ECONOMY 2003: A SEQUENTIAL GLIMPSE
Pakistan was amongst the few countries that succeeded in attracting increased FDI from 2001 to 2003
By SYED ALI HASAN MUKHTAR
Apr 05 - 11, 2004
Year 2003 was attributed with broad-based economic developments, as a complete buoyancy was observed in both domestic as well as external sector of the economy. With the existence of strong macroeconomic fundamentals linked with the previous year diplomatic achievements, sustained external account improvements, correlation of high industrial outputs with that of strong surge in aggregate demand as a result of increased consumer spending resulted in setting various remarkable highs and lows. Among these were the industrial growth that rose to a 7-year high, the fiscal deficit that plunged to a 27-year low, exports that augmented to a record US$ 11.1 billion, the current account surplus that jumped to an all-time high of US$ 4.2 billion (5.9 percent of GDP) and remittances that accelerated to a new high of US$ 4.2 billion.
The outcomes of these achievements were the record dip in inflation, up-urge in national savings by 18.5 percent, an increase in total investment to 16.2 percent, the achievement of the tax collection target, historic lows in SBP interest rates and alike raising real GDP to grow at 5.1 percent, and moving the country closer to achieving the target of long-term growth of 6 percent by FY06.
These sustainable achievements also helped Pakistan improving its economic ranking to new alleviated bands according to various international agencies including the Standard and Poors and the Merrill Lynch. Most of the credentials are derived directly or indirectly from structural elements, the continuity of which will be the most crucial for such events to happen again in the future.
INVESTMENT CLIMATE: Share prices continued their rising trend in FY03 and the KSE-100 index broke its previous all-time high touching the peak of 4,604 and market capitalization rose to Rs 1,016 billion by 12 September 2003 qualifying Pakistan as one of the best performing equity markets in the world by yielding the highest capital gains. The market capitalization of the listed stocks rose by an impressive 83.0 percent during FY03. As a result, the market capitalization as a percentage of GDP rose for a second successive year, from 11.2 percent by end-June 2002 to 18.6 percent by end-June 2003.
There were 21 new TFC issues worth over Rs 10.4 billion in FY03 as against 17 issues totaling Rs 9.5 billion in FY02. However, corporate debt issues remained below the expectation mainly due to cheap availability of finance from the commercial banks. The ratio of total investments to GNP rose to 14.8 percent. Main component of which was the private sector investment, which grew by a healthy 14.4 percent during the year. Among the specific sectors, strongest investment was observed in the telecom sector, which showed impressive results of 30% growth together with the transportation sector.
Interestingly, according to World Investment Report 2003, Pakistan was amongst the few countries that succeeded in attracting increased FDI from 2001 to 2003. Pakistan attracted Foreign Direct Investment to the tune of US$798 million in 2003. However, in absolute terms, Pakistan FDI stands at mere 0.72 percent of the total FDI to Asia-Pacific region during the period.
FOREIGN DEBT: Successive governments during the 1980s and 1990s demonstrated a lack of fiscal responsibility. As a result, outstanding public debt increased from 66 percent of GDP in 1980 to 110 percent of GDP by end of FY2001, reflecting mostly the impact of the sharp depreciation of the currency on the Rupee value of external debt. Since 1999, the Government has prepared and implemented a comprehensive debt reduction strategy by undertaking fiscal adjustment and paying off expensive outstanding liabilities. Due to which Pakistan's debt contour witnessed a significant improvement for the second successive year. With a sharp reduction in the cost of debt, lengthening of the maturity profile, reduced dependence on external debt, as well as a sharp fall in the debt to GDP ratio, the stock of public debt rose by only 1.0 percent (Rs 38.6 billion) by end-June 2003, pushing down the debt to GDP ratio from 104.3 percent in FY02 to 95.1 percent in FY03.
