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
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
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
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.