Re: Pakistan's Economy :Midyear Review
EXTERNAL SECTOR:
EXPORTS: Exports are targeted at $17 billion or 18.1 percent higher than last year. Exports during July- December 2005-06 were up by 23.8 percent, rising to $8073.1 million from $6521.6 million in the same period last year. The exports of primary commodities were up by 30.0 percent with rice exports increasing by 47.7 percent.
Exports of Textile manufactures also registered a high double-digit-growth of 27.3 percent with exports of cotton yarn, cotton cloth, bed wear; readymade garments have been extra-ordinarily strong. Exports of other manufactures have been impressive as they grew by 17.8 percent. Exports of carpet & rugs, leather tanned, and surgical goods have declined during the first six months of the current fiscal year. More attention needs to be given in these items to enhance their exports.
IMPORTS: Imports continue to be pushed higher by rising oil prices and continued strength of non-oil imports owing to buoyant domestic demand. Pakistan's imports are up by 53.1 percent during the July- December 2005, rising from $8917.6 million to $13654.2 million.
Major contributions to this year's additional import bill have come from raw materials ($738 million), machinery ($763 million), petroleum group ($1161 million) and other imports ($1455 million). Raw materials, machinery and petroleum groups account for 56.0 percent increase in total imports. Consumer durables import account for only 6.5 percent in total imports. Its contribution to the overall increase in imports is only 7.5 percent.
Contrary to the general perception that the rise in import bill is mainly on account of the extra-ordinary increase in the imports of consumer durables, the fact remains that the surge in imports is mainly on account of strong domestic demand fuelling economic activity. Petroleum group imports emerged as the single largest item in country's import bill with 62 percent rise in the first half and amounting to $3 billion as against $1.9 billion in the comparable period of last year.
Food imports increased by 44.6 percent mainly because of large import of sugar compared with the negligible amount imported in the first half of last year.
The unprecedented surge in domestic demand has fuelled an exceptional increase in non-oil imports. In particular, imports of machinery increased by 41.3 percent, and raw material group are up by 54.8 percent. Non-food non-oil imports also increased sharply by 51.3 percent, reflecting continued strong domestic demand. All categories of non-food non-oil imports recorded robust double digit growth.
The increase in petroleum bill was mainly due to price increase of 50.6 percent for petroleum crude and 70.8 percent for petroleum products. Import of consumer durables is reflecting strong domestic demand fuelled by consumer credit as well as rising incomes in the last three years.
Import of both new and second hand cars was significantly liberalised in the FY 2006 budget and resultantly the import of motor vehicles, in the form of completely knocked down kits for local assembly and completely assemble cars has increased by 64.8 percent.
Notwithstanding a surge in the imports of road motor vehicles its share in total imports is only 4.8 percent and its contribution to overall imports is 5.4 percent.
The high economic growth continued to push up imports of machinery and raw materials, both of which increased at very high rates. A particularly large increase (201.7%) was seen in the import of agricultural machinery which more than doubled to $59.1 million.
This is a manifestation of higher cash incomes of farmers from last year's bumper cotton crop and the high price of wheat. Among raw materials, import of synthetic fiber increased by 57.9 percent and synthetic and artificial yarn by 86.2 percent. It also shows increasing input requirements of the textile industry.
BALANCE OF TRADE: Despite sizeable export gains, the merchandise trade deficit widen to $5.58 billion in the first half of the current fiscal year. Exports in recent years have benefited from structural changes that have improved their competitiveness. However, rising oil bill and continued strength of non-oil imports owing to strong domestic demand have pushed import higher, resulting in widening of trade gap.
CURRENT ACCOUNT BALANCE: Pakistan's current account balance that slipped into red in 2004-05 after posting surpluses for three consecutive years remains in deficit with gap continues to widen owing to higher oil import bill and hefty rise in non-oil imports fuelled by strong domestic demand.
In addition to widening of trade gap, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost and growth in personal travel due to the rising level of income of middle and high income groups have also contributed to the widening of current account deficit.
The current account deficit excluding official transfers stood at $3.0 billion in the first half (July -December) of the current fiscal year as against $0.83 billion in the same period last year.
WORKERS' REMITTANCES: Workers remittances, the second largest source of foreign exchange inflow after exports, continue to maintain a rising trend. Workers remittances totalled $2.0 billion during July - December of the current fiscal year, as against $1.9 billion in the same period last year, showing an increase of 5.6 percent.
The monthly average of remittances in the first six months stood at $342.5 million as against $324.4 million in the same period last year, showing an increase of 5.6 percent.
If the current trend continues workers' remittances may touch over $4.4 billion by the end of the current fiscal year. The United States continues to be the single largest source of cash workers' remittances accounting for almost 28.5 percent or $586.0 million, followed by the UAE ($301.8 million or 14.8%), Saudi Arabia ($335.2 million or 16.4%), UK ($201.7 million or 9.9%) and Kuwait ($112.2 million or 5.5%).
FOREIGN EXCHANGE RESERVES: Pakistan's total foreign exchange reserves maintained an upward trend during the last fiscal year. During the current fiscal year, the outflow in the shape of financing rising import bill was higher than the inflows in the shape of exports and other earnings, resulting in decline in reserves by $0.957 billion since the beginning of the fiscal year through end-December 2005.
EXCHANGE RATE: Exchange rate remained stable during the first half of the current fiscal year, ranging between Rs 59.6266 per dollar in July 2005 to Rs 59.8247 per dollar in December 2005, representing a depreciation of Rupee by 0.3 percent. The exchange rate in open market also remained stable with premium hovering around 1.0 percent.
