Pakistan Economy - News & Updates - Archive

[Neo]

Infrastructure industries index records 26.2 percent growth

FAISALABAD (December 08 2006): The infrastructure industries index, which measures the performance of seven industries, ie electricity generation, natural gas, crude oil, petroleum products, basic metal, cement and coal, has recorded a 26.2 percent growth in industrial sector of Pakistan.

According to official sources, the index is composed of energy-related industries (83.5 percent share) and construction and allied industries (16.5 percent share), which is a leading indicator of the performance of industrial sector.

The index recorded 26.2 percent growth in 2006 financial year as against 11.3 percent growth in 2005 financial year. The production of electricity and coal accelerated to 12.8 percent and 13.7 percent respectively during the FY06 compared with 10.3 and 2.6 percent growth respectively last year.

The positive impact of these two industries was offset by the deceleration in the production of natural gas, cement and petroleum products and fall in the production of basic metal and crude oil production. In terms of end-use categorisation of industrial production (basic, consumer, intermediate and capital goods), a deceleration is evident in all categories during FY06.

Encouragingly, capital goods group witnessed a marginal slowdown and grew by a strong 26.9 percent during FY06. This relatively strong growth came from higher production of electronic items such as transformers, meters and engineering products eg diesel engine, shuttles and bobbins.

Strong growth in capital goods suggests that growth momentum in other categories is also likely to accelerate in FY07. The second highest increase was registered under the category of consumer goods in FY06 for yet another year, on the back of a sustained rise in income, declining prices of electronics as well as availability of consumer financing. In particular, despite a slowdown in consumer durable goods, this group recorded a strong growth of 31.3 percent in FY06 as compared 40.8 percent growth in FY05.

This strong growth in consumer durable is mainly contributed by electronics and automobile industries due to consumer financing, and an evident weakening is entirely owed to rising interest rates on consumer financing. Given still strong aggregate demand and private spending, growth in consumer goods is likely to remain reasonably good.

The basic goods category showed some resilience, witnessing a deceleration of only 1.6 percent in FY06. Within basic goods, electricity generation (by both Wapda and KESC), marble, coal etc witnessed higher growth rates during FY06 as against in FY05.

The impact of this was offset by slowdown in the output of some chemicals eg hydrochloric acid, sulphuric acid and fall in the production of crude oil and coke. In FY06, the growth rate of 4.9 percent in the output of intermediate goods is lower than 16.8 percent growth in the corresponding year, mainly on account of a fall in the production of metal industry and cotton ginning.

Moreover, growth in production of textile related chemicals and natural gas also witnessed deceleration during FY06. Although, intermediate goods showed a dismal performance, it is likely that the growth would pick up in FY07 since the declines in both metal and cotton ginning appears to be temporary.

 

[Neo]

Investment seen volatile in mining sector

FAISALABAD (December 08 2006): The trend of real investment in the mining and quarrying sector remained volatile in recent years, said official sources. Real investment in this sector witnessed a growth of nine percent during 2005-06 compared with a fall of 22.2 percent for 2004-05 financial year, while the rising trend in 2006 financial year is entirely driven by private investment.

According to official sources, mining and quarrying sector is important for the economy, as it is the main supplier of key inputs and energy to industry. There was a need to exploit the natural resources of the country to sustain and diversify the growth momentum, they mentioned.

Progress in the development to exploit large copper deposit at Riko-Dik in Chagai district of Balochistan was a positive move in this direction, official sources stated, adding that the success in this project could encourage more investment in the mining sector.

 

[Neo]

Economy facing major risks: WB: Average inflation 7-7.5pc forecast

ISLAMABAD, Dec 7: The World Bank has identified some ‘major risks’ to Pakistan’s economy in the long and short terms owing to continuously rising fiscal and current account deficits and structural bottlenecks.

“The debt dynamics are vulnerable to downturns, inflation target for the year will be missed and the performance of exports and revenue is worrisome,” says the World Bank in its outlook on Pakistan based on latest economic results up to October 2006. Based on current trends, World Bank projects that average inflation during the fiscal year 2006-07 would be in the range of 7-7.5 per cent.

The bank said the poverty rate by the end of 2004-05 stood at 29.2 per cent, a decline of only five per cent from 34.4 per cent in 2000-01 and was well above 23.9 per cent estimated by the government of Pakistan. The bank said its poverty estimate of 29.2 per cent was just 0.8 per cent better than 30 per cent estimated in 1998-99 when President Musharraf assumed power. It said the poverty rate had increased to 34.4 per cent in 2000-01. The urban and rural rate of poverty incidence in 2004-05 stood at 19.1 per cent and 34 per cent, respectively.

"Pakistan's economy in the short run faces the risk of a continued widening of the current account deficit and difficulties in taming persistent inflation. If first quarter trends in the trade balance continue, the current account deficit could end up in the range of five to 5.5 per cent of GDP for the entire fiscal year."

Over the first quarter of 2006-07, the trade deficit has widened by a further $3.2 billion in spite of a deceleration of import growth to 13.4 per cent. “A significant development is that over the first quarter, exports grew by only 2.8 per cent to $4.3 billion,” the bank said, adding the exports of both textiles and other goods declined.

