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Economic Survey of Pakistan 2005-06 Highlights

ISLAMABAD (June 05 2006): Although Pakistan's economy grew at an average rate of almost 7.5 percent per annum during the past three years, it missed its 7 percent growth target set for the current fiscal year, growing only by 6.6 percent. According to the 'Economic Survey 2005-06', released on Sunday, two of the major components of GDP–agriculture and large-scale manufacturing (LSM)–remained below the target while other sectors, which included construction, industry, services, and investment performed, as per government expectation, above the estimates.

The country's per capita income also increased by 14.1 percent during the current year from $742 to $847 per annum. However, during the past four years, overall growth in per capita income registered at 13.9 percent per annum.

The sector-wise details are as follows;

GROWTH AND INVESTMENT: The real GDP grew by 6.6 percent in 2005-06 as against 8.6 percent of last year and fell short of the target of 7.0 percent. With economic growth at 6.6 percent in 2005-06, Pakistan's economy grew at an average rate of almost 7.0 percent per annum during the last four years, and over 7.5 percent in the last three years, thus enabling it to join the 'exclusive club' of the fastest growing economies of the Asian region, the government claims.

POVERTY AND UNEMPLOYMENT: The strong economic growth created employment opportunities and therefore reduced unemployment.

According to Labour Force Survey 2005 (First two quarters), since 2003-04 and until the first half of 2005-06, 5.82 million new jobs were created as against an average job creation of 1.0-1.2 million per annum. Consequently, unemployment rate, which stood at 8.3 percent in 2001-02, declined to 7.7 percent in 2003-04 and stood at 6.5 percent during July-December 2005. The rising pace of job creation is bound to increase the income levels of the people. The IT sector alone has created 114,737 new jobs in 2005-06.

The government spent Rs 1332 billion during the last five years on poverty-related and social sector program to cater to the needs of poor and vulnerable sections of the society.

The government is of the view that percentage of population living below the poverty line has fallen from 34.46 percent in 2000-01 to 23.9 percent in 2004-05, a decline of 10.6 percentage points. The percentage of population living below the poverty line in rural areas has declined from 39.26 percent to 28.10 percent while in urban areas it has declined from 22.69 percent 14.9 percent in this period.

AGRICULTURE: Agriculture and particularly its crop sector could not perform up to the expectations, especially major crops registered a negative growth of 3.6 percent. Livestock with 8.0 percent growth, a major component of agriculture, exhibited strong showing and pulled the overall growth in agriculture to 2.5 percent as against the target of 4.2 percent. Livestock has been the only saving grace sector as far as the performance of agriculture is concerned this year.

MANUFACTURING: Overall manufacturing, accounting for 18.2 percent of GDP, registered a robust growth of 8.6 percent against the target of 11.0 percent and last year's achievement of 12.6 percent.

LARGER SCALE MANUFACTURING (LSM): According to the survey, LSM grew weaker-than-the expected at 9.0 percent as against 15.6 percent of last year and 14.5 percent target for the year, exhibiting signs of moderation on account of higher capacity utilisation, on the one hand, and strong base effect along with several other factors, on the other hand.

CONSTRUCTION: Construction continued its strong showing, partly helped by activity in private housing market, spending on physical infrastructure, and reconstruction activities in earthquake affected areas. The construction sector is estimated to grow by 9.2 percent in 2005-06 as against extraordinary growth of 18.6 percent last year.

PER CAPITA INCOME: Pakistan's per capita real GDP has risen at a faster pace during the last three years (5.6 percent per annum on average in rupee terms) leading to a rise in average income of the people. Such increases in real per capita income have led to a sharp increase in consumer spending during the last three years. Per capita income, defined as Gross National Product at market price in dollar term divided by the country's population, grew by an average rate of 13.9 percent per annum during the last four years – rising from $579 in 2002-03 to $847 in 2005-06. Per capita income in dollar term registered an increase of 14.1 percent in 2005-06 over last year, rising from $742 to $847.

PRIVATE CONSUMPTION EXPENDITURE: The survey further shows that as opposed to an average annual increase of 1.4 percent during 2000-03, real private consumption expenditure grew by 13.1 percent in 2004-05 and further by 8.1 percent in 2005-06.