FOREIGN PRIVATE INVESTMENT: Total foreign private investment amounted to US $1462.6 million during the first six months (July -December) of the fiscal year 2005-06 as against US $504.3 million in the comparable period of last fiscal year, thereby registering an increase of 190.0 percent.
Further desegregating of foreign investment reveals that Foreign Direct Investment (FDI) has registered an increase of 147.9 percent, rising from $445.0 million to $1103.3 million and portfolio investment registered an inflow of $359.3 million as against $59.3 million in the comparable period of last year .
Energy sector (oil, gas and power), communication (including telecom), financial services and trade sectors have been the major recipient of FDI, accounting for almost 85 percent or $935 million.
The United States ($467.2 million), the UK ($110.7 million), Saudi Arab ($268.1 million), Hong Kong ($63.1 million) and Netherlands ($62.0 million) remained the major investors in Pakistan during the first six months of the current fiscal year.
PUBLIC DEBT: Pakistan's public debt grew at an average rate of 18 percent and 15 percent per annum during the 1980s and 1990s, respectively - much faster than the growth in nominal GDP (11.9% and 13.9% respectively).
Resultantly, public debt rose from 56 percent of GDP at the end of the 1970s to 92 percent by the end of the 1980s. In other words, it increased by 36 percentage points of GDP during the 1980s.
Public debt was 85 percent of the GDP (on the basis of the new GDP series with the 1999-2000 base) by the end of the 1990s.
A concerted effort was launched some six years ago to bring the country's public debt to a sustainable level. Reduction in the fiscal and current account deficits, lowering the cost of borrowing, raising revenue and foreign exchange earnings, and debt re-profiling from the Paris Club have been the key features of the debt reduction strategy.
The public debt- to-GDP ratio, which stood at almost 85 percent in end June 2000, declined substantially to 61.7 percent by the end of June 2005 23 percentage points decline in country's debt burden in 5 years. During the first half of the current fiscal year, public debt further declined to 55.7 percent of the projected GDP for the year. In absolute terms public debt grew by a meager 2.9 percent during July-December 2005.
NOTE: Beginning from 1999-2000, Pakistan's GDP was rebased at 1999-2000 Prices from two decades old base of 1980-81.Therefore, wherever, GDP appears in denominator the number prior to 1999-2000 are not comparable.
It may be pointed out that public debt is a charge on the budget and therefore it must be viewed in relation to government revenue. Public debt was 317 percent of total revenue in end-June 1980, increased to 505 percent by the end of the 1980s and further to 627 percent by the end of the 1990s.
Following the debt reduction strategy in which raising revenue was one of the key elements, the public debt burden in relation to total revenue has declined substantially to 437.2 percent by end-June 2005 and further to 418.5 percent by end-December 2005 to the projected revenue for the year. Although Public debt is now on a solid downward footing, sustaining the momentum will be a continuing challenge.
EXTERNAL DEBT AND FOREIGN EXCHANGE LIABILITIES: Pakistan's total stock of external debt and foreign exchange liabilities grew at an average rate of 7.4 percent per annum during 1990-99 - rising from $20.5 billion in 1990 to $38.9 billion by end June 1999 but declined slightly to $37.9 billion in 1999-2000. It exhibited a declining trend thereafter.
Foreign exchange earnings on the other hand either remained stagnant or increased at a snails pace during the same period. Despite the accumulation of over $18 billion debt in the 1990s, foreign exchange earnings rose by only $4.0 billion.
Consequently the debt burden (external debt and foreign exchange liabilities as a percentage of foreign exchange earnings) rose from 240.2 percent in 1989-90 to 347.0 percent in 1998-99.
Following a credible strategy of debt reduction, Pakistan has succeeded in reducing the rising trend in external debt and foreign exchange liabilities. Pakistan's external debt and liabilities have declined by $3.066 billion - down from $38.9 billion in 1998-99 to $35.834 billion by 2004-05.
External debt and liabilities further declined to $35.245 billion by end-December 2005, thus showing a decline of $0.589 billion in the first half of the current fiscal year.
The surplus in current account coupled with a continued build up in foreign exchange reserves and the higher foreign exchange earnings, the pre-payment of expensive debt and debt write-off are the major factors responsible for the reduction in the total stock of debt.
As percentage of GDP, external debt and liabilities stood at 51.7 percent in end-June 2000, declined to 36.7 percent in end-June 2004 and further to 32.5 percent by end-June 2005.
It has further declined to 28.5 percent in end-December 2005 of the projected GDP for the year. Similarly, external debt and liabilities as a percentage of foreign exchange earnings was 297.3 percent in 1999-2000, declined to 164.6 percent in 2003-04 and further to137.2 percent by end-June 2005.
**The economy continues to perform strongly despite rising oil prices and destruction caused by the October 8, 2005 earthquake. Although cotton and sugarcane production would be less than last year but other components of national accounts are likely to perform better than the target.
Therefore, the growth target of 7.0 percent is likely to be achieved. While revenue position is better than the target the expenditure side is under pressure owing mainly on account of earthquake-related expenditures. Consequently the overall budget deficit is likely to be slightly above 4.0 percent of GDP this year.
Inflation is on downward footing and the year is likely to end with an average inflation of 8.0 percent. Both exports and imports are growing at high double-digit with import growth likely to slow down during the second half of the current fiscal year. Both trade and current account deficits are high and rising. In the absence of both short and long-term corrective policy measures these two deficits may reach unsustainable levels.**