OVERVIEW OF THE ECONOMY

Pakistan’s economy has delivered yet another year of solid economic growth in 2005-06 in the midst of an extraordinary surge in oil prices and the devastating earthquake of October 8, 2005. Pakistani corporates and consumers continue to be the bright spot. Consumer spending remained buoyant and investors remained upbeat on the strength and sustainability of the current growth momentum, despite higher energy prices and natural calamities. With economic growth at 6.6 percent in 2005-06, Pakistan’s economy has grown at an average rate of almost 7.0 percent per annum during the last four years (2002/03 – 2005/06) and over 7.5 percent in the last three years (2003/04 – 2005/06), thus positioning itself as one of the fastest growing economies of the Asian region. The growth momentum that Pakistan has sustained for the last four years is underpinned by dynamism in industry, agriculture and services, and the emergence of a new investment cycle with investment rate reaching new height at 20.0 percent of GDP. Therefore, the pre-requisites for sustained economic growth appear to have gained a firm footing during the last four years. The outgoing fiscal year (2005-06) has been an extra-ordinary year for the economy of Pakistan. At the very onset of the year the economy faced headwinds from rising oil prices, hovering around $ 70 – 75 per barrel and putting severe strains on the country’s trade balance and the budget. The massive earthquake of October 8, 2005 also caused extensive damage to property, infrastructure, school, hospital etc. and a loss of over 70,000 human lives. The rescue and relief operations and reconstruction of earthquake affected areas also put Pakistan’s budget under severe stress. Despite these constraints, Pakistan’s economy has proved itself as remarkably resilient in the face of shocks of extraordinary proportions. Growth has remained buoyant with real GDP growing at 6.6 percent in 2005-06 as against the revised estimates of 8.6 percent last year and the 7.0 percent target for the year. The key drivers of this year’s growth have been the service sectors and industry. Large-scale manufacturing grew weaker-than-expected by 9.0 percent as against 15.6 percent of last year and 14.5 percent target for the year, perhaps exhibiting signs of moderation on account of higher capacity utilization on the one hand and a strong base effect on the other. The services sector continued to perform strongly at 8.8 percent. Construction also continued to show strong performance, partly due to the activity in the private housing market, spending on physical infrastructure, and reconstruction activities in the earthquake affected areas. Consumer spending remained strong and investment spending gained further traction. Pakistan’s economy continues to maintain a solid pace of expansion since the fiscal year 2002-03. The recovery has been strong, rapid and sustained. During the fiscal year 2005-06, Pakistan’s economic fundamentals have gained further strength. The most important achievements of this year include: (i) a solid pace of economic expansion in an extra-ordinary environment, underpinned by weaker-than-targeted performance of large-scale manufacturing and robust performance of services; (ii) three or four years of strong economic growth has positioned Pakistan as one of the fastest growing economies in Asian region; (iii) real per capita GDP grew by 4.7 percent and per capita income in current dollar term was up by 14.2 percent, reaching $ 847; (iv) a sharp pick up in overall investment reaching at a new height of 20 percent of GDP and most notably, private sector investment remained buoyant owing to a rare confluence of various positive developments in the economy; (v) a robust consumer spending ably supporting the ongoing growth momentum; (vi) the credit to private sector continue to rise at the back of improving investment climate, the private sector has borrowed over Rs.1100 billion in less than three years (2003/04 and until April 22, 2006) while their cumulative borrowing in the previous eighteen years (1984 – 2003) have been Rs.921 billion; (vii) a significant

Economic Survey 2005-06 abatement of price pressure indicating a steady deceleration in overall inflation, especially food inflation, the overall inflation decelerating from 9.0 percent in July 2005 to 6.2 percent in July 2006 and food inflation decelerating from 9.7 percent to 3.6 percent in the same period; (viii) energy consumption, particularly electricity and gas continue to rise at double-digit level, reflecting strong buoyancy in the economy; (ix) despite pressure emanating from the earthquake-related expenditures the underlying fiscal deficit performed better than the target; (x) the Central Board of Revenue (CBR) collecting taxes more than the target; (xi) a sharp reduction in public and external debt burden; (xii) the record public sector development program (PSDP) remained on track despite massive spending on earthquakerelated activities; (xiii) exports and imports continue to grow at high double-digit level; (xiv) workers’ remittances at around $ 4.5 billion continue to remain one of the largest sources of external finance for Pakistan; (xv) a continued accumulation of foreign exchange reserves; (xvi) exchange rate continued to remain stable despite extra-ordinary increase in imports and deterioration in trade balance; (xvii) privatization program achieved unprecedented success with the strategic sale of some difficult and complicated public sector units; (xviii) highest ever foreign direct investment flows, exceeding $ 3.0 billion; (xix) and the successful launch of new 10 year and 30 year 144A sovereign bond in international debt capital markets, totaling $ 800 million and reflecting a vote of confidence by the international investor community on Pakistan’s economic policies, reform agenda and future outlook. The ultimate objectives of the government’s socio-economic policy are to create jobs, raise incomes of the people and reduce poverty. This year has seen major successes on all these fronts. The pace of job creation has been brisk on the back of a sustained high economic growth, real per capita income has grown at an average rate of 5.7 percent per annum during the last three years, and accordingly, the overall poverty as well as rural and urban poverty has registered sharp declines. While the economy of Pakistan has gained further traction in 2005-06, there are however, some weaker areas that need to be highlighted. First and foremost is the sharp pick up in the prices of some of the essential food items, particularly during the second half of the fiscal year. Although, this year has seen significant abatement of price pressure resulting in a steady deceleration in inflation from as high as 11.1 percent in April 2005 to 6.2 percent in April 2006 and food inflation from 15.7 percent to 3.6 percent in the same period, yet the prices of some of the essential food items (out of the CPI basket of 370 items) such as sugar, pulses, milk, beef, mutton, and some vegetables items have witnessed sharp increases, adversely affecting the low and fixed income groups. In particular, the expenditure on food items constitutes bulk of the monthly expenditure of the poor segment of society. Within the food group, a significant proportion of the income of the poor are devoted to the consumption of the items listed above. Most of these items are part of minor crops (various kinds of pulses and vegetables) and livestock and dairy products (beef, mutton, milk). Both market and ‘extra-market forces’ were responsible for the surge in prices of these food items. Infact, inadequate supplies of essential commodities provided rooms to ‘extra-market forces’ to play their roles. Therefore, the challenge for the government is to maintain a balance between the supply and demand of these commodities through enhancing the production and imports. The key to addressing this challenge is to give due importance to minor crops and livestock and dairy sector. Currently there is a total disconnect between the importance given to these sub-sectors of agriculture and the relative roles they play in stabilizing overall inflation in general, especially food inflation. Notwithstanding the sharp pick up in prices of some of the food items in the second half of the fiscal year; it is equally true that the prices of essential commodities in Pakistan are still relatively cheaper in the region. For example, the prices of wheat, wheat flour, rice basmati broken, masoor pulse, gram pulse, chicken, and red chillies in Pakistan are the lowest in the South Asian region. However, this does not mean that we have to pause or rest. The government is fully aware of the fact that there is an urgent need to take necessary measures not only to stabilize but also to reduce the prices of essential food items. Secondly, four years of strong economic growth complemented by the benign interest rate environment have injected new life into domestic spending. The strengthening of domestic demand in conjunction with extra-ordinary surge in international price of oil, fueled import demand, which more than offset the improved outcomes for exports. Accordingly, this year has witnessed record trade deficit and widening of current account deficit mainly on account of

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Overview of the Economy higher oil bill, imports of machinery and raw materials. Although financing of current account deficit is not an issue yet it requires closer monitoring over the next few years. Thirdly, although the number of people living below the poverty line has declined substantially, the consumption inequality has increased marginally during the period 2001-05. More attention will be required in skill development in both the urban and rural areas. While socio-economic and macroeconomic policies pursued during the year have had a strong influence on across-the-board improvement, an increasingly broad and dynamic global recovery has aided Pakistan in this endeavor. Global Economic Environment While solid pace of economic expansion this year was underpinned by the macroeconomic policies pursued by the government, Pakistan has also benefited from the buoyant global economic environment undeterred by the rising and volatile energy prices. The global economy continued its strong expansion, becoming geographically more broad-based, and global growth is expected to remain strong over the near term. Inflation and inflationary expectations remained well contained but there is no room for complacency as there are downside risks, including those related to continued high and volatile oil prices, and abrupt tightening of global financial conditions, and a rise in protectionism. Where reforms have been undertaken, the benefits have been enhanced by an expanding world economy. In 200405, global growth at 5.3 percent was the strongest in thirty years. Growth in 2005-06 though more moderate, was around 4.8 percent and similar strong growth is expected in 2006-07. The remarkable expansion we have seen in the past couple of years has been worldwide with almost every region of the world experiencing buoyant growth – including South Asia. The United States and China remain the main engines of global economic growth, and that growth prospects in Japan and in some members of the euro area have steadily improved. The performance of many emerging economies and developing countries continue to be strong. As stated earlier, the United States continues to be a major driving force for global growth. Real GDP grew by 4.2 percent in 2004-05 and 3.5 percent in 2005-06 and is likely to moderate at around 3.3 percent in 2006-07. The buoyancy of the US economy has helped fuel growth in other regions. The pace of growth in emerging Asian countries especially in China, India and Pakistan, has also contributed to strong global performance in the past few years and this, too looks set to continue with growth in Asian emerging market forecast to exceed 7.0 percent this year. In those parts of the world, where growth has been persistently sluggish, the future already holds a promising picture. The Japanese economy appears better poised for a strong recovery than for many years, with deflation almost squeezed out of the system, and more buoyant consumer demand. In some European countries, growth seems to be picking up, albeit slowly. South Asia, particularly India and Pakistan, appear to have overtaken the ASEAN region, in terms of their growth performance. Barring China, Hong Kong SAR, and Vietnam all the other Asian economies have fallen short to the South Asian giants (India and Pakistan) in terms of their growth performance. The Middle Eastern and African countries showing strong to modest growth for the last few years. The performance of oil rich countries (Saudi Arabia, Iran and Kuwait) was expected to be strong in the Middle East region owing to massive influx of petro dollars. With the exception of Nigeria (another oil producing country), all other countries in the African region showing a modest to weak growth performance. There are many reasons for the global economic expansion. A major one is the reduction in inflation rates worldwide. For a long period, high inflation inflicted great harm on many countries. But in recent years, an extraordinary decline in inflation rates was observed worldwide. This has been a significant factor in the healthier rates of growth in many parts of the world. The low inflation environment has contributed significantly to the buoyancy of the global economy. The recent expansion has, after all, taken place against a backdrop, which might have been expected to hamper global growth. Continuing geopolitical uncertainty, a sharp rise in oil prices and continuing concern about global imbalances, the collective impact of these concerns so far, has been significantly less than many had predicted.

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Construction also continued its strong performance.0 percent per annum during the last four years and over 7. heavily dependent on Mother Nature is not a viable policy. Agriculture.4 percent and maize production was up by 27. Sugarcane is another major crop which registered a negative growth of 6. Wheat production remained more or less at last year’s level with a marginal increase of 0. depicted a negative growth of 3.0 percent less production of cotton (12.7 percent last year.3 million tons).3 million bales last year) owing to adverse weather conditions.5 percent of agricultural value added.8 percent growth of last year.0 percent target for the year. Global imbalances continue to pose a risk to continuing global growth. Besides measuring from a high base of last year.0 percent over an equally strong growth of 29. Despite the impressive performance of these two crops. this year was subjected to adverse weather conditions.0 percent of GDP. So far. High oil prices are clearly at or close to the top of the list.6 percent. fishing and forestry. the two other major crops.2 million tons to 44. This sector has posted a growth of 9.6 percent last year. now in excess of 6. the current outlook. All the components of services sector registered strong growth with the exception of ownership of dwellings and public administration and defense.2 percent target for the year. minor crops. When viewed at the backdrop of rising and volatile energy prices and the extensive damage caused by the earthquake of October 8.6 percent as against an impressive 17. respectively. The main risk posed by these global imbalances is a disorderly resolution of the problem.6 percent in 2005-06 as against the revised estimates of 8. partly helped by buoyant activity in private housing market. GDP Growth Real GDP grew strongly at 6. and sluggish growth in Europe and Japan. Agriculture The performance of agriculture remained weak this year as it grew by only 2. But the payment imbalances are part of a wider problem of imbalances in the global economy. 2005 Pakistan’s growth performance for the year has been impressive. Electricity and gas distribution. the rise in oil prices has been satisfactorily absorbed in most countries.7 percent of last year and the 4. But there are nevertheless.0 percent as against 15. livestock.7 million tons as against 21. however registered a high negative growth of 8. perhaps exhibiting signs of moderation on account of higher capacity utilization on the one hand and a strong base effect on the other. as against 6.7 percent. major crops registered a decline primarily on account of a 13. spending on physical infrastructure. The wholesale and retail trade and transport.8 percent over an equally robust growth of last year. This is partly a reflection of the fact that unlike the price rises of the 1970s the current increases have been demand rather than supply driven. continues to increase and therefore.3 percent. an abrupt adjustment of exchange rates and US interest rates.6 percent of last year and 14.6 percent last year and the 7. respectively. Due attention must be given to other components of agriculture. The current account deficit of the United States.4 percent purely on account of high operating expense of the WAPDA offsetting its gross value of sale. fuels concerns about sustainability.9 percent and 7. they failed to compensate the decline in production of cotton and sugarcane. with obvious implications for emerging market debt. The performance of agricultural sector remained weak this year as major crops registered a negative growth of 3. Livestock with almost 50 percent contribution iv . however performed well with rice production increasing by 10. This is once again a reminder that exclusive focus on few major crops.1 percent.2 percent (from 47. and reconstruction activities in the earthquake affected areas.5 percent per annum in the last three years and hence positioned itself as one of the fastest growing economies in the Asian region.Economic Survey 2005-06 Overall. accounting for 32. large-scale manufacturing grew weaker-than-expected by 9. The operating expense has grown twice as fast as gross value of sale of the WAPDA.6 percent in 2005-06. for example. is favourable. Within industry. storage and communication registered strong growth of 9.2 percent in 2005-06 over an extra-ordinary growth of 18. Finance and banking sector posted a remarkable growth of 23. With economic growth at 6.6 million tons). Major crops. some important downside risks to which all policy makers need to be ready to respond. The services sector continued to perform strongly and grew by 8.5 percent.4 million bales as against 14. The key drivers of this year’s growth have been the service sectors and industry. both at the global and at the regional level.4 percent (21.5 percent target for the year. and it partly also reflects the fact that policy makers have taken to heart the lessons of the 1970s and have gradually reduced their dependence on oil to run the machines of their economies. Rice and maize. with major crops and forestry registering a negative growth of 3. Pakistan’s economy has grown at an average rate of almost 7. with rapidly rising foreign exchange reserves in Asia. such as.6 percent and 5.

