Pakistan Economy - News & Updates - Archive

[Owais]

No gas sale to Pakistan and India at offered price: Iran

TABRIZ (July 16 2006): Iranian Oil Minister Kazem Vaziri-Hamaneh has said that his country will not sell its gas to India and Pakistan at their proposed price. Speaking to newsmen, Hamaneh said the price proposed by India and Pakistan is based on their domestic prices, IRNA reported. Vaziri-Hamaneh noted that the agreement with India about transferring gas has not been finalised yet.

"If the Indian side is not ready to buy our gas at its real price, we have no obligation to sell it at the price lower than the real one," he said. He said India and Pakistan should forget buying Iran's gas in the low price.

 

[Neo]

KARACHI, July 15: The performance of textile manufacture export was `remarkable’, rising by 18.4 per cent during July-March FY06 against nominal growth of 4.4 per cent realized during the same period last year, stated the State Bank of Pakistan’s third quarterly report for 2005-06 released on Saturday, which presented a picture of “the state of Pakistan’s economy”.

The report noted that both low and high value-added products had contributed to this ‘impressive’ textile export growth. The increase in textile exports in the post-Multi-Fiber Agreement (MFA) period was believed to be a good omen for the economy which remained heavily dependent on textile exports.

The SBP report makes what it terms an ‘interesting’ observation that textile exports had jumped by 18.4 per cent in the first nine months of the outgoing fiscal year, compared to a moderate 4.4 per cent rise in the same period last year, in spite of a slowdown in the production growth of textiles.

The central bank thought that the jump in exports might be a reflection of aggressive marketing by exporters in the post-MFA regime by utilizing inventories and significant growth in export-related production of small-scale textiles units.

On the production side, the report noted that similar to the petroleum industry, a slowdown was also seen in the textiles sub-sector which had the largest weight in LSM. During July-March FY06, the sector saw a production rise of four per cent, significantly lower than the 28.7 per cent growth seen in the same period last year. The SBP report reasoned that the deceleration in textiles mainly was due to low cotton harvest, high prices and disruption in gas supply during Dec-Feb FY06 by Sui Northern Gas Pipelines Limited (SNGPL) to about 40-42 captive power plants (CPP) in the areas of Sheikhupura, Faisalabad and Gujranwala where various textiles and chemical units are located.

More on textile exports, the SBP report recalled that in FY05, exports had suffered due to uncertainties surrounding the end of MFA in the middle of FY05. It said the growth, though, in the post-MFA period in FY05 was 9.3 per cent prior to that it was just 1.2 per cent. As a result FY05 growth was restrained to 4.9 per cent.

Within the low value-added group, cotton yarn and cotton fabrics showed 35.2 per cent and 15.5 per cent increase, respectively, during the period as against minus four per cent and 9.3 per cent growth in the same period last year. Along with an increase in quantum, the low base effect explains the jump in the group.

With regard to high value-

added products, bedwear and readymade garments were the major contributors, registering 46.5 and 27 per cent growth, respectively, during the period under review as against minus 0.3 per cent and 6.7 per cent in the same period last year. Almost the entire increase in bedwear was explained by the quantum impact, while increase in readymade garments was also caused by high unit values. “It is hoped that the reduction in EU antidumping duty from 13.1 per cent to 5.8 per cent with effect from May 7, 2006 will have a favourable impact on the export growth of bedwear in the forthcoming months," the report stated.

On Saturday, when the SBP report was released, textile circles were also debating on what the Trade Policy 2006-07 to be announced on Monday would hold for the industry. Already on Friday, the State Bank governor announced a cut in export refinance rate by an effective 1.5 per cent, which the head of the central bank said was meant to lower the cost of production. The step was being seen as a follow-up of the prime minister’s assurance to the industry at a meeting of the Export Promotion Bureau (EPB) in Islamabad last week, when he had pacified textile tycoons by saying that the SBP would look into the exporters’ demands.

“The textile sector is asking the government for a concessionary and incentive package of Rs50 billion so that the industry can compete with India, China and Bangladesh,” said Abdul Shakoor, a textile dealer. Those proposals are being pursued by the industry since April when they were first designed. But the government’s dilemma was that if they agreed to such a huge package of Rs50 billion, big cuts would have to be made from social sector spending, which would be, if nothing else, ‘politically incorrect’ decision.

“The government will perhaps hit a middle-of-the-way road, where textile exporters can be given as much as to please them, without causing much hurt to others,” said Mr Shakoor.

Saima Naz, analyst at Atlas Capital Markets, noted that Pakistan being the third largest player in Asia had a total of five per cent spinning capacity of the world. At present the cotton spinning sector comprises 458 textile units (50 composite and 408 spinning), with 8.8m spindles and 77,000 rotors in operation with capacity utilization of 87 and 49 per cent, respectively, for July-Feb 2005-06.

The analyst observed that Pakistan was gradually moving towards higher value-added in exports. The shares of bedwear, knitwear and towels had increased while those of cotton yarn and synthetic textiles declined during the past few years. The textile industry has made an investment of about $6 billion during the last six years in the form of BMR activities and capacity expansions. The share of total investment of $6 billion among different sectors of textile is 47 per cent in spinning, 27 per cent in weaving, 11 per cent in textile processing, eight per cent in made-ups, five per cent in synthetic textiles and five per cent in knitwear and garments.

The analyst quotes industry sources as saying that the textile sector proposes to make huge investment in the next five years, which would increase the spinning sector capacity by 1m tons to 3m tons, polyester fibre industry’s capacity from the existing 600,000 tons to about 1m tons, weaving industry to add another 3.5bn sq metre capacity to the existing 6.5bn sq metre and to enhance finished products’ capacity by 1bn sq metre.

 

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PESHAWAR, July 15: The NWFP government is over-optimistic about achieving higher Provincial Gross Domestic Product (PGDP) growth rate during the next four financial years, according to official sources.

