Despite unexpected challenges economy is poised to produce strong results

Dec 25 - 31, 2006

Despite confronted with some unexpected challenges such as a massive earthquake in 2005, comparatively low yield in the major crops of wheat and cotton and above all unprecedented rise in oil prices, the economy performed exceptionally during 2006.

Actually, it was due to sustained strong growth and an appreciable monetary policy initiated by the central bank. The monetary effectively contributed to overcome the inflationary pressures besides achieving a respectable economic growth which is likely to be in the region of somewhere 7 percent at the end of the financial year 2006-07.

However, there are some areas of concerns as well in the overall economic performance during 2006. The most disturbing factor is certainly the growing trade deficit, which is estimated to hit $12.2 billion at the end of the financial year.

According to the provisional figures, Pakistan's trade deficit during the first five months of the current fiscal stood at US$5.405billion, portraying 18% upsurge as against US$4.584billion during the corresponding period last year.

Primarily, higher imports of petroleum products, machinery, sugar and raw material are responsible for the extraordinary surge in the trade deficit. It is however painful to note that under the head of machinery, the precious and hard-earned foreign exchange is being drained out on the import of large and luxury cars. This is something very serious and needs to be rectified at the earliest in the larger interest of the common man rather than serving the interest of the affluent segment of the society.

The trade deficit doubled to $12.2 billion during financial year 2006 as compared to the previous financial year. The high deficit was the outcome of higher increase of 38.8 percent imports as compared to a moderate increase of 14.4 percent in exports during the period. However, the import growth slowed to 27.8 percent in the later half of 2006 from 53.1 percent during the first half of the year. The slow down is more pronounced in the non-oil imports growth particularly in the machinery group where the growth has slipped from 66 percent during first half of the year to 18 percent during second half the year. With oil prices declining substantially in recent months and aggregate demand being constrained by the tight monetary policy of the central bank, one may hope that import growth will decelerate significantly in 2007.

Overall, exports during the first five months of the current fiscal stood at US$6.927bn, 5% higher than last year while imports during the same period witnessed a 10% jump to US$12.33bn compared to US$11.17billion last year. Recently, the government of Pakistan has revised its FY07 trade deficit target to US$12.2bn as against US$9.4billion earlier.


It may be mentioned that inflation during the first five months of FY07 (July-November 2006) averaged at 8.29%, 12bps lower as against 8.41% during the same period last year.

The declining tendency during the first five months of FY07 is mainly because of Lower House rents and the absence of oil induced inflation.

The government has set FY2006-07 inflation target at 6.5%. 18bps higher CPI on monthly basis on monthly basis, the CPI increased to 8.07% compared to 7.89% during November 2005 primarily due to comparatively lower food & beverages prices previously. Last year, the oil induced inflationary pressure was the major contributor to the high inflation, which depicted approximately 23% upsurge as against approx. 4% hike during November 2006.

On the other hand, the heavily weighted food and beverages component of the CPI was surged 6% compared to 11% during November 2006. The food and beverages component of the CPI has a weightage of more than 40% in the index.

Softening trend in Petroleum and housing components on MoM basis Reportedly, during November 2006, house rent surged at a rate of 6.63%, 25bps slower as against the preceding month. Fuel and lightening decreased by 10.51%, 83bps lower while Transport and communication costs also decline at a marginally lower rate at 3.65% as against 3.66% in the previous month. Household, furniture and equipment surged by 6.88% compared to 6.53% previously.

The slowing trend in fuel & lighting and transport and communication components is on account of stabilized domestic oil price during last few months of the prevailing year. During the last five months, international crude oil prices have sharply receded and are approximately 25% lower from the nearly US$78/bbl peak levels witnessed in mid-July 2006.

However, during the period of this phenomenal fluctuation in international oil prices, the government of Pakistan kept the domestic POL price intact against the hopes of the people. The government is keeping the oil prices intact on the plea that it had absorbed a huge amount to keep the oil price on the lower side despite shooting up oil price in the international market and the prices will remain static till the time the loss is recover. The plea of the government is however sounds as an unpopular decision as the people were eagerly looking for a cut in oil price, which usually has a wide spread impact on general prices.


Amongst the large manufacturing sector, the performance of the auto industry remains conspicuous despite of higher interest rates during 2006.

The production of cars and sale during the first five months of the current fiscal (Jul Nov 2006) surged by 11% and 10% respectively to 65,421 units and 64,996 units.

Similarly, Light Commercial Vehicles (LCVs) segment registered 15% growth in production to 13,809 units while sales of the segment also increased by 15% to 13,622 units.

