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Pakistan’s economy extended its
impressive expansion for the third year in a row in 2004-05.
Economic growth at 8.4 percent reached its highest level in
two decades, the fifth time in the country’s history that it
exceeded 8 percent growth mark. This momentum is underpinned
by dynamism in industry, services and agriculture, and the
emergence of new investment cycle supported by the strong
credit growth.
Real GDP grew by 8.4
percent in 2004-05 as against 6.4 percent last year and
surpassed the target of 6.6% for the year by a wide margin.
The sharp pick up in growth is ably supported by large-scale
manufacturing, impressive recovery in agriculture and a
strong growth in services sector. Large scale manufacturing
grew by 15.4 percent against the target of 12.2 percent.
Agriculture posted a growth of 7.5 percent against the
target of 4.0 percent on the back of unprecedented rise in
the production of cotton and high growth in wheat
production. The services sector registered an equally strong
growth of 7.9 percent aided by remarkable growth in finance
and banking sector (21.8%), wholesale and retail trade (12%)
and a modest growth in transport and communication (5.6%).
Investment is a key
determinant of growth. During the fiscal year 2004-05 gross
fixed capital formation or domestic fixed investment grew by
15.6 percent as against a sharp rise of 17.4 percent last
year. Although the growth in domestic investment was
marginally slower than last year, private sector investment
grew by 19.3 percent this year as against a growth of 9.6
percent last year. Public sector investment on the other
hand registered marginal decline of 4 percent as against a
hefty 36.8 percent increase last year.
Inflation, as measured by
changes in the Consumer Price Index (CPI), averaged 9.3
percent during fiscal year 2004-05 as against 4.6 percent in
the last year.
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External sector is being
affected both by structural and cyclical factors. Exports
and imports both grew by 17 percent and 32.3 percent
respectively during 2004-05.
The tax revenue estimated
at 590.6 billion in 2004-05 as against 518.8 billion last
year. The overall fiscal deficit remained on the target
(3.2% of GDP).
Per Capital income in
dollar term registered an increase of 12 percent over last
year rising from $657 to $736 in 2004-05. The main factor
responsible for the sharp rise in per capital income
include: a sharp pick up in real GDP growth, stable exchange
rate, and rise in inflow of worker’s remittances.
Structure of Production (Sector
Analysis)
Agriculture:
Agriculture accounts for nearly 23 percent of
Pakistan’s national income (GDP) and employs 42 percent of
its work force. The agriculture sector registered a growth
of 7.5 percent in 2004-05 on the back of an unprecedented
rise in the production of cotton (14.6 million bales) and
wheat ( 21.1 million tons) crops.
Major crops, accounting for
37 percent of agricultural value added grew by 17.3 percent
in 2004-05 as against a mere 1.9 percent lat year. Minor
crops, accounting for 12 percent of value added in overall
agriculture, grew by 3.1 percent – a slight improvement over
last year’s growth of 2.6 percent.
Livestock sub-sector, has
witnessed a modest growth of 2.3 percent in 2004-05 as
against 2.8 percent last year. The value addition in
forestry sub-sector registered a marginal increase this
year.
Manufacturing:
The overall manufacturing, accounting for
18.3 percent of GDP repeated stellar performance by
registering a growth of 12.5 percent in 2004-05 as against
14.1 percent last year.
The large scale
manufacturing accounting for 69.5 percent of overall
manufacturing and 12.7 percent of GDP, recorded an
impressive and broad-based growth of 15.4 percent in 2004-05
as against 18.2 percent last year and against the target of
12.2 percent – the second highest growth achieved in three
decades.
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Mining and Quarrying:
The mining and quarrying sector grew by 5.0
percent in 2004-05 as against the rise of 3.8 percent last
year.
Services Sector:
The services sector, accounting for 52
percent of GDP, registered an impressive growth of 7.9
percent in 2004-05 as against the target of 6.2 percent for
the year. This sector surpassed the3 growth target by a wide
margin on account of robust growth in telecom sector,
stellar performance in banking and insurance, and wholesale
and retail trade.
Saving and Investment
In the fiscal year 2004-05, gross fixed capital
formation or domestic fixed investment grew by 15.6 percent
as against a sharp rise of 17.4 percent last year. The
composition of investment between private and public sector
has changed considerably. Private sector investment grew by
19.3 percent this year as against 9.6 percent increase in
last year. Public sector investment in fact registered a
marginal decline of 0.4 percent in 2004-05 as against a
massive increase of year 36.8 percent last year.
