AROOJ ASGHAR (arooj.asghar@crosby.com)
Dec 31, 2007 - Jan 06, 2008

Pakistan's economy in 2007 faced many challenges like trade, current account and budget deficits, unprecedented increase in oil prices in international market, electricity, wheat and cotton crisis, high inflation and political situation of the country. Oil prices were around 60 dollar a barrel at the start of the year but today it is again touching 100 dollar a barrel. Trade deficit is continuously increasing; government announced to form a new policy for textile sector but couldn't finalize that in 2007. Federal Bureau of Revenue tried its best to meet its tax collection targets 2007 but looks practically difficult for 2008. It is difficult to comment on over all economic performance of Pakistan in 2007 because first quarter was calm, second quarter was somewhat disturbing but affected less on economic front but third and fourth quarter proved to be disastrous. Pakistan is going through a political turmoil, needless to say, which has badly affected economy. Pakistan's economy has faced various high profile issues in 2007 which one way or another hampered the progress of the economy. Few of these are as follows;

Food inflation - High rate of food inflation is the luckiest issue where Musharaff and his backed politicians and economists confessed and - surprisingly - accepted its uncontrollability. Food inflation rate was the highest in the month of Ramazan which was even higher in last five years. Since school days we have been reading that Pakistan has agriculture based economy yet people had to buy tomatoes at Rs140 per kilo. The government had the advantage of a bumper wheat crop of 22.5 million tones in 2007. Although the move to export a part of the surplus to India was shot down, still the government could not hold down the prices because of excessive hoarding and profiteering. The food inflation in Pakistan is now admitted to be higher than it is in other South Asian countries. Food inflation is in double digits for the last several months. During the July-Sept period of 2007-08, average inflation stood at 7% as compared to 8.4% last year. Core inflation was 5.3% as compared to 6.6% and non-food inflation averaged 4.9% as against an average of 7.3% in the same period last fiscal year. According to the reports, food inflation increased slightly to 10% in the first quarter (July-Sept) of the current fiscal year as against 9.9% in the same period last year whereas it was 12.5% in November. A finance ministry report said the highest ever increase in food inflation in any month of the fiscal year 2007-08 was due to an extraordinary surge in demand, particularly for fruit, vegetables, milk, meat, poultry and cooking oil during Ramazan. A sharp rise was also witnessed in wheat and flour prices, driven by extra-market forces. Although, the prices of wheat and flour declined lately, their contribution to inflation was already realized. Food inflation emerged as a major source of concern for the policy-makers in emerging Asia, including Pakistan. While major sources of inflation can be external there are internal factors too which can aggravate the inflation.

Gwadar deep-sea port Gwadar deep-sea port, Pakistan's third modern port and Balochistan's first was become operational in March 2007. The port will serve as a strategic storage, transit facility and a regional hub for major trade activities, along some of the busiest sea-lanes in the region. The operation and management of the port has been awarded through bid to the Singapore Port Authority (SPA) under a 40-year agreement between the Gwadar Port Authority (GPA) and the SPA whereas operators of the port i.e. Port of Singapore has been exempted from income tax for 40 years. It is said that SPA will invest US$550 million in next five years. The construction of this port is undoubtedly one of the great achievements of 2007. The port will not only promote trade and transport with Gulf States, but will also provide tans-shipment of containerized cargo, unlock the development potential of hinterland and will become a regional hub for major trade and commercial activities. After this development, all banks are opening their branches in the city; few five star hotels are under construction while many other industrial and commercial activities are also underway. Free economic zones would be set up near the port that would help harness vast potential in natural resources of the area. It is said that this port would lead to the development of heavy and large-scale industries, petrochemicals and manufacturing sector. Pakistan is strategically located and this seaport would increase this importance and make the access to the Central Asian States more convenient. It is estimated that almost 50 million ton cargo would go through this port in next 10-15 years. Gwadar Port is expected to generate billions of dollars in revenue and create two million jobs.

