Pakistan Economy - News & Updates - Archive

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Timely provision of quality seeds to boost agriculture production: Zafar ​

ISLAMABAD (December 28 2008): Chairman Pakistan Agricultural Research Council (PARC) Dr Zafar Altaf has said that timely provision of quality seed to growers will enhance production, which would play a significant role for strengthening the economy on sound footing and ensure food security.

He expressed these views while addressing one-day workshop on "Enhancing the Quality, Production and Access to Seed in Sindh", at Karachi University. The workshop was organised by PARC in collaboration with Asian Development Bank and Sindh government. Dr Zafar Altaf stressed the key stakeholders of the workshop that their joint efforts could bring radical changes for promotion of seed industry and provision of quality seed to growers.

He said that public and private sector partnership is a real force which has a capacity for developing/organised seed industry, markets for sales of agricultural produce and distribution of seed and other inputs to growers according to their zoning that is the mechanism which will make dent on our economy.

The participants of the workshops highlighted various issues and appreciated the role of PARC for arranging two workshops on the subject "Strengthening the Sale and Marketing of Agricultural Produce" and "Enhancing the Quality, Production and Access to Seeds in Sindh".

The workshops were attended by representatives of seed industry, sales and marketing experts, agricultural scientists from Punjab, Balochistan, NWFP, Sindh, representatives of government/semi government organisations, Smeda, Rural Support Programme, farmers organisations, Women Agricultural Development Organisations, Chamber of Agriculture, representatives of Asian Development Bank, Agribusiness Support Fund, Competitive Support Fund, Senior Breeders, Progressive farmers NGOs and Federal Seed Certification and Registration Department (FSC&RD).

 

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Whose responsibility is it to control inflation? ​

ARTICLE (December 29 2008): What exactly does the State Bank do is a question that crops up repeatedly, especially during times when prices are high and the exchange rate appears to be in a freefall. In Pakistan these days, unfortunately, the rate of inflation on a weekly basis is above 20 percent while the rupee has fallen from 62 to a dollar in the first quarter of 2008 to around 80 rupees to a dollar by the end of the calendar year. Some one is not doing their job.

In the words of its latest report the State Bank of Pakistan (SBP) states that "price stability, the primary objective of all central banks, was threatened by one and a half year's developments in world's financial and commodity markets."

The question is what are the tools available to central banks to deal with the rate of inflation? First, open market operations which are defined as buying and selling previously issued government securities or IOUs. If controlling inflationary pressures is the objective then the central bank would opt to sell treasury securities to a firm that deals in them - an amount that is debited from the dealer's account held at his bank. This implies that the banking system has fewer funds to lend which, in turn, leads to a rise in interest rates or accessing credit becomes more expensive. The economy slows down and curbs the rate of inflation.

The second tool available to the central bank is manipulating the reserve requirement which is defined as the percentage of deposits that the bank must keep in its own vaults or with the central bank - a percentage that cannot be onlent. Raising the reserve requirement would therefore reduce lending - an anti-inflationary policy.

And finally the central bank can manipulate the discount rate or the interest it charges banks for short term loans. If the discount rate is raised then inflationary pressures are checked. So what monetary policy tools did the State Bank of Pakistan use as inflationary pressures began to rise in the country from mid 2007 when the international price of oil and commodities skyrocketed to the present when both oil and commodity prices have declined dramatically?

In the first round, according to the State Bank report, policy discount rate was raised by 50 basis points to 10 percent effective 1 August 2007. This, so claims the SBP, "neutralised the impact of monetary overhang created in June 2007 as evident from deceleration in M2 growth during July-October fiscal year 2007."

The report adds that during November to December 2007, the time of the Caretakers and the continuation of Salman Shah as the economic manager supremo of the Musharraf regime, the federal government borrowed 1.78 billion rupees which 'led to a softening of interest rate and acceleration of M2 growth.' In short the Musharraf regime and his economic managers (Shaukat Aziz did not leave the post of prime minister till November 15, 2007) have much explaining to do for the rate of inflation during this time period.

By February 1, 2008 the SBP raised the discount rate by another 50 basis points to 10.5 percent. At this point the SBP also adjusted the cash reserve requirement, another policy tool available to it and increased it by 100 basis points to 8 percent for demand liabilities. The SBP comments that subsidies continued which were funded through 'magnetisation which diluted the desirable impact of monetary tightening.' This too took place when the former regime's Salman Shah was still in his job, which he left on 25 March 2008.

The third round took place during the tenure of the current government on 23 May 2008 and the SBP used all the three monetary policy tools at this time to check inflation: discount rate was raised by 150 basis points to 12 percent, cash reserve requirement was increased by 100 basis points to 9 percent for demand liabilities and the statutory liquidity requirement was raised by 100 basis point to 19 percent. The SBP adds by way of justification of its failure to control inflation that 'government's heavy reliance on borrowing from SBP continued unabated with additional 149.8 billion rupees during May 25 to June 30, 2008.'

And finally the fourth round, this time under International Monetary Fund dictation, as a pre-standby arrangement approval, the SBP, on November 12, 2008 raised discount rate by a hefty 200 basis points to 15 percent.

