currency in circulation model Table S2.1: Estimates of Impact of Withholding Taxes
suggests that the imposition of WHT on cash Growth Deposit FBR
withdrawal has a negative but statistically Dependent Variables in CiC ratio tax
Dependent (-1) 0.573* 0.822*
insignificant impact on CiC growth. As the
[0.000] [0.000]
objective of the WHT on cash withdrawals was
WHT on cash withdrawal -0.684 -0.294 1.341*
to discourage the cash economy, the negative [0.453] [0.197] [0.000]
coefficient of WHT on cash withdrawals was WHT on non cash
expected. The imposition of the WHT on non- banking transactions 3.724* -0.462* 0.090*
cash banking transactions, on the other hand, has [0.000] [0.007] [0.008]
Constant 15.292* 5.152* 4.324*
positive and significant impact, leading to 3.7
[0.000] [0.001] [0.000]
percentage points increase in growth of currency
Adjusted R-squared 0.589 0.873 0.703
in circulation. Autocorrelation
(Chi-Sq) 5.044** 0.544 0.724
On the contrary, results suggest that imposition [0.025] [0.461] [0.395]
of WHTs led to decline in the deposit ratio. Normality 23.189* 0.588 0.402
[0.000] [0.745] [0.818]
However, the impact of WHT on the financial
Notes: Growth in CiC is growth in currency in circulation. Deposit
transactions is statistically significant and higher ratio is the ratio of private business deposits to the total deposit,
indicating that it affected the private business FBR tax and withholding taxes (WHTs) are monthly. Total tax
revenue and the revenue collected in respective WHT heads by
deposits more strongly compared to the WHT on FBR. Indicator variables are used for WHTs in models for growth
the cash withdrawal. in CiC and deposit ratio, covering July 2004-June 2017 period.
Actual total FBR tax and WHT tax revenues are used in logarithmic
form in third model covering July 2015-April 2017. * and **
The estimation result of the model for FBR tax indicates 5 and 10 percent level of significance. Figures reported in
collections also confirms that the WHT had parenthesis are p-values.
significant positive impact on the FBR Tax revenue. In case of revenue, however, WHT on cash
withdrawal has strong positive impact compared to the tax on non-cash banking transaction. In
particular, a 0.1 percent increase in the WHT on the cash withdrawals leads to 0.13 percent increase in
the FBR tax revenue, while similar increase in the tax on banking transactions leads to only 0.009
percent increase in the FBR tax revenue.
To check the robustness of the estimates, three relevant variables: weighted average deposit rates,
overnight repo rate, and exchange rate were introduced to capture the impact of return on deposits in
the interbank market and in the foreign exchange market respectively. These variables were found
statistically insignificant.6 Moreover, the initial estimates of the coefficients remain more or less same
after introduction of these variables, indicating robustness of the results reported in Table S1.1.
Moreover, the outcomes of the diagnostic test, reported in lower half of the Table S1.1, also suggest
that estimates are reasonably reliable.7
In effect, this analysis suggests that the economic cost of imposing WHT on non-cash banking
transactions need rethinking.
6
The results of these tests can be provided on request.
7
Adjusted R-Square, reported in Table S1.1, shows that the explanatory powers of the models are reasonable. In order to
test the first order serial correlation, BreuschGodfrey test for serial correlation in the disturbance is used. The null
hypothesis of the test is no serial correlation in the residuals. To assess the normality of the residual distribution, Jarque-Bera
test is used. The null hypothesis of this test is that the errors are normally distributed. P-value of less than 0.05, in
parenthesis, suggests that null hypothesis is rejected at 5 percent level of significance for the model of currency in
circulation. Further assessment suggests that these problems are less severe in nature. The first order correlation disappears
when higher order lags included in the test. Moreover, normality assumption of residuals in small sample often does not
hold. A graphical presentation of the Kernel density estimate, a generalized and improved method of presenting histogram,
suggests that residuals are distributed very close to the normal.
107
Special Section 2: Managing Contingent Liabilities in Pakistan
Contingent liabilities (CLs) are off-budget activities that appear on government balance sheet only
when the event actually happens. These generally relate to government guarantees, which may be
explicit or implicit. The explicit liabilities are the guarantees issued to sub national governments,
public or private sector entities against their borrowing. While these explicit government guarantees
are issued by law or by a contract, implicit guarantees could be in the form of moral obligations like
rehabilitation expenses in post-natural disasters or support to troubled banks and/or public sector
enterprises (PSEs) during crises.
The main risk associated with the CLs is the Table S2.1: Cost of Contingent Liabilities Realization (1990-2014)
fiscal cost after their occurrence. Once Number of Episodes Average Maximum
realized, these could result in additional burden Type episodes with cost cost* cost*
on the government resources and can lead to a Financial sector 91.0 82.0 9.7 56.8
higher debt/GDP ratio. Bova et al (2016) Legal 9.0 9.0 7.9 15.3
Sub-national governments 13.0 9.0 3.7 12.0
shows that CLs mainly government support
SOEs 32.0 31.0 3.0 15.1
to financial institutions emerged as a drain on
Natural disasters 65.0 29.0 1.6 6.0
fiscal resources in advanced and emerging Private non-financial sector 7.0 6.0 1.7 4.5
economies during 1990-2014. Their estimates PPPs 8.0 5.0 1.2 2.0
show average cost of 6.1 percent of GDP, the Others 5.0 3.0 1.4 2.5
median stood at 2.3 percent of GDP (Table Total 230 174 6.1 56.8
S2.1). Another important finding was that CLs *As percent of GDP
usually realize during the crises period; for Source: Bova et al (2016)
instance, emerging market economies during Asian Crises 1997-98 and advanced economies during
Global Financial Crises 2008.
In case of Pakistan, the latest available data shows that issuance of new guarantees amounted to Rs
586.3 billion during FY17 compared to an average of Rs 143 billion during last five fiscal years.1 As
a result, the outstanding stock of CLs rose to Rs 936.9 billion or 2.9 percent of GDP as of June 2017.
Importantly, around 90 percent of the guarantees were on domestic loans.
Table S2.2: Government Guarantees to PSEs

