Salient points of Economic Survey of Pakistan 2008

[Naveed Yaseen]

RECORDER REPORT
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ECONOMIC SURVEY'S SALIENT POINTS ARE AS FOLLOWS:

THE ECONOMY IN 2007-08, GROWTH AND INVESTMENT: Real GDP grew by 5.8 percent in 2007-08 as against the revised estimates of 8.8 percent last year and this year's target of 7.2 percent. With economic growth at 5.8 percent in 2007-08, Pakistan's economy has grown at an average rate of 7.0 percent per annum during the last five years. The growth of this magnitude not only shows its resilience but also provides a source of optimism that through a combination of adjustments and reforms we can regain the growth momentum.

AGRICULTURE: The performance of Agriculture has been far from satisfactory as it grew by 1.5 percent as against 3.7 percent last year and target of 4.8 percent. The poor showing was mainly on account of dismal performance of major crops such as wheat and cotton. Accordingly, the contribution of agriculture to this year's growth declined to 5.2 percent as against 12 percent last year. Major crops witnessed a negative growth of 3.0 percent as against positive growth of 8.3 percent last year. Livestock, a major component of agriculture, exhibited some improvement in growth from 2.8 percent last year to 3.8 percent in 2007-08.

OVERALL MANUFACTURING: Overall manufacturing, accounting for 19 percent of GDP, recorded a modest growth of 54 percent against 8.2 percent last year. Its contribution to this year's growth also declined from 22 percent last year to 17.2 percent this year.

LARGE SCALE MANUFACTURING: Large-scale manufacturing accounting for almost 70 percent of overall manufacturing, registered a growth of 4.8% in 2007-08 against the target of 12.5% and last year's achievement of 8.6%. The-less-than satisfactory performance this year is a combination of factors including signs of moderation on account of higher capacity utilisation, power shortages, disturbed law and order situation and political developments.

CONSTRUCTION: Construction continued its strong showing, partly helped by activity in private housing market, spending on physical infrastructure, and reconstruction activities in earthquake affected areas. The construction sector is estimated to grow by 15.2 percent in 2007-08 as against 17.9 percent last year.

SERVICES SECTOR: Services sector continued to maintain a solid pace of expansion at 8.2 percent as against 7.6 percent last year. Over three-fourth (75%) contribution to this year's growth came alone from services sector. Therefore, this year's growth is services sector- led -growth.

PER CAPITA INCOME: The per capita income in dollar term has increased from $926 in 2006-07 to $1085 in 2007-08, showing an increase of 18.4 percent.

PRIVATE CONSUMPTION EXPENDITURE: Real private consumption expenditure grew by 8.5 percent in 2007-08 as against 4.8 percent last year. Accordingly, it has contributed more than 100 percent to this year's growth. The contribution of net exports is negative 21 percent. It is therefore safe to suggest that this year's growth is services/ consumption-led-growth.

INVESTMENT: Total investment could not sustain its record level of 22.9 percent of GDP of last fiscal year and declined to 21.6 percent of GOP in 2007-08. The contribution of investment to this year's GDP growth therefore, declined significantly from 45 percent last year to almost 12 percent this year.

Fixed investment has declined to 20.0 percent of GDP from 21.3 percent last year. While public sector investment remained at last years level of 5.7 percent, private sector investment decline from 15.6 percent to 14.2 percent of GOP this year.

NATIONAL SAVINGS: National Savings at 13.9 percent of GOP has financed 65 percent of fixed investment in 2007-08 as against 77.7 percent last year. National savings as percentage of GOP stood at 13.9 percent in 2007-08 - far lower than last year1s level of 17.8 percent. The decline in national saving rate simply indicates that the reliance on foreign savings increased to finance domestic investment.

MONETARY POLICY: During FY08, the SBP continued with a tight monetary policy stance, thrice raising the discount rate and increased the Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR).

The money supply growth during July-May 10th 2007-08 (henceforth July-May) of the current fiscal year slowed to 9 percent compared to 14 percent during the corresponding period of FY07. The FY 08 growth in M2 is entirely attributable to a rise in the net domestic assets (NDA) of the banking system due to high government borrowings for budgetary support, as the NFA registered a contraction during the period, mainly reflecting the weaknesses in country's external balance of payment.

CREDIT TO PRIVATE SECTOR: Credit to private sector grew by 14.9 percent during July-May FY08 as against 12.2 percent in the same period of last year. Credit to private sector as percent of GDP is continuously rising since 2001-02. The key factors contributing to this year's acceleration in private sector credit growth include: (i) rise in working capital requirements due to higher input costs; and (ii) the need for bridge financing to settle price differential claims of the OMCs and IPPs.

INFLATION: Inflation is uncomfortably high in almost every corner of the world including Pakistan, creating extra-ordinary difficulties for the governments all over the world. The culprit every where is rising food and energy prices. In Pakistan, besides rising food and fuel prices, the excessive burrowing of the government from State Bank of Pakistan (SBP) have been responsible for the rise in inflation.