Over the first quarter of 2006-07, the current account deficit has increased to $2.7 billion, roughly equal to half the magnitude of the full year deficit in the previous year. "Inflationary pressures have continued to persist, but core inflation has started declining," said the bank.

In the current fiscal year, the reliance on domestic borrowing has increased, with government borrowing from the central bank reaching Rs86 billion at end of October 2006, an amount roughly equal to two-third of the amount targeted for the whole fiscal year.

The bank criticised the government for allowing institutional investors to invest in national savings to finance the deficit at a higher cost and said that the opening of NSS to the institutional investors might have an adverse effect on the stock market as mutual funds had begun switching out of capital markets to invest in NSS.

“Pakistan’s tax system continues to under-perform in fundamental ways,” said the World Bank, adding that the fiscal sustainability of increases in spending hinges on improvements in revenue collections. “The tax revenue at 10.3 per cent of GDP and accounting for two-third of total revenue remains low against government's spending needs.”

“The revenue structure is heavily skewed towards indirect taxes, with six major items alone accounting for more than half of the total collection in indirect taxes. Moreover, agriculture and services sectors remain outside the tax net, depriving the system of additional revenue resources,” the bank observed.

Sub-national revenue collection, the bank says, is weak, amounting to less than one per cent of GDP. This is partly due to weaknesses in the tax policy, and partly due to limited incentives of the provincial governments to collect their own taxes.

Excess liquidity in the economy has led to increases in domestic demand, which has been the driving force behind the economic growth witnessed over the last few years. The availability of and access to cheap credit has allowed households to finance consumption needs, businesses to expand, contributing to an increase in investment levels to 20.8 per cent of GDP from 18.1 per cent the previous year.

“Pakistan will have to raise its investment rate above the current levels and raise domestic saving rates to sustain higher growth rate,” the concluded.

 

[Neo]

Positive list to double trade with India

ISLAMABAD, Dec 7: A study has revealed that the formal trade with India could be double from $1 billion to $2 billion after a recent action by Pakistan to increase the positive list of tradable products from 773 to 1075 items.

But, the exchange can quadruple, if only there is closer economic cooperation and that could lead to better peace. Whenever one speaks about the peace-promoting economic relations between India and Pakistan, critics opine that relations between the two are marred by the Kashmir dispute and the cross-border infiltration.

These facts were revealed in a joint research study conducted by secretary general of CUTS International--an Indian based leading research and networking group--Pradeep Mehta and its Pakistani partner Ms Huma Fakhar —- the Lahore-based lawyer of Fakhar Law International and Market Promotion.

Hence, to expect more peaceful relations between the two fast growing economies through trade is a dream. But the researchers said that they did not agree with the assumption that trade could not help in normalising relations between the two arch rivals.

According to the study, a copy of which made available to Dawn, it was suggested that the US government can promote mutual trade between the two countries by offering duty-free imports, if one used the other’s inputs in their exportable items to the US. This idea, the researchers said played positive role in case of many countries.

The study pointed out the example of US scheme of qualified industrial zones (QIZs), which was in operation since 1996, in a bid to promote peace in the Middle East between Israel with Jordan and Egypt. The scheme allowed duty free export to US market from Jordan and Egypt in case a minimum level of inputs from Israel was used in the manufacturing of these products.

Since both India and Pakistan are currently preparing to or entering into various preferential trade agreements (PTAs), bilateral as well as regional) with other countries and regions both with developed and developing countries, it would be sensible to include QIZs type arrangements in some of the agreements, particularly with EU, US and China and even within Safta and the proposed Asean-India FTA.

Such arrangement would help both Indian and Pakistani exporters and importers to reap benefits of free trade as well as promote greater cooperation, the research paper said.

The report says the mega projects like the Turkmenistan-Afghanistan-Pakistan and the Iran-Pakistan-India gas pipeline projects would help in promoting trust and regional economic cooperation between India and Pakistan.

Though both India and Pakistan are moving closer, it is at a snail’s pace and constantly encountering hurdles. Some of these measures could divert attention from sticky matters and accelerate the speed of greater economic cooperation between the two nations through reduction (if not elimination) in tensions and mistrust and bringing in peace and tranquillity in this region, the researchers opined.

 

[Neo]

Cellular firms to start free MNP service in January

KARACHI: All the six cellular companies have agreed to keep MNP (mobile number portability) offer free of charge, once it starts functioning in January 2007.

Senior officials of the mobile phone companies said the high-ups of cellular firms met last month and agreed to offer free MNP service to consumers, who eagerly wait for the new system across the country.

“Advisory Board of the National Database Company met last month and reached a consensus that no fee would be charged from the consumers for MNP service,” said one of the officials of the board, who asked not to be named.

“Initially, there was resistance from big operators but in the end it was decided that there would be no charges for the service. It has now become the defined policy or regulation for the MNP operation mechanism.”

He said all the six operators - Mobilink, Ufone, Warid, Telenor, Paktel and Instaphone - had also reaffirmed their commitment to meet the deadline of January to implement the MNP after five-time extension offered by the authorities concerned.

“No one can be blamed for the delay as such,” said another official. “In fact there are so many technicalities involved in implementing such a sensitive and hi-tech system. Each company has to install special equipment and share its data with others, which is obviously a time-consuming procedure.”

