Economic Bulletin March June 2008

8/8/2019 Economic Bulletin March June 2008

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Editors CornerDear Readers,

Pakistan economy is facing serious strains and challenges, as reflected by high inflation, with a pronouncedincrease in food and energy prices, widening of the trade and current account deficit, rising fiscal imbalances,and growing income inequalities. These have compounded the social problems especially for the vulnerablegroups who have been hurt the most by rise in food prices.

Food price inflation has generated growing concerns world wide. The rise in the price of staples like wheat,rice, cereals, has led to protests, rallies and riots in many countries. Price of basic food items has risen, inresponse to many factors like higher energy prices and the resultant rise in prices of fertilizers, and

transportation costs for farm products, increased demand for bio-fuels, drought in Australia and othercountries, declining yields and low stocks and weak dollar. With an increase in oil prices, the demand forbio-fuels has risen. There is now competing use of food grain to produce ethanol as substitute for oil.

The hardest hit are the developing countries where the poor segments of population have seen an erosionof purchasing power. According to World Bank statistics, almost half of the worlds poor live in South Asiaalone. Child malnutrition is high and almost half of the children in Afghanistan, Bangladesh, India and

Nepal are malnourished. Some 1.9 billion people in the region do not have access to basic sanitation.

As many of these countries are in a crisis, because of high food prices, the inhabitants social conditionsis expected to be affected. In Asia, the poor people spend on average 60 percent of their income on foodand an increase in food prices places millions of desperately poor households at greater risk of hunger andmalnutrition, and they are left with no choice but to see an increased expenditure on food, or try and lowerthe quality of their diet, and squeeze their expenditure on health and education. As a consequence, the

prospect of overcoming poverty becomes far more remote.

According to the World Bank, food price inflation could push at least 100 million more people into poverty,wiping out all the gains the poorest have made during almost a decade of economic growth. It would notonly reverse the gains made in poverty reduction, but if the rise in food prices continue to persist, theMillennium Development Goal of halving poverty by 2015 could be jeopardized.

Like many other countries that have been impacted by higher food prices, Pakistan too has seen a surgein food prices, rising to a high of 28.5 percent in May 2008. This has unfairly affected the low incomegroups who spend a major share of their consumption expenditure on food necessities, the prices of whichhave increased drastically in FY08. This is attributable to both international and domestic factors. Risingoil prices and a weak dollar has left Pakistan facing a huge import bill. As producers pass on the increasedcosts to consumers, this leads to an increase in cost of imports which drives up inflation. Also as pricesof fertilizer which is highly dependent on petroleum and natural gas goes up, it adds to production costs.Transport becomes expensive with a rise in oil prices and adds to the costs of goods.

At home, agriculture performance has been poor, resulting in an overall fall in the production of majorcrops. Production/yield of wheat and cotton have declined. As income levels have grown because ofsustained economic growth in the past, it has led to a rise in domestic demand. The incoming remittanceshave provided an impetus to demand.

The government has in the recent past taken some measures to contain inflation. The State Bank of Pakistanhas tightened the monetary policy, and asked the government to contain its high levels of borrowings from


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the SBP as it complicates monetary management and poses a risk in the containment of inflationary pressures.

Administrative steps have been taken by the government to enhance supplies of essential commodities likewheat, edible oil, pulses, sugar etc through the Utility Stores.

Poverty has emerged as the major issue facing the country. A rise in food prices, and poor performanceof the agricultural sector, has exacerbated the situation. The Asian Development Bank, using householdexpenditure survey data has analyzed the impact of food price inflation on poverty and inequality in Pakistan.If there is a 10 percent, 20 percent and 30 percent increase in food prices, the number of absolutely poorwill rise by 7.05 million, 14.67 million and 21.96 million respectively.

Most of the poor are in rural areas and agriculture is their main livelihood. Research carried out by theUnited Nations Economic and Social Commission for Asia and the Pacific (ESCAP), shows that persistent

poverty and widening inequality in the region are the result of decades of neglect of agriculture. The report

has said that the potential of the agricultural sector to reduce poverty has been weakened by unfavourablemacroeconomic policies that has led to the erosion of public services such as agricultural extensive services,the failure of agricultural credit policies and the massive scaling down of public investment in irrigationand rural infrastructure.

Any impetus to the agricultural sector results not only in its growth, but also the growth of rural industries,raising the incomes of small farmers and increasing the employment opportunities for the rural poor,in general.

The Federal Budget 2008-09 has announced measures to raise agricultural productivity, improve its overallperformance so that it contributes its due share to the national economy. Agriculture is considered a keyto reducing poverty. Alongwith agriculutre, livestock and dairy farming, and fisheries will also receive

focus. During last fiscal year, the supply shortages of domestic food crops that occurred because of a declinein major crops output and a slower growth of the overall agricultural sector has had an adverse impact onthe vulnerable segments of society. This was compounded by hoarding of essential food items and smugglingof wheat flour to neighbouring countries where prices are higher. The government has taken steps to checkthis and bring stability in prices.


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Abstract of the BulletinFederal Budget 2008-09

The Federal Budget 2008-09 has been presentedat a time when the economy is under pressure

because of deteriorating macroeconomic indicators.

Many of the indicators like growth in GDP,agriculture, manufacturing, inflation, fiscal deficit,national savings as percentage of GDP, overallinvestment as percent of GDP missed theirrespective targets during 2007-08.

Inflation was at record high, as food inflationsurged, affecting the poor and the fixed incomegroup.

Energy shortages persisted.

Trade deficit worsened to $20 billion and the fiscaldeficit rose to over 7 percent of GDP, against thetarget of 4 percent.

Subsidy bill was substantially higher than the

budgeted figure. As the international price of cruderose, an excess of Rs160 billion over and abovethe Rs15 billion budgeted amount was paid tooil refineries/oil marketing companies. Thegovernment was also heavily subsidising the costat which fertilizer is made available to the farmersand on import of wheat.

The Federal Budget 2008-09 has a total outlay ofRs2 trillion.

Internal resources are budgeted at Rs1535.5

billion, Rs300 billion would flow from externalresources, Rs25.1 billion would come from theprivatisation proceeds and Rs149 billion frombank borrowings.

The Budget has proposed significant additionalresource mobilisation efforts.

