Signs of improvement despite global economic slow down


Mar 31 - Apr 06, 2003



















Pakistan's economy has registered considerable improvement over the last three years. This is evident from: a comfortable balance of payments position, strong build up in foreign exchange reserves, stable exchange rate, surplus in current account, relatively low budget deficit, low inflation, declining interest rates and country's improved credit rating. The current fiscal year envisages consolidation of these gains and further build upon the strong foundation laid over the years.

There are grounds for optimism for the current fiscal year (2002-03) as world economy has started showing signs of recovery after the significant downturn in the late 2001, caused by the events of September 11 and the subsequent developments thereafter. In the wake of several adverse developments the optimism for global economic recovery largely dissipated during the later half of the year 2002. The performance of Pakistan's economy during the first half of the current fiscal year has remained encouraging and provides grounds for optimism for the remaining months of the fiscal year. However, due to the hike in international prices of crude oil and the ongoing war in Iraq, Pakistan's economy may once again come under pressure.


Pakistan's economy, mainly driven by agriculture, has suffered badly over the last couple of years on account of severe shortage of irrigation water. The travails of water shortage still continue, though the extent of shortage is relatively lesser this year. On the whole, the water situation in the current fiscal year appears better than last year but remains in short supply compared with the normal supplies. Thus, the relative improvement in water availability is likely to have positive impact on overall agricultural production this year. It is expected that sugarcane, rice and wheat crops would be higher but cotton crop may be lower than last year. The 2.6 percent growth target for agriculture is likely to exceed in the current fiscal year on account of significant improvement in major as well as minor crops.


The performance of large-scale manufacturing sector has been quite encouraging and offers grounds for optimism in achieving the target of 6.5 percent for the full year. The sub sectors showing impressive growth were sugar (13.6%), cotton yarn (6.9%), cotton cloth (7.5%), jute goods (27.7%), paper and paper board (17.4%), cement (17.8%), bicycles (15.8%), motor-tyres (10.0%), motor-tubes (11.0%), cars (42.0%), buses (92.3%), tractors (9.1%) and motor-cycles (38.3%). Iron and steel production was up by only 2.8 percent. The industries showing decline in production were cigarettes (-9.6%), fertilzser (-0.7%), jeeps (-22.2%), coke (-3.5%) and petroleum products (-0.9%).




Inflation, as measured by the changes in the consumer price index (CPI), stood at 3.6 per cent as against 3.2 percent in the comparable period of last year. Inflation has remained below the annual target of 4.0 per cent. The low level of inflation in the midst of substantial monetary expansion is the result of better supply situation of essential commodities, appreciating as well as stable exchange rate, and prudent fiscal management. Food inflation, though higher than last year, has remained subdued. Rise in the prices of wheat, wheat flour, rice, vegetable ghee, and cooking oil are responsible for relatively higher food inflation. The price of vegetable ghee and cooking oil reflect the rising world prices of edible oil and imposition of GST. Non-food inflation remained lower than last year mainly because of the lower price increases of POL products. It may be noted that the prices of POL products were adjusted upward on ten occasions and adjusted downward twice. Therefore, the cumulative effects did not add much to non-food price inflation. The CPI based inflation is expected to remain within the annual target of 4.0 per cent in view of strong rupee and continued sterilisation of monetary impact of massive inflow of foreign exchange.


Pakistan's stock markets have remained buoyant during the first half of the current fiscal year. The KSE-100 index witnessed a phenomenal growth, rising from 1770.1 points in June 2002 to an all time high of 2701.4 points at the close of the year 2002, registering an increase of 52.6 percent during this period. The aggregate market capitalisation went up by 46 per cent, rising from Rs 407.6 billion to Rs 588.4 billion. In terms of US dollar, the market capitalisation increased by 50.4 percent, rising from $ 6.78 billion to $ 10.2 billion. In terms of GDP, the aggregate market capitalisation jumped from 10.0 percent to 14.6 percent during the same period.

Yet another indicator of impressive performance of the Karachi Stock Exchange has been the extraordinary surge in monthly turnover of shares. The monthly turnover jumped from 2.018 billion in June 2002 to 6.728 billion in December 2002, registering an increase of 233.4 per cent. The daily turnover in December 2002 alone increased from 145.31 million to 689.32 million. Price Earning improved from 8.35 per cent to 13.43 per cent. As a result of the unprecedented boom in Karachi Stock Exchange during the calendar year 2002 it was declared as the best performing market in the world. With profitability in terms of US dollar, Pakistan has been the most profitable market in the region followed by Sri Lanka and India. All other markets of Asia Pacific region registered significant losses. The surge in Pakistan's equity markets during 2002 is the results of a significant turnaround in the economy in general and the external account in particular.


