Wednesday, June 11, 2008
ISLAMABAD: The government on Tuesday released the Economic Survey 2007-08. Following is the Executive Summary of the survey.
Growth and Investment
Pakistan’s economy has shown great resilience against internal and external shocks of very high intensity and grew robustly at 5.8 percent in 2007-08, as against 6.8 percent last year and this year’s target of 7.2 percent. The Commodity Producing Sector (CPS) registered a growth of 3.2 percent in 2007-08 as against 6.0 percent last year owing mainly to the lackluster performance of agriculture and manufacturing. While agriculture grew by 1.5 percent, the manufacturing sector posted a modest growth of 5.4 percent in 2007-08. The large scale manufacturing (LSM) sector witnessed a modest growth of 4.8 percent, down from 8.6 percent last year. The manufacturing sector has been hard hit by political instability, frequent eruptions of incidents detrimental to law and order and the acute energy shortages. In unison with increasing prices for fuel and energy, all these factors have caused slower growth in LSM. Growth in the small scale manufacturing sub-sector moderated to 7.5 percent in 2007-08 from 8.1 percent during 2006-07.The poor show of the agriculture sector was the result of a sharp deceleration in the growth of the major crops sub-sector, which posted a negative growth of 3.0 percent in 2007-08 as against a healthy growth of 8.3 percent last year. Minor crops registered a growth of 4.9 percent as against the negative growth of 1.3 percent last year. Fishing and forestry exhibited robust growth of 3.8 percent and 11.0 percent, respectively.The services sector has surpassed the growth target of 7.1 percent and grew by 8.2 percent in 2007-08 as against the actual achievement of 7.6 percent last year. The finance and insurance sector displayed a stellar growth performance of 17.0 percent during 2007-08 as against 15 percent last year. Value added in the wholesale and retail trade sector grew at 6.4 percent as compared to 5.4 percent last year and the target of 7.8 percent this year. The Transport, Storage and Communication sub-sector saw a deceleration in growth to 4.4 percent in 2007-08 as compared to 6.5 percent of last year.The contribution of CPS to GDP growth has declined to 26.6 percent from 42.4 percent last year. Agriculture sector contributed only 0.3 percentage points or 5.6 percent to GDP growth in 2007-08 as against 0.8 percentage points or 12 percent contribution last year. The manufacturing sector contributed 1.0 percentage point or 17.7 percent to GDP growth as against 1.5 percentage points or 22.2 percent last year. Industry contributed 1.2 percentage points or 20.9 percent to this year’s real GDP growth. The Services sector contributed 4.2 percentage points or 73.4 percent to overall growth this year. The contribution made by wholesale and retail trade has been 18.7 percent or 1.1 percentage points to GDP growth in 2007-08. Finance and insurance has also contributed 18.7 percent or 1.0 percentage point to this year’s growth.Per capita income has grown at an average rate of above 13.0 percent per annum during the last five years, rising from $586 in 2002-03 to $925 in 2006-07 and further to $1085 in 2007-08. Per capita income in dollar terms rose from $925 last year to $1085 in 2007-08, depicting an increase of 18.4 percent. Real per capita income in rupee terms has also increased by 4.7 percent, on average, for the last three years. The real per capita income grew by 4.2 percent as compared to 4.9 percent last year. Real private consumption expenditure grew by 8.5 percent in 2007-08 as opposed to 4.1 percent last year.Total investment declined to 21.6 percent of GDP in 2007-08 from its peak level of 22.9 percent last year. However, total investment has increased from 16.9 percent of GDP in 2002-03 to 21.6 percent of GDP in 2007-08, showing an increase of 5.7 percent of GDP in five years. Fixed investment grew by 3.4 percent in real terms and 12.5 percent in nominal terms. Private investment grew by 16.3 percent per annum in real terms and 30.7 percent per annum in nominal terms during the period (2004-07). However, its growth declined substantially to 0.9 percent in real terms and 9.7 percent in nominal terms. Major nominal growth in private sector investment was witnessed in mining & quarrying (15.3 percent), electricity & gas (11.0 percent), financial business (11.4 percent), and wholesale and retail trade (18.4 percent).National Savings stood at 13.9 percent of GDP in 2007-08 down from last year’s level of 17.8 percent. Domestic savings has declined to 11.7 percent of GDP from 16.0 percent of GDP in 2006-07. Public sector investment has also increased by 30.0 percent per annum during the last three years and 20.2 percent during the current fiscal year in nominal terms.Overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 32.2 percent and stood at $ 3.6 billion as against $5.3 billion in the comparable period of last year, mainly because of the fact that the political economy suffered many headwinds at continuous intervals.Foreign direct investment (private) has shown more resilience and stood at $3481.6 million during the first ten months (July-April) of the current fiscal year as against $4180.8 million in the same period last year, thereby showing a decline of 16.7 percent. Private portfolio investment on the other hand witnessed a massive decline of 91 percent by recording an inflow of $98.9 million as against $1097.3 million in the comparable period of last year. Public foreign investment depicted a modest inflow of only $20.5 million as against an outflow of $66.6 million in the comparable period of last year.Almost 57 percent of FDI has come from three countries, namely, the UAE, US, and UK. US investors, with 33.4 percent investment, contributed the most during the first ten months (July-April) of 2007-08. Norway (4.4 percent or $154.8 million), Switzerland (4.1 percent or $141.3 million), Hong Kong (3.5 percent or $121.3 million), Netherlands (2.9 percent or $101.0 million) and Japan (2.9 percent or $100.3 million) were the other contributors to FDI inflows. Three groups, namely; communication, financial business and oil & gas exploration, accounted for almost 67 percent of FDI inflows in the country.AgricultureNotwithstanding its declining share in GDP, agriculture is still the single largest sector of the economy, contributing 21 percent to GDP and employing 44 percent of the workforce. More than two-third’s of Pakistan’s population lives in rural areas and their livelihood continues to revolve around agriculture and allied activities. Like in other developing countries, poverty in Pakistan is largely a rural phenomenon. Therefore, development of agriculture will be a principal vehicle for alleviating rural poverty. The recent global food crises, while creating difficulties for net food importing countries, is equally providing opportunities for developing countries like Pakistan to get their acts together and benefit from the current situation by giving more serious attention to agriculture.The sustained higher growth in emerging economies has impacted the consumption patterns of households, including dietary changes towards higher quality food such as meat and dairy products. As a result, the production of these items is rising globally. In Pakistan, the livestock and dairy sectors accounts for 52 percent of agriculture, 11 percent of GDP and affects the lives of 30-35 million people in rural areas. In order to achieve higher sustained growth in agricultural value added, it is absolutely necessary to give due attention to the livestock and dairy sector to achieve multiple objectives, such as, the objectives of attaining food security and poverty reduction.The growth performance of agriculture over the last six years has fluctuated in the range of 1.5 percent to 6.5 percent. The volatility in agricultural growth is mainly caused by the crop sector which is associated with the vagaries of Mother-Nature, pest attacks, ill effects of adulterated pesticides etc. Such volatility is detrimental to income growth of farmers and hampers government efforts to reduce poverty.Agriculture performed poorly in 2007-08, growing at 1.5 percent against the target of 4.8 percent. This poor performance is mainly because of equally poor performance of major crops and forestry, registering negative growths of 3.0 percent and 8.5 percent, respectively. Livestock, minor crops and fishing have been the saving grace for agriculture as these sectors performed reasonably well and compensated for the performance of major crops and forestry, which allowed the growth rate in agriculture to arrive at 1.5 percent this year. Major crops, accounting for 34 percent of agriculture and 7.1 percent of GDP, suffered on account of the poor showing of wheat and cotton and less than satisfactory performance of the rice crop. Sugarcane and maize, being the other two major crops, performed impressively in 2007-08.The cotton crop suffered for a variety of reasons, including heavy rainfall in May 2007, which caused poor germination in Punjab, high temperatures during August and September 2007, causing more shedding of fruit parts and pest attacks, especially the dangerous mealy bug infestation. Consequently, cotton production declined to 11.7 million bales as against 12.9 million bales last year, registering a negative growth of 9.3 percent. The wheat crop was adversely affected by the shortage of irrigation water to the extent of 23.3 percent over normal supplies during Rabi and the inordinate spike in prices of DAP fertilizer. Accordingly, production of wheat declined to 21.7 million tonnes as against 23.3 million tonnes last year, thereby showing a decline of 6.6 percent. In sheer contrast, the two other major crops performed well with sugarcane recording the highest ever production level of 63.9 million tonnes, 16.8 percent higher than last year. The production of rice witnessed a modest growth of 2.3 percent and stood at 5.6 million tonnes.Minor crops, accounting for 12 percent in agriculture value added, posted a growth of 4.9 percent against the negative growth of 1.3 percent last year. The performance of livestock, accounting for 52.2 percent of agricultural value added, was satisfactory at 3.8 percent. The performance of fisheries has been impressive as it grew by 11 percent in 2007-08 because inland fish catch increased by 11.1 percent, while the output of marine fishing grew by 11.5 percent during 2007-08. Forestry followed the traditional negative growth pattern for the fifth year in a row. This small sector, with only one percent stake in the overall value-addition in agriculture, registered a negative growth of 8.5 percent in 2007-08 as the turnout of production of timber and firewood during the year declined by 9.3 percent.Pakistan’s agricultural output is closely linked with the supply of irrigation water. Against the normal surface water availability at canal heads of 103.5 million-acre feet (MAF), the overall (both for Kharif and Rabi) water availability has been lower in the range of 5.9 percent (2003-04) to 20.6 percent (2004-05). Relatively speaking, Rabi season faced more shortage of water than Kharif during 2007-08.During the current fiscal year (2007-08), the availability of water for Kharif 2007 (for the crops such as rice, sugarcane and cotton) has been 5.5 percent more than the normal supplies and 12.2 percent more than last year’s Kharif. The water availability during Rabi season (for major crop such as wheat), as of end-March 2008 was, however, estimated at 27.9 MAF, which was 23.4 percent less than the normal availability, and 10.5 percent less than last year’s Rabi, adversely affecting the wheat crop, production of which has decreased by 6.6 percent over the last year.Manufacturing & Mining
Pakistan’s manufacturing sector recorded the weakest growth in a decade during the outgoing fiscal year 2007-08. Overall manufacturing posted a growth of 5.4 percent during the first nine months of the current fiscal year against the target of 10.9 percent and 8.1 percent of last year. Large scale manufacturing, accounting for 70 percent of overall manufacturing, registered a growth of 4.8 percent in the current fiscal year 2007-08 against the target of 12.5 percent and last year’s achievement of 8.6 percent. Heightened political tension, deteriorating law and order situation, growing power shortages, the cumulative impact of monetary tightening and rising cost of doing business are the reasons responsible for the poor showing of manufacturing in 2007-08.The main contributors to this growth of 4.8 percent during July-March 2007-08 over last year, are pharmaceuticals (30.7 percent), wood products (21.9 percent), engineering products (19.5 percent ), food & beverages (11.1 percent), petroleum products (6.0 percent) and chemicals (3.1 percent). The individual items that displayed positive growth include cotton cloth (4.8 percent) and cotton yarn (3.3 percent) in the textile group; cooking oil (1.1 percent), sugar (33.9 percent) and cigarettes (5.1 percent) in the food, beverages and tobacco group; cement (17.9 percent) in the non-metallic mineral products group; and buses (32.0 percent), LCV’s (16.4 percent) and motorcycles (28.1 percent) in the automobile group. A few items that showed a decline in production include fertilizers (16.9 percent), electronics (4.6 percent), paper & paper board (5.5 percent) and iron & steel products (7.6 percent). The individual items that exhibited negative growth include cars & jeeps (3.9 percent), phosphatic fertilizer (24.0 percent) and billets (20.6 percent).The mining and quarrying sector registered a growth rate of 4.9 percent as against a target of 4.5 percent and 3.0 percent of last year. The higher growth was propelled by magnetite (20.5 percent), lime stone (17.8 percent) and Baryte (15.6 percent).With effect from January 1991 to February 2007, GoP has privatized around 166 units at Rs475 billion (approx US$8.9 billion). The transactions carried out during the period of July 2007 to February 2008 include UBL’s divestment of 25 percent shares through a GDR fetched $650 million and was the biggest book building ever in Pakistan’s banking history. Initially 21.74 percent (175.95 million) shares were divested in June 2007 for total proceeds of $565.4 million. Another 3.2 percent (26.39 million) shares were divested in July 2007 for total proceeds of $84.81 million. The stock was priced at 5 times to book which is the highest valuation compared to similar transactions globally. The HBL-IPO was the largest offering ever in Pakistan in terms of value and the number of successful applicants. A total subscription of Rs18.9 billion was received against the base offer of Rs8.1 billion resulting in an over subscription of 2.3 times. The IPO has generated gross proceeds worth Rs12.2 billion against the divestment of 51.8 million shares (including a green shoe option of 17.2 million).A new SMEs Policy 2007 was launched in fiscal year 2007-08, where an attempt has been made to define uniformly, small and medium sectors in manufacturing, trade and services sectors for all the stake-holders and give a broad frame-work for the promotion of SMEs by improving the regulatory, fiscal and business environment. The policy document gives a broad frame-work for promoting and developing small and medium sectors through institutionalization of the support structure, and outlines a strategy for SME-led private sector growth for poverty reduction and job creation.Fiscal Developments
