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Economic Survey confirms 4.1 percent GDP growth
MUSHTAQ GHUMMAN
ISLAMABAD (June 03 2010): The Economic Survey 2009-10, which will be unveiled on Friday, confirms 4.1 percent Gross Domestic Growth (GDP) growth as compared to 1.1 percent of last fiscal year, despite economic challenges and worsening social indicators. According to highlights of Economic Survey, the growth achieved has been far below the desired level, given the population growth rate of 2 percent and around 3 percent of labour force.
Inflation undoubtedly has been less severe as compared to last year''s 22 percent but is still in double digits (at 11.5 percent). Keeping the fiscal deficit low, given the security situation, debt repayments and making robust development expenditure to overcome social and infrastructure imbalances and moving towards sustainable and inclusive development still remains a daunting task.
Despite economic difficulties, the government has made determined efforts to protect the poor and the vulnerable and its overarching objective has been to ensure stabilisation with a human face. Social protection measures were expanded from around Rs 8 billion two years ago to around Rs 80 billion this year. Direct income support for the poor and needy has been provided mainly through the Benazir Income Support Program (BISP), which in 2009-10 was expanded to cover 5 million families, though actual coverage may be somewhat less, it is still substantive. Provincial governments have also launched program to provide income support, food subsidies and job opportunities for the poor and needy.
The development of less developed provinces and regions has remained a major priority in the allocation of resources (Balochistan, Khyber Pakhtunkhwa (KP) and FATA). Rehabilitation of IDPs has been handled with satisfactory results in difficult circumstances.
The coming financial year 2010-11 poses challenges as well as offers new opportunities. Economic recovery has to be carefully but firmly transformed into a sustainable growth and pro-poor development to secure a bright economic future for our next generation.
Implementation of the historical 7th NFC Award and 18th Amendment will require that the Federal and Provincial governments work in close harmony to ensure that the "growth dividend" as a result of these changes is fully realised. The coming year also marks the start of the Tenth five-year Plan (2010-15) which will provide an overall medium-term policy and development framework to achieve the objective of sustained and pro-poor growth and equitable development.
ECONOMIC PERFORMANCE DURING 2009-10 Main Features of economic performance during the current year are as follows: Economic growth in 2009-10 is provisionally estimated at 4.1 percent, higher than the targeted growth of 3.3 percent. This was mainly due to a sharp bouncing lack of large-scale manufacturing (4.4 percent) pushing up industrial growth to 4.9 percent which triggered robust growth in services (4.6 percent). The construction sector also recorded a high growth of 15 percent, but this was mainly due to the low base of last year.
Agriculture, having grown at a fast rate in 2008-09, slowed down to 2.0 percent this year. Major crop sectors, in fact, hardly grew at all and agriculture growth was pushed up due to an assumed growth of 4.0 percent in livestock (based on inter-censual estimates). Besides immediate factors like water and energy shortages, adverse weather conditions and lower credit transfers also played an important role in the growth of agriculture. It again underlines the need for overcoming critical gaps (infrastructure, seeds) to ensure sustained growth in agriculture, which employs almost half of the labour force and on which the vast majority of the people depend.
Large scale manufacturing after nose-diving to 7.7 percent in 2008-09 recovered to 4.4 percent in 2009-10. This was largely due to growth of consumer durables and allied industries. Also recovery in construction was pushed up as shown by the high growth in cement industry.
The continuing fall in investment levels to 16.6 percent (targeted 20 percent) especially in private sector investment to 12.3 percent has been an area of considerable concern. While there is excess capacity that can push-up short-term growth, the medium-term capacity is being considerably impaired.
SECTORAL GROWTH PERFORMANCE Agriculture: Agriculture growth remained less than the target, at around 2.0 percent. Various factors affected the growth in agriculture. The fertiliser off-take increased by 32.6 percent in contrast to a decline of 9.2 percent witnessed in the July-January period last year. The urea off-take rose by 19.8 percent during this period as against 2.4 percent fall seen in the preceding year. There was improvement in water availability due to rainfall in third quarter, improvement in area cultivation for cotton and stable domestic wheat prices. The agriculture sector, however, suffered from overall water shortages especially for the Rabi crops.
MANUFACTURING: The sector recovered well amid continuing uncertainty in global demand and domestic constraints especially power outages. Data for July-March 2009-10 showed a growth of 4.36 percent in large scale manufacturing. Large part of recovery emanated from consumer durables and allied industries. Main factors contributing to growth in consumer durables were improvement in rural incomes and record high remittances. The factors contributing to the recovery in LSM included growth in production of jeeps, cars, tractors, motorcycles, cement, fertilisers, leather and cotton cloth.
