State Bank report


Mar 28 - Apr 03, 2005



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 year-on-year basis.

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 momentum.

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 website.

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 past year.

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.




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 period.


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.