As this sentiment got its beginning in the previous years, it continued to dilate in the FY03 as well. As part of its debt reduction strategy, the government is continuing with its policy of reducing the fiscal deficit and it plans to make a before-time repayment during FY2004 of US$1 billion of relatively high interest debt owed to the World Bank and the Asian Development Bank. The most noteworthy development seen during the period was the reduction of Rs 77.9 billion in external debt stock during FY03. Broadly, it is based on various factors like: the write-off of bilateral debt totaling approximately US$ 1.0 billion by the US, the retirement of commercial loans, the repayment of first installment of Euro bonds and the prepayment of a portion of private commercial debt. Therefore, the quality of debt reduction in FY03 is significantly better than FY02 which was only due to the appreciation of rupee by 6.7 percent that offset a US$ 1.2 billion rise in the debt stock during the period.
PRIVATIZATION AND RESTRUCTURING: The process of privatization continued throughout the year. The Privatization Commission (PC) continued to make increasing use of the stock market for selling government shares in various public sector enterprises, which has the added advantage of deepening and strengthening the stock market, as well as broadening the ownership of corporate shares. Privatization Commission offered 2.5 percent shares (107.5 million shares) of the Oil and Gas Development Corporation (OGDC) at a premium price of Rs 32 per share. The offer had a green shoe option for the sale of another 2.5 percent shares. With a total subscription of Rs 24.0 billion, the issue was oversubscribed to the tune of seven times. Previously, PC had raised Rs 604 million from the public offer of 13.1 million shares of the National Bank of Pakistan, for which the subscription was twice the offered amount.
Privatization proceedings for a number of other PSEs, namely Pakistan State Oil (PSO), KESC, Faisalabad Electric Supply Company, Jamshoro Power Company, and Habib Bank Limited, are at different stages of implementation. In case of HBL, its data Room has been opened for six pre-qualified parties on September 3 to start due diligence, and bidding date is expected to be announced shortly. In all, privatization transactions worth Rs 8,967 million are in the final stages of completion.
BALANCE OF PAYMENTS: The improvement in Pakistan's external sector gathered further momentum in FY03 together with the spectacular performance over the preceding two years as improvements in both the current and capital accounts led to yet another record breaking overall BOP surplus of US$ 4.6 billion or 6.7 percent of GDP — nearly 70 percent higher than next largest overall surplus of US$ 2.7 billion that was recorded in FY02. The dominant contributors were the workers' remittances which registered buoyant 79 percent growth during FY03 to reach a new all-time high of US$ 4.2 billion, a sharp fall in interest payments following the retirement of expensive debt and liabilities as well as the partial substitution of expensive debt with soft loans from IFIs and tremendous growth in exports earnings which rose to a record US$ 10.9 billion.
BANKING SECTOR: The banking sector continued its double digit growth in deposits over the preceding three years and raised deposits to the tune of Rs 275 billion. This impressive growth was largely due to the increased workers remittances despite sharp decline in the deposit rates. The weighted average lending rate slipped to single digits for the first time since 1974 and weighted average deposit rates dipped to 1.9 percent; narrowing the banking spread by 227 basis points.
A strong contribution of increased economic activity, the aggressive marketing of consumer credit by the banks and large reduction in interest rates initiated a resurgence of credit demand, taking the FY03 net credit expansion to a phenomenal Rs 133.2 billion, over three times higher than the corresponding FY02 figure.
The efforts regarding Islamic Banking are also underway. Five banks have applied for permission to establish stand-alone branches for Islamic banking, leading to the issuance of the first Islamic Banking Branch License to MCB in May 2003, while applications of other banks are under consideration. And new changes have been assimilated in SBP Prudential Regulation focusing good corporate governance and KYC.
While an improvement was also visible in the portfolio of non-performing loans (NPLs) which decreased to Rs 227.7 billion in 2003 as compared to Rs 234.7 in the preceding year. Private sector banks remained market leaders among the profit takers and in aggressive marketing and investments policies. SBP is specially interested in some dynamic private banks to step ahead to take over the control of NCBs, like the ABL for which Privatization Commission has previously requested SBP to make arrangements for the dis-investment of the government's remaining 49 percent shares.