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Economic Survey 2005-06: overview of the economy Part I

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  • Economic Survey 2005-06: overview of the economy Part I

    Economic Survey 2005-06: overview of the economy

    TEXT (June 05 2006): The money supply during July-April 22, 2006 of the current fiscal year expanded by Rs 294.9 billion or 9.9 percent as against an expansion of Rs 332.4 billion or 13.34 percent in the same period last year. The pace of monetary expansion remained well within the Credit Plan target for the year (12.8 percent) primarily because of the moderate build up in net domestic assets (NDA).

    Within the NDA, both net budgetary and borrowings for commodity operations have also remained well within the credit plan targets.

    However, credit to private sector has exceeded the target and stood at Rs 345.1 billion as against Rs 330 billion envisaged for the year in credit plan reflecting the buoyancy in the economy. Expansion in net foreign assets (NFA) on the other hand exceeded the target (Rs 15 billion) and stood at Rs 37.8 billion owing mainly to the receipts of privatization proceeds and issuance of sovereign bond.

    The proceeds from privatisation 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.

    The net credit to government for budgetary purposes which had peaked at Rs 162.2 billion during July-March 11, 2006 sharply reduced to Rs 43.3 billion compared to the annual credit plan target of Rs 98 billion and Rs 15.0 billion borrowed in the corresponding period of last year.

    The net budgetary support to government decreased by about Rs 115 billion between March 31, and April 13, 2006 due to the inflow of proceeds from privatisation and sale of bonds in the international capital market. Higher government borrowing for budgetary support reflects a large spending on earthquake related activities. Monetary expansion in fact, picked up substantially after the October 8, 2005 earthquake when broad money supply grew by 5.6 percent after a contraction of 1.2 percent during the first quarter (July-September) of the current fiscal year.

    The tight monetary policy stance of the SBP was reflected in the slower pace of credit expansion to the private sector. The credit to private sector grew by 20.2 percent (Rs 345.1 billion) during July-April 22, 2006 compared with the growth of 28.0 percent or Rs 357.4 billion during the same period of last year.

    Credit to private sector continued to exhibit strong demand, reflecting the confidence of the private sector on the continuously improving macroeconomic fundamentals of the country. During the last three years (2003/04 to April 22, 2006) the cumulative credit flow to the private sector amounted to Rs 1108 billion, surpassing the total credit flow of Rs 921 billion in the previous 18 years (1984 - 2003).

    The distribution of credit to the private sector during July-March FY06 has been broad-based. The manufacturing sector continued to be the largest recipient of bank credit amounting to Rs 130.0 billion during July-March 2005-06, - 17.1 percent more than the comparable period of last year.

    The overall manufacturing sector accounted for almost 47.9 percent of the credit to private sector businesses. Within the manufacturing sector, textile industry received Rs 69.5 billion or 53.5 percent followed by cement (Rs 15.1 billion), leather (Rs 2.2 billion), and fertiliser (Rs 3.6 billion).

    Commerce - related activities also picked up strongly as their credit off-take rose by 35.4 percent to Rs 51.2 billion. Wholesalers and retail traders as well as exporters received three - fourth of the credit under commerce - related activities.

    The growth in consumer loans remained robust, and their scale expanded by 27 percent to Rs 67.2 billion. Most of the consumer loans were acquired to finance a range of products including automobiles (Rs 23.2 billion) followed by personal loans (Rs 21.5 billion), credit cards (Rs 10.4 billion) and house building (Rs 10.1 billion). Three major reasons may be given to account for higher growth in consumer loans.

    First, banks are more interested in consumer loans due to relatively higher spreads. Second, consumers find these loans still affordable amid expectations that interest rates may rise in the near future. Third, some of the banks are working more aggressively to tap their potential customers for consumer loans.

    The tight monetary policy is also reflected in the rise of the weighted average lending rate. The average lending rate increased by 193 bps to 10.14 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.

    It is for the first time in many years that the inflation - adjusted average lending rate has turned positive. It is expected that the private sector would now be more selective and prudent in terms of availing bank credit. The tight money market conditions also led the banking industry to raise the average deposit rate by 90 bps to 2.75 percent. However, this rise was not enough as the banking spread further rose by 103 bps to 7.39 percent since July 2005.

    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. 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, 2006.

    The KSE-100 Index made further inroad and reached 12274 points on April 17, 2006, showing a growth of 64.7 percent over June 2005. Similarly, the total market capitalisation also increased to Rs 3419.4 billion on April 17, 2006 (US $57.0 billion) from Rs 2013.2 ($33.7 billion) showing a growth of 70 percent over June 2005. At current levels, KSE's market capitalisation is equivalent to about 46 percent of estimated GDP of FY06.

    The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth; a successful privatisation process attracting foreign investors in prestigious organisation like PTCL and National Refinery; sound monetary policy of the SBP, maintenance of fiscal discipline and the capital market reforms including development measures introduced by the stock exchanges with full support of the SECP. The government's economic policies and capital market reforms helped in promoting a fair, efficient and transparent capital market and restoring investors' confidence. The privatisation of the government entities through the bourses helped broad-basing the equity ownership to a significant level.

    The buying euphoria in the stock market has been spurred by a number of other favourable factors, including the continuation of the present policies on the banking sector by the SBP, renewed interest of large number of buyers of shares, bright prospect of reaping dividends, good capital gains and presence of institutional investors in the market. The KSE saw robust activity especially during the first 4 months of 2006, with all vital indicators pointing in the right direction.

    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, based on sound regulatory principles that provide impetus for high economic growth. The reforms introduced over recent years in the fields of risk management, governance and transparency have contributed significantly towards the growth and development of capital market and building investor confidence.

    FISCAL POLICY: Fiscal policy primarily deals with the levels and composition of taxation, spending and borrowing by the Government. A sound fiscal policy is essential for preventing macroeconomic imbalances and realising the full growth potential. Pakistan has witnessed serious macroeconomic imbalances in the 1990s mainly on account of its fiscal profligacy. Persistence of large fiscal deficit resulted in unsustainable levels of public debt, adversely affecting the country's macroeconomic environment.

    Pakistan, accordingly paid, a heavy price for its fiscal indiscipline in terms of deceleration in economic growth and investment, and the associated rise in the levels of poverty. Considerable efforts have been made over the last six years to inculcate financial discipline by pursuing a sound fiscal policy. Pakistan's hard earned macroeconomic stability is underpinned by fiscal discipline.

    In order to address the structural problems in the tax system and tax administration, the government has been introducing wide-ranging tax and tariff reforms, as well as reforms in tax administration. These reforms have already started yielding handsome dividends. During the last seven years, tax collection by the CBR has increased by 130.0 percent - that is, more than doubled.

    The revenue deficit (the difference between total revenue and total current expenditure), a measure of government dis-saving, was 2.2 percent of GDP in 2000-01 but it has almost been eliminated in 2005-06. Under the Fiscal Responsibility and Debt Limitation Act 2005, the government was bound to eliminate revenue deficit by 2007-08. This target has almost been achieved two years in advance.

    The primary balance (total revenue minus non-interest total expenditure) was in surplus from 2000-01 to 2004-05. However, primary balance has entered into deficit zone in 2005-06, though the number is small (0.2 percent of GDP). Pakistan must not allow primary deficit to get entrenched.

    The share of indirect taxes declined from 82 percent to 69 percent since 1990-91 and until 2005-06. Even within the indirect taxes, dramatic changes have taken place. The collection from custom duty used to account for 45 percent of total tax collection and 55 percent of indirect taxes in 1990-91, its share has now been reduced to 19.3 percent and 28 percent, respectively. This is the consequence of the tariff reform implemented by successive governments since 1990-91.

    The share of sales tax increased at a tremendous pace from 14.4 percent to 40 percent of total taxes and from 17.6 percent to 60.2 percent of indirect taxes during the same period. Central excise as a tax is loosing its importance and gradually being faded out. Its shares in total taxes and indirect taxes were 22.5 percent and 27.5 percent, respectively in 1990-91. These have now been reduced to 8.4 percent and 11.9 percent, respectively during the same period.

    The total expenditure remains more or less stable in a narrow band of 17.0 to 18.8 percent of GDP during the last six years. A substantial decline in interest payments from as high as 7.5 percent of GDP in 1998-99 to 3.1 percent of GDP in 2005-06, has provided fiscal space to re-orient expenditure in favour of development expenditure. 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.

    In addition, the share of development expenditure doubled from 11 percent to 22 percent in the same period. During the last six years the development expenditure improved from 2.2 percent of GDP in 2000-01 to 4.2 percent of GDP in 2005-06 and is likely to make a further jump to 4.7 percent of GDP in 2006-07.

    The second largest component of the current expenditure, namely, defence spending remained stagnant at around 3.1 percent to 3.3 percent of GDP during the last six years. It is more useful to analyse the trend in expenditure after adjusting for inflation. The analysis in trend in expenditure in real term reveals some interesting facts.

    During the last six years, the real growth in current expenditure averaged 3 percent per annum as compared with 4.5 percent in the 1990s. Total expenditure in real term grew by 3.4 percent in the first three years (2000-03) but accelerated to 5.6 percent during the last three years (2003-06).

    The main contribution has come from development expenditure which grew by 7.4 percent per annum in first three years (2000-03) and by 23.8 percent in recent three years (2003-06). Non-defence non-interest expenditure in real term grew by 13.9 percent and 11.2 percent in these two periods, respectively.

    This tremendous growth is mainly contributed by massive fall in real incidence of interest payments which depicted negative growth of 7.4 percent and 7.2 percent in first and second three years period. Defence spending, in real term grew by an average rate of 1.5 percent per annum during the last six years. Development expenditure in real term on the other hand grew by an average rate of 15.6 percent per annum during the same period. This fact, hopefully, will dispel some misconception in the minds of various analysts on the issue of defence versus development expenditure.

    The fiscal policy stance remained decidedly growth-oriented during the fiscal year 2005-06, providing for strong public sector spending, intensification of spending on poverty alleviation and investing in infrastructure. Pakistan has made considerable progress in recent years on fiscal side. The overall fiscal deficit that averaged nearly 7.0 percent of GDP in the 1990s has declined to 3.3 percent in 2004-05. Fiscal deficit was targeted at 3.8 percent of GDP for the current fiscal year (2005-06) which was higher than the deficit of previous year (3.3 percent of GDP).

    Higher deficit was targeted to finance higher public sector development program (PSDP), particularly towards financing infrastructure projects. Better than the targeted revenue position helped Pakistan over perform in achieving the underlying fiscal deficit. The underlying fiscal deficit for the year is estimated at Rs 261.6 billion or 3.4 percent of GDP as against the target of Rs 285 billion or 3.8 percent of GDP.

    The earthquake-related expenditure for the year amounted to Rs 65.8 billion or 0.85 percent of GDP. Thus, including the earthquake-related spending, Pakistan's overall fiscal deficit stood at Rs 327.4 billion or 4.2 percent of GDP. In the next two years, Pakistan will continue to report overall fiscal deficit with and without earthquake-related spending to keep track of its underlying deficit.

    Total revenues are estimated at Rs 1095.6 billion in 2005-06 compared with Rs 900 billion in 2004-05, thereby showing an increase of 21.7 percent. Tax revenue is provisionally estimated to have risen by 22.2 percent while non- tax revenue is estimated to rise by 16.9 percent. The Central Board of Revenue (CBR) was targeted to collect Rs 690 billion but it is likely to collect Rs 710 billion - Rs 20 billion more than the target and over 20 percent more than last year.

    Total expenditure without earthquake-related spending on the other hand is estimated to grow by 21.5 percent. The higher growth in expenditure was mainly on account of a 43.4 percent increase in development spending which simply points toward the fact that the fiscal policy stance adopted by the government was growth-oriented.

    The government has provided almost Rs 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.

    Public debt burden continues to decline rather sharply for the sixth year in a row on account of prudent fiscal management. Public debt was 85 percent of GDP in 1999-2000 but has declined sharply to 54.7 percent in 2005-06 - a decline of over 30.0 percentage points in just six years is one of the significant achievements of the government.

    During the year, public debt as percentage of GDP declined from 61.4 percent to 54.7 percent - a 6.7 percentage points decline in one year in the midst of earthquake-related spending is other stellar occurrences of the current fiscal year. Since public debt is a charge on the budget, its burden must be viewed in relation to government revenue.

    Public debt was 448.9 percent of total revenue last year but declined to 384.9 percent this year - a decline of 64 percentage points in one year is not a mean achievement.

    External Sector Pakistan's external sector is being affected both by structural and cyclical factors. On the domestic side, four years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending, has led to a massive surge in imports.

    On the external side, the global economy continues its 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 4.0 percent.

    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. Like many other developing countries, Pakistan has also benefited from a strong and sustained growth in world economy. Notwithstanding global economic expansion, the sound macroeconomic policies that Pakistan pursued coupled with wide - ranging structural reforms, 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.

    EXPORTS: Exports were targeted at $17 billion or 18.1 percent higher than last year. Exports during the first nine months (July-March) of the current fiscal year are up by 18.6 percent - rising from $10.18 billion to $12.07 billion in the same period last year. The exports of primary commodities were up by 22 percent; prominent among those are exports of rice (33.6 percent), fish and fish preparation (30.2 percent) and fruits (20.6 percent).

    Exports of textile manufactures grew by 19.2 percent; prominent among those are exports of bedwear (58.4 percent), readymade garments (31.0 percent), cotton yarn (29.4 percent), cotton cloth (16.5 percent) and towels (12.0 percent). Exports of other manufactures also registered a high double digit growth of 19.2 percent.

    Within this category, exports of petroleum products grew by 80.8 percent and leather manufactures were up by 44.0 percent. In recent years, Pakistan has also entered in the exports of engineering goods. Though relatively small in numbers, exports of engineering goods were up by 10.3 percent.

    The overall exports posted an increase of $1890.2 million, in absolute term in the first nine months, of the current fiscal year over the same period of last year. Of this increase, 61.4 percent or $1160.5 million has come alone from textile manufactures followed by other manufactures (20.9 percent or $395.7 million), primary commodities (11.1 percent or $209.6 million) and other exports (6.5 percent or $124.5 million). In other words, 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.

    It is encouraging to note that exports this year have been largely quantity driven and with firming up of the price of exportable, Pakistan's exports may rise substantially in the medium- terms. During the first nine months (July-March) of the current fiscal year, 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).

    Pakistan's exports are highly concentrated in few items namely, cotton, leather, rice, synthetic textiles and sports goods. These five categories of exports account for 74.5 percent of total exports during the first nine months of the year with Cotton manufacturers alone contributing 58.4 percent, followed by leather (6.1 percent), rice (6.9 percent) and synthetic textiles (1.2 percent). Pakistan's exports are also highly concentrated in few countries.

    The seven countries, namely USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia account for 50 percent of its exports. The United States is the single largest export market for Pakistan, accounting for 27 percent of its exports followed by the United Kingdom, Dubai, Germany and Hong Kong. Japan as Pakistan's export destination is fast loosing its significance less than one percent of its exports entering Japan. Pakistan needs to diversify its exports not only in terms of commodities but also in terms of markets. Heavy concentration of exports in few commodities and few markets could cause serious export instability.