and 8. and registered a growth for the third year in a row. stable exchange rate.7% in 2005-06).4 percent last year.5% in 2003-04. the availability of water for Kharif 2005 (for the crops such as rice. sugarcane and cotton) has been 5. In particular.6 percent. Secondly. extra-ordinary rise in consumer spending over the last three years appears to have contributed. During the fiscal year 2005-06.0 percent as against the target of 14. the production of basic metal industries badly suffered. 6.4 percent. (11. gross fixed capital formation or domestic fixed investment in real term grew by 10.7% in 2004-05 and 4. 13. Such increases in real per capita income have led to a sharp increase in consumer spending during the last three years.5 percent as against a robust growth of 10. Thirdly. albeit at a relatively slower pace of 8.0 percent and production of cotton cloth remained flat.1% in 2005-06).9 percent per annum during the last three years. It simply indicates the average level of prosperity in the country or average standard of living of the people in a country. textile and apparel grew by only 4.5 percent and last year’s achievement of 15. This sector has large weight in largescale manufacturing.8 percent more than last year’s Rabi.8 percent more than last year’s Kharif. in part to building inflationary expectations in Pakistan. the higher consumer spending feeding back into economic activity is likely to support the on-going growth momentum.0 percent. The real private sector investment grew by 11.4 percent during 2000-2003. Consequently.6 percent last year.7 percent.0 percent last year. The relatively slower pace of expansion perhaps exhibits signs of moderation on account of higher capacity utilization on the one hand and a strong base effect on the other.3 percent growth this year as against 9.6 percent last year.Overview of the Economy in agriculture has been the only saving grace as this sector grew by 8.3 percent as against 9.6 percent as against 12. accounting for 69. and rise in inflow of workers’ remittances.9 percent per annum during the last four years – rising from $582 in 2002-03 to $847 in 2005-06.2 percent of GDP. Excessive winter rainfalls. the middle classes are becoming an increasingly dominant force. The performance of petroleum group also remained lackluster with 2.3 percent of last year and hence took the overall agricultural growth to a positive side. registered weaker-thanexpected growth at 9. Furthermore. as against 2. accounting for 18. Basic metal industries registered a sharp contraction of almost 59 percent because two coke oven batteries of the Pakistan Steel Mill went out of order in July 2005 and the Mill was operating at around one-third of its capacity. Firstly.5% in 2003/04.5 percent more than the normal supplies and 19. Firstly. the real private consumption expenditure has grown at an average rate of 10.0 percent decline in cotton production the overall performance of textile and apparel sector remained subdued.9 percent of overall manufacturing. The extra-ordinary strengthening of domestic demand during the last three years points to the following facts. it suggests the emergence of a strong middle class with strong buying powers – good for business expansion.3 percent less than the normal availability but 29.6 percent per annum during the last three years (5. Per capita income defined as Gross National Product at market price in dollar term divided by the country’s population. Large-scale manufacturing. As against a hefty growth of 24.3 percent last year.2 percent over last year – rising from $ 742 to $ 847. Sugar production with large weight also registered a decline of 2. during the current fiscal year (2005-06). Manufacturing Manufacturing is the second largest sector of the economy. Several other factors contributed to the slower pace of expansion of large-scale manufacturing. Per Capita Income Per capita income is one of the main indicators of development. The water availability for Rabi season (for major crop such as wheat) was 17. Per capita income in dollar term registered an increase of 14. v .1% in 2004/05.0 percent this year as against an increase of 9. Pakistan’s per capita real GDP has increased at an average of 5. The main factor responsible for the sharp rise in per capita income include: a sharp pick up in real GDP growth. grew by an average rate of 13. Consumption Pakistan’s economy is undergoing structural shifts that are fueling rapid changes in consumer spending patterns. leading to a rise in average income of the people. Public sector investment on the other hand registered a substantial increase of 22. as a result of 13. Investment Investment is a key determinant of growth. (January – March 2005) along with melting of snow on mountains top were responsible for higher than normal availability of water during Kharif 2005. As opposed to an average annual increase of 1.

also contributed in building inflationary pressure in Pakistan. was the significant abatement of price pressure over the course of the year. Inflation during the first ten months (July-April) of the current fiscal year is estimated at 8. This inadvertently kept the prices of pulses at record high level. These measures include: a liberal import regime for food items including zero rating of the imports of these commodities. when overall inflation reached 93 months high at 11. The measures taken by the Government.8 percent in the same period last year. moved up and estimated at 7.1 percent in the same period last year. all important barometers of price pressure in the economy indicated a steady deceleration in inflation. reaching at 23 months low at 6.the lowest in the last 31 months.year performance of inflation. Fixed investment is estimated at 18. Non-food inflation at 8.2 percent in April 2006. Brazil.the highest in the last 12 years and is up from 18.4%) after food (40.3 percent in the same period last year.7 percent in April 2005 (last-time it was at 15. Almost 2.7 percent at the beginning of the current fiscal year but decelerated sharply to 3.6 percent in April 2006. The prices of other food item such as beef. particularly during the second half of the fiscal year and therefore adversely affected the low and fixed income groups.0 percent in the same period last year. but continued to decelerate.1 percent (the lasttime inflation was at this level in July 1997) and food inflation peaked at 15.0 percentage points jump in investment is consistent with the rise in credit to private sector this year. mis-management in wheat operation in one of the wheat deficit province. total investment is provisionally estimated at 20. In order to keep the prices of essential commodities under control.7 percent as against 7. yielded handsome dividend in the shape of overall inflation decelerating to 6. the government has been taking various measures throughout the year.9 percent in the same period last year.2 percent and food inflation to 3. For the first ten months of the current fiscal year (July–April 2005-06). during fiscal year 2005-06. This also reflects the confidence of the private sector on the improving macroeconomic conditions in the country. the current fiscal year exhibits significant abatement of price pressure and declaration in overall inflation as well as its sub-indices. In recent months. inter-provincial ban on the movement of wheat resulting in sharp increases in prices of wheat and wheat flour. Food inflation was closed to 9.0 percent as against 12. Notwithstanding a steady deceleration in inflation. particularly since April 2005. When viewed in the context of year-on. Four years of strong economic growth has given rise to the income levels of various segments of the society. Inflation Among the most appreciated developments.3 percent as against 11. prices of various kinds of pulses also registered sharp increases owing to a significant decline in domestic production as well as shortages in international markets. The core inflation which excludes food and energy costs from the headline CPI. chicken.4 percent of GDP this year versus 16. The expenditure on food items constitutes bulk of the monthly expenditure of the poor segment of the society. Food inflation is estimated at 7.8 percent is on higher side compared with 6.5 percent last year. started with an inflation rate of 9. Lower production of sugar due to a relatively lower production of sugarcane and a sharp increase in the international prices of sugar brought about by a significant diversion of sugarcane into ethanol (petroleum substitute). An unprecedented rise in international oil prices also contributed to the build up in inflationary pressure in Pakistan.0 percent .1 percent last year. With second largest weight in the CPI (23.6 percent in April 2006. shortage of wheat owing to less than the targeted production. milk etc also registered sharp increases owing to “sympathy effect” on the one hand and demand pressure on the other. the house rent component of the CPI registered a marginal decline to 10. Sharp increases in the prices of some of the strategic food items put pressure on the poor. House rent index also played an important role in building inflationary pressure this year.7 percent in May 1994).Economic Survey 2005-06 As percentage of GDP. Supply side pressure emanated from a variety of factors. The current fiscal year.0 percent as against 9. mutton. the government vi . The higher inflationary trend in Pakistan over the last two years has been the outcome of pressure that emanated from demand and supply sides.3%). In order to provide relief to the low and fixed income groups. prominent among those are: increase in support price of wheat for three years in a row. the prices of some of the essential food items (out of the basket of 370 items in CPI) registered sharp increases. The rising level of income have strengthened domestic demand and put upward pressure on prices of essential commodities.0 percent in July 2005. by the largest producer.

330 billion envisaged for the year in credit plan reflecting the buoyancy in the economy. The role of the Trading Corporation of Pakistan (TCP) has been enhanced. The easy and accommodative monetary policy stance that had been pursued during the last few years by the SBP underwent considerable changes during the fiscal year 2004-05. In recent years the banking industry in Pakistan has been transformed from state owned sector to a vibrant private sector industry.8%) primarily because of the moderate build up in net domestic assets (NDA). The same tight monetary policy stance continued during the current fiscal year despite declines in both core and overall inflation.115 billion between March 31. The net credit to government for budgetary purposes which had peaked at Rs. Notwithstanding the tight monetary policy stance the SBP continued to strike a balance between promoting growth and controlling inflation on the one hand and maintaining a stable exchange rate environment on the other. Banking industry has not only gained strength from the positive interplay of economic and political factors. The TCP has also been asked to import various kinds of pulses to meet the domestic consumption requirements and stabilize their prices in the country. However. but also has become an engine of growth for the economy. the government has also allowed the import of various items through land routes from neighbouring countries.3 billion compared to the annual credit plan target of Rs. the SBP has set the target for monetary expansion to the tune of Rs. Higher government borrowing for budgetary support reflects a large vii . continued to exhibit a rising trend during the fiscal year 2004-05.15. They can provide credit to those investments that offer the highest risk adjusted rates of return. and April 13.0 billion borrowed in the corresponding period of last year. A strong and well-functioning financial and banking sector is also critical for sustained higher economic growth.8 percent in April 2005. According to the credit plan for 2005-06. The growth target of broad money (M2 definition) was deliberately kept below the growth of nominal GDP to absorb monetary overhang of the last few years. more so since April 2005 to tame inflation. switching from a broadly ‘accommodative' to ‘aggressive tightening’ in the second half of the last fiscal year. 2006 due to the inflow of proceeds from privatization and sale of bonds in the international capital market. The proceeds from privatization and sovereign bond not only helped build NFA but it also helped in containing the growth in NDA through the retirement of government debt held by the SBP. credit to private sector has exceeded the target and stood at Rs 345.9 percent as against an expansion of Rs 332. 2006 sharply reduced to Rs. A weak financial sector can undermine efforts to achieve stability through prudent fiscal and monetary policies.15 billion) and stood at Rs. Expansion in net foreign assets (NFA) on the other hand exceeded the target (Rs.98 billion and Rs.Overview of the Economy has been selling wheat flour and sugar through the outlets of the Utility Stores Corporation (USC) at much lower prices than the market. the SBP changed its monetary policy stance to aggressive tightening in April 2005 by raising discount rate from 7.1 percent and core inflation at 7. The TCP is active in importing sugar from around the world to build up strategic reserves with a view to continue selling sugar at less than the market price through the USC. Monetary Policy An important lesson that we learnt from the experience of the decade of the 1990s is the importance of a healthy banking and financial sector.37.380 billion or 12. Within the NDA. The money supply during July-April 22. Tight monetary policy stance is likely to continue until inflationary pressures are significantly eased off.34 percent in the same period last year.43.2 billion during July-March 11. The net budgetary support to government decreased by about Rs. The State Bank of Pakistan has taken a number of steps in various areas to further enhance the effectiveness of banking industry in Pakistan. 2006 of the current fiscal year expanded by Rs 294. In order to arrest the rising trend in inflation.5 percent to 9. This is a key element of macroeconomic stability.8 percent higher than last year (FY05) on the basis of a growth target of 7.1 billion as against Rs.0 percent. Overall inflation in general and core inflation in particular.9 billion or 9. both net budgetary and borrowings for commodity operations have also remained well within the credit plan targets. the overall inflation reaching as high as 11. The pace of monetary expansion remained well within the Credit Plan target for the year (12. In order to augment supplies of essential commodities in shortest possible time and at lower freight charges.4 billion or 13.162.8 billion owing mainly to the receipts of privatization proceeds and issuance of sovereign bond.0 percent and inflation target of 8 percent.

5 billion or 53. efficient and transparent capital market and restoring investors’ confidence. The growth in consumer loans remained robust.2 billion).1108 billion.39 percent since July 2005. It is expected that the private sector would now be more selective and prudent in terms of availing bank credit. Wholesalers and retail traders as well as exporters received three – fourth of the credit under commerce related activities.2 ($ 33.1 billion). 2006 (US$ 57.2013. consumers find these loans still affordable amid expectations that interest rates may rise in the near future.921 billion in the previous 18 years (1984 . the total market capitalization also increased to Rs. It is for the first time in many years that the inflation – adjusted average lending rate has turned positive.15.0 percent or Rs.4 percent to Rs.10. Credit to private sector continued to exhibit strong demand. 2006 compared with the growth of 28. banks are more interested in consumer loans due to relatively higher spreads.69. KSE’s market capitalization is equivalent to about 46 percent of estimated GDP of FY06.5 billion). 2006. The distribution of credit to the private sector during July-March FY06 has been broad-based. At current levels.67.2 percent (Rs.2. picked up substantially after the October 8. showing a growth of 64. textile industry received Rs. credit cards (Rs. this rise was not enough as the banking spread further rose by 103 bps to 7. a successful privatization process attracting foreign investors in prestigious organization like PTCL and National Refinery.357. Stock Market The stock market continued to maintain its strong performance and achieved new heights by creating many new records during the fiscal year 2005-06.0 billion) from Rs. 2006) the cumulative credit flow to the private sector amounted to Rs. Within the manufacturing sector.23. reflecting the confidence of the private sector on the continuously improving macroeconomic fundamentals of the country. The manufacturing sector continued to be the largest recipient of bank credit amounting to Rs.5 percent followed by cement (Rs. The average lending rate increased by 193 bps to 10.Economic Survey 2005-06 spending on earthquake related activities.51. Third. The tight monetary policy stance of the SBP was reflected in the slower pace of credit expansion to the private sector. Monetary expansion in fact.1 billion) during July-April 22. Commerce .7 percent over June 2005.4 billion) and house building (Rs.6 percent after a contraction of 1. The KSE-100 Index crossed the barrier of 12000 marks for the first time in the history of capital market and touched an all time high on April 13. Three major reasons may be given to account for higher growth in consumer loans. However. 2005 earthquake when broad money supply grew by 5.related activities also picked up strongly as their credit off-take rose by 35. surpassing the total credit flow of Rs. 2006.2 billion. During the last three years (2003/04 to April 22. The KSE-100 Index made further inroad and reached 12274 points on April 17.6 billion).3419.10.75 percent.2 billion.0 billion during July-March 2005-06. The overall manufacturing sector accounted for almost 47. — 17. sound monetary policy of the SBP. The tight monetary policy is also reflected in the rise of the weighted average lending rate. The government’s economic policies and capital market reforms helped in promoting a fair. The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth.130.9 percent of the credit to private sector businesses.1 billion). The privatization of the government viii . Second.4 billion during the same period of last year. First.21. The credit to private sector grew by 20.7 billion) showing a growth of 70 percent over June 2005. and fertilizer (Rs.2 billion) followed by personal loans (Rs.14 percent during July-March FY06 due to the lagged impact of 5-6 percentage point increases in cut-off yields on various TBs last year. some of the banks are working more aggressively to tap their potential customers for consumer loans.3. leather (Rs.4 billion on April 17. The tight money market conditions also led the banking industry to raise the average deposit rate by 90 bps to 2. maintenance of fiscal discipline and the capital market reforms including development measures introduced by the stock exchanges with full support of the SECP.2 percent during the first quarter (July-September) of the current fiscal year. Most of the consumer loans were acquired to finance a range of products including automobiles (Rs. Similarly.2003).345.1 percent more than the comparable period of last year. and their scale expanded by 27 percent to Rs.

accordingly paid.5 percent. Pakistan.2 percent of indirect taxes during the same period. Pakistan’s hard earned macroeconomic stability is underpinned by fiscal discipline. more than doubled. The buying euphoria in the stock market has been spurred by a number of other favourable factors. based on sound regulatory principles that provide impetus for high economic growth.2% of GDP).2 percent of GDP in 2000-01 to 4. In order to address the structural problems in the tax system and tax administration. as well as reforms in tax administration. A sound fiscal policy is essential for preventing macroeconomic imbalances and realizing the full growth potential. has provided fiscal space to re-orient expenditure in favour of development expenditure. a heavy price for its fiscal indiscipline in terms of deceleration in economic growth and investment. respectively during the same period. This is the consequence of the tariff reform implemented by successive governments since 1990-91. including the continuation of the present policies on the banking sector by the SBP.1 percent of GDP in 2005-06. However. bright prospect of reaping dividends. The primary balance (total revenue minus non-interest total expenditure) was in surplus from 2000-01 to 2004-05. renewed interest of large number of buyers of shares. Under the Fiscal Responsibility and Debt Limitation Act 2005. During the last seven years. During the last six years the development expenditure improved from 2.3 percent and 28 percent. with all vital indicators pointing in the right direction. Its shares in total taxes and indirect taxes were 22. the share of development expenditure doubled from 11 percent to 22 percent in the same period. Considerable efforts have been made over the last six years to inculcate financial discipline by pursuing a sound fiscal policy.4 percent and 11. the government was bound to eliminate revenue deficit by 2007-08.5 percent and 27. and the associated rise in the levels of poverty.5 percent of GDP in 1998-99 to 3. The Securities and Exchange Commission of Pakistan (SECP) has been actively pursuing a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market.8 percent of GDP during the last six years. Even within the indirect taxes.0 to 18. respectively. Fiscal Policy Fiscal policy primarily deals with the levels and composition of taxation. respectively in 1990-91.Overview of the Economy entities through the bourses helped broad-basing the equity ownership to a significant level.6 percent to 60. tax collection by the CBR has increased by 130.2 percent of GDP in 2005-06 and is likely to make a further jump to 4. though the number is small (0. In addition. Pakistan must not allow primary deficit to get entrenched. governance and transparency have contributed significantly towards the growth and development of capital market and building investor confidence. These have now been reduced to 8. A substantial decline in interest payments from as high as 7.9 percent. These reforms have already started yielding handsome dividends. This target has almost been achieved two years in advance. the government has been introducing wide-ranging tax and tariff reforms.2 percent of GDP in 2000-01 but it has almost been eliminated in 2005-06. Pakistan has witnessed serious macroeconomic imbalances in the 1990s mainly on account of its fiscal profligacy.7 percent of GDP in 2006-07. The total expenditure remains more or less stable in a narrow band of 17. The revenue deficit (the difference between total revenue and total current expenditure). The KSE saw robust activity especially during the first 4 months of 2006. The reforms introduced over recent years in the fields of risk management. Persistence of large fiscal deficit resulted in unsustainable levels of public debt. The collection from custom duty used to account for 45 percent of total tax collection and 55 percent of indirect taxes in 1990-91.4 percent to 40 percent of total taxes and from 17. The share of indirect taxes declined from 82 percent to 69 percent since 1990-91 and until 2005-06. was 2. dramatic changes have taken place. a measure of government dis-saving. adversely affecting the country’s macroeconomic environment. the share of current expenditure in total expenditure declined from 89 percent of total expenditure in 1998-99 to 78 percent in 2005-06. Central excise as a tax is loosing its importance and gradually being faded out. primary balance has entered into deficit zone in 2005-06. The share of sales tax increased at a tremendous pace from 14. good capital gains and presence of institutional investors in the market. its share has now been reduced to 19. ix . spending and borrowing by the Government. Resultantly.0 percent – that is.