High priority has been attached to the revival ofthe agricultural sector, livestock and dairy farmingand fisheries.

The Budget has a relief package for the poor.

Rising Food Prices

Rising prices of key food staples continued toprovide impetus to food inflation in recent months.

The price of wheat flour has risen due to domesticshortages because of lower wheat crop, speculativehoarding and smuggling, alongwith its exports.

Food import bill has risen because of import ofwheat and palm oil/soyabean oil.

Market Analysis

The market experienced a bear attack from lastweek of April to end of May because of speculationregarding the imposition of CVT on shares.

Early June, the market staged a slight recovery.

The budget was perceived differently by the variouseconomic sectors of the economy.

Sectoral Implications of Federal Budget

This section has discussed the impact of budgetarymeasures announced in Federal Budget 2008-09on the banking and insurance sector, cement sector,oil sector, auto assemblers and fertilizer sector.

Interim Monetary Policy Measures

The State Bank of Pakistan announced interimmonetary policy measures to further tighten themonetary policy.

The discount rate was raised by 150 basis pointsto 12 percent, the Cash Reserve Requirement forall deposits upto one year maturity was raised to9 percent and the SLR to 19 percent.

Provincial Budgets 200809

Punjab has presented a Rs390 billion budget for2008-09. It lays emphasis on poverty alleviation,construction of low cost housing, social sectors,infrastructural development and development ofagriculture and rural areas.


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Federal Budget 2008-09Inflationary pressures have gained momentumin recent months. Consumer Price Index (CPI)rose by 19.3 percent in May 08 (year-on-year), compared with a rise of 7.4 percent inMay 07. Food (40.34% group weight in total)inflation surged to 28.5 percent against11.3 percent a year earlier, while non-foodinflation was 12.5 percent compared to 4.7

percent in May 07.

Trend in CPI

Inflation is at record high levels, despite thefact that sharp increase in international oil

prices have not been fully passed on to theconsumers and wheat is being subsidised.

The surge in CPI food inflation started in April06 and reached a peak of 19 percent in May08, principally on account of risinginternational prices of fuel and commodities,coupled with domestic supply shortages of

basic food items, as agricultural productionhas been unable to keep pace with the risingdemand. Smuggling to neighbouring countries,where wheat prices are higher, and speculativehoarding at home are some of the other factorsresponsible for higher prices.

Rising oil and food prices have had an indirecteffect via the sharp jump in the subsidy billthat has raised the fiscal deficit. Last fiscalyear, the deficit has been financed largely by

borrowings from the State Bank, which hasbeen inflationary and has put pressure on the

Macroeconomic Background

The Federal Budget 2008-09 has beenpresented at a time when the economy is under pressure because of deteriorating macro-economic indicators and peoples expectationsfor some kind of relief from the newgovernment is high.

The re-emergence of inflationary pressures,rising concerns with widespread poverty,

widening fiscal and current account deficits,depressed savings rate, depleting foreignexchange reserves, increase in externaldebt liabilities have affected the pace ofeconomic growth.

In FY08, the economy (real GDP) grew by5.8 percent, short of the target of 7.2 percentand preceding years growth of 6.8 percent.This was mainly on account of a slowdownin commodity producing sectors. Agriculturegrew by a mere 1.5 percent (target 4.8 %),while manufacturing sector registered a growth

of 5.4 percent (target 10.9 percent). Majorcrops wheat and cotton suffered and riceoutput did not show any major increase.Political uncertainty, deteriorating law andorder, power outages, and rising cost of doing

business were some of the factors affectinglarge scale manufacturing performance.

The services sector has proved to bethe main force driving economic growth inthe year.

GDP and Sectoral Growth Rates

Source: Pakistan Economic Survey 2007-08

(%)

1816

14

12

10

8

6

4

2

0

-2

-4

GDP Agriculture Manufacturing Services

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2000-01

Macroeconomicchallen-ges

Risingfood

prices

Year-on-Year General Food Non Food

May

June

July

August

September

October

November

December

January

February

March

April

May

7.4

7.0

6.4

6.5

8.4

9.3

8.7

8.8

11.9

9.3

14.1

17.2

19.3

11.3

9.7

8.5

8.6

13.0

14.7

12.5

12.2

18.2

16.0

20.6

25.5

28.5

4.7

5.1

4.9

4.9

5.0

5.4

5.9

6.3

7.3

7.8

9.4

11.2

12.5

Period Average

(%)

Source: State Bank of Pakistan

2007

2008

FY07 (Jul-May)

FY08 (Jul-May)

7.8

11.1

10.3

16.3

6.1

7.3

Factorsrespon-

sible forhigherprices


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monetary management. The SBP Third

Quarterly Report on the State of the Economystates, The exceptional borrowings reflectmore than budgeted expansion in the fiscaldeficit against a slower growth in revenuemobilization and a shortfall in externalfinancing receipts.

Enhanced reliance on financing from SBP was partly a result of a shortfall in externalfinancing receipts and reduced interest ofscheduled banks in government papers. Thiswas because of tight liquidity conditions

in the interbank market and strong creditdemand from the private sector, which offersgreater returns.

Highly inflationary borrowings from thecentral bank, and the pass through of highinternational prices to the domestic economy(particularly of energy and food) throughrising import, plus domestic shortages haveled to strong inflationary expectations. Theimpact on domestic inflation has recently

become more pronounced as the governmentbegan to gradually pass-on the rise in cost of

major fuel petrol and diesel, which hadearlier been frozen, to the domestic consumers.

This necessitated a tightening of the monetarypolicy. While the State Bank had tightenedthe monetary policy in January 08, itannouncedInterim Monetary Policy Measuresin May 08 to suppress the aggregate demand

pressures and cool off inflation expectations.

A steady deterioration in the current accountgap is a major source of concern. The slidein the current account deficit, was mainly aconsequence of sharply rising trade deficitalongwith an increase in net outflows fromservices account. This decline was contributed

by high import growth and decline in exportof services. While the growth in remittanceshelped offset the deficit in the services account,it was the rising trade deficit as thefundamental source of expansion in currentaccount deficit. The deficit has widened from$5.0 billion in FY06 to $7.0 billion in FY07and FY08 is likely to end with a deficitof $12 billion or 7.5 percent of GDP.