The inflation rate, as measured by the changes in Consumer Price Index (CP9, averaged 10.3 percent during the first ten months (July-April) of the current fiscal year, 2007-08, as against 7.9 percent in the comparable period of last year. The food inflation is estimated at 15.0 percent and non-food at 6.8 percent, against 10.2 percent and 6.2 percent in the corresponding period of last year.

FISCAL POLICY: The overall fiscal deficit is estimated at Rs 737.8 billion or 7.0 percent of GDP for 2007-08 as against the target of Rs 399 billion or 4.0 percent of GOP. Some shortfall in revenue and massive slippages in expenditure side on account of interest payments and subsidies are responsible for the rise in fiscal deficit. FBR was targeted to collect Rs 1025 billion but they are likely to collect Rs 1000 billion-Rs 25 billion short of the target.

PUBLIC DEBT: Public debt was 53.5 percent of GOP by end-March 2008 as against 55.2 percent in end-June 2007. However, by the year end public debt is likely to be slightly higher than last year. The reversal in the declining trend of public debt was mainly on account of large slippages in the budget which increased our borrowing requirement as well as sharp depreciation of rupee viz US $.

EXTERNAL SECTOR:

EXPORTS: Overall exports recorded a growth of 10.2 percent during the first ten months (July-April) of the current fiscal year against a growth of 3.6 percent in the same period last year. In absolute terms, exports have increased from $13.8 billion to $15.3 billion. Broad categories of exports suggest that with the exception of textile manufactures, all other categories of exports registered strong growth. For example, exports of food group were up by 22.4 percent; petroleum group exports registered an increase of 38 percent; exports of other manufactures and 'other items' posted a handsome growth of 33.2 percent and 59.5 percent, respectively. Textile manufactures, accounting for almost 57 percent of total exports, performed poorly as it registered a decline of 2.5 percent. The government has provided financial support to the textile sector through R & D during the current fiscal year. Even this financial support could not help improve the performance of textile exports.

IMPORTS: Imports during the first ten months (July-April) of the current fiscal year (2007-08) grew by 28.3 percent to $32.1 billion on the back of an extraordinary surge in the imports of petroleum products as well as imports of food group and raw material. Non-oil imports were up by 22.5 percent and non-oil and non food imports surged by 18.8 percent during the same period. Imports of food group were up by 48.6 percent in the current fiscal year mainly on account of unanticipated imports of wheat amounting to $819 million and an extraordinary surge (70.4%) in the imports of edible oil due to the sky-rocketing price of palm oil in the international market.

PETROLEUM PRODUCTS AND EDIBLE OIL IMPORT: Imports of petroleum products and edible oil alone contributed 47 percent to the rise of this year's import. Additional 18.7 percent contribution came from import of wheat and fertiliser, Together these four items accounted for two-thirds growth in this year's import.

TRADE BALANCE: During the first 10 months of the current fiscal year (July- April), the merchandise trade deficit worsened sharply to $17 billion as compared to $11 billion in the same period last year. The surge in merchandise trade deficit owes to an outsized increase of 28.3 percent in imports that more than offset a modest export growth 10.2 percent.

CURRENT ACCOUNT BALANCE: Pakistan's current account deficit further widened to US $11.6 billion (including official transfers) during Jul-Apr FY08 against US $6.6 billion in the comparable period of last year, showing an increase of 75.6 percent. Even when compared to the size of the economy, the current account deficit was substantially high at 6.9 percent of GOP during Jul-April FY08 as against 4.6 percent for the same period last year.

WORKERS REMITTANCES: Workers remittances registered commendable growth during Jul-Apr FY08, growing by 19.5 percent to $5.3 billion on top of 22.7 percent growth in the corresponding period of last year. Remittances routed through exchange companies contributed 60.2 percent in the overall remittances growth. As a result, foreign exchange companies share in overall remittances increased to 23.8 percent during Jul-April FY08 from 16.7 percent for same period last year.

FOREIGN EXCHANGE RESERVES: Pakistan's total foreign exchange reserves stood at $12.3 billion as of end-April 2008 significantly lower than end June 2007 level of $15.6 billion.

EXCHANGE RATE: The rupee after remaining stable for more than four years lost significant value against the US dollar, depreciating by 6.4 percent during July-April 2007-08.

EXTERNAL DEBT: External Debt and Liabilities (EDL) rose to $45.9 billion from $40.5 billion an increase of $5.4 billion or 13.3 percent in the first nine months (July-March) of FY 2007-08-the highest increase in almost one decade.

During the first nine months of this fiscal year, the total increase in EOL amounts to $5.4 billion, of which, $4.2 billion is the exchange rate translation effect while net disbursement of loan was just $1.2 billion.

The government is fully aware of the challenges and its responsibilities. Efforts are underway to address the multifaceted challenges currently being faced by the economy.

Restoring macroeconomic stability in a reasonable timeframe is the top most priority of the government because we believe that a stable macroeconomic environment will absolutely essential to sustain higher economic growth, creating job opportunities and reducing poverty.

This will require continuous reform in various sectors of the economy with private sector taking the lead role. The current economic situation also demands that the burden on the poor be minimised. It is in this perspective that the government is setting up an Income Support Fund to target the vulnerable segments of society with a view to providing relief to them.

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