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SBP 3rd Quarter Report
The State of Pakistan's economy

Despite drought like situation most of the targets seem achievable

June 11 -17, 2001

The continuing drought and water shortage have taken a heavy toll on Pakistan's economy. The water shortage has impaired the country's ability to generate hydel power causing pressure on forex reserves. Pakistan's cotton crop has not been impaired and large scale manufacturing has recorded strong growth. However, performance of external sector has been lackluster. The good standing with International Financial Institutions (IFIs) has not yet helped in reviving widespread investment nor accelerating the pace of economic activity to meet the expectations of public at large. It is also evident that unless Pakistan receives medium-term assistance on soft terms, the external payment position will remain under severe strain. The balancing act between keeping the debt burden under control and achieving a healthy balance of payments remains the biggest challenge for the economic managers.

Developments in the third quarter of 2000-2001 were adversely affected by the water shortage in the country. Since agriculture has strong spillover on rest of the economy, the downward revision in the size of Pakistan's major crops will not only tone down economic growth projections, but also require urgent actions to reduce the degree of vulnerability of the agriculture sector to weather conditions. The adverse impact of the drought on Pakistan's major crops may result in negative 5.4 per cent growth this year, compared to a target of 3.2 per cent set at the beginning of the financial year.

As against this, the performance of the manufacturing sector has been much better during the first three quarters of the current financial year. Large-scale manufacturing was up by nearly 9 per cent compared to 3.5 per cent for the corresponding period last year. The refining of petroleum products showed strong growth. Production of automobiles and chemicals has also shown rising growth rate. Overall, low growth in agriculture has been compensated by strong growth in manufacturing.

Tax collection in the first three quarters is up nearly 15 per cent over last year. Even with this impressive growth in revenue, the IMF's quarterly targets for end-December and March were not met. As a consequence, the end June 2001 target stands revised at Rs 417.3 billion, from an original target of Rs 430.2 billion. It should be noted that ambitious targets set at the onset of the fiscal year, paints a bleaker picture than is actually the case, which undermines the perceived improvement in revenue collection.

The Karachi Stock Exchange (KSE) displayed bearish sentiments in the third quarter of this financial year. As regard the dispute between KSE and Securities and Exchange Commission of Pakistan (SECP) that surfaced in end-December, a mutually satisfactory resolution has been achieved. In spite of this, the market's resentment did not disappear. In early May this year, issues relating to capital market reforms advocated by the SECP became contentious. The issuing of TFCs by leasing companies continued in last quarter. Although, only one company issued TFCs during third quarter, out of 18 new issues since 1996, six have been issued this year. The growing interest of issuing long-term bonds by leasing companies exhibits the increasing popularity of leasing consumer durables.

On the international trade front, the US$ 1.32 billion trade deficit during nine months, was marginally above the deficit in the corresponding period last year. The main reasons for this were: 1) weak international prices for Pakistan's main textile exports, 2) higher imports of machinery on account of textile sector's BMR drive and 3) the ballooning oil bill exceeding US$ 2.5 billion in nine months alone. For the second year in a row, growth in export revenues came on the back of substantial quantitative increases.

Driven by higher than anticipated non-tax revenues and stricter expenditure controls, the budget deficit was close to the IMF target for the first half of 2000-2001. The realized deficit in first half and tax collection in third quarter provide sufficient evidence that the GoP will be able to meet its deficit target of 5.3 per cent of GDP. Additionally, as gas prices have been increased, higher surcharge collection will compensate for any shortfalls in tax collection. However, quantitative targets for total expenditure outlay and revenues may differ from those envisaged in the Federal Budget.

Despite an easing of market liquidity, T-Bill rates did not fall as commercial banks were still hesitant about placing funds in government securities. Similarly, despite a fall in international interest rates spearheaded by the US Federal Reserve Bank, SBP could not ease its monetary policy in third quarter due to two reasons: 1) domestic interest rates are not anchored to international markets, and more importantly 2) pressure on rupee started to build in mid-February. With on-going depreciation of rupee, it was unwise to signal a relaxation in monetary policy for the fear that this could put additional buying pressure of dollar.