However the Governor of the SBP also announced that 319 billion rupees would be pumped into the economy to meet exceptional liquidity requirements of the banking system. What were these liquidity requirements?

According to the Governor in her widely reported Press conference at the time "the SBP's new move would not only help in aligning aggregate demand with supply but would also provide room to accommodate the government's financing requirements from commercial banks."

The latter is disturbing because this implies a substantial money injection into the economy to fund government expenditure which will, needless to say, have inflationary implications. Or, in effect, money has been withdrawn from the system with the raising of the basis points, an anti-inflationary measure, while 319 billion rupees is to be released into the economy with obvious inflationary implications.

A further increase in the discount rate, according to the Letter of Intent submitted by the government to the IMF board and a reflection of already agreed conditionalities with the Fund, "will be considered at the time of the monetary policy statement scheduled for end January 2009."

There is no doubt about the fact that both the previous government as well as the present one have been guilty of borrowing amounts from the SBP that were simply not sustainable. It took going on the IMF programme for the government to commit to zero borrowing from the SBP till the next fiscal year. It is also evident that the SBP acted four times this year to contain inflation and that the last action, which essentially was much more contractionary on the one hand than previous actions put together, was expansionary in terms of liquidity injection, on the other hand.

The question that comes to mind is: if the SBP had undertaken more stringent measures to effectively deal with the rate of inflation would we have as high a rate of inflation? The answer is unfortunately in the affirmative: inflation is not only a function of government borrowing but the fact that production declined due to massive loadshedding, cartelization by suppliers of key kitchen items, for example wheat, and dwindling foreign exchange reserves due to high oil import bill and failure of our exports to keep pace with imports. But one thing is certain - it may not have been as high. This lends credence to critics of the SBP who allege it was too little too late.

 

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Pakistani GDP growth seen lower than target: SBP ​

Monday, 29 Dec, 2008

KARACHI: Pakistan's gross domestic product (GDP) is likely to be significantly lower than a target of 5.5 per cent in the 2008/09 (July-June) fiscal year, the central bank said on Monday.
The State Bank of Pakistan said in a report on the first quarter, that ended on Sept 30, inflation would also exceed a target of 12 per cent by a wide margin.
The central bank projected GDP growth to range from 3.5 per cent to 4.5 per cent and inflation from 20 per cent to 22 per cent this fiscal year.
The fiscal and current account deficits were expected to improve in the year to June 30, it said.
The central bank estimated that the current account deficit would fall to between 6.2 per cent and 6.8 per cent of GDP, compared with 8.4 per cent in the fiscal year of 2007/08.
The fiscal deficit was projected to be 4.7 per cent of GDP, compared with 7.4 per cent in the previous year, it said.
However, it said Pakistan still had many challenges even though there had been a fall in global commodity prices and the country entered an International Monetary Fund (IMF) programme last month.
'While many of the country's macroeconomic indicators may no longer be worsening, the imbalances are nonetheless still quite large,' the bank said in its report, said adding that there was no room for complacency.

 

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Economy: the worst nearing its end? ​

By Afshan Subohi

Monday, 29 Dec, 2008

Experts predict the next year to be difficult for the world economy. For Pakistan, it seems, the worst is nearing an end as 2008 closes. The year 2009 may be comparatively more productive for the businesses and the people. It is, however, imperative that war mongers are kept at bay by the people of the region.

The current government can use the democratic dividends to negotiate a turnaround and make 2009 a year of economic renewal. This would generate goodwill among the multitude, necessary for the success of an elected government. The economic development that benefits the majority nurtures democratic dispensation.

While the humbled world is bracing to contain the fallouts of the most serious financial crisis since the Great Crash of 1929, like many other developing countries that were relatively immune, Pakistan did not receive a direct hit.

The international financial crisis that originated from the US subprime mortgage market spread to London, to Berlin, to Paris, to Iceland, to Russia, to China, to Japan, and to Dubai among others, and brought many corporate giants to their knees. It had a direct relation to the size of the economy and the level of integration in the global market. The relatively small economies and marginal integration proved to be a bliss in disguise for the developing world.

There are reasons to believe that for Pakistan the FY2009 may actually prove to be better than FY08 at the macro level. The balance of payment position, inflation situation and the value of currency may all improve. After hitting rock bottom, the capital market and real estate may get stabilised. Inflation may fall and trade deficit shrink gradually over the year.

The investment levels may not improve unless the internal law and order and relations with India and Afghanistan begin to normalise. The political stability, to a great extent, depends on the internal and external security.

The domestic and the foreign investment will pick up when stability is achieved. However, if innovative schemes to channel idle resources are initiated to close the investment gap in industry and agriculture, economic indicators may start improving from the second quarter of FY2009.

With the easing out of harsh external factors, the performance of the economy in FY2009 will depend on the collective wisdom of the country’s team of economists. The team has been entrusted with the task of devising a workable economic plan for broad based development. The issue is not just stabilisation but also expansion and higher capital formation.

Some positive signals emanated when economists, in and outside the government, were inducted in the planning process in mid-FY2008. The measures taken so far to tackle the economic slow down, however, are not enough.

If a plan to prevent the slow down in the economy is not evolved and the pace of investment in the real sector does not improve, unemployment may become the single most important problem with multiple social and political implications.