The province in its fiscal management roadmap for next four years has anticipated the PGDP to grow at an annual rate of 12.8pc in the FY07 and 13.2pc in the FY08. And after touching 13.6pc in the FY09, the PGDP has been estimated to grow at 13.5pc in the FY2010.

The total size of the PGDP, that has been estimated to be Rs775bn in the current fiscal year, would rise to Rs877bn in the FY08 and to Rs996bn in the FY09, whereas, the PGDP in FY2010 would be around Rs1130bn.

In the absence of a proper mechanism to gauge and analyse the PGDP, according to official circles, the NWFP government has developed PGDP growth scenario by applying the situation analysis available from the national GDP drawn out every year by the federal government.

The NWFP’s GDP constitutes 10pc of the national GDP, said an official source, so on the basis of the national GDP growth rate targets the provincial government had drawn out a picture to determine PGDP for the next four financial years.

Though the PGDP situation analysis developed by the provincial government sets explicit goals to achieve higher Provincial Own Receipts (POR), lowering current expenditure, maintaining salary bill at a specific level through effective fiscal management, it appears to be silent about various important aspects pertaining to private sector.

"It does not provide an insight about the performance of different economic sectors including industries, agriculture, etc.," said an economic expert while commenting on the anticipated PGDP growth rates.Similarly, said the expert, it was also not clear that how much high growth rates would help in alleviating poverty and creating job opportunities during the next four years.

Provincial finance managers, when contacted, conceded that the exercise to draw out PGDP in itself did not help to get answers to many important questions.

They, however, said that based on the performance of the past couple of years, improved economic indicators reflected that the provincial economy was heading in the right direction.

"The government has been able to maintain its annual wage bill to remain 4pc of the PGDP, the PORs have grown and interest payment has decline, which shows the economy is on right track," said a finance manager of the province.

The Medium-Term Budgetary Framework (MTBF), said the official, projected the wage bill to remain 4pc of the PGDP in the FY07, 3.99pc in the FY08, 3.97pc in the FY09 and 3.96pc in FY2010.

The provincial government has been striving hard to keep its wage bill below 4pc to fulfil a condition of its loan agreement with the World Bank.

An official said that the progress in terms of improving PORs had also remained quite satisfactory because of changes in the taxation system and the province would maintain PORs at a ratio of 0.8pc of the PGDP.

Interest payments would decrease from 0.75pc of the PGDP in the FY07, 0.65pc in the FY08, 0.60pc in the FY09 and 0.55pc in the FY2010.

 

[Neo]

ISLAMABAD, July 15: The country’s trade deficit widened 88pc during the fiscal year 2005-06 to its highest level as oil prices hit a new high and imports of petroleum products set a record.

Official provisional figures obtained by Dawn here on Saturday indicated the trade gap totalled over $11.64bn as against $6.216bn during the FY05.

The import bill reached to record $28.2 billion during the year as against $20.627 billion the previous year, an increase of 36.74pc.

While exports remained short of target by $440m at $16.56 billion during 2005-06 as against the target of $17 billion. However, it increased by 14.92 per cent when compared with the last year’s exports proceeds of $14.41 billion.

The massive rise in trade deficit was attributed to robust increase in imports of machinery and food items — wheat, sugar, pulses. The import of cement and other products required for rebuilding of quake-hit areas also had an impact on the overall trade deficit during FY06.

The government had projected the trade deficit at $4bn for 2005-06. The statistics showed that the country’s trade deficit remained in the range of $1 billion to $2 billion during the last six years.

The rising trade gap is going to have serious implications for Pakistan’s balance of payments particularly on its current account and on the health of the rupee. The rupee had already depreciated by around 5pc against the dollar, which was not officially notified. But it also had a negative impact on the export proceeds.

A senior official said that despite large trade and current account deficit the overall balance of payment for the FY06 had ended in surplus thereby by adding about $0.5bn in foreign exchange reserves.

The current account showed a deficit of $4.76 billion in the first 11 months of FY06 as against $3.12 billion the same period last year, showing an increase of 52.56 per cent. The ballooning current account deficit was a result of the widening trade gap and could result in a weaker rupee.

The workers’ remittances, the second largest source of foreign exchange inflows after exports, totalled $4.612 billion during the FY06 as against $4.168 billion the last year. It would now cover only the nominal part of the deficit.

Efforts to privatise state-run enterprises also were aimed not only at making them more efficient but to get extra foreign exchange to fill in the holes in the balance of payments.

Foreign exchange received through privatisation of state-run entities forms part of foreign direct investment (FRI). The country received an all-time high FDI of $3.525 billion in July-May 2005-06 compared with $1.171 billion received the same period last year.

 

[Neo]

Sunday, July 16, 2006

* President, PM review economy’s performance in FY 2005-06
* New trade policy approved, to be announced on Monday


RAWALPINDI: Pakistan must improve agriculture and industrial production if it is to achieve this year’s GDP growth target of seven percent, President General Pervez Musharraf said on Saturday.

The president, chairing a meeting to review the economic situation in the country, emphasised the need for a comprehensive strategy to raise the growth rate in various sectors this fiscal year. He expressed satisfaction on the overall state of the economy, despite the earthquake tragedy of October 8 last year and a shortage of water.

He said employing scientific methods of yield intensification would boost agricultural productivity. He said new achievable targets must be set for the industrial sector, whose growth rate declined to 9.5 percent for fiscal year 2005-06 from 14.5 percent the year before. He said the factors that have led to a less-than-expected growth in exports must also be reviewed.

The meeting was informed that exports in FY 2005-05 had fallen $1 billion short of its target of $17 billion. Exports grew by 14 percent over the previous year. The meeting was told that this year’s export target would be achieved through higher growth in the industrial and agriculture sectors, especially through value addition in textile.

Gen Musharraf was satisfied with the $3.7 billion in foreign direct investment Pakistan received in FY 2005-06, and hoped it would increase further as a result of incentives offered to foreign entrepreneurs. The meeting noted that Pakistan was one of the fastest growing economies in the region and the benefits of this growth must reach the common man. It also noted the need to create jobs, lower poverty and control inflation to sustain Pakistan’s high growth rate.

