Pakistan Economy - News & Updates - Archive

[A.Rahman]

Trade deficit widens

ISLAMABAD (July 19 2006): Pakistan's trade deficit widened to a provisional $1.47 billion in June from $1.16 billion in May and $697 million in June 2005, official data showed on Tuesday. The trade deficit for fiscal year 2005/06 that ended on June 30 widened to a provisional $12.11 billion from $6.21 billion in 2004/05.

here is some inertesting piece of info:

Most economists do not believe that trade deficits are inherently good or bad; some even believe they should be ignored entirely. They do believe, however, that trade deficits are generally harmful when countries engage in currency controls such as fixed or pegged exchange rates. They argue that fixed exchange rates do not allow the market to naturally correct any current account “problems”.
Milton Friedman has argued that many of the fears of trade deficits are unfair criticisms in an attempt to push macroeconomic policies favorable to export industries. He states that these deficits are not harmful to the country as the currency always comes back to the country of origin in some form or another (country A sells to country B, country B sells to country C who buys from country A, but the trade deficit only includes A and B). He continues by informing readers that the "worst case scenario" of the currency never returning to the country of origin is actually the best possible outcome; as the country just purchased goods by exchanging pieces of cheaply made paper. The same result would happen if the exporting country burned the dollars it earned, never returning it to market circulation.
If these current account "problems" become unstable and unsustainable, Friedman notes that the market will correct any "problems" as floating currency rates will rise or fall with time to encourage or discourage imports in favor of the exports, and then possibly reverse again in favor of imports as the currency gains strength.
Friedman and other economists also point out that a large trade deficit (importation of goods) signals that the currency of this country is strong and desirable. Citizens of such a country also receive the benefit of having the ability to choose between many competing consumables and lower prices than they would otherwise experience if the currency was weaker and the country was "enjoying" a trade surplus. To Milton Friedman, a trade deficit simply means that consumers get to purchase and enjoy more goods at lower prices; conversely, a trade surplus implies that a country exported goods that its own citizens did not get to consume and enjoy, while paying high prices for the goods that were consumed.

 

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ISLAMABAD, July 18: Commerce Minister Humayun Akhtar Khan on Tuesday linked the highest ever trade deficit in the fiscal year 2005-06 to overall economic policies of the government, saying the trade policy was one part of it.

Addressing a post-trade policy press conference, the minister said trade deficit might record some reduction during the fiscal year 2006-07 as a result of certain measures taken and possible stability of oil prices in the international market.

Mr Khan said besides high import bill of oil, the increase in import of cars through bank credits also pushed up the import bill during 2005-06. He said $28 billion import bill was a realistic target.

When asked that this year the projected growth in exports was less than last year, the minister said there were some conservative elements due to which the growth target was set less than last year. However, the minister did not elaborate on those hindrances.

In reply to a query, Mr Khan said market forces determined the value of rupee. The minister was of the opinion that increasing interest rates resulted

in a surge in cost of doing business. It is believed that the commerce ministry is pushing for devaluation of the rupee to bridge the gap of widening trade deficit.

Answering another question, the minister said the expansion of positive list for trading with India was an ongoing process. The proposed lists would be taken to the ECC meeting for consideration. Mr Khan said there was no plan under consideration to add the import of used machinery or parts to the positive list.

The minister said an inter-ministerial committee headed by the deputy chairman of the Planning Commission had been constituted to prepare a strategy for enhancing competitiveness and production surplus to increase exports.

The committee, he said, would interact with all the relevant ministries and departments and formulate a short, medium and long-term industrial strategy. The minister said the committee had also been asked to exploit the efforts under Doha agenda negotiations made by the government to boost the agriculture sector and its competitiveness internationally.

In reply to a question, Mr Khan said the cost of production would be to some extent met through the revised refinance scheme, particularly capital cost announced recently.

The minister said a new organisation Trade Development Authority of Pakistan (TDAP) would be established through an act of parliament. He said the authority would be supervised by a policy board chaired by the commerce minister and its members would represent both public and private sectors.

The minister said the proposed expo centres would be established through funding received under the PSDP. He said the government would prepare draft legislation enabling the private sector to effectively participate in the national effort to achieve rapid economic growth.

The minister said Trade Ordinance, 1961 had been revised in consultation with various trade bodies and associations and added that his ministry would prepare the draft legislation.