Wheat Crisis - Due to shortage of wheat, Pakistan has imported one million tons of wheat from Russia at an estimated cost of US $510 million to meet the domestic demand. The worst part of the story is that this import could be avoidable. It is because of the wrong policies regarding the support price of wheat and cultivation, production and management of the crop. With every day passing by, wheat crisis in Pakistan is worsening instead of improving. The government; because of its polices is caught up in a situation that can best be identified as being caught between the devil and the deep sea . The government goes for import of one million tons of wheat at a high price, pay a high freight and then arrange for its local distribution. After adding the freight bill and local charges, the consumers are paying much higher price than what they would have been paying otherwise. This high cost of import of wheat and subsidy by government would push up the expenditure budget and further enlarge budget deficit. The price of wheat, which is the main diet of all and sundry and largest grain crop of the country, is increasing day by day and nobody has a clue as to when it is going to stabilize. When the issue first emerged in second half of 2007, both Federal and Punjab (being the biggest wheat grower) governments started accusing each other for this crisis. The problem seems to have originated from the zeal of government authorities to propagate their achievements that as always were not in conformity with the reality. Though the estimates were stated to be provisional, everybody was made to believe that the wheat crop during 2006-07 (to be largely consumed in 2007-08) was exceptionally good and would be more than sufficient for the consumption requirements of the country. The crop was reported to have been cultivated on an area of 8494 thousand hectares, showing 1.0% increase over last year and 0.4% increase over the target. The size of the wheat crop was provisionally estimated at 23.52 million tons - highest wheat production in the country's history, which was higher by 10.5% than last year and 4.5% higher than the target. Higher production, the government reasoned, was due to higher availability of certified seed and fertilizers, improvement in water availability, greater disbursement of agricultural credit and the release of three new high yielding wheat varieties. The market, however, is generally wiser than the public officials and senses a crisis much earlier. In the wake of unanticipated continued surge in flour prices, the government agencies started to have second thoughts about the size of wheat crop. According to revised estimates reportedly presented by the Trading Corporation of Pakistan (TCP) to then Prime Minister, wheat output was actually 22.2 million tons, much lower than the original government estimate of 23.52 million tons. After accounting for 21.5 million tons of flour consumption and allowing for two million tons for local feed (cattle and poultry), the wheat deficit was expected in the vicinity of 1.3 million tons. The magnitude of overall wheat shortage was much higher due to the fact that 0.5 million tons of wheat was exported through legal means while 1.5 million tons was thought to have been smuggled out of the country. The belated decision of the government to import one million tons of wheat was a sincere effort to resolve the crisis but it was a partial solution but not complete remedy. Many economists believe that wheat production estimates were increased in the beginning to 23.5 million tons in order to substantiate the projection of 7% GDP growth target for the year ending June 30, 2007. If the difference between the original estimates and TCP's estimates is taken into account, the growth rate would tumble down substantially. Another very serious dimension of the problem is that Pakistan exported half a million tons of wheat at around US$220 per ton earlier this year while it would be compelled to import one million tons at above US$5000 per ton. The loss from this flawed policy approach, whether intentional or unintentional, is obviously quite huge.

Oil Prices - Skyrocketing crude oil prices in the global market that touched an all-time high of US$100 per barrel in the New York market in 2007 due to rising US-Iran tension, pose a great concern to the economy of oil-dependent countries like Pakistan in near future. As Pakistan's economy is highly dependent on furnace oil thus the direction of its economy highly depends on the movement of oil prices whether they go up or down. If oil prices move up persistently, then obviously it will have a negative impact on the country's progress. Crude oil has always been one of Pakistan's major imports. During the first two months of the current fiscal year, the import bill for crude oil by 6.53% to reach US$1.344 billion on a year-on-year basis but analysts believe that it will increase by 20-22% further if the current high oil price scenario continues. Economists predict that if the government had to increase prices of petroleum products i.e. high-speed diesel and motor sprit (MS) or gasoline/petrol in the retail market, it would also result in high inflationary pressures. Although petrol has a higher weight age of 0.98% than diesel's 0.2% in general CPI, the actual impact on the economy would come from increasing the prices of diesel, as majority of the transportation (public and cargo both) depends on diesel. This is also evident from the consumption of 1.15 million tons of gasoline /petrol against 7.3 million tons of diesel. Government of Pakistan subsidizes petrol prices and has not yet transferred oil price hike impact to general public. The core reason for not transferring impact to general public is not the welfare of people but due to the upcoming general election. One can find various news items in newspaper like Business Recorder of December 26th, where Dr. Salman Shah quite reasonably advocating increasing oil prices but even Caretaker government doesn't want to create any embracement for its predecessors even though previous government has nothing to do with the increase of oil price internationally. Presently, political environment is fully charged and any such decision can give opportunity to the anti-Musharaff politicians to exploit the situation without realizing the ground realities. Impact of oil price affects almost every area, from cost of electricity generation to the cost of textile products; from consumer products to transportation; from agricultural products to education etc- The government's policy of not passing this hike to the consumers is pressurizing its fiscal abilities. This might derail all macroeconomic indicators. If the government does not pass on inflationary pressures to the consumer, then the current deficit account will be widen further, interest rates will jump up and the government will face budget deficit at the end of the fiscal year.