(This is for all you haters out there who said we could not even manufacture a bicycle chain)
SERVICES: Drawing on growth in agriculture and manufacturing sectors and increase in trade values, the services sector surpassed its target of 3.9 percent and grew by 4.6 percent. The wholesale & retail trade activities are likely to benefit from recovery seen in commodity producing sectors. The transport, storage and communications sub-sector posted a growth of 4.5 percent due to increase seen in value-addition of air and road transport, storage and telecom sector.
SAVINGS AND INVESTMENT: National savings are expected to decrease and will stand at 13.8 percent of GDP from the targeted figure of 14.7percent. Total investment has fallen significantly in 2009-10 and is expected to be 16.6 percent as compared to the target of 20.0 percent of the GDP. This position is largely a reflection of the security situation, reduced external inflows and global recession. Total public sector and general government investment is 4.3 percent of the GDP.
FOREIGN DIRECT INVESTMENT: The position of foreign direct investment (FDI) for July-March 2009-10 shows a decline of 58 percent, with portfolio investment falling by 189 percent. FDI remained depressed mainly due to the security situation. Major contributors to foreign direct investment were: European Union ($474.8 million), USA ($443.9 million); Netherlands ($268.4 million), UK ($168 million), and Asian region ($126.3 million). Major sectors attracting FDI include oil and gas exploration ($519.9 million), telecommunications ($264.1 million), financial business ($118.7 million), trade ($65.1 million), construction ($77.7 million) and chemicals ($76.5 million).
FISCAL DEVELOPMENTS The Budget 2009-10 adopted a balanced approach of stabilising the economy as well as taking concrete measures to ensure sustainable economic growth by investing in real sectors of the economy such as agriculture and industry besides taking a number of significant pro-poor development measures.
The consolidated Budget for the year 2009-10 has estimated government expenditure at Rs 2,877.4 billion (19.4 percent of GOP) - current expenditure at Rs 2,103.8 billion and development expenditure including net lending at Rs 773.6 billion. Total government revenue for the year was estimated to increase from Rs 1,850.9 billion in 2008-09 to Rs 2,155.4 billion in 2009-10 (14.5 percent of GOP).
Tax revenue was estimated to rise from Rs 1,204.7 billion to Rs 1,563.6 billion during 2009-10. Non-tax revenue was estimated to be Rs 591.8 billion during 2009-10, as compared to Rs 646.2 billion in 2008-09. On this basis, the overall fiscal deficit was estimated at Rs 722.1 billion (4.9 percent of the GOP) against Rs 680.4 billion (5.2 percent of the GDP) last year.
Despite a modest recovery in the overall performance of the economy during 2009-10, the fiscal position has still been a matter of concern. Fiscal deficit during first half of 2009-10 has been 2.7 percent of GDP as compared to 1.9 percent during the same period of last year.
The main reason is a substantial increase in expenditure on anti-terror operations and power sector subsidies. The target of keeping the fiscal deficit at 4.9 percent of GDP appears challenging despite government''s resolve and reduction in the development budget. Compounded by very low releases of expected external aid flows and delays in proceeds from Coalition Support Fund, the fiscal deficit for 2009-10 may be in the range of 5.0 percent to 5.5 percent of the GOP.
TAX COLLECTION BY FBR: During July-March 2009-10, taxes collected by FBR witnessed an increase of 11.6 percent (Rs 909.6 billion) as against Rs 815.1 billion during the corresponding period of last year. This constitutes 65.9 percent of the full year target of Rs 1,380.0 billion. Collection of direct taxes stood at Rs 342.3 billion during July-March 2009-10 against Rs 307.6 billion during the same period of last year shows an increase of 11.3 percent. Indirect taxes witnessed a growth of 11.8 percent (Rs 567.3 billion) as against Rs 507.5 billion collected in the same period of last year.
MONETARY DEVELOPMENTS As the macroeconomic situation of the country started showing signs of improvement in late 2008-09, mainly because of a home-grown stabilisation programme implemented with IMF support, monetary policy has been suitably adjusted during the current financial year to best suit the needs of the economy.
Following the cut of 100 basis points in April 2009, the policy rate was further cut by 100 basis points in August 2009 and then in November, 2009, by another 50 basis points. Keeping in view the rising inflationary pressures, rising imports and fragile fiscal position, it has been considered prudent to bring no further change in the policy rate keeping it at 12.5 percent.
On the other hand, State Bank has kept its vigil over liquidity situation in the economy. Through its open market operations, State Bank has managed liquidity concerns and prevented to the extent possible, any crowding out of private sector, which is also evident from rise in credit to it.