Rising trade deficit is the major source of

curent account deficit. It widened to $20.7billion during FY08 against $13.6 billion inFY07. The increase in deficit reflects a surgeof 31 percent in imports, while exports grew

by 13 percent. One of the main reasons forthe rise in imports is increasing international

prices of crude oil, wheat and palmoil/soyabean oil. Import of fertilizer and rawcotton has also increased. Disaggregated datais available for July-May.

Export/Import of Selected Commodities

Growth in exports slowed to 11.4 percent,mainly because of a decline in the export ofcotton and textiles (-2.5%), which constitutesnearly 56 percent of total exports. Except

for raw cotton, knitwear, synthetic textile,most of the other items in this group likecotton yarn, cotton cloth, bedwear, towels,readymade garments, showed fall. Leathertanned and manufactures, leather garments,surgical goods and medical instruments,chemicals and pharmaceuticals, jewelleryshowed a growth in exports.

The governments fiscal position remainedunder stress in the outgoing FY07. Taxcollections fell short of the target primarily

because direct tax collection declined.

Borrow-ings fromSBP

Currentaccountdeficitworsens

Risingtradedeficit

Rice

Raw cotton

Cotton yarn

Cotton cloth

Knitwear

Bedwear

Towels

Readymade Garments

Leather and its manufactures

Surgical goods

Chemicals & pharmaceutical

Exports

1525.4

65.0

1179.3

1747.8

1664.0

1724.1

557.1

1351.4

1007.5

228.5

564.3

1045.8

48.0

1303.2

1875.4

1633.4

1818.1

562.7

1390.9

820.3

171.8

354.6

July-May2007-08

July-May2006-07

($ Mn)

Source: Federal Bureau of Statistics

Imports

Wheat

Soyabean oil

Palm oil

Petroleum crude and products

Raw cotton

Fertilizer

Power generating machinery

860.0

96.7

1385.4

10094.2

1249.0

845.3

994.2

41.6

36.7

827.4

6631.9

561.8

354.8

678.9

July-May

2007-08

July-May

2006-07

Exportsslowed

Tightfiscal

position


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share in total collection declined slightly to

36.3 percent in FY08 (July-May) from 37.8percent a year earlier. Meanwhile, indirecttaxes grew by 20.6 percent. Within indirecttaxes, sales tax which accounts for 61.3 percenthas shown a growth of 21.7 percent to Rs332.6

billion. Here sales tax collected from domesticeconomic activity is more than its collectionat import stage.

Rising fiscal and current account deficit,alongwith Pak Rupee exchange ratedepreciation have caused the public debt to

grow. The year 2007-08 is likely to end withpublic debt at around 56 percent of GDP, areversal in the declining trend witnessedsince 2001. Rising debt has adverseconsequences for debt servicing obligations,for it restricts governments spending on

poverty and social sectors.

A major challenge facing the government isthe widening energy demand supply gap.While demand has risen sharply, the supplyon the other hand has fallen far too short, asexisting energy sources have not been

sufficiently explored and exploited.

With rising prices of oil, there has been achange in the energy consumption mix inPakistan since 1996-97; while the share ofoil has dropped, the share of gas has risen,which is a relatively cheaper fuel and isconsidered a good alternate to oil. Powersector is the largest user of gas, followed bythe industrial sector, household, fertilizer,transport and cement.

To meet the energy shortages, the governmentis initiating programmes to develop alternativeenergy sources, develop small hydro projects,

promote efficient use of energy, use the coalreserves, encourage the use ofCNG, improveoperational and managerial efficiency toreduce power losses, improve distributionsupply network, augment the electricitytransmission network and develop biofuels.

During FY08, Pakistans stock markethas shown considerable resilience, despiteless than satisfactory performance of major


2000-01

10.5

10

9.5

9

8.5

8

(%)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Expenditures continued to grow, with a

substantial rise of interest payments. The risein the later, reflected in an accumulation of

public debt.

Tax-GDP ratio has remained stagnant at around910 percent ofGDP, as the growth in theeconomy has not translated into an increaseof the ratio and due to higher costs of subsidies.The tax base continues to be restricted as

potential tax paying sectors continue to beoutside the tax ambit.

Tax Revenue as % of GDP

In FY08, the problem was compounded bythe increased reliance by the government onfinancing the widening deficit through

borrowings from the State Bank. Suchborrowings had reached Rs551.0 billion as ofMay 10, 2008, pushing the outstandingstock of market related treasury bills toRs940.6 billion.

Against a revised tax collection target ofRs990 billion for the year 2007-08, theFederal Board of Revenue (FBR) had

provisionally collected Rs851.3 billion (net)during July-May 2007-08. The Debt Office,Ministry of Finance, GoP in its latest Updateon Pakistans Economy (June 16, 08) states,although almost 86 percent of the targetfor the year has been achieved it seemsunlikely that FBRwill be able to achieve itsannual target for FY08.It was later (July 4)reported in newspapers thatFBR had collected

Rs1002 billion.

During this period, direct tax collection grewby 13.4 percent to Rs309.3 billion, while its

PakRupeedeprecia-tes

Energyshortages

Govern-mnet

borrow-ings fromSBP


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Economy 2007-08HighlightsBox

Growth Trends

GDP grew at 5.8 percent, short of the target of 7.2 percent.

Agriculture sector grew a modest 1.5 percent against the target

of 4.8 percent, due to poor performance of major crops.

Production of wheat and cotton declined, while rice showed

a small increase.

Manufacturing sector grew by 5.4 percent against the target

of 10.9 percent; large scale manufacturing registered a growth

of 4.8 percent against the target of 12.5 percent and last years

achievement of 8.6 percent.

Services sector grew by 8.2 percent.

Per capita income rose from $925 in FY07 to $1085 in

2007-08.

Total investment as a proportion of GDP moderated to 21.6

percent.

National savings as percentage of GDP stood at 13.9 percent

in 2007-08, while domestic savings was 11.7 percent.

Foreign investment inflows stood at $3.6 billion during the

first ten months of the current fiscal year.

Consumer Price Index rose by 19.3 percent in May 08 year

on-year, with food inflation rising by 28.5 percent and nonfood inflation by 12.5 percent.