Billion rupees
SECMC 52.0
NPGCL 37.7 35.6
PHPL 136.5 103.0 96.0 32.5
PIA 4.5 9.5 38.5 58.8 18.7
WAPDA 6.5 19.3
PSM 8.9 20.0 4.2
Central Power Generation Company Limited 43.9
Others 51.5 4.5 13.0 6.2 1.2 52.2
Total(Flow) 62.4 203.2 136.0 105.7 155.9 190.9 586.3*
Outstanding stock 559.0 516.0 626.0 555 644 721.2 936.9
Percent of GDP
Flow 0.3 1.0 0.6 0.4 0.6 0.6 1.8
Outstanding stock 3.1 2.6 2.8 2.2 2.3 2.4 2.9
*Absolute number derived from data on new guarantees as percent of GDP for FY17 period
Source: Debt Policy Coordination Office, Finance Division (http://finance.gov.pk/dpco/guarantees.pdf)
Guarantees are generally issued to PSEs to cover for their losses and to ensure smooth running of their
1
This largely stemmed from ongoing investment in power sector.
day-to-day operations.2 This, nevertheless, creates a moral hazard and increases the default risk, as
guarantees usually cover losses on default. The entity-wise detail suggests that loss-making entities
regularly rely on government guarantees for their day to day operations (Table S2.2). 3
Table S2.3:PSE Debt