Fiscal year 2007-08 proved to be a difficult year for Pakistan, with several political and economic events transpiring unexpectedly. Domestic and global headwinds have had adverse consequences for fiscal discipline. Resultantly, the fiscal deficit is likely to miss its target of 4.0 percent of GDP by a wide margin. The hard earned macroeconomic stability underpinned by fiscal discipline appears to have been evaporated.Total revenues collected during the current year stood at Rs1545.5 billion, higher than the targeted level of Rs1476 billion. This increase of Rs69.5 billion from the budgeted revenues was mainly due to higher than targeted non-tax revenues. There are expectations that the FBR may fall short of its targeted level with total tax collections of Rs1.0 trillionóRs25 billion less than the original target. It is also anticipated that the government may receive an additional Rs103 billion from non-tax revenues, reaching to Rs483 billion. Slippages in provincial tax revenues amounted to Rs8 billion.Pakistan’s tax revenue-to-GDP ratio stood at only 9.5 percent of GDP during 2007/08 as compared to an average of 18 percent for other developing countries, indicating that substantial tax policy reforms are still needed to broaden the tax base. The indirect tax-to-GDP ratio stood at around 6 percent, while the direct tax-to-GDP ratio was calculated to be 4 percent. The government recognizes the need to broaden the tax base and reduce marginal tax rates, which would stimulate investment and production. The overall services sectors, including wholesale and retail trade, as well as agriculture, are potential candidates for broadening of the tax bases.Gross and Net tax collection has increased by 12.3 percent and 16.3 percent respectively. In absolute terms, these collections have gone up by Rs89.9 billion and 107.1 billion, respectively. Among the four federal taxes, the highest growth of 28.9 percent was recorded in the case of federal excise receipts, followed by sales tax (19.5 percent), direct taxes (12.5 percent) and customs (11.4 percent). The collection of direct taxes has suffered a substantial shortfall during July-April FY 07-08.The total expenditure for 2007-08 was budgeted at Rs1875 billion, 11.9 percent higher than last year. Current expenditure on the other hand was budgeted at Rs1378 billion, which was at previous year’s level. Development expenditure was targeted at Rs496 billion, 16.7 percent higher than last year. On the basis of revenue and expenditure projections, the overall fiscal deficit was targeted at Rs398 billion or 4 percent of GDP as against 4.3 percent last year. However, large slippages have occurred on the expenditure side mainly on account of subsidies on oil, power, fertilizer, wheat and other foods.Two factors had a significant impact on the budgetary outlook. Firstly, oil prices continued to rise at a greater pace, reaching as high as $115 per barrel in May 2008, an increase of over 116 percent during the fiscal year. Secondly, the lack of action on the part of the government aggravated the fiscal situation as the high international price of oil was not passed on to the domestic consumers. Consequently, the oil subsidy is projected to rise to Rs175 billion, over shooting the targeted level by Rs160 billion. Hoarding, smuggling and mismanagement of wheat operations forced the government to import 1.7 million tonnes of wheat at all time high prices.Interest payments surpassed their targeted level by a significant margin. A sum of Rs375 billion was budgeted for interest payments in 2007-08, whereas they are estimated at Rs503.2 billion, thereby surpassing the targeted level by a staggering Rs128.2 billion. The adverse developments on the revenue and expenditure sides resulted in massive slippages in the overall fiscal deficit for the year 2007-08. Against the target of Rs398 billion or 4 percent of GDP the overall fiscal deficit is likely to be Rs683.4 billion or 6.5 percent of GDP, the highest in the last ten years. In order to counter massive gaps between budgeted and estimated targets in current expenditure, the government made efforts to mobilize more resources on the one hand, and postpone development spending on the other. An adjustment of Rs100 billion was made in development expenditure.Domestic and external shocks not only increased the size of the fiscal deficit but they also changed the composition of financing. The borrowing requirements increased from Rs324 billion to Rs683.4 billion, an increase of 111 percent. External resource inflows were adversely affected by these shocks and against the budgeted level of Rs193 billion, only Rs119.4 billion is likely to materialize. In addition to this, Pakistan could not complete the transaction of Global Depository Receipts (GDRs) of the National Bank of Pakistan and could not launch sovereign and exchangeable bonds. Furthermore, some of the expected disbursements of multilateral banks and privatization proceeds were not materialized. These developments had adversely impacted the external resource inflows which remained below the budgeted level. Thus, the brunt of adjustments on the financing side fell on domestic sources. Against the budgeted financing of Rs131 billion from domestic sources, it increased to Rs564 billion. Within domestic sources, the bulk (82.2 percent) of financing came from banks while the remaining Rs100 billion or 17.8 percent came from non-bank sources. Most importantly, the borrowings from the State Bank of Pakistan (SBP) reached an alarming level. Consequently, the money supply growth for the year 2007-08 is expected to breach the target of 13.7 percent.Public debt as a percentage of GDP (a critical indicator of the country’s debt burden), which stood at 85 percent in end-June 2000, declined to 55.2 percent by end-June 2007, a reduction of almost 30 percentage points of GDP in seven years. The declining trend in public debt is likely to be reversed in 2007-08, mainly on account of yawning fiscal and current account deficits and a sharp depreciation of the rupee vis-‡-vis the US dollar. By end-March 2008 the public debt as percentage of full year GDP stood at 53.5 percent. However, more damage has been done to public debt in the last quarter (April-June) of the current fiscal year, which means a further widening of the fiscal and current account deficits, increased borrowing from domestic and external sources to finance the deficits, and a sharper adjustment to the exchange rate. The year 2007-08 is likely to end with public debt at around 56 percent of GDP, marking the first time in a decade to see a reversal in trends. Public debt in rupee terms has increased by 15.8 percent in the first nine months (July-March) of the fiscal year 2007-08.By end-June 2007 total domestic debt stood at Rs2610.2 billion which was estimated at 30 percent of GDP. The outstanding stock of domestic debt rose by Rs409.9 billion and stood at Rs3020.1 billion by end-March 2008 or 30.3 percent of GDP. The domestic debt had increased by 15.7 percent by end-March 2008 over end-June 2007. The increase in domestic debt mainly emanates from floating debt (27.1 percent) while the other two components, unfunded and permanent, witnessed a modest growth of 6.1 percent and 9.4 percent, respectively.Money & Credit
Pakistan has made significant progress in improving the health and soundness of the banking and financial sector over the last two decades. During this period of transformation, the financial sector of Pakistan has evolved into a more progressive and dynamic module of the economy, both in response to the financial sector reforms and to the growing financing needs of an expanding economy. In response to the growing demands of financial globalization, Pakistan’s financial system is starting to integrate with international financial markets.The process of the tightening of monetary policy began in FY05, from being broadly accommodative to one more aggressive. The government’s December 2004 decision to lift the freeze on domestic POL prices raised inflationary expectations, forcing a more aggressive tightening of monetary policy. During FY08, the SBP continued with a tight monetary policy stance, thrice raising the discount rate while also increasing the Cash Reserve Requirement (CRR) and the Statutory Liquidity Requirement (SLR). The impact of the tight monetary stance and liquidity management began to translate into a rise in other interest rates, with varied magnitude, at different stages of the economy. For instance, the 6 months T-bills cutoff witnessed an increase of 97 basis points to 9.9 percent during Jul-Apr FY08. Similarly, the 6 months and 12-months KIBOR also increased by 77 basis points and 63 basis points to 10.38 percent and 10.71 percent respectively.In order to improve the effectiveness of monetary policy and avoid ambiguities in sending out policy signals, the SBP has abolished the Annual Credit Plan (ACP). For 2007-08, the SBP had assumed that with real GDP growth target of 7.2 percent and inflation target of 6.5 percent, the broad money (M2) growth should have grown by 13.7 percent. The money supply growth slowed to 9.0 percent during July 2007-May 10, 2008 compared to 14 percent during the corresponding period of FY07. The M2 growth is entirely attributable to a rise in net domestic assets (NDA) of the banking system driven by high government borrowings for budgetary support. The NDA of the banking system registered an expansion of Rs656 billion during July 2007-May 10, 2008 compared with an expansion of Rs395 billion during the same period of last year. The net bank credit to the government for financing commodity operations and budgetary support amounted to Rs423 billion against Rs185 billion in the same period. Credit to government for commodity operations expanded by Rs60 billion compared to a contraction of Rs26 billion, while credit to government for budgetary support increased to Rs362 billion. The NFA of the banking system registered a net contraction of Rs289 billion compared to an expansion of Rs84 billion during this period. This contraction in NFA is attributable to delays in the issuance of GDRs, sovereign bonds, lower than expected receipts on account of logistics support, decline in foreign investment, lower inflows from multilateral institutions, and SBP’s decision to provide foreign exchange to support a part of oil payments even when the oil prices are at their historic high levels. Credit to private sector grew by 14.9 percent during July 2007-May 10, 2008 against 12.2 percent in the same period of last year. The key factors contributing to the recent acceleration in private sector credit growth were (i) rise in working capital requirements due to higher input costs, (ii) the need for bridge financing to settle price differential claims of OMCs and IPPs and (iii) the higher fixed investment in the month of March 2008.The impressive performance of Pakistan’s banking sector has attracted considerable FDI inflows in recent years. The banking sector of Pakistan has undergone a visible change as about eighty percent of the banking assets are now controlled by the private sector. Assets of all banks showed a net expansion of Rs203.1 billion in the first six months of FY 08 and stood at Rs5155 billion as compared to Rs4351 billion in the same period of last year.The Islamic Financial industry in Pakistan has grown substantially in recent years. Total assets of the Islamic banks reached Rs200.4 billion in FY 08 from Rs12.9 billion in FY03 and had contributed 4.1 percent in banking assets till end-February 2008.The importance of the SME sector cannot be overemphasized in the overall industrial development of a country. SMEs constitute nearly 90 percent of all the enterprises in Pakistan, they employ 80 percent of the non-agriculture labor force and their share in the annual GDP is nearly 40 percent. During FY08, credit to the SME sector decreased to Rs18 billion from Rs30 billion during FY07.The nonñbank financial sector has historically played an important role in the mobilization and channeling of savings in the financial system. The NBFIs have, in recent years benefited from an environment of low interest rates coupled with high economic growth, but have been unable to create an impact as well-functioning, specialized financial intermediaries. The success story among NBFIs is that of mutual funds. The mutual fund sector is rapidly growing in Pakistan and accounted for the largest chunk in total assets of non-bank financial sector. Between FY00 to FY 07, net assets of mutual funds have grown by more than 12 times to reach Rs313 billion from Rs25 billion only in FY 00.