Fiscal and Monetary Development

Budget deficit is estimated at 7.0 percent of GDP, against the

target of 4.0 percent.

Tax-GDP ratio remains stagnant at 11.0 percent, owing mainly

to structural deficiencies in the tax collection system.

There has been rationalisation of government expenditures.

Some shifting of expenditure from current to development

has taken place.

The structure of taxation in Pakistan has changed following

a number of tax and tariff reforms.

There has been a gradual reduction on the dependence on

foreign trade taxes and a concurrent increase in GST and

direct tax collections.

FY08 witnessed surging oil, food and commodity prices which

had an adverse impact on Pakistans budgetary position.

To finance the rising fiscal deficit, the borrowing requirements

of the government rose, especially the borrowings from the

State Bank reached an alarming level.

Total public debt to GDP ratio has declined from 83.8 percentin FY01 to 53.5 percent in FY08.

Interest payments as a percentage of total revenue have beenreduced from 41 percent to 21.6 percent in the last eight years.

The State Bank of Pakistan continued with a tight monetarystance.

The State Bank abolished the Annual Credit Plan.

Credit to the private sector grew by nearly 15 percent (JulyMay) FY08 as against 12.2 percent in the same period of lastyear.

Consumer financing has slowed and was Rs16.6 billion duringJuly-March FY08, against Rs35.2 billion in the preceding

year.

A tight monetary policy resulted in a rise in interest rates.

Capital Markets

The stock market performed well during the year, as the KSE100 index rose to 12370 points by April 07 and the aggregatemarket capitalisation increased to $59.4 billion.

Foreign investors interest in the stock market was sustained.Foreign portfolio investment increased to $1.82 billion.

Several key takeovers took place in the corporate sector.

Balance of Payments

During FY07 (July-April) exports are provisionally estimatedat $13.9 billion and imports at nearly $25 billion, resultingin a trade deficit of $11.1 billion.

Current account deficit has widened to $6.2 billion in July-March 2006-07.

Workers remittances totaled $4.45 billion in the first tenmonths of FY07.

Total liquid foreign exchange reserves stood at $13.7 billionat the end of April 2007.

Exchange rate remained more or less stable during the year.

External Debt

External debt and liabilities at the end of March 07 were

$38.86 billion.

As a proportion of GDP, the external debt and liabilitiesdeclined from 51.7% in FY00 to 27.1% by end March 07.

During July-March 2006-07 total disbursements stood at $1.8billion.

Social Sector

Literacy rate has risen to 54%.

Public sector expenditure on education stood at 2.42% ofGDP.

Health expenditure as a percentage of GDP has remainedstagnant at 0.57 percent.


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macroeconomic indicators. Aggregate market

capitalisation stood at $56 billion on May 30,2008. The listed capital at Karachi StockExchange increased Rs690.1 billion by March31, 2008.

Foreign portfolio investment showed a netinflow of $62.2 million during July-May FY08compared with $1760.5 million in thecorresponding period of FY07. The substantialdecline in the level of investment was becauseof large outflows from developing countriesof Asia and the European Union.

Merger and acquisition activity in the corporatesector continued in the outgoing fiscal year,

providing some support to the valuation inthe stock market.

Given the macroeconomic imbalances in thedomestic economy and the financial crisishaving had an impact on the internationalcapital markets, access to financing has beenrestricted. Pakistan has not issued any newinstruments in FY08, though it plans to

continue to tap the global capital markets,when conditions are favourable.

The Federal Budget 2008-09 has beenpresented at a difficult time. Policy makershave to make grim choices between improvingmacroeconomic indicators and at the sametime taking care that their decisions to managethe economy has minimum impact on thevulnerable group in the society.

The Budget has been formulated with theobjective to: -

- restore economic stability,- increase the income of the vulnerable group

through targeted programmes,- focus on agriculture and the manufacturing

sector,- restore investor confidence,- increase social sector allocations,- remove the irritants towards development

of infrastructure,- build low cost housing for the low income

groups.

The Federal Budget 2008-09 has a total outlay

of Rs2010 billion; where 74.3 percent isearmarked for current expenditure, 27.3

percent for development expenditure, anoperational shortfall of 3.8 percent isestimated, while 2.2 percent is set aside forother development expenditure.

Revised estimates for 200708 show thatcurrent expenditure at Rs1516.2 billionexceeded the budgeted figure of Rs1056.3

billion by 43.5 percent, while developmentexpenditure showed a shortfall of nearly 12

percent. Historically, there have been cuts indevelopment expenditure in response to fiscalconstraints in Pakistan. In the outgoing fiscalyear also, development expenditure wasreduced by Rs61.2 billion.

The revised estimates show that currentexpenditure was higher by Rs460 billion,

because interest payments and subsidies weresubstantially higher than budgeted. Subsidiesrose to nearly 4 percent of GDP in FY08,against initial estimate of 1.1 percent. Servicing

of domestic and foreign debt increasedfrom Rs375 billion to Rs502 billion or by 34percent. Due to higher international fuel pricesand food prices, revised expenditure onsubsidies have increased from Rs114 billionto Rs407.5 billion, two and a half times higher.Major increases were recorded under thefollowing heads: -

Subsidies

Foreignportfolioinvest-mentdeclines

FederalBudgetobject-ives

Outlaysizeraised

Higher

subsidyexpen-diture

WAPDA

Trading Corporation of Pakistan

Import of wheat

Oil Refineries/Oil Marketing Cos.

R&D Support to Textile

Development Subsidies on Fertilizer

(Rs Bn)

2007-08Budgeted

2007-08Revised

Source: Budget in Brief 2008-09

52.9

8.7

0

15.0

0

13.5

113.7

46.5

40.0

175.0

19.0

29.5

While the international price of crude has jumped during the last one year, thegovernment did not pass on this increase tothe consumers. Its subsidy bill on this account

Subsidyon oil andwheat


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alone was Rs160 billion above the budget

figure of Rs15 billion. Similarly, thegovernment has been heavily subsidizing thecost at which fertilizer is made available tofarmers, and paid Rs40 billion last year, assubsidy on import of wheat.