INVESTMENT: During the fiscal year 2005-06, gross fixed capital formation or domestic fixed investment grew by 30.7 percent as against a rise of 28.6 percent last year.

The survey says that the private sector investment grew by 31.6 percent this year as against last year's growth of 29.1 percent. Public sector investment on the other hand registered massive growth of 46.7 percent as against a 32.9 percent increase last year.

Total investment increased from 18.1 percent of GDP last year to 20.0 percent of GDP in 2005-06 – highest in the last 12 years. Fixed investment as percentage of GDP is estimated at 18.4 percent as against 16.5 percent last year. Both public sector investment and private sector investment as percentage of GDP have increased to 4.8 percent and 13.6 percent, respectively, up from 4.4 percent and 12.1 percent of last year.

Almost 2.0 percentage points jump in investment is consistent with the rise in credit to private sector this year. This also reflects the confidence of the private sector on the improving macroeconomic conditions in the country.

MONETARY POLICY: Large expansion of private sector credit was Rs 345 billion in 10 months of the current fiscal year and the extremely buoyant attitude of the private sector can be viewed from the fact that the cumulative borrowing by this sector during the last three years amounted to over Rs 1100 billion as against the cumulative borrowing by this of Rs 921 billion in the previous 19 years (1984-2003). More importantly, credit to private sector as percentage of GDP surged from almost 20 percent in 1999-2000 to over 26 percent in 2005-06 – almost 6 percentage points increase in the last six years.

INFLATION: Inflation during the first ten months (July-April) of the current fiscal year was estimated at 8.0 percent as against 9.3 percent in the same period last year. Food inflation was estimated at 7.0 percent as against 12.8 percent in the same period last year whereas non-food inflation, at 8.8 percent, was on higher side compared with 6.9 percent in the same period of last year.

The core inflation, which excludes food and energy costs from the headline CPI, moved up and was estimated at 7.7 percent as against 7.0 percent in the same period last year.

House rent index also played an important role in building inflationary pressure this year. With second largest weight in the CPI (23.4 percent) after food (40.3percent), the house rent component of the CPI registered a decline to 10.3 percent as against 11.1 percent in the same period last year.

When viewed in the context of year-on-year performance of inflation, the current fiscal year exhibits significant abatement of price pressure and declaration in overall inflation as well as its sub-indices. The current fiscal year started with an inflation rate of 9.0 percent in July 2005, but continued to decelerate, reaching 23-month low at 6.2 percent in April 2006. Food inflation was close to 9.7 percent at the beginning of the current fiscal year but decelerated sharply to 3.6 percent in April 2006-the lowest in the last 31 months.

In order to keep the prices of essential commodities under control, the government has been taking various measures throughout the year. These measures included a liberal import regime for food items including zero rating of the imports of these commodities.

FISCAL POLICY: The overall fiscal deficit, that averaged nearly 7.0 percent of the GDP in the 1990s, had reduced to 2.3 percent in 2003-04 but increased to 3.4 percent in 2005-06 as against the target of 3.8 percent of GDP, mainly on account of better than expected revenue performance. The fiscal deficit, including earthquake spending, is estimated at 4.2 percent of GDP in the current fiscal year.

The Central Board of Revenue (CBR) is targeted to collect Rs 690 billion but it is likely to collect Rs710 billion – Rs 20 billion more than the target and 20.6 percent more than last year.

Public Debt Burden: Public debt burden continued to decline rather sharply over the last six years with significant improvement in fiscal situation.

The public debt-to-GDP ratio, which stood at 85 percent in 1999-2000, has declined sharply to 54.7 percent in 2005-06 – almost 30 percentage points reduction in debt burden in just six years is one of the significant achievements of the government.

The public debt as percentage of GDP declined from 61.4 percent to 54.7 percent – a 6.7 percentage decline in one year is other stellar occurrences of the current year.

Since public debt is a charge on the budget, its burden must be viewed in relation to government revenue. Public debt was 448.9 percent of total revenue last year but declined to 414.9 percent this year – a decline of 34 percentage points is not a mean achievement.

The 'Survey' says that exports were targeted to grow by 18.1 percent in 2005-06 – rising from $14.4 billion last year to $17.0 billion this year.