billion rupees
Stock Flow
Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 FY16 FY17
Domestic 281.1 312.2 366.2 458.7 568.1 822.8 109.3 254.7
WAPDA 9.6 9 20.6 18.9 55.8 81.4 36.9 25.7
OGDC 1.1 0.9 2.5 2.3 2.0 3.1 -0.3 1.2
PIA 48.3 61.1 67.6 78.7 99.8 122.4 21.1 22.6
PSM corporation 25 36 39.7 42.3 43.2 43.2 0.9 0
Other 197.1 205.2 235.9 316.6 367.3 572.6 50.7 205.3
External 144.2 183.2 203.8 252.6 294.0 283.8 41.3 -10.2
Guaranteed 21.4 59.3 53.1 98.7 132.5 127.3 33.8 -5.2
Non-guaranteed 122.8 123.9 150.7 153.9 161.4 156.5 7.5 -4.9
Total debt 425.2 495.2 569.8 711.3 862.1 1106.6 150.8 244.5
Total debt (% of GDP) 2.1 2.2 2.3 2.6 3.0 3.5 - -
Source: State Bank of Pakistan
Despite significant increase in the new Figure S2.1: Expenditure on Subsidies

guarantees issued, it remained within the limit Others PASSCO USC Power sector Target
of 2 percent of GDP set under the Fiscal 600
Responsibility and Debt limitation Act 2005. At
the same time, the stock of the PSEs debt has
450
increased sharply by Rs 232.3 billion during
FY17 with the stock of PSE debt reaching Rs
1.0 trillion as of June 2017 or 3.5 percent of the 300
GDP (Table S2.3). This coincides with the
reduction in expenditures on subsidies, which 150
are alternate to guarantees (Figure S2.1).4
0
The data on fiscal operation shows that
government expenditures on contingent FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Budget documents
liabilities have in general declined in terms of
GDP in past few years (Figure S2.2). Despite some improvements, annual financial losses of PSEs
remain at 0.3 percent of GDP, reaching around 3.8 percent of GDP in cumulative terms (source: IMF
estimates). Given government guarantees behind most of borrowings by PSEs and the need for
government grants to cover these losses, the fiscal cost could increase in future.
2
This is worth noting that despite privatization, PSEs carry a lot of significance for the economy. First, Aftab et al (2013)
show that more than hundred of the PSEs are involved in wide range of economic activities, that accounts for 10 percent of
GDP and one-third of the market capitalization. These PSEs provide public services like power, transport, logistics, banking
insurance etc. Second, disruption in operations of the PSEs can hurt private sector growth due to poor service delivery of the
public goods.
3
The estimated losses of some key PSEs enjoying government guarantees stood at Rs 29.9 billion for PIAC (2015), Rs 28.2
billion for PR (2015-16), and Rs 18.5 billion for the power sector (FY15).
4
Generally, it is believed that the government guarantees are alternate to subsidies or direct transfers. The key difference
between the two is their impact on the fiscal account. Subsidies hit the budget directly and increase the public debt, while
guarantees only affect, if realized. In terms of cost, issuing guarantees could nevertheless be cheaper than the direct
subsidies, if the default risk is low. However, it can result in an additional cost due moral hazard behavior, both from
beneficiary and issuer perspective. As the lending is guaranteed, this can lead to insufficient losses prevention efforts by the
beneficiary. From the issuer perspective, such support doesnt involve any approval or scrutiny involved in the budget
making process.
110
Managing Contingent Liabilities in Pakistan
How to minimize the impact of CLs on fiscal accounts and public debt?
Avoiding contingent liabilities is neither
Figure S2.2: Fiscal Cost of Contingent Liabilities (as percent of
feasible nor a realistic option for the GDP)*
governments. The CLs have to be managed to 0.8
minimize their fiscal costs and impact on debt
sustainability. It has become more important, 0.6
particularly in view of projects under CPEC,
some of which are in public-private partnership 0.4
mode. The absence of any oversight on CLs
could either result in fiscal cost or disruption in 0.2
the projects or production process in public
entities. In this regard, some of the best 0.0
practices adopted by many countries to manage
FY11
FY12
FY13
FY14
FY15
FY16
FY17
the risks associated with CLs are summarized
*Revised estimates for full year
as follows: Source: Federeal Budget Documents
Ceiling on stock/flow of contingent liabilities

Pakistan has already adopted this best practice and placed a ceiling on issuance of new guarantees to 2
percent of GDP under FRDLA 2005. A few countries have also introduced limit on stock of
guarantees. For instance, South Africa limits the sum of net debt and contingent liabilities to 50
percent of GDP. Similarly, India has the rules for some states; which require outstanding state
guarantees should not exceed some percentage of their revenue (around 70-80 percent). Limiting the
stock of government guarantees is important for Pakistan, as the outstanding stock of CLs hovers
around 2.5 percent of GDP over the last five years.
Parliamentary approval of the contingent liabilities