8 percent of GDP.690 billion but it is likely to collect Rs. its burden must be viewed in relation to government revenue. namely. The main contribution has come from development expenditure which grew by 7.6 billion or 3. It is more useful to analyse the trend in expenditure after adjusting for inflation. four years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending. providing for strong public sector spending.8 percent in recent three years (2003-06). Total expenditure in real term grew by 3.261. The overall fiscal deficit that averaged nearly 7. hopefully. thereby showing an increase of 21.6 billion in 2005-06 compared with Rs.2 percent in these two periods. Public debt was 448. Defence spending.4 percent of GDP as against the target of Rs. Pakistan will continue to report overall fiscal deficit with and without earthquake-related spending to keep track of its underlying deficit. intensification of spending on poverty alleviation and investing in infrastructure.7 percent. Since public debt is a charge on the budget. Public debt was 85 percent of GDP in 1999-2000 but has declined sharply to 54.3 percent of GDP during the last six years. respectively.9 percent this year – a decline of 64 percentage points in one year is not a mean achievement.8 billion or 0. The fiscal policy stance remained decidedly growth-oriented during the fiscal year 2005-06.285 billion or 3.65. The higher growth in expenditure was mainly on account of a 43. public debt as percentage of GDP declined from 61. Tax revenue is provisionally estimated to have risen by 22. The earthquake-related expenditure for the year amounted to Rs. The underlying fiscal deficit for the year is estimated at Rs.6 percent during the last three years (2003-06).9 percent of total revenue last year but declined to 384. The Central Board of Revenue (CBR) was targeted to collect Rs.1 percent to 3. Pakistan has made considerable progress in recent years on fiscal side.3 percent in 2004-05. Total revenues are estimated at Rs. the real growth in current expenditure averaged 3 percent per annum as compared with 4.4 percent per annum in first three years (2000-03) and by 23.0 percentage points in just six years is one of the significant achievements of the government.2 percent in first and second three years period.8 percent of GDP for the current fiscal year (2005-06) which was higher than the deficit of previous year (3.900 billion in 2004-05.7 percent in 2005-06 – a decline of over 30. Thus.9 percent.710 billion – Rs. Better than the targeted revenue position helped Pakistan over perform in achieving the underlying fiscal deficit. particularly towards financing infrastructure projects.1095. Pakistan’s overall fiscal deficit stood at Rs. including the earthquake-related spending. External Sector Pakistan’s external sector is being affected both by structural and cyclical factors. The government has provided almost Rs.5 percent in the 1990s.4 percent in the first three years (2000-03) but accelerated to 5.7 percent . Public debt burden continues to decline rather sharply for the sixth year in a row on account of prudent fiscal management. in real term grew by an average rate of 1.9 percent and 11. Higher deficit was targeted to finance higher public sector development program (PSDP).5 percent. will dispel some misconception in the minds of various analysts on the issue of defense versus development expenditure.2 percent while nontax revenue is estimated to rise by 16. During the year. On the external side.85 percent of GDP.66 billion for earthquake .related spending this year and will continue to provide adequate resources for the rehabilitation of the affected people and for the reconstruction of the affected areas.4 billion or 4. Development expenditure in real term on the other hand grew by an average rate of 15. During the last six years.20 billion more than the target and over 20 percent more than last year. The analysis in trend in expenditure in real term reveals some interesting facts.a 6.6 percent per annum during the same period. This tremendous growth is mainly contributed by massive fall in real incidence of interest payments which depicted negative growth of 7.4 percent to 54.5 percent per annum during the last six years. In the next two years.327. has led to a massive surge in imports. On the domestic side. the global economy continues its x .Economic Survey 2005-06 The second largest component of the current expenditure.4 percent and 7.3% of GDP).2 percent of GDP. Total expenditure without earthquake-related spending on the other hand is estimated to grow by 21.0 percent of GDP in the 1990s has declined to 3. Non-defence non-interest expenditure in real term grew by 13.7 percentage points decline in one year in the midst of earthquake-related spending is other stellar occurrences of the current fiscal year. Fiscal deficit was targeted at 3.4 percent increase in development spending which simply points toward the fact that the fiscal policy stance adopted by the government was growth-oriented. defence spending remained stagnant at around 3. This fact.

followed by leather (6. Emerging as a single largest item in country’s import bill. Major contributors to the substantial rise in food imports include wheat.7 billion. in absolute term in the first nine months. In other words. It is encouraging to note that exports this year have been largely quantity driven and with firming up of the price of exportable. During the first nine months (July-March) of the current fiscal year. In recent years.69 billion in the same period last year. sugar and pulses. cotton yarn (29. Exports of textile manufactures grew by 19. fish and fish preparation (30.Overview of the Economy strong and broad – based expansion with growth reaching close to 5 percent in 2006 with similar expansion projected for the next year – which will be the fifth successive year that the world economy has grown by more than 4. particularly in the areas of trade and tariff that it implemented over the last six or seven years have helped Pakistan doubled its exports in seven years. Dubai and Saudi Arabia account for 50 percent of its exports. Japan. readymade garments (31. Exports during the first nine months (July-March) of the current fiscal year are up by 18.6%).0 percent.4%).4%).6 percent – rising from $ 10.07 billion in the same period last year.8 percent and leather manufactures were up by 44. they together contributed 93 percent to the rise in food imports.5%) and towels (12.25 percent for the fiscal year 2005-06 – rising from $ 14.2 percent.0%). Though relatively small in numbers.0 percent. synthetic textiles and sports goods. leather. Like many other developing countries.2%) and fruits (20. Dubai.1% or $ 209. rice. Heavy concentration of exports in few commodities and few markets could cause serious export instability.7 million). Within this category.up from $ 990. cotton cloth (16. Imports are up by 43.4 billion to $ 20.9% or $ 395.1 percent higher than last year. 61. The United States is the single largest export market for Pakistan.2%). Imports were targeted to grow by 4.5 million has come alone from textile manufactures followed by other manufactures (20. namely USA.45 billion to $ 20. Japan as Pakistan’s export destination is fast loosing its significance less than one percent of its exports entering Japan.4 percent. Exports of other manufactures also registered a high double digit growth of 19. primary commodities (11. the sound macroeconomic policies that Pakistan pursued coupled with wide – ranging structural reforms. prominent among those are exports of rice (33. Hong Kong. cotton. of the current fiscal year over the same period of last year.0%). Disaggregation of total imports suggests that food imports grew by 35. Petroleum group import amounted to $ 4. Pakistan needs to diversify its exports not only in terms of commodities but also in terms of markets. Of this increase.5 million). Pakistan has also entered in the exports of engineering goods.2 million. Pakistan’s exports may rise substantially in the mediumterms.9 percent . accounting for 27 percent of its exports followed by the United Kingdom. The exports of primary commodities were up by 22 percent. Germany and Hong Kong. A strong and geographically broad – based growth has helped world trade to expand strongly and at the same time the rapid expansion of global trade has been a key driving force for growth in almost every part of the world. over 88 percent increases in exports are driven by quantity (quantity effect) and the remaining 12 percent are due to the increase in unit values of exports (price effect). Notwithstanding global economic expansion.6 million) and other exports (6.4 percent or $ 1160. Imports of petroleum group have played a key role in taking Pakistan’s import to a new height.18 billion to $ 12. Imports Pakistan’s imports continue to be pushed higher by unprecedented rise in oil prices and continued strength of non-oil imports owing to buoyant domestic demand. prominent among those are exports of bedwear (58.2 percent.1%).5% or $ 124. exports of engineering goods were up by 10.2 percent in the first nine months (JulyMarch) of the current fiscal year – rising from $ 14. exports of petroleum products grew by 80.9%) and synthetic textiles (1. over 82 percent incremental exports in the first nine months (July-March) of the current fiscal year owe to textile and other manufactures and the remaining 18 percent to primary and non-traditional exports. Pakistan’s exports are also highly concentrated in few countries. These five categories of exports account for 74.6%). Exports Exports were targeted at $ 17 billion or 18.6 billion during the first nine months xi .7 million. The seven countries. Pakistan has also benefited from a strong and sustained growth in world economy. Germany. UK.7 million to $ 1346.3 percent.5 percent of total exports during the first nine months of the year with Cotton manufacturers alone contributing 58. The overall exports posted an increase of $ 1890. Pakistan's exports are highly concentrated in few items namely. rice (6.

High global price of oil also inflated the oil import bill owing to its increasing dependence of imported crude oil. The current account deficit.0 percent.2 percent growth in total import this year. Saudi Arabia is emerging as major suppliers to Pakistan followed by the USA and Japan.5 percent of total imports during 2005-06. Within this category of imports.7 percent while the contribution of cars has been 4.25 billion. the growth in overall imports would have been 30. These three items alone accounted for 75 percent to the further rise in trade deficit. iron & steel.4 percent instead of 43. Although the quantity of imports of crude as well as petroleum products are down by 2. causing import of these two items to rise by 64. Therefore. respectively. fertilizer and tea. The merchandise trade deficit stood at $ 8.5 percent. Pakistan was forced to pay $ 1.9 billion more to import crude and petroleum products – a very heavy price for a developing country like Pakistan. machinery. the contribution of consumer durables has been 9. edible oil. chemicals.4 percent to the additional increase in total imports and 2. Trade Balance Despite sizable export gains. These eight categories of imports accounted for 72. Saudi Arabia.4 percent of total imports. Apart from further widening of trade deficit.3 percent and 5. petroleum & petroleum products and chemicals accounted for 53. thus registering an increase of 64. Despite reduction in quantity. the USA. unchanged over the last one decade with the exception of 2000-01. these three items alone are responsible for 64 percent additional import and 27. by and large. Kuwait.2 percent in the increase in trade deficit. the growth in total imports would have been 40. Among these categories machinery. the major contributors to further widening of trade deficit have been the petroleum group. import growth is likely to decelerate in 2006-07.62 billion by the end of the third quarter (July-March) of the current fiscal year as against $ 4. Contrary to the general perception. Once again. Current Account Balance Pakistan’s current account balance that slipped into red in 2004-05 after posting surpluses for three consecutive years remained in deficit in 2005-06 with gap continued to widen owing to higher oil import bill on the back of high global crude oil prices and hefty rise in non-oil imports fueled by strong demand. have contributed only 6.7 percent.5 percentage points less than what is currently estimated. More importantly. and 29 percent from petroleum group. imports in absolute terms have increased by $ 6. Pakistan's imports are also highly concentrated in few items namely. and growth in personal travel due to the rising level of income of middle and high income groups have also contributed to the widening of current account gap. had the total value of import of car would have been at last year’s level or had there been no growth in import of cars in value term. Germany.2 percent. that is. stood at $ 4. the UK and Malaysia.5 percent in value terms. As percentage of projected GDP for xii . Concentration of imports remained. machinery and iron & steel and scrap. the merchandise trade deficit continues to widen. thereby showing a deterioration of over 100. On the contrary.8 billion in the same period last year. higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost. petroleum & petroleum products. Overall imports during the first nine months (July-March) of the current fiscal year grew by 43.8 percentage points to the 43. had the price of oil in international market remained at last year’s level.8 percent. The sign of deceleration is already visible as import growth has slowed substantially in recent months. In other words. Deceleration in the growth of net transfers is also responsible for widening of the current account deficit.18 billion in the same period last year.7 percent only.Economic Survey 2005-06 (July-March) of the current fiscal year as against $ 2. Major contributions to this year’s incremental imports have come from petroleum group. Like exports.9 percent compared with last year.8 percentage points to the overall growth in imports. raw materials and machinery.7 billion in the first nine months (July-March) of the current fiscal year.2 percent. Going forward. electrical machinery and appliances contributed merely 1. Car has merely contributed 2. excluding official transfers.6 percent and 62. Almost 35 percent contribution came from machinery and raw materials. on the back of Pakistan’s strong domestic demand fueling non-oil imports.6 percentage points to the 43. Pakistan’s imports are highly concentrated in few countries.2 percent growth in total import this year. Over 40 percent of them continue to originate from just seven countries namely. 12. Japan. transport equipments. Consumer durables including cars. no one is expecting another 65 percent increase in oil prices in 2006-07 therefore. compared to $ 1. the prices of these two items were up by 76.3 billion in the same period last year.