 

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KARACHI (Dow Jones)

Trade policy sees deficit of $9.4 billion in the current fiscal year

Pakistan’s exports are forecast to grow 13% to $18.6 billion in the current fiscal year that began July 1 mainly due to efforts to explore new markets and bilateral trade agreements with new partner countries, Commerce Minister Humayun Akhtar Khan said yesterday.
Khan, unveiling the country’s trade policy on state television, said the country’s exports in the past fiscal year that ended June 30 totaled $16.468 billion, slightly lower than the $17 billion target.
Despite the expected rise in exports, the trade policy forecasts a deficit of $9.4 billion in the current fiscal year, narrower than around $11.64 billion last year.
“This (last year’s exports) is a reasonable achievement in view of the fact that over the last year we were all working in a very difficult environment,” he said, referring to Oct. 8 devastating earthquake and high international oil prices.
He said further export growth “is facing serious supply-side constraints,” making it harder to achieve export growth targets. Khan said the large-scale manufacturing sector grew 9.0% last year while growth in agriculture remained less than 3%.
“This means that we are facing a shortage of exportable surpluses and this is proving to be a major obstacle in the effort to rapidly increase our exports,” he said. The government was aware of the problem, and was moving rapidly to address the causes of supply side constraints.
Khan said the government was trying to diversify the country’s export portfolio.
More than 60% of Pakistan’s total exports are from the textile and clothing sector.

“Non-textile exports have for the first time exceeded $6 billion,” he said. Exports of rice in the last fiscal year exceeded $1 billion.

“Until last year only five products enjoyed this distinction of being in the billion-dollar club, but they were all from the textile and clothing sector,” he said.

Khan said the government was carrying out intense trade diplomacy to improve market access for domestic exporters.

He said the government has initiated talks with several other countries for preferential market access arrangements. Bilateral negotiations in this regard are currently underway with Mauritius, Morocco, Russia and Thailand.

“Additionally multilateral negotiations are taking place in the context of the Organization of Islamic Countries, and Group of Developing Eight countries,” he said. The government was also seeking a preferential accord with the Association of South East Asian Nations.

Talking about measures to boost exports, Khan said the government has decided to restructure and rename the state-run Export Promotion Bureau to an autonomous Trade Development Authority of Pakistan, or TDAP.

“TDAP will be equipped with the necessary resources and autonomy so that it can effectively exploit opportunities for increasing Pakistan’s prosperity through enhanced trade,” he said. The first phase of transition from EPB to TDAP will be completed in six to 12 months.

In addition, Khan announced the establishment of exclusive export zones for the carpet industry and gem and jewelry sector.

On the import side, Khan said the construction and petroleum sectors will be allowed to import certain types of used machinery, provided the equipment isn’t more than 10 years old.

-By Imran Maqbool, Dow Jones Newswires; +92300-9229939; imran.maqbool@dowjones.com

(END) Dow Jones Newswires

 

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NEW DELHI: India has officially put Central Asia in the pipeline, with the oil ministry telling the Asian Development Bank it will join a $3.5-billion project for wheeling gas from Turkmenistan through Afghanistan and Pakistan (TAP) and suggested minor changes regarding gas usage inside Pakistan in the project agreement.

The decision, conveyed last month, raises the bar for Tehran which has been playing hardball on gas pricing issue to keep Asia's biggest pipedream - the $7-billion energy lifeline from Iran via Pakistan - in limbo.

Unlike the Iran pipeline, TAP is politically easier to implement as it has Washington's tacit backing by way of the ADB's participation. The project is free from funding fears, the bane of Iran pipeline, over US sanctions law.

The ADB is okay with the "minor"changes suggested by India and is talking to TAP's three other promoter-governments on this.

India has sought changes in the framework agreement regarding Pakistan's original plan to take Turkman gas to Gwadar port for liquefaction (LNG) and producing petrochemicals. Pakistan has drawn up a grand blueprint for a gas-based export hub in the area.

India wants Pakistan should only feed to Gwadar its own share of gas or any surplus that may be left over after supplying each participating country's contracted quantity. The ministry has also told ADB it will not be party to plans for building a crude pipeline, road and fibre-optic network along TAP pipeline.

The promoters are proceeding with the southern route passing through heavily-mined territories held by the Taliban in Afghanistan and Pakistan's Balochistan.

India sees this as risky and feels more comfortable with the northern route passing through territories held by Ahmad Shah Masood's Northern Alliance, which New Delhi had supported.

The northern route passes through Mazar-e-Sharif, Jalalabad, Peshawar, Attock, Islamabad and Lahore before entering India near Amritsar.