Pak Suzuki and Indus Motor continue to outperform the market by depicting 26% and 34% YoY sales growth.

Pak Suzuki Market share swell by 7pps Pak Suzuki remained the overall volume leader in the car and LCV segment during the July November 2006 period with 59% market share compared to 52% last year.

The exceptional sales growth of the company is attributable to efficient product portfolio of the company, relatively lower prices and cheaper parts availability. Cultus, Alto and Bolan remained in the limelight with 37%, 52% and 34% YoY growth to 10,209 units, 8,779 units and 5,399 units respectively Furthermore, on MoM basis, sales boosted by 37% for Cultus, 43% for Alto, 51% for Bolan and 59% for Mehran. Volumetric sales of Suzuki Ravi also picked up to 3,675 units during Jul Nov 2006 compared to 1,756 units last year, portraying a whopping 109% growth. On the other hand, Suzuki Liana failed to attract buyers as the sales volume during the period stood at 2,812 units while during the November 2006 sales declined by 5% to 354 units compared to 372 units in October 2006.

INDUS MOTORS Holding an impressive 26% market share and has successfully made the presence of Toyota Corolla felt in the market. The lackluster demand of Honda Civic enable Indus Motor to grow its market share to 26% during the first five months of the current fiscal with overall sales standing at 20,030 units as against 14,932 units previously.

Sturdy product demand made it possible for INDU to post 34% YoY volumetric growth. Sales of Toyota Corolla depicted an enormous 40% surge to 14,625 units during the period while sales of Daihatsu Cuore stood at 5,372 units, up 65% compared to 3,246 units last year.


The sales trend of Honda Atlas Cars remained depressed during the July November 2006 period. Overall, Honda Atlas sold 7,236 units during the period under review compared to 12,317 units last year, portraying 41% decline. The newly launched Honda Civic apparently failed to magnetize buyers due to its relatively higher prices. On the other hand, lukewarm demand for Honda City also continued as the volumetric sales of the car dipped by 22% during the period to 4,857 units.

DEWAN FAROOQUE: The sales of Dewan motors dipped by 25% Sales as volumes of Dewan Farooque Motor during July November 2006 stood at 4,423 units, down 25% compared to last year sales volumes at 5,864 units.

In terms of volume, the sales of Hyundai Santro and Hyundai Shahzore remained dismal during the period. Hyundai Santro sales decreased by a massive 43% to 1,538 units during the period as against 2,703 units mainly due to the influx of imported cars, which are available in almost the same price range. Furthermore, sales during November 2006 declined by 49% MoM and 70% on monthly basis to 206 units. Moreover, sales of Hyundai Shahzore also decreased by 9% during the period to 2,885 units compared to 3,161 units last year.


OGDCL's international offering early this month priced at US$18.90/GDR which was an epoch making event for the players in the capital market.

The government of Pakistan had priced the GDRs offering of the Oil and Gas Development Company Limited (OGDCL) at US$18.90/GDR (or Rs115/share) with each GDR representing 10 ordinary shares of the company. The offering price represents 9.5% discount to the last closing of the scrip at Rs127.20 in Karachi Stock Exchange. The total offering to international and local intuitions stands for 10% of the company's outstanding share capital, excluding the over-allotment option of approx. 53.3m shares. The expected gross proceeds from this offering are estimated at Rs43.3billion or US$712million. The conditional trading of GDRs on the London Stock Exchange will commence from December 01, 2006 while unconditional trading is expected to start from December 06, 2006. Furthermore, the government has also approved 5% secondary public offering of the company to local retail investors at Rs110/share.


Following a 21.9 percent rise in domestic prices during 2006 amidst persistent increase in international oil prices, the production of high-speed diesel is declined mainly due to fall in demand.

Furnace oil out put recorded an acceleration of 7.8 percent growth in 2006 against a fall of 0.1 percent in 2005, principally due to higher consumption by electricity producers. Jet fuel also witnessed 11.7 percent growth in output during 2006 in contrast with a 9.4 percent fall in the preceding year. Increasing domestic consumption of jet fuel on account of expansion in activities of domestic airlines and exports to Afghanistan are the major factors for this encouraging performance.

However, despite confronted with all odds, the economy of Pakistan has demonstrated its mettle and is bound to produce attractive results provided our exports regime lends a supporting hand.

However, the most disturbing factor continued to persist and that is the unfriendly approach of our government functionaries who are more interested in personal gains instead of paving the way for national gains by extending an helping out attitude towards the people who invest, produce and export to earn fuel for the economy.