89 billion in the same period last year.5 million). accounting for almost 94 percent or $2. reserves held by the State Bank of Pakistan amounted to $ 10. as against $ 0.4 million). energy (oil. Switzerland. April 2005 published by the IMF.6 million) has topped the list of foreign investors followed by the US (13. helped improve their housing facility and improve their overall living conditions. chemicals. have provided stability in exchange rate.1%). the UAE. remittances can help improve the country’s development prospects.1 million).6 billion) and until end-April 2006 ($ 13. trade ($81. To the extent.0 billion). Telecom sector has been the single largest recipient of FDI with $1. it is likely that workers remittances may touch $ 4. Given the trend so far.0 million in its foreign exchange reserves.63 billion during the first ten months (July – April) of the current fiscal year. continue to maintain its rising trend.7 percent of GDP. the strong inflows under private transfers fueled by rising workers’ remittances offset some of the negatives with current account deficit standing at $ 4. The United States continues to be the single largest source of cash workers’ remittances accounting for 27.4 billion.7 percent as against 1. Many factors contributed towards this comfortable position of reserves. UK and Netherlands. education. According to the World Economic Outlook.9% or $419. It is different from other major types of external private capital flows in that it is motivated largely by the investors’ long-term prospects for making profits in production activities in the host countries.4 percent or $995 million.0 percent of FDI has come from six countries. Workers’ Remittances Workers’ remittances.0 billion per annum during the last four years. Almost 75.2 million) and cement ($33.Overview of the Economy the year the current account deficit stood at 3. 2006.0 billion followed by the energy sector ($304 million).9 million). food and personal services have been the major recipient of FDI.4 billion in 2005-06. Such a massive inflow of remittances has helped Pakistan builds its foreign exchange reserves which. Privatization A wide-ranging structural reform introduced during the last six year coupled with macroeconomic xiii . Switzerland (5. Saudi Arabia (9. higher FDI flows and privatization proceeds. The Outlook also finds strong empirical evidence that suggest that construction activity is highly correlated with remittances inflow. maintain macroeconomic stability. the massive flow of remittances has helped increase their consumption spending. Pakistan has been receiving.7 percent.6 billion and by banks stood at $ 2. By the end of the current fiscal year.6 million).45 billion in the same period last year. thus registering an increase of 238. on average. Pakistan has added $ 407. US. trade. the poorer section of the society depend on remittances for their basic consumption needs. Workers’ remittances totaled $ 3. personal services ($45.34% or $161.5 percent ($1284.7 million). floatation of bonds. namely.0 billion at the end of April. FDI is expected to reach $ 3. mitigate the impact of adverse shock and reduce poverty. depicting an increase of 5.4 million) and Netherlands (2. Telecom. Although trade deficit almost doubled over the last year and services balance deteriorated by 27. UK ($ 346 million or 9. in turn. and small-businesses formation.2 percent. With this build up in reserves. housing.5%) and other GCC countries ($426 million or 13. construction ($54. the second largest source of foreign exchange inflow after exports.5 billion or 2. FDI in the first ten months (July-April) of the current fiscal year has reached $3. Remittances have so far proved remarkably resilient and have hovered around $ 4. The Outlook further states that remittances allow families to maintain or increase expenditure on basic consumption. increase remittances could be associated with reduction in poverty and possibly inequality. UAE ($556 million or 15. The UAE with 42. construction. Foreign Exchange Reserves Pakistan’s total liquid foreign exchange reserves stood at $ 13. For the families.0 billion since 2002-03.7 million). The most prominent among those are: private transfers that include remittances. gas and power). UK (5. over $ 4. as against $ 3. followed by Saudi Arabia ($585 million or 16.5 percent.082 billion.06% or $273.7 billion. Of which. Pakistan is in a position to meet any abnormal external shock. food ($52. Foreign Direct Investment Foreign Direct Investment (FDI) has become an important source of private external finance for developing countries.5 million). higher export proceeds. financial services ($265.02 billion – the highest ever in the country’s history. financial services. It has also played an important role in reducing poverty in Pakistan.1 percent in the same period last year.9% or $87. Saudi Arabia.3%).0% or $151.1 million). Since end-July 2005 ($ 12.2%).

As compared to the issue spread of UST + 370bps. but the debt carrying capacity of the country was weakening at a similar pace. 11 transactions worth Rs. For example. Pak-Arab Fertilizers. Pakistan decided to give signal to the international capital markets through issuance of debt instruments.6 percent by end-March 2006.4 percent in 1998-99 to 127.9 percent in the same period. Mustehkam Cement. GENCO-1 Jamshoro. This transaction attracted strong demand from high quality and diversified international investors resulting in 4 times over subscription and consequent tightest possible pricing of the bond in comparison to similar rated sovereign offering for 5-year new issues. it has undergone compression by about 201bps as on May 04. rating agencies. It may also be noted that the maturity profile of the debt has also improved during the period. due 2009. the debt burden (external debt and foreign exchange liabilities as percentage of foreign exchange earnings) reached an unsustainable level of 335 percent by 1998-99. declined to 28. Following a credible strategy of debt reduction. External Debt Until a few years ago.750% which looked very tight when compared with emerging market peers.5 billion by end-March. Pakistan issued S$500 million 5-year Regulation-S Eurobond due 2009 lead managed by JP Morgan. Foreign investors are not only entering into the greenfield projects but are also actively participating in Pakistan’s privatization program.395. Pak-American Fertilizer. Javedan Cement and CTI.2 billion. Oil and Gas Development Company Limited (OGDCL). Consequently. 2006.4 billion by Etisalat and transfer of management control of PTCL has been one of the major achievements of privatization program for the year. PTCL. Pakistan Steel Mill. have shown sharp reduction. Pakistan has succeeded in not only slowing the pace of debt accumulation but also succeeded in reducing the country’s debt burden in a substantial manner. Pakistan has completed 160 transactions with gross proceeds of Rs. In January 2005. The major privatization initiatives which are under process and are likely to be complete soon include: Pakistan State Oil (PSO).217. over the last six years. It may also be pointed out that Pakistan’s external debt and liabilities were 22 times of its foreign exchange reserves in 1998-99 but declined sharply to 3. the external debt and liabilities as percentage of foreign exchange earnings was reduced from 335. Pakistan’s external debt and liabilities have declined by $ 2. 2006. National Investment Trust (NIT) and other industrial units. and participants of the international debt capital markets. Not only was the stock of external debt and foreign exchange liabilities growing at an average rate of 7. despite the fact that it was rated three notches lower. On February 12.9 billion at the end of the 1990s to $36.338 billion were completed during October 1999 to April 2006.3 percent in end-March 2006. 2006. Faisalabad Electric Supply Company (FESCO). strong and sustained economic recovery has transformed Pakistan into one of the ideal locations for foreign investment. The success of this transaction reflected a vote of confidence by the international investor community on Pakistan’s economic policies and reform agenda. The upfront payment of $ 1. 2004 Pakistan made a successful return to the international capital markets for the first time in more than five years. Of which. the external debt and liabilities as percentage of GDP which stood at around 52 percent in end-June 2000. The major milestones achieved under the privatization program for the year include the strategic sale of the entities like KESC. the bond is trading currently at a spread of UST + 169bps. Pakistan Petroleum Limited (PRL). The other indicators of debt burden which are widely monitored by the international financial institutions. Similarly. The Pakistani bond was priced some 50bps inside the Philippines. The 5 xiv .4 billion in seven years — down from $ 38.Economic Survey 2005-06 stability and rapid. Pakistani paper was tightly priced when it was also compared with the weighted average spread of 435bps for the Emerging Market Bonds at the time of Pakistani deal. Since the issue of Pakistan’s Eurobond.2 percent of the external debt and liabilities but declined to 0. Pakistan issued US$ 600 million Islamic Sukuk lead managed by Citi Group and HSBC. about 54 percent less.4 percent per annum during 1990-99. Pakistan’s Link with International Capital Market With the successful implementation of first generation structural reforms and after gaining economic stability.9 billion have been completed. These statistics suggest that Pakistan’s external debt burden has declined at a much faster pace than anticipated and that it is now on a solid downward footing. Since January 1991 and until April 18. During the first ten months (July – April) of the current fiscal year. Pakistan was facing serious difficulties in meeting its external debt obligations.1 times in just seven years. Pakistan’s Eurobond was priced at 370bps above US Treasury to yield 6. The short-term debt was 3. This is also the reflection of the confidence of the global investors on the transparent privatization program that has been followed in the past several years. 57 transactions worth Rs. Deutsche Bank and ABN Amro Bank.

While incidence of poverty declined in South Asia. It was the longest ever tenor achieved by Pakistan. This remarkable achievement was completed against a backdrop of increased volatility in the US Treasury and Asian credit markets. is trading currently at a spread of UST + 266bps. The 10-year notes were priced with a coupon of 7. Pakistan was able to achieve spreads on both the new 10 and 30-year bonds that were tighter than its previous 5-year issues. Poverty The fight against poverty represents the greatest challenge of our times. as compared to the issue spread of UST + 302bps. Considerable progress has nevertheless been made in different parts of the world in reducing poverty. The Pakistan ’2016 and ’2036 bonds have performed in line with the markets with the spread over UST undergoing compression by about 24bps and 36bps respectively. framing a spread of 302bps over the relevant 30-year US Treasury benchmark.Overview of the Economy year notes. The Central and Eastern Europe and the CIS also witnessed a dramatic increase in poverty. Latin America and the Middle East witnessed no change. In absolute numbers the reduction during the period was 130 million with most of it coming from China. With over 170 accounts participating. within just over a month since issued. Asia 31% and Europe 22%). the EM credit markets have continued to tighten. Pakistan completed its primary objective of establishing a full Pakistani International yield curve in record time. Eurobond of 2016 and 2036 On March 23. Asia. Pakistan had over 80 accounts with a well-distributed book (Middle East 47%. increases the income of the people and therefore reduces poverty. The recent trends in global and regional poverty clearly suggest one thing and that is. even when developing countries are growing at xv . At the micro level. This transaction. the 2016 bond is trading currently at a spread of UST + 216bps. Middle East and Europe. Macroeconomic stability is therefore. It took Philippines 4 years and Brazil and Turkey 3 years to extend their yield curve to 30 years.5 times oversubscribed. about 10% less. Pakistan decided to increase the transaction size from the original US$ 300-500 million to US$ 600 million to cater for the significant demand and to allocate the bonds to high quality accounts. At the macro level.125%. the gap between the rich and poor countries is increasing. The largest deal.875%. books closed with total orders exceeding US$2bn. that rapid economic growth over a prolonged period is essential for poverty reduction. health and other services. which represented the first international 144A bond issued by Pakistan since 1999. economic growth implies greater availability of public resources to improve the quantity and quality of education. It attracted orders worth $1. The Pakistan Sukuk 2010 over the past year have witnessed tightening of spreads over US$ Mid Swaps which is the evidence of continued investor confidence in the Pakistan economy. Citi Group and Deutsche Bank. It is important to note that this offering was the largest ever funding exercise of the government. Although extreme poverty on global level has declined. key to a sustained high economic growth. about 12% less. Pakistan successfully issued US$500 million new 10-year Notes and US$300 million new 30-year Bonds in the international debt capital markets lead managed by JP Morgan. The 30-year bonds were priced with a coupon of 7. framing a spread of 240bps over the relevant 10-year US Treasury benchmark. Most emerging market sovereign issuers have taken longer time to extend their yield curve from 5 to 30 years. Pakistan’s debut Islamic Bond issue saw considerable interest from both conventional as well as Islamic investors across the three regions. Both the new 10 and 30 year offerings are debut offerings for Pakistan and the US dollar yield curve was extended out to 30 years in just 2 years.875% to yield 7. Since the issue of the new Pakistan bonds due 2016 and 2036. The proportion of people living in extreme poverty on global level fell from 28 percent in 1990 to 21 percent in 2001 (on the basis of $1 a day). with more than 80 accounts participating in the transaction. prior to this transaction has been the $ 600 million Sukuk in 2005. By issuing 10 and 30 year bonds.125% to yield 7. economic growth creates employment opportunities. It requires policies that will promote growth. raised significant interest amongst US QIBs and international Institutional investors. structured to comply with Islamic law (“Shariah”) were priced at 6 month US$ Libor + 220 bps benchmark. But only those that have achieved higher economic growth over a long period have seen a lasting reduction in poverty – East Asia and China are classic examples of lasting reduction in poverty. The 2036 bond.2 billion. The issue was over 2. One thing is also clear from the evidence of East Asia and China that growth does not come automatically. 2006. In Sub-Saharan Africa. the absolute number of poor actually increased by 100 million during the period. Many developing countries have succeeded in boosting growth for a short period. As compared to the issue spread of UST + 240bps.

Total remittances inflows since 2001-02 and until 2005-06 have amounted over $ 19 billion or Rs. In recent years the role of remittances in reducing poverty has been widely acknowledged. To the extent that the poorer sections of society depend on remittances for their basic consumption needs.1129 billion. The information pertaining to income and expenditure of the households are used to estimate poverty. 5. and small-business formation. Sound macroeconomic policies and implementation of structural reforms in almost all sectors of the economy have transformed Pakistan into a stable and resurgent economy in recent years. Consequently. Since 2003-04 and until the first half of 2005-06.82 million new jobs have been created as against an average job creation of 1. respectively.6 percent per annum. Remittances allow families to maintain or increase expenditure on basic consumption.0 – 1. (b) investing in human capital. It is also comparable with poverty line of 2000-01 as it was also based on 2350 calories and calculated from Pakistan Integrated Household Survey (PIHS). The poverty line of 2004-05 is adjusted by the inflation rate during the period 2001-2005.7 percent in 2003-04 and stood at 6. In a world of six billion people.Economic Survey 2005-06 a faster pace than developed ones – perhaps due to the large income gaps at the initial level. unemployment rate which stood at 8.scale household surveys in order to gauge their progress in meeting the targets set by Pakistan for achieving the seven UN Millennium Development Goals by 2015. it covered 5808 and 8898 households in the urban and rural areas of the country. The net outcome of interactions among these five elements would be the expected reduction in transitory and chronic poverty on a sustained basis. and (e) improving governance. allowing them to increase consumption of both durables and non-durables. the real per capita income has grown at an average rate of 5.5 percent per annum during the last three years (2003/04 to 2005/06). With a representative sample size of 14706 households.2 million per annum. Such a massive inflow of remittances particularly towards the rural or semi-urban areas of Pakistan must have helped loosen the budget constraints of their recipients. growth is necessary but it is not sufficient to make any significant dent to poverty. housing. In Pakistan. education. Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in poverty during 1990s. The evidence provided by the Labour Force Survey 2005 (First two quarters) clearly supports the fact that economic growth has created employment opportunities. The reduction in poverty and improvement in social indicators and living conditions of the society are being monitored frequently through large. It consisted of the following five elements:.5 percent during July – December 2005.9 percent per annum. Realizing this fact the government had launched a directed program under the title of Poverty Related and Social Sector Program some five years ago. increased flow of remittances would be associated with reduction in poverty. This issue of global imbalance is at the core of the challenge to scale up poverty reduction. (d) expanding social safety nets. The rising pace of job creation is bound to increase the income levels of the people. The Household Integrated Economic Survey (HIES) – a component of Pakistan Social and Living Standards Measurement (PSLM) Survey provides important data on household income.3 percent in 2001-02 declined to 7.1332 billion on poverty-related and social sector program to cater to the needs of poor and vulnerable sections of the society. xvi . The real GDP has grown at an average rate of over 7. Although. With population growing at an average rate of 1. one billion have 80 percent of the income and five billion have less than 20 percent. Pakistan’s growth performance over the last four years is enviable in many respects. and on real estate. Such a huge spending on targeted program is bound to make a significant dent to poverty. The Survey was started in July 2004 and the entire field operations were completed in June 2005. consumption expenditure and consumption patterns at national and provincial level with rural-urban breakdown. Over the last five years the government has spent Rs. The HIES is specifically designed to monitor poverty status of population by collecting information on consumption expenditure at the household level. (c) augmenting targeted interventions. on human capital accumulation (through both education and health care). The poverty line is based on 2350 calories per adult equivalent per day. The strong economic growth is bound to create employment opportunities and therefore reduce unemployment.(a) accelerating economic growth and maintaining macroeconomic stability.