The southern route traverses Herat, Kandahar, Dera Gazi and Multan to enter India near Fazilka. TAP is being seen as the southern companion to the new market access routes being put in place through Turkey for Central Asian gas.

 

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Bloomberg News

Published: July 18, 2006

British bank mulls deal in Pakistan

Standard Chartered is in talks to buy a stake worth more than $500 million in Union Bank of Pakistan, according to Shaukat Tarin, president of the Pakistani lender.

Standard Chartered "has completed the due diligence and negotiations are going on," Tarin said. "I am sure the agreement will be signed in the next few weeks."

The deal, which would be Pakistan's biggest ever, would give Standard Chartered a bank that has 67 branches in a nation of 160 million people.

Filipino bank sees gains

Philippine National Bank said its second-quarter profit rose 43 percent to 235 million pesos, or $4.4 million, from 164 million pesos a year earlier. First-half profit rose 35 percent to 425 million pesos, the bank said, including a 900 million peso provision for possible losses.

Separately, the bank is in talks with seven potential investors to sell as much as 8 billion pesos of bad loans and 1.5 billion pesos of seized assets.

China broker posts fall

China International Capital, a Beijing-based brokerage one-third owned by Morgan Stanley, said its first-half profit fell 18 percent to 172.8 million yuan, or $21.6 million, in the first six months, from 212 million yuan a year earlier.

Underwriting revenue, the bank's main business, slumped 56.7 percent to 199.7 million yuan, from 461.4 million yuan.

Profit rise for Rinker

Rinker Group, Australia's biggest building materials maker, said net income for the quarter ended June 30 rose 14 percent to $206 million from $181 million a year ago.

Sales at Rinker, which makes 80 percent of its profit in the United States, increased 18 percent to $1.46 billion.

Mortgage firm on roll

Housing Development Finance, India's biggest mortgage lender, said its first-quarter profit rose 20 percent to 2.97 billion rupees, or $64 million, in the three months ended June 30, from 2.47 billion rupees a year earlier.

British bank mulls deal in Pakistan

Standard Chartered is in talks to buy a stake worth more than $500 million in Union Bank of Pakistan, according to Shaukat Tarin, president of the Pakistani lender.

Standard Chartered "has completed the due diligence and negotiations are going on," Tarin said. "I am sure the agreement will be signed in the next few weeks."

The deal, which would be Pakistan's biggest ever, would give Standard Chartered a bank that has 67 branches in a nation of 160 million people.

Filipino bank sees gains

Philippine National Bank said its second-quarter profit rose 43 percent to 235 million pesos, or $4.4 million, from 164 million pesos a year earlier. First-half profit rose 35 percent to 425 million pesos, the bank said, including a 900 million peso provision for possible losses.

Separately, the bank is in talks with seven potential investors to sell as much as 8 billion pesos of bad loans and 1.5 billion pesos of seized assets.

China broker posts fall

China International Capital, a Beijing-based brokerage one-third owned by Morgan Stanley, said its first-half profit fell 18 percent to 172.8 million yuan, or $21.6 million, in the first six months, from 212 million yuan a year earlier.

Underwriting revenue, the bank's main business, slumped 56.7 percent to 199.7 million yuan, from 461.4 million yuan.

Profit rise for Rinker

Rinker Group, Australia's biggest building materials maker, said net income for the quarter ended June 30 rose 14 percent to $206 million from $181 million a year ago.

Sales at Rinker, which makes 80 percent of its profit in the United States, increased 18 percent to $1.46 billion.

http://www.iht.com/articles/2006/07...rg/sxbriefs.php

 

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Wednesday, July 19, 2006

ISLAMABAD: Dan Sullivan, US Assistant Secretary for Economic and Business Affairs, has stressed the need to strengthen people-to-people contact for strengthening and broadening the bilateral economic relationship.

Mr Sullivan, heading a delegation, called on Minister of State for Finance Omar Ayub Khan here on Tuesday.

The minister briefed the US delegation about various economic policies of the government initiated by Prime Minister Shaukat Aziz as finance minister for achieving economic development through deregulation, privatization and liberalization.

He said Pakistan is now one of the fastest growing economy in the region. Last year, the rate of GDP growth was 8.6 percent and this year it would be more than 6.6 percent. We have reduced poverty to 25 percent in the last five years from 32 percent. He said there is significant improvement and growth in each sector of the economy such as manufacturing, agriculture and services.

The minister pointed out that there is a sizeable growth in the dairy sector and Pakistan has a well thought-out strategy through which it will become one of the top dairy producing countries in the world.