Political Situation - 2007 saw lot of political troubles in Pakistan entirely because of few preemptive measures. It started back on March 9th when President Musharaff dismissed Chief Justice of Pakistan and sent reference against him in Supreme Judicial Council. Without going into details of the "reference" and "other related issues", this reference brought restoration of judiciary movement by the lawyers and civil society. Despite all political uncertainty, stock market kept on moving upward which many felt artificial while few believed it to be continuity of good governess and economic policies. Chief Justice was restored unanimously by full court of Supreme Court of Pakistan on July 20th and thereafter started another political phase which ended on November 3rd. Again, without going into niceties of the motive of the imposition of emergency plus, this step and thereafter dissolution of assemblies created immense political unrest in Pakistan. Though Musharaff has announced general election on January 8, 2008, there seems little chance of peace in political front even after election. Few weeks back, there was an article in Washington Post on the worst case scenario for Pakistan's economic and political situation and according to that the worst case would be the assassination of either Benazir Bhutto or Nawaz Shariff and postponement of general election. Unfortunately, Benazir Bhutto has been assassinated in Rawalpindi on 27th December, which has literally jolted the very foundations of Pakistan. Because of current political uncertainty and unrest, foreign investor is reluctant in investing in Pakistan though one finds few millions of foreign direct investment which is definitely much lower than the inflow which Pakistan has witnessed till last year. Going forward, there is no chance of political stability and one should forget the elections. Analysis of country's economy is incomplete without discussing political situation. The core reason for the completion of full five years term by previous government and the political stability from late 1999 to 9th March 2007 and even till November 27th was President-in-uniform who forcefully made it possible otherwise it might not have been the case. But a single point that no one should forget while viewing Pakistan's political culture is that President has removed his uniform and two and half feet long stick is now in another person's hand and two times Prime Minister of Pakistan, Chairperson of Pakistan's largest political party and most prospective Prime Minister has been assassinated. Pakistan's political culture can't obviously digest this tragedy in near future thus will defiantly affect economy badly. Overall, 2007 was full of politically strife and turbulence which one way or another affected economy. Despite all the sky high claims by government officials, Pakistan is not going to meet its key economic targets. If political stability was one of the determinants of good economic performance in the past, then the reverse effect must also be considered.

Stock Exchange - Since General (RETIRED) Pervez Musharaff first suspended constitution in 1999, Karachi Stock Exchange (KSE) Index has increased more than 800% in dollar terms. On November 3, 2007, President General (RETIRED) Musharaff issued a Proclamation of Emergency suspending the country's Constitution again. The proclamation justified the suspension as necessary due to the country's rapidly deteriorating security circumstances. The imposition of an emergency came after months of political instability and worsening Islamist-related violence in Pakistan in 2007. Lawyers and civil society have been demonstrating against his decision and supporters of opposition parties also joined the demonstrations. Yet market boomed like never before, with the KSE-100 index touching new all-time highs after every few days. As a matter of fact this steadfast bullish trend had little to do with the fundamentals of the economy, the state of the nation or the strength of listed companies. Clearly, the confidence of the market is not based on macroeconomic performance, which has been well below par in the last 12 months, or the security situation in a country ranked in a recent study as the seventh most dangerous in the world. Nor is it is associated with the profits announced or dividends paid out by any particular company. There is an element of the speculation in bourse activity across the world. Pakistan's market is a place where speculation not only rules the market but it appears to be its sole occupation. Trade experts say that everyone was expecting that the market will react bearish after November 3rd. The market moved between a generally acceptable narrow band of 230 to 300 points decline until midday when panic button was finally pressed on 5TH November. The only reason for fall of index was the rumors of house arrest of Musharaff, which spread like wildfire and nervous investors started selling their shares on throw away prices. By the time dust settled, an estimated sum of above US $3 billion had been washed away from the market capitalization. The KSE-100 plummeted by 635 points or 5% by 2 p.m which eroded market capitalization by Rs186bn the biggest ever one-day fall -on what will always be remembered as black day in the history of the Pakistan's capital markets. This was the second jolt for KSE before this, KSE sharply fell in July when there were rumors of imposition of emergency but when the emergency was actually imposed interestingly market didn't react. After July event, industry experts didn't expect that KSE would react violently after the proclamation of emergency and the issuance of the Provisional Constitution Order by the Chief of the Army Staff. One of the reasons for this optimism was simple that the market had been discounting the emergency during October and already adjusted itself by shedding 800 points in that period. The bullish sentiment that had propelled the KSE-100 index to the all-time highest level of 15000 points in October was already diminished on speculation of the impending imposition of emergency. KSE is wisely being closed after Bhutto's assassination but how long one can save falling graph of index. Sooner or later, there would be another sharp decline.