A number of the OECD countries require parliamentary approval of the loan guarantees. In some
countries, this requirement is a part of budget laws and is written in the constitution in other countries.
For example, Swedens Budget law only allows guarantees for the purposes approved by parliament,
while Finland and Germany has such requirement in the constitution. In some cases, the ministry of
finance is authorized to approve the guarantees; however, they have to report to parliament at the time
of its realization (e.g. South Africa).
The rationale behind need for approval of contingent liabilities from parliament is due to their likely
impact on the fiscal accounts. In particular, the explicit guarantees are considered like government
debt instruments that require contingent expenditures, which require approval as in case of any
conventional expenditure.
Impose limit on financial claims

When the lending is fully backed by government guarantees, the banks have little incentives to carry
out due diligence with respect to borrowers credit worthiness. One arrangement to minimize such
moral hazard could be to share some risk with private sectors. Usually, the governments set the limit
on the financial claims that can arise in case of contingent liability realization. For instance, in
Canada, the government sets limits on guarantees to a maximum of 85 percent, while EU state rules
prohibit the government from guaranteeing more than 80 percent of any loan.
Contingency reserve fund

Many countries secure financing in the form of contingency reserve fund in the budget that could be
used to meet calls on contingent liabilities. The size of this fund is small (usually less than 3 percent
of total spending) and its usage is restricted to items to calls on contingent liabilities. While most of
the countries have the contingency funds for natural calamities, Colombia has contingency fund for
state entities. This fund is managed by the ministry of finance and financed through the fee charged
111
to public entities according to their exposure to guarantees. The Public Debt Office is responsible for
assessing the individual entities contribution, ensuring that present values of contingent liabilities are
aligned with present value of the contributions.
Scrutiny through Auditor General of Pakistan

Many countries have supreme audit institutions (SAIs) having responsibilities of oversight and audit
of contingent debts. Along with future implications of other economic decision made by the
government, the audit office also examine the fiscal impact of contingent debts (e.g., Lithuania,
Mexico, Portugal, and Sweden). The SAI findings are generally reported to parliament, either as
stand-alone reports or through annual reports on the work of the SAI.
Early caution system

Many countries developed early caution system for the issuance of government guarantees. For
example, in Australia, the guidelines require the government not to issue guarantees in case there is
any explicitly identified risk of default and that the expected benefits outweigh the risks associated
with the guarantee, even if the associated risks are managed through commercial insurance.
Canada has a similar principle under which they evaluate: the possibility of project financing without
a government guarantee and whether future cash flow would be enough to cover principal and the
interest payment. In the European Union, the framework restricts the provision of guarantees to a
limited set of activities.
References
Allen, Mr Richard I., and Mr Miguel A. Alves. How to Improve the Financial Oversight of Public
Corporations. International Monetary Fund, 2016.
Aftab, Sarwat, and Sarmad Shaikh. "Pakistan Policy Note 4."
Bova, Ms Elva. The Fiscal Costs of Contingent Liabilities. International Monetary Fund, 2016.
Ter-Minassian, Teresa. "Government guarantees and fiscal risk." The Fiscal Affairs Department,
International Monetary Fund (2005).
Cebotari, Aliona. Contingent liabilities: issues and practice. No. 8-245. International Monetary Fund,
2008.
Gamper, Catherine, et al. "Managing disaster-related contingent liabilities." (2017).
112
Annexure A: Data Explanatory Notes
1) GDP: In case of an ongoing year, for which actual GDP data is yet not available, SBP uses the
GDP target given in the Annual Plan by the Planning Commission in order to calculate the ratios
of different variables with GDP, e.g., fiscal deficit, public debt, current account balance, trade
balance, etc. SBP does not use its own projections of GDP to calculate these ratios in order to
ensure consistency, as these projections may vary across different quarters of the year, with
changing economic conditions. Moreover, different analysts may have their own projections; if
everyone uses a unique projected GDP as the denominator, the debate on economic issues would
become very confusing. Hence, the use of a common number helps in meaningful debate on
economic issues, and the number given by the Planning Commission better serves this purpose.
2) Inflation: There are three numbers that are usually used for measuring inflation: (i) period
average inflation; (ii) YoY or yearly inflation; and (iii) MoM or monthly inflation. Period average
inflation refers to the percent change of the average CPI from July to a given month of the year
over the corresponding period last year. YoY inflation is percent change in the CPI of a given
month over the same month last year; and monthly inflation is percent change of CPI of a given
month over the previous month. The formulae for these definitions of inflation are given below:
t 1
I t i
Period average inflation (Ht) = t 1 i 0
1 100