The minister told the US delegation that the government is making heavy investment in human resource development, building of infrastructure and especially the energy sector where the demand is increasing at the rate of 13 percent per annum.

He said there is a large potential for harnessing energy resources of the country. He particularly mentioned that Pakistan will become a corridor of regional trade. The North-South corridor will connect western China and the Central Asian Republics with Gawadar and Karachi. He said besides mega projects, infrastructure in rural areas is also being developed.

He referred to the computerization of land record so that the facilities of credit and others can be extended to rural areas. He also informed the delegation about the financial sector reforms.

He stressed upon the US delegation to extend access to Pakistani products through tariff rationalization and that it would be mutually beneficial to both countries.

Earlier, the minister thanked the US delegation for the timely assistance provided by the US to the efforts of the government in the earthquake-hit areas, especially the provision of heavy helicopters.

The US assistant secretary appreciated the growth of the Pakistan's economy. The meeting was attended by the secretary finance and other senior officers of the ministry of finance.

 

[Neo]

Wednesday, July 19, 2006

ISLAMABAD: By setting an export target of 17.8 billion US dollars for the current financial year, the ministry of commerce has saved itself from big and concerted efforts to ensure a quantum jump in the country’s exports, said an economic expert.

In recent years Pakistan’s GDP growth has exhibited an impressive growth of around six percent. This should have helped the country in achieving a better position in exports. But despite this fact, the ministry of commerce failed to achieve the export target for the last fiscal, he said.

The actual increase, which has been suggested in the Trade Policy 2006-07, would be around one billion dollars as the government would bear the burden of subsidies, which are to be given by the government. These subsidies would be an extra burden on the national kitty as these were not projected in the 2006-07 federal budget.

The prime minister and some other cabinet ministers, according to a well-placed source, failed to impress the minister for commerce on setting the export target at $19.5 billion. The export-to-GDP ratio remained at 12.9 percent in the last fiscal. The same would fall to 12.5 percent as far as the export target for the current fiscal is concerned, the source added.

“If we include the amount of subsidy, which will be given by the government, the export- to-GDP ratio will go further down,” an expert said. The GDP has been estimated to grow at seven percent in the current fiscal against last year’s 6.6 percent. This means that the government expects that the country’s agriculture and industrial sectors would respond well in the current fiscal. Furthermore, the estimated exports will further widen the trade deficit, current account deficit and budget deficit, the expert said.

The expert said the country’s exports exhibited growth even in those years in which the industrial and agricultural outputs remained “not up to the mark.” The government facilitates the import of raw material whenever there is shortage of them in the local market, he said. There is a need that the ministry of commerce finds new markets. There was no distortion in the international market in the last fiscal. And we do not see that there will be any kind of setback to exports in the current fiscal, the expert said.

However, the ministry of commerce is of the view that the government should not make the export target an issue for the ministry will make allout efforts to increase exports. An official in the ministry of commerce said if there is potential, there would be more exports. The more the surplus production, the more will be exports. The only thing in the trade policy is that it has not set an ambitious export target, the official said.

 

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ISLAMABAD (July 19 2006): Commerce Minister Humayun Akhtar has categorically said that trade with India will continue under bilateral arrangements, rather than South Asian Free Trade Agreement (Safta).

"All Saarc member countries have ratified Safta, which is operational from July 1, 2006, but Pakistan did not accord 'Most Favoured Nation' (MFN) status to India, and trade on the basis of positive list will continue," he said in reply to a question at the post-trade policy press conference here on Tuesday.

About expansion in the positive list, he said that in case of shortage of essential commodities on supply side, the government from time to time enlarges the positive list, but any change on permanent basis has to be made in consultation with all public and private sector stakeholders.

He said that the positive list had been approved by the Economic Co-ordination Committee (ECC) of the Cabinet, and the Ministry would again approach the ECC for making necessary amendments in the list.

However, an official told Business Recorder that a summary for inclusion of more than 200 items in the positive list was ready for ECC approval, but any announcement in this regard would be made keeping in view the timing.

Asked if there would be any change in trade relations between Pakistan and India after the Mumbai blasts, Humayun said that this incident would not negatively impact the existing ties, and expressed hope that business would continue at the same pace.

Regarding import of used machinery from India, he said that no decision had been taken to include any new item in the positive list, and added that if any item already exists on the list, it can be imported, otherwise import would not be allowed.