The PTA last year asked the cellular companies to implement MNP system by November 2005 in line with Pakistan Telecommunications (Re-organisation) Act 1996, which demands the regulator protect consumers’ interest and promote availability of a wide range of high quality, efficient and cost-effective services.

However, the operators ignored five consecutive deadlines set by the watchdog with their consent on unknown grounds and finally they approached the federal telecom ministry to win extension, which has now fixed January 2007 to see the system implemented and operational.

“The MNP requires more than $500 million investment, which is contributed by the operators at the ratio of their subscribers base share,” said the cellular company official.

He said the companies had met almost all the major requirements of the MNP operation and now there were minor issues left, which would not take more than a month to resolve.

“So we are very much hopeful to get such operation started sometime in January 2007,” he added. “A final meeting of the advisory board is due within next one month to give a nod for the MNP implementation and review the overall achievement.”

MNP is an ability to retain an existing mobile subscriber number along with operator code while shifting connectivity from one operator to another operator. In general it is a circuit-switch network service provided by the cellular or fixed line operators to the consumers with the ability to change service providers, locations or service types without changing their telephone numbers.

Analysts see the MNP as vital in determining real market leader among cellular service providers, as it offers options and requires quality service by the companies to keep their subscribers intact.

“There would be a cutthroat competition among the operators in the second half of 2006-07, if the MNP is implemented by the set time,” said Anwaar Ahmed Khan, a telecom analyst at Capital One Equities.

He said the technology would also force the companies to enter into those areas, where they had yet to initiate service and it would ultimately require network expansion and investment.

 

[Neo]

Friday, December 08, 2006

PC shipments grew 20.9% in Q2 compared with last year

LAHORE: Pakistan’s PC shipments grew 20.9 percent in Q2 2006 (April-June) to 173,834 units as compared to the same quarter of preceding year, announced by Springboard Research, a leading innovator in the IT Market Research industry.

The portable segment experienced the substantial growth of 64.1 percent year-to-year mainly due to a major deal of 4,500 portables announced by Bahria University.

The government’s continuous effort to automate the different public and private sector bodies was also noticeable in the quarter. In the federal budget for fiscal year 2006-2007, the government announced an imposition of 15percent General Sales Tax (GST) on the import and sale of computers and software, which will negatively affect the country’s PC/Server market.

The second quarter of 2006 yielded stiff competition among multinational vendors in the desktop market. HP led the market with 5.1 percent share, followed by Lenovo and Dell. The government agenda of promoting local players seems to be materializing for the domestic market development. During Q2 2006, Raffles, a major local player, registered the highest growth in the PC market with 49.5 percent year-to-year growth, while Inbox (another local player) shipments also grew substantially.

Amongst all segments, government held the greatest share (23.7percent) of total PC shipments in Q2 2006, followed by large enterprises (500+ employees) and the home segment. Additionally, Springboard saw the government, banking and telecom sectors spending heavily in strengthening their IT infrastructure.

One area that has drawn attention from both local and international players is the growing telecom sector in the country. Pakistan’s telecom sector has witnessed an unprecedented growth in the recent years with the total IT spending in the industry estimated at $134.5 million in 2005, generating 22.5 percent annual growth. Currently the hardware segment accounts for about 70percent of the total telecom IT spending in the country.

“With the deregulation of the fixed line and mobile sectors we expect to see a considerable amount of investment both locally and internationally. In this event, IT business opportunities for vendors will be accelerated,” commented Rehan Ghazi, a market analyst in Springboard Research’s Pakistan office.

Although the government has announced new standard operating procedures and projects for the IT industry, the GST imposed in the new fiscal budget will increase computer prices by at least 15-20 percent and make them unaffordable for some home users, educational institutions, and other price-sensitive users. “Our latest forecast for 2006 and beyond has been decreased as we expect to see a 10-15percent decline in the branded machine sales. We expect the market to grow 23.4 percent in 2006 as compared to our earlier forecast of 25 percent”, added Mr. Ghazi.

The Pakistan PC/server market is one of the fastest emerging segments in South Asia and in the past few years, the market has attracted a lot of attention from international IT vendors. Improving economic indicators and foreign investor’s confidence will help the sector gain momentum as well. The growing trend of strengthening the IT infrastructure by both government and private sectors may trigger an expansion of competition in the market.

 

[Owais]

Prime Minister for efficient use of gas

ISLAMABAD (December 08 2006): Prime Minister Shaukat Aziz on Thursday said natural gas is an important resource which needs to be used efficiently and judiciously to ensure maximum benefit to consumers including households, industry and power generation units.

He said this presiding over a meeting to review the fuel supply to the power sector held at the Prime Minister House. The PM said that Pakistan is a rapidly growing economy with ever-increasing power demand and the fuel requirements to fulfil the generation needs of the power sector are also growing accordingly.

He said the power demand-supply gap is increasing due to growth in economic activity and the Ministry of Petroleum and Natural Resources should work towards optimal utilisation of the available gas resources.

Shaukat was informed that winter is a season when the demand-supply gap for natural gas is at its highest and the government is making every effort to ensure uninterrupted supply of natural gas to the consumers and all relevant authorities have been directed to maintain seamless co-ordination in this regard.

He stressed the need to carry out further exploration of new gas fields so that this growing fuel demand can be met and the demand-supply gap bridged. He also directed the Ministry of Petroleum and Natural Resources to review the progress on appraisal and development of new gas fields on regular basis and submit periodical reports in this regard regularly.