Prime Minister Shaukat Aziz said the State Bank would support any sector of the economy requiring intervention on a short-term basis and provide temporary relief to the textile sector to enhance its competitiveness. He said monthly review meetings would be held to evaluate the achievement of targets and take timely measures if required. He said consistency and continuity in economic policies, sustained productivity and a business-friendly had encouraged international investors to invest money in Pakistan.

Online adds: The meeting also approved the basic outlines of a new trade policy for 2006-07 and Commerce Minister Humayun Akhtar Khan will announce the policy on Monday.

Sources said that the commerce minister apprised the president of the outlines of the new trade policy, which would include incentives for all sectors including textiles. Garments cities would be set up in major cities across the country. A trade development authority would be established under the new policy. The export target would be over $19 billion and import target nearly $27 billion, the minister said.

The president said the new trade policy must also encourage trade with Central Asia and China, to cement Pakistan’s position as a trade corridor.

 

[Neo]

RAWALPINDI, July 15: President General Pervez Musharraf on Saturday said the growth target of 7 per cent set for the current fiscal year is achievable through yield intensification in the agriculture and higher productivity in the industrial sector.

Presiding over a meeting to review the overall economic scenario of the country the president emphasised the need for a comprehensive strategy during the current fiscal year to achieve higher targets in various sectors of the economy.

Prime Minister Shaukat Aziz also attended the meeting.

Gen Musharraf expressed his satisfaction on the overall state of the economy, despite the earthquake tragedy of Oct 8 last year and the shortage of water.

He said the growth target of seven per cent set for the current fiscal year is achievable through enhanced productivity and yield intensification by employing scientific methods in the agro sector.

The president called for adopting “corrective measures” wherever needed and targeted government intervention, where required on the basis of exception rather than a matter of routine.

He said that the new achievable targets for the industrial sector should be set, which registered a decline from 14.5 per cent to 9 per cent in the outgoing financial year and review of the factors which caused the decline in exports.

The meeting was informed that the export target during the last year was set at $17 billion and there was a shortfall of one billion dollars. However the exports registered an increase of 14 per cent as compared to the previous year.

The meeting was also informed that the new export targets for the current financial year would be achieved through higher growth in the industrial and agriculture sectors especially through value addition in textile.

Gen Musharraf expressed satisfaction over the Foreign Direct Investment which remained at the tune of $3.7 billion in the last financial year and hoped it will further increase as a result of the incentives the government is offering to foreign entrepreneurs.

The meeting noted that growth in all the sectors was vital to improve the lot of the common man. Pakistan with its growth rate was one of the fastest growing economies of the region and was bound to improve the quality of life of its people.

The meeting also vowed to sustain the high growth rate by increasing employment opportunities, lowering poverty and controlling inflationary trends and price hike.

Prime Minister Shaukat Aziz assured that the State Bank will extend support to any sector of the economy requiring intervention on short term basis and said it will provide temporary relief to the textile sector to enhance its competitiveness.

The meeting was attended by Minister for Commerce Hummayun Akhtar Khan and Minister for Industries and Special Initiatives Jehangir Khan Tareen, Adviser to the Prime Minister on Finance Dr Salman Shah, Ministers of State Hina Rabbani Khar and Umar Ayub Khan

 

[Neo]

Karachi: Pakistan's central bank said yesterday that a loosening of monetary policy was not advisable while inflation pressure remained and growth was strong.

"Arguments have been made that inflation is now on a downtrend, and therefore monetary policy can be safely loosened," the State Bank of Pakistan said in its quarterly economic review.

"However, given that aggregate demand is still strong, and the economy will benefit also from the expansionary fiscal stance, a loosening of the monetary posture is clearly not advisable," it said.

The central bank's assertion is broadly in line with market expectations, which is expecting a continuation of the current tight monetary stance in the coming months.

Pakistan's monetary policy was last adjusted in April 2005, when the central bank raised the key discount rate to 9.0 per cent from 7.5 per cent, and prompted a sharp rise in Treasury bill yields.

However, yields have stabilised over the past few months around the current levels. The cut-off yield for the benchmark six-month T-bills was set at 8.4869 per cent in the last auction on July 5.

The bank is scheduled to release its monetary policy statement for the first half of 2006-07 on July 29.

In Saturday's report, the central bank said that 6.5 per cent average inflation target for the 2006-07 (July-June) financial year was achieveable as the impact of the credit slowdown on inflation was likely to be augmented by a continuing decline in food inflation. But with oil prices at record highs, the risks to price stability and growth still existed, it said.

"The broadest inflation measure, the GDP deflator, is estimated at 10.3 per cent for FY06, up sharply from 8.8 per cent in the preceding year, suggesting that inflationary pressures still persist in the economy," it added.

SBP expected a recovery in agriculture, given the low base provided by the poor performance of the sector last year, when it recorded a growth of only 2.5 per cent.

 

[Neo]

Overview, Executive Summary of SBP’s Q3 report for FY06



KARACHI: The State Bank of Pakistan on Saturday released Third Quarterly Report for FY06. Following is the text of Overview and Executive Summary:

Overview

Provisional estimates show that the country’s long-term growth momentum remains intact, with real GDP growth exceeding 6 per cent for the third successive year. While the 6.6 per cent real GDP growth estimated for FY06 is relatively weaker than the 8.6 per cent revised growth rate for FY05, this was not unexpected in light of historic trends and a high-base effect, as evident in the lower growth target (7 per cent) for FY06. It must also be kept in mind that a substantial portion of the losses in agriculture simply reflected bad luck, e.g., even if only the cotton harvest had not been hit by inclement weather, it is possible that the FY06 growth target may have been exceeded.

The strength of aggregate demand in the economy is quite encouraging, particularly given the impact of the global rise in energy costs. However, given that the fiscal stimulus from the recently announced budget for FY07 will add to demand and the emerging macroeconomic imbalances, there is a clear need for corrective policy measures to protect long-term growth prospects of the economy. The risks include the possibility of an increase in inflationary pressures, the gradual weakness in fiscal indicators, and the widening of the current account deficit.