For FY09, the government is proposing toreduce subsidies and a total reduction of Rs112

billion against last years Rs407 billion isbudgeted for. This reduction will be broughtabout by reducing subsidies to oil marketingcompanies from Rs175 billion to Rs140

billion, a decline of 20 percent, to WAPDAfrom Rs114 billion to Rs75 billion, to KESCfrom Rs20 billion to Rs14 billion and onimport of wheat it would be halved from Rs40

billion to Rs20 billion. Farmers wouldhowever, continue to receive fertilizer atsubsidised rates. The government decision toreduce subsidies was taken to relieve the

pressure on the budget.

The rising subsidy bill has compelled thegovernment to pass on partial increase to theconsumers from July 1, 2008. Earlier it hadmaintained the policy of absorbing the impactof increasing international oil prices. Despitethe increase in domestic prices, the governmentcontinues to subsidise the price of keroseneoil and light diesel oil and motor spirit.

Motor Spirit

HOBC

Kerosene Oil

Light Diesel Oil

July 1, 2008 January 1, 2008

75.69

88.85

49.73

49.05

53.70

64.88

35.23

32.57

(Rs)

Increase in fuel prices in the domestic marketwould consequently raise transport costs,prices of food items, construction materialetc. As the subsidy on wheat imports is beingreduced by Rs20 billion, it would have animpact on retail prices of wheat flour. Similarlythe proposed reduction in WAPDA and KESCsubsidies by 34 percent 30 percent respectivelywould result in tariff increases.

The revised estimates for 2007-08 show areduction of 12.0 percent in the developmentoutlay, declining to Rs458.3 billion against

the budgeted Rs520.0 billion, because of

resource constraints. Over the last few yearshowever, development expenditure hasimproved as a proportion ofGDP.

Expenditure as % of GDP

GoP toreducesubsidies

Trend inexpendi-tures

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Current Development

16.9

15.7

16.0

13.8

14.5

14.8

15.8

14.5

2.3

2.8

2.6

2.9

3.5

4.3

4.5

4.4


For FY09, the government has raised the sizeof development expenditure by 20 percent toRs550 billion. Higher allocations have beenearmarked for water and power (Rs62.3 bn),special programmes (Rs62.4 bn), agricultureand livestock (Rs20.5 bn), health (Rs19 bn),higher education commission (Rs18 bn) and

National Highway Authority (Rs36.5 bn).

Revenue Receipts

Revised figures for 2007-08 show that revenuereceipts (net) exceeded the budgeted figureof Rs902.2 billion by 4.4 percent. This isattributable to higher (16.5%) non-tax revenue,for tax revenue fell short of the target ofRs1030.5 billion by 2.4 perent. This declineis ascribed to the performance of direct taxcollection which has fallen short of the target.Apart from political unrest and law and order,the major setback has been due to significantreduction in voluntary compliance.

Payments with returns have dropped fromRs47.9 billion during July-March FY07 toRs8.5 billion during FY08. Three majorrevenue yielding sectors, banks, oil & gas andtelecom adjusted their profits lower duringthe year. As a result, they paid less advancetax as compared to preceding fiscal year. Lastyear, the Budget had reduced the maximumrate of income tax for individuals, and the

basic threshold was raised for salariedindividuals. A new slab of lower rate of 20


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percent was also introduced forSMEs. This

affected the collection of taxes.

Though the share of direct taxes in federal taxreceipts have increased to close to 39 percent,and have become one of the leading sourcesof revenue, its share to GDP at 4.1 percent, islow compared to other countries likeSingapore, Malaysia, Indonesia where it ranges

between 6-7 percent.

In the Budget 2008-09, the governmentproposes to significantly raise tax revenues

from Rs1006 billion to Rs1251 billion, anincrease of about 25 percent. Direct taxeswould contribute Rs108 billion, while Rs138

billion would be generated through indirecttaxes on commodities and transactions.

Revised estimates for FY08 show that indirecttax collection fell slightly short of the targetof Rs622.3 billion by 0.8 percent, primarily

because of lower customs duty. The role ofcustoms duty has gradually diminished

both as a major source of revenue andprotecting the domestic industry. World over

customs duties are being lowered in line withWTO arrangements.

In Pakistan, for the last many years not onlyhave the tariff rates been gradually reduced,

but the number of tariff slabs has also beenreduced considerably in an effort to liberalizetrade in the country. Maximum tariff rate has

been brought down from 35 percent to thecurrent level of 25 percent.

In the last budget, customs duty was withdrawn

from machinery used in horticulture, furniture,marble & granite, surgical & medicalinstruments. Similarly, customs duty on certainraw material was reduced.

Customs duty collection have fallen short bynearly 4 percent against the years budgetedfigure of Rs154 billion. For FY09, customsduty are projected at Rs170 billion.

The FBR Quarterly Review January-March2008, shows that customs duty collection lacksdiversification as during the first nine months

of FY08, fifteen commodities group

contributed for the bulk of receipts.

Collection from the auto sector has fallen,because of a change in government policy,which restricts import of old and used vehiclesto only 3 years age. This has discourageddemand for the import of second hand motorcars and jeeps. Import of motor cars under

Revenue Receipts

Budget

2008-09

Budget1030.5

408.2388.0

2.87.76.53.2

622.3154.0375.091.01.3

01.1

337.6

144.5

9.60.3

18.237.578.7

86.3

1.860.023.20.3

0.60.3

106.8

2.125.022.2

4.08.5

21.47.3

16.2

Tax Revenue*

Direct TaxesIncome TaxWorkers Welfare TaxWorkers Participation FundCapital Value TaxForeign Travel Tax (Arrears)

Indirect TaxesCustomsSales TaxFederal ExciseOther TaxesAirport TaxAirport Tax (Arrears)

Non-Tax Revenue

Income from Property & Enterprises

Profit of Pak TelecomProfit of Pakistan PostInterest (Provinces)Interest (PSEs & others)Dividends

Receipts from Civil Admn& Other Functions

General AdmnSBP ProfitsDefenceLaw & Order

Community ServicesSocial Services

Miscellaneous Receipts

Economic Services Petroleum Development Levy

Gas Development SurchargeDiscount Retained onLocal Crude PricesRoyalty on OilRoyalty on GasPassport & Copyright FeeOthers

(Rs Bn)

Source: Federal Budget in Brief 2008-09

1005.6

388.2367.3

2.49.65.73.2

617.3148.0375.092.0

1.30

1.1

393.3

143.2

7.50.8

19.836.378.7

138.8

1.588.048.0

0.4

0.70.3

111.4

1.78.2

21.0

22.013.021.0

7.416.9

1251.5

496.0477.0

3.59.06.5

0

755.5170.0472.0112.0

1.40.06

0

427.8

128.1

5.80.6

17.022.682.0

183.1

1.6110.070.00.4

0.70.3

116.6

2.214.017.4

23.512.721.38.2

17.4

2007-08

Revised

* Out of which FBR collection has been projected at Rs1025 billion for BE 2007-

08, at Rs1000 billion for RE 2007-08 and at Rs1250 billion for BE 2008-09.

