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mtgondal · #5 Monday, June 04, 2007

An analytic objective assessment of the economy

Pakistan’s economy is likely to show commendable growth for the fourth successive year, with real GDP expected to exceed the annual plan target of 7 per cent. This robust growth is estimated to be quite broad based with commendable contributions from agriculture, manufacturing and services sectors

By Aftab Ahmad Khan

The recently released third quarterly report of the State Bank of Pakistan (SBP) presents an analytic objective assessment of the economy during July-March FY07 against the background of past trends. It also recommends appropriate policies and measures for putting the economy on a path of sustained high growth in a stable and equitable milieu.

According to the report, Pakistan’s economy is likely to show commendable growth for the fourth successive year, with real Gross Domestic Product (GDP) expected to exceed the annual plan target of 7 per cent. This robust growth is estimated to be quite broad based with commendable contributions from agriculture, manufacturing and services sectors.

In the agriculture sector, the growth of major crops could reach as high as 5.8 per cent in FY07, which is notably higher than the target growth of 4.3 per cent for this year. The output of wheat has witnessed an exceptional growth of 6 per cent in FY07 to reach 23 million tons, well above the target of 22.5 million tons, and the largest ever recorded in Pakistan. A rise in the area under cultivation of wheat, higher irrigation water availability, policy support as well as efficient use of inputs are the main reasons for this exceptional growth.

Aside from the record wheat crop, higher that estimated output of sugarcane and cotton harvests has also contributed to the above target performance of the agriculture sector.

Agri-credit disbursements registered a strong growth of 22.5 per cent in July-March FY07 as against the corresponding period of FY06 and above the annual target of 16.4 per cent.

Increased income of farming sector in FY07 is reflected by the improvement in the Agri-credit recovery, which grew by 22.5 per cent YoY during July-March FY07 against 16.1 per cent increase during the previous year.

Growth in the large scale manufacturing industries during July-March FY07, according to the report is probably higher than in the corresponding period of last year, but the 13.0 growth target of large scale manufacturing (LSM) sector for FY07 may not be achieved.

The services sector, according to the report, will maintain its growth momentum in the current fiscal year despite a slowdown in the growth of wholesale and retail sub-sector due to deceleration in imports.

On the monetary front, there was sharp expansion in M2 during July-April FY07 of 12.1 per cent as compared with 10.8 per cent growth witnessed during the corresponding period of FY06. According to the report, the FY07 M2 growth target of 13.5 would be exceeded. Large M2 growth is mainly attributable to strong government borrowings and rise in net foreign assets.

The report quite appropriately recommends that the government needs to retire borrowings from the banking system, particularly from the central bank and that the fiscal deficit may be contained in years ahead to reduce the risk of crowding out of the private investment.

The SBP has focused on effective liquidity management to prevent M2 expansion stimulating the multiplier process by putting downward pressures on interest rates in coming months. The SBP rightly is of the view that given the supply side pressures, a further increase in aggregate demand can only exacerbate inflationary pressures in the economy. The SBP has been monitoring closely liquidity in the inter-bank market and has been intervening as and when required.

The net foreign assets (NFA) of the banking system registered a massive rise of Rs82.2 billion during July-April FY07. The main factors responsible for this large increase in NFA includes influx of foreign exchange through GDRs, a relatively high foreign investment (both FDI and portfolio), private loans and increase in loan disbursements from the Asian Development Bank.

Growth in the net domestic assets NDA of the banking system during July-April FY07 at 12.1 per cent was more or less unchanged as compared with the previous year. There was, however, a slowdown in credit to the non-government sector (from 19.4 per cent in July-April FY06 to 12.7 per cent in July-April FY07) which was offset by acceleration in credit to the government sector (from 2.7 per cent in July-April FY06 to 14.3 per cent in July-April FY07).

Despite slowdown in credit growth to the private sector, the fixed investments have registered a higher growth during July-April F07 as compared with the same period in FY06.

Consumer loans dropped by 11.9 per cent in July-March FY07 as compared with a decline of 31.6 per cent in July-March FY06. The slowdown during July-March FY07 was primarily due to the increase in interest rates as well as more restrained lending by the banks.

The deposit base of the banking industry during July-April FY07 witnessed a growth of 11.7 per cent, little higher than the 10.5 per cent registered during July-April FY06. The increase in this behalf during July-April FY07 is primarily attributable to more aggressive marketing of deposit products by banks, increase in weighted average deposit rates and expansion in the network and usage of automated tellers machines (ATMs).

On the fiscal front, the report is confident that the deficit target of 4.2 per cent of GDP for FY07 would be achieved.

The Central Board of Revenue (CBR) surpassed its tax collection target of Rs579.8 billion during July-March FY07 with actual collection of Rs597.0 billion (21.9 per cent YoY growth).

Direct tax collection stood at Rs237.8 billion during July-March 07 against the target of Rs183 billion showing a massive growth of 55.7 per cent YoY. Almost half of direct tax collection was under the head of “voluntary payments” which nearly doubled during July-March FY07 as compared to the same period in the previous year.

Indirect taxes receipts during July-March FY07 amounted to Rs359.2 billion as against the target of Rs398.6 billion. This shortfall is due to a sharp deceleration in the import growth which dropped from 43.2 per cent YoY during July-March FY06 to 8.1 per cent during July-March FY07.