The growth of Broad Money (M2) in the economy is targeted on the basis of an estimated money demand function that takes into consideration the growth rate of real GDP and the inflation rate. During July 1, 2009 to May 7, 2010, M2 expanded by Rs 416.3 billion (8.10 percent) against an expansion of Rs 194.4 billion (4.15 percent) during the corresponding period of last year.
The expansion in M2 has been contributed by a recovery in the Net Foreign Assets (NFA) and improvement in Net Domestic Assets (NDA) of the Banking Sector owing to increased credit to public as well as private sector. The Net Foreign Assets (NFA) of the banking system expanded by Rs 97.3 billion (18.8 percent) during July 1, 2009 to May 7, 2010 against contraction of Rs 227.0 billion (34.0 percent) during the corresponding period of last year.
The Net Domestic Assets (NDA) of the Banking System expanded by Rs 319.1 billion (6.9 percent) during July 1, 2009 to May 7, 2010 against Rs 421.5 billion (10.5 percent) during the corresponding period of last year. The trend in the major components of M2 during the said period has been as follows: The government borrowing for budgetary support stood at Rs 365.9 billion against Rs 319.6 billion over the corresponding period last year.
NFA remained under pressure, yet maintained a positive growth. Growth in NDA has picked up owing to rise in private sector credit and increased government borrowing from the banking system. Growth in credit to Public Sector Enterprises (Rs 66.4 billion) has been slower during July 1, 2009 to May 7, 2010 as compared to corresponding period of last year (Rs 138.5 billion). With gradual improvement in the economy, the private sector credit has grown by about 4.5 percent to Rs 130.2 billion.
INFLATION: Consumer Price Index (CPI) inflation had been targeted at 9.0 percent for 2009-10. It has registered an increase of 11.5 percent during July-April 2009-10 against an increase of 22.4 percent in July-April 2008-09, with food inflation at 12.0 percent against 26.6 percent and non-food inflation at 11.0 percent against 19.0 percent over the same period of last year. The core inflation during July-April 2009-10 increased by 11.2 percent against 17.9 percent in July-April 2008-09. The WPI during July-April 2009-10 registered an increase of 11.3 percent against 21.4 percent in July-April 2008-09. Similarly, SPI registered an increase of 13.0 percent against 26.3 percent in the respective period of last year.
The reasons for the persistence of high inflation in Pakistan were: i) continuing pressure of food inflation; ii) fiscal pressures especially due to security situation; iii) adjustment in utility prices and increase in transport charges to cover cost increases; iv) continued depreciation of Pak rupee thus increasing the cost of imported raw materials, goods and services; v) high mark-up rate; and vi) loss in productivity due to severe electricity and gas shortages, thus raising cost of production.
While inflation has declined during July-April 2009-10 as compared to similar period of 2008-09, expected rise in prices of food items, electricity & gas tariffs and increase in global commodity and crude oil prices are likely to cause pressures on inflation in the coming months. The average CPI inflation for current financial year is likely to remain around 12.0 percent.
BALANCE OF PAYMENTS The unsustainable current account deficit of the balance of payments was a key challenge for the government. Due to a better than expected performance of exports in the months of March & April of 2009-10 and robust performance of remittances, the current account deficit reduced to more than projected.
In the first ten months of 2009-10, the current account deficit stood at $3.1 billion (1.8 percent of GDP) as compared to $9.0 billion (5.5 percent of GDP) for the same period of last year. It is expected that the current account deficit for the current financial year will remain around 3.0 percent of GDP, much lower than the target of 5.3 percent of GDP.
This improvement is attributed to reduction in trade deficit and significant increase in workers'' remittances. The foreign reserves stood at $15.05 billion as on 30th April 2010. The rupee has also recovered part of its losses. The average exchange rate for the month of April, 2010 was Rs 83.90/1$.
In reviewing the Balance of Payments situation it must be kept in mind that the improved situation also reflects lower growth in the economy which dampened imports.
BALANCE OF TRADE: It was expected that trade deficit during 2009-10 will be $10.7 billion (6.2 percent of GDP). In the first ten months of 2009-10, trade deficit has been contained to $9.1 billion (5.2 percent of GDP) as compared to $11.1 billion (6.8 percent of GDP) in the corresponding period of last year. This reduction has been due to positive growth of exports by 2.1 percent and reduction in imports by 6.3 percent.