    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. Imports were targeted to grow by 4.25 percent for the fiscal year 2005-06 - rising from $14.4 billion to $20.7 billion.

    Imports are up by 43.2 percent in the first nine months (July- March) of the current fiscal year - rising from $14.45 billion to $20.69 billion in the same period last year. Desegregation of total imports suggests that food imports grew by 35.9 percent - up from $990.7 million to $1346.7 million. Major contributors to the substantial rise in food imports include wheat, sugar and pulses; they together contributed 93 percent to the rise in food imports.

    Imports of petroleum group have played a key role in taking Pakistan's import to a new height.

    Emerging as a single largest item in country's import bill, Petroleum group import amounted to $4.6 billion during the first nine months (July-March) of the current fiscal year as against $2.8 billion in the same period last year, thus registering an increase of 64.5 percent.

    Although the quantity of imports of crude as well as petroleum products are down by 2.3 percent and 5.8 percent, respectively, the prices of these two items were up by 76.6 percent and 62.9 percent compared with last year, causing import of these two items to rise by 64.5 percent in value terms. Despite reduction in quantity, 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.

    Overall imports during the first nine months (July-March) of the current fiscal year grew by 43.2 percent. In other words, imports in absolute terms have increased by $6.25 billion.

    Major contributions to this year's incremental imports have come from petroleum group, raw materials and machinery. Almost 35 percent contribution came from machinery and raw materials, and 29 percent from petroleum group.

    Therefore, these three items alone are responsible for 64 percent additional import and 27.6 percentage points to the 43.2 percent growth in total import this year. Consumer durables including cars, have contributed only 6.4 percent to the additional increase in total imports and 2.8 percentage points to the 43.2 percent growth in total import this year. Within this category of imports, electrical machinery and appliances contributed merely 1.7 percent while the contribution of cars has been 4.7 percent only.

    More importantly, had the price of oil in international market remained at last year's level, the growth in overall imports would have been 30.7 percent, that is, 12.5 percentage points less than what is currently estimated.

    On the contrary, 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, the growth in total imports would have been 40.4 percent instead of 43.2 percent. Car has merely contributed 2.8 percentage points to the overall growth in imports.

    Like exports, Pakistan's imports are also highly concentrated in few items namely, machinery, petroleum & petroleum products, chemicals, transport equipments, edible oil, iron & steel, fertiliser and tea. These eight categories of imports accounted for 72.5 percent of total imports during 2005-06. Among these categories machinery, petroleum & petroleum products and chemicals accounted for 53.4 percent of total imports.

    Concentration of imports remained, by and large, unchanged over the last one decade with the exception of 2000-01. Pakistan's imports are highly concentrated in few countries. Over 40 percent of them continue to originate from just seven countries namely, the USA, Japan, Kuwait, Saudi Arabia, Germany, the UK and Malaysia. Saudi Arabia is emerging as major suppliers to Pakistan followed by the USA and Japan.

    Trade Balance Despite sizable export gains, the merchandise trade deficit continues to widen, on the back of Pakistan's strong domestic demand fuelling non-oil imports. High global price of oil also inflated the oil import bill owing to its increasing dependence of imported crude oil.

    The merchandise trade deficit stood at $8.62 billion by the end of the third quarter (July-March) of the current fiscal year as against $4.3 billion in the same period last year, thereby showing a deterioration of over 100.0 percent. Once again, the major contributors to further widening of trade deficit have been the petroleum group, machinery and iron & steel and scrap.

    These three items alone accounted for 75 percent to the further rise in trade deficit.

    Contrary to the general perception, the contribution of consumer durables has been 9.2 percent in the increase in trade deficit. Going forward, no one is expecting another 65 percent increase in oil prices in 2006-07 therefore, import growth is likely to decelerate in 2006-07. The sign of deceleration is already visible as import growth has slowed substantially in recent months.

    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 fuelled by strong demand.

    Apart from further widening of trade deficit, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost, 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. Deceleration in the growth of net transfers is also responsible for widening of the current account deficit.

    The current account deficit, excluding official transfers, stood at $4.7 billion in the first nine months (July-March) of the current fiscal year, compared to $1.18 billion in the same period last year.

    As percentage of projected GDP for the year the current account deficit stood at 3.7 percent as against 1.1 percent in the same period last year. Although trade deficit almost doubled over the last year and services balance deteriorated by 27.5 percent, the strong inflows under private transfers fuelled by rising workers' remittances offset some of the negatives with current account deficit standing at $4.7 billion.

    WORKERS' REMITTANCES: Workers' remittances, the second largest source of foreign exchange inflow after exports, continue to maintain its rising trend. Workers' remittances totalled $3.63 billion during the first ten months (July - April) of the current fiscal year, as against $3.45 billion in the same period last year, depicting an increase of 5.2 percent. The United States continues to be the single largest source of cash workers' remittances accounting for 27.4 percent or $995 million, followed by Saudi Arabia ($585 million or 16.1 percent), UAE ($556 million or 15.3 percent), UK ($346 million or 9.5 percent) and other GCC countries ($426 million or 13.2 percent). Given the trend so far, it is likely that workers remittances may touch $4.4 billion in 2005-06. Remittances have so far proved remarkably resilient and have hovered around $4.0 billion since 2002-03.

    According to the World Economic Outlook, April 2005 published by the IMF, remittances can help improve the country's development prospects, maintain macroeconomic stability, mitigate the impact of adverse shock and reduce poverty. The Outlook further states that remittances allow families to maintain or increase expenditure on basic consumption, housing, education, and small-businesses formation.

    To the extent, the poorer section of the society depend on remittances for their basic consumption needs, increase remittances could be associated with reduction in poverty and possibly inequality.

    The Outlook also finds strong empirical evidence that suggest that construction activity is highly correlated with remittances inflow. Pakistan has been receiving, on average, over $4.0 billion per annum during the last four years. Such a massive inflow of remittances has helped Pakistan builds its foreign exchange reserves which, in turn, have provided stability in exchange rate. For the families, the massive flow of remittances has helped increase their consumption spending, helped improve their housing facility and improve their overall living conditions. It has also played an important role in reducing poverty in Pakistan.

    FOREIGN DIRECT INVESTMENT: Foreign Direct Investment (FDI) has become an important source of private external finance for developing countries. 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.

    FDI in the first ten months (July-April) of the current fiscal year has reached $3.02 billion - the highest ever in the country's history, as against $0.89 billion in the same period last year, thus registering an increase of 238.7 percent. By the end of the current fiscal year, FDI is expected to reach $3.5 billion or 2.7 percent of GDP.

    Almost 75.0 percent of FDI has come from six countries, namely, the UAE, US, Saudi Arabia, Switzerland, UK and Netherlands. The UAE with 42.5 percent ($1284.6 million) has topped the list of foreign investors followed by the US (13.9 percent or $419.1 million), Saudi Arabia (9.06 percent or $273.7 million), Switzerland (5.34 percent or $161.5 million), UK (5.0 percent or $151.4 million) and Netherlands (2.9 percent or $87.1 million).

    Telecom, energy (oil, gas and power), financial services, trade, construction, chemicals, food and personal services have been the major recipient of FDI, accounting for almost 94 percent or $2.082 billion.

    Telecom sector has been the single largest recipient of FDI with $1.0 billion followed by the energy sector ($304 million), financial services ($265.5 million), trade ($81.9 million), construction ($54.4 million), food ($52.7 million), personal services ($45.2 million) and cement ($33.6 million).

    FOREIGN EXCHANGE RESERVES: Pakistan's total liquid foreign exchange reserves stood at $13.0 billion at the end of April, 2006. Of which, reserves held by the State Bank of Pakistan amounted to $10.6 billion and by banks stood at $2.4 billion.

    Since end-July 2005 ($12.6 billion) and until end-April 2006 ($13.0 billion), Pakistan has added $407.0 million in its foreign exchange reserves. Many factors contributed towards this comfortable position of reserves. The most prominent among those are: private transfers that include remittances, higher export proceeds, floatation of bonds, higher FDI flows and privatisation proceeds. With this build up in reserves, Pakistan is in a position to meet any abnormal external shock.

    Privatisation: A wide-ranging structural reform introduced during the last six year coupled with macroeconomic stability and rapid, strong and sustained economic recovery has transformed Pakistan into one of the ideal locations for foreign investment. Foreign investors are not only entering into the greenfield projects but are also actively participating in Pakistan's privatisation program.

    This is also the reflection of the confidence of the global investors on the transparent privatisation program that has been followed in the past several years. Since January 1991 and until April 18, 2006, Pakistan has completed 160 transactions with gross proceeds of Rs 395.2 billion. Of which, 57 transactions worth Rs 338 billion were completed during October 1999 to April 2006. During the first ten months (July - April) of the current fiscal year, 11 transactions worth Rs 217.9 billion have been completed.

    The major milestones achieved under the privatisation program for the year include the strategic sale of the entities like KESC, Pak-Arab Fertilisers, PTCL, Pakistan Steel Mill, Pak-American Fertiliser, Mustehkam Cement, Javedan Cement and CTI. The upfront payment of $1.4 billion by Etisalat and transfer of management control of PTCL has been one of the major achievements of privatisation program for the year.

    The major privatisation initiatives which are under process and are likely to be complete soon include: Pakistan State Oil (PSO), Pakistan Petroleum Limited (PRL), Oil and Gas Development Company Limited (OGDCL), Faisalabad Electric Supply Company (FESCO), GENCO-1 Jamshoro, National Investment Trust (NIT) and other industrial units.

    EXTERNAL DEBT: Until a few years ago, Pakistan was facing serious difficulties in meeting its external debt obligations. Not only was the stock of external debt and foreign exchange liabilities growing at an average rate of 7.4 percent per annum during 1990-99, but the debt carrying capacity of the country was weakening at a similar pace.

    Consequently, 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. Following a credible strategy of debt reduction, over the last six years, 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's external debt and liabilities have declined by $2.4 billion in seven years - down from $38.9 billion at the end of the 1990s to $36.5 billion by end-March, 2006. The other indicators of debt burden which are widely monitored by the international financial institutions, rating agencies, and participants of the international debt capital markets, have shown sharp reduction.

    For example, the external debt and liabilities as percentage of GDP which stood at around 52 percent in end-June 2000, declined to 28.3 percent in end-March 2006. Similarly, the external debt and liabilities as percentage of foreign exchange earnings was reduced from 335.4 percent in 1998-99 to 127.6 percent by end-March 2006.

    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 3.1 times in just seven years.

    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. It may also be noted that the maturity profile of the debt has also improved during the period. The short-term debt was 3.2 percent of the external debt and liabilities but declined to 0.9 percent in the same period.

    PAKISTAN'S LINK WITH INTERNATIONAL CAPITAL MARKET: With the successful implementation of first generation structural reforms and after gaining economic stability, Pakistan decided to give signal to the international capital markets through issuance of debt instruments. On February 12, 2004 Pakistan made a successful return to the international capital markets for the first time in more than five years.

    Pakistan issued S$500 million 5-year Regulation-S Eurobond due 2009 lead managed by J. P Morgan, Deutsche Bank and ABN Amro Bank. 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.

    The success of this transaction reflected a vote of confidence by the international investor community on Pakistan's economic policies and reform agenda. Pakistan's Eurobond was priced at 370bps above US Treasury to yield 6.750 percent which looked very tight when compared with emerging market peers. The Pakistani bond was priced some 50bps inside the Philippines, despite the fact that it was rated three notches lower.

    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, due 2009, it has undergone compression by about 201bps as on May 04, 2006. As compared to the issue spread of UST + 370bps, the bond is trading currently at a spread of UST + 169bps, about 54 percent less.

    In January 2005, Pakistan issued US $600 million Islamic Sukuk lead managed by Citi Group and HSBC. The 5 year notes, structured to comply with Islamic law ("Shariah") were priced at 6 month US $Libor + 220 bps benchmark. Pakistan's debut Islamic Bond issue saw considerable interest from both conventional as well as Islamic investors across the three regions, Asia, Middle East and Europe.

    It attracted orders worth $1.2 billion, with more than 80 accounts participating in the transaction. 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. Pakistan had over 80 accounts with a well-distributed book (Middle East 47 percent, Asia 31 percent and Europe 22 percent).

    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.

    EUROBOND OF 2016 AND 2036: On March 23, 2006, 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 J. P Morgan, Citi Group and Deutsche Bank.

    This transaction, which represented the first international 144A bond issued by Pakistan since 1999, raised significant interest amongst US QIBs and international Institutional investors. The 10-year notes were priced with a coupon of 7.125 percent to yield 7.125 percent, framing a spread of 240bps over the relevant 10-year US Treasury benchmark. The 30-year bonds were priced with a coupon of 7.875 percent to yield 7.875 percent, framing a spread of 302bps over the relevant 30-year US Treasury benchmark.

    Pakistan was able to achieve spreads on both the new 10 and 30-year bonds that were tighter than its previous 5-year issues. By issuing 10 and 30 year bonds, Pakistan completed its primary objective of establishing a full Pakistani International yield curve in record time. This remarkable achievement was completed against a backdrop of increased volatility in the US Treasury and Asian credit markets. With over 170 accounts participating, books closed with total orders exceeding US $2bn.

    The issue was over 2.5 times oversubscribed. Since the issue of the new Pakistan bonds due 2016 and 2036, the EM credit markets have continued to tighten. 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, within just over a month since issued.

    As compared to the issue spread of UST + 240bps, the 2016 bond is trading currently at a spread of UST + 216bps, about 10 percent less. The 2036 bond, as compared to the issue spread of UST + 302bps, is trading currently at a spread of UST + 266bps, about 12 percent less.

    It is important to note that this offering was the largest ever funding exercise of the government. The largest deal, prior to this transaction has been the $600 million Sukuk in 2005.

    It was the longest ever tenor achieved by Pakistan. 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. Most emerging market sovereign issuers have taken longer time to extend their yield curve from 5 to 30 years. It took Philippines 4 years and Brazil and Turkey 3 years to extend their yield curve to 30 years.

    POVERTY: The fight against poverty represents the greatest challenge of our times. Considerable progress has nevertheless been made in different parts of the world in reducing poverty. 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).

    In absolute numbers the reduction during the period was 130 million with most of it coming from China. In Sub-Saharan Africa, the absolute number of poor actually increased by 100 million during the period. The Central and Eastern Europe and the CIS also witnessed a dramatic increase in poverty. While incidence of poverty declined in South Asia; Latin America and the Middle East witnessed no change.

    The recent trends in global and regional poverty clearly suggest one thing and that is, that rapid economic growth over a prolonged period is essential for poverty reduction. At the macro level, economic growth implies greater availability of public resources to improve the quantity and quality of education, health and other services. At the micro level, economic growth creates employment opportunities, increases the income of the people and therefore reduces poverty.

    Many developing countries have succeeded in boosting growth for a short period. 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. One thing is also clear from the evidence of East Asia and China that growth does not come automatically. It requires policies that will promote growth.

