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 year.

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 previous year.

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.

OUTLOOK

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 price realization.

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 import bill.

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.