Energy Crisis - 2007 is yet another year where Pakistan couldn't be able to add single megawatts in its electricity generation capacity though number of power projects (all based on imported furnace oil) have signed Implementation Agreements while few did financial closure whereas lot many investor are still planning and negotiating. It appears that they need an "ideal and out of this world plan" without realizing time value of money and need of the country. After realizing the situation and initiatives offered by government to investors, mostly illogical, it appears that few people are deliberately creating hurdles and making progress slow so as to get as much benefit as possible. One must decide the upper limit of benefit being offered. 2007 also proved to be another year where government couldn't enable it's to start construction of Kala Bag dam or any other big or even small dam. Saying all this doesn't mean that glass is half empty because finally in December 2007 government of Pakistan realized the importance of Nelum Jehlum Hydro Power Project. It is indeed a good news for people of Pakistan, though late. However it is better to late than never. Pakistan is fortunate enough to have abundant natural resources such as water and coal. Despite all the sky high claims, almost nil has been done in hydro and coal power sector in Pakistan this year as well. Obviously one doesn't always desire to criticize government; alas one finds it difficult to find happy moments in energy sector. Millions of Thar coal reserves kept idle this year also. Unfortunately Pakistan has wasted another year. Policy makers keep on discussing how, and from where to finance the development of coal mines. Interestingly these meetings and planning are going on since mid nineties yet policy makers couldn't finalize any "ideal" strategy and "perfect" policy. Since June this year no one has heard any demonstration against load shading mainly due to better weather. As soon as we approach to summer season, warm weather will flare up people, government will start meeting with stakeholders; setting targets and issuing ultimatums to investors. Until then have a tight sleep.

Cotton Crisis - Government exported cotton on the basis of its initial estimates and claims of having bumper crop this year which proved wrong later thus emerged as cotton crisis of 2007. Due to this human error, yield was cut by almost two million bales, loss of around Rs 60 billion and hit textile and edible oil industries badly. Industry experts believe that "official mismanagement" regarding supply of seed and pesticides, pest scouting and replacement of cotton crop with sugarcane in the cotton belt would further widen the trade deficit this year. It is estimated that timely action could reduce the figure by at least two million bales against a target of 14.14 million bales whereas the country may not go beyond 12.14 million bales whereas textile industry needs at least 15 million bales for its export and local requirements. Thus it was decided to fill the gap by importing three million bales. The loss does not stop here but also includes two more areas; edible oil supply and livestock fodder. The reduction in production would also reduce the supply of cotton-seed by at least 100,000 tons to the edible oil industry, while adding that another Rs10 billion to the import bill. Already, the import of edible oil has been costing around Rs45 billion to the national exchequer. It is said that produce was low this year because of the poor quality seed. All cotton farmers have been crying about the importance and non-availability of quality seed, but in vain. Though seed crisis is not new to farmers, but its effects have been magnified by other factors like pest-attack and non-availability and high prices of pesticides. Like any other area, this story is being repeated every year without learning any lesson.

Privatization - Despite all efforts, Pakistan State Oil (PSO) couldn't be privatized in 2007. The date of privatization of PSO kept on changing and finally was called off. This mega transaction of PSO was delayed after having challenged in the Supreme Court. Similarly, the second public offering and GDR of Kot Addu Power Company (Kapco) was in the doldrums because of what was termed "ineffective" Privatization Commission. Government tried its best but failed to issue GDR of National Bank of Pakistan and Habib Bank Limited, intended to privatize PSO, Small and Medium Enterprise (SME) Bank, Hazara Phosphate & Fertiliser Limited and Initial Public Offering (IPO) of Pakistan Steel Mills Corporation (PSMC). Two mega transactions - the Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company (SSGC) - were postponed by the government on the insistence of provincial and national assembly legislators who thought that they needed to offer gas connections to their voters before Jan 8 elections. It wouldn't be wrong to say that 2007 was a non-active year for privatization. Essentially government stopped the privatization process in the 3rd quarter of 2007 when Minister for Privatization was swapped with Minister for Law and Human Rights and further when President didn't appoint any caretaker Minister for Privatization.

Summing up, over all 2007 but especially second half of 2007 was full of political turbulence which going forward seems to protract. Like 2007, it is also expected that there would again be a wheat crisis in 2008 even worse than this year if existing polices remain operative. Every time ordinary people have to suffer from the mistaken policies of the government. Besides the drain on the foreign exchange reserves of the country, the price impact in the domestic market could also be substantial. Market analysts believe that market was due for a correction of 1,000 to 1,500 points whereas it is difficult for investors to ignore the current political situation because nobody knows how things will turn up. It is a big question mark hanging over the economy. As a consequence of being an election year, foreign inflows and privatization receipts are also expected to slow down. The turbulence that has hit the political arena in the last few months has significantly affected economy. It is evident that there are only a handful of people related to politics and commerce who advocate continuity of existing polices instead of realizing that good polices need no patronage and who ever comes in power should follow the same While having a flashback of economy in 2007, it is evident that independent judiciary and rule of law is the only solution for all these economic problems and above all the time has come when everyone ought to realize the fact that "PAKISTAN FIRST".