When asked, if the country had achieved 15 percent growth in exports during 2005-06 why exports growth had been estimated at 13 percent, he said that sluggish trend in trade had been witnessed during the last few months, and the new export target, of $18.6 billion, had been fixed keeping in view the future hardships. "We are anticipating problems in exports, and the new target has been set keeping in mind these factors," he added.

He said that exports registered nearly 24 percent growth during first five/six months of last year, but in later months it was 7 percent, "which is the fundamental assumption". He also mentioned several reasons which negatively impacted the exports growth.

He said there was need to balance the economic policies with monetary policy and exchange rate and other policies affecting GDP growth. However, he made it clear that the State Bank of Pakistan did not try to intervene to appreciate value of rupee and this was being done by market forces.

The Commerce Minister said that defence and services exports would be made part of overall exports, in future, and for this purpose the mechanism would be finalised, in consultations with other ministries.

He said that the Prime Minister had directed the Planning Commission to prepare short-term and long-term strategies to boost exports, and added that the PC would interact with other ministries in this regard. He said that capital cost has reduced to a reasonable level but there were still problems with regard to transport cost and gas and electricity charges.

He appreciated the efforts of Export Promotion Bureau (EPB) Chairman Tariq Ikram to increase exports from $7.8 billion to $16.6 billion, but no name "has been finalised to head the newly constituted Trade Development Authority of Pakistan (TDAP)". He said that all rules of Auditor General of Pakistan would apply on TDAP, while Commerce Ministry would be its administrative authority.

 

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ISLAMABAD (July 19 2006): President Pervez Musharraf, has approved roadmap 2006-07, for Sui Northern Gas Company Limited (SNGPL) and Sui Southern Gas Pipeline Company (SSGC) for gas supply to the domestic sector, it was learnt here on Tuesday.

The roadmap attached priority to rural areas for supply of gas and makes population a criterion for the gas distribution companies. The Ministry of Petroleum has been given the role of implementation agency for the roadmap.

The roadmap indicated that the gas distribution companies will follow the principle of population of 1000 and above persons for supply of gas to rural areas.

Sources said the President took critical view of the roadmap during a presentation given to him sometime back. Petroleum Minister, Amanullah Khan Jadoon, Secretary Ahmed Waqar, SNGPL Managing Director, Rashid Lone, SSGC Managing Director, Munawar Basir, and public sector E&Ps heads were present during the presentation.

The presentation covered domestic gas production, capacity and efficiency of the system for its delivery to different categories of the consumers.

The president was apprised that domestic gas production was around 1450 mmcfd and SSNGPL and SSGC were delivery it to different categories judiciously.

However, a big shortfall exists in gas supply and demand. The government is presently working on different options to plug the gap and ensure supply of cheap fuel to different categories of consumers. Import of gas is one of the options.

The President was informed that the government was making all out efforts to increase domestic gas production. He was told that domestic gas production will increase considerably by the end of the current calendar year as few major oil and gas discoveries were expected in different parts of the country in next couple of months. The presentation also covered offshore plan of the government to explore the new areas to increase gas and oil production.

According to the roadmap, SNGPL and SSGC will carry out demographic survey and compile data with the help of Nadra to identify villages with population of 1000 or more persons and prepare implementation schemes accordingly.

Sources said the ministry and gas distribution companies will compliance report to the President on the progress on demographic data and gas supply plan on monthly basis that would be considered in the meetings for the future line of action.

 

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KARACHI (July 19 2006): The sustainable growth rate of Pakistan's economy is on an upward trajectory but has not yet reached the point where 7-8 percent growth can be sustained.

These views were expressed by Dr Shaghil Ahmed, Acting Managing Director, Social Policy and Development Centre (SPDC) in his presentation while releasing the SPDC Annual Review of the State of the Economy in the light of the Pakistan Economic Survey 2005-06 and the Federal Budget 2006-07 here on Tuesday.

The Review presents an in-depth analysis of the economic situation and policies.

Dr Shaghil Ahmed acknowledged the improvements in economic performance and an increase in the economy's sustainable rate of growth over the past few years, which are in part a result of the improved macroeconomic policy environment.

Although economic activity has decelerated, growth is still occurring at a robust pace despite last October's devastating earthquake.

However, Dr Ahmed also pointed towards some worrisome factors present in the economic situation that result from the growing macroeconomic imbalances. These imbalances manifest themselves in the form of a level of domestic demand that is much higher than domestic production, a huge trade deficit, an increase in the fiscal deficit and a failure of inflation to recede to an acceptable level.

The imbalances pose serious downside risks to the economy and threaten the hard-earned macroeconomic stability and policy credibility. If not controlled, they could jeopardise the very objective of high long-term sustainable growth with price stability.