Capital Markets
A strong economy requires a cutting-edge financial system that instills confidence and efficiently provides a wide range of financial services to households and businesses alike, and capital markets are an essential component of a strong financial system. A diversified financial system is conducive to both financial stability and to efficient resource allocation in support of medium term economic growth. Pakistan, with its large consumer base, has enormous and attractive investment opportunities, and like other developing countries, needs both local and foreign investment to support and sustain its economic growth.Pakistan’s equity market has performed comparatively better in comparison to its regional counterparts during the outgoing fiscal year 2007-08, albeit with a volatile political scenario and fragile economic outlook. A large number of mergers and acquisitions were witnessed during the outgoing fiscal year, which is a healthy sign for a corporate assessment of the country. Two major banks (HBL and Arif Habib Bank) went public on the KSE via IPOs. The premier stock exchange index (KSE-100) broke the psychological barrier of 15,500 points to close at 15,676 points on April 18, 2008. This level has never been achieved in Pakistan before, portraying an attractive valuation of the domestic equity market. The unprecedented events of November 3, December 27, February 18 and May 22 invited sharp corrections to the stock market. Nevertheless, the stock market was able to survive through these periods of tumult, which increased the confidence of the equity market investors, despite the overall market return remaining notably lower than those in the past several years. LSE and ISE followed the foot prints of the leading stock exchange in the country. Moreover, the sectoral performance in the bourses remained impressive with banks and financial institutions outperforming the others.
Pakistan’s debt market has seen a consistent supply of long term government securities amounting to about Rs69 billion and the inflation-adjusted rise in deposit rates of National Savings Schemes in 2007-08. Five new TFCs have been issued, mostly by the financial sector in the same period, and a sophisticated derivative market has taken off recently. The Pakistani investor base has observed phenomenal progress in terms of size, liquidity and growth in recent years. Over time, the Non-Banking Finance Companies sector has demonstrated better performances. In particular, the leasing and investment finance sectors have shown impressive growth. The buoyant capital market provided vigour to the growth and development of mutual funds, which nearly doubled their asset holdings during last year. However, growth in the housing finance sector has remained stagnant. It is also pertinent to note that the development of discount houses and venture capital companies remains at an initial stage. Real Estate Investment Trusts, Private Equity and Venture Capital Funds are welcome additions this year. However, the credit rating industry still lags behind with only two companies currently involved in it. This has clearly hampered the development of sub-grade investment bonds in the country though the credit quality remains high.Capital market reforms initiated by the SECP promise far-reaching results in improving the financial markets of Pakistan although some key steps are still to be taken. However, the domestic capital markets need more aggressive reform actions and hence, a comprehensive set of recommendations has been laid out at the end of the chapter. Strong dedication and commitment by the government will lead to constant innovation and a healthy development of the local capital markets.
InflationThe inflation rate as measured by the Consumer Price Index (CPI) averaged at 10.3 percent during (July- April) 2007-08, as against 7.9 percent in the same period last year. Food price inflation is estimated at 15.0 percent compared to 10.2 percent in the same period of last year. Non-food inflation increased to 6.8 percent versus 6.2 percent in the comparable period of last year. The core inflation (non-food, non-energy sector), increased little over last year increasing from 6.0 percent in 2006-07 to 7.5 percent in the first ten months of the current fiscal year. The larger contribution towards the overall CPI inflation comes from food inflation. Based on current trends, it is expected that the average inflation rate during 2007-08 will be over 10.5 percent.Major factors contributing to the rise in inflationary pressures in the economy during the current year 2007-08 include the extremely high food and energy prices, which is in fact a global problem. Food inflation was predominantly driven by unprecedented rise in the prices of few items like wheat, rice and edible oil etc, owing to supply short-fall of key consumer items as well as the impact of the significant increase in their global prices. The record high jump in oil prices lead to an increase in the cost of Pakistani imports as well as aggravating food shortages across the world through the conversion of many crops from human consumption to fuel, which have also seriously spurred the world-wide price level including those in Pakistan.Inflation is an important determinant of the macroeconomic stability and thus attracted policy measures to contain it at tolerable level. The corrective measures include pursuing tight monetary policy by SBP to control money supply and credit expansion, easing supply by allowing imports of several essential items to augment domestic supply, gearing reforms toward additional agricultural output and effective participation of the public sector distribution network (USC & TCP).Trade and Payments
Pakistan’s exports were growing at 16 percent per annum on the back of strong macroeconomic policies pursued at home and the hospitable international trading environment the period (2002-03 to 2005-06). The impressive export performance backtracked to dismal in 2006-07 when they hardly managed to grow at less than 4 percent. Overall exports recorded a growth of 10.2 percent during the first ten months (July- April) of the current fiscal year against 3.6 percent in the same period of last year. In absolute terms, exports have increased from $13847.3 million to $15255.5 million in the period. Although exports growth has remained far short of the average growth of 16 percent achieved during 2002-03 to 2005-06, but it was satisfactory when viewed in the backdrop of poor show last year.Imports during the first ten months (July-April) of the current fiscal year (2007-08) grew by 28.3 percent compared with the same period of last year, reaching to $32.06 billion. After growing at an average rate of 29 percent per annum during 2003-04, Pakistan’s import growth slowed to a moderate level of 6.9 percent in the last fiscal year (2006-07). Import’s growth exhibited a sharp pick up in 2007-08 on the back of an extra-ordinary surge in the imports of petroleum products, food and raw material. Non-oil imports were up by 22.5 percent and non-oil and non food imports spiked by 18.8 percent during the first ten months (July- April) of the current fiscal year.Imports of the petroleum group registered extraordinary growth of 47 percent and reached to $8670 million. The petroleum group accounts for 27 percent of total imports but contributed 39 percent in the overall growth of imports for the year. The rise in imports of the petroleum group has been the fallout of extraordinary hike in crude oil prices in the international market, as well as the substantial increase in its quantity imported. The imports of raw material contributed almost 21 percent to this year’s rise in import bill. This is followed by imports of food group which contributed 16 percent to the overall imports growth. Imports of petroleum products and edible oil contributed 47 percent to the additional import bill in FY 08. Additional 18.7 percent contribution came from the import of wheat and fertilizer. These four items accounted for two-thirds of imports growth. Consumer durables contribution was negative (0.4 percent) mainly on account of decline in the import of road motor vehicles.Pakistan’s current account deficit (CAD) widened to US$11.6 billion during Jul-Apr FY08 against US$6.6 billion in the comparable period of last year, showing an increase of 75.7 percent. Even when compared to the size of the economy, CAD was substantially high at 6.8 percent of GDP during Jul-April FY08 as against 4.6 percent for the same period last year. The deterioration of the current account deficit was mainly driven by sharp rise in the trade deficit along with an increase in net outflows from services and income account. Services account deficit widened by 44.2 percent during Jul-April FY08 to reach $5.6 billion. This deterioration was contributed by relatively high import growth and the decline in export of services. However, the strong growth in current transfers on the back of impressive growth in remittances almost entirely offset the deficit in services and income account thereby leaving the trade deficit as the fundamental source of expansion in the current account deficit. The current transfers witnessed an impressive increase of 16.4 percent during Jul-April FY08 on the back of strong growth in both private and official transfers.The Pak rupee, after remaining stable for more than four years, lost significant value against the US dollar and depreciated by 6.4 percent during July-April 2008. The fall in the value of the rupee is mainly attributed to rising oil prices in the international market, widening of current account deficit and the uncertain political situation in the country.Worker’s remittances registered commendable growth during Jul-Apr FY08 by growing by 19.5 percent on top of 22.7 percent growth in the corresponding period of last year. Worker’s remittance totaled $5.3 billion in the first ten months of (Jul-April) of the fiscal year as against $4.4 billion in the same period last year. Pakistan’s total foreign exchange reserves stood at $12,344 million as on end-April 2008, significantly lower than the end-June 2007 level of $15,646 million. Reserves peaked to $16,443 million at end Oct 2007, while they showed significant depletion of $4.1 billion during Nov-Apr FY08. During Jul-Oct 2007, reserves improved by 5.1 percent due to the relatively lower current account deficit and substantial inflows in the financial account. However, October onwards, net outflows from portfolio investment, and a steep rise in the current account deficit led to a sharp decline in the foreign exchange reserves of the country.External Debt and Liabilities
Owing to the prudent debt reduction strategy and successive high growth rates, Pakistan has reduced its public debt burden (including Rupees debt and foreign currency debt) from 100.3 percent of GDP in end-FY99 to 53.5 percent of GDP by end-March FY08. The external debt component of public debt (excluding private non-guaranteed debt and liabilities) has decreased from 40.8 percent of GDP end-FY02 to 24.7 percent of GDP at end-March FY08.External debt and liabilities (EDL) at the end of March FY08 stood at US$45.9 billion. This represents an increase of US$5.4 billion, indicating a 13.3 percent increase over the stock at the end of FY07. Borrowing from multilateral and bilateral lenders accounts for 80 percent of outstanding debt, and are mostly in the form of medium and long term debt. The share of short term debt, on the other hand, is extremely low at 1.3 percent. Pakistan took advantage of an earlier Paris Club rescheduling to re-profile its debt at a more manageable level. The external debt and liabilities (EDL) declined from 51.0 percent of GDP at the end of FY02 to 26.9 percent of GDP by end-March 2008. Similarly, the EDL were 236.8 percent of foreign exchange earnings, but declined to 127.1 percent in the same period. The EDL were nearly 5.8 times foreign exchange reserves at the end of FY02, but declined to 3.4 by end March 2008. Interest payments on external debt were 7.8 percent of current account receipts, but declined to 2.5 percent during the same period. The maturity profile also showed an improvement over the last five years as short-term debt was 1.4 percent of EDL, but declined modestly to 1.3 percent of EDL in the same period. International capital markets have suffered one of the most turbulent years in recent history. With the financial crisis instilling a sense of distrust amidst the market, access to financing has been restricted, with spreads widening for both developed and emerging economies alike. Given the negative sentiment surrounding capital markets, and a domestic economy with substantial macroeconomic imbalances and political uncertainty, Pakistan has not issued any new