Shaukat said the government has clear and consistent policies for all sectors of the economy including oil and gas exploration and power sector and all policies are made in a transparent manner. Earlier, the Advisor to the Prime Minister on Energy Mukhtar Ahmed gave a detailed presentation on the situation of fuel supply to the power sector.

The meeting was attended by Federal Minister for Petroleum and Natural Resources Amanullah Khan Jadoon, Chairman Wapda, Secretary Petroleum, Secretary Water and Power and other officials.

 

[Owais]

Trade deficit likely to devalue rupee

ISLAMABAD: The International Monetary Fund issued its annual report on the economy of Pakistan, in which Pakistan is stated to be making satisfactory progress.

Owing to the increasing trade deficit of the country, the report signaled the 20 per cent downward move in rupee’s value and urged the transparent utilization of national resources and implementation of elastic policies.

IMF’s report on Pakistani economy says that trade deficit of Pakistan has increased manifold, which may jeopardize the macro-economic stability.

In comparison with the exports of the country, the unbridled imports swelled so much to put the payments balance at risk.

IMF said Pakistan should not delay raising interest rates in order to bolster its competitiveness and meet its inflation target.

"To be effective, monetary policy should be supported by exchange rate flexibility and a fiscal policy that keeps this year's budget deficit, excluding grants and earthquake-related expenditures, at least at the level of 2005/06," the fund said in its annual review of Pakistan's economy.

The review was generally upbeat about Pakistan's economy and said economic developments in the last fiscal year ending June 2006 were "favorable," with gross domestic product growth buoyant at 6.6 percent, although lower from the previous year's 8.6 percent, and inflation was declining to 7.6 percent.

The IMF said economic policies in the current 2006/07 fiscal cycle should focus on reducing domestic demand and strengthening balance of payments.

It said an increase in domestic demand was a risk to the economic outlook, because it had negative effects on the trade and current account deficits, as well as on the pace of disinflation during 2005/06.

Pakistan's current account deficit has increased to $5 billion, or 3.9 percent of GDP, from $1.5 billion, or 1.4 percent of GDP, a year earlier.

Record capital flows, mainly from foreign direct investment, including privatization, more than covered the deficit and allowed for a build up of nearly $1 billion in reserves.

The fund cautioned Pakistan from using the reserves to cover shortfalls in external financing.

 

[Owais]

Current economic situation impresses World Bank

ISLAMABAD (December 09 2006): The World Bank country director, John Wall on Friday said that Pakistan economy is growing very fast more than six percent a year in a row for the last four years. The high growth resulted in a sharp fall in poverty of 5-10 percentage points, increased investment and reduced public debt.

"Pakistan's economy will add another year of over 6 percent growth for the fourth year in a row. This is a remarkable achievement particularly given the major shocks of a big oil price hike and the October 2005 earthquake", Wall said at a press conference here.

Rapid economic growth has produced a sharp fall in poverty of 5-10 percentage points, an increase in investment from 18 percent to over 20 percent of GDP, a great acceleration in foreign trade and reduction in public debt from 85 percent of GDP in 1999-2000 to 55 percent at the start of 2006-07, he said.

John Wall said the problems of low growth, high poverty, high debt and stagnant foreign trade are things of the past decade, says a WB's news release issued at the press conference; now the problems are those to keep the monetary fiscal and foreign payment accounts in balance.

He also praised the government's sound framework for fiscal management, the "Fiscal Responsibility and Debt Limitation Bill." Pakistan's credit ratings have steadily improved, allowing the government to return to the capital markets to raise resources. Investor's confidence has been restored resulting in private capital inflows through remittances, privatisation proceeds and portfolio investment.

These positive developments have allowed private foreign saving to grow by six percentage points of GDP over the last four years. Official transfers have also increased as The World Bank, Asian Development Bank, and Islamic Development Bank; and Japan, the UK, the US and others countries all have made dramatically larger financial assistance available to Pakistan for its long-term development.

Inflation is in single digit and falling, from a spike of over 10 percent to 7.5 percent or less. Interest rates have risen and the growth of credit to the private sector is moderating, indicating tighter monetary policies. Further reductions in inflation may require even tighter credit policies.

Expenditure pressures, including coping with the earthquake reconstruction of over half a million houses and much higher development expenditures on much needed infrastructure, have increased. Tax revenues have grown faster than GPD over the past two years, although they are still low compared to the economy's expenditure needs. Nevertheless, the overall fiscal stance also has been tight and the deficits so far are close to their targets.

The rapid economic growth led to a very healthy growth in foreign trade, resulting in large trade and current account deficits. These have been financed with mostly non-debt creating capital inflows-official transfers, privatisation and foreign investment.

He said that foreign debt, as a percent of GDP, is falling rapidly. Foreign reserves have not fallen-they have even risen a bit, although not as fast as imports. Most recently, foreign trade has cooled off, with sharp reductions in the growth of both imports and exports. If exports pick up from their sudden and inexplicable slump, the trade gap will narrow.

 

[Owais]

Musharraf stresses power production from all sources


QUETTA (December 09 2006): President General Pervez Musharraf on Friday said Pakistan needs to produce electricity from all sources for its rapidly growing industrial and domestic usage and to meet economic growth targets.