    Macroeconomic stability is therefore, key to a sustained high economic growth. Although extreme poverty on global level has declined, the gap between the rich and poor countries is increasing, even when developing countries are growing at a faster pace than developed ones - perhaps due to the large income gaps at the initial level.

    In a world of six billionpeople, one billion have 80 percent of the income and five billion have less than 20 percent. This issue of global imbalance is at the core of the challenge to scale up poverty reduction.

    In Pakistan, Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in poverty during 1990s.

    IT CONSISTED OF THE FOLLOWING FIVE ELEMENTS:- (a) accelerating economic growth and maintaining macroeconomic stability, (b) investing in human capital, (c) augmenting targeted interventions; (d) expanding social safety nets; and (e) improving governance.

    The net outcome of interactions among these five elements would be the expected reduction in transitory and chronic poverty on a sustained basis. The reduction in poverty and improvement in social indicators and living conditions of the society are being monitored frequently through large- 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.

    Pakistan's growth performance over the last four years is enviable in many respects. 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. The real GDP has grown at an average rate of over 7.5 percent per annum during the last three years (2003/04 to 2005/06). With population growing at an average rate of 1.9 percent per annum, the real per capita income has grown at an average rate of 5.6 percent per annum.

    The strong economic growth is bound to create employment opportunities and therefore reduce unemployment. The evidence provided by the Labour Force Survey 2005 (First two quarters) clearly supports the fact that economic growth has created employment opportunities. Since 2003-04 and until the first half of 2005-06, 5.82 million new jobs have been created as against an average job creation of 1.0 - 1.2 million per annum. Consequently, unemployment rate which stood at 8.3 percent in 2001-02 declined to 7.7 percent in 2003-04 and stood at 6.5 percent during July - December 2005. The rising pace of job creation is bound to increase the income levels of the people.

    In recent years the role of remittances in reducing poverty has been widely acknowledged. Remittances allow families to maintain or increase expenditure on basic consumption, housing, education, and small-business formation. Total remittances inflows since 2001-02 and until 2005-06 have amounted over $19 billion or Rs 1129 billion. 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, allowing them to increase consumption of both durables and non-durables, on human capital accumulation (through both education and health care), and on real estate. To the extent that the poorer sections of society depend on remittances for their basic consumption needs, increased flow of remittances would be associated with reduction in poverty.

    Although, growth is necessary but it is not sufficient to make any significant dent to poverty. Realising this fact the government had launched a directed program under the title of Poverty Related and Social Sector Program some five years ago. Over the last five years the government has spent Rs 1332 billion on poverty-related and social sector program to cater to the needs of poor and vulnerable sections of the society. Such a huge spending on targeted program is bound to make a significant dent to poverty.

    THE HOUSEHOLD INTEGRATED ECONOMIC SURVEY (HIES) - a component of Pakistan Social and Living Standards Measurement (PSLM) Survey provides important data on household income, consumption expenditure and consumption patterns at national and provincial level with rural-urban breakdown. The information pertaining to income and expenditure of the households are used to estimate poverty. The HIES is specifically designed to monitor poverty status of population by collecting information on consumption expenditure at the household level. With a representative sample size of 14706 households, it covered 5808 and 8898 households in the urban and rural areas of the country, respectively. The Survey was started in July 2004 and the entire field operations were completed in June 2005.

    The poverty line is based on 2350 calories per adult equivalent per day. 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.

    THE LATEST ESTIMATE OF INFLATION - adjusted poverty Iine is Rs 878.64 per adult equivalent per month - up from Rs 723.40 in 2001. Headcount ratio, ie, percentage of population living below the poverty line has fallen from 34.46 percent in 2001 to 23.9 percent in 2004-05, a decline of 10.6 percentage points. In absolute numbers the count of poor persons has fallen from 49.23 million in 2001 to 36.45 million in 2004-05.

    The percentage of population living below the poverty line in rural areas has declined from 39.26 percent to 28.10 percent while those in urban areas, has declined from 22.69 percent 14.9 percent. In other words, rural poverty has declined by 11.16 percentage points and urban poverty is reduced by 7.79 percentage points. Consumption inequality increased marginally during the period. These findings are consistent with the developments on economic scene that have taken place in Pakistan since 2000-01. A strong growth in economy, rise in per capita income, a large inflow of remittances and massive spending on poverty-related and social sector programs were expected to reduce poverty in Pakistan.

    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, the Asian Development Bank, the United Nations Development Program (UNDP) and the Department for International Development (DFID), UK. The service of world renowned poverty expert, Professor Nanak Kakwani was hired by the UNDP to independently look into the methodology as well as poverty estimates. He also authenticated both the methodology and estimates. In order to maintain consistency across years, it is essential that we apply the same agreed upon methodology over the years, irrespective of its weaknesses and strengths.

    SECOND GENERATION REFORMS: Structural reform is the essence of development. Broadly speaking, structural reforms entail measures that change the institutional framework and constraints governing market behaviour and outcomes.

    In general, 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. It would, however, be misleading to equate structural reforms with the goal of abandoning regulation altogether. Structural reforms aim at adapting institutional frameworks and regulations for markets to work properly.

    But it is well-known that some markets are prone to market failure or inefficiencies, therefore, there is a role of the government to correct the market failure and improve the efficiencies of the markets. Structural reforms, therefore, do not abdicate the government to play its due role.

    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, removing irritants to improve investment climate and improving the allocation of resources. The reforms implemented thus far include: financial sector reforms, capital markets reforms, tax and tariff reforms, reforms in tax administration, fiscal transparency, reforms in privatisation program, governance reform, particularly with respect to devolution and capacity building, agricultural reform, particularly with respect to agriculture pricing, movement of commodities and introducing private sector in wheat operation, and most importantly, the passing of the Fiscal Responsibility and Debt Limitation Act 2005. The last one was very essential to pursue a rule-based fiscal policy to inject financial discipline. Pakistan has benefited immensely from what is known as first generation reforms.

    Pakistan's economic recovery has been strong, rapid and sustained. Going forward, Pakistan is targeting a growth rate of 6 to 8 percent per annum in the next five years. However, it is clear that a growth of this magnitude would not be achievable automatically. To sustain a growth momentum of 6 to 8 percent per annum more efforts and more 'growth-critical' reforms would be required.

    OVER THE NEXT FIVE YEARS THE GOVERNMENT'S REFORM AGENDA INCLUDE: strengthening institutions, improving the competitiveness of our industry, building a robust financial system in an environment of global financial restructuring, further strengthening of tax administration, promoting transparency in economic policy-making, further reform in capital market and strengthening the country's physical and human infrastructure. While it is not possible to discuss each element of reform, an attempt has been made to provide some flavour of these reforms.

    Strengthening of institutions is vital to remove obstacles to higher growth and better social service delivery. As part of institutional strengthening the government has already launched major initiatives, prominent among those include reforms in judiciary, police, civil service, and pension, the restructuring of the Central Directorate of National Savings (CDNS), transforming the existing Monopoly Control Authority (MCA) into a Competition Authority Organisation, and introduction and adoption of E-Government Strategy.

    Furthermore, the government has already set-up 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, corruption opportunities.

    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 modernising the court system at all levels and strengthening capacity, effectiveness, and accountability of law enforcement agents. This is an on-going and difficult reform program.

    Some progress in police reform has also been made. 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. On pension reform, the government is working towards introducing a contributory Provident/ Pension Fund Scheme for the new entrants. The work on converting the existing CDNS into a corporate body is also at a fairly advance stage. 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.

    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. In order to improve the efficiency of various ministries the government is working towards achieving ISO 9001 Certification.

    A beginning has already been made with Ministry of Finance working towards achieving this certification. 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. To implement the second generation reform the government is setting up an Economic Reform Unit in the Ministry of Finance with a view to co-ordinating with other ministries in implementing various reforms. This unit will also serve as Secretariat for the Private Sector Development initiatives.

    Improving competitiveness of Pakistan's industries is central to the reform agenda. It deals with improving investment climate by strengthening microeconomic sources of competitiveness. Improving competitiveness requires understanding of various impediments and policy bottlenecks that affects competitiveness of our industry.

    Most important element of improving competitiveness is the strengthening of the country's physical infrastructure, that is, the supply of gas, power, working of ports, roads, rail linkages, telecommunication network, and water availability. Given the resource constraints on the one hand and the role strong infrastructure in enhancing competitiveness on the other, the government has recently set-up Infrastructure Project Development Facility in line with public-private partnership.

    Furthermore, 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.

    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. However, further strengthening of the banking system to meet the challenges arising from global financial restructuring is required. Future reforms include: voluntary mergers and consolidation of smaller banks to become effective and strong banks; further strengthening of the legal infrastructure of the banking system; formulation of new Banking Law to deal with current and future challenges; a deposit insurance scheme to protect the small depositors; further liberalisation of financial services in the context of TRIMs; promoting transparency and accountability in banking system; and observance of international standards.

    Tax administration reform is the cornerstone of the reform agenda. A major overhaul of the Central Board of Revenue (CBR) is being implemented. It aims at increasing the CBR's effectiveness, reduce corruption opportunities, and raise the buoyancy of the tax system through organisational restructuring, self assessment, elimination of personal contacts between tax-payers and tax authorities, simplified processes, tax-payers facilitation, revised terms and conditions for employment of the CBR officials and improved IT management. 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.

    Concluding Remarks Economic success brings fresh challenges. Pakistan has witnessed strong, rapid and sustained economic recovery with growth averaging at 7.0 percent per annum during the last four years. This has positioned Pakistan as one of the fastest growing economies in Asia. The economic landscape of Pakistan has changed altogether therefore; its challenges are also different today. How to sustain the on-going growth momentum

    in an environment of macroeconomic stability is the biggest challenge going forward. Linked with this are the challenges of job creation, poverty alleviation, improving social indicators and most importantly, strengthening the country's physical infrastructure to support 6-8 percent growth in the medium-term.

    An impressive economic recovery from an economic downturn is a good time to enhance the speed of implementation of the second generation reforms. Many economic problems are due to shortcomings in the markets, rather than to resource shortages or an excess or deficiency of overall demand. There is a broad consensus that where there are such problems, structural reforms, that is policy measures that change the institutional and regulatory frameworks governing market behaviour, 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 realising its potential for sustained economic growth, better living standards, and greater resilience to shocks. The moment such as this does not mean that we have time to pause or rest. Although we have made great strides over the last six years, we are fully aware that much remains to be done.

    EXECUTIVE SUMMARY:

    Pakistan's economy has delivered yet another year of solid economic growth in 2005-06 in the midst of an extra- ordinary surge in oil prices and devastating earthquake of October 8, 2005 causing widespread damages. 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 sustained for the last four years is underpinned by dynamism in industry, agriculture and services, and the emergence of a new investment cycle supported by strong credit growth.

    The pre-requisites for a sustained economic growth appear to have gained 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 on the one hand and budget on the other, and massive earthquake of October 8, 2005 causing extensive damage to property, infrastructure, school, hospital etc and loss of over 70,000 human lives. The rescue, relief and reconstruction of earthquake affected areas also put budget under severe stress. Pakistan's economy has proved itself as remarkably resilient in the face of shocks of extra-ordinary proportions. Growth has remained buoyant. Real GDP grew strongly at 6.6 percent in 2005-06 as against the revised estimates of 8.6 percent last year and 7.0 percent growth target for the year.

    Key drivers of this year's growth have been service sectors and industry. Large-scale manufacturing grew by 9.0 percent as against 15.6 percent of last year and 14.5 percent target for the year, exhibiting signs of moderation on account of higher capacity utilisation on the one hand and strong base effect along with several other factors on the other hand. The services sector continued to perform strongly at 8.8 percent. Construction too continued to perform strong showing, partly helped by activity in private housing market, spending on physical infrastructure, and reconstruction activities in earthquake affected areas. Consumer spending remained strong and investment spending gained further traction.

    Pakistan's economy continues to maintain solid pace of expansion since the fiscal year 2002-03 recovery in the economy 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:

    GROWTH AND INVESTMENT:

    Pakistan's economy continued to maintain solid pace of expansion for the fourth year in a row in the fiscal year 2005-

    06 despite facing headwinds from rising energy prices at $70-75 per barrel and the widespread damage caused by the earthquake of October 8, 2005. The growth momentum that Pakistan sustained for the last four years is underpinned by dynamism in industry, agriculture and services, and the emergence of a new investment cycle supported by strong credit growth.

    Real GDP grew by 6.6 percent in 2005-06 as against 8.6 percent last year and fell short of the target (7.0 percent). 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 and over 7.5 percent in the last three years, thus enabling it to join the exclusive club of the fastest growing economies of the Asian region.

    Growth of value addition in Commodity Producing Sector (CPS) slowed to 4.3 percent in 2005-06 as against 9.2 percent last year. Both the important components of the commodity producing sector namely, agriculture and manufacturing performed less than their targets. Within the CPS, agriculture and manufacturing grew by 2.5 percent and 8.6 percent, respectively.

    Agriculture and particularly its crop sector could not perform up to the expectation especially major crops registered a 3.6 percent contraction in growth. Livestock, a major component of agriculture, exhibited strong showing and pulled the overall growth in agriculture to 2.5 percent as against the target of 4.2 percent. Livestock has been the only saving grace as far as the performance of agriculture is concerned this year.

    Overall manufacturing, accounting for 18.2 percent of GDP, registered an impressive growth of 8.6 percent against the target of 12.0 percent and last year's achievement of 12.6 percent.

    Large-scale manufacturing grew by 9.0 percent as against 15.6 percent of last year and 14.5 percent target for the year, exhibiting signs of moderation on account of higher capacity utilisation on the one hand and strong base effect along with several other factors on the other hand. Small-scale manufacturing grew at estimated 9.3 percent in 2005-06.

    The Construction sector continued its strong showing, partly helped by activity in private housing market, spending on physical infrastructure, and reconstruction activities in earthquake affected areas. The construction sector is estimated to grow by 9.2 percent in 2005-06 as against extraordinary growth of 18.6 percent last year.

    The services sector grew by 8.8 percent in 2005-06 as against 8.0 percent of last year. Growth in the services sector in 2005-06 was primarily attributable to strong growth in the finance and insurance sector, better performance of wholesale and retail trade, as well as transport and the communications sector. Finance and insurance sector spearheaded the growth in the services sector and registered stellar growth of 23.0 percent during the current fiscal year 2005-06 which is slightly lower than 29.7 percent of last year. Value added in the wholesale and retail trade sector has increased by 9.9 percent over the previous year, compared to 11.1 percent growth last year. The transport, storage and communications sector grew by 7.1 percent compared to 3.5 percent growth last year.

    Major contribution towards growth has come from the services sector which has emerged as a new growth power house for some time. 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 6.6 percent. The CPS contributed 31.7 percent or 2.1 percentage point to this year's growth while the remaining 68 percent or 4.5 percentage points contribution came from services sector. Within the CPS, agriculture contributed 0.55 percentage points or 8.4 percent to overall growth while industry contributed 1.54 percentage points or 23.3 percent. Within services sector wholesale and retail trade has contributed 27.9 percent or 1.84 percentage points to GDP growth.