EXPORTS: Exports during July- April, 2009-10 stood at $16.2 billion as compared to $15.8 billion in the corresponding period last year, showing an increase of 2.1 percent. Component-wise analysis of exports items (during July-April, 2009-10) indicates that positive growth has been witnessed in raw cotton (140.2 percent), yarn other than cotton yarn (103.5 percent), jewellery (102.3 percent), transport equipment (82.2 percent); vegetables (71.2 percent), art, silk & synthetic textiles (66.9 percent), fruits (55.1 percent), meat and meat preparations (39.8 percent), electric fans (38.0 percent), cotton yarn (32.1 percent), cutlery (24.4 percent), spices (22.6 percent), chemical and pharmaceutical products (22.0 percent), made up articles (10.8 percent), rice (7.5 percent), petroleum group (7.3 percent), towels (4.8 percent) and sports goods 4.1 percent. Almost all other items showed negative growth during the period under review. About 80 percent of total export items, for which data on both volume and price is available, showed positive growth of 3.5 percent. Bifurcation of export growth into volume and price effect showed an increase of 6.0 percent in volume and decrease of 2.5 percent in price. The weak performance of exports was broad-based. Factors adversely affecting exports were: i) slow recovery of the global economy, energy and power shortages; ii) deteriorating law and order situation; iii) increased competition in the international market for textile products; and iv) high cost of doing business in the country. Exports (fob) for the full year 2009-10 are estimated to be around $19.2 billion as against the Annual Plan target of $18.3 billion.
IMPORTS: Imports during July-April, 2009-10 reduced by 6.3 percent to $25.2 billion over the corresponding period of last year ($26.9 billion). The items of imports which showed positive growth during July-April, 2009-10 have been: sugar (591.6 percent), gold (308.6 percent), agricultural machinery (130.6 percent), mobile phones (69.9 percent), insecticides (48.7 percent), manufactured fertilisers (39.8 percent), transport group (37.7 percent), medicinal products (36.6 percent), jute (28.7 percent), rubber, tyre & tubes (21.7 percent), synthetic fibre (21.6 percent), textile machinery (20.5 percent), synthetic and artificial yarn (18.7 percent), and tea (15.1 percent). Imports of almost all other commodities witnessed a negative growth. Items for which data on both volume and prices are available (55 percent of total import items) showed a negative growth of 2.8 percent. Fall in imports was broad-based across various items, contributed mainly by decline in POL imports and significant fall in the prices of imports. It is estimated that Imports (fob) for 2009-10 will be $29.9 billion compared to the Annual Plan target of $28.9 billion.
WORKERS'' REMITTANCES: Workers'' remittances continuously witnessed increasing trend during the period July-April 2009-10, touching the level of $7.3 billion as against $6.4 billion in the corresponding period of last year, registering an increase of 15.0 percent. The monthly average remittances during this period stood at $730.7 million as compared to $635.6 million of last year. Remittances for the full year are estimated at $8.4 billion. Remittances have shown an upward trend due to various factors prominent among which are the measures taken under the Pakistan Remittance Initiative (PRI) leading to increased inflow through official channels.
CURRENT ACCOUNT BALANCE: The current account deficit was targeted at $9.4 bullion (5.3 percent of GDP) as against $9.3 billion (5.7 percent of GDP) recorded in 2008-09. This was largely based on higher level of workers'' remittances. With the estimated trade deficit at $10.7 billion and workers'' remittances of $8.4 billion, the current account deficit for 2009-10 is estimated to reduce to around $4.8 billion from last year''s deficit of $9.3 billion.
CAPITAL ACCOUNT: Gross aid disbursements during 2009-10 are expected to remain at the same level of $3.7 billion recorded last year. Allowing for other capital inflows, the overall balance is likely to be in deficit by $0.3 billion in 2009-10 compared to a deficit of $3.1 billion in 2008-09.
REDUCING POVERTY AND VULNERABILITY The government took various steps to give relief to the poor/vulnerable groups and to secure them against different types of shocks faced by rising food prices and slow down of economic growth. These measures are described below:
An allocation of Rs 70 billion was made for 2009-10 in Benazir Income Support Programme (BISP), launched in 2008-09. Under BISP a poverty exit strategy known as Wasee!a-e-Haq was launched during 2009-10 in order to promote self-employment among women or their nominees to improve their livelihood.
Peoples'' Works Programme generates income and employment opportunities at the local level and helps build needed social and physical infrastructure. Rs 31.0 billion have been spent under this Programme during July - March, 2009-10 out of the annual allocation of Rs 35 billion.
Microfinance Network consisting of a host of institutions like Pakistan Poverty Alleviation Fund, Rural Support Programmes, Khushali Bank, First Microfinance Bank, Kashaf Foundation, etc, is expected to disburse micro credit of Rs 31 billion to about two million persons.
