Manager Research

Aug 13 - 19, 2007

A high economic growth is attracting global investors awash with excess money interested primarily in take-over of local profitable institutes and organizations. Despite the emerging political uncertainties, the foreign investors from across the world have invested in a wide range of economic activities during the last fiscal year. Apart from a record trade deficit that may seem out of proportion, the rest of the macro-economic picture of the country is very much satisfactory. The government through its Policies though didn't achieve the targeted level of inflation but was able to lower it when compared to last year numbers. The economy attracted high foreign investment and remittances and controlled exchange rate against the Dollar.






Foreign Direct Investment





Foreign Portfolio Investment





Total Foreign Investment





Forex Reserves















Trade Deficit





Foreign Remittances





Inflation - CPI





US $










Source: SBP, FBS, CBR, ForexPK


The annual inflation has surged to 7.78% by end June 2007 as against the target of 6.5% mainly due to significant price hike in food items. The inflation - measured through Consumer Price Index target has been missed for the second consecutive year mainly due to government's failure to ensure smooth supply of the essential food items despite the tight monetary policy of the State Bank of Pakistan. Led by a 9.68% increase in food inflation, the overall consumer prices jumped to 7% in June 2007 over the same month of the last year. The statistics indicated that the inflation went up by 0.20 per cent in June 2007 over May 2007. The lowest growth in inflation was recorded in January 2007 at 6% followed by 7.39% in February.

The food inflation was pushed by highest ever increase in the price of essential items like potatoes, eggs, rice, milk powder, cigarettes, vegetable ghee, condiments, spices, mustard oil, beverages, milk fresh, milk products, pulse masoor, sweetmeat and nimco, cooking oil, wheat flour, wheat, pulse moong and readymade food. Apart from the increase in food items, the medicare charges and education went up by 9.85% and 6.41% respectively in June 2007 over the same month of the last year. This indicates that the charges of the basic facilities like life saving drugs and education fees prices sky-rocketed thus affected the monthly budget of the poor people. The government had frozen the oil prices in the domestic market for the last couple of months, which had also resulted into lowering the transportation cost and fares. With this the non-food inflation also witnessed steep decline during the month under review. This freezing of oil prices resulted in stabilizing the prices of transportation which recorded a negative growth of 3.06% in June 2007 over the same month of the last year.


During FY07, exports of the country remained very lackluster, depicting a marginal growth of 3%, just barely crossing the US$17bn mark and much less than the target of US$18.6bn while the imports rose by 7%, crossing the US$30bn mark. Pakistan's economy has grown at an average rate of 7%. Higher investments have led to higher imports of machinery and raw materials which have increased the level of deficit to as high as US$13.54bn which in last year stood around US$12.13bn.


Since 9/11, Pakistan's home remittances have been on the rise and from FY02 to FY07, the country has received roughly $24.8 billion or more than $4.1 billion on an average per year. Based on the end-2006 data, Pakistan was receiving an average of 1.5 per cent share in all countries home remittances of $276 billion and two per cent in $206 billion flowing towards developing countries. Out of the total remittances of $24.8 billion received between FY02 and FY07, $7.2 billion or 29 per cent came from America. During this period, remittances from the UAE, Saudi Arabia and the UK totalled $4.18 billion (16.8 per cent), $3.9 billion (15.7 per cent) and $2 billion (eight per cent) respectively. In other words, Pakistan attracts roughly 70 per cent of home remittances from the above-named four countries and the remaining 30 per cent from the rest of the world. Up till FY06, home remittances were the second biggest source of foreign exchange earnings for Pakistan after exports. The trend changed in the last fiscal year and foreign investment exceeded remittances. However, these remittances are undoubtedly a more preferable source of foreign exchange earning than foreign investment. The foreign investment that comes into the stocks is vulnerable to the vagaries of the market. And in the case of foreign direct investment, substantial foreign exchange flows out of the recipient country in the shape of profits and dividends repatriated abroad.


Over the past few years, Pakistan has managed to control the exchange rate fluctuation and hold it near the Rs.60/Dollar level. However on the other side the EURO has outperformed all the currencies and has rose significantly by 5.6% to Rs.81.80 earlier being Rs.77.45 a euro.


Foreign direct investment in Pakistan soared by 45.6% year-on-year to US$5.124 billion during 2006-07 while portfolio investment climbed by 417.9% to US$1.82 billion compared to the previous fiscal year. During July-June 2006-07, FDI in absolute terms rose by US$1.604 billion and portfolio investment by US$1.468 billion over the corresponding period of 2005-06, when these stood at US$3.521 billion and US$351.50 million respectively. Therefore, on balance, total foreign private investment in the 12-month period shot up by 79.3% to US$6.945 billion from US$3.872 billion in the same period a year ago. The break-up of investment further indicated that United Kingdom was the biggest investor in Pakistan as it invested US$1.82 billion - US$860.1 million FDI and US$960.1 million portfolio investment. The US was second with an investment of US$1.766 billion, including FDI of US$913.1 million and portfolio investment of US$853.4 million. The Netherlands was third, whose direct investment was US$771.8 million while portfolio investment was US$6.2 million. China invested US$712 million in FDI. The United Arab Emirates (UAE) invested US$676.3 million comprising US$661.5 million FDI and US$14.9 million portfolio investment.


Pakistan's foreign exchange reserves rose by $2.476 billion or 18.85 percent to a record level of $15.613 billion in the last fiscal year FY07 compared with $13.136 billion in the fiscal year 2005-06. Foreign exchange reserves held by the SBP increased by $2.568 billion or 23.86 percent to $13.328 billion in the last fiscal year compared with $10.760 billion in the fiscal year 2005-06. Reserves held by commercial banks were recorded at $2.285 billion in FY07 as against $2.376 billion in FY06. Foreign exchange reserves of the country crossed the $15.6 billion mark at the end of the last fiscal year, largely due to the issue of debt-accumulating bonds and global depository receipts (GDRs) by the government. Achievement of this record level of foreign exchange reserves has been made possible by the healthy growth in external inflows during FY07 including foreign direct investment, workers remittances, portfolio investment, proceeds of the recent successful launch of Pakistan Euro Bonds and the GDRs in the international financial markets. Proactive management of the foreign exchange reserves by the SBP has also contributed to the achievement of this landmark.