KANWAL SALEEM (feedback@pgeconomist.com)
Feb 15 - 21, 2010

Pakistan's economy faced yet another turbulent year in 2009 mainly due to internal and external factors. Recent economic indicators may suggest that Pakistan's economy has started shaping up, but there exists doubts on the existence of positive trends. Inflation numbers have inched down, but the cost of doing business and prices of essential items continue to remain a worrisome factor.


Price Index (CPI), a key indicator of inflation, rose 13.68 per cent in January 2010 over the same month previous year. Analysts are of the view that hike in petroleum and electricity prices was the prime trigger of inflation during the month of January. Overall, CPI also rose 10.79 per cent during the first seven months (July-January) of current fiscal (2009-10) over the corresponding period of last fiscal year.

Experts believe that the increased prices directly affected inflation (cumulative weight of 6.3 per cent in CPI basket). Conversely, indirect impact in terms of uneven increase in the transportation cost had negative impact on inflation outlook in the short-term. Exporters are critical of high transportation charges and increased cost of doing business. They said the government increased electricity and petroleum prices by an average of 12 per cent and 10 per cent in January, respectively. On the other hand, food inflation also registered 15.49 per cent growth during the month under review.

Non-perishable food item prices increased 14.76 per cent whereas perishable food items recorded 21.30 per cent increase. Fuel and lighting index rose 20.19 per cent during the month of January whereas house rent index posted 13.38 per cent increase. Transport and communication index rose 9.43 per cent, education expenses increased 13.68 per cent and medical expenses increased 5.88 per cent.

The country's economy is also witnessing some positive signs, as trade deficit narrowed to around 22 per cent in the first seven months of the current fiscal year as imports decreased 10.77 per cent.

As per data released by the Federal Bureau of Statistics (FBS), the trade deficit reduced to $8.44 billion in July-Jan (2009-10) against $10.82 billion in the same months of the previous year (2008-09).

Exports increased to $10.87 billion during the period July-January 2009-10 compared to $10.82 billion in the same period last year, while the imports were down to $19.31 billion compared to $21.64 billion last year. Exports in Jan 2010 stood at $1.7 billion, while imports remained at $3.32 billion resulting in a trade gap of $1.62 billion.

Businessmen believe that there is room for increasing exports, but for this hard work, commitment, value addition and exploring new markets are required for which the government should play the role of facilitator for the exporters. Export sector is unlikely to take a big stride unless some innovative measures are taken, they added.

Economists said the trade deficit narrowed because of declining imports and lesser export.

As per government estimates, the trade deficit would be $10.7 billion for the current fiscal year. Exports would be around $18.3 billion and imports around $28.9 billion.

According to analysts, inflation risk has re-emerged, which could once again put pressure for a discount rate hike. They are expecting 3 to 4 percent surge in inflation number by the end of June.

They viewed demand for food will increase and push food prices higher. Similarly, global growth will create more demand for oil, which would push oil prices higher. An average price of oil beyond dollar 80 per barrel will not be sustainable for our economy, they added.

They said constant growth in currency in circulation needs to be checked, as in last 6 months it grew by Rs 187.7 billion to Rs 1.34 trillion. Despite committing to IMF to maintain its tightening stance until inflation is brought down to its desired levels, the central bank is forced to pump liquidity in the interbank market through its open market operation.

They further said that domestic debt and external debt are the major cause of concern. Domestic debt outstanding surged to Rs 4.230 trillion a jump of Rs 675 billion against last year's Rs 3.555 trillion while external debt surpassed dollar 55 billion marks for the first time. They advised the government to concentrate on core issues, slash its non-developmental expenditures and set its policies in right direction for the benefit of people who are being hit hard due to soaring prices.