    Pakistan's per capita real GDP has risen at a faster pace during the last three years (5.6 percent per annum on average in rupee terms) leading to a rise in average income of the people. Such increases in real per capita income have led to a sharp increase in consumer spending during the last three years. Per capita income defined as Gross National Product at market price in dollar term divided by the country's population, grew by an average rate of 13.9 percent per annum during the last four years - rising from $579 in 2002-03 to $847 in 2005-06. Per capita income in dollar term registered an increase of 14.1 percent over last year - rising from $742 to $847.

    As opposed to an average annual increase of 1.4 percent during 2000-03, real private consumption expenditure grew by 13.1 percent in 2004-05 and further by 8.1 percent in 2005-06.

    INVESTMENT:

    During the fiscal year 2005-06, gross fixed capital formation or domestic fixed investment grew by 30.7 percent as against a sharp rise of 28.6 percent last year. Private sector investment grew by 31.6 percent this year as against a growth of 29.1 percent last year. Major growth in investment by private sector is witnessed in agriculture (15.3 percent), manufacturing (14.4 percent), mining and quarrying (45.5 percent), construction (9.5 percent), transport and communication (20.2 percent), and wholesale and retail trade (424.5 percent). Public sector investment on the other hand registered massive growth of 46.7 percent as against a hefty 32.9 percent increase last year.

    The growth in domestic investment was largely a public sector phenomenon last year but this year, it was mainly public-private sector partnership driven. Total investment increased from 18.1 percent of GDP last year to 20.0 percent of GDP in 2005-06.

    Fixed investment as percentage of GDP is estimated at 18.4 percent as against 16.5 percent last year. Both public sector investment and private sector investment as percentage of GDP have increased to 4.8 percent and 13.6 percent respectively, up from 4.4 percent and 12.1 percent last year.

    SAVINGS:

    National savings as percentage of GDP stood at 16.4 percent in 2005-06 fractionally lower than last year's level of 16.5 percent. Domestic savings stood at 14.4 percent of GDP in 2005-06 slightly lower than 14.5 percent of GDP last year.

  • #2
    Part II

    AGRICULTURE:

    Agriculture is the mainstay of Pakistan's economy. Nearly twenty-two percent of total output (GDP) and 44.8 percent of total employment is generated in agriculture. It also contributes substantially to Pakistan's exports. Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products.

    Furthermore, 44.8 percent of country's work force is employed in agriculture, but 65.9 percent of country's population living in rural areas is directly or indirectly linked with agriculture for their livelihood. Whatever happens to agriculture is bound to affect not only the country's growth performance, but to a large segment of the country's population as well.

    Over the last five years, growth in agriculture has witnessed a mixed trend. During the first two years (2000-01 and 2001-02), the country experienced the crippling drought, which badly affected its agriculture and eventually overall growth in agriculture turned negative for these two years. In the preceding years (2002-03 to 2004-05), relatively better availability of irrigation water had positive impact on overall agricultural growth and this sector exhibited a modest to strong recovery.

    However, the performance of agriculture during the fiscal year 2005-06 has been weak. Against the target of 4.2 percent and last year's achievement of 6.7 percent, overall agriculture grew by 2.5 percent in 2005-06, due to a relatively poor performance of major crops and forestry, and weaker one of minor crops and fishery. At the same time, Livestock has been the sole saving grace.

    Major corps, accounting for 35.2 percent of value added in agriculture, registered a decline of 3.6 percent as production of two of the four major crops, namely cotton and sugarcane has been significantly less than last year for a variety of reasons including, excessive rains at the time of sowing, high temperature at the flowering stage, late harvesting of wheat crop, a strong base effect (cotton) and lastly the incidence of frost, damaging sugarcane crop in the month of January, 2006.

    The production of third major crop, namely wheat, remained more or less at last year's level at 21.7 million tons thereby registering a meager growth of 0.4 percent. The production of rice - the fourth major crop - has been the sole major crop which registered an impressive growth of 10.4 percent, but failed to turn the negative growth in major crops to a positive one.

    Minor crops, accounting for 12.3 percent of agricultural value added, barely managed to register a positive growth of 1.6 percent in 2005-06 as against a growth of 3.0 percent last year.

    The performance of livestock, the single largest sector accounting for almost one - half of agricultural value added, has been impressive as this sector grew by 8.0 percent on the back of substantial increase in the population of species, milk etc. The performance of fisheries has been poor as it grew by 1.9 percent only in 2005-06. Forestry has been registering negative growth for three consecutive years - registering a negative growth of 9.7 percent in 2005-06 as against a negative growth of 30.4 percent.

    Pakistan's agriculture has been suffering, on and off, from a severe shortage of irrigation water in recent years. As against the normal surface water availability at canal heads of 103.5 million-acre feet (MAF), the overall (both for Kharif and Rabi) water availability has been less in the range of 5.9 percent (2003-04) to 29.4 percent (2001-02). Relatively speaking, the Rabi season faced more shortage of water than Kharif during these periods.

    During the current fiscal year (2005-06), the availability of water for Kharif 2005 (for the crops such as rice, sugarcane and cotton) has been 5.5 percent more than the normal supplies and 19.8 percent more than last year's Kharif. 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. The water availability during the Rabi season (for major crop such as wheat), as on end of March, 2006 was estimated at 30.0 MAF, which was 17.3 percent less than the normal availability, and 29.8 percent more than last year's Rabi.

    Amongst major crops, cotton production is estimated at 12.417 million bales for 2005-06 lower by 13 percent over the last year's production of 14.265 million bales. Wheat production is estimated at 21.7 million tons in 2005-06, as against 21.612 million tons last year, showing an increase of 0.4 percent. Rice production has increased by 10.4 percent in 2005-06 from 5.025 million tons last year to 5.547 million tons in 2005-06. Sugarcane production, however, decreased from 47.244 million tons in 2004-05 to 44.312 million tons in 2005-06, showing a decease of 6.2 percent.

    As regards the minor crops, the production of chillies and onions increased by 34.8 and 29.0 percent respectively during 2005-06. The production of all the pulses, namely masoor, mung and mash are down by 13.5, 12.6 and 9.8 percent, respectively during 2005-06. Lesser production over last year is due to shortfall in area.

    The production of potato also decreased by 17.9 percent on account of frost, which affected the potato crop. Agriculture credit disbursement of Rs 91.161 billion during July-March, 2005-06 is higher by 23.5 percent, as compared to Rs 73.811 billion over the corresponding period last year. The fertiliser off-take stood at 2982 thousand nutrient tons in July- March 2005-06 or higher by 6.1 percent, as compared to 2811 thousand nutrient tons for the corresponding period last year.

    MANUFACTURING, MINING AND INVESTMENT POLICIES 2005-06:

    The overall manufacturing sector continued to maintain its growth momentum with more vigour during the current fiscal year. Overall manufacturing recorded an impressive and broad based growth of 8.6 percent, against a target of 12.0 percent and last year's growth of 12.6 percent. Large-scale manufacturing registered an impressive growth of 9.0 percent in the current fiscal year 2005-06 against a target of 14.5 percent and last year's achievement of 15.6 percent.

    The main contributors to this impressive growth of 9.0 percent in July-March 2005-06 over last year are the automobile group (29.76 percent), engineering goods group (6.46 percent), non-metallic mineral products (9.49 percent), leather products (10.91 percent), chemicals (9.08 percent), pharmaceuticals (14.83 percent) and electricals (11.78 percent).

    The items that registered positive growth were cotton cloth (0.07 percent) and cotton yarn (11.16 percent) in the textile group; cooking oil (17.6 percent) in the food, beverages and tobacco groups; nitrogenous fertiliser (4.46 percent), in the chemical group, cement (9.75 percent) in the non-metallic mineral products group and Jeeps & Car (29.9 percent), LCV's (29.3 percent) and motorcycles/scooters (15.04 percent) in the automobile group. The individual items exhibiting negative growth include; sugar (2.40 percent), coke (77.39 percent), power looms (24.67 percent) and billets (47.95 percent).

    The output of the mining and quarrying sector grew by 3.8 percent this year as against the rise of 9.6 percent last year. The principal minerals which have shown positive growth are: baryte (11.4 percent), limestone (9.9 percent), natural gas (4.5 percent), rock salt (13.2 percent), sulphur (5.4 percent) and gypsum (12.6 percent). While negative growth was exhibited by chromite (6.7 percent) and magnetite (10.7 percent).

    Foreign direct investment has witnessed an increase of 238.7 percent in the first ten months (July-April, 2005-06), whereas, net foreign private investment stood at US $3376 million against US $1027 million last year, thereby, showing increase of $2349 million. The increase in foreign private investment is because of the inflow of portfolio investment of $355.8 million as compared to inflow of $135.5 million in the comparable period last year.

    The privatisation program maintained its pace during 2005-06 and succeeded in privatising some high-ticket items despite an inhospitable global environment. By end April 2006, Pakistan had completed or approved 160 transactions at gross proceeds of Rs 985 billion. This includes 57 transactions for Rs 337.908 billion completed during October 1999 to April 2006.

    POVERTY AND INCOME DISTRIBUTION:

    In Pakistan, the Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in poverty during 1990s. Preliminary findings of Pakistan Social and Living Standards Measurement Survey (PSLM 2004-05) on poverty status were released at the end of February 2006, which indicates that the poverty level in Pakistan has been reduced during the last four years.

    A strong growth (7.5 percent on average) for three years in a row, with per capita income growing at an average rate of 5.6 percent; a large inflow of remittances (over $4.0 billion per annum) in recent years, a huge expenditure on poverty-related and social sector program, and many other interventions have made a significant dent to poverty in Pakistan.

    As per HIES survey 2004-05, the percentage of the population living below the poverty line is provisionally estimated at 25.4 percent in 2005 - down from 32.1 percent in 2001.

    This suggests a decline of 6.7 percentage points in poverty in the last four years. More importantly, the rural poverty has declined more than urban poverty. The provisional estimates show that rural poverty has declined from 39.0 percent in 2001 to 31.8 percent in 2005 - a decline of 7.2 percentage points. Urban poverty on the other hand is provisionally estimated to have declined from 22.7 percent in 2001 to 17.2 percent in 2005 - a decline of 5.5 percentage points.

    The social sector and poverty related expenditures grew at an average rate of more than 20 percent per annum during 2001-05.

    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. Within the various categories of pro-poor expenditure, human development comes out to be the priority item of the Government with expenditures under this head constituting, on average, more than 50 percent of all PRSP related expenditures.

    Further reduction in poverty, however, serves as a major challenge for the government. 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.

    FISCAL DEVELOPMENT:

    Pakistan has gained further strength on fiscal side. Revenues are buoyant, expenditure is rationalised, fiscal deficit is at sustainable level and revenue deficit has almost been eliminated. Resultantly, Public debt is fast moving towards a sustainable level. Much progress has been made towards fiscal consolidation.

    The wide-ranging tax and tariff reforms as well as reforms in tax administration have started paying dividends. Tax collection by the Central Board of Revenue (CBR) has picked up. As a result of prudent fiscal management over the last 5 years, the burden of interest payment in domestic budget has declined sharply, thereby, releasing resources for development and social sector program.

    During the five years from 2000-01 to 2005-06, tax collection by the CBR increased by 81.0 percent. The Central Board of Revenue (CBR) was targeted to collect Rs 690 billion but it is most likely to collect Rs 710 billion - Rs 20 billion more than the target and 20.6 percent more than last year.

    The total expenditure remains more or less stable in a narrow band of 17 to 18.8 percent of GDP during the last six years.

    Substantial decline in interest payments from as high as 7.5 percent of GDP in 1998-99 to 3.1 percent of GDP in 2005-06, has provided fiscal space to reorient expenditure in favour of development expenditure. 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. In addition, the share of development expenditure doubled from 11 percent to 22 percent in the same period.

    During the last six years the development expenditure improved from 2.2 percent of GDP in 2000-01 to 4.2 percent of GDP in 2005-06. Second largest component of the current expenditure, namely, defence spending remained stagnant at around 3.1 percent to 3.3 percent of GDP during the last six years. Government is achieving the goal of fiscal stabilisation without compromising spending on the social sector. Non-defence-non-interest expenditure has improved from 7.8 percent of GDP in 1999-2000 to 11.8 percent of GDP in 2005-06.

    During the last six years the real growth in current expenditure hovered around 3 percent per annum and pace of growth has slowed down. Total expenditure grew by 3.4 percent in the first three years (2000-03) but accelerated to 5.6 percent during the last three years (2003-06). The main contribution is coming from development expenditure which grew by 7.4 percent per annum in first three years (2000-03) and by 23.8 percent in recent three years (2003-06).

    Total consolidated revenues are targeted at Rs 1095.6 billion in 2005-06 compared to Rs 900.0 billion in 2004-05, an increase of 21.7 percent. This was primarily due to a rise of 22.2 percent in tax revenue on the back of increases in both federal and provincial tax revenues, which grew by 19.8 percent and 50.1 percent, respectively. Non-tax revenue increased by 19.3 percent in 2005-06 but remained stagnant at 3.8 percent of GDP.

    In 2005-06, Pakistan is likely to face an overall fiscal deficit of Rs 261.6 billion or 3.4 percent of GDP excluding earthquake effect and if we include earthquake related spending worth Rs 65.8 billion, the size of the deficit stood at Rs 327.3 billion or 4.2 percent of GDP. This revenue-expenditure gap was financed through external and domestic sources.

    Out of the gap of Rs 327.3 billion, financing from external sources is expected at Rs 118.4 billion. The remaining gap of Rs 208.9 billion is likely to be financed from domestic sources. Within domestic sources, financing from non-bank sources amounted to Rs 22.4 billion while Rs 96.7 billion would be contributed by the Banking sources, and Rs 90.0 billion is to be financed through privatisation proceeds.

    The revenue deficit (the difference between total revenue and total current expenditure), a measure of government dis-saving, was at a deficit of 0.7 percent of GDP in 2004-05 compared to a deficit of 2.2 percent in 2000-01. It has further progressed towards almost elimination at 0.03 percent of GDP in 2005-06.

    The public debt- to-GDP ratio, which stood at almost 85 percent in end June 2000, declined substantially to 61.4 percent by the end of June 2005 23.6 percentage points decline in country's debt burden in 5 years. By end March 2006, public debt further declined to 54.7 percent of the projected GDP for the year.

    Following the debt reduction strategy in which raising revenue was one of the key elements, the public debt burden in relation to total revenue has declined substantially from 562.5 percent in 1999-2000 to 448.9 percent by end-June 2005 and further to 384.9 percent by end-March 2006 to the projected revenue for the year. During the last six years, the debt servicing liabilities have declined sharply from 65.4 percent of revenue in 1999-2000 to 27.8 percent of revenue and from 53.5 percent to 27.8 percent of current expenditure in 2005-06.