More than the pace of growth, it would be the composition of the contributing sectors that may undergo a change over the year 2009. The share of agriculture is set to improve because of higher procurement prices for agriculture produce and improved availability of agricultural inputs.

There is a possibility of an increase in inter-provincial disparity gaining momentum with Punjab forging ahead under stewardship of its Chief Minister Shehbaz Sharif on the growth path while other provinces are bogged down by mismanagement and lack of ownership of development programmes in their fragmented societies.

There is little hope about the government delivering much on the social sector front, keeping resource constraints in view. The diversion of direct support funds (Zakat, Ushr and others) for the poor towards Benazir Support Programme and its distribution to the needy households through members of the Parliament may generate more controversies than goodwill for the government.

Besides, doles cannot compensate for the human resources being utilised in productive undertakings. A security net is absolutely necessary to save the poor from free fall but the thrust must be on helping them to earn their livelihoods.

The inflationary pressure is expected to ease as oil and commodity prices fall in the international market. The tight monetary policy and improvement in the supply situation of the essential commodities from the increased farm output will curb the price spiral and could bring prices of edibles down to, perhaps, tolerable levels.

The pressure on the current account may also ease somewhat because of reduction in the import bill. The import bill may fall because of cheaper oil and raw materials in the international market. Besides, higher duties on import of luxury items may suppress domestic demand.

According to an estimate, an average 50 per cent fall in the prices may lead to the reduction from high $20 billion in FY2008 to $11 billion in FY2009, assuming all other things remain the same.

If exporters succeed in relocating their exportable surplus to new markets in Afro-Asian region, the deficit can come down to a single digit. If the government succeeds in negotiating better market access in the EU and US markets, it could give the impetus needed to the textiles exports.

The hope for higher resource mobilisation through taxes looks too optimistic in the wake of the economic slow down. The collection from custom duty because of lower and cheaper imports will fall. Lack of inclination of the government to tax the agriculture income or the service sector will leave little manoeuvring space for the tax collection machinery to turn in more revenue. The tax-to-GDP ratio is not likely to improve in the immediate future.

After entering the IMF programme, confidence of global investors in the economy has improved. With macroeconomic stability, the country could qualify for more credit and grants from friendly countries.

To conclude, it is certainly not an easy situation as the impact of deepening world financial turmoil continues to unfold worldwide.

In Pakistan the weak institutions require that not just the government but the civil society must try to channel resources to productive sectors for accelerated capital formation, development and quality growth.

However, if the current stabilisation concerns continue to overshadow the imperatives of a robust economic growth, the situation is likely to worsen.

 

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Transit trade up, exports tumble ​

By Mohammad Ali Khan

Monday, 29 Dec, 2008

THE goods in transit facility extended to Afghanistan (GITA), a major source of supply to local Bara markets is being misused to smuggle industrial raw material and consumer goods.

Some manufacturers told Dawn in Peshawar that the levy of regulatory duties on imports of luxury items has proved to be counter productive, as the Afghan transit trade facility has replaced the legal channels to bring consumer goods and raw materials. Pakistan has imposed regulatory duties on imports of more than 300 ‘luxury’ goods, to cut trade deficit.

‘The regulatory duty on imports is proving to be a two-edged sword,’ said Sharafat Ali Mubarik, president Sarhad Chamber of Commerce and Industry adding, ‘not only the government is losing revenue which it collects on imports, but it has also damaged the industrial sector in the face of growing volume of smuggled goods from Afghanistan.’

Sources said, raw materials and finished products imported under Afghan Transit Trade Agreement (ATTA) are sent back to Pakistan from Jalalabad, the bordering town of Afghanistan. Organised bands of smugglers ensure safe delivery of consignments to any destination in Pakistan.

A manufacturer in Peshawar told Dawn that a container load of stainless steel, imported through legal channels costs 800,000 whereas the same costs Rs300,000 if smuggled from Afghanistan through ATTA.

Consumer goods cost less if smuggled from Afghanistan. ‘I have to pay 35 per cent extra for many edible items if I import through legal channels compared to those being smuggled from Afghanistan,’ said a trader in Karkhano market, famous for smuggled goods located on the fringes of Peshawar.

The negative list consisting 60 different items banned under ATTA to protect the local industry has been reduced to two items; now only cigarettes and automobile are under the ban.

With the present economic slow down, the volume of transit trade is on increase whereas the volume of Pakistan’s export is decreasing, said a Peshawar-based custom official.

‘Pakistan’s exports to Afghanistan dropped to $600 million last year from $1.8 billion two years ago, whereas the size of transit business swelled to Rs85 billion in the same period from the Rs35 billion which clearly indicates that the facility is being misused greatly,’ the official said. Currently the consumption of a number of items such as steel products, electronics, cloth, readymade garments and toilet-paper across the border is very limited, but their supply has increased considerably, he added.

Nauman Wazir, the president of the Industrial Association Peshawar, said: ‘The ATTA is responsible for the poverty and unemployment, particularly in the NWFP. If cheap smuggled goods are freely available, the local industries cannot flourish.’ All transactions in this business are done through Hundi and illegal money transfers are also a serious issue of capital flight from here, he added while suggesting that the ATTA should be amended to facilitate the cross border trade in a way that it would not hurt the local industry.