"We have adopted a holistic approach to address electricity shortage and are working on short, medium and long term plans to bridge the gap," he said while addressing a gathering at the commencement of Zarghun Gas Field, around 57 km from here.

The 104 million-dollar project aimed at providing natural gas to Quetta and other parts of Balochistan is scheduled to be completed by 2009. The President directed the company engaged in the project to ensure that the locals get the maximum number of jobs and to employ people from other areas only if no local expertise was available.

He however directed the company to set up a training centre to impart necessary skills to train the locals in all aspects of exploration. The President stressed that a conducive atmosphere was vital for any development and noted that the security situation in the province was improving.

"I foresee further improvement in the law and order situation in the next few months and the political environment will also improve," he added. President urged the locals to part ways with those who were against development and progress in the province.

The President said the total national output of natural gas; around 23 percent was being explored from Balochistan, including 18 percent from Sui. He said there were large oil and gas reserves in the province that need to be explored.

"No foreign investor will invest, if there is lawlessness and we all have to work together to ensure adequate security so that the country progresses," he said.

President said he was fully in favour of share of locals from oil and gas exploration fields. He said though the province was getting its due royalty, there was also a need to put in place a mechanism to share the gains with the locals of that particular area.

The President informed the gathering including Governor Awais Ahmed Ghani, Chief Minister Jam Mohammad Yousaf and Minister of State for Petroleum Nasir Khan Mengal about plans to meet country's energy needs.

The short-term strategy to be complete by June 2008 is to generate electricity through natural gas and local units, the focus of mid-term is on hydel, gas and coal and the long-term is to produce electricity through nuclear energy, he added.

The President said in the past few years the prices of oil and gas have surged dramatically in the international market and said there was a need to have a pricing formula that takes into account all realities.

President Musharraf also recalled his recent telephonic discussion with the Iranian President Mahmoud Ahmadinejad and said Pakistan was willing to go ahead with the gas pipeline project as its requirements for energy were increasing.

The President also mentioned the mega development projects in Balochistan including dams, canals, brick lining of watercourses and safe drinking water to improve the quality of life of the common man.

He said two world-class exploration companies, one Chilean and the other Canadian, would explore gold and copper in Balochistan and would put the province on world's gold and copper map by 2010.

The government of Balochistan would have 25 percent share from exploration in Recodak area, he added. He however stressed capacity building of the youth in this regard and urged them to play a proactive role by focusing on education and learning skills that can lead to a bright future, not only for the country but also for their families.

Minister of State for Petroleum Naseer Khan Mengal said the development of gas field was part of President Musharraf's vision for the development of Balochistan and said it will generate economic activity and create more jobs in local industries.

Lieutenant General Imtiaz Shaheen (Retd) Managing Director of Mari Gas Company Limited (MGCL) said that the field development and subsequent production activities at the Zarghun gas field will open new vistas of economic and social uplift for the local community. He said the field was being developed by the Bolan Joint Venture comprising Mari Gas Company (35 percent), Spud Energy Private Limited (40 per cent), GHPL (17.5 percent) and Premier-Kufpec (7.5 percent) and Mari Gas will be the operator.

He said the gas estimates were 132 billion cubic feet (BCF), with recoverable gas reserves of 93 BCF. He said it would be the only field in Pakistan from where the gas shall be produced and consumed exclusively within the same province.

He said the Bolan Joint Venture had entered into a gas sales and purchase agreement with the Sui Southern Gas Company in August 2006, according to which the pipeline quality gas will be supplied to Sui Southern Gas Company and it will be responsible for further transportation to Quetta.

 

[Neo]

IMF seeks 10pc devaluation, power rate hike

By Khaleeq Kiani and Sabihuddin Ghausi

ISLAMABAD/KARACHI, Dec 8: The International Monetary Fund has expressed concern over Pakistan’s large current account deficit, warning that further widening could compromise external debt sustainability.

During consultations with officials of the finance division in Islamabad, the IMF proposed a raft of measures to arrest the deficit. The measures include the raising of electricity charges, devaluing the rupee by 10 per cent and the floatation of investment bonds.

In a recent staff report for the year 2006, put on its website on Thursday, the IMF considers sustainable an annual external account deficit of five to six billion dollars provided the ratio of external current account deficit to GDP declines.

The IMF’s board of directors ‘noted the risks to the (economic) outlook, including the continued strength of domestic demand, and its adverse effects on trade and current account deficits as well as on the pace of disinflation during 2005-06’, a statement said.

Differences appeared to have emerged between Islamabad and the IMF on the rupee’s real exchange value during extensive consultations in August. The IMF mission met the prime minister, his adviser on finance and State Bank governor.

The IMF has suggested a 10 per cent devaluation of the rupee to narrow down the current account deficit to a level that stabilises the net foreign assets to GDP ratio at the level of 2004.

But the government sees the current real exchange rate as appropriate, contending that its devaluation in the nineties was unreasonable and that the exports have not been affected by the recent real appreciation. The IMF however noted that while domestic pressures, rather than losses in external competitiveness, had been a major factor behind the increase in the trade and current account deficits since 2003-04, it proposed that Pakistan should see to it that the real exchange rate does not rise over the medium term.