    The ratios of domestic debt to GDP and to tax revenue both decreased during 2005-06. The stock of domestic debt as percent of GDP declined from 35.7 percent in 2003-04 to 32.8 percent in 2004-05 and further to 29.4 percent by end March 2006.

    As a result of prudent fiscal management over the last 6 years, the burden of interest payments on the domestic budget has declined sharply, thereby, releasing resources for development and social sector programs. Interest payments as a percentage of total revenue have been reduced to one-half (41 percent to 20 percent) over the last six years.

    Similarly, share in total expenditure declined from 30 percent to 16 percent during the same period. Most importantly, as percentage of GDP, interest payments declined from 6 percent to 2.6 percent in the last six years.

    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, switching from a broadly accommodative to aggressive tightening in the second half of the last fiscal year, since April 2005.

    The same tight monetary policy stance continued during the current fiscal year despite declines in both core and overall inflation. 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.

    Tight monetary policy stance is likely to continue until inflationary pressures are significantly eased off.

    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. Going forward, the SBP would continue to take measures aimed at expanding credit to priority sectors such as agriculture, SMEs and export sector. To further revamp the financial sector in line with the global financial system, the State Bank of Pakistan has set out a road map for the implementation of Basel-II. It is the new regulatory capital adequacy regime, which offers a series of approaches ranging from simple to more complex methodologies for capital allocation against credit and operational risk.

    The credit plan for 2005-06 set the target for monetary expansion at Rs 380 billion or 12.8 percent higher than last year (FY05) on the basis of a growth target of 7.0 percent and inflation target of 8 percent. The money supply during July-April 22, 2006 of the current fiscal year expanded by Rs 294.9 billion or 9.94 percent as against an expansion of Rs 332.4 billion or 13.37 percent in the same period last year.

    The pace of monetary expansion remained well within the Credit Plan target for the year (12.8 percent). Within the NDA, both net budgetary borrowings and borrowings for commodity operations remained well within the credit plan targets.

    The net credit to the Government for budgetary purposes was Rs 43.3 billion compared to the annual credit plan target of Rs 98 billion and Rs 15.0 billion borrowed in the corresponding period of last year. However, credit to the private sector has exceeded the credit plan target and stood at Rs 345.1 billion as against Rs 330 billion envisaged for the year in the credit plan. Expansion in NFA stood at Rs 37.8 billion owing mainly to the receipts of privatisation proceeds and issuance of sovereign bond.

    The proceeds from privatisation and sovereign bond not only helped build NFA; it also helped in containing the growth in NDA through the retirement of government debt held by the SBP.

    Despite the tight monetary policy stance of the SBP, credit to the private sector was broad-based which grew by 20.2 percent (Rs 345.1 billion) during July-April 22, 2006 compared with the growth of 28.0 percent or Rs 357.4 billion during the same period of last year.

    Credit to the private sector continued to exhibit strong demand, 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 130.0 billion during July- March 2005-06, -- 17.1 percent more than the comparable period of last year and accounting for almost 47.9 percent of the credit to private sector businesses. The growth in consumer loans remained robust, and their scale expanded by 27 percent to Rs 67.2 billion. The consumer loans were acquired to finance a range of products including automobiles (Rs 23.2 billion) followed by personal loans (Rs 21.5 billion), credit cards (Rs 10.4 billion) and house building (Rs 10.1 billion).

    Credit disbursement to the agriculture sector, also remained consistent with the previous year trend. Scheduled banks and DFIs advances to SME sector witnessed a growth of Rs 40.6 billion during July-February FY06 compared with an expansion of Rs 59.9 billion in the same period of last year.

    The scheduled banks have opened 304 offices during the period from 01-04-2005 to 31-03-2006. During July-March 2005-06, there was an increase of Rs 303.9 billion (17.3 percent) in the net advances of the scheduled banks. Their deposits increased by Rs 272.9 billion (11.5 percent) and their total investments increased by Rs 77.1 billion during the first nine months of the current fiscal year. In 2005, the banking sector produced impressive results. The year has been unprecedented in terms of profits.

    Pakistan continues to be at the forefront of the Micro-Finance Sector Development Program (MSDP). Within the overall MSDP framework, Khushhali Bank (KB) is the lead micro-finance institution in Pakistan. The Bank now serves nearly 250,000 clients, with a cumulative disbursement of over Rs 6.0 billion in 75 districts of Pakistan with high poverty incidence. 60 percent of KB's clients are in the rural areas, roughly one-third being women.

    CAPITAL MARKET:

    During the fiscal year 2005-06, the stock market continued to maintain its strong performance and achieved new heights by creating many new records. 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, 2006.

    The KSE-100 index made further inroad and reached 12274 points on April 17, 2006 showing a growth of 64.7 percent over June 2005. Between December 2005 and April 2006 alone, the KSE share index increased by 25 percent. Similarly, the total market capitalisation also increased to Rs 3419.4 billion on April 17, 2006 (US $57.0 billion) from Rs 2013.2 billion ($33.7 billion) showing a growth of 70 percent over June 2005. At current levels, KSE's market capitalisation is equivalent to about 44.3 percent of estimated GDP of FY06.

    The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth; a successful privatisation process attracting foreign investors in prestigious organisation like PTCL and National Refinery; sound monetary policy of the SBP, maintenance of fiscal discipline and the capital market reforms including development measures introduced by the stock exchanges with full support of the SECP.

    The government's economic policies and capital market reforms helped in promoting a fair, efficient and transparent capital market and restoring investors' confidence. The privatisation of the government entities through the bourses helped to broad base the equity ownership to a significant level.

    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, renewed interest of large number of buyers of shares, bright prospect of reaping dividends, good capital gains and presence of institutional investors in the market. The KSE saw robust activity especially during the first 4 months of 2006, with all vital indicators pointing in the right direction.

    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, based on sound regulatory principles that provide impetus for high economic growth. The reforms introduced over recent years, the fields of risk management, governance and transparency have contributed significantly towards the growth and development of capital market and building investor confidence.

    During July-March 2005-06, the listed capital on KSE increased from Rs 438.49 billion to Rs 486.49 billion, reflecting an increase of around 11 percent. The market capitalisation increased from Rs 2,071.18 billion to Rs 3,257.06 billion, reflecting an increase of over 57 percent in the value of shares. Similarly, the average daily turnover of shares increased from 430 million to 462 million shares. Unprecedented growth in the leading market indicators was also witnessed in Lahore and Islamabad Stock Exchanges.

    During the calendar year 2004, total profit before taxation of the 12 trading groups amounted to Rs 229.5 billion, which increased to Rs 326.3 billion in 2005 recording a growth of 42.2 percent. Fuel and energy, banks and other financial institutions, transport and communications and cement were the trend setters in the stock market during the current fiscal year.

    INFLATION:

    For the first ten months of the current fiscal year (July - April ) 2005-06, the inflation as measured by the Consumer Price Index (CPI), declined to 8.0 percent from 9.3 percent in the same period last year . Food price inflation averaged at 7.0 percent compared to12.8 percent for the same period last year. Non-food inflation increased to 8.8 percent versus 6.9 percent in the comparable period of last year.

    Core inflation, which excludes food and energy costs from the headline CPI, also reflected a favourable trend and remained almost at last years' level of 7 percent. The larger contribution toward the overall CPI inflation come from Non-food, House rent, Energy and transport components of CPI. However, based on current trends, and barring any adverse shocks, it is expected that inflation would be within the target of 8 percent 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, which is compounded by supply shortages of principal commodities. The supply side factors responsible for pushing the local price up, include an increase in support prices of wheat, wheat shortage resulting from inadequate production and lastly, the mis management of wheat. Other issues to consider include, the significant increase in prices of pulses and the lower production of sugarcane and sugar.

    Furthermore, the high increase in International prices of sugar owing to a global shortfall in supplies, brought about by the production of ethanol in Brazil, have also led to inflationary pressures this year. The continuous surge in International oil prices, coupled with an unprecedented rise in world prices of other commodities, also impacting prices in Pakistan.

    Cognisant of the impact of inflation on the economy and its disproportionate effect on the poor and fixed income groups of society, the government has responded in a multi-pronged manner to the rise in the price level. A strategy of regular monitoring of domestic stocks of key commodities and their prices was adopted, by which the government was able to respond in a timely manner to shortages by importing substantial quantities of wheat, sugar, pulses and other essential commodities.

    TRADE AND PAYMENTS:

    Pakistan's foreign trade sector is being affected both by structural and cyclical factors. On the domestic side, four years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending, have led to a massive surge in imports. On the external side, the global economy continues its 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 4.0 percent.

    Export during the first nine months (July-March), of the current fiscal year, are up by 18.6 percent - rising from $10183 million to $12073 million in the same period last year. Thus, Pakistan is gradually moving towards higher value added in exports of textile manufacturers. The shares of value added exports have also increased. 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.

    Imports, on the other hand, have risen by 43.2 percent, 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.

    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. Major contributors to the substantial rise in food imports include wheat, sugar and pulses. Owing to domestic shortage, the government has liberalised 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. Sugar alone contributed 74 percent to the rise in food imports.

    At the same time, sugar also contributed 26.6 percentage points to the 35.9 percent growth in food imports. Altogether, Wheat, sugar, and pulses alone contributed 93 percent to the rise in food imports and 33.4 percentage points to the 35.9 percent growth in food imports. In fact, if sugar production had remained normal and no shortages had emerged during the year, food imports would have risen only by 9.3 percent.

    The unprecedented surge in domestic demand has fuelled an exceptional increase in non-oil imports, registering a growth of 38.1 percent in the first nine months (July-March) of the current fiscal year. Non-food non-oil imports also grew by 38.3 percent, reflecting continued strong domestic demand.

    Major contributors to the rise in machinery imports include power generation machine (44.8 percent), agriculture machinery (109.2 percent), construction and mining machinery (29.0 percent) and other machinery (51.7 percent). A surge in imports of machinery reflects a growth in domestic investment driven imports, thus allowing the expansion of the country's production base.

    Imports of petroleum group have also played a key role in taking Pakistan's import to a new height. Emerging as the single largest item in the country's import bill, the Petroleum group import amounted to $4615.8 million, during the first nine months (July-March), of the current fiscal year, as against $2806.6 million in the same period last year. Thus an increase of 64.5 percent resulted in an increase in trade deficit to $82620.3 million, in comparison to $4263.4 million in the same period last year.

    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 a widening gap due to a higher import bill. This was brought about by high global crude prices and a hefty rise in non-oil imports.

    Furthermore, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost, 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. Deceleration in the growth of net transfers is also responsible for widening of the current account deficit.

    The current account deficit, excluding official transfers, 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. As percentage of projected GDP for the year the current account deficit stood at 3.7 percent as against 1.1 percent in the same period last year.

    Although trade deficit (fob) almost doubled over the last year and services balance deteriorated by 27.5 percent, the strong inflows under private transfers fuelled by rising workers' remittances and resident foreign currency accounts offset some of the negatives with current account deficit standing at $4696 million. The flow under long - term capital (net) improved markedly and risen to $3905 million from $1633 million last year.

    EXTERNAL DEBT AND LIABILITIES:

    Pakistan's total stock of external debt and foreign exchange liabilities grew at an average rate of 7.4 percent per annum during 1990-99 - rising from $20.5 billion in 1990 to $38.9 billion by end June 1999 but declined slightly to $37.9 billion in 1999-2000.

    It exhibited a declining trend thereafter. Pakistan's external debt and liabilities have declined by $3.1 billion - down from $38.9 billion in 1998-99 to $35.834 billion by 2004-05. However, external debt and liabilities increased to $36.557 billion by end-March 2006, thus showing a rise of $0.723 billion in the first nine months of the current fiscal year. The rise is mainly on account of issuance of Sovereign bonds worth $800 million in March 2006.

    External debt and foreign exchange liabilities, instead of growing at the pace of the 1990s, were in fact reduced from U.S. $38.9 billion in 1998-99 to $36.5 billion by end-March 2006 - a reduction of $2.4 billion in seven years.

    Most importantly, the burden of the debt has declined substantially during the same period. For example, the external debt and liabilities as a percentage of foreign exchange earnings which stood at 335.4 percent in 1998-99, declined to 127.6 percent by end-March 2006.

    The external debt and liabilities stood at 64.1 percent of GDP in end-June 1999, declined to 28.3 percent in end-March 2006. The annual debt servicing payments made during the period 1999-2000 to 2003-04 averaged just above $5 billion per annum. This amount has drastically come down to around $3 billion in 2004-05. An amount of $2.4 billion has been paid during July-March 2005-06 and the amount rolled over declined from $4.1 billion in 1999-2000 to $1.1 billion in July-March 2005-06.

    On March 23, 2006, 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 J. P Morgan, Citi group and Deutsche Bank.

    This transaction, which represented the first international 144A bond issued by Pakistan since 1999, raised significant interest amongst international Institutional investors.

    The 10-year notes were priced with a coupon of 7.125 percent, framing a spread of 240bps over the relevant 10-year US Treasury benchmark and 187bps over the US $mid-swap rate. The 30-year bonds were priced with a coupon of 7.875 percent to, framing a spread of 302bps over the relevant 30-year US Treasury benchmark and 256bps over the US $ mid-swap rate. Pakistan was able to achieve spreads on both the new 10 and 30-year bonds that were tighter than its previous 5-year issues. By issuing 10 and 30 year tranches, Pakistan completed its primary objective of establishing a full Pakistani International yield curve in record time. With over 170 accounts participating, books closed with total orders exceeding US $2bn. The issue was over 2.5 times oversubscribed.

    EDUCATION:

    Right to education is the basic requirement of every individual. Nations all over the world reached high levels of prosperity and human development through investing and prioritising provision of quality and equitable health and education faculties to their citizens.

    East Asian economies are a recent example that, show how nations can benefit from an educated and productive labour force. Pakistan is in fact, entering into that phase of demographic transition, where in few years massive influx in the working age population (60 million) is expected. Thus, Investing in providing quality education to the upcoming working age population, is the only way to cash the demographic dividend.

    Currently, 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.

    Looking at the gender disaggregated data for overall literacy, 65 percent of males and 40 percent of females were literate in the year 2004-05. District disaggregated data for adult literacy show that, in Punjab Rawalpindi with 75 percent is ranked at the top and Lohdran with 34 percent at the bottom. Karachi with 78 percent literacy is ranked at the top while Jacobabad with 43 percent is ranked at the bottom in Sindh. In NWFP, Abbotabad (65 percent) is at the top and Kohistan (25 percent) at the bottom. Finally, in Balochistan Quetta (65 percent) at the top and Jhal Magsi (20 percent) and Qilla Saifullah (20 percent) are at the bottom.

    The key impediments to the progress in reaching a higher level of literacy in Pakistan are the low enrolment rates and poor quality of education provided by the public sector. In case of enrolments, Net Enrolment Rate (NER) has seen a considerable increase of 10 percentage points from 42 percent in 2001-02 to 52 percent in 2004-05. The MDG targets to reach 100 percent NER till 2015. This requires almost 50 percent increase in enrolment in next 10 years, which is a huge challenge for the policy makers.