The first of these may not be of serious immediate concern. The tight monetary policy being followed by the SBP clearly appears to be bearing fruit, with M2 growth falling to 13.3 per cent for Jul-Jun 10, FY06, down from 16.2 per cent in the corresponding period last year. This fall is led principally by a deceleration in private sector credit to 19.5 per cent in Jul-Jun 10 FY06 from 29.7 per cent in the corresponding period of FY05.

The resulting relative slowdown in aggregate demand, coupled with supply-side improvements through: (1) better harvests (for some crops, particularly wheat), and (2) administrative measures by the government (including the use of cheap imports to discouraging cartels, etc.) have helped significantly reduce inflationary pressures in the economy. CPI inflation has dropped from 11.1 per cent YoY in April 2005 to 7.1 in May 2006, and it is expected that the FY06 average inflation will fall within the 8 per cent target, despite the unexpectedly high oil prices that prevailed throughout the year.

The second issue (i.e. the fiscal deficit) is a concern more in terms of the trends and structural weaknesses (and therefore the probable future impacts). While the fiscal deficit has indeed widened in FY05 and FY06, in both years the underlying figures are low, at 3.3 per cent and 3.4 per cent of GDP respectively (the latter number jumps to 4.2 per cent of GDP only due to the impact of the earthquake relief efforts). The concern stems from the fact that the tax net has seen little broadening in recent years, and continues to exclude (or under-tax) a substantial portion of the economy. It is therefore not surprising that the growth in the economy is not matched by a corresponding increase in tax revenues. To put this in perspective, if the tax-to-GDP ratio had been maintained even at the low FY01-05 average of 10.8 per cent, the government would have had additional resources of Rs27.4 billion in FY06 alone.

The lack of buoyancy in the tax receipts needs to be addressed while the economy is still strong, as the costs of the re-distribution of the tax base are more palatable as long as sectoral profitability of hitherto under-taxed areas remains strong. Such measures would also strengthen the competitiveness of other sectors of the economy by allowing the government to reduce the tax burden in these sectors that currently carry a disproportionate share of the tax burden.

The third macroeconomic risk, the re-emergence and widening of the current account deficits from a surplus of US$1.8 billion in FY04 to a sizeable deficit of US$5.7 billion (annual estimate) in FY06 poses a more immediate policy dilemma. This phenomenon is inextricably linked with the strength of the domestic economy (as seen from the very substantial share of industrial inputs and machinery in the total import bill), the impact of liberalisation of the economy (as seen in the rising imports of media and telecom equipment, as well as the fall in the effective tariff rates) and a sharp rise in oil prices.

The policy options are correspondingly complex, particularly given that (1) exports continue to rise strongly, suggesting that the problems could ease with time, as import growth reverts to (lower) historical norms, and (2) given that a heavy-handed, knee-jerk response could easily add disruptive volatility to the financial markets.

Accordingly, with the current account deficit still low, at 4.3 per cent of GDP (estimated) in FY06, and given the availability of external financing, the SBP opted to keep monetary policy tight to contain excessive volatility in the exchange rate and inflation.

 

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Looking Forward

Despite a relative slowdown, all evidence indicates that the growth momentum of the economy remains strong, although growth is now more narrowly-based compared to the previous year. It is in light of this evident strenght in the economy that the government has set the GDP growth target of 7 per cent for FY07, which at first glance, does not seem unreasonable.

In particular, it is quite possible that FY07 will see a strong agri-growth given the low base provided by the relatively poor performance by major crops in FY06. This in turn, would support an improved performance in key industries such as textiles and sugar, thus supporting growth in the large-scale manufacturing. However, FY07 could also see the drag from high oil prices (though the government has signaled that it will keep domestic prices in check by eliminating substantial taxes on key fuels), and from a continued tight monetary policy. On the last, arguments have been made that inflation is now on a downtrend, and therefore monetary policy can be safely loosened. However, given that aggregate demand is still strong, and that the economy will benefit also from the expansionary fiscal stance, a loosening of the monetary posture is clearly not advisable.

Going forward, the impact of the credit slowdown on inflation may be substantially augmented by a continuing decline in food inflation following the implementation of the recently announced administrative measures and subsidies by the government. This suggests that the 6.5 per cent average inflation targeted for FY07 may not be unachieveable. However, there are some risks to this relatively benign picture. Oil prices are at historical highs, with attendant risks to price stability and growth. Moreover, the broadest inflation measure, the GDP deflator, is estimated at 10.3 per cent for FY06, up sharply from 8.8 per cent in the preceding year, suggesting that inflationary pressures still persist in the economy. The path of future monetary policy becomes further complicated by both, the proposed expansionary fiscal policy as well as the uncertainty on the degree of monetization of the fiscal deficit.

On the positive side, over half of the increase in government expenditure during FY07 is on account of development spending (which will add to the economy’s future growth), and there is also a substantial one-off element (Rs50 billion in earthquake related spending) to the proposed rise. However, it is troubling to note that even adjusting for the earthquake related spending, there is a gradual weakening in the underlying trend of the fiscal deficit. Although the CBR taxes have grown strongly in recent years, the tax-to-GDP ratio remains low, having declined from 11.5 in FY03 to 10.4 in FY06. It is in this backdrop that the government’s intention of keeping the fiscal deficit at 4.2 per cent of GDP has already drawn reproof from the rating agency Standard & Poors. The fiscal position would worsen if the 18.6 per cent growth target for FY07 tax revenues is not achieved.

However, this possibility seems remote. On the one hand, measures to expand the tax base will support strong growth in receipts, while on the other hand, the government will also have the possibility of raising revenues from the Petroleum Development Levy (PDL). The FY07 budget does not envisage any revenues from this source, in contrast to the Rs20.2 billion collection (estimate) for FY06, but the government has the option to revise this decision in case of serious revenue shortfalls.