instruments in FY08. However, the country is still pursuing a comprehensive external borrowing strategy consistent with borrowing constraints such as the saving/investment gap, amortization payments, keeping adequate reserves and most importantly the government’s medium-term development priorities. The government plans to continue to tap the global capital markets, when conditions are more favorable, through regular issuance of bonds (conventional and Islamic) to ensure a steady supply of Pakistan’s sovereign paper, establish a benchmark for Pakistan and to keep Pakistan on the radar screen of global investors. This will keep spreads on Pakistani paper low, give more borrowing options to Pakistani borrowers including the government and ensure that Pakistan is covered by various investment research products.EducationEducation is central to the socio-economic development of a country. It plays a vital role in building human capabilities and accelerates economic growth through knowledge, skills and creative strength of a society. The positive outcomes of education include reduction in poverty and inequality, improvement in health status and good governance in implementation of socio-economic policies. The multifaceted impact of education makes it an essential element for policy framework. Developing countries, where majority of the world’s population resides, need to redesign educational policies for promoting productivity in different sectors of the economy by developing highly skilled manpower and addressing their development needs for rapid industrialization.The government is making serious efforts to improve the quantity and quality of education by enhancing educational facilities within the minimum possible time. National Textbook and Learning Materials Policy (2007) has been prepared to prop up the quality of education at all levels through better quality textbooks at affordable prices and other learning materials for promoting Pakistan as a knowledge based society. National Curriculum Council (NCC) has prepared a comprehensive review of school curriculum to make it relevant to student needs.Between two Population Census 1972 and 1981 literacy rate improved by 0.5 percent per annum. However, between 1981 and the 1998, Census revealed a growth rate of 1.07 percent per annum in literacy. The adult literacy rate (10 years and above) rose from 26.2 percent to 43.9 percent in this period. In the current decade, Literacy Rate has improved at a moderate pace. According to PSLM Survey data (2006-07), the overall literacy rate (10 years & above) was 55 percent in 2006-07 compared to 45 percent in PIHS (2001-02), indicating a 10 percentage points increase over a period of only six years. Males’ literacy rate increased from 58 percent in 2001 to 67 percent in 2006-07, while it increased from 32 to 42 percent for females during the same period, highlighting the gender gaps that still persist in access to education. Province wise literacy data (2006-07) show Punjab stood at 58 percent followed by Sindh (55 percent), NWFP (47 percent) and Balochistan at 42 percent.According to PSLM Survey data (2006), the overall school attendance (age 10 years and above) is 57 percent (69 percent for male and 44 percent for female) in 2006-07 compared to 51 percent (66 percent for male and 36 percent for female) in PIHS (2001-02). Province-wise, school attendance data for 2006-07 as against 2001-02 shows Punjab to be on the top (60 percent Vs 54 percent) followed by Sindh (56 percent Vs 49 percent), NWFP (50 percent Vs 45 percent), and Balochistan (39 percent Vs 37 percent) to be at the lowest level.According to the Ministry of Education (2006-07), there are currently 231,289 educational institutions in the country. The overall enrollment in these institutions is recorded at 34.8 million with teaching staff of 1.307 million. Out of the total institutions, there are 50 percent primary schools, 16 percent middle, 10 percent high, 4.9 percent Deeni Madaris and 1.2 percent Vocational Institutions. About three-fourth of the institutions are in rural areas. About 67 percent of the educational institutions in the country are run publicly relative to only 33 percent in the private sector.The government has established the National Vocational & Technical Education Commission (NAVTEC) to facilitate, regulate, and provide policy direction for technical education and vocational training to meet national and international demand for skilled manpower. In view of spreading higher education to every area of Pakistan, over the past three years, 17 new universities have been granted Charters, with the majority opened in areas where higher education opportunities were previously unavailable. To promote research and development (R&D) activities, the Higher Education Commission (HEC) has awarded 5,837 PhD scholarships (3,237 indigenous, 2,600 foreign) over the past three years.Health & Nutrition
Good health, defined in terms of a state of complete physical, mental and social well being, is a prerequisite for a nation to be productive. The intrinsic importance of health in social, economic and human development of individuals implies that poor health can directly influence an individual’s opportunities, his or her earning capacity, participation in community activities, and so on. The cohesive agenda of Millennium Development Goals (MDGs) also reflects the important role of health in the form of specific measurable targets. Pakistan is also a signatory to the UN Millennium Declaration and is fully committed to extend the agenda of providing basic right of health to all of its citizens. The Government’s commitments regarding the health sector are spelled out in the form of MDGs, PRSP, and MTDF.A considerable improvement in health sector facilities over the past year is reflected in the existing vast network of health care facilities, which consist of 4,755 dispensaries, 5,349 basic health units/sub health centers (BHUs/SHCs), 562 rural health centers (RHCs), 945 hospitals, 903 maternal and child health centers (MCHs), and 290 TB centers (TBCs). Available Human resource for fiscal year 2007-08 turns out to be 127,859 doctors, 8,795 dentists and 62,651 nurses, which make the ratio of population per doctor as 1,225, population per dentist as 19,121 and population per nurse as 2,501. The new health facilities added to overall health services include the construction of 56 new facilities (43 BHU and 13 RHCs), upgrading of 1,015 existing facilities (65 RHCs and 950 BHUs) and addition of 4,500 new doctors, 3,350 nurses and 400 dentists. The total outlay for the health sector is budgeted at Rs60 billion, which shows an increase of 20 percent over the last year, and turns out to be 0.6 percent of GDP. To reduce the incidence of disease and to alleviate people’s pains and sufferings so as to improve their health status, various health programs remained operative during fiscal year 2007-08. These include the national programs for the prevention and control of tuberculosis, malaria, HIV/AIDS, hepatitis, blindness and the program on maternal, neonatal and child health etc. During the fiscal year 2007-08 the caloric availability per day is likely to increase from 2,466 to 2,529.Population, Workforce and Employment
Pakistan, with a population of 160.9 million in mid-2008, is the 6th most populous country in the world. In absolute numbers, almost 128 million persons have been added to the population during the last 58 years (1951-2008). Annual growth rates have risen from 1 percent in the first three decades of the country, to around 2 percent in the next three decades after peaking over 3 percent in the 1960s and 1970s and then below 3 percent in the 1990s. The country’s population is estimated to double in the year 2045 if it continues to grow at 1.8 percent. The population density has increased to 203 persons per square kilometer today from 42.5 persons per square kilometer in 1951, which is almost a four time increase. Movement of population to urban areas, attributed to well known “pull” and “push” factors continues and as a result, the urban population has increased from 6 million in 1951 to today’s 57 million. This has put enormous pressure on available infrastructure like housing, transportation, electricity, water, sewerage, sanitation, health and educational facilities.The Crude Birth Rate (CBR) and Crude Death Rate (CDR) are statistical values that can be utilized to measure the growth or decline of a population. The CBR and CDR are both measured by the rate of births or deaths respectively among a population of 1,000. The Crude Birth Rate is called “crude” because it does not take into account age or sex differences among the population. CBR of more than 30 and less than 18 per 1000 population are respectively considered high and low. The CBR in Pakistan is estimated at 26.1. It is worth mentioning that health statistics in Pakistan are gradually improving; mortality rate is declining and was 7.1 (per thousand) in 2005-06; the decline is attributed to the elimination of epidemic diseases and the improvement in medical services. Despite a considerable decline in the total mortality in Pakistan, infant mortality remains high at 76.7 per thousand live births in 2005-06. The major reasons for the high mortality rate include diarrhea and pneumonia. While maternal mortality ratio ranges from 350-400 per hundred thousand births per year, the contraceptive prevalence rate (CPR) is estimated at 26 percent and total fertility rate (TFR) has exhibited a decline from 4.5 percent in 2001-02 to 3.8 percent in 2005-06.The labour force participation rate is an important variable which indicates the supply of labour in the economy and the composition of the country’s human resource. Labour force analyses also helps in policy formulation for employment, human resource development, determination of training needs, etc. In addition this indicator of labour force is helpful in assessing the labour market behavior for different segments of population, especially for youth. The working age (10 years & above) population is estimated to be 111.39 million. The labour force participation rate, though demonstrating an increasing trend in recent years, is nevertheless lower than the global or regional rates. The increasing trend in labour force participation witnessed in the recent years can be attributed to rising employment opportunities owing to robust growth and lowering of socio-cultural barriers for females to enter the job market. Total provincial LFPR (both sex) has however, witnessed a decline in all the four provinces in the year 2006-07. The most pronounced reduction has been noted for NWFP (from 39.7 percent to 36.3 percent). A province-wise break up of refined participation rates suggest that against the national average of 45.2 percent, the participation rate in Punjab is 48.5 percent followed by Sindh (42.7 percent), Balochistan (43.6 percent) and NWFP (36.3 percent).Agriculture employs 43.61 percent work force in Pakistan followed by trade (14.43 percent), services sector (14.41 percent) and manufacturing (13.54 percent). In other words, over 86 percent of work force is employed in these four sectors. As against 2005-06 the shares of agriculture and services in employed workforce marginally increased in 2006-07, while those in manufacturing and trade registered a marginal decline.There has occurred a shift in employment in major sectors of the economy. However, agriculture still remains the dominant source of employment in Pakistan. In 1999-00, the share of agriculture in employment was 48.4 percent, while in 2006-07 this has reduced to 43.6 percent. Targeting of labor intensive livestock and dairy sectors can be an important strategy for employment augmentation in rural areas. These are complemented by public sector funded small area development schemes. These strategies have successfully expanded rural employment, particularly at the local level. Agriculture is followed by wholesale and retail trade, community and social services and manufacturing sector. These sectors employ 14.4 percent, 14.4 percent and 13.5 percent workforce, respectively. An increase in the share of manufacturing sector (2.1 percent), over the last seven years, is an indication that employment opportunities are being created in both rural and urban regions of the country. Trade (0.9 percent), construction (0.8 percent) and transport (0.4 percent) are supplementing employment generation as well. The policy of deregulation, privatization and liberalization helped in increasing the participation of private sector in the economy. As a result, a significant number of employment opportunities are being generated in urban areas. The capital intensity of the industrial sector, however, limits its employment generating capacity.