    Another factor that contributes to lower literacy rates is the high dropout rate at all levels. Major reasons behind dropout include poor quality of infrastructure, teacher's absenteeism, quality of education and the value of returns attached to sending children to schools.There exist wide gender gaps especially in the rural areas in enrolments at all levels.

    In the past year, 2187 new primary schools were established, 1221 in the public sector and 881 in the private sector. This increase has occurred in both rural and urban areas. Enrolment at the primary level increased from 19.92 million in 2001-02 to 21.33 million in 2004-05, 4.28 million to 4.55 million at the middle level and 1.79 million to 1.88 million at the secondary level during 2001-02 to 2004-05. During the past four years 249 additional technical and vocational institutions were established. 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. Government of Pakistan is currently spending 2.1 percent of its GDP on education sector which is very low as compared to other countries in the region. The share of education sector has not seen much change in the past several years, infact it has stagnated to about 2 percent from 2003-2005.

    Government has launched several programs to increase coverage by increasing enrolment and to improve the overall quality of education but these initiatives need proper implementation and constant monitoring for their timely completion.

    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.

    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, irrespective of sex, caste, creed or race. Government of Pakistan recognises 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. 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.

    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, 4554 dispensaries,5290 basic health units/sub health centres (BHUs/SHCs), 552 rural health centers (RHCs), 907 maternal and child health centers (MCHs) and 289 TB centres (TBCs).

    Available human resource for the fiscal year 2005-06 turn out to be 118160 doctors, 6761 dentists and 33427 nurses which makes the ratio of population per doctor as 1310, population per dentist 25297 and population per nurse as4636.The new health facilities added to overall health services include construction of 56 new facilities (42 BHU and 14 RHCs ),upgrading of 59 existing facilities (18 RHCs and 41 BHUs) and addition of 3500 new doctors ,1900 nurses, and 15000 lady health workers.

    The total outlay on health sector is budgeted at Rs 40 billion which shows an increase of 5.3 percent over the last year and turns out to be 0.51 percent of GDP. To reduce incidence of disease and to alleviate their suffering and pain so as to improve the health status of people, various health programmes like Lady health worker program, Malaria, Tuberculosis, HIV/AIDS control progam, the expanded program on immunisation, National Maternal and child Health Program, Prime Minister Program for prevention and Control of Hepatitis in Pakistan, Drug Abuse, Cancer Treatment program remained operative during fiscal year 2005-06.

    During the fiscal year 2005-06 the caloric availability per day is likely to increase from 2271 to 2328 and protein availability from 65.5 to 66.9 grams PSLM 2004-05 reports district level data for major indicators in the health sector such as sickness/injuries, immunisation, pre and post natal consultation etc .

    In the case of immunisation, the top ranked districts are Jhelum (Punjab), Hyderabad (Sindh) ,Chitral (N.W.F.P) and Gwadar (Balochistan).The districts reporting lowest immunisation are Muzaffar Garh ( Punjab), Jacobabad (Sindh), Shangla (N.W.F.P) and Qilla Saifullah (Balochistan). 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.

    POPULATION, 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. 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.

    Pakistan being a developing country also faces the problem of over population. During the past 25 years, cultivable land has increased by 27 percent compared to 98 percent increase in population, resulting in reduced individual land holdings in Pakistan. 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.

    Even now each year, deforestation occurs at the rate of 2.5 percent. In addition, since only 60 percent of our population has sewerage facility, the remaining 40 percent churn out wastes damaging the environment and causing a lot of diseases. 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 percent of our on-the-road vehicles have outlived their life span and emit unburnt monoxide gases.

    In Pakistan, labour force participation is estimated on the basis of the Crude Activity Rate (CAR) and the Refined Activity Rate (RAR). 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.

    The figures both for CAR (32.8 percent) and RAR (46.9 percent) for the first half of 2005-06 fare higher than LFS 2003-04 (30.4 percent and 43.7 percent). This phenomenon is more obvious for rural areas and women. Augmentation of the rates for the set of economic activities carried out within the house precincts also depicts the same scenario (42.8 Vs 38.5 percent).

    Agriculture still accounts for the largest source of employed work force. The share of agriculture in employment has increased from 43 percent in 2003-04 to almost 45 percent by mid of 2005-06. Sector wise break up of employed labour force shows that female labour force participation is on the rise for most sectors especially agriculture, fishery and telecom sectors.

    It is important to note that the employment of the rural females increased despite a considerable rise in female Labour Force Participation Rate. The increase in rural female employment was mainly in the category of unpaid family helpers, which may be due to enhanced growth rates in agriculture in recent years or due to the combined efforts of various NGO.

    TRANSPORT AND COMMUNICATIONS:

    A strong, efficient and affordable infrastructure is a critical element of a good investment climate and therefore, is a pre-condition to sustain the growth momentum. Transport and Communications both are important elements of infrastructure services and are essential in maintaining economic growth and competitiveness. In fact, the transport and communication sector in Pakistan account for about 11 percent of GDP, 16 percent of fixed investment, 6 percent of employment and about 15 percent of the Public Sector Development Programme.

    Road transport is a backbone of Pakistan's transport system, accounting for 90 percent of national passenger traffic and 96 percent of freight movement. Over the past ten years, road traffic - both passenger and freight - has grown much faster than the country's economic growth. The 9,518 km long National Highway and Motorway network contributes about 3.7 percent of the total road network and carries 90 percent of Pakistan's total traffic.

    The total length of roads in Pakistan was 258,340 Km, including 165,762 Km of high type (64 percent) and 92,578 Km of low type roads (36 percent) by the end of March, 2006. During the outgoing fiscal 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 2.9 percent.

    The construction work on Islamabad-Peshawar Motorway (M-1) however, is still in progress.

    Furthermore, the Pakistan Railways have carried 61.3 million passengers and 4.3 million tons freight, with its gross earnings stood at Rs 12.5 billion during July-March 2005-06.

    In comparison, PIA carried 3.972 million passengers during July-February 2005-06 as against 3.571 million in the same period last year, showing an increase of 11.2 percent. Both passenger capacity and traffic volume also increased by 2.4 percent and 8.7 percent, respectively. in addition, Its fleet consists of 41 aircrafts of various types. In addition, there are three private airlines, operating in the country and provide both domestic and international services.

    Karachi Port has also handled 24,572 thousand tons of cargo during July-March, 2005-06, compared to 21,845 thousand tons during the same period last year, showing an increase of 12.5 percent. Port Qasim has handled 16.8 million ton of cargo during July-March 2005-06 compared to16 million cargo handled during the corresponding period last year, registering a growth of 5 percent. The Gwadar Port is also being built with Chinese assistance and its first phase has almost been completed.

    In 1999-2000, there were only 0.3 million cellular mobile subscribers in Pakistan which jumped to 2.4 million by 2002-03 as a result of introduction of CPP regime and addition of another mobile operator (Ufone). Mobile subscribers continued to rise at an unprecedented pace, reaching 12.8 million by 2004-05. A major turnaround was witnessed when the mobile companies started giving free mobile connections and bearing the cost of government levies themselves. In a short period of 9 months in the outgoing fiscal year, more than 16 million new subscribers have been added to the list, reaching over 29.6 million by end April 2006. In other words, a more than 131 percent increase in subscribers in just 9 months was unprecedented. Accordingly, the total teledensity (Fixed + Cellular + WLL) has jumped form 3.7 percent in 2001-02 to 23.1 percent by end March 2005-06.

    For promotion of Information Technology, 2339 cities/towns/villages have been provided Internet facility, by March, 2006. Total fixed telephone lines installed by March 2006 were 5.2 million as against 5.1 million up to June 2005 last year.

    ENERGY:

    Global energy consumption is expected to increase steadily over the next twenty years. According to the International Energy Outlook 2001, the actual growth of world energy consumption increased from 207 quadrillion Btu in 1970, to 382 quadrillion Btu in 1999 which is anticipated to further increase to 607 quadrillion Btu in 2020. Over this fifty-year period, the consumption of energy will likely increase by about 200 percent, from 207 quadrillion Btu in 1970, to 607 quadrillion Btu in 2020. The largest increase in energy use will occur in the developing world. From 1999 to 2020, energy consumption in the developing countries is expected to climb 122 quadrillion Btu to 264 quadrillion Btu, depicting an increase of 116 percent.

    In other words, the increase in energy use in the developing world is roughly double that of all countries in the global economy. Because, firstly many developing countries are striving towards economic development and industrialisation and will thus require additional energy. Secondly, virtually all of the increase in the world's population over the next twenty years, will take place in the developing world. Population growth will add over 1 billion people to the poorer regions, thus expanding the energy requirements for these regions.

    Production of crude oil per day has decreased to 65,385 barrels during July-March 2005-06 from 66,199 barrels per day during the same period last year, showing a decline of 1.2 percent.

    The overall production of crude oil has decreased to 17.9 million barrels during July-March 2005-06 from 18.1 million barrels during the corresponding period last year, showing a decline of 1.1 percent. On an average, the transport sector consumes 49.7 percent of the petroleum products, followed by power sector (32.3 percent), industry (11.8 percent), household (2.5 percent), other government (2.3 percent), and agriculture (1.4 percent) during last 10 years ie 1995-96 to 2004-05.

    The average production of natural gas per day stood at 3,825 million cubic feet during July-March, 2005-06, as compared to 3,663 million cubic feet over the same period last year, showing an increase of 4.4 percent. The overall production of gas has increased to 1,048,190 million cubic feet during July-March 2005-06 as compared to 1,003,189 million cubic feet daily in the same period last year, showing an increase of 4.5 percent. On average, the power sector consumes 36.6 percent of gas, followed by fertiliser (22.5 percent), industrial sector (18.8 percent), household (18.4 percent), commercial sector (2.8 percent) and cement (1.3 percent) during last 10 years ie 1995-96 to 2004-05.

    Total installed capacity of electricity (WAPDA, KESC, KANUPP AND IPPs) stood at 19,439 MW during July-March 2005-06, compared to 19,389 MW during July-March 2004-05. Total installed capacity of WAPDA stood at 11,363 MW during July-March 2005-06 of which, hydel accounts for 56.9 percent or 6,463 MW, thermal accounts for 43.1 percent or 4,900 MW. During the first three quarters of current fiscal year, 63,978 GWh electricity has been generated as against 61,758 GWh were produced in the same period last year. The number of villages electrified increased to 99,595 by March 2006 from 90,467 upto 2004-05, showing an increase of 10 percent.

    Presently, some 930 CNG stations are operating in the country, while 200 are under construction. By March 2006 about one million vehicles were converted to CNG as compared to 700,000 vehicles during the same period last year, showing an increase of 43 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.

    ENVIRONMENT AND HOUSING:

    Sustainable development remains the cornerstone of government policies, and the concern for environment, its protection, renewal and enrichment is recognised as an obligation for the betterment of all citizens. The poverty- environment nexus has been of particular interest in the recent years, as poverty in Pakistan, like in many other middle-income countries, plays an important role in increasing the vulnerability of the poor to pollution and environmental degradation.

    Several policies, plans, programs and projects have been initiated for environmental protection and conservation in the sectoral areas of water and air pollution control, land use, forest management, energy efficiency, biodiversity conservation, and waste management, etc. 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 andconservations, (b) energy efficiency and renewable, (c) agriculture and livestock, (d) forestry and plantation, (e) biodiversity and protected areas, (f) climate change, air quality and noise, and (g) pollution and waste management.

    THE KEY FACTORS CONTRIBUTING TO AIR POLLUTION IN PAKISTAN ARE: a) rapidly growing energy demand; b) increasing industrial and domestic demand and c) a fast growing transport sector. In the cities, widespread use of low-quality fuel, combined with a dramatic expansion in the number of vehicles on roads, has led to significant air pollution problems. Air pollution levels in Pakistan's most populated cities are among the highest in the world, causing serious health issues in the process.

    The government is promoting the use of CNG in a big way to reduce the pollution level. Presently, some 935 CNG stations are operational through out the country, while another 200 are under construction. As of April 2006, the total number of CNG vehicles stood at 950,000, compared to 700,000 vehicles in April 2005, making Pakistan's CNG fleet the largest in Asia and the third largest in the world after Argentina and Brazil.

    Water availability in Pakistan continues to decrease, both in total amount of water as well as in the per capita water availability in Pakistan. In 1951, when population stood at 34 million, per capita availability of water was 5300 cubic meter, which has now decreased to 1105 cubic meter, just touching water scarcity level of 1000 cubic meter. With a present growth in population and the low rainfall, the threshold limit of water scarcity ie 1000 m3 of water per capita per year may be reached as early as the year 2010. Various mega initiatives have been planned especially under WAPDA vision 2025. 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.

    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, which caters for the installation of 544 water purification plants of 2000 gallons/ hour capacity, one in each Tehsil of Pakistan. A new project on "Clean Drinking Water for All" under Khushal Pakistan Programme, has been recently approved and caters for installation of around 6035 water purification plants of different capacities (500/ 1000/ 2000 gallons/ hour), one in each union council of Pakistan.

    Like many other developing countries, 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.

    The situation is further aggravated by scarcity of water, frequent droughts and miss-management of land resources, contributing to expansion of deserts, reduced productivity and consequently increases in rural poverty. In order to address the problems of land degradation and desertification, the Ministry of Environment, Government of Pakistan has taken an initiative and designed a full-scale project on "Sustainable Land Management to Combat Desertification in Pakistan". The project aims at combating desertification and improving land management practices to eradicate poverty in arid and semi-arid regions of Pakistan.

    Forestry sector plays an important role in soil conservation, water regulation for irrigation and power generation, reduction of sedimentation in water conveyances and reservoirs, employment and maintenance of ecological balance. Under the Millennium Development Goals of the Forestry Sector, Pakistan is committed to increase forest cover from existing 5 percent to 5.7 percent by the year 2011 and to 6 percent by the year 2015. This implies bringing an additional 1.051 million hectares land area under forest.

    The Government of Pakistan is implementing a number of Policies and programs in the Environment Sector. National Environment Action Plan (NEAP) remains the Flagship program of the Ministry of Environment.

    The main objectives of NEAP are to safeguard public health, promote sustainable livelihood and enhance quality of life for the people of Pakistan.

    It focuses on clean air, clean water, solid waste management and eco-system management.

    HOUSING SECTOR:

    Housing is one of the basic human requirements, as every family needs a roof. Providing shelter to every family has become a major issue as a result of rapid urbanisation and higher population growth.

    According to the housing census 1998, the housing backlog, which stood at 4.30 million, has been currently projected at 6.19 million. 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 500,000 housing units annually.

    The present housing stock is also rapidly aging and estimates suggest that more than 50 percent stock is over 50 years old.

    It is also estimated that 50 percent of the urban population now live in slums and squatter settlements. Meeting the backlog in housing, besides replacement of out-lived housing units is beyond the financial resources of the Government.

    This necessitates putting in place a framework to facilitate financing in the formal private sector and mobilise non-government resources for a market based housing financed system.

    The government of Pakistan is, therefore, 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.