The expansionary fiscal stance will add to aggregate demand, and therefore to inflationary pressures. The impact could be worsened if the government depends heavily on central bank borrowings to finance the deficit. The budget for FY07 envisages a receipt of Rs35 billion from SBP profits, which suggests that this may be the case, and therefore the burden of containing inflationary pressures will fall disproportionately on monetary policy.

This is amply clear also from the trends in the external account, where strong aggregate demand, together with rising oil prices, has led to a sharp 39.4 per cent hike in imports during Jul-May FY06, substantially overshadowing the 16.7 per cent rise in exports in the same period. While the exceptional growth in imports is certain to moderate in FY07 (despite an anticipated rise in the oil import bill, especially following an anticipated dip in hydroelectricity generation), it is important that the export growth momentum be sustained. Indeed, while data shows that the exceptional growth in imports may already be slowing considerably, export growth is also weakening, suggesting the need for greater support for exporters in the forthcoming trade policy, and that the projects to improve domestic logistics chain and infrastructure be expedited. This also requires that the central bank remain vigilant against inflation, as price stability will be a key competitive advantage for the country.

The current account deficit is envisaged at US$ 6.3 billion or 4.3 percent of targeted GDP in the Annual Plan for FY07. While this deficit seems high, privatization receipts and strong aid inflows are anticipated to offset much of the impact during FY07. This, however, would primarily depend on the realization of the anticipated moderation in import growth, as foreseen in the annual plan, and continued strong export growth. If, as suggested by SBP projections, the current account deficit proves to be substantially higher, it would be extremely difficult to sustain without either substantially raising external debt, recourse to an undesirable drawdown in reserves, or strong measures to contain aggregate demand or a more focused policy of containing external demand.

 

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Executive Summary

Economic Growth

According to provisional estimates of national income accounts, real GDP remained at its long-term growth path in FY06 with a growth rate of 6.6 percent. While this growth is marginally lower than the 7.0 percent annual target, this is quite impressive given the aftermath of the earthquake, the relatively poor harvests of key crops, the impact of high oil prices and rising domestic interest rates. The greater contribution to this high growth rate is by the services sector, which exhibited a remarkable 8.8 percent growth during FY06 as compared to the 4.3 percent growth of the commodity-producing sector in the same period. Within the services sector, the highest growth was seen in finance & insurance (23.0 percent) followed by wholesale & retail trade (9.9 percent).



Agriculture

The disappointing performance of key kharif cash crops (cotton and sugarcane) coupled with below-target production of wheat and minor crops, dragged down the agricultural growth to 2.5 percent during FY06 from 6.7 percent last year. The value addition by crops showed a decline of 2.3 percent during the year compared to previous year mainly due to lower production of cotton, sugarcane and grams. However, the livestock sub-sector posted strong growth of 8.0 percent in FY06.

It is encouraging that the off-take of fertilizers increased sharply (by 12.1 percent) despite rise in prices. Both urea and DAP witnessed higher growth rates of 11.1 percent and 15.7 percent during Jul-Apr FY06 respectively compared with corresponding figures of 5.0 percent and 7.7 percent in FY05.

The growth in agriculture credit disbursement, on the other hand, decelerated to 25.7 percent YoY (Rs 116.96 billion) in Jul-May FY06 as against a robust growth of 50.4 percent YoY in the corresponding period of FY05 which probably reflects the rising interest rates in the economy.

The growth in loan recoveries also decelerated, but this is smaller than that in disbursements and, as a result, recoveries as a percent of disbursements have increased during the year.



Large-scale Manufacturing

Provisional estimates indicate that LSM growth has fallen significantly from 15.6 percent in FY05 to 9.0 percent during the current fiscal year; and is lower than the FY06 target of 13.0 percent. Moreover, the data for Jul-Mar FY06 shows that the deceleration is quite broad based with most of the sub-groups showing growth below that in the previous year. The only sectors showing higher growth included food, leather, pharmaceutical, paper & board.

The sector which has the largest weight in LSM, i.e., textiles, saw growth slow to 4.0 percent during Jul-Mar FY06 as compared with a 28.7 percent growth seen in the same period of FY05. A substantial contribution to this slowdown was from a deceleration in the production growth of cotton yarn & cotton cloth and a decline in the production of ginned cotton.

A sharp deceleration was also seen in the petroleum and lubricant (POL) and fertilizer industries, which recorded growth rates of 2.3 percent and 9.8 percent respectively during Jul-Mar FY06 as compared corresponding FY05 figures of 11.7 percent and 37.2 percent respectively. While the growth in the automobiles industry also declined, it remained a robust 27.7 percent during Jul-Mar FY06, only a little lower than the 31.5 percent for Jul-Mar FY05.

Capacity utilization in LSM declined by 1.3 percentage points in Jul-Mar FY06 as compared with a rise of 0.5 percentage points during the same period of FY05. However, this was essentially due to Pak Steel Mills, where production has dropped steeply due to a major technical fault. Excluding the impact of the latter, LSM capacity utilization was 1.1 percentage points higher than in the corresponding period of last year, even after capacity additions in some industries.



Prices

Inflationary pressures generally weakened throughout the current fiscal year due to tight monetary stance since April 2005, and administrative measures to improve the supply of key commodities.

Inflation measured by the Consumer Price Index (CPI) increased to 7.1 percent YoY in May 2006, which is significantly lower than the 9.8 percent inflation in May 2005. The deceleration in CPI inflation stemmed essentially from decelerating CPI food inflation, which declined to 5.6 percent in May 2006 down from 12.5 percent in the corresponding month last year. CPI non-food inflation, on the other hand, weakened modestly, remaining above 8 percent during Jul-May FY06.

After declining steadily through most of Jul-Apr FY06, WPI inflation jumped back to 9.1 percent YoY in May 2006 up from 8.1 percent in the preceding month, and significantly higher than the 6.0 percent recorded in May 2005. This increase has been contributed both by food and non-food groups of WPI. SPI inflation also witnessed an increase of 7.7 percent during May 2006 which is significantly higher than the inflation of 6.4 percent seen in the preceding month.



