BRIEF OF STATE BANK ANNUAL REPORT FY07

MARIAM NASIR
Manager Research

Nov 05 - 11, 2007

Pakistan's economy recorded one of the fastest growth rates in Asia as well as when compared with last fiscal year. Real GDP growth accelerated to 7% percent as against 6.6% in the same period last year. This was a result of sound macroeconomic policies which have successfully transformed the initial consumption-led growth impetus of a few years back. A high economic growth is attracting global investors as well. 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. Although 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. Investment to GDP ratio at a record 23%, complemented by a surge in domestic private investment and record FDI flows whereas domestic debt and foreign debt as percentage of GDP declined to 29.8% and 26.8% respectively. Current account balance however remained in the negative and increased to 4.9% as against 3.9% in the same period last year.

ECONOMIC PERFORMANCE

   

FY06

FY07

GDP

(%)

6.60

7.00

M2 Growth

(%)

15.10

19.30

Forex Reserves

(US$bn)

11.47

14.07

Inflation - CPI

(%)

7.94%

7.78%

As % of GDP

     

Total Investment

(%)

21.80

23.00

Domestic Debt

(%)

30.20

29.80

Foreign Debt

(%)

28.30

26.80

Current Account Balance

(%)

(3.90)

(4.90)

Source: SBP

GDP GROWTH

The FY07 economic performance has propelled the five-year average real GDP growth rate to approximately 7%. The last time such high growth levels were sustained, in the FY79-FY83 period. If the economy is to continue growing at rates above historical norms, there is a need to implement policies and measures to stabilizing emerging macroeconomic imbalances.

INFLATION

Inflation as per SBP report surged to 7.78% as against the target of 6.5%. The decline in non-food inflation during FY07 shows that monetary policy was effective in containing demand-pull inflationary pressures, but the impact of the monetary tightening was muted by the unanticipated strength in food inflation. Increase in food inflation, which was being 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.

FOREIGN INVESTMENT

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. Total investment as % of GDP increased to 23% as against 21.3% earlier.

RESERVES

Pakistan's foreign exchange reserves increased to US$14.07bn in the last fiscal year FY07 compared with US11.47bn in the fiscal year 2005-06. 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.

EXCHANGE RATE

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.

MONETARY GROWTH

Pakistan has witnessed a considerable growth in M2. A high growth in currency in circulation reflects increased level of economic activities. The M2/GDP ratio, which is an indicator of financial development, has continued to exhibit a rising trend since FY91 from 36.9%to 45%in FY07. M2 growth in FY07 stood at 19.3%, earlier being 15.1%.

CURRENT ACCOUNT DEFICIT

Pakistan's balance of payments show a record increase in capital flows that has substantially offset a gradual widening of the current account deficit. Huge current account deficits (as percentage of GDP) of -3.9% in FY06 and -4.8% in FY07 explain Pakistan's robust domestic demand story. Increase in current account deficit has been contributed by trade, services and income deficit, besides huge payments of interest and dividends during the 2007 fiscal year.