The SBP report should only be read as an indicator of emerging trends


July 07 - 13, 2003




No doubt Pakistan's economy has graduated from revival phase to expansion era. It has managed to meet almost all the targets, including CBR revenue collection. CBR has rather collected more than the target, which most of the critics had termed unachievable. As the details for the achievements for the full year have started pouring in, review of third quarterly report of State Bank of Pakistan (SBP) may not be more than a ritual. Therefore, an appropriate approach would be to explore some of the key emerging trends.

The SBP report should only be read as an indicator of emerging trends. Performance of agriculture, large-scale manufacturing, banking, foreign trade show substantial growth. Growing demand for virtually all the products and services, at the back of improving per capita income, is expected to provide further impetus to the manufacturing sector. Higher domestic sales and exports have also improved capacity utilization of almost all the industries. A 25% reduction in excise duty on cement and cut in duties/taxes on other materials used in construction are expected to grossly accelerate the construction industry in the country. The boom in construction will lead to improved activities in more than 40 other industries.

There were apprehensions that the interest rates may go up in the longer term. However, the cut off yields on T-Bills and Pakistan Investment Bonds hint towards further reduction in average interest rates. The lower return of banks deposits (virtually being negative) and further reduction of returns on National Savings Schemes is expected to increase the flow of funds to equities market. Prices of shares of almost all the blue chip companies have gone up considerably. The prices have hiked mainly due to the demand and supply gap. Not only that but the prices of second and third tier scrips have also gone up to unrealistic levels.



The GoP has announced to divest more shares of Sui Southern Gas Company (SSGC), National Bank of Pakistan (NBP) and Pakistan International Airline (PIA). The GoP also intends to enlist Oil and Gas Development Company (OGDC) on local stock exchanges and divest part of its holding in the company. The latest news is that Pakistan Steel will also be listed at the stock exchanges and 10% of its shares will be offered to general public. While some of the analysts believe that the GoP's divestment plan may lead to a decline in the KSE-100 index. However, others believe that the indicated percentages are too small to meet the market appetite.

Despite influx of billions of dollars into the country, through unilateral remittances, the rate of inflation has remained around 3.5%. Many economists had expressed their apprehensions that influx of dollars in such colossal quantity would push the inflation rate up, but this did not happen. The reason being that bulk of these funds has gone into real estate and equities markets. Though, a part of these funds are being utilized for consumption, it has only improved the production and productivity. No shortage of any product has been observed as yet. Therefore, if the demand has not surpassed the supply the probability of rate of inflation going up is still low.

The key factor contributing to lower rate of inflation is the stability of exchange rate. The rupee dollar parity has helped in containing the cost-pushed inflation low. Many analysts still say that the parity may have gone to as low as Rs 45 to a dollar had the SBP not been following the sterilization policy. The hike in crude oil prices due to attack on Iraq was a temporary phenomenon. Oil prices have now stabilized, rather showing a downward trend. The proof of this saying is the hike and fall of polyester staple prices in the domestic market.

There are substantial evidences that surplus liquidity is flowing to the equities market. The indicator is the prevailing Badla rate. It is estimated that at present Badla investment hovers around Rs 12.5 billion. It is on record that when Badla investment touched this level in the past the average Badla rate crossed 40% level. However, the rate is around 10% at present.

The recent T-Bills and PIBs auctions clearly established the fact that the banks are suffering from 'surplus liquidity syndrome'. Under the prevailing scenario the banks are forced to extend more and more funds to agriculture sector and undertake aggressive consumer financing. Auto financing has been on constant rise and rates are coming down. After achieving higher capacity utilization and threat of competition from the low cost cars of Chinese origin local assemblers have reduced prices of various models. Increase in supply and reduction in prices, coupled with easy financing of cars, would further improve the performance of large-scale manufacturing sector.

Last but not the least, the already enhanced textile quota by the European Union and signing of Trade and Investment Framework Agreement (TIFA) with the US has the potential to further accelerate economic activities in the country. However, the benefits can only be achieved if political stability is ensured and the elected government also abstains from introducing popular policies to attain mileage.