Money & Credit:
Fiscal years 2003-04 and 2004-05 have witnessed a gradual
shift in monetary policy stance, as rising inflation became
a source of concern. Although the SBP raised interest rates
steadily through the first 9 months of 2004-05, monetary
policy largely remained accommodative, the weighted average
lending rates remained negative in real terms and private
sector credit rose by a record Rs 370 billion during the
period. To counter the inflationary trend, SBP has raised
the benchmark 6-months T-bill interest rate by 500 basis
points since June 2004 to 7.08 percent by April 2005. the
renewal of inflationary pressure, following the surge in
food prices and hike in oil prices indicated that the
tightening of monetary policy was needed. Accordingly,
successive T-bill auctions saw sharper increase in the
weighted average yields. The discount rate was also
increased by 1.5 percentage points in April 2005 from 7.5
percent in November 2002 to 9.0 percent, strongly signaling
the increase in the lending rates.
The original Credit Plan
for 2004-05 projected the broad money (M2) growth at 11.3
percent (Rs 280 billion) and the projection was made on the
basis of the GDP growth target of 6.6n percent and inflation
target of 5 percent. The growth rate of broad money was kept
slightly less than the nominal GDP growth rate because of
the monetary overhang for the last couple of years and
rising inflation.
The dominant source of
broad money growth was projected to be the build-up in the
net domestic assets (NDA) of the banking system, which was
targeted to grow by 13.13 percent (Rs 250 billion),
primarily in view of continuation of strong demand for
credit by the private sector. The net foreign assets (NFA)
of the banking system were projected to increase by only
5.14 percent (Rs 30 billion) in view of expected
deceleration in capital inflows. The non-government sector
was projected to avail Rs 190 billi9on, while government
borrowings from the banking system for budgetary support and
commodity operations were targeted at Rs 45 billion and Rs 5
billion respectively. The credit to the private sector was
estimated to expand by Rs 200 billion whilethe public sector
enterprises were expected to continue to perform well and
retire Rs 5 billion during 2004-05.
The monetary developments
during the first sex months of 2004-05 and the estimates of
GDP growth rate and inflation, which were revised upward to
more than 7.0 percent each, suggested higher monetary
expansion. The Credit Plan was therefore, revised and the
broad money was estimated to grow by 14.5 percent (Rs 360
billion) during the 2004-05 mainly due to higher credit
disbursement to the private sector. The build-up in NFA was
expected to remain at the original estimate of Rs 30 billion
while expansion in NDA was revised upward to Rs 330 billion.
Within the NDA, the government was estimated to borrow Rs 65
billion for commodity operations). The non-government sector
was expected to avail Rs 330 billion with the private sector
credit growing by Rs 350 billion against the earlier
estimate of Rs 200 billion.
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Capital Market
The
buoyant mood in Pakistan’s stock markets that prevailed
during fiscal year 2003-04 continued during the current
fiscal year. The Karachi Stock Exchange (KSE) share index
and aggregate market capitalization (AMC) recorded an
increase of 55.2 percent and 81.9 percent respectively
during 2003-04. during July-March 2004-05 the KSE 100 Share
Index rose from 5279 points to 7770.3 points – an increase
of 47.2 percent. During the period the AMC rose from Rs
1357.5 billion (or $23.4 billion) to Rs 2114.8 billion (or
$36.6 billion), thus showing growth of 55.8 percent. The
Karachi Stock Market remained as one of the five best
performing markets around the world wutg rate of returns
dollar term of 100 percent.
In the early part of 2005,
the Karachi Stock Exchange (KSE) witnessed an accelerated
rise with KSE-100 index rising by 65 percent in a period of
only 2.5 months to a record level of 10,303 on 15th
March 2005. to add perspective, this increase was on top of
the cumulative 388 percent rise in KSE 100 index dropped to
as low as 6939 as on April 12, 2005 from its peak of 10,303
on 15th March 2005 showing a decline of 32.7
percent. Such a sharp rise in index and a subsequent steep
decline represented abnormal and unhealthy movements in the
equity market. Notwithstanding sharp fall there were no
broker defaults in the stock market and also market was not
closed or suspended, as had been the case in some previous
market falls.
Although market faced
extreme volatility in the of March 2005 however, for the
period beginning January to March 2005 the KSE perform
better than the other regional markets. The KSE 100-index
increased by 24 percent form 1st January 2005
till 25th March 2005 as compared to the other
regional markets. The Sensex-Mumbai index during the same
period declined by 2 percent and Hong Kong Han Seng Index
declined by 4 percent. The Thailand SET and the all
Singapore SES index during the same period increased by 3
percent and 5 percent respectively.