Pakistan has benefited immensely from what is known as first generation reforms. promoting transparency in economic policy-making.Overview of the Economy The latest estimate of inflation . UK. It is important to note that the methodology and the estimates of poverty have been endorsed by the development partners such as the World Bank. As xvii . However.45 million in 2004-05. therefore. particularly with respect to agriculture pricing. In general. therefore. do not abdicate the government to play its due role. structural reforms have been associated with the notion of increasing the role of market forces and reducing the extent to which government regulations or ownership of productive capacity affect the decision making of private firms and households. The percentage of population living below the poverty line in rural areas has declined from 39. Strengthening of institutions is vital to remove obstacles to higher growth and better social service delivery. Going forward. reforms in privatization program.40 in 2001. reforms in tax administration. Professor Nanak Kakwani was hired by the UNDP to independently look into the methodology as well as poverty estimates. The reforms implemented thus far include: financial sector reforms. Structural reforms. Over the next five years the Government’s reform agenda include: strengthening institutions.10 percent while those in urban areas. agricultural reform. it is essential that we apply the same agreed upon methodology over the years.46 percent in 2001 to 23.6 percentage points.878. further strengthening of tax administration. Consumption inequality increased marginally during the period. But it is well-known that some markets are prone to market failure or inefficiencies. has declined from 22. particularly with respect to devolution and capacity building. further reform in capital market and strengthening the country’s physical and human infrastructure.16 percentage points and urban poverty is reduced by 7.23 million in 2001 to 36. Pakistan has been implementing wide-ranging structural reforms in almost every sector of the economy to improve supply-side response by removing impediments to private sector development.723. an attempt has been made to provide some flavour of these reforms.9 percent. building a robust financial system in an environment of global financial restructuring.69 percent 14. The last one was very essential to pursue a rule-based fiscal policy to inject financial discipline. Broadly speaking. removing irritants to improve investment climate and improving the allocation of resources. rural poverty has declined by 11. The service of world renowned poverty expert. Headcount ratio.26 percent to 28.64 per adult equivalent per month ─ up from Rs. In other words.e.79 percentage points. structural reforms entail measures that change the institutional framework and constraints governing market behaviour and outcomes. These findings are consistent with the developments on economic scene that have taken place in Pakistan since 2000-01. movement of commodities and introducing private sector in wheat operation. irrespective of its weaknesses and strengths. Structural reforms aim at adapting institutional frameworks and regulations for markets to work properly. Pakistan’s economic recovery has been strong. there is a role of the government to correct the market failure and improve the efficiencies of the markets. a large inflow of remittances and massive spending on poverty-related and social sector programs were expected to reduce poverty in Pakistan.adjusted poverty Iine is Rs. It would. rise in per capita income. Pakistan is targeting a growth rate of 6 to 8 percent per annum in the next five years. i. be misleading to equate structural reforms with the goal of abandoning regulation altogether.9 percent in 2004-05. however. a decline of 10. Second Generation Reforms Structural reform is the essence of development. A strong growth in economy. tax and tariff reforms. In absolute numbers the count of poor persons has fallen from 49. He also authenticated both the methodology and estimates. governance reform. While it is not possible to discuss each element of reform. and most importantly. the United Nations Development Program (UNDP) and the Department for International Development (DFID). In order to maintain consistency across years. improving the competitiveness of our industry. To sustain a growth momentum of 6 to 8 percent per annum more efforts and more ‘growth-critical’ reforms would be required. fiscal transparency. rapid and sustained. capital markets reforms. the Asian Development Bank. percentage of population living below the poverty line has fallen from 34. it is clear that a growth of this magnitude would not be achievable automatically.. the passing of the Fiscal Responsibility and Debt Limitation Act 2005.

prominent among those include reforms in judiciary. working of ports. The banking and financial sector of Pakistan is much stronger today than it was some one decade ago or in comparison to other countries in the Asian region. effectiveness. Tax administration reform is the cornerstone of the reform agenda. further liberalization of financial services in the context of TRIMs. However. a deposit insurance scheme to protect the small depositors. self assessment. It aims at increasing the CBR’s effectiveness. A considerable progress in these areas have been made but much more is required to make CBR an efficient tax administration for which many initiatives have been launched and are at various stages of implementation. Furthermore. and observance of international standards. This is an on-going and difficult reform program.Economic Survey 2005-06 part of institutional strengthening the government has already launched major initiatives. the supply of gas. revised terms and conditions for employment of the CBR officials and improved IT management. In order to improve the efficiency of various ministries the government is working towards achieving ISO 9001 Certification. to improve the competitiveness of our industries the Government has commissioned a number of studies with the help of development partners to examine microeconomic constraints in improving investment climate and promoting private sector development. It deals with improving investment climate by strengthening microeconomic sources of competitiveness. promoting transparency and accountability in banking system. The civil service reform is also an on-going reform and major progress has been made in enhancing the capacity of our civil servants through training within and outside the country. The government believes in free-market system but in recent years the rise of ‘extra-market forces’ have been observed. leading to market failures and creating hardship for ordinary consumers. reduce corruption opportunities. and accountability of law enforcement agents. corruption opportunities. Furthermore. To implement the second generation reform the government is setting up an Economic Reform Unit in the Ministry of Finance with a view to coordinating with other ministries in implementing various reforms. the government is working towards introducing a contributory Provident/ Pension Fund Scheme for the new entrants. On pension reform. the restructuring of the Central Directorate of National Savings (CDNS). that is. Most important element of improving competitiveness is the strengthening of the country’s physical infrastructure. Improving competitiveness of Pakistan’s industries is central to the reform agenda. and raise the buoyancy of the tax system through organizational restructuring. Improving competitiveness requires understanding of various impediments and policy bottlenecks that affects competitiveness of our industry. This unit will also serve as Secretariat for the Private Sector Development initiatives. and introduction and adoption of E-Government Strategy. Future reforms include: voluntary mergers and consolidation of smaller banks to become effective and strong banks. transforming the existing Monopoly Control Authority (MCA) into a Competition Authority Organization. roads. A major overhaul of the Central Board of Revenue (CBR) is being implemented. Some progress in police reform has also been made. and pension. The work on converting the existing CDNS into a corporate body is also at a fairly advance stage. further strengthening of the banking system to meet the challenges arising from global financial restructuring is required. It is clear that judicial reform is aimed at strengthening the rule of law and enhancing the transparency and accessibility of the legal system by modernizing the court system at all levels and strengthening capacity. police. telecommunication network. elimination of personal contacts between tax-payers and tax authorities. formulation of new Banking Law to deal with current and future challenges. A beginning has already been made with Ministry of Finance working towards achieving this certification. tax-payers facilitation. further strengthening of the legal infrastructure of the banking system. Given the resource constraints on the one hand and the role strong infrastructure in enhancing competitiveness on the other. simplified processes. civil service. the government has already setup a Commission to assess existing regulations and procedures affecting the interaction between the administration and the business with a view to eliminating red tape and with it. the government has recently setup Infrastructure Project Development Facility in line with public-private partnership. It is in this perspective that the government is revamping the existing Monopoly Control Authority by converting it into a Competition Authority with proper powers to deal with extra-market forces. The restructuring of the Federal Bureau of Statistics with a view to converting it into an autonomous institution is also high on the agenda of reform. and water availability. power. rail linkages. xviii .

Real GDP grew strongly at 6. spending on physical infrastructure. 2005 causing extensive damage to property. that is policy measures that change the institutional and regulatory frameworks governing market behaviour. Large-scale manufacturing grew by 9.0 percent growth target for the year. Growth has remained buoyant. Key drivers of this year’s growth have been service sectors and industry. poverty alleviation. Consumer spending remained buoyant and investors remained upbeat on the strength and sustainability of the current growth momentum. we are fully aware that much remains to be done. rapid and sustained economic recovery with growth averaging at 7. The outgoing fiscal year (2005-06) has been an extra-ordinary year for the economy of Pakistan. How to sustain the on-going growth momentum in an environment of macroeconomic stability is the biggest challenge going forward. Pakistan’s economy has grown at an average rate of almost 7. and reconstruction activities in earthquake affected areas. infrastructure. and greater resilience to shocks. During the fiscal year 2005-06. Pakistan’s economy has proved itself as remarkably resilient in the face of shocks of extra-ordinary proportions. At the very onset of the year the economy faced headwinds from rising oil prices. There is a broad consensus that where there are such problems. strengthening the country’s physical infrastructure to support 6-8 percent growth in the medium-term. The most important achievements of this year include: xix . despite higher energy prices and natural calamities.8 percent. Linked with this are the challenges of job creation. An impressive economic recovery from an economic downturn is a good time to enhance the speed of implementation of the second generation reforms.Overview of the Economy Concluding Remarks Economic success brings fresh challenges. can lead to a greater efficiency in the allocation of resources. Notwithstanding extra-ordinary successes in the face of headwinds Pakistan still faces many challenges in fully realizing its potential for sustained economic growth. Consumer spending remained strong and investment spending gained further traction. The services sector continued to perform strongly at 8. partly helped by activity in private housing market.000 human lives. and massive earthquake of October 8. its challenges are also different today. The growth momentum that Pakistan sustained for the last four years is underpinned by dynamism in industry.0 percent as against 15. Pakistan has witnessed strong.6 percent in 2005-06 as against the revised estimates of 8.5 percent in the last three years (2003/04 – 2005/06). The moment such as this does not mean that we have time to pause or rest.6 percent in 2005-06. hospital etc. and loss of over 70.6 percent of last year and 14. 2005 causing widespread damages. The economic landscape of Pakistan has changed altogether therefore. exhibiting signs of moderation on account of higher capacity utilization on the one hand and strong base effect along with several other factors on the other hand. Pakistan’s economic fundamentals have gained further strength. The pre-requisites for a sustained economic growth appear to have gained firm footing during the last four years. and the emergence of a new investment cycle supported by strong credit growth. thus positioning itself as one of the fastest growing economies of the Asian region. Although we have made great strides over the last six years. With economic growth at 6. agriculture and services.0 percent per annum during the last four years (2002/03 – 2005/06) and over 7. school. Pakistan’s economy continues to maintain solid pace of expansion since the fiscal year 2002-03 recovery in the economy has been strong. structural reforms. Pakistani corporates and consumers continue to be the bright spot. relief and reconstruction of earthquake affected areas also put budget under severe stress. rather than to resource shortages or an excess or deficiency of overall demand. improving social indicators and most importantly. EXECUTIVE SUMMARY Pakistan’s economy has delivered yet another year of solid economic growth in 2005-06 in the midst of an extraordinary surge in oil prices and devastating earthquake of October 8. The rescue.5 percent target for the year.0 percent per annum during the last four years. better living standards. This has positioned Pakistan as one of the fastest growing economies in Asia. rapid and sustained.6 percent last year and 7. hovering around $ 70 – 75 per barrel and putting severe strains on the country’s trade balance on the one hand and budget on the other. Construction too continued to perform strong showing. Many economic problems are due to shortcomings in the markets.

5 percent and 8.0 percent during the current fiscal year 2005-06 which is slightly lower than 29.5 percent target for the year.9 percent or 1. storage and communications sector grew by 7. Agriculture and particularly its crop sector could not perform up to the expectation especially major crops registered a 3.6 percent. Within the CPS.4 percent to overall growth while industry contributed 1.2 percent in 2005-06 as against extraordinary growth of 18.1 percentage point to this year’s growth while the remaining 68 percent or 4.5 percent as against the target of 4. Livestock. Pakistan’s per capita real GDP has risen at a faster pace during the last three years (5. The growth momentum that Pakistan sustained for the last four years is underpinned by dynamism in industry. The Construction sector continued its strong showing. Within the CPS.6 percent in 2005-06. Small-scale manufacturing grew at estimated 9.5 percentage points contribution came from services sector. agriculture and services. 2005.6 percent against the target of 12. agriculture and manufacturing performed less than their targets. a major component of agriculture.0%). exhibited strong showing and pulled the overall growth in agriculture to 2.6 percent. The transport.5 percent in the last three years.7 percent or 2. agriculture and manufacturing grew by 2.6 percent last year. Large-scale manufacturing grew by 9. Within services sector wholesale and retail trade has contributed 27.6 percent.6 percent last year and fell short of the target (7. spending on physical infrastructure.54 percentage points or 23.Economic Survey 2005-06 01.9% over the previous year. The construction sector is estimated to grow by 9. registered an impressive growth of 8. respectively.2 percent of GDP.7 percent of last year. and the emergence of a new investment cycle supported by strong credit growth. as well as transport and the communications sector.8 percent in 2005-06 as against 8. exhibiting signs of moderation on account of higher capacity utilization on the one hand and strong base effect along with several other factors on the other hand.5% growth last year.3 percent in 2005-06 as against 9. Value added in the wholesale and retail trade sector has increased by 9.3 percent.0 percent of last year. Such increases in real per capita income have led to xx .84 percentage points to GDP growth. Growth of value addition in Commodity Producing Sector (CPS) slowed to 4. Growth in the services sector in 2005-06 was primarily attributable to strong growth in the finance and insurance sector. The commodity producing sectors (agriculture and industry) has contributed one-third of the GDP growth and the services sector contributed the remaining two-third to the real GDP growth of 6. better performance of wholesale and retail trade.6 percent in 2005-06 as against 8. thus enabling it to join the exclusive club of the fastest growing economies of the Asian region. Real GDP grew by 6. agriculture contributed 0. compared to 11. Livestock has been the only saving grace as far as the performance of agriculture is concerned this year. Overall manufacturing. Both the important components of the commodity producing sector namely. The CPS contributed 31.1% compared to 3.0 percent and last year’s achievement of 12. and reconstruction activities in earthquake affected areas. GROWTH AND INVESTMENT Pakistan’s economy continued to maintain solid pace of expansion for the fourth year in a row in the fiscal year 200506 despite facing headwinds from rising energy prices at $ 70-75 per barrel and the widespread damage caused by the earthquake of October 8.2 percent.55 percentage points or 8.0 percent as against 15. Major contribution towards growth has come from the services sector which has emerged as a new growth power house for some time. Finance and insurance sector spearheaded the growth in the services sector and registered stellar growth of 23. partly helped by activity in private housing market.1% growth last year. With economic growth at 6.6 percent of last year and 14. The services sector grew by 8. Pakistan’s economy has grown at an average rate of almost 7. accounting for 18.0 percent per annum during the last four years and over 7.2 percent last year.6% per annum on average in rupee terms) leading to a rise in average income of the people.6 percent contraction in growth.3 percent in 2005-06.

1 percent over last year – rising from $ 742 to $ 847. Savings National savings as percentage of GDP stood at 16. and wholesale and retail trade (424. but to a large segment of the country’s population as well.8 percent and 13. 2006. the country experienced the crippling drought.8 percent of country’s work force is employed in agriculture. accounting for 35.5 percent last year.5 percent in 2005-06. Against the target of 4. grew by an average rate of 13.1 percent of GDP last year to 20. real private consumption expenditure grew by 13. registered a decline of 3. high temperature at the flowering stage. the performance of agriculture during the fiscal year 2005-06 has been weak. due to a relatively poor performance of major crops and forestry.8 percent of total employment is generated in agriculture. Major corps. Over the last five years. At the same time. namely cotton and sugarcane has been significantly less than last year for a variety of reasons including. overall agriculture grew by 2.1 percent last year. up from 4. Both public sector investment and private sector investment as percentage of GDP have increased to 4. remained more or less at last year’s level at 21.3%). Major growth in investment by private sector is witnessed in agriculture (15. manufacturing (14.6 percent last year.1 percent in 2004-05 and further by 8. and weaker one of minor crops and fishery.4 percent and 12. Investment During the fiscal year 2005-06.9 percent of country’s population living in rural areas is directly or indirectly linked with agriculture for their livelihood. 02. Whatever happens to agriculture is bound to affect not only the country’s growth performance. Public sector investment on the other hand registered massive growth of 46.4 percent during 2000-03.6 percent as production of two of the four major crops. relatively better availability of irrigation water had positive impact on overall agricultural growth and this sector exhibited a modest to strong recovery.4 percent of GDP in 2005-06 slightly lower than 14. During the first two years (2000-01 and 2001-02). As opposed to an average annual increase of 1. However. 44. namely wheat.4 percent as against 16. Fixed investment as percentage of GDP is estimated at 18.7 percent as against a sharp rise of 28.5%). AGRICULTURE Agriculture is the mainstay of Pakistan’s economy.1 percent last year.7 percent. gross fixed capital formation or domestic fixed investment grew by 30. Private sector investment grew by 31.2 percent and last year’s achievement of 6.0 percent of GDP in 2005-06. growth in agriculture has witnessed a mixed trend. In the preceding years (2002-03 to 2004-05). It also contributes substantially to Pakistan’s exports. which badly affected its agriculture and eventually overall growth in agriculture turned negative for these two years. Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products.4%). excessive rains at the time of sowing.6 percent respectively.1 percent in 2005-06. Domestic savings stood at 14.6 percent this year as against a growth of 29.5 percent of GDP last year. Nearly twenty-two percent of total output (GDP) and 44. The growth in domestic investment was largely a public sector phenomenon last year but this year.9 percent increase last year. it was mainly public-private sector partnership driven. a strong base effect (cotton) and lastly the incidence of frost.Overview of the Economy a sharp increase in consumer spending during the last three years. Total investment increased from 18.4 percent in 2005-06 fractionally lower than last year’s level of 16. Livestock has been the sole saving grace.5 percent.2%). Furthermore.5%). Per capita income in dollar term registered an increase of 14. but 65. damaging sugarcane crop in the month of January. mining and quarrying (45. Per capita income defined as Gross National Product at market price in dollar term divided by the country’s population.5%). The production of third major crop.7 million tons thereby registering a meager growth of xxi . late harvesting of wheat crop. transport and communication (20. construction (9.2 percent of value added in agriculture.9 percent per annum during the last four years – rising from $579 in 2002-03 to $847 in 2005-06.7 percent as against a hefty 32.