The ATTA was signed on March 2, 1965 in Kabul to facilitate Afghan transit goods via land routes initially for a period of five years. Unless a notice of termination is given in writing by either contracting party to the other six months before the expiration of the five-year period, the agreement is automatically renewed for another period of five years. It can be terminated by either party at any time provided six months notice of termination is given by either party.

But the contracting parties are required to review the working of the agreement once a year. The agreement has not been revised for almost four decades, said the custom official. The revision of ATTA is currently under discussion on both the sides and a consensus has been developed on re-designing it.

Manzoor Elahi, a leading exporter and manufacturer, opined that ATTA is a two-way pact but practically it is unilateral, benefiting only Afghanistan. He said, bilateral accord is the need of the hour, adding that, ‘Pakistan has done enough to facilitate Afghan transit trade and now we expect the same from the other side.’

Apart from revising the ATTA, measures should be taken to counter smuggling of consumer goods from Afghanistan, said Mr Wazir, president IAP. Fencing of border is the only solution to counter the smuggling from Afghanistan, the major threat to our industries,’ he added.

The growing volume of transit trade is also worrying the authorities responsible for checking re-entry of these goods into local markets, as measures are being taken to counter this trend, said Raja Sikandar, Director General Custom Intelligence, when approached by Dawn.

Curbing the smuggling is an uphill task because of the porous border, he concluded.

 

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Trading volumes signal a return towards normalcy ​

Monday, 29 Dec, 2008

THE benchmark KSE 100-share index last week demonstrated that it was close to its last resistance level around 6,000 points as the current spate of nervous selling seemed to have overrun its course followed by revival of selective buying at the terribly lower levels. The KSE 100-share index suffered fresh sharp fall of 1,026.90 points at 6,487.52 during the week.

The out-of-the-court settlement of CFS MK-II positions of Rs7 billion at 12.5 per cent discount of rate prevailing on Dec 24, 2008, had positive impact on the market as a good number of shares managed to finish modestly recovered under the lead of mutual funds, modarabas, leasing and some leading shares on other counters.

Under the agreed formula, financers would lift shares worth Rs3.05 billion and the public sector institutions the identical amount to settle the longstanding dispute among the parties.

It is too early, however, to predict about the new year trading on capital market as much would depend on the positive news from the political front but some analysts are optimistic that beginning could be better on technical ground alone.

Although the fourth consecutive week suffered a fall of over 1,000 points or 13 per cent making the total to about 60 per cent in December 2008 indications are that some of the leading investors have decided to return to the market.

The outgoing calendar year witnessed many ups and downs both in term of lows and highs, the index level of 15,622.30 of all-time high may not be bettered in the near future. Its lowest of the year was noted at 6,400 points. Its single session rise of 960 points after the extension of the capital gains tax by two years was another all-time record.

But the market also witnessed a number of official steps to put it back on the rails including floor under the KSE 100-share index. Although it did more damage to the trading pattern than good as after its lifting on December 15, after about four months, continued to inspire fresh selling by the foreign investors who were out to unload their long positions at a discount of well over 30 per cent.

The year witnessed many crucial phases both in terms of lowest ever daily volume and massive price fall notably in oil, banking and on the blue chip counters owing to persistent liquidation.

The market remained depressed through out the last week as liquidity crunch continued to haunt investors in the backdrop of increasing tension with India.

Threatening statements by the Indian leaders in the aftermath of Mumbai incident seemed to have created pre-war hysteria on the stock market as some of the leading investors hastened to liquidate their positions at the falling prices but without finding any willing buyer.

‘War with India may not be imminent but persistent threats from across the borders has made political situation look like as was reflected by steep fall in the daily volume,’ analyst Hasnain Asghar Ali said.

And added to it was various interpretations of Sindh High Court ruling on the outstanding positions on the badla market and talk of revision petition in the Supreme Court and out-of-the-court settlement on the issue, said a analyst Ahshan Mehanti.

According to market sources meetings were being held between the brokerage houses to resolve the issue out of the court to give a breathing space for the unprecedented fall in the trading history of the KSE.

Another analyst Ashraf Zakaria says positive news on market support fund of Rs20 billion after the IMF approval should have created a sense of security among the investors but delay in its launching is also taking its toll.

He says there are more sellers than the buyers as no one is inclined to make fresh commitments even at the lower levels on all the bluechip counters despite the fact that they provide an attractive bait for the future capital gains after the recovery process is initiated.

Minus signs again dominated the list, under the lead of bank, insurance and oil sectors as leading among them ended the week with sharp fall and so did blue chips on the other counters.

FORWARD COUNTER: Leading shares on this counter also followed the lead of their counterparts in the ready section without any transaction as no one was inclined to make fresh commitments.

 

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RPT-Iran ready for gas deal with Pakistan, without India ​

Mon Dec 29, 2008

TEHRAN, Dec 29 (Reuters) - Iran will sign a deal with Pakistan to sell gas to the neighbouring country, even if India, a third party to the deal, walked out, student news agency ISNA reported Iran's oil minister as saying on Monday.