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External Sector (Balance
of Payments:
Pakistan’s external sector is being affected both by
structural and cyclical factors. Three years of strong
economic growth, complemented by record low interest rate
and the ongoing structural shift of many household in
Pakistan towards higher consumption have injected new life
into domestic spending. The strengthening of domestic demand
triggering a pickup in investment spending after a
multi-year lull, has fueled Pakistani import growth. Higher
global oil prices further added to a massive surge in
imports which more than offset the improved outcome from
exports and accordingly were the drivers of the widening
trade gap.
Exports:
The exports during the July-June 2004-05 were
$14.4 billion as against $12.3 billion during the same
period last year, registered an increase of 17 percent.
Imports
The imports during July-June 2004-05 were $ 20.6 billion as
against $ 15.6 billion during the same period last year,
registered an increase of 32.3 percent.
Trade Deficit:
The trade deficit rose by 87.9 percent during the July-June
period of the current financial year over the same period
last year. In absolute term the trade deficit rose to $6.2
billion during current fiscal year as against $3.3 billion
over the last year.
Remittances:
The workers’ remittances stood at $4.2 billion, during
July-June 2004-05 as against $3.9 billion in the
corresponding period of last year, registered an increase of
7.7 percent .
Foreign Exchange
Reserves:
Pakistan’s total
liquid foreign exchange reserves, with some fluctuations,
maintained an upward trend during the current fiscal year.
By end April 2005, reserves touched all time high at
$13,000.2 million. Then declined and Foreign Exchange
Reserves stood at $12.6 billion as on June 30 2005. With
these build up in reserves, Pakistan is in a position to
meet any abnormal shock on external front.
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Finance:
The wide-ranging tax and tariff reforms as
well as reforms in the tax administration have started
paying dividends. Tax collection by the Central Board of
Revenue (CBR) has picked up, the overall budget deficit as
percentage of GDP has declined the revenue deficit has been
narrowed, and the primary surplus has increased.
Consequently, public debt as a percentage of GDP has
declined and Pakistan is now moving towards fiscal
consolidation. During the last six years, tax collection has
increased by 70 percents and the overall fiscal deficit
which averaged almost 7.0 percent of GDP during the 1990s
has been reduced to 3.0 percent in 2004-05 (of new GDP). The
revenue deficit has been narrowed from 3.0 percent of GDP to
0.2 percent in 2004-05, which will increase national
savings, and thus reduce the country’s dependence on foreign
savings to finance domestic investment. The primary balance
(total revenue minus non-interest total expenditure)
remained in surplus for the last four years. Pakistan is the
only country in South Asia which is generating primary
surpluses on sustained basis. An improved tax structure will
reduce the deadweight loss associated with raising a given
amount of revenue and a reduction in the relative share of
trade taxes and increases in the relative shares of taxes on
income and consumption could be taken as evidence of an
improvement in the tax system.
The Central Board of
Revenue (CBR) collected Rs 590.6 billion revenue during
2004-05 surpassed the revised target of Rs 590 billion and
earlier target of Rs 580 billion.
Federal Budget 2005-06
The Government has rightly
decided to change gears to shift from macroeconomic
stabilization to high growth trajectory. The stumbling
blocks are resource gap owing to existing saving rate being
much below the warranted rate of investment, rising
inflation and infrastructural bottlenecks. Against this
backdrop, the budget can be termed as investment and
business friendly, leaving the issue of equity at the mercy
of market forces.
The overall size of the
budget outlay is projected at Rs. 1,098.5 billion, which is
21.7 and 11.3 percent higher than the budget (Rs. 902.8
billion) and revised estimate (Rs 986.7 billion) for FY
2004-05 respectively. The current expenditure at Rs. 826
billion shows an increase of 18 percent and development
expenditure at Rs. 272 billion an increase of 34.7 percent
over the budget of FY 2004-05. When compared with revised
estimates of FY 2004-05, the current expenditure is 5.3
percent higher.
The share of current
expenditure in total budgetary outlay for 2005-06 is 75.2
percent which is lower than the budget (77.6 percent) and
the revised estimates ( 79.5 percent) for 2004-05. Debt
servicing (Rs 301 billion) and Defense (Rs. 223.5 billion)
together account for 48 percent of current expenditure.
The federal budget for
fiscal year 2005-06 envisages an allocation of Rs. 272
billion for Public Sector Development Program (PSDP), 34.7
percent higher than the PSDP size of Rs. 202 billion
originally budgeted for 2004-05. As percentage of GDP,
development expenditure will be percent against 2.9 percent
during 2004-05 (as compared to 6.8% in early 1990s). PSDP is
mainly aimed at building of social and physical
infrastructure and poverty reduction.
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