I t 12i
i 0
I
YoY inflation (YoYt) = t 1 100
I t 12
I
Monthly inflation (MoMt) = t 1 100
I t 1
Where It is consumer price index in tth month of a year.
3) Change in debt stock vs. financing of fiscal deficit: The change in the stock of gross public
debt does not correspond with the fiscal financing data provided by the Ministry of Finance. This
is because of multiple factors, including: (i) The stock of debt takes into account the gross value
of government borrowing, whereas financing is calculated by adjusting the government borrowing
with its deposits held with the banking system; (ii) changes in the stock of debt also occur due to
movements in exchange rates, both PKR and other currencies against US Dollar, which affect the
rupee value of external debt.
4) Government borrowing: Government borrowing from the banking system has different forms
and every form has its own features and implications, as discussed here:
(a) Government borrowing for budgetary support:
Borrowing from State Bank: The federal government may borrow directly from SBP either
through the Ways and Means Advance channel or through the purchase (by SBP) of
Market Related Treasury Bills (MRTBs). Ways and Means Advance allows government
to borrow up to Rs 100 million in a year at an interest rate of 4 percent per annum; higher
amounts are realized through the purchase of 6-month MTBs by SBP at the weighted
average yield determined in the most recent fortnightly auction of treasury bills.
Provincial governments and the Government of Azad Jammu & Kashmir may also
borrow directly from SBP by raising their debtor balances (overdrafts) within limits
defined for them. The interest rate charged on the borrowings is the three month average
yield of 6-month MTBs. If the overdraft limits are breached, the provinces are penalized
by charging an incremental rate of 4 percent per annum.
Borrowing from scheduled banks: This is mainly through the fortnightly auction of 3, 6 and
12-month Market Treasury Bills (MTBs). The Government of Pakistan also borrows by a
monthly auction of 3, 5, 10, 15, 20 and 30 year Pakistan Investment Bonds (PIBs).
However, provincial governments are not allowed to borrow from scheduled banks.
(b) Commodity finance:
Both federal and provincial governments borrow from scheduled banks to finance their
purchases of commodities e.g., wheat, sugar, etc. The proceeds from the sale of these
commodities are subsequently used to retire commodity borrowing.
5) Differences in different data sources: SBP data for a number of variables, such as government
borrowing, foreign trade, etc often do not match with the information provided by MoF and
PBS. This is because of differences in data definitions, coverage, etc. Some of the typical cases
are given below.
(a) Financing of budget deficit (numbers reported by MoF vs. SBP): There is often a
discrepancy in the financing numbers provided by MoF in its quarterly tables of fiscal
operations and those reported by SBP in its monetary survey. This is because MoF reports
government bank borrowing on a cash basis, while SBPs monetary survey is compiled on an
accrual basis, i.e., by taking into account accrued interest payments on T-bills.
(b) Foreign trade (SBP vs PBS): The trade figures reported by SBP in the balance of payments
do not match with the information provided by the Pakistan Bureau of Statistics. This is
because the trade statistics compiled by SBP are based on exchange record data, which
depend on the actual receipt and payment of foreign exchange, whereas the PBS records data
on the physical movement of goods (customs record).
114
List of Acronyms
A
ACPL Attock Cement Pakistan Limited
ADB Asian Development Bank
ADP Automotive Development Policy
ADF Augmented Dickey Fuller
AML Anti Money Laundering
APCMA All Pakistan Cement Manufacturers Association
APP Asset Purchase Program
ATM Average Time to Maturity
B
BB Branchless Banking
bbl barrels
BEOE Bureau of Emigration and Overseas Employment
BISP Benazir Income Support Program
BMR Balancing, Modernization and Replacement
BoP Balance of Payments
BPO Business Process Outsourcing
bps basis points
Brexit Britains planned exit from the EU
BSC Behbood Savings Certificate
C
CAGR Compound Annual Growth Rate
CBU Complete Built Unit
CCAC Cotton Crop Assessment Committee
CD Customs Duty
CDNS Central Directorate of National Savings
CPDI Centre for Peace and Development Initiatives
CHCC Cherat Cement Company Ltd
CKD Completely Knocked Down
CL Contingent Liabilities
CNG Compressed Natural Gas
CoD Collection on Demand
CPEC China Pakistan Economic Corridor
CPI Consumer Price Index
CSF Coalition Support Fund
CY Calendar Year
D
DAP Di Ammonium Phosphate
DG Khan Dera Ghazi Khan
DGKC D G Khan Cement Company Ltd
DRAP Drug Regulatory Authority of Pakistan
DSC Defence Savings Certificate
DSL Digital Subscriber Line
E
115
ECB European Central Bank