The overall performance of tax collection during the first six months of the current fiscal year has been quite encouraging. This is the first time in many years that the CBR has over performed and this performance was not achieved by holding refunds or over reporting the revenue figure. Tax collection sustained the momentum. Cumulative tax collection during the first half amounted to Rs 200.5 billion. Although the exceptional growth in tax receipts witnessed in first quarter weakened somewhat during the second quarter, collections grew by 14.4% over second quarter of previous year.

The analysis of taxes collected under various heads reveals interesting developments. While overall tax collection increased, the increase largely came from sales tax and customs duty. Direct taxes collection was Rs 61.7 billion. Sales tax collection at Rs 92.2 billion. Higher level of sales tax collection was due to improved level of economic activity in the country. The higher level of economic activity was also reflected by increased demand for imported goods, including raw materials for consumer and capital goods. The collection of central excise at Rs 19.8 billion was marginally lower. The decline in central excise collection was mainly on account of transfer of several major revenue spinners to custom duty. The collection of custom duty at Rs 27.7 billion registered an increase. This impressive growth was realised even when the maximum duty rate was slashed from 30 percent to 25 per cent, duty rates on over 2500 tariff lines were reduced, and Pakistani rupee was appreciated by 3.0 per cent.




The government has set the exports target at US$ 10.4 billion for the current fiscal year. Exports during the first six months of the current fiscal year grew by 16.6 per cent to US$ 5.2 billion. Exports of textile manufactures crossed US$ 3 billion. Within textile manufactures, exports of cotton cloth, knitwear, bedwear, and readymade garments were up in the range of 18 to 32 percent. It is important to note that exports of cotton cloth, knitwear, and bedwear also grew in quantity term in the range of 10.5 percent, cotton cloth (27.7%), knitwear (26%) and bedwear (28%). Exports of other manufactures registered a growth of 8 percent with engineering goods, chemical and pharmaceutical products, petroleum products and sports goods showing tremendous potential of exports. Exports of carpet & rugs and leather and leather manufactures continue to show a declining trend. Given the trends in exports during July-January 2002-03, the current year's target of $ 10.347 billion likely to be achieved. Primary commodities export grew by 16 per cent. Within primary commodities, export of rice increased by 7.2 percent and Pakistan was also able to export $ 24.7 million of raw cotton during the same period.


Imports are targeted at $ 11.1 billion for the current fiscal year or 7.4 percent higher than last year. Imports grew by 18.7 percent during the first half as compared to the corresponding period of last year. This growth was driven by higher imports of non-food and non-POL imports, with the machinery group having the biggest share. These developments suggest an appreciable increase in industrial activity in the country. The hike in the oil import bill was due to rising oil prices, as each of these categories witnessed a fall in their quantum of imports. Machinery group recorded an impressive 35% growth and share of machinery in total import rose to 22% during the first half. Food group imports registered a 30% rise mainly due to higher import of edible oil and pulses that was only partially offset by lower import of sugar.


During the second quarter the highlight of the sector development is remarkable growth in net credit. There was as supply push as banks had ample liquidity and investment in government securities had become less attractive. During the second quarter NCBs and foreign banks registered negative growth in deposit, mainly due to heavy withdrawals by PSEs in December 2002. Private and privatized banks managed to enhance their deposit base. The comparatively better performance of private banks reflects their higher return on deposits, increasing branch network as well as improved marketing efforts.


As such not much of an impact is anticipated on industries catering to the domestic market. Saying this, analysts fear some delays in implementation of BMR projects, mainly in the textile sector, the backbone of Pakistan's economy. The improved water availability is expected to help in achieving higher growth of agriculture sector.

With each passing day it seems that the war in Iraq will be much longer and complicated than the perception of the US administration. There is a concern, how badly remittance and exports will be affected? Many analysts believe that since remittances originate from many other countries there would not be any impact. However, exports may come under pressure due to a number of reasons that include hike in cost of production and freight charges, delay in confirmation of export orders and any interruption in ship movement passing through Suez Canal. There is also a growing concern that which countries will be the US target after Iraq.