ISLAMABAD: The government on Tuesday released the Economic Survey 2007-08. Following is the Executive Summary of the survey.
Growth and Investment
Pakistan’s economy has shown great resilience against internal and external shocks of very high intensity and grew robustly at 5.8 percent in 2007-08, as against 6.8 percent last year and this year’s target of 7.2 percent. The Commodity Producing Sector (CPS) registered a growth of 3.2 percent in 2007-08 as against 6.0 percent last year owing mainly to the lackluster performance of agriculture and manufacturing. While agriculture grew by 1.5 percent, the manufacturing sector posted a modest growth of 5.4 percent in 2007-08. The large scale manufacturing (LSM) sector witnessed a modest growth of 4.8 percent, down from 8.6 percent last year. The manufacturing sector has been hard hit by political instability, frequent eruptions of incidents detrimental to law and order and the acute energy shortages. In unison with increasing prices for fuel and energy, all these factors have caused slower growth in LSM. Growth in the small scale manufacturing sub-sector moderated to 7.5 percent in 2007-08 from 8.1 percent during 2006-07.The poor show of the agriculture sector was the result of a sharp deceleration in the growth of the major crops sub-sector, which posted a negative growth of 3.0 percent in 2007-08 as against a healthy growth of 8.3 percent last year. Minor crops registered a growth of 4.9 percent as against the negative growth of 1.3 percent last year. Fishing and forestry exhibited robust growth of 3.8 percent and 11.0 percent, respectively.The services sector has surpassed the growth target of 7.1 percent and grew by 8.2 percent in 2007-08 as against the actual achievement of 7.6 percent last year. The finance and insurance sector displayed a stellar growth performance of 17.0 percent during 2007-08 as against 15 percent last year. Value added in the wholesale and retail trade sector grew at 6.4 percent as compared to 5.4 percent last year and the target of 7.8 percent this year. The Transport, Storage and Communication sub-sector saw a deceleration in growth to 4.4 percent in 2007-08 as compared to 6.5 percent of last year.The contribution of CPS to GDP growth has declined to 26.6 percent from 42.4 percent last year. Agriculture sector contributed only 0.3 percentage points or 5.6 percent to GDP growth in 2007-08 as against 0.8 percentage points or 12 percent contribution last year. The manufacturing sector contributed 1.0 percentage point or 17.7 percent to GDP growth as against 1.5 percentage points or 22.2 percent last year. Industry contributed 1.2 percentage points or 20.9 percent to this year’s real GDP growth. The Services sector contributed 4.2 percentage points or 73.4 percent to overall growth this year. The contribution made by wholesale and retail trade has been 18.7 percent or 1.1 percentage points to GDP growth in 2007-08. Finance and insurance has also contributed 18.7 percent or 1.0 percentage point to this year’s growth.Per capita income has grown at an average rate of above 13.0 percent per annum during the last five years, rising from $586 in 2002-03 to $925 in 2006-07 and further to $1085 in 2007-08. Per capita income in dollar terms rose from $925 last year to $1085 in 2007-08, depicting an increase of 18.4 percent. Real per capita income in rupee terms has also increased by 4.7 percent, on average, for the last three years. The real per capita income grew by 4.2 percent as compared to 4.9 percent last year. Real private consumption expenditure grew by 8.5 percent in 2007-08 as opposed to 4.1 percent last year.Total investment declined to 21.6 percent of GDP in 2007-08 from its peak level of 22.9 percent last year. However, total investment has increased from 16.9 percent of GDP in 2002-03 to 21.6 percent of GDP in 2007-08, showing an increase of 5.7 percent of GDP in five years. Fixed investment grew by 3.4 percent in real terms and 12.5 percent in nominal terms. Private investment grew by 16.3 percent per annum in real terms and 30.7 percent per annum in nominal terms during the period (2004-07). However, its growth declined substantially to 0.9 percent in real terms and 9.7 percent in nominal terms. Major nominal growth in private sector investment was witnessed in mining & quarrying (15.3 percent), electricity & gas (11.0 percent), financial business (11.4 percent), and wholesale and retail trade (18.4 percent).National Savings stood at 13.9 percent of GDP in 2007-08 down from last year’s level of 17.8 percent. Domestic savings has declined to 11.7 percent of GDP from 16.0 percent of GDP in 2006-07. Public sector investment has also increased by 30.0 percent per annum during the last three years and 20.2 percent during the current fiscal year in nominal terms.Overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 32.2 percent and stood at $ 3.6 billion as against $5.3 billion in the comparable period of last year, mainly because of the fact that the political economy suffered many headwinds at continuous intervals.Foreign direct investment (private) has shown more resilience and stood at $3481.6 million during the first ten months (July-April) of the current fiscal year as against $4180.8 million in the same period last year, thereby showing a decline of 16.7 percent. Private portfolio investment on the other hand witnessed a massive decline of 91 percent by recording an inflow of $98.9 million as against $1097.3 million in the comparable period of last year. Public foreign investment depicted a modest inflow of only $20.5 million as against an outflow of $66.6 million in the comparable period of last year.Almost 57 percent of FDI has come from three countries, namely, the UAE, US, and UK. US investors, with 33.4 percent investment, contributed the most during the first ten months (July-April) of 2007-08. Norway (4.4 percent or $154.8 million), Switzerland (4.1 percent or $141.3 million), Hong Kong (3.5 percent or $121.3 million), Netherlands (2.9 percent or $101.0 million) and Japan (2.9 percent or $100.3 million) were the other contributors to FDI inflows. Three groups, namely; communication, financial business and oil & gas exploration, accounted for almost 67 percent of FDI inflows in the country.AgricultureNotwithstanding its declining share in GDP, agriculture is still the single largest sector of the economy, contributing 21 percent to GDP and employing 44 percent of the workforce. More than two-third’s of Pakistan’s population lives in rural areas and their livelihood continues to revolve around agriculture and allied activities. Like in other developing countries, poverty in Pakistan is largely a rural phenomenon. Therefore, development of agriculture will be a principal vehicle for alleviating rural poverty. The recent global food crises, while creating difficulties for net food importing countries, is equally providing opportunities for developing countries like Pakistan to get their acts together and benefit from the current situation by giving more serious attention to agriculture.The sustained higher growth in emerging economies has impacted the consumption patterns of households, including dietary changes towards higher quality food such as meat and dairy products. As a result, the production of these items is rising globally. In Pakistan, the livestock and dairy sectors accounts for 52 percent of agriculture, 11 percent of GDP and affects the lives of 30-35 million people in rural areas. In order to achieve higher sustained growth in agricultural value added, it is absolutely necessary to give due attention to the livestock and dairy sector to achieve multiple objectives, such as, the objectives of attaining food security and poverty reduction.The growth performance of agriculture over the last six years has fluctuated in the range of 1.5 percent to 6.5 percent. The volatility in agricultural growth is mainly caused by the crop sector which is associated with the vagaries of Mother-Nature, pest attacks, ill effects of adulterated pesticides etc. Such volatility is detrimental to income growth of farmers and hampers government efforts to reduce poverty.Agriculture performed poorly in 2007-08, growing at 1.5 percent against the target of 4.8 percent. This poor performance is mainly because of equally poor performance of major crops and forestry, registering negative growths of 3.0 percent and 8.5 percent, respectively. Livestock, minor crops and fishing have been the saving grace for agriculture as these sectors performed reasonably well and compensated for the performance of major crops and forestry, which allowed the growth rate in agriculture to arrive at 1.5 percent this year. Major crops, accounting for 34 percent of agriculture and 7.1 percent of GDP, suffered on account of the poor showing of wheat and cotton and less than satisfactory performance of the rice crop. Sugarcane and maize, being the other two major crops, performed impressively in 2007-08.The cotton crop suffered for a variety of reasons, including heavy rainfall in May 2007, which caused poor germination in Punjab, high temperatures during August and September 2007, causing more shedding of fruit parts and pest attacks, especially the dangerous mealy bug infestation. Consequently, cotton production declined to 11.7 million bales as against 12.9 million bales last year, registering a negative growth of 9.3 percent. The wheat crop was adversely affected by the shortage of irrigation water to the extent of 23.3 percent over normal supplies during Rabi and the inordinate spike in prices of DAP fertilizer. Accordingly, production of wheat declined to 21.7 million tonnes as against 23.3 million tonnes last year, thereby showing a decline of 6.6 percent. In sheer contrast, the two other major crops performed well with sugarcane recording the highest ever production level of 63.9 million tonnes, 16.8 percent higher than last year. The production of rice witnessed a modest growth of 2.3 percent and stood at 5.6 million tonnes.Minor crops, accounting for 12 percent in agriculture value added, posted a growth of 4.9 percent against the negative growth of 1.3 percent last year. The performance of livestock, accounting for 52.2 percent of agricultural value added, was satisfactory at 3.8 percent. The performance of fisheries has been impressive as it grew by 11 percent in 2007-08 because inland fish catch increased by 11.1 percent, while the output of marine fishing grew by 11.5 percent during 2007-08. Forestry followed the traditional negative growth pattern for the fifth year in a row. This small sector, with only one percent stake in the overall value-addition in agriculture, registered a negative growth of 8.5 percent in 2007-08 as the turnout of production of timber and firewood during the year declined by 9.3 percent.Pakistan’s agricultural output is closely linked with the supply of irrigation water. Against the normal surface water availability at canal heads of 103.5 million-acre feet (MAF), the overall (both for Kharif and Rabi) water availability has been lower in the range of 5.9 percent (2003-04) to 20.6 percent (2004-05). Relatively speaking, Rabi season faced more shortage of water than Kharif during 2007-08.During the current fiscal year (2007-08), the availability of water for Kharif 2007 (for the crops such as rice, sugarcane and cotton) has been 5.5 percent more than the normal supplies and 12.2 percent more than last year’s Kharif. The water availability during Rabi season (for major crop such as wheat), as of end-March 2008 was, however, estimated at 27.9 MAF, which was 23.4 percent less than the normal availability, and 10.5 percent less than last year’s Rabi, adversely affecting the wheat crop, production of which has decreased by 6.6 percent over the last year.Manufacturing & Mining
Pakistan’s manufacturing sector recorded the weakest growth in a decade during the outgoing fiscal year 2007-08. Overall manufacturing posted a growth of 5.4 percent during the first nine months of the current fiscal year against the target of 10.9 percent and 8.1 percent of last year. Large scale manufacturing, accounting for 70 percent of overall manufacturing, registered a growth of 4.8 percent in the current fiscal year 2007-08 against the target of 12.5 percent and last year’s achievement of 8.6 percent. Heightened political tension, deteriorating law and order situation, growing power shortages, the cumulative impact of monetary tightening and rising cost of doing business are the reasons responsible for the poor showing of manufacturing in 2007-08.The main contributors to this growth of 4.8 percent during July-March 2007-08 over last year, are pharmaceuticals (30.7 percent), wood products (21.9 percent), engineering products (19.5 percent ), food & beverages (11.1 percent), petroleum products (6.0 percent) and chemicals (3.1 percent). The individual items that displayed positive growth include cotton cloth (4.8 percent) and cotton yarn (3.3 percent) in the textile group; cooking oil (1.1 percent), sugar (33.9 percent) and cigarettes (5.1 percent) in the food, beverages and tobacco group; cement (17.9 percent) in the non-metallic mineral products group; and buses (32.0 percent), LCV’s (16.4 percent) and motorcycles (28.1 percent) in the automobile group. A few items that showed a decline in production include fertilizers (16.9 percent), electronics (4.6 percent), paper & paper board (5.5 percent) and iron & steel products (7.6 percent). The individual items that exhibited negative growth include cars & jeeps (3.9 percent), phosphatic fertilizer (24.0 percent) and billets (20.6 percent).The mining and quarrying sector registered a growth rate of 4.9 percent as against a target of 4.5 percent and 3.0 percent of last year. The higher growth was propelled by magnetite (20.5 percent), lime stone (17.8 percent) and Baryte (15.6 percent).With effect from January 1991 to February 2007, GoP has privatized around 166 units at Rs475 billion (approx US$8.9 billion). The transactions carried out during the period of July 2007 to February 2008 include UBL’s divestment of 25 percent shares through a GDR fetched $650 million and was the biggest book building ever in Pakistan’s banking history. Initially 21.74 percent (175.95 million) shares were divested in June 2007 for total proceeds of $565.4 million. Another 3.2 percent (26.39 million) shares were divested in July 2007 for total proceeds of $84.81 million. The stock was priced at 5 times to book which is the highest valuation compared to similar transactions globally. The HBL-IPO was the largest offering ever in Pakistan in terms of value and the number of successful applicants. A total subscription of Rs18.9 billion was received against the base offer of Rs8.1 billion resulting in an over subscription of 2.3 times. The IPO has generated gross proceeds worth Rs12.2 billion against the divestment of 51.8 million shares (including a green shoe option of 17.2 million).A new SMEs Policy 2007 was launched in fiscal year 2007-08, where an attempt has been made to define uniformly, small and medium sectors in manufacturing, trade and services sectors for all the stake-holders and give a broad frame-work for the promotion of SMEs by improving the regulatory, fiscal and business environment. The policy document gives a broad frame-work for promoting and developing small and medium sectors through institutionalization of the support structure, and outlines a strategy for SME-led private sector growth for poverty reduction and job creation.Fiscal Developments