Copyright Business Recorder, 2010
Business Recorder [Pakistan's First Financial Daily]
MUSHTAQ GHUMMAN
ISLAMABAD (June 03 2010): The Economic Survey 2009-10, which will be unveiled on Friday, confirms 4.1 percent Gross Domestic Growth (GDP) growth as compared to 1.1 percent of last fiscal year, despite economic challenges and worsening social indicators. According to highlights of Economic Survey, the growth achieved has been far below the desired level, given the population growth rate of 2 percent and around 3 percent of labour force.
Inflation undoubtedly has been less severe as compared to last year''s 22 percent but is still in double digits (at 11.5 percent). Keeping the fiscal deficit low, given the security situation, debt repayments and making robust development expenditure to overcome social and infrastructure imbalances and moving towards sustainable and inclusive development still remains a daunting task.
Despite economic difficulties, the government has made determined efforts to protect the poor and the vulnerable and its overarching objective has been to ensure stabilisation with a human face. Social protection measures were expanded from around Rs 8 billion two years ago to around Rs 80 billion this year. Direct income support for the poor and needy has been provided mainly through the Benazir Income Support Program (BISP), which in 2009-10 was expanded to cover 5 million families, though actual coverage may be somewhat less, it is still substantive. Provincial governments have also launched program to provide income support, food subsidies and job opportunities for the poor and needy.
The development of less developed provinces and regions has remained a major priority in the allocation of resources (Balochistan, Khyber Pakhtunkhwa (KP) and FATA). Rehabilitation of IDPs has been handled with satisfactory results in difficult circumstances.
The coming financial year 2010-11 poses challenges as well as offers new opportunities. Economic recovery has to be carefully but firmly transformed into a sustainable growth and pro-poor development to secure a bright economic future for our next generation.
Implementation of the historical 7th NFC Award and 18th Amendment will require that the Federal and Provincial governments work in close harmony to ensure that the "growth dividend" as a result of these changes is fully realised. The coming year also marks the start of the Tenth five-year Plan (2010-15) which will provide an overall medium-term policy and development framework to achieve the objective of sustained and pro-poor growth and equitable development.
ECONOMIC PERFORMANCE DURING 2009-10 Main Features of economic performance during the current year are as follows: Economic growth in 2009-10 is provisionally estimated at 4.1 percent, higher than the targeted growth of 3.3 percent. This was mainly due to a sharp bouncing lack of large-scale manufacturing (4.4 percent) pushing up industrial growth to 4.9 percent which triggered robust growth in services (4.6 percent). The construction sector also recorded a high growth of 15 percent, but this was mainly due to the low base of last year.
Agriculture, having grown at a fast rate in 2008-09, slowed down to 2.0 percent this year. Major crop sectors, in fact, hardly grew at all and agriculture growth was pushed up due to an assumed growth of 4.0 percent in livestock (based on inter-censual estimates). Besides immediate factors like water and energy shortages, adverse weather conditions and lower credit transfers also played an important role in the growth of agriculture. It again underlines the need for overcoming critical gaps (infrastructure, seeds) to ensure sustained growth in agriculture, which employs almost half of the labour force and on which the vast majority of the people depend.
Large scale manufacturing after nose-diving to 7.7 percent in 2008-09 recovered to 4.4 percent in 2009-10. This was largely due to growth of consumer durables and allied industries. Also recovery in construction was pushed up as shown by the high growth in cement industry.
The continuing fall in investment levels to 16.6 percent (targeted 20 percent) especially in private sector investment to 12.3 percent has been an area of considerable concern. While there is excess capacity that can push-up short-term growth, the medium-term capacity is being considerably impaired.
SECTORAL GROWTH PERFORMANCE Agriculture: Agriculture growth remained less than the target, at around 2.0 percent. Various factors affected the growth in agriculture. The fertiliser off-take increased by 32.6 percent in contrast to a decline of 9.2 percent witnessed in the July-January period last year. The urea off-take rose by 19.8 percent during this period as against 2.4 percent fall seen in the preceding year. There was improvement in water availability due to rainfall in third quarter, improvement in area cultivation for cotton and stable domestic wheat prices. The agriculture sector, however, suffered from overall water shortages especially for the Rabi crops.
MANUFACTURING: The sector recovered well amid continuing uncertainty in global demand and domestic constraints especially power outages. Data for July-March 2009-10 showed a growth of 4.36 percent in large scale manufacturing. Large part of recovery emanated from consumer durables and allied industries. Main factors contributing to growth in consumer durables were improvement in rural incomes and record high remittances. The factors contributing to the recovery in LSM included growth in production of jeeps, cars, tractors, motorcycles, cement, fertilisers, leather and cotton cloth.