Money and Banking

State Bank of Pakistan maintained a tight monetary policy throughout FY06 in order to contain inflationary pressures in the economy. The instrument used for containing monetary growth was predominantly open market operations through which the SBP drained excess liquidity from the inter-bank market without bringing any significant change in the benchmark 6-month T-bill rate. The discount rate was also kept unchanged during the period.

As a result of monetary tightening, monetary aggregates have been showing significant weakening by Jun 10 FY06 compared with the corresponding period of FY05. The growth in money supply (M2) decelerated to 13.3 percent during Jul-Jun 10 FY06 from 16.2 percent in the same period last year. This slowdown was driven primarily by the deceleration in the growth of both private sector credit and net foreign assets.

The downtrend in the NFA of the banking system during most of Jul-Jun 10 FY06 is driven by two apparently contradictory developments - the sharp widening of the country’s current account deficit, and the firming expectations of exchange rate stability. Although the receipts from the PTCL privatization and the Eurobond issues prevented a net decline in the NFA of the banking system during the period, the growth is still significantly below the levels of the previous year.

The NDA of the banking system showed a growth of 16.0 percent during Jul-Jun 10 FY06 compared with the growth of 19.6 percent during the same period of FY05. As in the previous year, the current increase in NDA was driven principally by the growth in credit to the non-government sector.

By end-February 2006, government borrowing for budgetary support from the banking sector had exceeded the Rs98.0 billion FY06 annual target by 64 percent, principally due to substantial borrowings from SBP. However, the inflows under PTCL privatization and the issuance of Eurobonds during March 2006 allowed the government to retire a large part of these borrowings.

As a result, the cumulative government borrowings from the banking sector dropped to Rs120 billion during 1st Jul-10th June FY06, which remains higher than that in the corresponding period of FY05.

The growth in private sector credit during 1st Jul-10th June FY06 was a little higher than the annual credit plan estimates for the year, but was significantly lower than the increase during the same period of FY05. This slowdown is despite the larger increases in trade-related loans and the private sector commodity finance during Jul-May FY06 compared with the preceding year. This slowdown in the credit market appears to be driven by both demand and supply side factors.



Fiscal Sector

Fiscal indicators weakened for the second successive year in FY06. Not only has the fiscal deficit widened, the revenue and primary balances have also declined, primarily due to the impact of the earthquake relief and rehabilitation expenditures. Adjusting for these, the fiscal picture improves somewhat, with the re-emergence of primary and revenue surpluses, but the fiscal deficit continues to show a marginal increase. However, to the extent that the higher fiscal deficit stems from rising developmental spending, the increase is less of a problem.

Total revenue is estimated to reach Rs1095.6 billion during FY06, up 21.7 percent YoY as compared to the growth of 13.8 percent YoY in FY05. Growth in both tax and non-tax revenue contributed to this achievement. In terms of individual taxes, the direct taxes and sales-tax surpassed their targets, while the collections on account of Federal Excise Duty (FED) and Customs duty remained below the respective targets.

Total expenditure in FY06 is estimated at Rs 1423.0 billion, up 27.4 percent YoY. Almost 55 percent of the total expenditure was accounted for by interest payments, defense, current subsidies and general administration. However, encouragingly, the growth in both the interest payments and defense expenditures was lower than in the previous year.

The development expenditure increased 43.5 percent YoY to Rs 326.7 billion, mainly to expand infrastructure and on social development.

The overall budgetary deficit for FY06 works out to be Rs327.4 billion, which is financed by external resources to the extent of Rs118.3 billion and the rest is financed from internal resources. Of the internal resources, the government is likely to meet the financing gap from the banking sector (Rs96.7 billion), from the non-bank (Rs 22.4 billion), and privatization proceeds (Rs90 billion; of which Rs55.2 billon has already been realized by the end of the third quarter of FY06).

 

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Balance of Payments

The pressure on the country’s external account increased substantially during FY06, as the current account deficit swelled to a historic peak of US$ 4.1 billion by end-Apr FY06, sharply higher than the US$ 0.94 billion deficit recorded in the corresponding period of FY05. Even more significantly, as a percentage of GDP the annual current account deficit is estimated to rise from an innocuous 1.4 percent of GDP in FY05 to a more troubling 3.2 percent of GDP in FY06, indicating that a continued weakening would raise grave risks to the hard-won macroeconomic stability achieved in recent years.

As in the previous year, the deterioration in the current account deficit during Jul-Apr FY06 emanates essentially from the trade deficit, wherein the gains from a robust 13.0 percent increase in exports have been eclipsed by the exceptionally strong 28.5 percent increase in imports. Within the current account, the trade deficit of US$6.5 billion was accompanied by services account deficit of US$ 3.5 billion, up 36 percent from last year (mainly due to higher transportation and other business charges associated with higher imports). The Income account also recorded a deficit of US$ 2.1 billion. The rise in deficit in the trade, services and income account was partially offset by an increase in the current transfers, which rose from US$ 7.1 billion in Jul-Apr 2005 to US$ 8.1 billion in Jul-Apr 2006, largely on account of the worker remittances and increases in official grants.

Pakistan was however, successful in tapping the international markets to finance its deficit, attracting FDI (including for its privatisation program) and in obtaining financing for developmental projects. All of these, together with rising portfolio investment, are reflected in the country’s substantial US$5.0 billion financial account surplus during Jul-Apr FY06, as compared to a surplus of only US$ 24 million in the corresponding period of FY05. As a result, the overall balance witnessed a surplus of US$ 1.4 billion during Jul-Apr FY06.

This also helped sustain the relative stability of the exchange rate ñ the rupee depreciated only 0.88 percent against the US dollar during Jul-May FY06 to Rs60.22/US$ and sustaining SBP reserves around the US$ 10.6 billion mark by end-May 2006.