India stayed away from talks in Tehran on a proposed $7 billion pipeline in September, saying it wanted to agree transit costs through Pakistan on a bilateral basis first.

Iran Oil Minister Gholamhossein Nozari said a delegation from Pakistan had arrived in Tehran for two days.

"Iran will sign a deal with Pakistan, if India does not take part in the project," ISNA quoted Nozari as saying.

In July, Iran said India and Pakistan had accepted Iran's demand for gas price reviews based on market changes, denying reports by some Indian newspapers that the pipeline talks had failed after Iran demanded a review every three years.

The pipeline would initially carry 60 million cubic metres of gas daily to Pakistan and India, half for each country. The pipeline's capacity would later rise to 150 million cu metres.

Iran says it has completed 18 percent of the work for the pipeline to bring gas from its South Pars field to the Iran-Pakistan border.

Pakistan has yet to begin work on a 1,000 km (625 mile) stretch of the pipeline to link Iran with India.

Iran has the world's second-largest gas reserves after Russia. But sanctions, politics and construction delays have slowed its gas development, and analysts say Iran is unlikely to become a major exporter for a decade. (Writing by Parisa Hafezi, Editing by Sue Thomas)

 

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Pakistan Wants To Buy Indian Share in IPI​

29.12.2008

The IPI pipeline was conceptualized in 1989. Negotiations over pricing mechanisms and concerns over the Pakistani leg of the planned 1,724-mile pipeline from the Iranian South Pars field have hampered progress.

Asim Hussein, a Pakistani energy adviser, will travel to Iran Dec. 29 to meet with his Iranian counterparts to discuss purchasing the Indian shares in the project, Pakistani daily The Dawn reported.

India expressed repeated concerns over the Pakistani leg of the pipeline that will travel through volatile tribal regions.

Iran said terrorism and other concerns over the security of IPI should not drive decisions for the proposed pipeline.

"Terrorists should not dictate policy," said Iranian Deputy Foreign Minister Muhammad Mahdi Akhoundzadeh.

New Delhi seemingly has backed away from IPI negotiations somewhat following a civilian nuclear energy deal with Washington.

 

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Global environment carries risks for external receipts: economy improving through entering programme under IMF aegis: SBP​

KARACHI (December 30 2008): The country's ailing economy is witnessing improvement and has started to ease from the crisis since November, that had circumscribed it during the early months of the current fiscal year. However, despite some improvement, the country needs effective policies and implementation of reforms in the fiscal year FY09 to regain the macroeconomic stability and meet economic challenges, says the (SBP) First Quarterly Report (July-September) FY09, released on Monday.

The report said that healthy economic signs emerged after the government addressed the most immediate risks to the country's falling economy through entering the macroeconomic stabilisation programme to support medium-term reforms under the aegis of IMF.

It said that among the biggest challenges for the government would be to ensure the passthrough of the decline in international commodity prices to consumers. In this background, while recent downward adjustments in the administered prices of key fuels is appreciable, transport fares and goods transportation charges were "either not adjusted downwards or saw small changes", it added.

However, notwithstanding the relative positives, there is no room for complacency, the Report asserted. "While many of the country's macroeconomic indicators may no longer be worsening, the imbalances are nonetheless still quite large," it said, and added that resolving them will require disciplined efforts over an extended timeframe.

"This challenge is all the greater because of the difficult international economic environment, which has restricted the country's ability to tap international capital markets and carries risks for other external receipts like exports, remittances, FDI, etc," it said.

The central bank has estimated that the country is likely to miss the GDP growth, inflation, and export targets, while foreign direct investment would be lower than recent years. However, on a positive note, both fiscal and current account deficits are estimated to improve in FY09, the SBP said. As per report, real GDP growth is likely to be significantly lower, around at 3.5-4.5 percent, than the annual target of 5.5 percent and inflation will breach its target of 11 percent to 20 percent by the end of FY09 with a wide margin of 9 percent.

While fiscal and current account deficits are expected to be under control and would be close to the targets, fiscal deficit is likely to stand at 4.3-4.8 percent of GDP against the target of 4.7, and current account deficit would be 6.2-6.8 percent against the target of 7.2 percent by the end of current fiscal year.

The SBP has estimated that imports and exports have been revised downward, with a more pronounced effect on imports. At the same time, in the event of shortfall of external financing, the burden of financing fiscal deficit will disproportionately fall on the domestic commercial banks, since the government has committed not to borrow incrementally from the central bank.

In addition, FDI inflows may be substantially lower than in recent years, in which case, pressures on forex reserves could remain strong. Both possible developments indicate continuing risk on interest rates and exchange rate, and thus the need for continued vigilance by policymakers. The Report maintained that global recession and risk averse behaviour of investor would likely severely impact international trade and level of foreign exchange inflows in the economy.

"SBP estimates for both imports and exports have been revised downwards, with a more pronounced effect on imports," it said, and added that at the same time, in the event of shortfall of external financing, the burden of financing fiscal deficit will disproportionately fall on domestic commercial banks, since the government has committed not to borrow incrementally from the central bank.

