PERFORMANCE OF THE ECONOMY

It is for the first time that all the target, fixed for the fiscal year have already been met  

From SHAMIM AHMED RIZVI,
Islamabad

June 23  - 29, 2003 

The financial year 2002-2003 coming to a close by the end of this month has created a record in the financial history of Pakistan. It is for the first time that all the target, fixed for the fiscal year have already been met some even surpassed except the revenue collection by the CBR. Latest figures are not available but it is almost certain that the target of revenue collection of Rs.454 billion will also be met by June 30.

Export target of $10 billion was already crossed last week when President Musharraf personally witnessed the sailing of the container from Karachi port with a consignment touching the figure of 10.5 billion dollars. It is likely to cross $11 billion by June 30, GDP growth rate target of 4.5 per cent was surpassed during the first 10 month. It is estimated to cross 5.1 by the close of current fiscal. Forex exchange reserves has crossed the target of $10 billion about six week back. It is likely to end up at $11 billion. Remittances from expatriates have already surpassed the target by about a billion dollar. Inflation has been contained to slightly less then estimated.

The significant economic achievements of 2002-03 include a notable increase in growth of domestic output stemming from a sharp pick up in manufacturing and a welcome recovery in agriculture; a robust growth in per capita income: a healthy reduction in fiscal deficit, low inflation; notable increase in current balance of payments surplus; impressive growth in exports and imports; surge in workers' remittances; massive addition to the country's foreign exchange reserves; a decline in both external and domestic debt; a significant lowering of domestic interest rates; a noteworthy increase in national savings; a substantial rise in foreign direct investments; record rise of Karachi Stock Exchange (KSE) index and a distinct improvement in Pakistan's credit rating in international markets.

Real Gross Domestic Product (GDP) in the current fiscal year is now anticipated to increase by 5.1 per cent as against the target of 4.5 per cent and 3.4 per cent last year. This significant improvement in growth performance is attributable to impressive increase of output in manufacturing, agriculture and service sectors which grew by 7.7 per cent, 4.2 per cent and 5.3 per cent respectively. Pakistan's growth performance in 2002-03 exceeded the average growth of developing countries estimated at 4.6 per cent.

The major contribution to revival of growth in 2002-03 is attributable to agriculture, which on account of improvement in water availability is expected to witness a rise in output of 4.2 per cent after the disappointing growth of 2.64 per cent during 2001-2002. Major crops wheat, sugarcane, rice and maize registered an impressive recovery with 5.8 per cent growth against a contraction of two previous years on account of drought conditions in the country.

The latest estimate of wheat production is 19.235 million tonnes 6.5 per cent higher than last year's 18.227 million. Rice crop in the current fiscal year is estimated at 4.478 million tonnes as against 3.882 million tonnes last year. The estimate of sugarcane production is 53.049 million tonnes as against 48.042 million tonnes last year. The cotton crop, however, registered a decline of 3.8 per cent from 10.6 million bales to 10.3 million bales.

The most noteworthy economic development of the current fiscal years is substantial rise is the growth of manufacturing output at 7.7 per cent. Factors contributing to this notable performance are macroeconomic stability, decline is cost of capital, increase in exports and the availability of consumer financing at reasonable rates of interest.

More impressive than the Growth of Domestic Output (GDP) has been robust rise in Gross National Product (GNP), which escalated by 8.4 per cent in 2002-03 primarily on account of sharp increase in remittances. This was substantially higher than 5.3 per cent growth in GNP in 2001-03. Real per capita GNP grew by 6.3 per cent as against 3.1 per cent last year. In dollar terms, per capita income jumped from $419 to 492, an increase of 17.4 per cent.

A praiseworthy economic achievement of the present government is restraint on inflation, which remained subdued at 3.3 per cent in 2002-03 as against 3.4 per cent last year. Low inflation is attributable to better supply situation of essential commodities, prudent fiscal management, appreciation of exchange rate and sterlisation by the State Bank of Pakistan (SBP) of monetary impact of substantial inflow of foreign exchange.

Monetary policy during the current fiscal year was greatly influenced by developments in external accounts of the country. The State Bank had the difficult task of striking a balance between the two conflicting imperatives of how to prevent a sharp appreciation of our exchange rate (which would have an adverse impact on the competitiveness of our exports) and how to prevent an excessive increase in money supply with a view to ensuring price stability.