The IMF had a word of praise for the economy nevertheless. “Pakistan’s economy has withstood well the impact of large negative shocks, including the earthquake, a sharp increase in international oil prices and unfavourable weather conditions.”

The board advised Islamabad to strengthen the balance of payments to reduce external vulnerabilities by containing the external current account deficit. It also urged the government to obtain foreign financing in keeping with external debt sustainability.

Most of the directors felt that macroeconomic policies during the current fiscal year should aim at reducing domestic demand and strengthening the balance of payments. They cautioned the government against deferring measures to tighten monetary policy, calling for increasing cut-off rates at treasury bill auctions to keep the inflation target in sight.

The IMF called upon the government to make the exchange rate flexible and to adopt measures to keep this year’s budget deficit, excluding grants and earthquake-related expenditures, at the level of the last financial year. The directors stressed that beyond 2006-07, Pakistan’s macroeconomic policies should ensure that the external current account deficit-to-GDP ratio remains on a declining path, with a steady build-up of reserves. In this regard, they encouraged the authorities to adopt a policy stance that maintains real interest rates at `positive levels’, accompanied by a close monitoring of credit growth and a fiscal consolidation programme that lowers the overall deficit to a sustainable level over the medium term.

The IMF noted that progress on structural reforms was mixed and criticised the government for not going ahead with reforms in the power sector. “Reform of the power sector has stalled and the schedule of higher regional electricity tariffs has not yet been implemented. Progress on trade liberalisation has slowed.”

The IMF viewed the favourable prospects for sizable FDI inflows as important for future gains in productivity and investment. But at the same time, it warned, `challenges lie ahead’ for macroeconomic policy. They observed that continued reliance on FDI inflows of an uncertain size and timing would require a large degree of flexibility.

The Fund cautioned that the option of resorting to use of international reserves to cover shortfalls in external financing, especially those stemming from delays in FDI-related flows, ought to be used sparingly. They viewed structural reforms as conducive to higher saving and investment, an improved business climate, and poverty-related spending as critical to sustaining growth and reducing poverty.

The IMF asked the government to quickly complete the reform of the regulatory and tariff framework for the power sector, and step up efforts to broaden the tax base and further curtail tax exemptions. Islamabad was also advised to improve its debt management strategy by increasing the issuance of long-term marketable securities and by reducing reliance on treasury bills and the National Savings Schemes (NSS) to finance fiscal deficit.

It also urged the authorities to expedite the process of subscribing to the Special Data Dissemination Standard.

The fund noted that the fiscal deficit exceeded the original budget target for 2005-06 owing to the earthquake-related spending. Excluding the latter, the increase in revenues and expenditures was roughly the same as in the previous fiscal year.

 

[Neo]

Saturday, December 09, 2006

Praise Pakistan’s economic performance since 2001:

Pak should have flexible exchange rate: IMF, WB

IMF says fiscal policy should keep this year’s budget deficit at 4.2%

By Sajid Chaudhry

ISLAMABAD: The Inter-national Monetary Fund (IMF) says Pakistan’s monetary policy should be supported by exchange rate flexibility (allow devaluation of the Pakistani rupee) and a fiscal policy that keeps this year's budget deficit (excluding grants and earthquake-related expenditures) at least at the level of 4.2% of GDP in 2005/06.

The Executive Board of the IMF that concluded its Article IV consultation with Pakistan on Nov 22 has said in its assessment the executive directors have commended Pakistan's impressive macroeconomic performance since 2001. They welcomed in particular the acceleration in output growth, the steady decline in debt ratios and the fall in poverty rates. The directors noted that Pakistan's strong track record on the macroeconomic and structural reform fronts had made the country increasingly attractive to foreign investors, as shown by the record-high inflows of foreign direct investment (FDI) during 2005/06 and the favourable terms obtained on recent sovereign bond placements in the international capital markets.

The directors noted that during 2005/06 the Pakistani economy had withstood well the impact of large negative shocks, including the tragic earthquake of October 2005, a sharp rise in international oil prices and unfavourable weather. Although these shocks had limited the scope for fiscal manoeuvre, growth had remained buoyant, inflation had declined slightly and the import coverage of reserves had remained stable.

The directors, nonetheless, noted the risks to the outlook, including the continued strength of domestic demand, and its adverse effects on the trade and current account deficits as well as on the pace of disinflation during 2005/06. They noted also the authorities' view that macroeconomic imbalances would decline without the need for further changes in the stance of policies envisaged for the current fiscal year, and welcomed the government's commitment to tighten monetary policy, if warranted. However, most directors felt that macroeconomic policies during 2006/07 should be more effectively geared at reducing domestic demand and strengthening the balance of payments position. To this effect, many considered that a further tightening of monetary policy (including by allowing higher cutoff rates at treasury bill auctions) should not be delayed to help strengthen the external position and allow the government to meet its inflation target. Most directors considered that to be effective, monetary policy should be supported by exchange rate flexibility and a fiscal policy that keeps this year's budget deficit (excluding grants and earthquake-related expenditures) at least at the level of 2005/06.

The directors stressed that, beyond 2006/07, Pakistan's macroeconomic policies should aim at ensuring that the external current account deficit-to-GDP ratio remains on a declining path with a steady build-up of reserves. In this regard they encouraged the authorities to adopt a policy stance that maintains real interest rates at positive levels accompanied by a close monitoring of credit growth and a fiscal consolidation program that lowers the overall fiscal deficit to a sustainable level over the medium term.