It said the disbursement of the first tranche of $3.0 billion by end-November 2008 under the program meant that any immediate risk of default on external obligations receded, with a substantial improvement in foreign exchange reserve adequacy indicators. Also, export growth has strengthened and import growth moderated somewhat. "This lent strength to the rupee, reducing the impact of an important generator of inflationary pressures," it added.

The Report said the gain on the external account was helped by a sharp decline in international commodity prices that is expected to substantially lower the country's import bill, offering the possibility of a decline in the country's very large current account deficit, and lower inflation. This supply side improvement has been reinforced by the reasonably good performance of crops during kharif FY09 cropping season, it said.

There is also substantial progress on containing fiscal imbalances, with the government moving bravely to reduce subsidies, contain growth in other spending and increase revenues, the report said. It added that the result has been an encouraging improvement in some fiscal indicators, including a sharp fall in the fiscal deficit from 1.5 percent of GDP during first quarter of FY08 to 1 percent of GDP in Q1-FY09.

"This figure appears consistent with the annual target embedded in the macroeconomic stabilisation program framework," it said. According to SBP's Report, agricultural growth in the current fiscal year could be significantly better than in FY08, notwithstanding a sharp fall in sugarcane harvest.

"This expectation is based on a record rice harvest of 6.5 million tons, a small improvement in cotton production during Kharif FY09, supported by the possibility of a record wheat harvest," it said, and added that initial information also raises the possibility of a very good showing by minor crops and reasonable growth in the livestock sub-sectors.

However, large scale manufacturing (LSM) continued to decline during the first quarter due to energy shortages, deterioration in domestic law & order situation, impact of pass through of international oil prices, sharp depreciation in rupee parity and most importantly, weak external demand on the back of global recession and slowdown in domestic demand.

LSM registered a negative growth of 6.2 percent in Q1-FY09 against a reasonable growth of 7.3 percent in Q1-FY08. This decline in LSM production is broad-based, as seven sub-sectors (having 72.4 percent weight) out of fifteen registered a decline, while three (having 15.3 percent weight) registered a growth of less than one percent, it said.

Referring to services sector, the report said that the sector exhibited resilience to fluctuations in economic activity in recent years. "This is also evident in continued growth in FDI in the services sector, despite slowdown in overall economic activities in the country," it added.

The Report said that the State Bank undertook aggressive monetary tightening during FY09, further increasing the policy rate by 300 bps in two rounds. On cumulative basis, this means a 550 bps increase during the last 18 months. It said in terms of monetary aggregates, the YoY growth in M2 decelerated steeply to 10.7 percent by end-November 2008 - the lowest growth seen during the last seven years. Indeed, an extraordinarily strong contraction in net foreign assets (NFA) of the banking system more than offset a sharp rise in budgetary borrowings from the central bank and continued strong demand for credit both from public sector enterprise and private sector, it added.

Referring to fiscal developments, the Report said that the Q1-FY09 fiscal performance improved consequent to the policy shift, with the overall fiscal deficit estimated to have dropped to 1 percent of annual GDP. "This is consistent with the annual fiscal deficit target set under the IMF stabilisation program. The reduction in fiscal deficit in Q1-FY09 was brought about mainly by a drastic cut in development expenditures," it added.

The Report said Pakistan's external account remained under stress through July-November FY09, as acceleration in the growth of the current account deficit, and sharply reduced financial & capital account inflows drew the country's foreign currency reserves to perilously low levels.

Not surprisingly, the rupee also weakened substantially in the period, depreciating by as much as 17.5 percent against the US dollar by end-October 2008, before recovering, somewhat, after Pakistan gained IMF support for a macroeconomic stabilisation program.

The Report said that during July-November period of FY09, strong growth in imports, mainly due to higher import prices, outpaced the otherwise substantial improvement in export growth causing the trade deficit for the period to widen by $1.4 billion compared to the same period last year. However, the combined impact of lower commodity prices and easing of domestic demand pressure are likely to reduce the trade deficit going forward, it added.

 

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High inflation rate persists​

KARACHI (December 30 2008): Inflationary pressure remained strong in the economy during the first five months of fiscal year 2008-09, despite some decline in it globally. The State Bank of Pakistan in its first quarterly report for FY09 said that strength of domestic inflation reflected the cumulative impact of strong aggregate demand, weakness of the rupee and other factors that limited the passthrough of lower international prices to domestic consumers.

The report said that consumer price index (CPI) and the sensitive price indicator (SPI) have seen strong YoY increases in FY09 in Pakistan so far. However, after recording strong growth (YoY) during the first two months of FY09, a significant decline in Wholesale Price Index (WPI) inflation has been observed during the later months.

WPI inflation dropped to 19.9 percent in November 2008 from its peak of 35.7 percent in August 2008, mainly due to a decline in international fuel and commodity prices, the report said. This also suggested that the passthrough of declining fuel and commodity prices to the wholesale prices had been quicker as compared to the retail prices. If the declining trend in wholesale prices continued, it might also help bring down retail prices in coming months, the report said.

Core inflation, measured by both non-food non-energy (NFNE) and 20 percent trimmed mean, strengthened during the first five months of FY09. Strength in core inflation is indicating the persistence of inflationary pressures, it added.