During the first nine months of the current fiscal year exports were up by 18.6 percent, rising to $12.1 billion from $10.2 billion in the same period last year. Given the performance of the first nine months, exports are likely to touch $17 billion mark by the end of this fiscal year.

The imports were targeted to grow by 26.0 percent in the current fiscal year – rising from $14.4 billion to $20.7 billion. During the first nine months were up by 43.2 percent in the first nine months of the current fiscal year – rising from $14.4 billion to $20.7 billion, showing an increase of almost $6.0 billion this year.

Major contributions to this year's additional import bill have come from machinery, chemical and petroleum groups. Over one-half of the increases have come from machinery and petroleum group and over 22.3 percent has come from petroleum group.

In particular, import of machinery, raw material and consumer durable groups are up by 30.8 percent, 36.1 percent and 41.8 percent, respectively as domestic investment has come back to life owing to stronger domestic and external demand.

TRADE BALANCE: During the first nine months of current fiscal, trade deficit amounted to $8620.3 million and was up sharply from $4263.3 million in the same period last year (During the first ten months (July-April) of the current fiscal year, trade deficit stood at $9427.1 million as against $4868.0 million in the same period last year). the major contribution to trade deficit came from petroleum group (41.5 percent), machinery group (21.5 percent), iron and steel scrap (11.9 percent) and consumer durables (9.2 percent).

WORKERS REMITTANCES: The government had fixed $4 billion target for workers remittances but total $3.63 billion has been received during the first ten months (July – April) of the current fiscal year, as against $3.4 billion in the same period last year, showing an increase of 5.2 percent. However, the prevalent trend shows that remittances may touch $4.4 billion by the end of the fiscal year.

CURRENT ACCOUNT BALANCE: The current account deficit, excluding official transfers, stood at $4696 million (3.7 percent of GDP) during July-March, 2005-06 as against a deficit of $1181 million in the same period last year.

FOREIGN DIRECT INVESTMENT: Pakistan has succeeded in attracting $3020.2 million in FDI during July-April, 2005-06 -the highest ever in the country's history, as against $891.5 million in the same period last year, showing an increase of 238.7 percent. By the end of the current fiscal year, FDI is expected to reach $3.5 billion mark, or close to 3.0 percent of GDP.

Over 90 percent of FDI has come to power sector, telecom sector, chemicals, pharmaceutical and fertiliser, oil and gas, and banking and finance. Almost 75 percent of FDI has come from USA, UK, Switzerland, Japan, UAE and Netherlands.

EXTERNAL DEBT: The 'Survey' says that a few years ago, Pakistan was facing serious difficulties in meeting its external debt obligations. 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 $2.3 billion – down from $38.9 billion by end June 1999 to $36.6 billion by end-March, 2006.

The country's debt burden, defined as a ratio of external debt and liabilities to GDP, stood at around 52 percent in end-June 2000, declined to 32.3 percent in end-June 2005 and further to 28.3 percent by end-March 2006.

The country's debt burden, also defined as 'external debt and liabilities as percentage of foreign exchange earnings', was 297 percent in 1999-2000, declined to 134.3 percent in 2004-05 and further to 127.6 percent by end-March 2006.

It may also be pointed out that Pakistan's external debt and liabilities were 22 times of its foreign exchange reserves in 1998-99 but declined sharply to 2.9 times in just six years. These statistics suggest that Pakistan's external debt burden has declined at a much faster pace than anticipated and that it is now on a solid downward footing.

On March 23, 2006, Pakistan successfully issued $500 million new 10-year Eurobond and US $300 million new 30-year Bonds in the international debt capital markets lead managed by J. P Morgan, Citi Group and Deutsche Bank. This transaction, which represented the first international 144A bond issued by Pakistan since 1999, raised significant interest amongst US QIBs and international Institutional investors.

The 10-year notes were priced with a coupon of 7.125 percent to yield 7.125 percent, framing a spread of 240 bps over the relevant 10-year US Treasury benchmark. The 30-year bonds were priced with a coupon of 7.875 percent to yield 7.875 percent, framing a spread of 302 bps over the relevant 30-year US Treasury benchmark.

Pakistan was able to achieve spreads on both the new 10- and 30-year bonds that were tighter than its previous 5-year issues. By issuing 10- and 30-year bonds, Pakistan completed its primary objective of establishing a full Pakistani international yield curve in record time.

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