The directors viewed the favourable prospects for sizable FDI inflows as important for future gains in productivity and investment, but also as presenting challenges for macroeconomic policy in the years ahead. They highlighted that continued reliance on FDI inflows of uncertain size and timing would require a large degree of flexibility in economic policymaking. In this connection the directors stressed the need to improve the government's capacity to generate timely policy responses to shortfalls of external financing arising from negative balance of payments shocks. The directors were of the view that those shocks should generally require monetary policy and exchange rate responses, but also envisaged a role for fiscal tightening in cases where the shocks are large, or more permanent in nature. The directors cautioned that the option of resorting to the use of international reserves to cover shortfalls of external financing (especially those stemming from delays in FDI-related flows) ought to be used sparingly.

The directors viewed structural reforms conducive to higher saving and investment, an improved business climate and well-targeted poverty-related spending as critical for sustaining growth and poverty reduction over the medium term. They encouraged the authorities to quickly complete the reform of the regulatory and tariff framework for the power sector, and step up efforts to broaden the tax base and further curtail tax exemptions. The directors also saw scope for improving the government's debt management strategy, including by increasing the issuance of long-term marketable securities and reducing its reliance on treasury bills and the National Savings Schemes (NSS) to finance the fiscal deficit. The directors welcomed the initiatives underway to modernize the NSS and reform the system of broker-financing of stock trading, but noted that these should be followed quickly with measures that enable the integration of the NSS with local financial markets.

The directors welcomed the authorities' commitment to maintaining a liberal trade regime and their determination to contribute to the success of the Doha round of trade talks. They called upon the authorities to resist pressures to reinstate adhoc tariff and non-tariff measures and broaden export subsidy schemes.

The directors encouraged the authorities to further improve the quality and timelines of data, including by reporting fiscal data on an economic classification. They also urged the authorities to expedite the process of subscribing to the Special Data Dissemination Standard.

 

[Neo]

Saturday, December 09, 2006

WB says trade deficit is to reach more than $12 billion this fiscal

By Sajid Chaudhry

ISLAMABAD: The World Bank (WB) on Friday stressed upon the need to have flexible exchange rate policy, allowing the Pakistani rupee to depreciate against currencies of its trading partners to keep the economy growing and be competitive.

India and China have allowed their currencies to depreciate to remain competitive in the international export markets. Pakistan at present is not allowing its rupee to depreciate resultantly making its exports uncompetitive in the international markets and encouraging imports leaving exports and imports gap widening.

Johan Wall, Country Director of World Bank in Pakistan, speaking at a media briefing projected that GDP growth in current fiscal year 2006-07 could reach 6% to 6.5%. The government is projecting GDP growth of more than 7% for the current fiscal year 2006-07. He said the Pakistani rupee has appreciated during the last few years against the currencies of its trading partners. Pakistan has to compete in the international export markets with its competitors who are depreciating their currencies.

Boom in the economy, which had reached unsustainable level, during the last two years is now moderating. Trade deficit is to reach more than $12 billion due to which current account deficit is expected to be around $6 billion. He said countries making rapid economic progress always face current account deficit, and in Pakistan this deficit is projected to be 5.5% of GDP, which need to be brought down to 3%-4% of GDP. He, however, said it is difficult to project at present that trade deficit and current account deficit by the end of this fiscal year.

Answering a question, Mr John said Pakistan can maintain 8% growth rate but it would require macroeconomic variables to be correct. The country would require enhancing its saving and investment rate, which would help it to maintain a growth momentum in the long run. He said inflation has declined from 10% in the year 2004 to 8% in the current year 2006, which is still high. The inflation of 8% is still very high for the poor population of the country as its causes shock to their income and reduce their buying power.

Fiscal deficit that was 6%-7% of GDP in the early Nineties has declined to 3%-4% of GDP and it is expected that the fiscal deficit is to remain above 4% of GDP in the current fiscal year 2006-07. He said inflation can cross the target of 6.5% fixed by the government and can reach 7.5% in this fiscal year.

Commenting on low tax-to-GDP ration in Pakistan, Mr John said the country has witnessed a GDP growth of up to 9%, and if we take into account inflation of 8%, then the real GDP growth rate was 15%, but the tax-to-GDP ratio is still in single digit, tax-to-GDP rate should be more than the real GDP growth rate. Pakistan should improve its tax policy and bring into the tax net more people to generate more revenues. Anyone owning a car must be brought into the tax net, he said.

“Pakistan’s economy has built up a strong momentum of growth” said Mr John, following a “Growth and Competitiveness Conference” at the Lahore University of Management Science on Dec 5 & 6. “Pakistan’s economy will add another year of over 6% growth for the fourth year in a row. This is a remarkable achievement particularly given the major shocks of a big oil price hike and the October 2005 earthquake,” he said.

