Review of Economic Situation 2008-09: ‘External account remains vulnerable’

[Naveed Yaseen]

By Sajid Chaudhry
ISLAMABAD: The Ministry of Finance (MoF) said on Monday the fiscal deficit target of 4.3 percent of GDP and the current account deficit target of 5.9 percent of GDP were achievable.

However, recent global financial crisis and extremely vulnerable security environment added risks to the economy. The external sector data for the last quarter (April-June 2009) would give a real reflection of the impact of global financial crisis on Pakistan’s external sector.

In a report on July-March period of 2008-09, MoF stated that the global economic slowdown was making inroads into real economy through contraction in demand in the export sector and as well as shrinkage of external inflows. Pakistan’s economy continues to remain exposed to the vagaries of international developments as well as internal security environment, it said. Despite support from the IMF and other bilateral and multilateral donors, Pakistan’s external account remains exposed to a host of uncertainties, it said.

The outlook for economic growth remained pessimistic as import demand shriveled, tax collection declined, and inflows of foreign investment and privatization dampened.

Real Sector: Notwith-standing the vulnerabilities, the economy is set to post economic growth in the range of 2.5 percent to 3.5 percent, far lower than its historical average, but relatively satisfactory in the given international environment. The real GDP growth outlook drew strength from positive outlook of the agriculture sector, which has given all indications of a healthy growth. The outlook is based upon anticipated high wheat crop and above target growth of minor crops and reasonably good outturn by the livestock sub-sector.

Manufacturing Sector: Large-scale manufacturing depicted negative growth of 5.73% during July-February 2008-09 as against 5.27% positive growth in the comparable period of last year. Going forward the situation may improve to some extent because of lower base effect and some improvement in energy supplies.

The LSM growth is adversely impacted by a sharp reduction in demand from both domestic and international buyers.

Services sector has exhibited resilience to fluctuations in the economic activity. The FDI inflows in the telecommunications, financial businesses and personal services have reached a level of saturation in the first nine months (July-March) of the current fiscal year. There are enough anecdotal evidence that financial sector is set to provide substantial growth.

Inflation: Pakistan still faces high double-digit inflation. The dirty work of extra-market forces kept fruits of falling inflation away from Pakistan’s consumers. Given current trends and barring any adverse shocks, it is expected that the average inflation for the year (2008-09) as measured by CPI will be close to 20 percent.

Capital Market: The local bourse remained buoyant throughout the month of March 2009 thanks to encouraging developments on the political and economic fronts. The recovery phase of the premier stock exchange after floor removal has been hopeful and this outstanding performance has made it one of the best performing markets of the world in 2009.

Fiscal Policy: The fiscal improvement in the first nine months (July-March 2008-09) has largely based on reduction of oil subsidies and a cut in development spending. The government received Rs 141.1 billion in gross external inflows against outflow of Rs 104.1 billion which means net availability of Rs 37 billion.

Tax Collection: Tax revenue collected by the Federal Board of Revenue (FBR) stood at Rs 813.6 billion (net) during the first nine months (July-March) of the current fiscal year (2008-09) compared with Rs 679.9 billion in July-March, 2007-08 — posting a healthy increase of 19.7%. Given these developments, the tax revenue target of Rs 1250 billion seems a herculean task.

External Sector: The external sector has shown definite sign of improvement. The current and trade account balance has improved but there were some slippages on account of current transfers. However, buoyancy in remittances is more than offset by substantial declining trend in inflows through exchange companies.

CAB: Current Account Balance (CAB) shrank by 20.8 percent during July-March 2008-09. Current account deficit shrank to $7.6 billion during this period as against $9.6 billion during the same period of last year. Pakistan need investment driven current account deficit neutralized to some extent by rising savings level.

External Debt: External debt and liabilities (EDL) stood at $49.7 billion or 30.7 percent of the projected GDP for the 2008-09 at the end of March 2009 which is higher than end-June 2008 stock of $46.3 billion or 27.6 percent of GDP.

http://www.dailytimes.com.pk/default.asp...2009_pg5_1