The SBP said it undertook aggressive monetary tightening during FY09 to arrest the inflation and further increase the policy rate by 300 bps in two rounds. On cumulative basis, this means a 550 bps increase during the last 18 months.

Similar to CPI inflation, core inflation measured by both indicators, non-food non-energy (NFNE) and 20 percent trimmed mean, continued to accelerate during the first five months of FY09.

"After touching record highs, international commodity prices retreated sharply since June 2008 primarily due to global recession", the report said. Other factors that led to the easing of commodity prices in international markets included (a) appreciation of US dollar against almost all major currencies, (b) improved outlook for food commodity supplies, (c) significant reduction in shipment costs, as well as, (d) removal of trade barriers by some countries imposed earlier to shield their domestic economies from rising commodity prices.

Core inflation (YoY) measured by NFNE increased to 18.9 percent during November 2008 compared to only 6.9 percent in November 2007.

Similarly, 20 percent trimmed mean core inflation (YoY) also remained strong as it increased to 21.3 percent in November 2008 from 8.6 percent in the same month of last year.

The report said that strength in core inflation indicated the persistence of inflationary pressures. Keeping in view stubbornly high inflation, uncomfortably high government borrowings from the central bank and almost about 100 percent increase in the current account deficit during July-October FY09, SBP tightened monetary policy during November 2008. Nevertheless, it should be kept in mind that the desired macroeconomic stability cannot be achieved solely by monetary policy measures. Co-ordination of fiscal policy is also needed. In this background, recent fiscal constraint, under IMF program, is likely to supplement monetary policy actions. Thus, inflationary pressures are expected to steadily ease going forward. Despite easing of inflationary pressures, average CPI inflation for FY09 is likely to be in the range of 20 - 22 percent, compared with 12 percent in FY08.

The persistence of inflationary pressures requires sustained macroeconomic discipline. In particular, reduction in fiscal and external deficits is necessary to achieve conducive macroeconomic environment.

 

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FBR surpasses revenue target of Rs 413.2 billion for July-November fiscal year 2009​

KARACHI (December 30 2008): The Federal Board of Revenue (FBR) has surpassed its revenue target of Rs 413.2 billion for July-November FY09, despite a shortfall of Rs 12.3 billion in direct tax collections, says State Bank of Pakistan's first quarterly report released on Monday.

It said that this was made possible by above-target collection for all three components of indirect taxes. As a result, indirect taxes reached Rs 290.8 billion during July-November FY09 up by 28.3 percent YoY compared to a 13.4 percent YoY rise in the corresponding period last year.

Though welcome, the strong growth in indirect taxes should not be taken as an indication of higher tax buoyancy since a significant part of this increase was contributed by a rise in international commodity prices and steep depreciation of the Pakistani rupee, the report said.

With recent decline in POL product prices and presence of considerable scope of further downward adjustment, the tax base, and consequently, the tax receipts, could decelerate in remaining months of FY09. Furthermore, the deceleration in direct tax collection could intensify with possible declines in withholding tax receipts from contracts as a result of large cuts in development expenditures, it added. First-quarter total revenues posted an impressive YoY growth for the second consecutive year.

Specifically, total revenues rose to Rs 385.0 billion, registering YoY growth of 23.1 percent during Q1-FY09 as compared to 22.3 percent growth in Q1-FY08, the report informed. However, the contribution to growth in total revenues in Q1-FY09 saw a reversal from that of Q1-FY08. In particular, the strong rise in total revenues during Q1-FY09 is mainly due to substantial rise in tax revenues, which offset the impact of a deceleration in the growth of non-tax revenues.

 

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Power import from Iran: transmission line pact not signed due to absence of bank representative​

ISLAMABAD (December 30 2008): Pakistan and Iran on Monday discussed avenues of more electricity trade between the two countries, but postponed signing of an agreement on transmission line-specific credit facility of $55 million to be provided by Iran for laying 70 km transmission line, official sources told Business Recorder.

During two rounds of ministerial level talks, ie one in the Ministry of Water and Power's committee room, and second in the Marriott Hotel reopened a day before, Iran was represented by Energy Minister Engineer Parviz Fattah, and Pakistan team was led by Minister for Water and Power Pervaiz Ashraf.

Iran has agreed to extend $55 million credit facility to Pakistan for laying transmission line for supplying 1000 mw electricity. Both countries had also signed a Memorandum of Understanding (MoU) according to which Tehran will provide 1000 mw electricity to Pakistan via Balochistan.

Pakistan is currently importing 40 mw from Iran for coastal areas of Balochistan. The import of power is being enhanced by additional 100 mw for Gwadar port, for which an agreement has already been signed. However, progress on the project has been too slow and both parties were accusing each other for not proceeding at the required pace.

Sources said that Pakistan has made its documents ready for signing of credit facility agreement in the presence of Iranian Energy Minister, but signing did not materialise because the official of Iran Export Development Bank was not accompanying the Minister. "We hope that the agreement will be inked shortly between Iran and National Transmission and Dispatch Company (NTDC)," sources said.

According to an official statement, both sides discussed bilateral co-operation on existing power sector projects related to import of electricity from Iran and future investment prospects in the power sector of Pakistan.

