The national economy has been emerging out of the
recessionary straits that it has been mired for about three quarters
of the last decade. Indications coming along suggest higher than
targeted growth in GDP, particularly from the manufacturing sector.
State Bank of Pakistan, which released its six-monthly report on March
21, narrated a promising outlook of the overall state of country's
economy through two lethals but integral components. Inflation and
interest rates surging on equally faster pace, which could mar the
current pace of growth in coming years.
The bank attributed the sharp improvement in the
fortunes of the agriculture sector as the most significant development
for the domestic economy for the first six months of the fiscal
2004-05. The revised number for the cotton crop placed the Kharif for
the year while agriculture growth considerably higher than earlier
projected. Timely rains have erased the looming threat of a
below-target wheat crop. It seems quite likely that agriculture growth
during the current fiscal would exceed the 4.0 percent target as
compared to negative growth of past year.
On the other side, industrial production recorded
yet another robust growth of 15.4 percent during the first half of the
year that was significantly higher than 9.8 percent annual growth
rate. LSM continued to dominate the industrial growth profile,
contributing approximately two-third of the overall industrial growth
during the period and recording growth rate of 16.1 percent on
The bank appears to be complacent over the LSM and
industrial growth pace but it has pointed out that the growth momentum
seems to have weakened somewhat.
Some concerns need to be addressed as some
independent economists suggest support for policy makers with measures
to overcome weaknesses in the sector and to consolidate the growth
The two fastest growing sectors — automobiles and
electronics — owe their growth largely to lease financing offered by
commercial banks. Their products classy as 'consumer durable' have a
service life of a few to several years, at least. Given that it is the
upper and upper middle income sector on the population that can afford
to access bank financing and constitute a numerically small section of
the population, the growth of these sectors cannot be expected to be
sustained in the domestic market.
The bank rightly pinned the concerns with the
inflationary pressure in the domestic economy, which remains a crucial
area and worrisome development for the planners. On the face of it,
they appear to have peaked for the time being during the first half of
the fiscal year, as the inflation measured by all the three price
indices moved down in unison after July 2004. Despite the evident of
weakness in food inflation, the core inflation rose. The broader-based
and benchmark consumer price index, while depicting a small
deceleration, continues to hover stubbornly in the 8 to 9 percent
ranges, however, at the year-end it feared to range in the same range.
Analysis of inflation factors show that inflation
might leave the bank forecast behind and it may exceed to 10 percent
as contributing factors offer rather crucial picture by the year-end.
Money supplies, which contributed 42 percent to the inflationary in
2004, may still make the largest source of inflation.
Bumper wheat and cotton crops resulted in
exchanging hands at Rs75 billion amidst the countrymen as President
Pervez Musharraf told journalist that featured his newly launched
Moreover, the credit takeoff by the industries has
already set a record level of Rs322.5 billion during the first half of
the current fiscal year despite the increasing benchmark interest
rates, which now reach, to 5.2 percent from mere 2.2 percent in the
The bank has vowed to tighten the monetary policy
wherein M2 growth is envisaged at 14.5 percent, roughly in line with
the then-expected growth in nominal GDP. While there now appears to be
broad market consensus on the desirability of a tighter monetary
posture in order to contain inflationary pressures, the pace and the
extent of the tightening need is still unclear.
The second crucial contributor to the inflation is
price index of imports, which accounted for 25.6 percent in the
previous year. With the mind-boggling crude oil prices in
international market and the import cost, it will be beyond planners'
control to check negative implications. The increasing demand of goods
would also move up unabated as purchasing power of the people has
shown resilience giving the widespread and liberal leasing schemes.
BALANCE OF PAYMENT
The external account recorded a large deficit for
the second successive quarters during the fiscal 2005. As a result,
the aggregator deficit reached 1.2 billion dollars in the first six
months of the year, which was in sharp contrast to the surplus of
around 1.0 billion dollars recorded in the corresponding period of the
previous year. Almost all of the deterioration emerges from large 2.1
billion dollars jump in the country's trade deficit from a mere 0.2
billion dollars in the first half of the previous fiscal to 2.3
billion dollars in this year's first half.
A continued rise in machinery and raw material
imports, together with a slight fall in textile exports in the second
quarter of the current fiscal led to a considerable widening of the
trade deficit. This increase in the deficit was recorded despite 648
million downward revisions in petroleum product imports for the months
of October and November, 2004.
Another alarming area was the stock of total debt
and liabilities that witnessed an increase of 4.1 percent during the
period under review. This was due mainly to fresh flows from
multilateral institutions and increase in the value of Paris Club and
multilateral debt stock on account of the appreciation yen and euro
vis-a-vis US dollar.
The central bank, however, did not touch the
pinching issue of long prevailing poverty in the country, although it
referred to a Labour Force Survey (LFS) for the year 2004. According
to LFS the unemployment rate has improved from 8.3 percent in fiscal
year 2002 to 7.7 percent in 2004. Thus 41.8 million persons were
employed in 2003.04 compared to 38.9 million in 2001-02. In other
words, the economy added 2.9 million new jobs during this two-year
A disagreement on budgetary targets popped up the
next day after the State Bank of Pakistan released its second
quarterly report. The Ministry of Finance also released its own
estimates, the very next day, which figured a mismatch between the
forecasts of major economic indicators.
State Bank of Pakistan forecast the economy to grow
by up to 7.8 percent and inflation is likely to range from 8.2 to 8.8
percent.. However, Finance Division's report says that GDP growth is
likely to be around 7 percent by June 30, 2005 and inflation would
hover around 7 percent.
The government had projected 6.4 percent growth
target in 2004-05 and revised upwards to 7.1 percent earlier this
year, says the report of State Bank of Pakistan, while the Finance
Division in its report said that GDP was target to grow by 6.6 percent
in 2004-05 budget. The bank stated that according to a revised
estimate, cotton production will exceed 14 million bales compared to
an earlier estimate of 11.6 million bales.. The Finance Division
report says in clear words that the production of cotton would stand
at 14.6 million bales.
The report of Finance Division says that the
overall fiscal deficit that averaged nearly 7 percent of the GDP in
the 1990s has declined to 2.4 percent in 2003-04.
On account of some shortfall in petroleum
surcharges on revenue side and 25 percent increase in public sector
development program on expenditure, the overall fiscal deficit is
targeted at Rs199 billion or 3.2 percent of GDP of the current year.
The report says that revenue collection by CBR is targeted at Rs580
billion for the fiscal 2004-05. The CBR is, however, making efforts to
collect Rs590 billion, Rs10 billion more than the target for the year.
The report of Finance Division said that a sharp
pick up in commodity prices and unprecedented rise in international
prices of oil has led to the re-emergence of inflationary pressures
across the globe. China is witnessing highest inflation during the
last seven years. Similarly, Taiwan, Thailand and India are also
witnessing highest inflation in six, five and three years
respectively. After living in a low inflationary environment for the
last five years, Pakistan is currently witnessing higher inflation for
variety of reasons. The current inflationary trend in Pakistan is the
outcome of pressures emanating from demand and supply side.
About exports, the report says that Pakistan's
exports are up by 10.5 percent in first 6 months (July December) of
the current fiscal. Pakistan's imports are up by 34.8 percent in the
first six months of the fiscal from $6.604 million to $8.905 million
Remittances grew 5.3 percent to $1.94 billion,
compared with $1.84 billion during the same period in the last fiscal
year. The foreign exchange reserves held by State Bank of Pakistan
stood at $12.751 billion on end-January 2005, showing an increase of
6.2 percent over the level of $12.06 billion as on January 2004.