Inflation as measured by the consumer price index (CPI) YoY stood at 6.9 per cent for April 2007 as compared with 6.2 per cent for April FY06. The CPI inflation during the first ten months of FY07 is primarily attributable to food inflation. The contribution of food group in overall inflation was 56.1 per cent.

Inflation as measured by wholesale price index (WPI) registered an increase of 6.0 per cent in April 2007 compared to 8.1 per cent during the same month last year. WPI inflation during July-April FY07 is attributable to rise in wholesale prices of onions, fruits, poultry items, cotton, seeds, wires and cables etc. which showed increases of varying magnitudes.

The sensitive price Index (SPI) also remained uncomfortably high during the first ten months of FY07 on account of rising prices of food items. Inflation as measured by SPI was 7.7 per cent in April 2007 as compared with 6.4 per cent in the same period last year.

So far as performance of the economy’s external sector is concerned, Pakistan’s current account deficit continued to widen during July-March FY07, rising to a record of US$6.0 billion as compared with $4.2 billion during the corresponding period of the previous year. However, Pakistan continued to record large surpluses in the capital and financial account which comfortably financed the current deficit and generated an external account surplus of US$373 million during the first nine months of FY07.

The current account deficit (CAD) as a ratio of GDP during July-March FY07 was 4.1 per cent as compared with the corresponding FY06 level of 3.3 per cent.

The main factors responsible for the widening of the CAD during July-March FY07 include a widening of trade deficit by 1.3 billion and a US$730 million increase in income deficit. There was, however, an increase of US$425 million in current transfers which helped in curtailing the deficit to an extent.

Pakistan’s trade deficit increased to US$7.6 billion during July-March FY07 as compared with $6.24 billion during the corresponding period in FY06 despite a significant decline in import growth. Import growth slowed down to 10.0 per cent during July-March FY07 as compared with the growth of 34.5 per cent in the same period in FY06. This was mainly due to deceleration in petroleum imports on account of declining international oil prices and lower machinery imports. Exports grew by only 4 per cent during July-March FY07 as against a commendable growth of 12.4 per cent during July-March 2006.

Workers’ remittances of US$3.9 billion during July-March FY07 showed a remarkable rise of 21.9 per cent YoY. SBP projection shows that the rising trend in remittances will continue and the total for FY07 may approximate $5.5 billion.

The net foreign investment recorded a substantial increase of US$2.2 billion in July-March FY07 to reach US$5.5 billion. This impressive increase was mainly attributable to rise in foreign direct investment (FDI). Foreign portfolio investment also showed a significant increase of 55.5 per cent YoY during July-March FY07 to reach US$1.7 billion.

Pakistan’s total foreign exchange reserves increased by $616 million to reach US$13.74 billion at end-April 2007, compared to a level of 13.12 billion at end-June-2006.

Pakistan’s exchange rate has broadly remained stable during the last few years and moved within a narrow band of 60.2 to 60.9 rupees per US$ during July-March FY07.

The report has quite rightly emphasised that despite the impressive growth record of recent years, sustained efforts and vigilance are essential to adequately address the challenges of macro-economic environments. Inflationary pressures have to lowered, savings and investment rates have to be raised and a gradual reduction in the fiscal deficit should be achieved by a graduated increase in tax-to-GDP ratio.

TABLE-1: SELECTED ECONOMIC INDICATORS

Jul-Mar or as mentioned

FY05 FY06 FY07

Growth rate (per cent)

Large scale manufacturing 18.7 9.9 9.8*

Exports (fob) 14.3 18.0 3.5

Imports (fob) 37.6 43.2 8.1

Tax revenue (CBR) 13.5 22.1 21.9

CPI (12 month MA) End-Apr 9.0 8.2 7.8

Private sector credit Jul-Apr 28.6 20.2 13.0

Money supply (M2) Jul-Apr 13.7 10.8 12.1

Billion US Dollars

Total liquid reserves 1 End-Apr 13.0 13.1 13.7

Home remittances 3.1 3.2 3.9

Foreign investment 1.4 3.3 5.6

Per cent of GDP 2

Fiscal deficit Jul-Dec 1.2 1.8 1.9

Trade deficit 3.8 6.7 6.8

Current a/c deficit 1.0 3.3 4.1

* Sept 2006 data point. More recent data is not available.

1. With SBP & commercial banks.

2. Based on full-year GDP in the denominator.

Source: State Bank of Pakistan

TABLE-2: MAJOR ECONOMIC INDICATORS

FY2007

Provisional Original SBP

FY06 Targets projection

Growth rates (%)

GDP 6.6 7.0 6.6-7.2

Inflation 7.9 6.5 7.5-7.8

Monetary assets (M2) 15.2 13.5 14.3-15.5

Billion US Dollars

Exports (fob)1 16.6 19.8 17.6

Imports (fob)1 25.0 27.4 27.2

Exports (fob)2 16.5 18.6 17.2

Imports (cif)2 28.6 28.0 30.2

Workers' remittances 4.6 4.5 5.3-5.5

Per cent of GDP

Budgetary balance - 4.2 - 4.2 - 4.2

Current account balance - 3.9 - 4.3 - 4.8

1 BoP data 2 Customs data

Source: State Bank of Pakistan