Iranian delegation was briefed by the Ministry of Water and Power authorities on the current power situation, short, medium and long term measures being taken by the Pakistan to bridge the gap between demand and supply, future plans to inject more electricity in the national grid to end the energy crisis and the potential projects being offered to the investors in the coal, hydro and renewable energy sectors. The salient features of the power policy and liberal incentives for private investors were also highlighted in the briefing.

Export Development Bank of Iran will be extending credit of $55 million to NTDC/Pepco for construction of transmission line in Pakistan (70 km). The balance 50 km on the Iranian side will be constructed by Iran, which will be made part of the tariff. In addition to the above, consultants have been engaged to carry out feasibility study for import of additional 1,000 mw from Iran for which an MOU has already been signed. Both sides expressed keenness to accelerate progress on these projects.

The Iranian Minister, stressing the need for enhancing bilateral co-operation, offered supply of more power from Iran. He offered to export electricity from its port at Chabahar, which is nearest to Gwadar port where a power plant of 500 mw is being constructed by Iran and will be ready within the next six months, the statement said.

Meanwhile, the Iranian delegation also met Prime Minister Yousaf Raza Gilani and discussed regional situation. The Prime Minister reiterated Pakistan's stance for not allowing its soil to be used against other countries for any terrorist activities.

Expressing satisfaction over the bilateral relations between the two countries, he underscored the need for further promoting co-operation, especially in the energy sector. He expressed hope that the MoU signed between the two countries for the import of 1000 mw of electricity from Iran would soon materialise.

 

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Pakistan stocks almost cheapest in Asian markets​

KARACHI (December 30 2008): Pakistan stock market, after the recent fall, ranks as one the cheapest in Asia and trades at 35 percent discount of average Asian PE, analysts said. This is mainly on account of deteriorating economic fundamentals, rating downgrade, exclusion from MSCI and due to loss in investors' confidence after the unwarranted price floor for more than three months, Muhammad Sohail, senior analyst at JS Global Capital said.

Though 16-year average PE of Pakistan is slightly over 10x with a range of 4-22x. However in FY02 Pakistan PE was 4.4x due to geopolitical tensions post 9/11 and Pakistan's own political tension with India that raised risk premium.

Except for Malaysian and Chinese markets, all other Asian emerging markets are trading at single digit forward PE multiple. This is due to earnings revisions and a fall of 56 percent in MSCI EM Asia and 55 percent in MSCI Asia Ex-Japan in 2008.

Share prices in Pakistan are now coming closer where the shares may be seen changing hand and volumes to pick up. This has occurred after a fall of 29 percent in benchmark KSE Index since the removal of price floor on December 15, 2008 after a gap of three-and-a-half-months. Pakistan bourse now trades at a discount of 35 percent versus other Asian emerging markets compared to the historical average discount of 30 percent.

 

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CDWP approves three important uplift projects​

ISLAMABAD (December 30 2008): A special meeting of the Central Development Working Party (CDWP) held here on Monday to consider three important development projects costing Rs 173 billion, sources told Business Recorder. The three projects included Benazir Income Support Programme (BISP) Rs 34 billion and setting up two nuclear power plants CHASHNUP III and CHASHNUP IV at a cost of Rs 139 billion.

According to the sources, the three projects were cleared in principle. The Planning Commission (PC), however, gave some observations on BISP stating that the government must make special allocation for the pro-poor project as it cannot be included in the over all development plan for the current fiscal. The PC high ups gave no detail of the meeting. This was an in-camera meeting. We cannot give any detail to the media, said a high PC official when he was contacted.

Sources said that the three projects were important and the concerned ministries had requested for the special meeting of the CDWP to consider them on priority basis. Due to power shortage, there is a need to start projects in power generation sector to help government reduce the power demand and supply gap that reached over 3,300 MW even when the electricity demand is not that high due to winter.

 

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Iran ready for gas deal with Pakistan without India​

TEHRAN (December 30 2008): Iran will sign a deal with Pakistan to sell gas to the neighbouring country, even if India, a third party to the deal, walked out, student news agency ISNA reported Iran's oil minister as saying on Monday. India stayed away from talks in Tehran on a proposed $7 billion pipeline in September, saying it wanted to agree transit costs through Pakistan on a bilateral basis first.

Iran Oil Minister Gholamhossein Nozari said a delegation from Pakistan had arrived in Tehran for two days. "Iran will sign a deal with Pakistan, if India does not take part in the project," ISNA quoted Nozari as saying. In July, Iran said India and Pakistan had accepted Iran's demand for gas price reviews based on market changes, denying reports by some Indian newspapers that the pipeline talks had failed after Iran demanded a review every three years.

The pipeline would initially carry 60 million cubic metres of gas daily to Pakistan and India, half for each country. The pipeline's capacity would later rise to 150 million cu metres. Iran says it has completed 18 per cent of the work for the pipeline to bring gas from its South Pars field to the Iran-Pakistan border.

Pakistan has yet to begin work on a 1,000 km (625 mile) stretch of the pipeline to link Iran with India. Iran has the world's second-largest gas reserves after Russia. But sanctions, politics and construction delays have slowed its gas development, and analysts say Iran is unlikely to become a major exporter for a decade.