The SPDC Review also highlights both positive and negative aspects of the Federal Budget 2006-07. It accepts that the post-earthquake reconstruction expenditures and a large increase in the allocations for public sector development programmes largely drive the rise in the fiscal deficit.

The earthquake-related spending is essential and the development programmes are potentially a very pro-poor aspect of the budget and are to be lauded.

However, not enough has been done by way of expenditure switching and raising of tax revenues to finance these larger expenditures in a more sustainable way. As a result, the expansionary stance of fiscal policy has continued, which will make it much more difficult to control inflation.

The official figures released by the GoP recently imply a phenomenal decrease in poverty in just four years from 2001 to 2005. The stance of the SPDC Review on this issue is that non-availability to the public of the full Pakistan Social Living-Standards Measurement (PSLM) Survey data set on which the official figures are based makes an objective analysis of the situation difficult.

A significant reduction in poverty seems plausible given the strong growth and the increases in public development expenditures in recent years.

At the same time, the official figures are likely to represent a substantial overestimate of the extent of the poverty reduction in the presence of some clear offsetting factors. These include high inflation and growing income disparities and other inequalities, which is poverty increasing.

According to SPDC's analysis, there is a need to let domestic demand growth slow further, given that we are not quite yet at the point where 7-8 percent growth is sustainable, that capacity constraints have been reached and that inflation remains high. In his concluding remarks, Dr Shaghil Ahmed said that at the moment there is no trade-off between growth and inflation.

The choices are to let growth slow somewhat with less price pressures and smaller macroeconomic imbalances, or to try to grow faster than is possible with the result that growth will fall more abruptly and with more disruptive consequences. Some more details of SPDC's Annual Review of the State of the Economy are provided below:

MACROECONOMIC ANALYSIS: Economic growth slowed from 8.6 percent in FY05 to 6.6 percent in FY06. The performance across sectors has become much more uneven. In particular, agricultural growth has decreased from 6.7 percent to just 2.5 percent, while manufacturing growth has also slowed from 12.6 percent to 8.6 percent.

Services growth continued at a high pace of 8.5 percent, with the finance and insurance sub-sector should grow by 23 percent in FY07. SPDC's analysis suggests that the bumper cotton crop contributed significantly to the high overall as well as high agricultural growth in FY05 and the fall in cotton production took away from growth in FY06, partly explaining the deceleration.

On the expenditure side, growth in consumption and imports has slowed but remains high at nearly eight percent and 24 percent, respectively, in FY06. The investment picture appears to have improved, but there have been substantial data revisions for FY04 and FY05, which have not been well explained by the government. As such, the true investment picture remains unclear.

Growth of domestic demand at 8.1 percent continued to outpace the growth of domestic output at 6.2 percent (as measured by real GDP at market prices) in FY06. On the expenditure side, consumption remained the main driver of growth, while net exports shaved off nearly two percentage points of growth in FY06.

The relative price of investment has risen by about 30 percent since FY03, with the result that the fixed investment-to-GDP ratio was 18.4 percent in FY06 if measured by nominal values but only 14.3 percent if measured by real values.

Inflation, which had picked up sharply after FY04, receded somewhat in FY06 dropping to eight percent, based on data through May. However, core inflation - which excludes the food and energy components -rose slightly to 7.2 percent. By one statistical measure, the potential output growth of Pakistan's economy has increased from four percent in FY00 to about six percent in FY06, a creditable achievement.

However, with actual output growth being above potential output growth for the past few years, the output gap - the deviation of the level of actual output from the level of potential output - has become positive. This is a source of continued inflationary pressures and if growth of seven percent is targeted, the output gap will continue to grow and these pressures will not abate.

In the first nine months of FY06, imports surged 30 percent over the corresponding period of the previous year while exports rose 11 percent. This put the merchandise trade balance, measured at an annual rate, in the first nine months of FY06 at more than 6.5 times its value in FY04.

Moreover, the external deficit on services has now become 88 percent of the merchandise deficit. Thus, although net transfer payments (including remittances) have increased somewhat, they are now financing about 60 percent of the trade deficit on goods and services relative to nearly 85 percent before.

A disruptive correction of the trade deficit through sudden import compression caused either by a sharp slowdown in economic activity or a sharp depreciation of the currency is a significant downside risk, according to the SPDC report.