(This is for all you haters out there who said we could not even manufacture a bicycle chain)
SERVICES: Drawing on growth in agriculture and manufacturing sectors and increase in trade values, the services sector surpassed its target of 3.9 percent and grew by 4.6 percent. The wholesale & retail trade activities are likely to benefit from recovery seen in commodity producing sectors. The transport, storage and communications sub-sector posted a growth of 4.5 percent due to increase seen in value-addition of air and road transport, storage and telecom sector.
SAVINGS AND INVESTMENT: National savings are expected to decrease and will stand at 13.8 percent of GDP from the targeted figure of 14.7percent. Total investment has fallen significantly in 2009-10 and is expected to be 16.6 percent as compared to the target of 20.0 percent of the GDP. This position is largely a reflection of the security situation, reduced external inflows and global recession. Total public sector and general government investment is 4.3 percent of the GDP.
FOREIGN DIRECT INVESTMENT: The position of foreign direct investment (FDI) for July-March 2009-10 shows a decline of 58 percent, with portfolio investment falling by 189 percent. FDI remained depressed mainly due to the security situation. Major contributors to foreign direct investment were: European Union ($474.8 million), USA ($443.9 million); Netherlands ($268.4 million), UK ($168 million), and Asian region ($126.3 million). Major sectors attracting FDI include oil and gas exploration ($519.9 million), telecommunications ($264.1 million), financial business ($118.7 million), trade ($65.1 million), construction ($77.7 million) and chemicals ($76.5 million).
FISCAL DEVELOPMENTS The Budget 2009-10 adopted a balanced approach of stabilising the economy as well as taking concrete measures to ensure sustainable economic growth by investing in real sectors of the economy such as agriculture and industry besides taking a number of significant pro-poor development measures.
The consolidated Budget for the year 2009-10 has estimated government expenditure at Rs 2,877.4 billion (19.4 percent of GOP) - current expenditure at Rs 2,103.8 billion and development expenditure including net lending at Rs 773.6 billion. Total government revenue for the year was estimated to increase from Rs 1,850.9 billion in 2008-09 to Rs 2,155.4 billion in 2009-10 (14.5 percent of GOP).
Tax revenue was estimated to rise from Rs 1,204.7 billion to Rs 1,563.6 billion during 2009-10. Non-tax revenue was estimated to be Rs 591.8 billion during 2009-10, as compared to Rs 646.2 billion in 2008-09. On this basis, the overall fiscal deficit was estimated at Rs 722.1 billion (4.9 percent of the GOP) against Rs 680.4 billion (5.2 percent of the GDP) last year.
Despite a modest recovery in the overall performance of the economy during 2009-10, the fiscal position has still been a matter of concern. Fiscal deficit during first half of 2009-10 has been 2.7 percent of GDP as compared to 1.9 percent during the same period of last year.
The main reason is a substantial increase in expenditure on anti-terror operations and power sector subsidies. The target of keeping the fiscal deficit at 4.9 percent of GDP appears challenging despite government''s resolve and reduction in the development budget. Compounded by very low releases of expected external aid flows and delays in proceeds from Coalition Support Fund, the fiscal deficit for 2009-10 may be in the range of 5.0 percent to 5.5 percent of the GOP.
TAX COLLECTION BY FBR: During July-March 2009-10, taxes collected by FBR witnessed an increase of 11.6 percent (Rs 909.6 billion) as against Rs 815.1 billion during the corresponding period of last year. This constitutes 65.9 percent of the full year target of Rs 1,380.0 billion. Collection of direct taxes stood at Rs 342.3 billion during July-March 2009-10 against Rs 307.6 billion during the same period of last year shows an increase of 11.3 percent. Indirect taxes witnessed a growth of 11.8 percent (Rs 567.3 billion) as against Rs 507.5 billion collected in the same period of last year.
MONETARY DEVELOPMENTS As the macroeconomic situation of the country started showing signs of improvement in late 2008-09, mainly because of a home-grown stabilisation programme implemented with IMF support, monetary policy has been suitably adjusted during the current financial year to best suit the needs of the economy.
Following the cut of 100 basis points in April 2009, the policy rate was further cut by 100 basis points in August 2009 and then in November, 2009, by another 50 basis points. Keeping in view the rising inflationary pressures, rising imports and fragile fiscal position, it has been considered prudent to bring no further change in the policy rate keeping it at 12.5 percent.
On the other hand, State Bank has kept its vigil over liquidity situation in the economy. Through its open market operations, State Bank has managed liquidity concerns and prevented to the extent possible, any crowding out of private sector, which is also evident from rise in credit to it.
