Review of Pakistan's Economic Situation July-February 2008-09

[Naveed Yaseen]

Review of Economic Situation July-February 2008-09: Services sector to drive growth, fiscal & CAD targets would be met

ISLAMABAD: Growth in the services sector would drive the GDP growth in 2008-09 while fiscal deficit target of 4.2 percent of GDP and current account deficit of 5.9 percent would be achieved, stated Review of Economic Situation July-February 2008-09 released by Ministry of Finance here on Wednesday.

Recent global financial crisis and extremely vulnerable security environment added risks to the economy.

Real Sector: The growth outlook is not free of risks as industrial production has been badly affected by acute energy shortages, deterioration in law and order situation, and constricted access to finance by risk averse banks. For the year 2008-09, given

domestic and international economic pressures especially high inflation and macroeconomic imbalances, the GDP growth has been envisaged at 2.5% on the back of positive outlook of the agriculture sector where all indications are pointing at good growth.

Agriculture: The agriculture has been facing acute irrigation water shortages and the water intensive crops sugarcane and maize fell short of the target and depicted negative growth of 18.5 percent and 7.5 percent in 2008-09. However, other two major crops cotton and rice have registered positive growth of 7.3 percent and 13.5 percent, respectively. Wheat, with its 12.7 percent weight in overall agriculture, is estimated to post 19.0 percent growth over the last year.

The livestock sector is growing at normal pace and thus the target of 3.2 percent will be achieved.

Manufacturing Sector: Large-scale manufacturing registered a negative growth of 5.35 percent in July-January 2008-09 against reasonable positive growth of 5.7 percent in the comparable period of last year.

Services sector: Improved prospects in transportation and storage sub-sectors on the back of relatively better production in major crops, strong contribution by finance and insurance sector and augmented administrative and defence related spending will provide support to adequate level of growth in the services sector.

Inflation: All price indices like CPI, WPI and SPI witnessed a clear downtrend in recent months. On 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. The month of February witnessed fractional decline in the core inflation.

Monetary Policy: Net domestic assets (NDA) have increased by Rs 418.2 billion as compared with increase of Rs 541.7 billion in last year, thereby showing an increase of 10.4 percent in this period whereas, last year the growth in the comparable period was 17.6 percent. Net foreign assets (NFA) have recorded a contraction of Rs 283.5 billion against the contraction of Rs 232.3 billion in the comparable of last year.

Weighted average lending rate have witnessed slight decline from 15.5 percent in October 2008 to 15.3 percent in January 2009. The weighted average yields on 6 months T-bill has declined by almost 100 basis points to 13.0 percent in February 2009 as against 14 percent in November and December2008.

Capital Market: The market breached 7,000 points psychological barrier on March 31, 2009 in anticipation of political stability and restoration of judiciary. The positive reports like possible inclusion of KSE in MSCI Frontier Index, expected incentive driven petroleum policy and encouraging prospects on aid front are the supporting factors that are guiding the KSE in the positive direction.

Fiscal Policy: The stock of domestic debt grew by Rs 341 billion by end-January 2009. This strong growth in the domestic debt reflects non-realisation of privatization proceeds and reduced availability of net external financing due to increase in external debt repayments on maturing stock of foreign currency bonds.

Foreign direct investment (FDI) has reached $ 2794.4 million during July-February 2008-09 as against $2789 million in the comparable period of last year, thereby, depicting a marginal increase of 0.2 percent. If privatisation proceeds of $133 million received in the comparable period of last year is excluded, then FDI inflows witness an increase of 5.2 percent.

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