During July-March 2002-2003, the SBP, on account of net purchase of $4.4 billion from the market, injected Rs.257 billion, however, 70.4 per cent of this injection was sterilised through auctioning of government bonds. Despite this sterilisation on a massive scale, the over-all money supply during July-March 2003 grew by 12.5 per cent against the revised annual target of 16 per cent. Credit expansion through commercial banks registered an increase of 145 per cent.

The weighted average of lending rates declined from 14 per cent in June 2001 to 8.2 per cent in March 2003. The spread between lending and deposit rates also declined to 5.45 per cent from 7.8 per cent in June 2001.

Another important achievement of the present government is reduction in over-all fiscal deficit, which during 2002-03 is estimated at 4.6 per cent of GDP. Reduction in fiscal deficit has stemmed from improvements in revenue and curtailment in expenditure. Total revenue as a percentage of GDP increased from 17.2 in 2001-02 to 17.6 in 2002-03 and total expenditure declined from 22.8 per cent to 22.2 per cent.

The over-all performance of tax administration during the current fiscal year has been impressive. Central Board of Revenue (CBR) collected 15 per cent more revenue than last year.

The surplus in current account of the balance of payments (excluding official transfers) jumped to $2.562 million or 3.7 per cent of GDP during July-March 2002-03 from $1,014 million (1.7 per cent of GDP) during the same period last year. By the end of the current fiscal year the current account surplus, it is hoped, would be $3.0 billion or 4.3 per cent of GDP.

Exports grew by 20.8 per cent during July-April 2002-03 as against a decline of 1.8 per cent during the same period last year. Pakistan's export growth during the currency fiscal year out performed global export growth by a wide margin. Like exports, imports also increased by 22.5 per cent during July-April 2002-03 as against a decline of 6.9 per cent last year. Machinery imports grew by 35.6 per cent. The trade deficit stood at $1.250 million during July-April 2002-03. The fiscal year might end with a trade deficit of $1.5 billion.

Pakistan succeeded in attracting around $700 million FDI flows during July-April 2002-03 as compared to $308 million in the same period last year. It is expected that FDI flows may reach $800 million by the end of the current fiscal year.

The build up of foreign exchange reserves during the current fiscal year has been phenomenal. During July-May 2002-03, the country increased it's foreign exchange reserves by $4.279 billion. One may 30, 2003 the total foreign exchange reserves stood at $10.513 billion, of which SBP's reserves were $9.314 billion.

The massive build up of foreign exchange reserves has provided stability to the country's exchange rate, which appreciated by 4.0 per cent vis-a-vis US dollar since the beginning of the current fiscal year.

A heartening economic development in recent years has been decline in the dimensions of external debt and foreign exchange liabilities. This decline has amounted to $2.335 billion. Total external debt and foreign exchange liabilities at end March 2003 amounted to $35.6 billion. However, when adjusted for SBP's liquid reserves of $9.3 billion, the net external debt and foreign exchange liabilities amounted to $26.3billion at end March 2003.

The performance of Karachi Stock Exchange in the current fiscal year has been spectacular. On account of a marked improvement in the country's economic fundamental and promising prospects of growth with stability, KSE has been adjudged the best performing market in the calendar year 2002. KSE index rose from 1770 points in June 2002 to 3117 points on May 29, 2003 and points 3300 on June 18 which is an increase of 80 per cent. The aggregate market capitalisatiion also rose from Rs.407.6 billion to over Rs.700 billion during the same period, a growth of 70.5 percent.

Addressing a post budget seminar, the Finance Minister Shaukat Aziz rightly claimed that the wide-ranging fiscal reforms carried out during the last over three years have started paying dividends. He said that Pakistan is now moving towards fiscal consolidation on sustained basis. "Now our main objective is to ensure that the benefits of these improvement should trickle down to common man who is still hard pressed. The focus in the new budgets to create maximum jobs and reduce poverty, agriculture, housing and construction and SMEs sector have been identified as the priority areas in our development planning as these sectors are labour intensive and the maximum number of jobs can be created in these sectors. A major portion of the development budget in the next year budget will go to these sectors", the Finance Minister added.