Fiscal year 2007-08 proved to be a difficult year for Pakistan, with several political and economic events transpiring unexpectedly. Domestic and global headwinds have had adverse consequences for fiscal discipline. Resultantly, the fiscal deficit is likely to miss its target of 4.0 percent of GDP by a wide margin. The hard earned macroeconomic stability underpinned by fiscal discipline appears to have been evaporated.Total revenues collected during the current year stood at Rs1545.5 billion, higher than the targeted level of Rs1476 billion. This increase of Rs69.5 billion from the budgeted revenues was mainly due to higher than targeted non-tax revenues. There are expectations that the FBR may fall short of its targeted level with total tax collections of Rs1.0 trillionóRs25 billion less than the original target. It is also anticipated that the government may receive an additional Rs103 billion from non-tax revenues, reaching to Rs483 billion. Slippages in provincial tax revenues amounted to Rs8 billion.Pakistan’s tax revenue-to-GDP ratio stood at only 9.5 percent of GDP during 2007/08 as compared to an average of 18 percent for other developing countries, indicating that substantial tax policy reforms are still needed to broaden the tax base. The indirect tax-to-GDP ratio stood at around 6 percent, while the direct tax-to-GDP ratio was calculated to be 4 percent. The government recognizes the need to broaden the tax base and reduce marginal tax rates, which would stimulate investment and production. The overall services sectors, including wholesale and retail trade, as well as agriculture, are potential candidates for broadening of the tax bases.Gross and Net tax collection has increased by 12.3 percent and 16.3 percent respectively. In absolute terms, these collections have gone up by Rs89.9 billion and 107.1 billion, respectively. Among the four federal taxes, the highest growth of 28.9 percent was recorded in the case of federal excise receipts, followed by sales tax (19.5 percent), direct taxes (12.5 percent) and customs (11.4 percent). The collection of direct taxes has suffered a substantial shortfall during July-April FY 07-08.The total expenditure for 2007-08 was budgeted at Rs1875 billion, 11.9 percent higher than last year. Current expenditure on the other hand was budgeted at Rs1378 billion, which was at previous year’s level. Development expenditure was targeted at Rs496 billion, 16.7 percent higher than last year. On the basis of revenue and expenditure projections, the overall fiscal deficit was targeted at Rs398 billion or 4 percent of GDP as against 4.3 percent last year. However, large slippages have occurred on the expenditure side mainly on account of subsidies on oil, power, fertilizer, wheat and other foods.Two factors had a significant impact on the budgetary outlook. Firstly, oil prices continued to rise at a greater pace, reaching as high as $115 per barrel in May 2008, an increase of over 116 percent during the fiscal year. Secondly, the lack of action on the part of the government aggravated the fiscal situation as the high international price of oil was not passed on to the domestic consumers. Consequently, the oil subsidy is projected to rise to Rs175 billion, over shooting the targeted level by Rs160 billion. Hoarding, smuggling and mismanagement of wheat operations forced the government to import 1.7 million tonnes of wheat at all time high prices.Interest payments surpassed their targeted level by a significant margin. A sum of Rs375 billion was budgeted for interest payments in 2007-08, whereas they are estimated at Rs503.2 billion, thereby surpassing the targeted level by a staggering Rs128.2 billion. The adverse developments on the revenue and expenditure sides resulted in massive slippages in the overall fiscal deficit for the year 2007-08. Against the target of Rs398 billion or 4 percent of GDP the overall fiscal deficit is likely to be Rs683.4 billion or 6.5 percent of GDP, the highest in the last ten years. In order to counter massive gaps between budgeted and estimated targets in current expenditure, the government made efforts to mobilize more resources on the one hand, and postpone development spending on the other. An adjustment of Rs100 billion was made in development expenditure.Domestic and external shocks not only increased the size of the fiscal deficit but they also changed the composition of financing. The borrowing requirements increased from Rs324 billion to Rs683.4 billion, an increase of 111 percent. External resource inflows were adversely affected by these shocks and against the budgeted level of Rs193 billion, only Rs119.4 billion is likely to materialize. In addition to this, Pakistan could not complete the transaction of Global Depository Receipts (GDRs) of the National Bank of Pakistan and could not launch sovereign and exchangeable bonds. Furthermore, some of the expected disbursements of multilateral banks and privatization proceeds were not materialized. These developments had adversely impacted the external resource inflows which remained below the budgeted level. Thus, the brunt of adjustments on the financing side fell on domestic sources. Against the budgeted financing of Rs131 billion from domestic sources, it increased to Rs564 billion. Within domestic sources, the bulk (82.2 percent) of financing came from banks while the remaining Rs100 billion or 17.8 percent came from non-bank sources. Most importantly, the borrowings from the State Bank of Pakistan (SBP) reached an alarming level. Consequently, the money supply growth for the year 2007-08 is expected to breach the target of 13.7 percent.Public debt as a percentage of GDP (a critical indicator of the country’s debt burden), which stood at 85 percent in end-June 2000, declined to 55.2 percent by end-June 2007, a reduction of almost 30 percentage points of GDP in seven years. The declining trend in public debt is likely to be reversed in 2007-08, mainly on account of yawning fiscal and current account deficits and a sharp depreciation of the rupee vis-‡-vis the US dollar. By end-March 2008 the public debt as percentage of full year GDP stood at 53.5 percent. However, more damage has been done to public debt in the last quarter (April-June) of the current fiscal year, which means a further widening of the fiscal and current account deficits, increased borrowing from domestic and external sources to finance the deficits, and a sharper adjustment to the exchange rate. The year 2007-08 is likely to end with public debt at around 56 percent of GDP, marking the first time in a decade to see a reversal in trends. Public debt in rupee terms has increased by 15.8 percent in the first nine months (July-March) of the fiscal year 2007-08.By end-June 2007 total domestic debt stood at Rs2610.2 billion which was estimated at 30 percent of GDP. The outstanding stock of domestic debt rose by Rs409.9 billion and stood at Rs3020.1 billion by end-March 2008 or 30.3 percent of GDP. The domestic debt had increased by 15.7 percent by end-March 2008 over end-June 2007. The increase in domestic debt mainly emanates from floating debt (27.1 percent) while the other two components, unfunded and permanent, witnessed a modest growth of 6.1 percent and 9.4 percent, respectively.Money & Credit
Pakistan has made significant progress in improving the health and soundness of the banking and financial sector over the last two decades. During this period of transformation, the financial sector of Pakistan has evolved into a more progressive and dynamic module of the economy, both in response to the financial sector reforms and to the growing financing needs of an expanding economy. In response to the growing demands of financial globalization, Pakistan’s financial system is starting to integrate with international financial markets.The process of the tightening of monetary policy began in FY05, from being broadly accommodative to one more aggressive. The government’s December 2004 decision to lift the freeze on domestic POL prices raised inflationary expectations, forcing a more aggressive tightening of monetary policy. During FY08, the SBP continued with a tight monetary policy stance, thrice raising the discount rate while also increasing the Cash Reserve Requirement (CRR) and the Statutory Liquidity Requirement (SLR). The impact of the tight monetary stance and liquidity management began to translate into a rise in other interest rates, with varied magnitude, at different stages of the economy. For instance, the 6 months T-bills cutoff witnessed an increase of 97 basis points to 9.9 percent during Jul-Apr FY08. Similarly, the 6 months and 12-months KIBOR also increased by 77 basis points and 63 basis points to 10.38 percent and 10.71 percent respectively.In order to improve the effectiveness of monetary policy and avoid ambiguities in sending out policy signals, the SBP has abolished the Annual Credit Plan (ACP). For 2007-08, the SBP had assumed that with real GDP growth target of 7.2 percent and inflation target of 6.5 percent, the broad money (M2) growth should have grown by 13.7 percent. The money supply growth slowed to 9.0 percent during July 2007-May 10, 2008 compared to 14 percent during the corresponding period of FY07. The M2 growth is entirely attributable to a rise in net domestic assets (NDA) of the banking system driven by high government borrowings for budgetary support. The NDA of the banking system registered an expansion of Rs656 billion during July 2007-May 10, 2008 compared with an expansion of Rs395 billion during the same period of last year. The net bank credit to the government for financing commodity operations and budgetary support amounted to Rs423 billion against Rs185 billion in the same period. Credit to government for commodity operations expanded by Rs60 billion compared to a contraction of Rs26 billion, while credit to government for budgetary support increased to Rs362 billion. The NFA of the banking system registered a net contraction of Rs289 billion compared to an expansion of Rs84 billion during this period. This contraction in NFA is attributable to delays in the issuance of GDRs, sovereign bonds, lower than expected receipts on account of logistics support, decline in foreign investment, lower inflows from multilateral institutions, and SBP’s decision to provide foreign exchange to support a part of oil payments even when the oil prices are at their historic high levels. Credit to private sector grew by 14.9 percent during July 2007-May 10, 2008 against 12.2 percent in the same period of last year. The key factors contributing to the recent acceleration in private sector credit growth were (i) rise in working capital requirements due to higher input costs, (ii) the need for bridge financing to settle price differential claims of OMCs and IPPs and (iii) the higher fixed investment in the month of March 2008.The impressive performance of Pakistan’s banking sector has attracted considerable FDI inflows in recent years. The banking sector of Pakistan has undergone a visible change as about eighty percent of the banking assets are now controlled by the private sector. Assets of all banks showed a net expansion of Rs203.1 billion in the first six months of FY 08 and stood at Rs5155 billion as compared to Rs4351 billion in the same period of last year.The Islamic Financial industry in Pakistan has grown substantially in recent years. Total assets of the Islamic banks reached Rs200.4 billion in FY 08 from Rs12.9 billion in FY03 and had contributed 4.1 percent in banking assets till end-February 2008.The importance of the SME sector cannot be overemphasized in the overall industrial development of a country. SMEs constitute nearly 90 percent of all the enterprises in Pakistan, they employ 80 percent of the non-agriculture labor force and their share in the annual GDP is nearly 40 percent. During FY08, credit to the SME sector decreased to Rs18 billion from Rs30 billion during FY07.The nonñbank financial sector has historically played an important role in the mobilization and channeling of savings in the financial system. The NBFIs have, in recent years benefited from an environment of low interest rates coupled with high economic growth, but have been unable to create an impact as well-functioning, specialized financial intermediaries. The success story among NBFIs is that of mutual funds. The mutual fund sector is rapidly growing in Pakistan and accounted for the largest chunk in total assets of non-bank financial sector. Between FY00 to FY 07, net assets of mutual funds have grown by more than 12 times to reach Rs313 billion from Rs25 billion only in FY 00.