Trade Account

The steadily widening trade deficit touched US$ 10.6 billion during Jul-May FY06, substantially higher than the US$5.5 billion recorded in the same period last year. The driving force behind the exceptionally high trade deficit remained the persistent surge in the import growth. During the period, the extraordinary import growth of 39.4 percent outstripped the otherwise healthy export growth of 16.7 percent.

The major contributors to the growth in imports were soaring international oil prices and machinery imports. In fact, the POL imports contributed almost one-third (32.2 percent) of the total import growth of 39.4 percent. Machinery imports contributed another 22.7 percent of the annual import growth.

However, there is a discernible slowdown in the import growth from February 2006 onwards. The detailed analysis of the data shows that the growth in major heads is much lower in Feb-May 2006 compared to that in Jul-Jan 2006. Furthermore, almost 80 percent of the growth in the Feb-May period is being contributed by just two broad categories; ‘petroleum’ and ‘other imports’. The share of machinery in imports growth has gone down from 29 percent in Jul-Jan 2006 to 5 percent in Feb-May 2006.

Export growth averaged a healthy 16.7 percent during Jul-May FY06, despite the increasing competition post-MFA (which has hit unit values in key export commodites), as well as punitive anti-dumping duties and loss of GSP benefits for textile exports to the EU region.

However, a relative weakness in export growth in the latter half of FY06 is a matter of some concern, and it is hoped that with the recent reduction in antidumping duty by the European Union on Pakistan’s bedwear exports (from 13.1 percent to 5.8 percent, effective May 7, 2006), and restoration of some GSP benefits (albeit at lower levels), export growth could revive in FY07.







Table 1.1: Major Macroeconomic Indicators

Jul-to date

FY04 FY05 FY06

growth rates (percent)

Large-scale manufacturing (Mar) 17.0 15.4 9.0

Exports-FBS (May) 11.8 16.2 16.7

Imports-FBS (May) 24.1 33.8 39.4

Tax revenues (CBR) (May) 12.4 13.6 22.0

CPI (12-m ma) (May) 4.0 9.3 8.0

PSC (CBs) (Jun 10) 29.6 29.7 19.5

Money supply (M2) (Jun 10) 17.1 16.2 13.3

million US Dollars

Total liquid reserves1 (May) 12,438 12,359 12,990

Home remittances (May) 3,516.6 3,809.8 4,136.3

Foreign private investment (Apr) 629.1 1,027.0 3,376

percent of GDP2

Fiscal deficit (full year) 2.9 3.3 4.2

Underlying (ex-earthquake) 3.4 3.7

Trade deficit (Apr) 2.1 4.4 7.5

Current a/c balance (Apr) 2.2 -0.8 -3.3

1 With SBP & scheduled banks. End-May.

2 Calculated by taking fiscal year GDP. Projected GDP for FY06 has been used.







Table 1.2: Major Economic Indicators

FY06

FY05 FY07

Revised Original Prov. Targets/

targets estimates projections

growth rates (percent)

GDP 8.6 7.0 6.6 7.0

Inflation 9.3 8.0 7.9 6.5

Monetary Assets (M2) 19.3 12.8 14.8 13.5

billion US$

Exports (fob-Customs record) 14.4 - 16.8 19.5

Imports (cif-Customs record) 20.6 - 28.4 34.1

Workersí remittances 4.2 4.0 4.5 4.7

percent of GDP

Budgetary balance -3.3 -3.8 -4.2 -4.2

Current account balance

(excluding official transfers) -1.6 -2.1 -4.4 -5.7
http://www.thenews.com.pk/daily_detail.asp?id=15799

 

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KARACHI: City Nazim, Syed Mustafa Kamal, while emphasising on attaining knowledge of Information Technology (IT) and command over English language, has hinted 40,000 jobs in the next two years.

During a meeting at his office on Saturday, he said the City District Government Karachi (CDGK) has planned to generate better job opportunities for the educated youth. He commented that joblessness was a great concern for the educated youth.

ìOur youth are more competent than that of other nations in the world, but they donít have better opportunities,î Kamal observed.

He said that this was the responsibility of the government to generate more job opportunities and to create conducive atmosphere, enabling the youth to use their capabilities for the development of the nation.

He informed that the foundation of the tallest building of Pakistan. Call centres set up in this building would generate 30,000 jobs and students who have passed their Intermediate examination would also be provided with a job opportunity in these call centres, Kamal said.

 

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ISLAMABAD (July 17 2006): The government has accused the Water and Power Development Authority (Wapda) of providing 'unworthy' information on power shortage being faced by the country.

Sources in Islamabad Electric Supply Company (Iesco) told Business Recorder on Sunday that the Ministry of Water and Power has summoned all high-ups of Wapda and chief executives of the power distribution companies (Discos) on Tuesday for clarification on some of the information which the ministry says was 'not worthy'.

The country is facing up to 1500 MW power shortage but the utility has no concrete plan to deal with the situation which has not only slowed down the industrial activity, but also badly affected the agriculture sector when the rice season was in full swing.

Sources said that President Pervez Musharraf and Prime Minister Shaukat Aziz, at a recent meeting , snubbed Wapda officials for this crisis-like situation and directed that a 'short-term plan' be submitted to the federal government to finalise future strategy.

They said that Wapda had prepared a short-term power plan to meet the country's requirements but the information it provided to the government was 'not worthy' and what the utility had been asked to submit up to date information.

According to sources, the government raised a number of additional questions to be answered by Wapda Chairman and Chief Executives of power generation and distribution companies in the meeting on July 18.

Meanwhile, an official in the federal government told this scribe that the President has also convened a meeting on July 20 at camp office, Rawalpindi, to discuss the short-term power plan and seeking progress on guidelines given to the utility in this regard.

Sources said that Private Power Infrastructure Board (PPIB) was also under severe criticism for not making any progress on hydel or thermal power despite knowing that the country would face crisis-like situation in 2007-08, if new generation was inducted in the system.

In September last year, the Prime Minister had directed the Ministry of Water and Power and Wapda to ensure availability of energy to maintain the projected economic growth.