Share ofdirecttaxesrising

Customsdutycollectionseenfalling


13/48

13

March - June, 2008

CKD/SKD fell by 24.5 percent during July-

May 08 to $304.5 million, against $403.2million in the comparable period a year earlier.Alongwith this change in government policy,restrictions on car financing and increase incost of borrowings has caused substantialrevenue loss on this account.

Sales tax is one of the leading sources offederal tax receipts, constituting 37 percentof total tax revenue and 61 percent of indirecttaxes. Its scope has enlarged over the yearsand the size of the tax base has, therefore

been accordingly extended. Levied onmanufacturers and retailers, with an annualturnover of more than Rs5 million as well ason the importers, wholesalers, distributors,dealers and specified services @15 percent.Some items are exempt from this tax. Theseinclude, basic food stuff, agricultural produce,medicines, books, software etc.

Revised estimates for 2007-08 show thatrevenue collection from this source was thelargest, surpassing collection from taxes onincome. During the year, the target of Rs375

billion was realized. For FY09, sales taxcollection is budgeted at Rs472 billion.

Sales tax is levied at two stages in Pakistan- at the import stage and domestic production.Domestic sales collection in the last fiscalyear was generated by ten major items, namely,POL products, services (essentially telephoneand telefax), natural gas, sugar, cigarettes,iron and steel products, services, automobilesector, electrical energy and beverages.

POL products and services (including

telephone/fax etc) have been the leadingcontributors to the sales tax, while a sluggishgrowth has been recorded in GST receiptsfrom natural gas and sugar. TheFBR Quarterly

Report January-March 2008, attributes theincrease in the former to zero-rating of crudeoil for sales tax at import stage (since

November 07). The tax is now charged atsales stage. The low GST receipts from naturalgas is mainly due to, a relatively low growthin GST payment by the leading supplierholding 40 percent share in sales tax collection,among other factors.

Sales Tax Collection (Domestic)

POL Products

Services (incl. Telephone/Fax)

Natural Gas

Sugar

Cigarettes

Iron & Steel Products

Services (other than Telecom)

Motor cars/motor cycles/auto parts

Electrical Energy

Beverages

Sub Total

Others

Total

Refunds

Net GST Collection

(Rs Bn)July-March

2007-08July-March

2006-07

Source: FBR Quarterly Review, January-March 2008

34.0

32.9

11.2

8.6

5.4

5.4

4.3

3.7

2.8

2.6

110.9

26.8

137.7

20.8

116.9

23.1

26.4

10.7

8.4

4.6

1.5

3.5

2.8

11.5

2.2

94.7

27.9

122.6

29.7

93.1

Sales taxbasewidened

Leadingcontribu-tors tosales tax

Collection from iron and steel has improvedbecause of a change in policy, whereby salestax is now being charged on the basis ofelectricity consumption and collectedthrough the electricity bills ofWAPDA andKESC. Services other than telecom havecontributed an enhanced amount due toimproved performance of airlines, media and

courier services.

Sales tax collected at the import stageconstitutes slightly more than half of totalsales tax collection. Of the fifteen majorcommodity groups, nearly 38 percent ofcollection originates from POL products. Itsshare however, declined slightly in FY08,

because of zero-rating of crude oil, which isone of the two majorPOL contributors (theother is HSD). The other commodities showingincreases are edible oil, plastic resins, electricalmachinery among few others.

Major Contributors to Federal Excise Duty

Beverages

Beverage concentrate

Cement

Cigarettes & tobacco

Natural gas

POL products

Imported goods

1% Special Excise duty

(Rs Bn)

Budget

Source: Explanatory Memorandum on Federal Receipts 2008-09

5.6

2.2

17.8

28.7

6.4

5.1

5.0

0.0

Revised

3.7

2.7

16.0

28.5

6.6

2.8

14.8

10.4

2008-09Budget

4.1

3.1

19.7

36.6

6.8

3.2

16.5

10.8

2007-08


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14

March - June, 2008

Revised estimates of federal excise duty for

FY08 show that Rs92 billion was collectedduring the year, surpassing the target of Rs91

billion. For 2008-09, a target of Rs112 billionhas been set, nearly 22 percent higher overlast years revised estimates. During the year,major revenue contributors under this headwere, cigarettes, cement, imported goods,natural gas, beverages and POL products. Thelevy of 1 percent special excise duty both atdomestic and import stages netted in Rs10.4

billion or 11 percent of total excise collection.The tax net of excise duty has been extended

to cover services, like banking, telephones,electricity and professional services.

Tax to GDP Ratio

Exciseduty

Source: Tax data from SBP website andGDP data from Economic Survey 2007-08

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

DirectTaxes

(%)

Excise Customs Sales TotalIndirect

TotalTaxes

3.0

3.2

3.1

2.9

2.8

2.9

3.8

3.7

1.2

1.0

0.9

0.8

0.8

0.7

0.8

0.9

1.5

1.1

1.4

1.6

1.8

1.8

1.5

1.4

3.6

3.7

4.0

3.9

3.7

3.9

3.5

3.6

6.4

5.9

6.3

6.3

6.3

6.4

5.9

5.9

9.3

9.1

9.4

9.2

9.1

9.4

9.7

9.6

In the Federal Budget 2008-09, the govern-ment proposes to raise tax revenue fromRs1000 billion to Rs1250 billion, or by 25

percent. Additional resource mobilizationmeasures proposed would help achieve theenhanced target of various tax revenue heads;direct taxes, customs, sales and excise duty.

