Jan 18 - 24, 20

Describing the high cost of input or cost of doing business including rising energy prices and cost of financing as a worldwide phenomenon in the wake of financial meltdown originated from the United States and other Western economies, Senator Gul Mohammad Lot while talking to Page said Pakistan was not an exception.

In fact the government was not agreed to what you were pointing at as reasons behind rise in the input cost. When you look at the ground realities it was the untiring efforts that saved the country from the potential threat of bankruptcy by consolidating the financial strength from every possible source.

Today our foreign exchange reserves have gone up to $15 billion while the inflationary pressures are also subsiding. He was confident that the rate of inflation that was over 26 percent when this government took over would further go down to single digit from present 10-11 percent in near future. As a result, the interest rate would automatically come down with the reduction in the rate of inflation.

It was the policy of the present government to encourage the farmers by raising the support price of wheat which turned out to be a positive to give a 5 million ton surplus of wheat today.

If we desire, we can also embark on export of wheat now. Similarly the rice has become the second largest foreign exchange earner after textile. He said that situation was not as bad as being painted by some quarters for the sake of opposition.

Senator Gul Mohammad Lot said that things had started to ease and its benefits would soon have trickledown effects on to the common man. Referring to the improved situation, he said the depressed economic growth had shown some sign of improvement and the GDP growth might reach 3.3 percent in financial year 2010.

According to official figures, the real GDP growth in FY10 is likely to be between 2.5% and 3.5%. Average Consumer Price Index inflation may remain between 10% and 12%. Total amount of workers' remittances likely to be received during FY10 may hover between $7.8 billion and $8.8 billion. Total exports and imports may remain between $18.5 billion and $19.0 billion, $30.5 billion and $31 billion, respectively while fiscal and current account deficits are likely to be between 4.7% and 5.2% and 3.7% and 4.7% of GDP, respectively.

The real gross domestic product (GDP) growth in the current 2009-10 is likely to be around the annual target of 3.3 percent, higher than the 2.0 percent growth seen in FY09.

According to First Quarterly Report on the State of the Economy for FY10 released by the Central Bank, "The major impetus for the growth is expected to come from the services sector. The prospects of returning to macroeconomic stability have improved in the initial months of FY10 as most of the key indicators continue positive trends that began in the closing months of the last fiscal year."

It said that data on agriculture and the industrial sector is in line with the expectations of a modest recovery in economic growth during FY10. While the performance of major crops during FY10 Kharif (April-October 2009) cropping season was below expectations, growth in large-scale manufacturing has recovered substantially after recording a 20.6 percent year-on-year decline in March 2009.

Similarly, a sharp reduction in inflation, contained government borrowings from SBP, substantial contraction in external imbalances, the stability in the rupee-US$ parity, and easing monetary stance, are all likely to support economic stability, it said and added that the drop in overall volume of trade, poor tax growth, risk of lower than expected aid receipts and, in particular, a rise in the fiscal deficit, highlight the fragility of the improvement and pose continuing risk to the recovery.

The report said that within the commodity producing sector, an improvement in industrial output is expected to be partially offset by weaker agriculture. Similarly, the current account deficit is likely to improve further in FY10 relative to the previous year, though some expected revival in import demand from manufacturing and rising commodity prices may possibly contain the improvement going forward, it added.

It pointed out that while average CPI inflation during FY10 is projected to decelerate significantly from FY09 levels, it is likely to remain higher than the annual target of 9.0 percent for the year. "The adjustment in administered prices of key fuels amid rising international oil prices and cut in electricity subsidies, are important factors behind the expected strengthening of inflationary pressures," the report added.

The report stated a major challenge in the economy is to improve the tax-to-GDP ratio. "The 0.6 percent Y-o-Y increase in tax collection during Jul-Nov FY10 is a source of concern; if this continues, Pakistan's tax-to-GDP ratio will decline from an already low 9.8 percent seen in FY09," it said and added that in view of the needs of the structural second generation reforms in the economy, it is necessary to strengthen the capability of Federal Board of Revenue, increase documentation, reduce exemptions, equal treatment of incomes from different sources, and accelerate the levy of a comprehensive Value Added Tax.

It said that another challenge in public finance is the increasing level of contingent liabilities of the government. In particular, the energy sector circular debt issue has not been resolved yet, and the government's borrowings for commodity operations have not seen the expected seasonal retirement in Q2-FY10, the report underlined.

"It must be stressed that excessive government involvement in commodity trade/finance, and the interference in market price setting, can be counterproductive and should be avoided," the report said saying that cases of market failure are best handled through effective reforms and strengthening institutions like the Competition Commission of Pakistan.

The report said that SBP continued to gradually ease monetary policy in FY10, reducing the policy rate by 150 bps in two rounds while on cumulative basis, it means a total reduction of 250 bps in the policy discount rate since the beginning of current easing cycle in April 2009.These policy measures were supported by substantial moderation in demand pressures. For instance, a very sharp drop in headline inflation, i.e., from 24.7 percent in November 2008 to 10.5 percent in November 2009; persistent Y-o-Y fall in import growth, particularly the negative growth in import volumes during Jul-Nov FY10, and the low growth in private sector credit expansion, it said.

The scale and speed of the decline in inflation suggest that the tight monetary policy and sharply constrained monetization of the fiscal deficit have eased excess demand pressures that had plagued the economy in the previous three years. "This disinflationary impact received further support from lower imported inflation and improved domestic production of key staples," it added.


The total liquid foreign reserves held by the country stood at $ 15,202.8 million on 9th January, 2010.

The break-up of the foreign reserves position is as under: -

i) Foreign reserves held by the State Bank of Pakistan: $ 11,467.2 million
ii) Net foreign reserves held by banks (other than SBP): $ 3,735.6 million
iii) Total liquid foreign reserves: $ 15,202.8 million