EDL External Debt and Liabilities
EFF Extended Fund Facility
EIF Electronic Import Form
EM Emerging Markets
ENSO El Nino-Southern Oscillation
EOBI Employees Old-Age Benefits Institution
EU European Union
F
FBR Federal Board of Revenue
FCA Foreign Currency Accounts
FDI Foreign Direct Investment
FED Federal Excise Duty
Fed Federal Reserve
FEE Foreign Exchange Earnings
FFC Fauji Fertilizer Company
FIPI Foreign Investors Portfolio Investment
FIs Financial Institutions
FMCG Fast-moving Consumer Goods
fob Free on Board
FPI Foreign Portfolio Investment
FRDL Fiscal Responsibility and Debt Limitation
FX Foreign Exchange
FY Fiscal Year (July to June)
G
GCC Gulf Cooperation Council
GDP Gross Domestic Product
GESS Growth Enhancement Support Scheme
GST General Sales Tax
GST Goods and Services Tax, India
GSTS General Sales Tax on Services
Gw/h Gigawatt per hour
H
H1-FY First half of fiscal year
H2-FY Second half of fiscal year
HCV Heavy Commercial Vehicle
HIES Household Integrated Expenditure Survey
HOBC High Octane Blending Component
HR Hot Rolled
HRI House Rent Index
HS Codes Harmonized System Codes
HSD High Speed Diesel
I
IBA Institute of Business Administration
116
List of Acronyms
IBIs Islamic Banking Institutions

Information Technology and Business Process Association of the
IBPAP Philippines
IBRD International Bank for Reconstruction and Development
ICBC Industrial and Commercial Bank of China
ICI ICI Pakistan Limited
ICT Information Communication Technology
IDA International Development Assistance
IDB Islamic Development Bank
IDBP Industrial Development Bank of Pakistan
IFEM Inland Freight Equalization Margin
IFI International Financial Institutions
IH&SMEFD Infrastructure, Housing & SME Finance Department
ILO International Labour Organization
IMF International Monetary Fund
IPP Independent Power Producer
IRSA Indus River System Authority
ISOM Isomerization
IT Information Technology
ITC International Trade Centre
J
JPY Japanese yen
K
KOHC Kohat Cement Company Ltd
KPK Khyber Pakhtunkhwa
KW Kilowatt
Kwh Kilowatt-hour
L
LARMIS Land Administration and Revenue Management Information System
LCV Light Commercial Vehicle
LED Light Emitting Diode
LDO Light Diesel Oil
LNG Liquefied Natural Gas
LPG Liquefied Petroleum Gas
LSM Large-scale Manufacturing
LTFF Long-term Financing Facility
M
M2 Broad Money
MAF Million Acre Feet
mb/d Million Barrels Per Day
MENA Middle East and North Africa
MFBIs Microfinance Banks and Institutions
MFIs Microfinance Institutions
MLCF Maple Leaf Cement
117
MMBTU One Million British Thermal Units