The Budget has proposed significant additionalresource mobilization efforts. Revenuegenerated through various taxation proposalsis estimated to be about Rs77 billion. Proposalto increase the rate of sales tax from 15 percentto 16 percent would raise about Rs26 billion.Substantial amount would also accrue fromenhancement in import duty rates on non-essential and luxury items, and from anincrease in excise duty on telecommunicationservices, and on banking, insurance andfranchise services. Direct tax measures, likerationalisation of withholding tax on imports,WHT through electricity bills, enhancement

Addit-ionalresourcemobili-sation

of cash withdrawals from banks among others

would net in around Rs30 billion.

Non-tax receipts of the federal governmentwere Rs56 billion higher in FY08, over theearlier set target of Rs337.6 billion. Theincrease is attributable to higher receipts fromcivil administration, mainly from SBP Profits(Rs88 billion against the target of Rs60 billion)and from defence (revised figures are Rs48

billion against the target of Rs23 billion) andfrom discount retained on local crude price.

During the year, the surplus profit of the StateBank, after making provisions for reservefunds and payment of dividend had increasedwhich was transferred to the federalgovernment. For FY09, SBP Profits areestimated at Rs110 billion, 25 percent higherover revised estimates for FY08.

Petroleum development levy generated Rs8.2billion, substantially below the years targetof Rs25 billion, while gas developmentsurcharge at Rs21.1 billion was marginally

smaller against the target of Rs22.2 billion.The later is transferred to the provincesaccording to the production of gas in a

province. Both Royalty on Oil and on Naturalgas are transferred to the provinces afterdeducting 2 percent collection charges.

External resources which were projected atRs258.5 billion for FY08, were revisedupwards during the year and are placed higherat Rs275.4 billion. While project aid, bothto the federal and provincial governmentswere smaller against the target, a substantialincrease was witnessed in loans for earthquakerelief measures and in the category of OtherAid, which comprises of loans andgrants from non-traditional sources. Underthis head, aid flow from Islamic DevelopmentBank was higher at Rs33.8 billion (targetRs6.2 billion) and from China, Rs30.7 billion(target 0 rupees).

Given the turbulence in the international capitalmarkets and macroeconomic imbalances and

political uncertainty at home, Pakistan has

Non taxreceipts

Externalresources


15/48

15

March - June, 2008

not issued any new instrument in FY08. It

had budgeted for Rs31 billion throughEurobonds. The government plans to tapthe global capital markets, when conditionsare more favourable through regular issuanceof bonds.

External Resources

There was a large deterioration in the fiscaldeficit in 2007-08. Deficit had startedincreasing after 2003-04 as public expenditureslowly built up, alongwith rising currentexpenditure. During the year, the surging oil,food and commodity prices had an adverseimpact on Pakistans budgetary position. Thisalongwith higher power subsidy to WAPDA(due largely to rise in costs of fuel) raised the

subsidy bill to over Rs400 billion against thebudgeted amount of Rs114 billion.

Interest payments also surpassed their targetedlevel of Rs375 billion by a wide margin(Rs127 billion). This has been attributable

by the Economic Survey 2007-08 to slippageson account of the National Saving Schemes,

particularly with respect to Defence SavingCertificates.

Development spending had to be curtailed to

counter the gap between budget and estimatedfigures for current expenditure. This was doneto bring down the fiscal deficit, which hadrisen to 7.5 percent ofGDP. The Governmenthad to borrow heavily from the Central Bankto finance the large fiscal deficit. A part of thedeficit was proposed to be financed through

privatisation proceeds and Rs75.0 billion werebudgeted for this purpose in FY08. However,revised estimates show that only Rs1.65 billionwere realized. The government proposes to

bring down the deficit this year.

Project Aid

Commodity Aid

Earthquake

Other Aid

Total

(Rs Bn)

Budget

Source: Explanatory Memorandum on Federal Receipts 2008-09

70.1

101.0

50.2

37.3

258.6

Revised

58.0

94.6

58.3

64.6

275.4

2008-09Budget

76.8

151.0

9.8

62.5

300.2

2007-08

Fiscaldeficitwidens

A positive aspect of the Budget is the high

priority attached to revival of the growthprocess in the agricultural sector, by takingmeasures which makes costs cheaper andimproves access to inputs. Alongwithagriculture, the development of livestock anddairy farming and fisheries has also receivedfocus in the Budget. These areas are ofsignificance, for any setback to the sector isdetrimental to income growth of farmers andthose associated with the sector and constrainsefforts to reduce poverty. The measuresadopted include: -

Provision of Rs75 billion in the PSDP toimprove the availability and efficient use ofwater resources.

To facilitate export of agri produce, cold storagechains to be set up in the country.

To encourage the use of fertilizer by the farmers,the government will double the subsidy on DAPfertilizer from Rs470 per bag to Rs1000 per

bag. Subsidy on fertilizer to continue. Totalallocation for subsidy on fertilizer raised fromRs29.5 billion to Rs35 billion in FY09.

Exemption from sales tax and other duties onlocal supply of fertilizer and pesticides.

Availability of agricultural credit to receive aboost.

Other fiscal measures provided to raiseproductivity and the income levels of thoseassociated with the sector.

Higher allocations have been made in thePSDP for the development of livestock anddairy farming and for projects like shrimp

farming, fisheries. Foreign investors arebeing encouraged to invest in developingcultivable land by bringing in capital andtechnology. Any improvement in theagricultural sector would act as an engine foralleviating rural poverty.

The Budget has a relief package for the poor,who have been effected by rising food andfuel prices. The Budget seeks to enhanceexpenditures related to poverty reduction;initiate special programmes to enhanceincomes of low income groups, and a

Priorityforagricul-ture

Reliefpackagefor the

poor


16/48

16

March - June, 2008

programme of low cost housing will be started

during the year, which would make availablehousing for the low income group.

Cash grant of Rs1000 per month per householdwould be given through Benazir IncomeSupport Programme. Under this programme,the government would initially provideRs34 billion, which would be raised to Rs50

billion, primarily to the poorest of the poor.In addition the government would continuewith some of the existing programmes, likeBait-ul-Maal, Peoples Works Programme,Rozgar Scheme, food items at subsidised ratesthrough Utility Stores among others. The

beneficiaries of this programme will in duecourse be provided with other facilities likeemployment, skill development, medicalinsurance and food subsidy.