    Having realised the importance of the housing sector in the overall economic development of the country, the government, as an immediate measure, declared Housing and Construction as a priority industry and simultaneously formulated a pragmatic and workable National Housing Policy.

    This is aimed at revitalising the housing sector, providing therein various incentives for the construction industry and the private sector builders/developers.

    THE SALIENT FEATURES OF THIS POLICY INCLUDE: (i) Identify the state and other lands for housing development, (ii) To encourage the financial institution to give mortgage loans for housing at market rates. Commercial banks shall also be encouraged to advance loans for housing, by earmarking a substantial percentage of their loan portfolio (iii) The annual disbursement of HBFC loans shall be enhanced from the present Rs 1.2 billion to Rs 7.00 billion over the next 5 years. (iv) Simplification of procedures for land transactions and standardisation of mortgage documents to facilitate sale and purchase of housing. (v) Stamp duties and registration fees, which are exceptionally high as compared to other countries, shall be adequately reduced to an aggregate total of 1 percent to enhance registration, improve documentation and increase revenue receipts. (vi) Property tax on rented property shall be reduced from the current high rate of 25 percent to 5 percent. (vii) All new construction of houses on plots measuring upto 150 sq.yds. & Flats/apartments having an area of 1000 sft shall be exempt from all types of taxes for a period of 5 years. (viii) Provincial Governments shall develop packages in which prime state land within urban centers, occupied by the katchi abadies, 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 co-ordinated efforts of Federal and Provincial Governments and concerned private sector stakeholders, 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.

    http://www.brecorder.com/index.php?i...term=&supDate=

    Comment


    • #3
      Economic Survey 2006-07: seven percent growth spurred by agriculture, LSM and services sectors

      ISLAMABAD (June 09 2007): Pakistan's economy continues to gain traction as it experiences the longest spell of its strongest growth in years. The outcomes of the outgoing fiscal year indicate that Pakistan's upbeat economic momentum remains on track.

      Economic growth accelerated to 7.0 percent in 2006-07 on the back of robust growth in agriculture, manufacturing and services. Economic growth has been notably stable and resilient.

      With economic growth at 7.0 percent in 2006-07, Pakistan's real GDP grew at an average rate of 7.0 percent per annum during the past five years (2003-07), and over 7.5 percent in four years running (2004-07).

      Compared with other emerging economies in Asia, this put Pakistan as one of the fastest growing economies in the region, along with China, India and Vietnam The good performance resulted from a combination of generally sound economic policies and on-going structural reforms.

      Based on the performance of half a decade of strong, stable, resilient and broad-based economic growth, it appeared that Pakistan's economy would continue to be a high-mean, low-variance economy over the medium term.

      This year's economic growth was mainly driven by strong domestic demand, with investment taking lead over consumption for the first time in last three years. This year's economic growth benefited from higher consumption and investment demand owing to a growing middle class and favourable demographics. Increased contribution of investment to growth was a healthy development as it engendered employment growth, which supported consumption demand and together they played an important role in sustaining strong growth momentum in the medium term.

      MAJOR ACHIEVEMENTS IN FISCAL YEAR 2006-07 THE MOST IMPORTANT ACHIEVEMENTS OF THIS YEAR INCLUDED: A strong economic growth of 7.0 percent. The economy grew at an average rate of 7.5 percent per annum during last four years (2004-07). It grew at an average rate 7 percent per annum during the last 5 years (2003-07).

      The real per capita GDP grew by 5.2 percent and maintained an average growth of 5.5 percent per annum over last four years;

      Per capita income in current dollar-term was up by 11.0 percent, to $925 from $833 of last year. A strong recovery in overall agricultural growth at 5.0 percent and major crops at 7.6 percent.

      Highest production of wheat (23.52 million tons) in the country's history. An impressive 22.6 percent increase in sugarcane production (54.7 million tons--second highest production level in the history.

      Large-scale manufacturing continued to grow robustly at 8.8 percent, albeit at a somewhat less torrid pace than last year. The overall services sector continued to maintain solid pace of expansion at 8.0 percent.

      A sharp pickup in overall investment, reaching a new height of 23 percent of GDP and, most notably, private investment remained buoyant owing to the persistence of strong consumer demand. Despite monetary policy tightening the credit to private sector continued to grow strongly (12.2 percent) on the back of improving investment climate.

      On the fiscal side, the overall budget deficit target (4.2 percent of GDP) and revenue collection target of the Central Board of Revenue (CBR) were achieved. Across all measures of vulnerability to external shocks, Pakistan's debt profile improved significantly over the past year.

      Public debt declined from 56.9 percent to 53.4 percent of GDP and external debt and liabilities declined from 29.4 percent to 27.1 percent. Workers' remittances totalled $4.5 billion in the first ten months (July-April) of the fiscal year as against $3.6 billion in the same period of last year, depicting an increase of 22 6 percent If this trends is maintained, workers' remittances are likely to touch $5.5 billion for the year--the highest so far in the country's history:

      Highest foreign investment flows at around $6 billion in ten months (July-April), and the year is expected to end with $6.5 billion. Exchange rate continued to remain stable despite widening of trade and current account deficits, clearly indicating strong inflows of external resources.

      The successful launch of a new $75.0 million 10-year sovereign bond in international debt capital market with seven times over-subscription has been the defining moment in Pakistan's history as it reflected a strong vote of confidence by global investors on Pakistan's current economic prospects and future economic outlook.

      SECTOR WISE PERFORMANCE GROWTH AND INVESTMENT: Real GDP growth accelerated to 7.0 percent in 2006-07 as against the revised estimates of 6.6 percent of last year and the 7.0 percent target for the year. The final estimate for 2004-05 had also been revised upward to 9.0 percent as against the revised estimate of 8.6 percent for the year. Thus, over the last four years the real GDP grew at an average rate of 7.5 percent per annum.

      AGRICULTURE: Agriculture is still the single largest sector of the national economy It made a modest recovery this year. Overall agriculture grew by 5.0 percent in 2006-07 from 1.6 percent of last year. Within agriculture, the major crops witnessed strong recovery by growing at 7.6 percent against a negative growth of 4.1 percent of last year.

      Wheat production was up by 10.5 percent to 23.5 million tons--highest wheat production recorded in the country's history. Sugarcane production, likewise, improved by 22.6 percent to 54.8 million tons--second highest size of the crop in the country's history.

      Cotton production at 13.0 million bales remained at last year's level. Gram pulse, the other major crop, exhibited an impressive growth of 75.4 percent in 2006-07 to 0.842 million tons compared with 0.480 million tons of last year.

      Livestock, with almost 50 percent contribution to agriculture, performed reasonably well at 4.3 percent this year as against a strong growth of 7.5 percent of last year.

      MANUFACTURING: Manufacturing is the second largest sector of the economy, accounting for 19.1 percent of GDP. Overall manufacturing grew by 8.4 percent this year against 10 percent of last year. Large-scale manufacturing (LSM), accounting for nearly 70 percent of overall manufacturing, grew by 8.8 percent against the target of 12.5 percent and last year's achievement of 10.7 percent.

      CONSTRUCTION: Construction continued its strong showing, partly helped by activity in private housing market, spending on physical infrastructure, and reconstruction activities in earthquake affected areas. The construction sector is estimated to have grown by 17.2 percent in 2006-07 as against 5.7 percent of last year.

      SERVICES SECTOR: The services sector continued to perform strongly for third year in a row and grew by 8.0 percent in 2006-07 as against 9.6 percent of last year. Services sector grew at an average rate of 8.7 percent per annum during the last three years.

      PER CAPITA INCOME: Per capita income is regarded as one of the key indicators of economic wellbeing of any country. Per capita income, defined as GNP at market price in dollar terms divided by the country's population, grew by 11 percent this year to US $925, up from US $833 of last year. The per capita income in dollar terms grew at an average rate of 13 percent per annum during last four years, rising from $586 in 2002-03 to $925 in 2006-07.

      Business Recorder [Pakistan's First Financial Daily]

      Comment


      • #4
        Fourth successive year of sustained high growth in economy: SBP


        ARTICLE (October 30 2007): Reproduced alongside is the executive summary of State Bank of Pakistan Annual Report 2006-07 released by SBP Governor Dr Shamshad Akhtar on Monday. Pakistan's economy witnessed a moderate recovery during FY07 with real GDP growth reaching the 7.0 percent target, as compared with 6.6 percent growth seen in FY06.

        This is the fourth successive year of sustained high growth in the economy, with the average annual growth accelerated to 7.0 percent during FY03-07 period. The continued strong performance of the services sector made the major contribution to the FY07 outcome. Growth in agriculture and industry also witnessed improvement over the previous year.

        The disaggregation of the aggregate demand presents an encouraging scenario. Firstly, the growth in real private consumption remained stable, inching up from 3.3 percent during FY06 to 4.1 percent. Secondly (and more importantly) real gross fixed capital formation registered a double digit growth for the third consecutive year, accelerating to 20.6 percent in FY07, due to higher FDI inflows and an acceleration in public investment on the back of a higher PSDP. As a result of the increase in public and private investment, the investment to GDP ratio rose to a record 23.0 percent in FY07.

        AGRICULTURE:

        Agricultural growth witnessed a recovery in FY07. This was primarily due to a considerably improved performance by the cropping sub-sector that overshadowed the impact of a moderation in the growth of the livestock sub-sector. The contribution of the remaining sub-sectors to overall agricultural growth was not material.

        A sharp rise in value addition by crops, in turn, centered essentially around three major crops, ie, wheat, sugarcane and gram, all of which recorded exceptionally strong growth during FY07, comfortably offsetting the disappointing growth in two other cash crops (cotton and rice).

        The growth of the livestock sub-sector in FY07 is one of the strongest in a decade (exceeded only by the exceptional FY06 growth). Moreover, consequent to robust demand, this sub-sector is attracting investment in the production, processing, transportation and storage of dairy products. This augurs well for future growth prospects.

        In recent years, agriculture credit disbursement has increased substantially reflecting improvements in access (as banks have aggressively expanded activities in the sector), and sustained demand (as farmers were encouraged by strong commodity prices, supportive polices and reasonable weather). This was also seen in FY07, when the annual target was exceeded by 5.5 percentage points to reach Rs 168.8 billion against Rs 137.5 billion disbursed in FY06.

        INDUSTRY:

        The industrial sector witnessed a moderate recovery, with 6.8 percent growth during FY07 compared with 5.0 percent in FY06. This was the second consecutive fiscal year when growth targets for industrial sector remained unachieved. Within the industrial sector, the highest growth was observed in the construction sub-sector with value-addition rising by 17.2 percent in FY07, compared with only 5.7 percent in FY06. The FY07 growth is not only higher than the 7.0 percent target, it is also the second highest growth recorded by this sub-sector since FY76.

        Mining & quarrying sector witnessed 5.6 percent YoY growth during FY07 which is not only higher than the 4.6 percent growth seen in FY06, but also well above the 3.2 percent growth target for FY07.

        LSM growth remained a significant contributor to GDP growth during FY07 with value-addition rising by 8.8 percent, down from the 10.7 percent growth in the preceding year. This deceleration in LSM growth appears to reflect a broad moderation in external and domestic aggregate demand, as well as capacity and input constraints in some industries. The textile sector contributed almost a quarter of the increase in value-addition in LSM during FY07.

        The electricity and gas distribution sub-sector continued to record losses in FY07, with the value addition by this sub-group falling by 15.2 percent in FY07 on top of the decline of 23.8 percent in the preceding year.

        SERVICES;

        For yet another year, the services sector growth remained well above target; the 8.0 percent increase in value-addition during FY07 was substantially above the 7.1 percent target. The FY07 target had been set lower than the 9.6 percent growth recorded in FY06 taking into account the anticipated deceleration in some of the larger sub-sectors of the services group, but the performance of two sub- sectors - finance & insurance, and social & community services - proved to be much better than forecast. The sustained strong growth by the services sector for the last six successive years has contributed to a structural shift in the economy, with services contributing over half of GDP in FY07.

        NATIONAL SAVINGS:

        During FY07, national savings rose sharply by 19.8 percent, raising its share in GDP to 18 percent, the highest in the last four years. It should be noted that the despite a rise in FY07, Pakistan's savings to GDP ratio remains quite low relative to other emerging economies. To maintain the growth momentum, there is a need of investment flows in the economy without putting pressures on external balances. This is only possible by a rise in savings in the economy. The main causes of low savings in Pakistan include low per capita income, lack of proper saving infrastructure (particularly in small towns and rural areas) and high dependency ratio.

        To increase the savings rate, it is necessary to expand the network of banks, microfinance institutions, and postal savings to the far flung areas with simple procedure and friendly atmosphere for small depositors. In addition, savings schemes for school/college students could also help inculcate savings behaviour from an early age.

        INVESTMENT:

        The sustained high pace of growth in the economy is also reflected in a record level of investment during FY07. The total investment to GDP ratio rose to a record level of 23 percent in FY07, significantly higher than 21.7 percent seen in the preceding year as well as the annual target of 21.5 percent.

        This impressive performance is a result of continued strength of domestic demand, a sharp rise in foreign direct investment (FDI) as well as a healthy increase in the public sector development program (PSDP).

        In real terms, total investment witnessed a growth of 20.6 percent, the highest-ever growth recorded for Pakistan. The sustained double-digit growth in real investment for three years in a row is also an unprecedented phenomenon for Pakistan. The persistent increase in real investment reinforces the view that the current economic growth momentum would continue for a longer period. However, there is a need for effective implementation of second generation reforms, focusing on institution-building, improvement in governance, etc so that the cost of doing business can be reduced substantially in years ahead.

        PRICES:

        Inflationary pressures visibly declined in the domestic economy during the initial months of FY07, helping pull down the inflation numbers for the period below that in the preceding fiscal year. This evident deceleration in inflation, shown by all of the price indices, mainly reflects the impact of weaker growth in the prices of non-food components. The latter indicates a significant contribution by policies to contain excessive growth in aggregate demand.

        Despite these gains, the eventual FY07 inflation outcome was disappointing, given that the average annual CPI inflation of 7.8 percent was considerably higher than the 6.5 percent target for the year.

        The inability to achieve the inflation objective was principally due to the unexpected strength of food price inflation during the year, which considerably offset the gains from (1) the demand management policies and (2) the government subsidies that partially cushioned the domestic economy from high international oil prices.

        PUBLIC FINANCE:

        A surge was observed in direct tax collections and in non-tax revenues during FY07 but the fiscal deficit for the year rose to 4.3 percent of GDP a little higher than the target of 4.2 percent. The relatively higher fiscal deficit during FY06 and FY07 is mainly attributed to the exceptional expenditure on account of relief and rehabilitation of earthquake affected areas. In FY07 it is also supported by strong growth in current expenditure.

        The large increase in current expenditure, driven by a sharp rise in debt servicing costs, overshadowed the impact of a substantial increase in revenues. The above-target 22.9 percent increase in CBR tax collection pushed up the tax-to-GDP ratio to 10.2 percent in FY07, up from 9.9 percent in the previous year. The strong growth in CBR taxes was caused by an extraordinary growth of 48.2 in direct tax collection during FY07. However, the weak performance in indirect taxes partially offset the impact of this rise. The exceptional tax collection was equally supported by 26.2 percent YoY growth in non-tax revenue.