8 percent more than last year’s Kharif. Minor crops. Lesser production over last year is due to shortfall in area. and 29.8 percent more than last year’s Rabi. pharmaceuticals (14. the overall (both for Kharif and Rabi) water availability has been less in the range of 5.07 percent) and cotton yarn (11. Excessive winter rainfalls (January-March 2005) along with the melting of snow on mountains top were responsible for higher than normal availability of water during Kharif 2005. cooking oil (17.4 percent.76 percent). Forestry has been registering negative growth for three consecutive years – registering a negative growth of 9.0 percent last year. engineering goods group (6.6 percent) in the food.0 percent respectively during 2005-06. The production of all the pulses.7 million tons in 2005-06.025 million tons last year to 5. non-metallic mineral products (9.4 percent.08 percent). the Rabi season faced more shortage of water than Kharif during these periods. Agriculture credit disbursement of Rs 91. which was 17. Overall manufacturing recorded an impressive and broad based growth of 8. 12. chemicals (9. 2005-06 is higher by 23.6 percent. The water availability during the Rabi season (for major crop such as wheat).4 percent in 2005-06 from 5.0 percent in the current fiscal year 2005-06 against a target of 14.5 million-acre feet (MAF).6 percent. accounting for 12. The production of potato also decreased by 17.75 percent) in the non-metallic mineral products group and xxii .6 percent in 2005-06 as against a growth of 3.91 percent).46 percent).612 million tons last year. from a severe shortage of irrigation water in recent years. MINING AND INVESTMENT POLICIES 2005-06 The overall manufacturing sector continued to maintain its growth momentum with more vigour during the current fiscal year.5 percent and last year’s achievement of 15.8 and 29. Amongst major crops. respectively during 2005-06. Large-scale manufacturing registered an impressive growth of 9. has been impressive as this sector grew by 8.3 percent less than the normal availability.49 percent). namely masoor. The production of rice – the fourth major crop – has been the sole major crop which registered an impressive growth of 10.5 percent more than the normal supplies and 19. decreased from 47. showing an increase of 0.312 million tons in 2005-06. mung and mash are down by 13. The items that registered positive growth were cotton cloth (0.0 percent on the back of substantial increase in the population of species.6 percent.4 percent.811 billion over the corresponding period last year.Economic Survey 2005-06 0. MANUFACTURING. Pakistan’s agriculture has been suffering. showing a decease of 6. the single largest sector accounting for almost one – half of agricultural value added. beverages and tobacco groups. as compared to 2811 thousand nutrient tons for the corresponding period last year. The fertilizer off-take stood at 2982 thousand nutrient tons in JulyMarch 2005-06 or higher by 6.244 million tons in 2004-05 to 44. Relatively speaking. 03.5. the availability of water for Kharif 2005 (for the crops such as rice.0 MAF. barely managed to register a positive growth of 1. however.9 percent on account of frost.9 percent only in 2005-06. leather products (10. as on end of March. The performance of livestock.16 percent) in the textile group.0 percent in July-March 2005-06 over last year are the automobile group (29. as against 21. which affected the potato crop. cotton production is estimated at 12. the production of chillies and onions increased by 34.265 million bales. The main contributors to this impressive growth of 9. During the current fiscal year (2005-06).417 million bales for 2005-06 lower by 13 percent over the last year’s production of 14. on and off. Wheat production is estimated at 21.1 percent. Rice production has increased by 10.46 percent). against a target of 12. As against the normal surface water availability at canal heads of 103.8 percent. but failed to turn the negative growth in major crops to a positive one.0 percent and last year’s growth of 12. cement (9. sugarcane and cotton) has been 5.78 percent).2 percent.7 percent in 2005-06 as against a negative growth of 30.4 percent. The performance of fisheries has been poor as it grew by 1.3 percent of agricultural value added. milk etc. As regards the minor crops. Sugarcane production. 2006 was estimated at 30.161 billion during July-March.4 percent (2001-02). in the chemical group.83 percent) and electricals (11.5 percent.6 and 9. as compared to Rs 73.547 million tons in 2005-06.9 percent (2003-04) to 29. nitrogenous fertilizer (4.

sulphur (5.0 billion per annum) in recent years.5 percent). a large inflow of remittances (over $ 4. power looms (24.908 billion completed during October 1999 to April 2006. thereby. 04.9 percent).7 percent in the first ten months (July-April. By end April 2006. Tax collection by the Central Board of xxiii . on average.8 percent in 2005 ─ a decline of 7. Urban poverty on the other hand is provisionally estimated to have declined from 22. The wide-ranging tax and tariff reforms as well as reforms in tax administration have started paying dividends. 2005-06).4 percent in 2005 ─ down from 32. The privatisation program maintained its pace during 2005-06 and succeeded in privatising some high-ticket items despite an inhospitable global environment. the rural poverty has declined more than urban poverty. fiscal deficit is at sustainable level and revenue deficit has almost been eliminated.4 percent) and gypsum (12.67 percent) and billets (47.5 million in the comparable period last year. the Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in poverty during 1990s. Within the various categories of pro-poor expenditure. limestone (9. LCV’s (29. The increase in foreign private investment is because of the inflow of portfolio investment of $ 355.Overview of the Economy Jeeps & Car (29. Pakistan had completed or approved 160 transactions at gross proceeds of Rs 985 billion. Preliminary findings of Pakistan Social and Living Standards Measurement Survey (PSLM 2004-05) on poverty status were released at the end of February 2006.8 million as compared to inflow of $ 135. As per HIES survey 2004-05. rock salt (13.2 percent).7 percentage points in poverty in the last four years.2 percentage points.6 percent). Much progress has been made towards fiscal consolidation. More importantly. the percentage of the population living below the poverty line is provisionally estimated at 25. Revenues are buoyant. This includes 57 transactions for Rs. While negative growth was exhibited by chromite (6.0 percent in 2001 to 31.39 percent). Public debt is fast moving towards a sustainable level.7 percent) and magnetite (10. whereas. There is nearly a three-fold increase in the projected PRSP expenditure for 2006-07 when compared with the actual expenditures of base year 2001-02.6 percent.5 percentage points.5 % on average) for three years in a row.4 percent).04 percent) in the automobile group. a huge expenditure on poverty-related and social sector program. The provisional estimates show that rural poverty has declined from 39. which indicates that the poverty level in Pakistan has been reduced during the last four years. however. natural gas (4. The output of the mining and quarrying sector grew by 3. human development comes out to be the priority item of the Government with expenditures under this head constituting.1 percent in 2001.7 percent). Further reduction in poverty. showing increase of $ 2349 million. more than 50 percent of all PRSP related expenditures. The principal minerals which have shown positive growth are: baryte (11.6 percent last year.40 percent).2 percent in 2005 ─ a decline of 5.7 percent in 2001 to 17. 337. A strong growth (7. Foreign direct investment has witnessed an increase of 238. This suggests a decline of 6. POVERTY AND INCOME DISTRIBUTION In Pakistan. expenditure is rationalized. net foreign private investment stood at US $ 3376 million against US $ 1027 million last year. FISCAL DEVELOPMENT Pakistan has gained further strength on fiscal side. with per capita income growing at an average rate of 5.8 percent this year as against the rise of 9. The social sector and poverty related expenditures grew at an average rate of more than 20 percent per annum during 2001-05. coke (77.9 percent). sugar (2. A clear lesson from the past four years of Pakistan and from other countries’ experience is that sustained growth on a consistent basis is needed to reduce poverty.95 percent). 05.3 percent) and motorcycles/scooters (15. Resultantly. and many other interventions have made a significant dent to poverty in Pakistan. The individual items exhibiting negative growth include. serves as a major challenge for the government.

the burden of interest payment in domestic budget has declined sharply.8 percent of GDP in 2005-06. Total expenditure grew by 3. financing from external sources is expected at Rs 118.9 percent by end-March 2006 to the projected revenue for the year. 900. Pakistan is likely to face an overall fiscal deficit of Rs.690 billion but it is most likely to collect Rs. Second largest component of the current expenditure. The revenue deficit (the difference between total revenue and total current expenditure). and Rs. During the last six years the development expenditure improved from 2. thereby. which stood at almost 85 percent in end June 2000.5 percent of GDP in 1998-99 to 3.3 billion.3 billion or 4.2 percent of GDP in 2005-06. the public debt burden in relation to total revenue has declined substantially from 562.Economic Survey 2005-06 Revenue (CBR) has picked up.6 billion or 3. defence spending remained stagnant at around 3. Non-tax revenue increased by 19.to-GDP ratio.1 percent to 3.65. has provided fiscal space to reorient expenditure in favour of development expenditure.4 percent per annum in first three years (2000-03) and by 23. 208.4 percent by the end of June 2005 ⎯ 23. namely. The ratios of domestic debt to GDP and to tax revenue both decreased during 2005-06. It has further progressed towards almost elimination at 0. 261.4% of GDP excluding earthquake effect and if we include earthquake related spending worth Rs.1%.2 percent in tax revenue on the back of increases in both federal and provincial tax revenues. The Central Board of Revenue (CBR) was targeted to collect Rs.9 billion is likely to be financed from domestic sources.327.8 percent in recent three years (2003-06). a measure of government dis-saving. The remaining gap of Rs. respectively.8 percent of GDP in 1999-2000 to 11.1 percent of GDP in 2005-06.5 percent in 1999-2000 to 448.6 percent during the last three years (2003-06). This was primarily due to a rise of 22.6 percentage points decline in country’s debt burden in 5 years.0%. the size of the deficit stood at Rs.20 billion more than the target and 20. an increase of 21. the share of development expenditure doubled from 11 percent to 22 percent in the same period.710 billion – Rs. 1095. Out of the gap of Rs. Total consolidated revenues are targeted at Rs. During the last six years the real growth in current expenditure hovered around 3 percent per annum and pace of growth has slowed down.8 percent of GDP during the last six years.7% of GDP in 2004-05 compared to a deficit of 2. In addition. 22.3 percent in 2005-06 but remained stagnant at 3. was at a deficit of 0.8 percent of revenue and from 53.7 percent of the projected GDP for the year.03 percent of GDP in 2005-06.7%.4 billion. tax collection by the CBR increased by 81.4 billion while Rs. 90. As a result of prudent fiscal management over the last 5 years. The main contribution is coming from development expenditure which grew by 7.7 billion would be contributed by the Banking sources. Substantial decline in interest payments from as high as 7. The stock of domestic debt as xxiv .8 billion.4 percent in the first three years (2000-03) but accelerated to 5. Within domestic sources. During the five years from 2000-01 to 2005-06.0 billion is to be financed through privatization proceeds. releasing resources for development and social sector program. The total expenditure remains more or less stable in a narrow band of 17 to 18. 327. 96.8 percent of current expenditure in 2005-06. financing from non-bank sources amounted to Rs. Resultantly the share of current expenditure in total expenditure declined from 89 percent of total expenditure in 1998-99 to 78 percent in 2005-06. public debt further declined to 54. Following the debt reduction strategy in which raising revenue was one of the key elements. Government is achieving the goal of fiscal stabilization without compromising spending on the social sector. By end March 2006.3 percent of GDP during the last six years.2 percent of GDP.8 percent of GDP.2 percent of GDP in 2000-01 to 4. During the last six years. declined substantially to 61. The public debt. This revenue-expenditure gap was financed through external and domestic sources. which grew by 19.2% in 2000-01.4 percent of revenue in 1999-2000 to 27.6 percent more than last year. the debt servicing liabilities have declined sharply from 65.0 billion in 2004-05.6 billion in 2005-06 compared to Rs. In 2005-06.9 percent by end-June 2005 and further to 384.8% and 50.5 percent to 27. Non-defence-non-interest expenditure has improved from 7.

The consumer loans were acquired to finance a range of products including automobiles (Rs 23.0 billion during JulyMarch 2005-06. Going forward. Credit to the private sector continued to exhibit strong demand. However. Expansion in NFA stood at Rs 37. the burden of interest payments on the domestic budget has declined sharply. as percentage of GDP. The manufacturing sector continued to be the largest recipient of bank credit. Credit disbursement to the agriculture sector.8 percent in 2004-05 and further to 29. the State Bank of Pakistan has set out a road map for the implementation of Basel-II. credit to the private sector was broad-based which grew by 20. To further revamp the financial sector in line with the global financial system. thereby. credit cards (Rs 10. The same tight monetary policy stance continued during the current fiscal year despite declines in both core and overall inflation. amounting to Rs 130. switching from a broadly accommodative to aggressive tightening in the second half of the last fiscal year. the SBP would continue to take measures aimed at expanding credit to priority sectors such as agriculture. The credit plan for 2005-06 set the target for monetary expansion at Rs 380 billion or 12. 06. Most importantly. interest payments declined from 6 percent to 2.4 billion during the same period of last year. The net credit to the Government for budgetary purposes was Rs 43.0 percent and inflation target of 8 percent. share in total expenditure declined from 30 percent to 16 percent during the same period.1 billion) during July-April 22.9 percent of the credit to private sector businesses.17. 2006 of the current fiscal year expanded by Rs 294. and their scale expanded by 27 percent to Rs 67. Despite the tight monetary policy stance of the SBP.7 percent in 2003-04 to 32. Scheduled xxv .4 billion) and house building (Rs 10. 2006 compared with the growth of 28.9 billion or 9.8 percent higher than last year (FY05) on the basis of a growth target of 7. SMEs and export sector. The proceeds from privatization and sovereign bond not only helped build NFA. Within the NDA. credit to the private sector has exceeded the credit plan target and stood at Rs 345. Interest payments as a percentage of total revenue have been reduced to one-half (41 percent to 20 percent) over the last six years. The growth in consumer loans remained robust. Tight monetary policy stance is likely to continue until inflationary pressures are significantly eased off. The money supply during July-April 22. both net budgetary borrowings and borrowings for commodity operations remained well within the credit plan targets.0 billion borrowed in the corresponding period of last year.1 percent more than the comparable period of last year and accounting for almost 47. MONEY & CREDIT The easy and accommodative monetary policy stance that had been pursued during the last few years by the SBP underwent considerable changes during the FY05.1 billion). -. Notwithstanding the tight monetary policy stance the SBP continued to strike a balance between promoting growth and controlling inflation on the one hand and maintaining a stable exchange rate environment on the other.2 percent (Rs 345.4 billion or 13. The State Bank of Pakistan has taken a number of steps in various areas to further enhance the effectiveness of the banking industry in Pakistan. It is the new regulatory capital adequacy regime. since April 2005.94 percent as against an expansion of Rs 332.8%). also remained consistent with the previous year trend.8 billion owing mainly to the receipts of privatization proceeds and issuance of sovereign bond.6 percent in the last six years.37 percent in the same period last year.4 percent by end March 2006.2 billion. which offers a series of approaches ranging from simple to more complex methodologies for capital allocation against credit and operational risk.5 billion). As a result of prudent fiscal management over the last 6 years.1 billion as against Rs 330 billion envisaged for the year in the credit plan. it also helped in containing the growth in NDA through the retirement of government debt held by the SBP.2 billion) followed by personal loans (Rs 21.Overview of the Economy percent of GDP declined from 35.3 billion compared to the annual credit plan target of Rs 98 billion and Rs 15. The pace of monetary expansion remained well within the Credit Plan target for the year (12. reflecting the confidence of the private sector on the continuously improving macroeconomic fundamentals of the country. releasing resources for development and social sector programs.0 percent or Rs 357. Similarly.