 

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FISCAL ANALYSIS: The fiscal deficit is projected to increase to 4.5 percent of GDP in FY07, largely as a result of the increased allocation to the Public Sector Development Programme (PSDP), including allocations for the Earthquake Relief and Reconstruction Authority (ERRA).

External resources (including external borrowing) and privatisation receipts ended up financing a greater share of the deficit in FY06 than was anticipated. The share of bank borrowings was less than anticipated but still amounted to about 1/5th.

In FY07, bank borrowings are expected to increase 110 percent, which is not a good sign in the current environment of high inflation. Non-bank borrowings on the other hand are expected to decline 70 percent.

In addition to the pro-poor development expenditures, there are some other relief measures in the budget for FY07 as well, including a 25 percent increase in the minimum wage, an increase in the tax exempt level of income and a decrease in the effective tax rates of low-salaried workers.

There is also a substantial increase in food and other subsidies. However, the SPDC report cautions against overestimating the importance of the subsidy and relief measures in the budget.

Not counting the tax relief, the subsidies and relief amount to Rs 109 billion slated for FY07; as a share of projected GDP this amounts to 1.25 percent, which is only slightly higher than the 1.1 percent of GDP value for FY06.

The federal government's current expenditures are expected to fall about four percent in FY07 relative to the revised estimates of FY06. It is important to note, however, that the revised estimates represented a 12 percent overshooting of the original target, which continues the tendency year after year for current expenditures to substantially exceed their target.

The CBR tax receipts in FY06 were two percent above target, with indirect taxes being about on track and direct taxes exceeding the target by about five percent. However, this was partly due to inflation and, therefore, nominal income being higher than originally envisaged.

The SPDC Review points out the tax-to-GDP ratio hardly increased at all, from 9.0 percent in FY05 to 9.1 percent in FY06. Moreover, although tax revenue is projected to increase 18 percent in FY07 if we factor in the increase in nominal income from the government's growth and inflation targets, the tax-to-GDP ratio would increase only modestly to 9.6 percent in FY07 from 9.1 percent in FY06.

The initiatives for new taxes in FY07 fall well below expectations - all of the new taxes together will raise Rs25 billion, or only 0.3 percent of projected GDP. The changes in the existing income tax structure arc also inadequate as they will, on the whole, make the tax system less progressive.

The changes result in a substantial reduction in the effective tax rates of the high-salaried class, which will increase income inequality.

POVERTY AND UNEMPLOYMENT: According to the GoP, poverty declined from 34.5 percent in 2001 to 24 percent in 2005, which is a huge reduction of 10 percentage points or 31 percent in just four years. The government should release the PSLM Survey data, on which these figures are based, to the public immediately so that more informed debate on these figures can occur.

Empirically, there is an inverse relationship in Pakistan (as is true elsewhere as well) between changes in poverty and changes in economic growth.

Thus, some reduction in poverty is to be expected given the strong growth. But inflation is high and income inequality is also growing. During the period FYO2-FYO5, monthly real consumption of the richest 20 percent of the population grew almost four times more than the consumption of the poorest 20 percent.

Given these partially offsetting factors, the extent of the poverty reduction seems to be overestimated by the PSLM data.

Given that the Labour Force Survey (LFS) is being conducted for the first time on a quarterly basis, it is difficult to analyse the true employment picture.

The government claims a creation of 5.82 million new jobs from FY04 to December 2005, but this is based on a comparison of the new quarterly LFS with the older ones based on annual data. Such a comparison is not valid because of changes in the sampling framework and the presence of possible seasonal factors.

This is confirmed by some implausible results that emerge when we do compare the new quarterly LFS with the previous annual one using somewhat desegregated data as well.

These implausible results include that nearly 80 percent of the new jobs created were in rural areas, that the labour force in agriculture has increased while that in trade and services has declined and that female literacy rates have risen in rural areas but declined in urban areas.

Thus, SPDC cautions against any inferences being drawn about employment and other trends from a comparison of the new quarterly LFS with the previous annual ones.

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

 

[Neo]

ISLAMABAD (July 19 2006): US Assistant Secretary for Economic and Business Affairs, Dan Sullivan, had a meeting with Minister of State for Finance, Omar Ayub Khan, here on Tuesday and discussed matters relating to increased economic co-operation and trade between the two countries.

Omar briefed the US delegation about various economic policies of the government initiated by Prime Minister Shaukat Aziz as Finance Minister for achieving economic development through deregulation, privatisation and liberalisation.

He said: "Pakistan is now one of the fastest growing economies in the region. Last year, its GDP growth rate was 8.6 percent, and this year it would be more than 6.6 percent.