Capital Markets
A strong economy requires a cutting-edge financial system that instills confidence and efficiently provides a wide range of financial services to households and businesses alike, and capital markets are an essential component of a strong financial system. A diversified financial system is conducive to both financial stability and to efficient resource allocation in support of medium term economic growth. Pakistan, with its large consumer base, has enormous and attractive investment opportunities, and like other developing countries, needs both local and foreign investment to support and sustain its economic growth.Pakistan’s equity market has performed comparatively better in comparison to its regional counterparts during the outgoing fiscal year 2007-08, albeit with a volatile political scenario and fragile economic outlook. A large number of mergers and acquisitions were witnessed during the outgoing fiscal year, which is a healthy sign for a corporate assessment of the country. Two major banks (HBL and Arif Habib Bank) went public on the KSE via IPOs. The premier stock exchange index (KSE-100) broke the psychological barrier of 15,500 points to close at 15,676 points on April 18, 2008. This level has never been achieved in Pakistan before, portraying an attractive valuation of the domestic equity market. The unprecedented events of November 3, December 27, February 18 and May 22 invited sharp corrections to the stock market. Nevertheless, the stock market was able to survive through these periods of tumult, which increased the confidence of the equity market investors, despite the overall market return remaining notably lower than those in the past several years. LSE and ISE followed the foot prints of the leading stock exchange in the country. Moreover, the sectoral performance in the bourses remained impressive with banks and financial institutions outperforming the others.
Pakistan’s debt market has seen a consistent supply of long term government securities amounting to about Rs69 billion and the inflation-adjusted rise in deposit rates of National Savings Schemes in 2007-08. Five new TFCs have been issued, mostly by the financial sector in the same period, and a sophisticated derivative market has taken off recently. The Pakistani investor base has observed phenomenal progress in terms of size, liquidity and growth in recent years. Over time, the Non-Banking Finance Companies sector has demonstrated better performances. In particular, the leasing and investment finance sectors have shown impressive growth. The buoyant capital market provided vigour to the growth and development of mutual funds, which nearly doubled their asset holdings during last year. However, growth in the housing finance sector has remained stagnant. It is also pertinent to note that the development of discount houses and venture capital companies remains at an initial stage. Real Estate Investment Trusts, Private Equity and Venture Capital Funds are welcome additions this year. However, the credit rating industry still lags behind with only two companies currently involved in it. This has clearly hampered the development of sub-grade investment bonds in the country though the credit quality remains high.Capital market reforms initiated by the SECP promise far-reaching results in improving the financial markets of Pakistan although some key steps are still to be taken. However, the domestic capital markets need more aggressive reform actions and hence, a comprehensive set of recommendations has been laid out at the end of the chapter. Strong dedication and commitment by the government will lead to constant innovation and a healthy development of the local capital markets.
InflationThe inflation rate as measured by the Consumer Price Index (CPI) averaged at 10.3 percent during (July- April) 2007-08, as against 7.9 percent in the same period last year. Food price inflation is estimated at 15.0 percent compared to 10.2 percent in the same period of last year. Non-food inflation increased to 6.8 percent versus 6.2 percent in the comparable period of last year. The core inflation (non-food, non-energy sector), increased little over last year increasing from 6.0 percent in 2006-07 to 7.5 percent in the first ten months of the current fiscal year. The larger contribution towards the overall CPI inflation comes from food inflation. Based on current trends, it is expected that the average inflation rate during 2007-08 will be over 10.5 percent.Major factors contributing to the rise in inflationary pressures in the economy during the current year 2007-08 include the extremely high food and energy prices, which is in fact a global problem. Food inflation was predominantly driven by unprecedented rise in the prices of few items like wheat, rice and edible oil etc, owing to supply short-fall of key consumer items as well as the impact of the significant increase in their global prices. The record high jump in oil prices lead to an increase in the cost of Pakistani imports as well as aggravating food shortages across the world through the conversion of many crops from human consumption to fuel, which have also seriously spurred the world-wide price level including those in Pakistan.Inflation is an important determinant of the macroeconomic stability and thus attracted policy measures to contain it at tolerable level. The corrective measures include pursuing tight monetary policy by SBP to control money supply and credit expansion, easing supply by allowing imports of several essential items to augment domestic supply, gearing reforms toward additional agricultural output and effective participation of the public sector distribution network (USC & TCP).Trade and Payments
Pakistan’s exports were growing at 16 percent per annum on the back of strong macroeconomic policies pursued at home and the hospitable international trading environment the period (2002-03 to 2005-06). The impressive export performance backtracked to dismal in 2006-07 when they hardly managed to grow at less than 4 percent. Overall exports recorded a growth of 10.2 percent during the first ten months (July- April) of the current fiscal year against 3.6 percent in the same period of last year. In absolute terms, exports have increased from $13847.3 million to $15255.5 million in the period. Although exports growth has remained far short of the average growth of 16 percent achieved during 2002-03 to 2005-06, but it was satisfactory when viewed in the backdrop of poor show last year.Imports during the first ten months (July-April) of the current fiscal year (2007-08) grew by 28.3 percent compared with the same period of last year, reaching to $32.06 billion. After growing at an average rate of 29 percent per annum during 2003-04, Pakistan’s import growth slowed to a moderate level of 6.9 percent in the last fiscal year (2006-07). Import’s growth exhibited a sharp pick up in 2007-08 on the back of an extra-ordinary surge in the imports of petroleum products, food and raw material. Non-oil imports were up by 22.5 percent and non-oil and non food imports spiked by 18.8 percent during the first ten months (July- April) of the current fiscal year.Imports of the petroleum group registered extraordinary growth of 47 percent and reached to $8670 million. The petroleum group accounts for 27 percent of total imports but contributed 39 percent in the overall growth of imports for the year. The rise in imports of the petroleum group has been the fallout of extraordinary hike in crude oil prices in the international market, as well as the substantial increase in its quantity imported. The imports of raw material contributed almost 21 percent to this year’s rise in import bill. This is followed by imports of food group which contributed 16 percent to the overall imports growth. Imports of petroleum products and edible oil contributed 47 percent to the additional import bill in FY 08. Additional 18.7 percent contribution came from the import of wheat and fertilizer. These four items accounted for two-thirds of imports growth. Consumer durables contribution was negative (0.4 percent) mainly on account of decline in the import of road motor vehicles.Pakistan’s current account deficit (CAD) widened to US$11.6 billion during Jul-Apr FY08 against US$6.6 billion in the comparable period of last year, showing an increase of 75.7 percent. Even when compared to the size of the economy, CAD was substantially high at 6.8 percent of GDP during Jul-April FY08 as against 4.6 percent for the same period last year. The deterioration of the current account deficit was mainly driven by sharp rise in the trade deficit along with an increase in net outflows from services and income account. Services account deficit widened by 44.2 percent during Jul-April FY08 to reach $5.6 billion. This deterioration was contributed by relatively high import growth and the decline in export of services. However, the strong growth in current transfers on the back of impressive growth in remittances almost entirely offset the deficit in services and income account thereby leaving the trade deficit as the fundamental source of expansion in the current account deficit. The current transfers witnessed an impressive increase of 16.4 percent during Jul-April FY08 on the back of strong growth in both private and official transfers.The Pak rupee, after remaining stable for more than four years, lost significant value against the US dollar and depreciated by 6.4 percent during July-April 2008. The fall in the value of the rupee is mainly attributed to rising oil prices in the international market, widening of current account deficit and the uncertain political situation in the country.Worker’s remittances registered commendable growth during Jul-Apr FY08 by growing by 19.5 percent on top of 22.7 percent growth in the corresponding period of last year. Worker’s remittance totaled $5.3 billion in the first ten months of (Jul-April) of the fiscal year as against $4.4 billion in the same period last year. Pakistan’s total foreign exchange reserves stood at $12,344 million as on end-April 2008, significantly lower than the end-June 2007 level of $15,646 million. Reserves peaked to $16,443 million at end Oct 2007, while they showed significant depletion of $4.1 billion during Nov-Apr FY08. During Jul-Oct 2007, reserves improved by 5.1 percent due to the relatively lower current account deficit and substantial inflows in the financial account. However, October onwards, net outflows from portfolio investment, and a steep rise in the current account deficit led to a sharp decline in the foreign exchange reserves of the country.External Debt and Liabilities
Owing to the prudent debt reduction strategy and successive high growth rates, Pakistan has reduced its public debt burden (including Rupees debt and foreign currency debt) from 100.3 percent of GDP in end-FY99 to 53.5 percent of GDP by end-March FY08. The external debt component of public debt (excluding private non-guaranteed debt and liabilities) has decreased from 40.8 percent of GDP end-FY02 to 24.7 percent of GDP at end-March FY08.External debt and liabilities (EDL) at the end of March FY08 stood at US$45.9 billion. This represents an increase of US$5.4 billion, indicating a 13.3 percent increase over the stock at the end of FY07. Borrowing from multilateral and bilateral lenders accounts for 80 percent of outstanding debt, and are mostly in the form of medium and long term debt. The share of short term debt, on the other hand, is extremely low at 1.3 percent. Pakistan took advantage of an earlier Paris Club rescheduling to re-profile its debt at a more manageable level. The external debt and liabilities (EDL) declined from 51.0 percent of GDP at the end of FY02 to 26.9 percent of GDP by end-March 2008. Similarly, the EDL were 236.8 percent of foreign exchange earnings, but declined to 127.1 percent in the same period. The EDL were nearly 5.8 times foreign exchange reserves at the end of FY02, but declined to 3.4 by end March 2008. Interest payments on external debt were 7.8 percent of current account receipts, but declined to 2.5 percent during the same period. The maturity profile also showed an improvement over the last five years as short-term debt was 1.4 percent of EDL, but declined modestly to 1.3 percent of EDL in the same period. International capital markets have suffered one of the most turbulent years in recent history. With the financial crisis instilling a sense of distrust amidst the market, access to financing has been restricted, with spreads widening for both developed and emerging economies alike. Given the negative sentiment surrounding capital markets, and a domestic economy with substantial macroeconomic imbalances and political uncertainty, Pakistan has not issued any new instruments in FY08. However, the