The growth of Broad Money (M2) in the economy is targeted on the basis of an estimated money demand function that takes into consideration the growth rate of real GDP and the inflation rate. During July 1, 2009 to May 7, 2010, M2 expanded by Rs 416.3 billion (8.10 percent) against an expansion of Rs 194.4 billion (4.15 percent) during the corresponding period of last year.
The expansion in M2 has been contributed by a recovery in the Net Foreign Assets (NFA) and improvement in Net Domestic Assets (NDA) of the Banking Sector owing to increased credit to public as well as private sector. The Net Foreign Assets (NFA) of the banking system expanded by Rs 97.3 billion (18.8 percent) during July 1, 2009 to May 7, 2010 against contraction of Rs 227.0 billion (34.0 percent) during the corresponding period of last year.
The Net Domestic Assets (NDA) of the Banking System expanded by Rs 319.1 billion (6.9 percent) during July 1, 2009 to May 7, 2010 against Rs 421.5 billion (10.5 percent) during the corresponding period of last year. The trend in the major components of M2 during the said period has been as follows: The government borrowing for budgetary support stood at Rs 365.9 billion against Rs 319.6 billion over the corresponding period last year.
NFA remained under pressure, yet maintained a positive growth. Growth in NDA has picked up owing to rise in private sector credit and increased government borrowing from the banking system. Growth in credit to Public Sector Enterprises (Rs 66.4 billion) has been slower during July 1, 2009 to May 7, 2010 as compared to corresponding period of last year (Rs 138.5 billion). With gradual improvement in the economy, the private sector credit has grown by about 4.5 percent to Rs 130.2 billion.
INFLATION: Consumer Price Index (CPI) inflation had been targeted at 9.0 percent for 2009-10. It has registered an increase of 11.5 percent during July-April 2009-10 against an increase of 22.4 percent in July-April 2008-09, with food inflation at 12.0 percent against 26.6 percent and non-food inflation at 11.0 percent against 19.0 percent over the same period of last year. The core inflation during July-April 2009-10 increased by 11.2 percent against 17.9 percent in July-April 2008-09. The WPI during July-April 2009-10 registered an increase of 11.3 percent against 21.4 percent in July-April 2008-09. Similarly, SPI registered an increase of 13.0 percent against 26.3 percent in the respective period of last year.
The reasons for the persistence of high inflation in Pakistan were: i) continuing pressure of food inflation; ii) fiscal pressures especially due to security situation; iii) adjustment in utility prices and increase in transport charges to cover cost increases; iv) continued depreciation of Pak rupee thus increasing the cost of imported raw materials, goods and services; v) high mark-up rate; and vi) loss in productivity due to severe electricity and gas shortages, thus raising cost of production.
While inflation has declined during July-April 2009-10 as compared to similar period of 2008-09, expected rise in prices of food items, electricity & gas tariffs and increase in global commodity and crude oil prices are likely to cause pressures on inflation in the coming months. The average CPI inflation for current financial year is likely to remain around 12.0 percent.
BALANCE OF PAYMENTS The unsustainable current account deficit of the balance of payments was a key challenge for the government. Due to a better than expected performance of exports in the months of March & April of 2009-10 and robust performance of remittances, the current account deficit reduced to more than projected.
In the first ten months of 2009-10, the current account deficit stood at $3.1 billion (1.8 percent of GDP) as compared to $9.0 billion (5.5 percent of GDP) for the same period of last year. It is expected that the current account deficit for the current financial year will remain around 3.0 percent of GDP, much lower than the target of 5.3 percent of GDP.
This improvement is attributed to reduction in trade deficit and significant increase in workers'' remittances. The foreign reserves stood at $15.05 billion as on 30th April 2010. The rupee has also recovered part of its losses. The average exchange rate for the month of April, 2010 was Rs 83.90/1$.
In reviewing the Balance of Payments situation it must be kept in mind that the improved situation also reflects lower growth in the economy which dampened imports.
BALANCE OF TRADE: It was expected that trade deficit during 2009-10 will be $10.7 billion (6.2 percent of GDP). In the first ten months of 2009-10, trade deficit has been contained to $9.1 billion (5.2 percent of GDP) as compared to $11.1 billion (6.8 percent of GDP) in the corresponding period of last year. This reduction has been due to positive growth of exports by 2.1 percent and reduction in imports by 6.3 percent.