7 percent over June 2005. The Bank now serves nearly 250. The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth. 2006 (US$ 57. The market capitalization increased from Rs 2. the listed capital on KSE increased from Rs 438.2 billion ($ 33. KSE’s market capitalization is equivalent to about 44.1 billion during the first nine months of the current fiscal year.0 billion in 75 districts of Pakistan with high poverty incidence.18 billion to Rs 3.3 percent of estimated GDP of FY06. The reforms introduced over recent years. xxvi . The privatization of the government entities through the bourses helped to broad base the equity ownership to a significant level. a successful privatization process attracting foreign investors in prestigious organization like PTCL and National Refinery. maintenance of fiscal discipline and the capital market reforms including development measures introduced by the stock exchanges with full support of the SECP.49 billion to Rs 486. based on sound regulatory principles that provide impetus for high economic growth. Khushhali Bank (KB) is the lead micro-finance institution in Pakistan. Similarly.0 billion) from Rs 2013. bright prospect of reaping dividends. Similarly. 07. The scheduled banks have opened 304 offices during the period from 01-04-2005 to 31-03-2006. there was an increase of Rs 303. The buying euphoria in the stock market has been spurred by a number of other favourable factors including continuation of the present policies on banking sector by the SBP. The KSE saw robust activity especially during the first 4 months of 2006.9 billion (11. efficient and transparent capital market and restoring investors’ confidence. During July-March 2005-06.3%) in the net advances of the scheduled banks. the banking sector produced impressive results. renewed interest of large number of buyers of shares.257.9 billion (17. the KSE share index increased by 25 percent.000 clients.071. The KSE-100 Index crossed the barrier of 12000 mark for the first time in the history of capital market and touched an all time high on April 13.Economic Survey 2005-06 banks and DFIs advances to SME sector witnessed a growth of Rs 40.9 billion in the same period of last year. governance and transparency have contributed significantly towards the growth and development of capital market and building investor confidence. reflecting an increase of over 57 percent in the value of shares.49 billion.5%) and their total investments increased by Rs 77. roughly one-third being women. the total market capitalization also increased to Rs 3419. Within the overall MSDP framework. with all vital indicators pointing in the right direction. The KSE-100 index made further inroad and reached 12274 points on April 17. sound monetary policy of the SBP. 60 percent of KB’s clients are in the rural areas. reflecting an increase of around 11 percent. good capital gains and presence of institutional investors in the market.6 billion during July-February FY06 compared with an expansion of Rs 59. the average daily turnover of shares increased from 430 million to 462 million shares. with a cumulative disbursement of over Rs 6. Pakistan continues to be at the forefront of the Micro-Finance Sector Development Program (MSDP). the fields of risk management. the stock market continued to maintain its strong performance and achieved new heights by creating many new records. Between December 2005 and April 2006 alone. 2006. 2006 showing a growth of 64. The Securities and Exchange Commission of Pakistan (SECP) has been actively pursuing a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market.7 billion) showing a growth of 70 percent over June 2005. The government’s economic policies and capital market reforms helped in promoting a fair. In 2005. During July-March 2005-06. CAPITAL MARKET During the fiscal year 2005-06. Their deposits increased by Rs 272.06 billion. Unprecedented growth in the leading market indicators was also witnessed in Lahore and Islamabad Stock Exchanges. The year has been unprecedented in terms of profits. At current levels.4 billion on April 17.

total profit before taxation of the 12 trading groups amounted to Rs 229. sugar also contributed 26.2 percent. Pakistan’s imports continue to be pushed higher by unprecedented rise in oil prices and continued strength of non-oil imports owing to buoyant domestic demand. the inflation as measured by the Consumer Price Index (CPI). Core inflation. On the domestic side. At the same time. Other issues to consider include. wheat shortage resulting from inadequate production and lastly.9 xxvii . coupled with an unprecedented rise in world prices of other commodities. INFLATION For the first ten months of the current fiscal year (July .2 percent. Export during the first nine months (July-March). of the current fiscal year. The larger contribution toward the overall CPI inflation come from Non-food. four years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending. Non-food inflation increased to 8. banks and other financial institutions. on the other hand. which excludes food and energy costs from the headline CPI. by which the government was able to respond in a timely manner to shortages by importing substantial quantities of wheat. Fuel and energy. sugar and pulses. sugar. Furthermore.5 billion. include an increase in support prices of wheat.3 billion in 2005 recording a growth of 42. 09. based on current trends. Pakistan is gradually moving towards higher value added in exports of textile manufacturers.Overview of the Economy During the calendar year 2004. brought about by the production of ethanol in Brazil. 08. Imports. the high increase in International prices of sugar owing to a global shortfall in supplies. Cognizant of the impact of inflation on the economy and its disproportionate effect on the poor and fixed income groups of society. it is expected that inflation would be within the target of 8% set by the government for the full year Factor contributing to the build-up in inflationary pressures is the increase in aggregate demand in the economy. The supply side factors responsible for pushing the local price up. which increased to Rs 326.8% versus 6. have risen by 43. Food price inflation averaged at 7. have also led to inflationary pressures this year. the government has responded in a multi-pronged manner to the rise in the price level.0% from 9. Owing to domestic shortage. Energy and transport components of CPI. are up by 18. pulses and other essential commodities.0% compared to12. TRADE AND PAYMENTS Pakistan’s foreign trade sector is being affected both by structural and cyclical factors. The shares of value added exports have also increased. the significant increase in prices of pulses and the lower production of sugarcane and sugar.0 percent. Pakistan doubled its exports in seven years and has increased its trade-to-GDP ratio from close to 26 percent in 1999-2000 to an estimated 34 percent in 2005-06.6 percent – rising from $ 10183 million to $ 12073 million in the same period last year. in the first nine months (July-March) of the current fiscal year – rising from $ 14446 million to $ 20693 million in the same period last year. with similar expansion projected for the next year – which will be the fifth successive year that the world economy has grown by more than 4. Sugar alone contributed 74 percent to the rise in food imports.April ) 2005 -06. transport and communications and cement were the trend setters in the stock market during the current fiscal year.9% in the comparable period of last year.6 percentage points to the 35. House rent. the mis management of wheat. the global economy continues its strong and broad – based expansion with growth reaching close to 5 percent in 2006.8% for the same period last year. The continuous surge in International oil prices. Thus. and barring any adverse shocks. Major contributors to the substantial rise in food imports include wheat. A strategy of regular monitoring of domestic stocks of key commodities and their prices was adopted.3% in the same period last year . However. also reflected a favorable trend and remained almost at last years’ level of 7%. declined to 8. which is compounded by supply shortages of principal commodities. On the external side. have led to a massive surge in imports. also impacting prices in Pakistan. the government has liberalized its import regime and allowed duty free import of these three items to augment their supplies with a view to reducing food inflation in the country.

Pakistan’s external debt and liabilities have declined by $ 3. and growth in personal travel due to the rising level of income of middle and high income groups.7%).1 percent of GDP in end-June 1999.9 percent growth in food imports.5 percent resulted in an increase in trade deficit to $82620. in comparison to $ 4263. For example. Non-food non-oil imports also grew by 38. The unprecedented surge in domestic demand has fueled an exceptional increase in non-oil imports. the Petroleum group import amounted to $ 4615.8 million.9 billion in 1998-99 to $ 36. stood at $ 4696 million in the first nine months (July-March) of the current fiscal year as $ 1181 million in the same period last year. Although trade deficit (fob) almost doubled over the last year and services balance deteriorated by 27. Current Account Balance Pakistan’s current account balance that slipped into red in 2004-05 after posting surpluses for three consecutive years remained in deficit in 2005-06.9 billion by end June 1999 but declined slightly to $ 37.4 billion in seven years.2%). $38.557 billion by end-March 2006. have also contributed to the widening of current account gap.834 billion by 2004-05.3 percent. Imports of petroleum group have also played a key role in taking Pakistan’s import to a new height. of the current fiscal year.3 percent in end-March 2006. the burden of the debt has declined substantially during the same period. were in fact reduced from U.9 billion in 1999-2000. if sugar production had remained normal and no shortages had emerged during the year. construction and mining machinery (29. declined to 127.723 billion in the first nine months of the current fiscal year. The flow under long – term capital (net) improved markedly and risen to $ 3905 million from $ 1633 million last year.1 billion – down from $ 38.6 percent by end-March 2006.8%).5 billion in 1990 to $ 38. The rise is mainly on account of issuance of Sovereign bonds worth $ 800 million in March 2006. Major contributors to the rise in machinery imports include power generation machine (44. An amount of $ 2.1 percent in the same period last year. thus showing a rise of $ 0. thus allowing the expansion of the country’s production base. the external debt and liabilities as a percentage of foreign exchange earnings which stood at 335.4 billion has been paid during July-March 2005-06 and the amount rolled over declined xxviii .Economic Survey 2005-06 percent growth in food imports.S. EXTERNAL DEBT AND LIABILITIES Pakistan’s total stock of external debt and foreign exchange liabilities grew at an average rate of 7. during the first nine months (July-March). Altogether. A surge in imports of machinery reflects a growth in domestic investment driven imports.4 percentage points to the 35.6 million in the same period last year.4 million in the same period last year. The current account deficit. As percentage of projected GDP for the year the current account deficit stood at 3. The annual debt servicing payments made during the period 1999-2000 to 2003-04 averaged just above $ 5 billion per annum. It exhibited a declining trend thereafter. with a widening gap due to a higher import bill. However. higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost.0%) and other machinery (51. Emerging as the single largest item in the country’s import bill. Most importantly.3 million. and pulses alone contributed 93 percent to the rise in food imports and 33. instead of growing at the pace of the 1990s. Furthermore. This amount has drastically come down to around $ 3 billion in 2004-05. The external debt and liabilities stood at 64. external debt and liabilities increased to $ 36.4 percent per annum during 1990-99 – rising from $ 20.5 billion by end-March 2006 — a reduction of $ 2. agriculture machinery (109. In fact.5 percent. Deceleration in the growth of net transfers is also responsible for widening of the current account deficit. reflecting continued strong domestic demand. as against $ 2806. Wheat.1 percent in the first nine months (July-March) of the current fiscal year.7 percent as against 1.3 percent. 10. External debt and foreign exchange liabilities. the strong inflows under private transfers fueled by rising workers’ remittances and resident foreign currency accounts offset some of the negatives with current account deficit standing at $ 4696 million.4 percent in 1998-99. Thus an increase of 64. food imports would have risen only by 9. registering a growth of 38. sugar. excluding official transfers. This was brought about by high global crude prices and a hefty rise in non-oil imports. declined to 28.9 billion in 1998-99 to $ 35.

The MDG targets to reach 100 percent NER till 2015. entering into that phase of demographic transition. Citi group and Deutsche Bank. Government of Pakistan is currently spending 2.5 times oversubscribed. 65 percent of males and 40 percent of females were literate in the year 2004-05.92 million in 2001-02 to 21.88 million at the secondary level during 2001-02 to 2004-05. Investing in providing quality education to the upcoming working age population.33 million in 2004-05. The 10—year notes were priced with a coupon of 7. By issuing 10 and 30 year tranches. In NWFP. 4. On March 23. quality of education and the value of returns attached to sending children to schools. Pakistan completed its primary objective of establishing a full Pakistani International yield curve in record time. in Punjab Rawalpindi with 75 percent is ranked at the top and Lohdran with 34 percent at the bottom. the literacy rate is 53 percent which is much below the targets set to be achieved in 2005 (60 percent ESR and 58 percent in PRSP) and far away from reaching the Millennium Development Goals (MDGs) target of 80 percent literacy till 2015. Abbotabad (65%) is at the top and Kohistan (25%) at the bottom.875% to. 2006.28 million to 4. Another factor that contributes to lower literacy rates is the high dropout rate at all levels. framing a spread of 302bps over the relevant 30-year US Treasury benchmark and 256bps over the US$ mid-swap rate. EDUCATION Right to education is the basic requirement of every individual. show how nations can benefit from an educated and productive labor force. in Balochistan Quetta (65 %) at the top and Jhal Magsi (20%) and Qilla Saifullah (20%) are at the bottom.1 billion in 1999-2000 to $ 1. This transaction. is the only way to cash the demographic dividend. Karachi with 78 percent literacy is ranked at the top while Jacobabad with 43 percent is ranked at the bottom in Sindh. where in few years massive influx in the working age population (60 million) is expected. teacher’s absenteeism. Currently. In case of enrollments. Enrollment at the primary level increased from 19. The issue was over 2. infact it has stagnated to about 2 percent from 2003-2005. which is a huge challenge for the policy makers. The key impediments to the progress in reaching a higher level of literacy in Pakistan are the low enrollment rates and poor quality of education provided by the public sector. The 30—year bonds were priced with a coupon of 7. In the past year. District disaggregated data for adult literacy show that. which represented the first international 144A bond issued by Pakistan since 1999. Finally. 11. With over 170 accounts participating.55 million at the middle level and 1. Pakistan was able to achieve spreads on both the new 10 and 30—year bonds that were tighter than its previous 5—year issues. Looking at the gender disaggregated data for overall literacy. 2187 new primary schools were established. Net Enrollment Rate (NER) has seen a considerable increase of 10 percentage points from 42 percent in 2001-02 to 52 percent in 2004-05. Nations all over the world reached high levels of prosperity and human development through investing and prioritizing provision of quality and equitable health and education faculties to their citizens.Overview of the Economy from $ 4.There exist wide gender gaps especially in the rural areas in enrollments at all levels.125%. books closed with total orders exceeding US$2bn. The share of education sector has not seen much change in the past several years. East Asian economies are a recent example that. This requires almost 50 percent increase in enrollment in next 10 years. raised significant interest amongst international Institutional investors. Thus.1 percent of its GDP on education sector which is very low as compared to other countries in the region. 1221 in the public sector and 881 in the private sector. Pakistan successfully issued US$500 million new 10—year Eurobond and US$300 million new 30—year Bonds in the international debt capital markets lead managed by JP Morgan. During the past four years 249 additional technical and vocational institutions were established. Government has launched several xxix . This increase has occurred in both rural and urban areas.1 billion in July-March 2005-06. Major reasons behind dropout include poor quality of infrastructure.79 million to 1. There is a significant increase of 35 universities during the period 2001-02 to 2004-05 including 13 new public and 22 new private universities. Pakistan is in fact. framing a spread of 240bps over the relevant 10-year US Treasury benchmark and 187bps over the US$ mid-swap rate.