"Concentrated efforts be made to increase power generation capacity from hydel, thermal, alternative energy and nuclear power supply as well as required mix be ensured to meet peak and lows in demand, both seasonal and locational," sources quoted the Prime Minister as directing the concerned departments.

They said that the Ministry of Water and Power had been asked to submit recommendations, within two weeks, to meet the projected power shortage during the next two years, but the ministry did nothing substantial except routine paper work.

They said that a committee on power demand supply position, headed by the Secretary Water and Power, Ashfaq Mahmood had recommended that public sector Gencos should make investment for two 450 MW combined cycle power plants which would reduce the time spent on arranging financing and tariff negotiations. But at the same time it was also observed that it would be departure from the existing approach of the government for inducting private power units.

However, Wapda Chairman observed that the schedule proposed by the committee was tight and proposed commissioning dates of the units on open cycle by September 2007 and combined cycle by March 2008.

Later, Prime Minister Shaukat Aziz decided that no thermal power plant would be set up in the public sector but when it was felt that the situation was going worse, the earlier decision was declared nullified, the sources maintained.

Now, the President has taken a serious view of power crisis in the country and would discuss convey a strong message to the concerned high ups in the meeting scheduled to be held on July 20, sources said.

 

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KARACHI (July 17 2006): The teledensity in the last fiscal year was more than double after consumers attracted towards cellular phones. The telecom sector is one of the fastest growing sectors in Pakistan. Indeed, the FY06 could be termed as a fabulous year for the telecom sector for its upbeat growth.

While the conventional land/fixed line segment posted flat trend, the other segments ie cellular and WLL have depicted excellent display of growth in FY06.

Against its level of 11.9 percent at the beginning of FY06, Pakistan's total teledensity has more than doubled to 26.3 percent by the end of the year.

It is pertinent to note that the growth in teledensity is mostly fuelled by cellular growth. The fixed line teledensity has improved marginally to 4.1 percent in FY06 from 3.6 percent in FY05, while cellular density increased to 22.2 percent by the end of FY06 from that of 8.3 percent a year earlier.

It is interesting to note that cellular users accounts for around 85 percent of the total telecom subscribers in Pakistan. The remaining 15 percent are using fixed line (wireline and wireless). In India, about 68 percent of the total subscribers are mobile users with teledensity of 13.5 percent as of May 2006.

As mentioned above, within the telecom sector the major growth was witnessed in cellular segment. As per data release by the Pakistan Telecommunication Authority (PTA), mobile subscribers have reached 34.5 million at end of FY06 against 12.7 million subscribers previously - a growth of 170 percent. This translates into mobile teledensity of 22.2 percent. On an average, cellular subscribers have grown by 1.8 million per month (60k per day) in FY06. It was observed that the later half of the year saw higher growth, where on average 2.1 million connections were added each month versus 1.4 million in the first half of the year.

To win the race, the cut throat competition was seen amongst the cellular operators and ultimately we saw a price war. This, in turn, has resulted in the fall of Arpu (average revenue per user). As per latest available figure by PTA, Arpu of cellular companies has declined to $4.05 in 2005 as compared to $6.06 in 2004.

The WLL, relatively a new phenomenon in Pakistan, has posted gigantic growth of 284 percent with 1.03 million subscribers by FY06 versus that of 0.27 million a year ago. The PTCL, the largest player in WLL, gained its market share from 61 percent in FY05 to 64 percent in FY06. While Telecard, the second largest player, has lost its market share to 22 percent from 37 percent in FY05. The PTA awarded two more licenses of LDI making total number of LDI operators to 14. Here also, increased competition was observed leading to price war-like situation amongst the players.

Currently, there are six mobile operators working in Pakistan. The Mobilink is the market leader with a share of 50 percent by FY06 (58 percent in FY05). The following shows the subscribers base of the cellular companies and their respective share.

 

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KARACHI (July 17 2006): Listed companies results would start pouring in and analysts expect that banks, E&P and cement groups would show an average profitability growth in the range of 55 percent to 75 percent. Th result season is to arrive soon at the market. We expect from the last week of July 2006 companies at KSE to start announcing their results for the period ending June 2006.

The banking sector (21 percent weight in Index) would announce its half-year results of 2006 in the coming few weeks. This time analyst from Jahangir Siddiqui Capital Markets Ltd expects that banking sector to post an average growth of approximately 62 percent in 1H2006 as compared to corresponding period last year. The net interest income (NII) is likely to remain the major contributor.

Banks' advances and deposits growth has started gaining momentum in 2Q2006 and spread of the sector is also at its three-year high of 7 percent. More precisely, first five months average banking sector spread are recorded at 7.3 percent which is 210 basis points more than the corresponding period last year. Large commercial banks earnings growth (NBP, MCB and UBL) will surpass growth of medium and smaller banks, it is believed.

"We reiterate our 'overweight' stance on commercial banks and recommend 'buy' for NBP, UBL, FABL and BoP.

The exploration and production (E&P) having a share of 32 percent in the Index will announce its full year results for FY06. We expect the sector to post a growth of 55 percent approximately in FY06 as compared to last year. The reason behind growth is the increased production and a huge upsurge in international oil prices.

Average international oil prices (Saudi light) for FY06 was $58.55/barrel, which is 42 percent high from the average prices of last year, and we think this would be the main reason behind profitability. As per our analysis $1 increase in international oil prices improves earnings of E&P companies by 3 percent on an average.

"We remain 'over-weight' on these upstream oil companies and recommend 'buy' for POL, OGDC and PPL.

For the cement sector, having 4.3 percent weight in Index, we expect profitability growth of close to 75 percent. Thanks to double digits growth in sales of 12.6 percent in FY06 and regular increase in cement prices during the year. The last quarter ie Apr-June FY06 is expected to be the best quarter of the year for the cement companies as in this quarter cement dispatches, following their past trend, remained strong and cement prices touched all-time high in April 2006.

We maintain our 'market-weight' stance on the cement sector with DG Khan and Lucky Cement being our top picks.