        Reliance to finance the fiscal deficit of Rs 377.5 billion was almost on external and domestic resources during FY07. The major sources of external financing during FY07 were program loans/commodity aid, project aid and borrowings from international capital market through the issuance of various bonds. Domestically, the government obtained an amount of Rs 177.8 billion that was on almost same level in FY06. But a compositional shift in financing was observed in domestic sources as in FY06 government used a large amount of Rs 97 billion from privatisation proceeds to finance the deficit that remained at Rs 19 billion in FY07.

        The total provincial revenue receipts stood at Rs 483.4 billion during FY07 with tax revenue contributing Rs 400.1 billion. All the provinces recorded revenue surpluses accompanied with a substantial rise in development expenditure. The provincial share in federal tax receipts increased from 89.1 percent in FY06 to 91.6 percent in FY07.

        MONEY AND BANKING:

        SBP continued to maintain a tight monetary policy during FY07. This was desirable to further moderate aggregate demand pressures in the economy which were still present despite continued monetary tightening since September 2004. The presence of excessive demand pressures was already obvious in terms of high inflation through most of FY06.

        The inflation target for FY07 was set 6.5 percent compared to a high inflation of 7.9 percent in FY06. However, the monetary management during FY07 was complicated by the dual mandate of maintaining price stability and economic growth that required SBP to avoid significant slippage in targeted real GDP growth for FY07 that could have occurred due to excessive tightening.

        In this backdrop, the monetary policy framework for FY07 envisaged a further slowdown in monetary expansion (M2) to 13.5 percent from 15.1 percent growth realised in FY06. Simultaneously, as export growth continued to weaken, SBP took measures to partially shelter strategic sectors (textiles, and exports).

        In order to achieve the broad money target, SBP first raised the reserve requirements for banks and then increased its policy rate by 50 basis points to 9.5 percent. At the same time, SBP also continued to drain excess liquidity from the interbank market and maintained the overnight rates persistently close to the discount rate through most of FY07. In addition, the SBP provided support to the exporters in the form of reducing rates on export finance scheme (EFS), and a debt-swap facility for strategic sector of the economy that substantially reduced the cost of fixed investment loans acquired in recent years.

        SBP monetary policy proved effective in considerably moderating aggregate demand pressures in some sectors of the economy as reflected in a visible slowdown in import demand and private sector credit during FY07. The reduction in aggregate demand was also reflected in the continued downtrend in core inflation (NFNE). More importantly, the monetary tightening was clearly not excessive, given that the real GDP growth during FY07 comfortably achieved its target. Moreover, tight liquidity conditions in the interbank market probably helped in reducing speculative and unproductive demand for credit. In this perspective, it is encouraging to see that the demand for fixed investment loans during FY07 has remained intact, even a part of the slowdown visible in working capital loans appears short-lived (as a few structural factors limited the demand and supply of these loans during the year).

        Unfortunately, the impact of the slowdown in aggregate demand pressures in the economy did not translate into a decline in overall CPI inflation during FY07. Average CPI inflation for the year was 1.3 percentage points higher than the annual target, mainly because the gains from a deceleration in aggregate demand growth in some sectors of the economy were largely offset by an unexpected strength in food inflation, particularly during H2-FY07. To put this in perspective, had food inflation in FY07 remained at the average level observed in FY06 (ie, 6.9 percent), CPI inflation would have remained below the 6.5 percent target for the year.

        Another problem for monetary policy was the abrupt rise in monetary aggregates during the last month of FY07, entirely caused by a surge in external receipts. As a result, M2 growth exceeded the annual target by 5.8 percentage points to reach 19.3 percent. Since the acceleration in the growth of monetary aggregates was concentrated in the last month of FY07, it probably had only a weak contribution to inflation in FY07, but is more likely to impact FY08 inflation. For that reason, the central bank undertook corrective monetary policy measures in July 2007.

        A large part of the slippage in M2 target during FY07 stemmed from government borrowings. In particular, the sharp rise in net foreign assets (NFA) of the banking system during June 20075 principally reflected external financing needs for budgetary expenses of the government (such as receipts from Eurobond and GDR issues, US Aid inflows, multilateral loans, receipts against logistics support etc).

        To put this in perspective, M2 growth during Jul-May FY07 was 14.1 percent which was slightly less than the nominal GDP growth of 14.7 percent for the year. This also suggests that the magnitude of slippage in M2 growth from its target would have been substantially lower had the budgetary finance from the external sector been incorporated more accurately in the monetary policy framework for FY07.

        While the overall monetary indicators raised a few concerns from inflationary perspectives, financial soundness continued to exhibit improvement during FY07. More importantly, though the rise in interest rates did create some impact on the quality of loans, the stringent provisioning requirements as well as increased capital requirements did not allow the impact of loan quality on financial stability of the banking institutions. Not only did banks remain adequately capitalised, but the overall asset quality measured in terms of NPLs to loan ratio (net of provisioning) continued to decline.

        DOMESTIC & EXTERNAL DEBT:

        Country's total stock of debt and liabilities (TDL) rose by 10 percent YoY in FY07 to reach Rs 5,023.6 billion. The major causative factors for this increase in TDL were the rising level of country's current account deficit and a large fiscal deficit that raised the financing needs of the country. Encouragingly, despite this increase in the TDL stock, the ratio of total debt & liabilities to GDP continued to decline which shows country's improved debt servicing potential. The TDL to GDP ratio for FY07 remained significantly below the target of 60 percent set for the country in the "Fiscal Responsibility and Debt Limitation Act 2005" to be achieved in FY13.

        Pakistan's domestic debt stock increased sharply during FY07, registering a growth of 11.9 percent - much higher than the average growth of 7.7 percent during the preceding four year. This rise in stock is driven by the growth in the floating debt category which accounted for nearly two-thirds of the rise in domestic debt in FY07. The share of short term debt continued to rise and reached 43 percent during FY07.

        This rising share of short term domestic debt means increased vulnerability to adverse short-term interest rate movements, potentially rendering future debt management more difficult. An important feature for FY07 is the sharp rise of 57.1 percent in interest payments on domestic debt. The strongest contribution to the increase is probably from maturing high-cost, zero coupon instruments (DSCs) issued in late 1990s.

        Pakistan's external debt and liabilities (EDL) rose to US $40.1 billion during FY07, representing a US $2.9 billion increase over the stock in FY06. The rise in the EDL stock constituted inflows from IDA, ADB, and the issuance of a new Eurobond. Private loan inflows also had a sizeable contribution in the increase of the debt stock. Encouragingly despite this rise in the stock of EDL, Pakistan's EDL to GDP ratio continued to improve, reflecting country's improved debt servicing ability. This improvement in debt ratios was probably an important factor that led to improvement in sovereign rating; Moody's up-graded country's foreign and local currency bond ratings to B1 from B2 in FY07.

        Pakistan also witnessed an improvement in the maturity profile of its external debt stock in FY07. A significant share of the inflows received during FY07 had a long term maturity ranging from 15 - 40 years. The improved maturity structure of loan inflows to some extent offsets the effects of the floating interest rate structure of these loans.

        During FY07, 62.5 percent share of the new inflows was on floating interest rates, including US $750 million 10-year Eurobond issued by the country and a substantial portion of inflows from ADB. The rising share of such inflows in the total debt stock calls for the need of greater prudence in the future management of country's debt burden. A higher share of flexible rate loans might translate into increasing debt servicing burden for the country in case of adverse movements in these variable lending rates.

        It is worth mentioning that in the coming years, country is likely to face higher burden of debt servicing as (1) repayments of the rescheduled non-ODA Paris club debt stock will resume from FY08, and (2) the maturities of the Eurobond issued in FY04 and Sukuk issued in FY05 will become due in FY09 and FY10 respectively. In addition, interest payments on various Eurobonds issued recently are likely to add to debt servicing burden in coming years. Therefore in order to maintain the same debt servicing capacity, the country's foreign exchange earnings, and particularly export earnings need to grow faster.

        EXTERNAL SECTOR BALANCE OF PAYMENTS:

        As a result of a relative slowdown in the growth of the current account deficit and a record increase in investment inflows, Pakistan's external account surplus improved substantially to US $3.7 billion during FY07 as compared to US $1.3 billion in FY06. The FY07 moderation in the growth of current account deficit is attributable mainly to a sharp fall in the growth of imports (that compensated for an unexpected deceleration in exports) and strong increase in remittances (that partially offset the rise in investment income outflows).

        The deceleration in the imports growth was expected in the wake of falling oil prices, improved domestic production of some key food items and overall slowdown in capacity expansion. However, the impact of lower import growth (8.1 percent) in FY07 on the trade deficit was lost due to the unanticipated weakness in exports.

        Export growth fell from 14.3 percent in FY06 to only 3.2 percent in FY07. The slowdown in textiles exports was the major contributor to the decline in the overall exports growth, but the accompanying fall in exports of non-textile manufacturers and commodity producing sector made matters worse.

        Nevertheless, an impressive rise in the foreign private investment continued to moderate the impact of growing current account deficit in FY07.

        Specifically, financial account surplus increased substantially from US $5.8 billion in FY06 to a record surplus of US $10.1 billion during FY07. This improvement in the financial account was largely contributed by equity flows rather than debt.

        Benefiting from the substantial surplus in the external account, Pakistan's overall reserves increased by US $2.5 billion in FY07 compared to US $524 million rise in FY06. During FY07, Pak Rupee exhibited a mixed trend vis--vis benchmark currency US Dollar; depreciating by 1.14 percent in the first half and then appreciating by 0.81% in the second half of FY07. In the first half, the widening trade deficit drove the Rupee depreciation while in the second half, improved market related inflows helped Rupee to regain most of its lost ground, consequently the Rupee saw a net depreciation of 0.31 percent during FY07.

        TRADE ACCOUNT:

        After persistent widening during last four years, the difference between import and export growth seems to be converging during FY07 on the back of substantial slowdown in import growth, from 38.7 percent in FY06 to 6.9 percent in FY07. However, this welcome slowdown in import growth could not help in reducing the trade deficit due to a concurrent slowdown in export growth from an average 15.9 percent during last four years to 3.4 percent during FY07.

        As a consequent, the trade deficit reached an all time high of US $13.5 billion during the period under review. Nonetheless, the trade deficit as compared to size of economy slightly declined from record high level of 9.46 percent during FY06 to 9.31 percent during FY07.

        The broad based slowdown in import growth is mainly attributed to (1) decline in global oil prices, (2) the reduction in excess demand, (3) gradual absorption of one-off impact of liberalising of automobile & telecommunication sectors, and (4) improved domestic production of food items such as sugar and wheat.

        On the other hand, the sudden decline in export growth is little confusing given the support to this sector in policy formulation. The poor performance of exports becomes even more worrisome when analysed in the perspective of better environment in the form of robust economic growth in the domestic and key global markets. The slowdown in export growth was also broad based as the textile exports growth declined from last four years average of 14.4 percent to only 4.9 percent during FY07, whereas non-textile export growth declined from last four years' average of 19.2 percent to only 0.6 percent during FY07.

        Poor rice, fruit and cotton crops together with EU ban on fish & fish preparations imports from Pakistan and industry specific issues are considered as the main contributory factors behind the sluggish growth in non-textile exports during FY07. On the other hand, slowdown in the textiles exports can be attributed to: (1) low quality of the textile products on account of contaminated cotton and unskilled labour, (2) concentration of exports in the low and middle value added textile items, (3) frequent power failures in the country, and (4) EU market specific issues such as the antidumping duty on the bedwear exports and only partial restoration of GSP facility.

        Going forward, the rising cotton price which is main input for textile industry coupled with abolition of China specific textile and clothing safeguards in 2008 by EU and US, along with accession of Vietnam to WTO, are some factors that are likely to give tough time to Pakistan's textile industry. While, the rising cotton prices may not increase Pakistan's relative cost of production against its competitors as global cotton prices are also anticipated to rise, Pakistan's apparel exports to US and EU markets may weaken following the end of the US and EU safeguard measures imposed on China.

        On the import side, uncertainly in the global oil prices, increasing commodity prices, anticipated increase in the import of telecom following China's investment in Pakistan's telecom sector and likely rise in power generating machinery may put upward pressure on the import bill. However, increase in hydro power generation on account of better water availability and capacity constrains in the thermal power generation may lead to slower growth of furnace oil import, thereby relieving some pressure from the overall oil import growth.

        RECOMMENDATIONS BY INTER-MINISTERIAL COMMITTEE ON FOOD INFLATION:

        The prices of food items in Pakistan rose sharply during FY07, leading the government to set up an Inter-Ministerial Committee to assess the causes of the increase and recommend corrective policy measures. The committee found that most of the rise in food inflation was caused by high prices of a small number of commodities.

        The increase in the prices of some of these food commodities was found to be structural in nature reflecting diverse factors, such as, rising international prices, where government intervention has a very limited role to play, in the short run. The committee therefore recommended a mix of short-term measures to alleviate the impact of high prices in the short run, as well as, policies to address the structural factors. The key policy recommendations focused on wheat, pulses, sugar, and dairy product prices.

        WHEAT:

        -- The committee recommended that farmer profitability should be ensured so that the country should be self sufficient in wheat production. In order to achieve this, the committee has suggested that the government should provide support price and promote efficient farming practices resulting in cost reduction.

        -- MINFAL has been assigned the task of formulating policies to increase productivity and cost reduction plans in collaboration with the provinces.

        PULSES:

        -- The committee suggested controlling of pulse prices by adopting a policy of procuring the surplus pulses at market price and later releasing them regularly to maintain the target price and minimise speculators edge.

        -- Design a campaign to support farmers before planting. This may include ensuring availability of certified seed with incentives, and announcement of marketing support at support or market price.

        -- In case of gram, an aim to procure at least 25% of consumption and a regular intervention is needed to keep gram price from unnecessarily rising throughout the year.

        -- MINFAL has been asked to specially focus on the productivity of Mash and Masur and ensure marketability of production and sustain profitability of the farmers.

        -- MINFAL has been delegated the task to develop a focused strategy and work with the provinces to predict supply/demand timing, special funding window and incentives for improving farming practices.

        SUGAR:

        -- Farmers should be able to get at least minimum guaranteed support price.

        -- Provinces and Federal government should formulate sugarcane/sugar policy in consultation with stakeholders by September 15 every year.

        -- Sugar may not be imported until the duration of sugar season is determined by end March. However in case of abnormally high prices of sugar this condition may not be applied.

        -- Build up buffer stocks by importing or purchasing from the local mills and use these stocks to intervene to control sugar prices as and when needed.

        LIVESTOCK:

        -- A breakthrough can only be made by attracting expatriates and using them to bridge the yawning knowledge gap. The government should facilitate best research practices and provide alternatives to fodder which is very expensive.

        Business Recorder [Pakistan's First Financial Daily]

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          Thanks so much for sharing the post.



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