"We have reduced the poverty to 25 percent in the last five years from 32 percent, as there was significant improvement and growth in each sector of the economy, such as manufacturing, agriculture and services" he added.

He said that there was a sizeable growth in the dairy sector, and Pakistan has a well thought-out strategy through which it would become one of the top dairy producing countries in the world.

The Minister told the US delegation that the government was making heavy investment in human resource development, building of infrastructure and especially the energy sector where the demand was increasing at the rate of 13 percent per annum but there was also a large potential of harnessing energy resources of the country.

He said that Pakistan would soon become a corridor of regional trade as North-South corridor would connect western China and the Central Asian Republics to Gwadar and Karachi.

He said that besides mega projects, the infrastructure in rural areas was also being developed, and referred to computerisation of land record so that the facilities of credit and others could be extended to the rural areas.

He asked the US delegation to extend access to Pakistani products through tariff rationalisation and that it would be beneficial for both countries.

Earlier, Omar thanked the US delegation for the timely assistance provided by the US for the recovery and rehabilitation efforts of the government in the earthquake-hit areas, and especially the provision of heavy lift helicopters.

The US Assistant Secretary for Economic and Business Affairs appreciated the growth of Pakistan's economy and laid stress on strengthening the people-to-people contact for strengthening and broadening the economic relationship.

The meeting was also attended by Finance Secretary and other officers of the Ministry of Finance.

 

[Neo]

ISLAMABAD (July 19 2006): The government has announced it will start constructing two new airports, one each in Islamabad and Gwadar, costing Rs 18 billion and Rs 8 billion respectively towards the end of current year by utilising indigenous resources.

At the Public Accounts Committee (PAC) meeting here on Tuesday, a top official said the expansion project of Multan airport at Rs 3 billion would also be initiated the same time.

Defence Secretary Lieutenant General Tariq Wasim (Retd) told the meeting the government and the Civil Aviation Authority (CAA) had enough resources to initiate and carry forward all three projects at least for two initial years. The secretary, however, said if need arose the government would go for borrowing to complete these projects after two years.

Whether the government would prefer borrowing from within the country or outside Tariq did not mention. "The CAA and the government together have enough resources to run these projects for two years and after that we will look for borrowing," Wasim said.

The government's new position on the construction of new airports is contrary to what has been the part of un-contradicted media reports in the past. Some officials in the recent past have been saying new airports would be constructed on Build Operate and Transfer (BOT) basis. The defence secretary said the government had acquired some 3,200 acres of land for Islamabad airport and had made payment to the owners.

Secretary Tariq revealed the government was in the process of selecting design consultants and short listing contractors to execute these projects. Out of the total of Rs 18 billion for Islamabad airport, the CAA was likely to invest Rs 12 billion while rest would come from the government and borrowing, he added.

Similarly, for Gwadar both Pakistan and Oman governments would provide finances along with the CAA, Tariq told the meeting.

And the government and the CAA would share 50 percent each of Rs 3 billion for the expansion project of the Multan airport, he said. About the financial health of the CAA, the secretary said the entity was likely to have a surplus of Rs 5 billion next year. During 2006, he added, the CAA had total revenue collection of Rs 10 billion against the expenditure of Rs 5.4 billion.

 

[Owais]

Wapda to obtain US thermal power station LAHORE: Wapda in its emergent efforts to surmount the dearth of power has decided to obtain on lease 150-megawatt thermal power station from the US.

Wapda sources told that this 150-MW thermal power station being taken on rent for three years would be installed near Multan and it would start working in next two/two and half months. Thus, this would be the maiden thermal power station to be taken on rent in Pakistan’ history.

Sources told that the four 320 MW thermal power stations provided by UAE would go in operation by 2007.

 

[Owais]

Interest on deposits may rise further by 200 basis points KARACHI: Following the enhancements of Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR), interest rates on bank loans as well as on deposits could further surge by 100 to 200 basis points.

Standard Chartered Bank’s CEO, Badar Kazmi told this here to Geo News.

He said that the banks after the CRR and SLR enhancements would now focus on obtaining deposits mainly for over six months duration and the ongoing war for deposits would further heat up, which would benefit the depositors, especially those who wanted to keep their deposits with the banks for a period of over six months.

This step taken by the State Bank of Pakistan would bear out good results in the banking industry, as the scope of banking services would further widen, he told.

Badar Kazmi said that such banks that had indulged in much of their loan books’ expansion could now offer more readily handsome profits for obtaining the deposits.