country is still pursuing a comprehensive external borrowing strategy consistent with borrowing constraints such as the saving/investment gap, amortization payments, keeping adequate reserves and most importantly the government’s medium-term development priorities. The government plans to continue to tap the global capital markets, when conditions are more favorable, through regular issuance of bonds (conventional and Islamic) to ensure a steady supply of Pakistan’s sovereign paper, establish a benchmark for Pakistan and to keep Pakistan on the radar screen of global investors. This will keep spreads on Pakistani paper low, give more borrowing options to Pakistani borrowers including the government and ensure that Pakistan is covered by various investment research products.EducationEducation is central to the socio-economic development of a country. It plays a vital role in building human capabilities and accelerates economic growth through knowledge, skills and creative strength of a society. The positive outcomes of education include reduction in poverty and inequality, improvement in health status and good governance in implementation of socio-economic policies. The multifaceted impact of education makes it an essential element for policy framework. Developing countries, where majority of the world’s population resides, need to redesign educational policies for promoting productivity in different sectors of the economy by developing highly skilled manpower and addressing their development needs for rapid industrialization.The government is making serious efforts to improve the quantity and quality of education by enhancing educational facilities within the minimum possible time. National Textbook and Learning Materials Policy (2007) has been prepared to prop up the quality of education at all levels through better quality textbooks at affordable prices and other learning materials for promoting Pakistan as a knowledge based society. National Curriculum Council (NCC) has prepared a comprehensive review of school curriculum to make it relevant to student needs.Between two Population Census 1972 and 1981 literacy rate improved by 0.5 percent per annum. However, between 1981 and the 1998, Census revealed a growth rate of 1.07 percent per annum in literacy. The adult literacy rate (10 years and above) rose from 26.2 percent to 43.9 percent in this period. In the current decade, Literacy Rate has improved at a moderate pace. According to PSLM Survey data (2006-07), the overall literacy rate (10 years & above) was 55 percent in 2006-07 compared to 45 percent in PIHS (2001-02), indicating a 10 percentage points increase over a period of only six years. Males’ literacy rate increased from 58 percent in 2001 to 67 percent in 2006-07, while it increased from 32 to 42 percent for females during the same period, highlighting the gender gaps that still persist in access to education. Province wise literacy data (2006-07) show Punjab stood at 58 percent followed by Sindh (55 percent), NWFP (47 percent) and Balochistan at 42 percent.According to PSLM Survey data (2006), the overall school attendance (age 10 years and above) is 57 percent (69 percent for male and 44 percent for female) in 2006-07 compared to 51 percent (66 percent for male and 36 percent for female) in PIHS (2001-02). Province-wise, school attendance data for 2006-07 as against 2001-02 shows Punjab to be on the top (60 percent Vs 54 percent) followed by Sindh (56 percent Vs 49 percent), NWFP (50 percent Vs 45 percent), and Balochistan (39 percent Vs 37 percent) to be at the lowest level.According to the Ministry of Education (2006-07), there are currently 231,289 educational institutions in the country. The overall enrollment in these institutions is recorded at 34.8 million with teaching staff of 1.307 million. Out of the total institutions, there are 50 percent primary schools, 16 percent middle, 10 percent high, 4.9 percent Deeni Madaris and 1.2 percent Vocational Institutions. About three-fourth of the institutions are in rural areas. About 67 percent of the educational institutions in the country are run publicly relative to only 33 percent in the private sector.The government has established the National Vocational & Technical Education Commission (NAVTEC) to facilitate, regulate, and provide policy direction for technical education and vocational training to meet national and international demand for skilled manpower. In view of spreading higher education to every area of Pakistan, over the past three years, 17 new universities have been granted Charters, with the majority opened in areas where higher education opportunities were previously unavailable. To promote research and development (R&D) activities, the Higher Education Commission (HEC) has awarded 5,837 PhD scholarships (3,237 indigenous, 2,600 foreign) over the past three years.Health & Nutrition
Good health, defined in terms of a state of complete physical, mental and social well being, is a prerequisite for a nation to be productive. The intrinsic importance of health in social, economic and human development of individuals implies that poor health can directly influence an individual’s opportunities, his or her earning capacity, participation in community activities, and so on. The cohesive agenda of Millennium Development Goals (MDGs) also reflects the important role of health in the form of specific measurable targets. Pakistan is also a signatory to the UN Millennium Declaration and is fully committed to extend the agenda of providing basic right of health to all of its citizens. The Government’s commitments regarding the health sector are spelled out in the form of MDGs, PRSP, and MTDF.A considerable improvement in health sector facilities over the past year is reflected in the existing vast network of health care facilities, which consist of 4,755 dispensaries, 5,349 basic health units/sub health centers (BHUs/SHCs), 562 rural health centers (RHCs), 945 hospitals, 903 maternal and child health centers (MCHs), and 290 TB centers (TBCs). Available Human resource for fiscal year 2007-08 turns out to be 127,859 doctors, 8,795 dentists and 62,651 nurses, which make the ratio of population per doctor as 1,225, population per dentist as 19,121 and population per nurse as 2,501. The new health facilities added to overall health services include the construction of 56 new facilities (43 BHU and 13 RHCs), upgrading of 1,015 existing facilities (65 RHCs and 950 BHUs) and addition of 4,500 new doctors, 3,350 nurses and 400 dentists. The total outlay for the health sector is budgeted at Rs60 billion, which shows an increase of 20 percent over the last year, and turns out to be 0.6 percent of GDP. To reduce the incidence of disease and to alleviate people’s pains and sufferings so as to improve their health status, various health programs remained operative during fiscal year 2007-08. These include the national programs for the prevention and control of tuberculosis, malaria, HIV/AIDS, hepatitis, blindness and the program on maternal, neonatal and child health etc. During the fiscal year 2007-08 the caloric availability per day is likely to increase from 2,466 to 2,529.Population, Workforce and Employment
Pakistan, with a population of 160.9 million in mid-2008, is the 6th most populous country in the world. In absolute numbers, almost 128 million persons have been added to the population during the last 58 years (1951-2008). Annual growth rates have risen from 1 percent in the first three decades of the country, to around 2 percent in the next three decades after peaking over 3 percent in the 1960s and 1970s and then below 3 percent in the 1990s. The country’s population is estimated to double in the year 2045 if it continues to grow at 1.8 percent. The population density has increased to 203 persons per square kilometer today from 42.5 persons per square kilometer in 1951, which is almost a four time increase. Movement of population to urban areas, attributed to well known “pull” and “push” factors continues and as a result, the urban population has increased from 6 million in 1951 to today’s 57 million. This has put enormous pressure on available infrastructure like housing, transportation, electricity, water, sewerage, sanitation, health and educational facilities.The Crude Birth Rate (CBR) and Crude Death Rate (CDR) are statistical values that can be utilized to measure the growth or decline of a population. The CBR and CDR are both measured by the rate of births or deaths respectively among a population of 1,000. The Crude Birth Rate is called “crude” because it does not take into account age or sex differences among the population. CBR of more than 30 and less than 18 per 1000 population are respectively considered high and low. The CBR in Pakistan is estimated at 26.1. It is worth mentioning that health statistics in Pakistan are gradually improving; mortality rate is declining and was 7.1 (per thousand) in 2005-06; the decline is attributed to the elimination of epidemic diseases and the improvement in medical services. Despite a considerable decline in the total mortality in Pakistan, infant mortality remains high at 76.7 per thousand live births in 2005-06. The major reasons for the high mortality rate include diarrhea and pneumonia. While maternal mortality ratio ranges from 350-400 per hundred thousand births per year, the contraceptive prevalence rate (CPR) is estimated at 26 percent and total fertility rate (TFR) has exhibited a decline from 4.5 percent in 2001-02 to 3.8 percent in 2005-06.The labour force participation rate is an important variable which indicates the supply of labour in the economy and the composition of the country’s human resource. Labour force analyses also helps in policy formulation for employment, human resource development, determination of training needs, etc. In addition this indicator of labour force is helpful in assessing the labour market behavior for different segments of population, especially for youth. The working age (10 years & above) population is estimated to be 111.39 million. The labour force participation rate, though demonstrating an increasing trend in recent years, is nevertheless lower than the global or regional rates. The increasing trend in labour force participation witnessed in the recent years can be attributed to rising employment opportunities owing to robust growth and lowering of socio-cultural barriers for females to enter the job market. Total provincial LFPR (both sex) has however, witnessed a decline in all the four provinces in the year 2006-07. The most pronounced reduction has been noted for NWFP (from 39.7 percent to 36.3 percent). A province-wise break up of refined participation rates suggest that against the national average of 45.2 percent, the participation rate in Punjab is 48.5 percent followed by Sindh (42.7 percent), Balochistan (43.6 percent) and NWFP (36.3 percent).Agriculture employs 43.61 percent work force in Pakistan followed by trade (14.43 percent), services sector (14.41 percent) and manufacturing (13.54 percent). In other words, over 86 percent of work force is employed in these four sectors. As against 2005-06 the shares of agriculture and services in employed workforce marginally increased in 2006-07, while those in manufacturing and trade registered a marginal decline.There has occurred a shift in employment in major sectors of the economy. However, agriculture still remains the dominant source of employment in Pakistan. In 1999-00, the share of agriculture in employment was 48.4 percent, while in 2006-07 this has reduced to 43.6 percent. Targeting of labor intensive livestock and dairy sectors can be an important strategy for employment augmentation in rural areas. These are complemented by public sector funded small area development schemes. These strategies have successfully expanded rural employment, particularly at the local level. Agriculture is followed by wholesale and retail trade, community and social services and manufacturing sector. These sectors employ 14.4 percent, 14.4 percent and 13.5 percent workforce, respectively. An increase in the share of manufacturing sector (2.1 percent), over the last seven years, is an indication that employment opportunities are being created in both rural and urban regions of the country. Trade (0.9 percent), construction (0.8 percent) and transport (0.4 percent) are supplementing employment generation as well. The policy of deregulation, privatization and liberalization helped in increasing the participation of private sector in the economy. As a result, a significant number of employment opportunities are being generated in urban areas. The capital intensity of the industrial sector, however, limits its employment generating capacity.
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