EXPORTS: Exports during July- April, 2009-10 stood at $16.2 billion as compared to $15.8 billion in the corresponding period last year, showing an increase of 2.1 percent. Component-wise analysis of exports items (during July-April, 2009-10) indicates that positive growth has been witnessed in raw cotton (140.2 percent), yarn other than cotton yarn (103.5 percent), jewellery (102.3 percent), transport equipment (82.2 percent); vegetables (71.2 percent), art, silk & synthetic textiles (66.9 percent), fruits (55.1 percent), meat and meat preparations (39.8 percent), electric fans (38.0 percent), cotton yarn (32.1 percent), cutlery (24.4 percent), spices (22.6 percent), chemical and pharmaceutical products (22.0 percent), made up articles (10.8 percent), rice (7.5 percent), petroleum group (7.3 percent), towels (4.8 percent) and sports goods 4.1 percent. Almost all other items showed negative growth during the period under review. About 80 percent of total export items, for which data on both volume and price is available, showed positive growth of 3.5 percent. Bifurcation of export growth into volume and price effect showed an increase of 6.0 percent in volume and decrease of 2.5 percent in price. The weak performance of exports was broad-based. Factors adversely affecting exports were: i) slow recovery of the global economy, energy and power shortages; ii) deteriorating law and order situation; iii) increased competition in the international market for textile products; and iv) high cost of doing business in the country. Exports (fob) for the full year 2009-10 are estimated to be around $19.2 billion as against the Annual Plan target of $18.3 billion.
IMPORTS: Imports during July-April, 2009-10 reduced by 6.3 percent to $25.2 billion over the corresponding period of last year ($26.9 billion). The items of imports which showed positive growth during July-April, 2009-10 have been: sugar (591.6 percent), gold (308.6 percent), agricultural machinery (130.6 percent), mobile phones (69.9 percent), insecticides (48.7 percent), manufactured fertilisers (39.8 percent), transport group (37.7 percent), medicinal products (36.6 percent), jute (28.7 percent), rubber, tyre & tubes (21.7 percent), synthetic fibre (21.6 percent), textile machinery (20.5 percent), synthetic and artificial yarn (18.7 percent), and tea (15.1 percent). Imports of almost all other commodities witnessed a negative growth. Items for which data on both volume and prices are available (55 percent of total import items) showed a negative growth of 2.8 percent. Fall in imports was broad-based across various items, contributed mainly by decline in POL imports and significant fall in the prices of imports. It is estimated that Imports (fob) for 2009-10 will be $29.9 billion compared to the Annual Plan target of $28.9 billion.
WORKERS'' REMITTANCES: Workers'' remittances continuously witnessed increasing trend during the period July-April 2009-10, touching the level of $7.3 billion as against $6.4 billion in the corresponding period of last year, registering an increase of 15.0 percent. The monthly average remittances during this period stood at $730.7 million as compared to $635.6 million of last year. Remittances for the full year are estimated at $8.4 billion. Remittances have shown an upward trend due to various factors prominent among which are the measures taken under the Pakistan Remittance Initiative (PRI) leading to increased inflow through official channels.
CURRENT ACCOUNT BALANCE: The current account deficit was targeted at $9.4 bullion (5.3 percent of GDP) as against $9.3 billion (5.7 percent of GDP) recorded in 2008-09. This was largely based on higher level of workers'' remittances. With the estimated trade deficit at $10.7 billion and workers'' remittances of $8.4 billion, the current account deficit for 2009-10 is estimated to reduce to around $4.8 billion from last year''s deficit of $9.3 billion.
CAPITAL ACCOUNT: Gross aid disbursements during 2009-10 are expected to remain at the same level of $3.7 billion recorded last year. Allowing for other capital inflows, the overall balance is likely to be in deficit by $0.3 billion in 2009-10 compared to a deficit of $3.1 billion in 2008-09.
REDUCING POVERTY AND VULNERABILITY The government took various steps to give relief to the poor/vulnerable groups and to secure them against different types of shocks faced by rising food prices and slow down of economic growth. These measures are described below:
An allocation of Rs 70 billion was made for 2009-10 in Benazir Income Support Programme (BISP), launched in 2008-09. Under BISP a poverty exit strategy known as Wasee!a-e-Haq was launched during 2009-10 in order to promote self-employment among women or their nominees to improve their livelihood.
Peoples'' Works Programme generates income and employment opportunities at the local level and helps build needed social and physical infrastructure. Rs 31.0 billion have been spent under this Programme during July - March, 2009-10 out of the annual allocation of Rs 35 billion.
Microfinance Network consisting of a host of institutions like Pakistan Poverty Alleviation Fund, Rural Support Programmes, Khushali Bank, First Microfinance Bank, Kashaf Foundation, etc, is expected to disburse micro credit of Rs 31 billion to about two million persons.
Copyright Business Recorder, 2010
Business Recorder [Pakistan's First Financial Daily]
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uncalled for dude. please refrain