Rapid growth has produced a sharp fall in poverty of 5%-10%, an increase in investment from 18% to over 20% of GDP, a great acceleration in foreign trade and reduction in public debt from 85% of GDP in 1999/2000 to 55% at the start of 2006/07. The government of Pakistan has put in place a sound framework for fiscal management, the “Fiscal Responsibility and Debt Limitation Bill.” Pakistan’s credit ratings have steadily improved, allowing the government to return to the capital markets to raise resources. Investor confidence has been restored resulting in private capital inflows through remittances, privatization proceeds and portfolio investment. These have allowed private foreign saving to grow by six percentage points of GDP over the last four years. Official transfers have also increased as The World Bank, the Asian Development Bank, and Islamic Development Bank, and Japan, the UK, the US and others countries, all have made available dramatically larger financial assistance to Pakistan for its long-term development.

Managing this faster growth has given Pakistan very different and much better quality than at the beginning of this decade. Then the problems were low growth, high poverty, high debt and stagnant foreign trade. Now the problems are those of keeping the monetary fiscal and foreign payment accounts in balance while all the former problems are rapidly improving.

Inflation is in single digits and falling, from a spike of over 10% to 7.5%, or less. Interest rates have risen and the growth of credit to the private sector is moderating, indicating tighter monetary policies. Further reductions in inflation may require even tighter credit policies.

Expenditure pressures, including coping with the earthquake reconstruction of over half a million houses and much higher development expenditures on much needed infrastructure, has increased. Tax revenues have grown faster than GPD over the past two years, although they are still low compared with the economy’s expenditure needs. Nevertheless, the overall fiscal stance also has been tight and the deficits so far are close to their targets.

The rapid economic growth led to a very healthy growth in foreign trade, resulting in large trade and current account deficits. These have been financed with mostly non-debt creating capital inflows—official transfers, privatization and foreign investment. Foreign debt, as a percent of GDP, is falling rapidly. Foreign reserves have not fallen -- they have even risen a bit, although not as fast as imports. Most recently, foreign trade has cooled off, with sharp reductions in the growth of both imports and exports.

 

[Owais]

National Savings deposits rises to over Rs1 trillion: Pirzada


ISLAMABAD (updated on: December 10, 2006, 14:01 PST): The total deposits of National Savings have risen to over rupees one trillion against Rs 2.8 trillion collective deposits of all the commercial banks in Pakistan.

"The National Savings Schemes (NSS) are presently holding the major share in the domestic savings and for providing a truly competitive environment, the government has now allowed institutions to invest in all National Savings Schemes except those which are meant for special segments with immediate effect", Director General NSS, Awais Ahmed Pirzada told APP in an exclusive interview here today.

However, he said with the advent of technological revolution in the financial market, the financial institutions are offering better consumer friendly products every day.

Pirzada said that the NSS rates which remained a major factor in the deposit collection in the past are now narrowly linked with market. Therefore, he said innovative measures are required for deposit mobilisation.

"The wider distribution network is also being geared up to do business in a more effective and professional way and a number of measures have been taken to achieve this objective", he added.

In the light of changed environment, he also highlighted the following measures for promotion of National Savings.

Pirzada said that for providing a truly competitive environment, the government has now allowed institutions to invest in all National Savings Schemes except those which are meant for special segments of the society with immediate effect.

He said that the non-profit bodies, Registered Charities, Public Sector Enterprises excluding Banks, Private Educational and Health Institution, Employees Old Age Benefit Institutions (EOBIs), Private Corporate Sector excluding Banks and Non-Bank Financial Institutions (NBFIs) excluding Insurance Companies, are entitled to invest.

To facilitate the investors and avoid long queues, the Central Directorate of National Savings (CDNS) has decided to extend the facility for automatic transfer of monthly profit into the Savings Account of the holder at the same centres, he added.

This way, DG National Savings said, the client would not have to wait in long queues to get his profit first calculated and then encashed. Planning is underway that in future, the client will be facilitated to draw profit as per his own will and demand.

Therefore, he said, they will be encouraged to save from within the profit as they would be entitled for additional profit at the Savings Account's rate.

To meet the travelling demands of the depositors, he said, the CDNS has decided to introduce the facility of encashment all over Pakistan at the designated National Savings Centres.

The facility will be provided at the important stations keeping in view the demand of the public, he remarked.

To meet the day to day needs of the investors, he said, the limit of two withdrawals within a week's time have been increased to three times a week.

He said there was a mandatory lock-up period of one month in case of Defence Savings Certificates and Special Savings Certificates, which have now been removed to meet the emergent need of the investors.

Pirzada further said that measures are also being taken to facilitate the investment from abroad and several proposals in this behalf are being considered, which will be finalised shortly

 

[Owais]

'Government to promote public-private partnership'

FAISALABAD (December 10 2006): Faisalabad-Multan motorway (M-4) with a projected cost of US $24.5 billion, periodic overlay of M-2 and realignment of salt range with cost projected at US $11.8 billion among others and Karachi-Hyderabad motorway (M-9) with projected cost at US $105 million will be constructed with the co-operation of Private Sector under BOT.

Commenting over the Private Sector Participation in Road Projects, official sources stated that the road network in Pakistan has lagged behind its demand for past ten years, thanks to huge fiscal deficits resulting in lack of resource allocation from public sector. Overall this has created a severe shortage of road infrastructure and resultantly cost of business has gone up giving rise to inefficient markets.

Official sources stated that the Government of Pakistan is trying vigorously to promote the concept of Public Private Partnerships in road sector mainly through BOT concept.

Although this concept is not new; but it was not being implemented on large scale in the past. Hence it would help finance major road projects, which could not be undertaken in the past due to lack of resources.