mmcf Million cubic feet
MNC Multinational Corporation
MPC Monetary Policy Committee
MRL Maximum Residue Limit
MRTBs Market Related Treasury Bills
MS Motor Spirit
MSCI Morgan Stanley Capital International
MT Metric Tonnes
MTBs Market Treasury Bills
MTDS Medium Term Debt Strategy
MW Mega Watt
N
NA Not applicable
NASA National Aeronautics and Space Administration
NAVTTC National Vocational and Technical Training Commission
NBFI Non-banking Financial Institutions
NCCPL National Clearing Company of Pakistan Limited
NDA Net Domestic Asset
NEPRA National Electric Power Regulatory Authority
NFA Net Foreign Asset
NFC National Finance Commission
NFDC National Fertilizer Development Center
NFIS National Financial Inclusion Strategy
NFNE Non-food Non-energy
NOAA National Oceanic and Atmospheric Administration
NP Nitro Phosphate
NPK Nitrogen-Phosphorus-Potassium
NPL Non Performing Loan
NRL National Refinery Limited
NSS National Saving Scheme
NTC National Tariff Commission
O
OCAC Oil Companies Advisory Committee
OECD Organisation for Economic Co-operation and Development
OGDCL Oil and Gas Development Company
OGRA Oil and Gas Regulatory Authority
OMCs Oil Marketing Companies
OMO Open Market Operation
OPEC Organization of the Petroleum Exporting Countries
OTEXA Office of Textiles and Apparel, US
P
PAMA Pakistan Automotive Manufacturers Association
PBA Pensioners Benefit Account
118
List of Acronyms
PBS Pakistan Bureau of Statistics

PCGA Pakistan Cotton Ginners Association
PCMA Pakistan Chemical Manufacturers Association
PEZA Philippine Economic Zone Authority
PFA Punjab Food Authority
PIA Pakistan International Airlines
PIB Pakistan Investment Bond
PIDA Provincial Irrigation and Drainage Authority
PIOC Pioneer Cement Ltd
PITB Punjab Information Technology Board
PKR Pakistani Rupee
PL Petroleum Levy
PMG Premium Motor Gas
PMRC Pakistan Mortgage Refinancing Company
POL Petroleum, Oil and Lubricants
P2P People to people
PP Phillips Perron
PPCBL Punjab Provincial Cooperative Bank Limited
PRI Pakistan Remittance Initiative
PSDP Public Sector Development Program
PSE Public Sector Enterprise
PSMA Pakistan Sugar Mills Association
PSO Pakistan State Oil
PSPC Pakistan Security Printing Corporation
PSX Pakistan Stock Exchange
PTA Pakistan Telecommunication Authority
PVC Polyvinyl chloride
Q
Q1 First quarter
Q2 Second quarter
Q3 Third quarter
Q4 Fourth quarter
R
R&D Research and Development
RD Regulatory Duty
RDF Refused-derived fuel
rhs Right Hand Side
RLNG Regasified Liquefied Natural Gas
RON Research Octane Number
Rs Rupees
S
SAFE State Administration of Foreign Exchange, China
SAI Supreme Audit Institution
SBP State Bank of Pakistan
119
SEZ Special Economic Zone