During the past 25 years. The total outlay on health sector is budgeted at Rs. Available human resource for the fiscal year 2005-06 turn out to be 118160 doctors. 552 rural health centers (RHCs).51% of GDP.P) and Gwadar (Balochistan).W. Even now each year. creed or race.The new health facilities added to overall health services include construction of 56 new facilities (42 BHU and 14 RHCs ). The Constitution of Pakistan in its article 38 titled “promotion of social and economic wellbeing of the people” ensures the provision of basic necessities of life including health and medical relief for all citizens. population per dentist 25297 and population per nurse as 4636. 6761 dentists and 33427 nurses which makes the ratio of population per doctor as 1310.9 grams PSLM 2004-05 reports district level data for major indicators in the health sector such as sickness/injuries.Chitral (N. Hyderabad (Sindh) . Rising levels of income on the one hand and easy availability of loan facility/financing on the other has lead to an increase in motorization in the country and almost 70 xxx . HIV/AIDS control progam. Shangla (N. 4554 dispensaries. Population growth is a complex issue that directly or indirectly impacts all aspects of our lives and the conditions under which we live----from the environment and global stability to women's health and empowerment. HEALTH Importance of the health in the social lives of the people makes it such an important area that it cannot be considered in isolation and it is inextricably tied to other socio economic and political realities. During the fiscal year 2005-06 the caloric availability per day is likely to increase from 2271 to 2328 and protein availability from 65.F. pre and post natal consultation etc . resulting in reduced individual land holdings in Pakistan.3% over the last year and turns out to be 0.W. deforestation occurs at the rate of 2. National Maternal and child Health Program. POPULATION. Tuberculosis. Malaria. Jacobabad (Sindh). Pakistan being a developing country also faces the problem of over population.5 percent. In the case of immunization. 907 maternal and child health centers (MCHs) and 289 TB centres (TBCs).The districts reporting lowest immunization are Muzaffar Garh ( Punjab). the remaining 40 percent churn out wastes damaging the environment and causing a lot of diseases.5290 basic health units/sub health centres (BHUs/SHCs). 12. the top ranked districts are Jhelum (Punjab).5 to 66. various health programmes like Lady health worker program.upgrading of 59 existing facilities (18 RHCs and 41 BHUs) and addition of 3500 new doctors . 40 billion which shows an increase of 5. the expanded program on immunization. cultivable land has increased by 27 percent compared to 98 percent increase in population. There is a considerable improvement in health care facilities over the past year as the existing vast network of health care facilities consist of 946 hospitals.F. Drug Abuse. Government of Pakistan needs to address the problem of the adversely affected districts and focus on policies to solve the problems and initiate immediate remedial measures. Government of Pakistan recognizes and acknowledges the access to essential health care as a basic human right that is why the public health sector has always been a priority area of the government activities. 13. Cancer Treatment program remained operative during fiscal year 2005-06.1900 nurses. Due to a high birth rate urban population will double in the next 20 years causing more and more forests to be cut to make way for humanity.P) and Qilla Saifullah (Balochistan). In addition. To reduce incidence of disease and to alleviate their suffering and pain so as to improve the health status of people.Economic Survey 2005-06 programs to increase coverage by increasing enrollment and to improve the overall quality of education but these initiatives need proper implementation and constant monitoring for their timely completion. Prime Minister Program for prevention and Control of Hepatitis in Pakistan. Government of Pakistan is fully aware of its commitment to achieve Millennium Development Goals (MDGs) regarding health and initiatives have been taken to address health issues under PRSP and MTDF. immunization. LABOUR FORCE & EMPLOYMENT Achieving a world population in balance with its environmental resources is crucial to the future of our planet and the welfare of its people. irrespective of sex. and 15000 lady health workers. caste. since only 60 percent of our population has sewerage facility.

5 percent. Mobile xxxi . with its gross earnings stood at Rs. there were only 0.12. In Pakistan. is still in progress. there are three private airlines.518 km long National Highway and Motorway network contributes about 3. operating in the country and provide both domestic and international services. Road transport is a backbone of Pakistan’s transport system. the Pakistan Railways have carried 61. efficient and affordable infrastructure is a critical element of a good investment climate and therefore. It is important to note that the employment of the rural females increased despite a considerable rise in female Labour Force Participation Rate. 2006.5%). The CAR is the percentage of the labour force in the total population while RAR is the percentage of the labour force in the population of persons 10 years of age and above. In 1999-2000.7 percent of the total road network and carries 90 percent of Pakistan’s total traffic.2 percent. fishery and telecom sectors. the transport and communication sector in Pakistan account for about 11 percent of GDP. 14. which may be due to enhanced growth rates in agriculture in recent years or due to the combined efforts of various NGO. registering a growth of 5 percent.7 percent. In fact.572 thousand tons of cargo during July-March.578 Km of low type roads (36 percent) by the end of March.4 million by 2002-03 as a result of introduction of CPP regime and addition of another mobile operator (Ufone).8 Vs 38. The increase in rural female employment was mainly in the category of unpaid family helpers.7%).845 thousand tons during the same period last year. PIA carried 3. This phenomenon is more obvious for rural areas and women. compared to 21. Its fleet consists of 41 aircrafts of various types.9 percent. TRANSPORT AND COMMUNICATIONS A strong. During the outgoing fiscal year. showing an increase of 11. 6 percent of employment and about 15 percent of the Public Sector Development Programme.3 million passengers and 4. is a pre-condition to sustain the growth momentum. Port Qasim has handled 16.Overview of the Economy percent of our on-the-road vehicles have outlived their life span and emit unburnt monoxide gases. road traffic – both passenger and freight – has grown much faster than the country’s economic growth. including 165. 2005-06.4 percent and 8. 16 percent of fixed investment. Agriculture still accounts for the largest source of employed work force.571 million in the same period last year. the length of high type roads has increased by 1.8 percent over the last year but the length of low type roads has declined by 2.8 million ton of cargo during July-March 2005-06 compared to16 million cargo handled during the corresponding period last year.8%) and RAR (46.340 Km. in addition. accounting for 90 percent of national passenger traffic and 96 percent of freight movement.5 billion during July-March 2005-06. Furthermore.4% and 43.762 Km of high type (64 percent) and 92. The 9. Both passenger capacity and traffic volume also increased by 2. The Gwadar Port is also being built with Chinese assistance and its first phase has almost been completed. showing an increase of 12. Sector wise break up of employed labour force shows that female labour force participation is on the rise for most sectors especially agriculture. In comparison. The construction work on Islamabad–Peshawar Motorway (M-1) however. The figures both for CAR (32. In addition. Transport and Communications both are important elements of infrastructure services and are essential in maintaining economic growth and competitiveness. Karachi Port has also handled 24. respectively. Augmentation of the rates for the set of economic activities carried out within the house precincts also depicts the same scenario (42. The total length of roads in Pakistan was 258. The share of agriculture in employment has increased from 43 percent in 2003-04 to almost 45 percent by mid of 2005-06.3 million cellular mobile subscribers in Pakistan which jumped to 2.9%) for the first half of 2005-06 fare higher than LFS 2003-04 (30.972 million passengers during July-February 2005-06 as against 3. labour force participation is estimated on the basis of the Crude Activity Rate (CAR) and the Refined Activity Rate (RAR).3 million tons freight. Over the past ten years.

showing a decline of 1.363 MW during July-March 2005-06 of which.900 MW. by March. the actual growth of world energy consumption increased from 207 quadrillion Btu in 1970. 15. Total installed capacity of WAPDA stood at 11. depicting an increase of 116 percent. more than 16 million new subscribers have been added to the list. On an average.e. reaching 12. the consumption of energy will likely increase by about 200 percent. With these developments Pakistan has become the leading country in Asia and the third largest user of CNG in the world after Argentina and Brazil. Because. The average production of natural gas per day stood at 3.3 percent) during last 10 years i. energy consumption in the developing countries is expected to climb 122 quadrillion Btu to 264 quadrillion Btu. the transport sector consumes 49. Total fixed telephone lines installed by March 2006 were 5.978 GWh electricity has been generated as against 61. KESC. In a short period of 9 months in the outgoing fiscal year. followed by power sector (32.825 million cubic feet during July-March.663 million cubic feet over the same period last year. the total teledensity (Fixed + Cellular + WLL) has jumped form 3.4 percent.8 million by 2004-05. According to the International Energy Outlook 2001. household (18. will take place in the developing world. Secondly.1 percent by end March 2005-06. from 207 quadrillion Btu in 1970. Over this fifty-year period.385 barrels during July-March 2005-06 from 66. other government (2. reaching over 29.6 million by end April 2006. ENERGY Global energy consumption is expected to increase steadily over the next twenty years. firstly many developing countries are striving towards economic development and industralization and will thus require additional energy.000 vehicles during the same period last year. Population growth will add over 1 billion people to the poorer regions. showing an increase of 4. and agriculture (1.9 percent or 6. The overall production of crude oil has decreased to 17. The largest increase in energy use will occur in the developing world. 1995-96 to 2004-05. A major turnaround was witnessed when the mobile companies started giving free mobile connections and bearing the cost of government levies themselves.8 percent).7 percent of the petroleum products.5 percent).9 million barrels during July-March 2005-06 from 18.1 million barrels during the corresponding period last year. virtually all of the increase in the world’s population over the next twenty years. to 607 quadrillion Btu in 2020.595 by March 2006 from 90. the increase in energy use in the developing world is roughly double that of all countries in the global economy. During the first three quarters of current fiscal year. The number of villages electrified increased to 99.758 GWh were produced in the same period last year.1 million up to June 2005 last year.7 percent in 2001-02 to 23. household (2. 2339 cities/towns/villages have been provided Internet facility. KANUPP AND IPPs) stood at 19. showing an increase of 10 percent.6 percent of gas.8 percent) and cement (1. On average. some 930 CNG stations are operating in the country. xxxii . commercial sector (2.e. 63.3 percent). as compared to 3.467 upto 2004-05. showing a decline of 1. In other words. while 200 are under construction. industry (11. Production of crude oil per day has decreased to 65.199 barrels per day during the same period last year. 1995-96 to 2004-05.2 million as against 5. Accordingly. 2006.8 percent). thermal accounts for 43.463 MW.4 percent). hydel accounts for 56. showing an increase of 43 percent. For promotion of Information Technology. 2005-06.003. a more than 131 percent increase in subscribers in just 9 months was unprecedented. thus expanding the energy requirements for these regions.4 percent) during last 10 years i. to 382 quadrillion Btu in 1999 which is anticipated to further increase to 607 quadrillion Btu in 2020. The overall production of gas has increased to 1.2 percent. Total installed capacity of electricity (WAPDA. industrial sector (18. showing an increase of 4. the power sector consumes 36. Presently.1 percent.189 million cubic feet daily in the same period last year. compared to 19. In other words.5 percent).5 percent.389 MW during July-March 2004-05. By March 2006 about one million vehicles were converted to CNG as compared to 700.1 percent or 4.048.190 million cubic feet during July-March 2005-06 as compared to 1. followed by fertilizer (22.439 MW during July-March 2005-06.Economic Survey 2005-06 subscribers continued to rise at an unprecedented pace. From 1999 to 2020.3 percent).

just touching water scarcity level of 1000 cubic meter. and the concern for environment. biodiversity conservation. Like many other developing countries. the Ministry of Environment. one in each union council of Pakistan. employment and maintenance of ecological xxxiii . renewal and enrichment is recognized as an obligation for the betterment of all citizens. Environment Sustainable development remains the cornerstone of government policies. A new project on “Clean Drinking Water for All” under Khushal Pakistan Programme. As of April 2006. both in total amount of water as well as in the per capita water availability in Pakistan. the total number of CNG vehicles stood at 950. The government is promoting the use of CNG in a big way to reduce the pollution level. which has now decreased to 1105 cubic meter. one in each Tehsil of Pakistan. Government of Pakistan has taken an initiative and designed a full-scale project on “Sustainable Land Management to Combat Desertification in Pakistan”. plays an important role in increasing the vulnerability of the poor to pollution and environmental degradation. (c) agriculture and livestock. while another 200 are under construction. The povertyenvironment nexus has been of particular interest in the recent years. land use. has led to significant air pollution problems. The Government is committed to supply safe drinking water to its people and in this regard has started implementation of a “Clean Drinking Water Initiative” Project in 2005.e. In 1951. Several policies. The estimates show that the current water shortage of 9 million acre feet would aggravate to 25 MAF if all planned dams under Vision 2025 are not constructed by 2016. combined with a dramatic expansion in the number of vehicles on roads.000 vehicles in April 2005. Various mega initiatives have been planned especially under WAPDA vision 2025. One of the major achievements during 2005-06 was the formulation of the “National Environmental Policy 2005” which addresses the sectoral issues such as (a) water management and conservations. In the cities. its protection. and (g) pollution and waste management.Overview of the Economy 16. plans. compared to 700. making Pakistan’s CNG fleet the largest in Asia and the third largest in the world after Argentina and Brazil. b) increasing industrial and domestic demand and c) a fast growing transport sector. programs and projects have been initiated for environmental protection and conservation in the sectoral areas of water and air pollution control. (b) energy efficiency and renewable. reduced productivity and consequently increases in rural poverty. The project aims at combating desertification and improving land management practices to eradicate poverty in arid and semi-arid regions of Pakistan. reduction of sedimentation in water conveyances and reservoirs. as poverty in Pakistan. forest management. With a present growth in population and the low rainfall. when population stood at 34 million. like in many other middle-income countries. In order to address the problems of land degradation and desertification. has been recently approved and caters for installation of around 6035 water purification plants of different capacities (500/ 1000/ 2000 gallons/ hour). causing serious health issues in the process. the threshold limit of water scarcity i. energy efficiency. water regulation for irrigation and power generation. The key factors contributing to air pollution in Pakistan are: a) rapidly growing energy demand. Air pollution levels in Pakistan’s most populated cities are among the highest in the world. etc. The situation is further aggravated by scarcity of water. and waste management. frequent droughts and miss-management of land resources. (e) biodiversity and protected areas. (f) climate change. widespread use of low-quality fuel. contributing to expansion of deserts. dry lands in Pakistan are severely affected by land degradation and desertification due to unsustainable land management practices and increasing demand of natural resources causing enormous environmental problems. Forestry sector plays an important role in soil conservation. which caters for the installation of 544 water purification plants of 2000 gallons/ hour capacity. Presently. Water availability in Pakistan continues to decrease. per capita availability of water was 5300 cubic meter. some 935 CNG stations are operational through out the country.000. air quality and noise. (d) forestry and plantation. 1000 m3 of water per capita per year may be reached as early as the year 2010. ENVIRONMENT AND HOUSING I.

The main objectives of NEAP are to safeguard public health. therefore. The present housing stock is also rapidly aging and estimates suggest that more than 50 percent stock is over 50 years old. the government. by earmarking a substantial percentage of their loan portfolio (iii) The annual disbursement of HBFC loans shall be enhanced from the present Rs 1. Meeting the backlog in housing. This necessitates putting in place a framework to facilitate financing in the formal private sector and mobilize non-government resources for a market based housing financed system.2 billion to Rs 7. shall be adequately reduced to an aggregate total of 1% to enhance registration. (v) Stamp duties and registration fees. xxxiv . (viii) Provincial Governments shall develop packages in which prime state land within urban centers. shall be offered to the private developers for commercial use provided they arrange and finance upgradation or relocation of katchi abadies As a result of the coordinated efforts of Federal and Provincial Governments and concerned private sector stakeholders.yds.Economic Survey 2005-06 balance. It focuses on clean air. the housing backlog. as every family needs a roof. Under the Millennium Development Goals of the Forestry Sector. According to the housing census 1998. Pakistan is committed to increase forest cover from existing 5 % to 5. improve documentation and increase revenue receipts. National Environment Action Plan (NEAP) remains the Flagship program of the Ministry of Environment. occupied by the katchi abadies. has been currently projected at 6. (iv) Simplification of procedures for land transactions and standardization of mortgage documents to facilitate sale and purchase of housing. solid waste management and eco-system management. & Flats/apartments having an area of 1000 sft shall be exempt from all types of taxes for a period of 5 years. besides replacement of out-lived housing units is beyond the financial resources of the Government. Housing Sector Housing is one of the basic human requirements.051 million hectares land area under forest.30 million. which are exceptionally high as compared to other countries. (vi) Property tax on rented property shall be reduced from the current high rate of 25% to 5%. declared Housing and Construction as a priority industry and simultaneously formulated a pragmatic and workable National Housing Policy.000 housing units annually. (vii) All new construction of houses on plots measuring upto 150 sq. It is also estimated that 50 percent of the urban population now live in slums and squatter settlements. II. It is estimated that to address the backlog and to meet the housing shortfall in the next 20 years the overall housing production has to be increased to 500. This is aimed at revitalizing the housing sector.7% by the year 2011 and to 6% by the year 2015. clean water. encouraging participation of local as well foreign investors/developers and private sector companies in housing sector to build more and more housing projects to meet the demands of a vast segment of society. This implies bringing an additional 1. providing therein various incentives for the construction industry and the private sector builders/developers. The government of Pakistan is. a large number of policy measures have so far been implemented resulting in the improvement of overall housing situation in the country besides availability of affordable housing finance to the extent of Rs 34 billion in the market. (ii) To encourage the financial institution to give mortgage loans for housing at market rates.19 million. Commercial banks shall also be encouraged to advance loans for housing. as an immediate measure. Having realized the importance of the housing sector in the overall economic development of the country. Providing shelter to every family has become a major issue as a result of rapid urbanization and higher population growth.00 billion over the next 5 years. The salient features of this policy include (i) Identify the state and other lands for housing development. which stood at 4. promote sustainable livelihood and enhance quality of life for the people of Pakistan. The Government of Pakistan is implementing a number of Policies and programs in the Environment Sector.

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