One may only feel sorry for the cynics who were
disappointed after reading the Annual Report of State Bank of Pakistan
(SBP). All the economic indicators proved the resilience of Pakistan's
economy despite the aftermath of September 11, 2001 incident and
subsequent events. Saying this much one should not be a victim of
complacency. A lot more has to be done to provide further impetus to
achieve growth of economy in double digits.
A factor which has been responsible for persistent
erosion of Pakistan's sovereign rating in the past, very low level of
foreign exchange reserves, now portrays a very different picture.
Pakistan's foreign exchange reserves now exceed US$ 8.5 billion and
there is forecast that these reserves will cross US$ 9 billion by the
end of current financial year. This is not deceptive. Growing home
remittances, narrowing trade deficit gap and declining oil prices are
supporting building up of foreign exchange reserves. A factor which
must be highlighted is the level of home remittances achieved during
the first quarter of this financial year. During this quarter the
amount received surpassed the level achieved during previous financial
The other economic indicators proving the
resilience of economy were: 1)
a 3.6% GDP growth rate, 2)
a 1.4% growth of agriculture sector, 3)
a 4.4% growth of manufacturing sector and 4)
a 5.1% growth of services sector. Another indicator of investors'
confidence, particularly foreign investors, was the increase in
foreign direct investment, going up from US$ 322 million to US$ 485
million. Perhaps all these indicators were not sufficient for the
cynics who preferred to look at negative factors.
During the year 2001-2002 capital market exhibited
performance compared to the previous year. Although the country went
through various economic and non-economic shocks, both the equities
and fixed income securities markets remained buoyant. The KSE-100
index gained 29.5% in sharp contrast to a over 10% fall during the
The negative factors most talked about were: 1)
budget deficit swelling to 6.6% of GDP,
2) inability to meet the export target and 3)
revenue collection also below the target. However, the critics ignored
the ground realities. Budget deficit swelled due to: 1)
spending of Rs 17.4 billion on defence, 2)
an amount of Rs 22 billion paid as income tax refund, 3)
an investment of Rs 30 billion in KESC and 4)
payment of Rs 5 billion to WAPDA.
The strength of banking sector was visible from a
growth of 14% in deposits and a reduction in non-performing loans,
also establishing the better performance of the borrowers from
commercial banks. A major factor contributing to increase in deposits
was also the higher receipt of remittances.
Even the optimistic analysts are worried about the
narrow base of tax payers and higher percentage of tax being dependent
on imports. Saying this much a point of satisfaction is that
collection of General Sales Tax has improved during the first quarter
of current financial year.
The recovery in textile is very encouraging, given
its substantial weight in large scale manufacturing. Production of
textile industry recorded a growth of 4.1% during the year under
review against 2.8% in the preceding year. The average working
capacity of the mills increased by over 8%. The rising domestic
consumption of cotton yarn indicated higher value addition. The sector
also managed to increase exports in dollar terms, but average unit
price realization went down.
With the greater access to the European Union and
the US, textile exports are expected to improve further. However,
unless the local producers give more attention to value-addition and
quality it will be difficult to decelerate declining trend in unit
The two factors must also be kept in mind. First,
that the country may witness substantial outflow of capital due to
Engro Chemical Pakistan's decision to establish a 850,000 tonnes urea
manufacturing plant in Oman. Second, with this decision the import
bill of urea is expected to increase and become a regular part of
Though the country has been able to contain trade
deficit, movement of oil prices in the future may put some adverse
impact. Saying this much, it is also expected that with the
announcement of new Power Policy, shift towards use of domestically
produced fuel and buoyancy of capital market, the quantum of FDI
during 2002-2003 may increase.
In the past investors were uncomfortable due to
changing GoP policies. As the newly elected government is getting
ready to take over control from the existing managers, it is suggested
that economic policies should continue. It will be still better if the
next government comes out with improvised policies.