SIM Subscriber Identity Module
SKDs Semi Knocked Down Units
SLR Statutory Liquidity Requirement
SME Small and Medium Enterprise
SOE State Owned Enterprises
SRO Statutory Regulatory Order
SSA Special Saving Account
SSP Single Superphosphate
STP Software Technology Park
T
T-bills Treasury Bills
TDF Tyre-derived fuel
TDL Total Debt and Liabilities
TDPs Temporarily Dislocated Persons
TEVTA Technical Education and Vocational Training Authority
TFR Total Fertility Rate
TOKTEN Transfer of Knowledge through Expatriate Nationals
TPEDL Total Public External Debt and Liabilities
TPP Trans Pacific Partnership
U
UAE United Arab Emirates
UK United Kingdome
UN United Nations
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Program
UNICEF United Nations Childrens Fund
US$ US Dollar
USA United States of America
USAID United States Agency for International Development
USD US Dollar
USDA United States Department of Agriculture
UVM Unit Value of Imports
V
VP Voluntary Payments
W
WA Weighted Average
WALR Weighted Average Lending Rate
WAPDA Water and Power Development Authority
WASA Water and Sanitation Authority
WB World Bank
WeBOC Web-Based-One-Customs
WHO World Health Organization
120
List of Acronyms
WHR Waste Heat Recovery

WHT Withholding Tax
WiMax Worldwide Interoperability for Microwave Access
WPI Wholesale Price Index
WTI West Texas Intermediate
Y
YoY Year on Year
Z
ZTBL Zarai Taraqiati Bank Limited
121

SBP Annual Report 2016-17 (State of Economy)

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SBP Annual Report 2016-17 (State of Economy)

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Contents

3. Monetary Policy and Inflation

5. Domestic and External Debt

7. Water Sustainability in Pakistan- Key Issues and Challenges

Annexure A: Data Explanatory Notes 113

List of Acronyms 115

Box 2.1: Industrial Growth in Pakistan the Role of Liberalization Policy 12

Formatting: Muhammad Idrees; Hira Ghaffar

Publication Managers: Fida Hussain

Favorable macroeconomic policies continued to Table 1.1: Selected Macroeconomic Indicators

1.2 Assessment of FY17

Monetary policy and inflation

Domestic and external debt

Water sustainability in Pakistan key issues and challenges

1.3 Outlook for FY18

Box 2.1: Industrial Growth in Pakistan the Role of Liberalization Policy

Crop Sector Table 2.2: Performance of Important Crops

Another encouraging shift was the recovery in

FY17 was the fourth consecutive year when the

June 2014) (Figure 2.3). We expect this stock -50 3

certain costs. As the government has kept the

dispatches (Table 2.6).

On external front, the imposition of anti- Table 2.8: Cement Sales

According to Pakistan Sugar Mills Association Figure 2.10: Sugarcane Usage

gur and juices), which is considerably lower 60

Figure 2.11: Food Sector - Growth in Selected Segments

Data source: Pakistan Bureau of Statistics

main raw material) prices in the international 800

percent. The domestic industry does not fully 20

Encouragingly, National Refinery Limited 8

Box 2.2: Why is the Leather Industry Underperforming?

Table 2.10: Performance of Services

Finance and Insurance recorded an Table 2.11: Finance and Insurance

finance and insurance segment posted a 9.8

Transport, storage, and communication also 40

Box 2.3: How to Make Services Exportable?

Figure 2.3.1: Comparison of Services Sector

3.1 Policy Review

FY13 FY14 FY15 FY16 FY17

Data source: State Bank of Pakistan Data source: Haver Analytics

borrowings by private businesses was meant 20

3.2 Developments in Monetary Aggregates

Table 3.1: Key Monetary Indicators

represents their inclination towards cash-based Figure 3.4: Money Supply

On the asset side also, the composition of M2 10

Net Foreign Assets

reserves during the period (Chapter 6). This

Net Domestic Assets -300

Budgetary borrowing shifted gears

Table 3.3: Auction Profile of Government Papers

OMOs were instrumental

reduction in OMO injections. However, during

PSE borrowings increased sharply

Dasu projects, but also to finance payments due Jun-17

3.3 Credit to Private Sector

On the demand side, low financing costs 700

further; an added impetus came from CPEC- 500 commodity prices

Table 3.4: Loans to Private Sector Businesses (Flow)

Consumer loans firming up

Depth and access is still low

and supply side factors alike contributed to the 200 168

Box 4.1: Key Tax Incentives Provided in FY172

Table 4.1: Summary of Fiscal Operations

to remain dependent on withholding taxes