Prospects for 2008-09

The government has set a real GDP target of5.5 percent, with the agricultural sector

projected to grow by 3.5 percent, manufac-turing by 6.1 percent, and the services sector

by 6.1 percent. Inflation is expected to bearound 12 percent. Trade deficit is expectedto narrow to $14 billion, as exports grow by16 percent to $23 billion and import growthis contained at 6.5 percent, rising to $37 billion.Workers remittances are expected to touch$7.7 billion. Current account deficit would

be around 6 percent ofGDP against 7 percentin FY08. Fiscal deficit which had deterioratedin FY08, is estimated to be 4.7 percent ofGDP as government cuts down subsidies andother non-development expenditure andmakes greater efforts at enhanced resourcemobilisation.


17/48

17

March - June, 2008

Trends in Domestic EconomyReal Economic Growth

GDP GNP GDP Deflator 16

14

12

10

8

6

4

2

0

(%)

2

000-01

2

001-02

2

002-03

2

003-04

2

004-05

2

005-06

2

006-07

2

007-08

Per Capita Income

Dollar Rupees

20

15

10

5

0

-5

(%Growth)

2

000-01

2

001-02

2

002-03

2

003-04

2

004-05

2

005-06

2

006-07

2

007-08

Major Contributors to GDP Growth

Wholesale & Retail Trade Finance & Insurance

Agriculture Manufacturing Large Scale Construction

48

38

28

18

8

-2

-12

(%Growth)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Sectoral GrowthCommodity Producing Sector Services Sector

10

9

8

7

6

5

4

3

2

1

0

(%)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Industrial ProductionCotton Yarn Cotton Cloth Sugar Cement Vegetable Ghee

28

18

8

-2

-12

-22

-32

%Growth

2

000-01

2

001-02

2

002-03

2

003-04

2

004-05

2

005-06

2

006-07

2

007-08

(Jul-Mar)

1

999-00

Savings & Investment

Gross Investment National Saving Domestic Savings

25.0

20.0

15.0

10.0

As%ofGDP

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Private Investment

Manufacturing

Transport & Communication

Agriculture

Private Investment

200.0180.0160.0140.0120.0100.080.060.040.020.00.0

(Rs.Bn)

(%Growth)

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Composition of Value Addition

Rice Wheat Cotton Sugarcane

454035302520151050

%Share

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08


18/48

18

March - June, 2008

Sectoral Investment

Agriculture

Electricity & Gas

Finance & Investment

Large Scale Manufacturing

Transport & Communication

Domestic Investment

90.0

60.0

30.0

0.0

-30.0

-60.0

(%Growth)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

Inflation

CPI WPI Core Inflation Food Inflation

16

14

12

10

8

6

4

2

0

(%Growth)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Apr)

Lending & Deposit Rate

DepositLending15

10

5

0

(%perannum)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Apr)

1999-00

Monetary Assets

M2Mo30

25

20

15

10

5

0

(%Growth)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

Treasury Bills Yield & SBP Repo Rate

SBP Repo Rate (3 day)

Treasury Bills 6-Months weighted average

16

14

12

10

8

6

4

2

0

(%)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(J

ul-Mar)

1999-00

Domestic Debt

Permanent Debt

Total Debt

Floating Debt

Debt % GDP

Un-funded Debt

3500

3000

2500

2000

1500

1000

500

0

(Rs.Bn)

(%GDP)

50454035302520151050

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

Domestic Oil Prices (Ex-Depot Sale)

Petrol Kerosene Light Speed Diesel80

60

40

20

Rs/Ltrs

Jul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJunJul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJunJul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJun

2005 2006 2007 2008

Domestic Gold Prices25000

20000

15000

10000

5000

0

Rs/10gms

Jul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJunJul

AugSepOct

NovDecJanFeb

Mar

Apr

May

2006 2007 2008


19/48

19

March - June, 2008

Domestic Credit

Overall Credit Net Credit to Private Sector40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

(%Growth)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Mar)

1999-00

Trade & Payments

Exports Imports Trade Balance Current A/c. Balance

30

25

20

15

10

5

0

-5

-10

-15

$Bn

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Apr)

1999-00

Export/Import Trend

Exports Imports

45

35

25

15

5

-5

(%Growth)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-May)

1999-00

Home Remittances/Foreign Investment/Forex Reserves

Home Remittances Foreign Investment Forex Reserves

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Apr)

1999-00

18

16

14

12

10

8

6

4

2

0

Rs.Bn

Foreign Private Investment

Direct Portfolio Total Investment

7300

5800

4300

2800

1300

-200

($Mn)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-May)

1999-00

Exchange Rate

Rs/$ Rs/Euro100

90

80

70

60

50

40

30

20

10

0

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-May)

1999-00

External Debt & Liabilities

External Debt EDL/GDP50

45

40

35

30

25

20

15

10

5

0

($Mn)

(%)

60

50

40

30

20

10

0

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Mar)

1999-00

Interest Payment on Domestic Debt

Interest Payment Interest Payment % of GDP

350

300

250

200

150

100

50

0

(Rs.Bn)

(%)

6

5

4

3

2

1

0

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08


20/48

20

March - June, 2008

External Debt Servicing

Principal Interest Total

3500

3000

2500

2000

1500

1000

500

0

($Mn)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Mar)

1999-00

Loan Commitments & Disbursements

Commitments Disbursements

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

0

($Mn)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Mar)

1999-00

Project/Non Project Aid Disbursements

Project Aid DisbursementNon Project Aid

90

80

70

60

50

40

30

20

10

0

%Share

4500

4000

3500

3000

2500

2000

1500

1000

500

0

$Mn

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Mar)

1999-00

Public & Publically Guaranteed Debt

Paris Club TotalMultilateral & Bilateral Others

45

40

35

30

25

20

15

10

5

0

($Bn)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-Mar)

1999-00

Gold & Forex Reserves

Gold Forex18000

16000

14000

12000

10000

8000

6000

4000

2000

0

($Mn)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

(Jul-May)

1999-00

Overall Budget

Resources Expenditure Fiscal Deficit

2500

2000

1500

1000

500

0

(Rs.Bn)

8

7

6

5

4

3

2

1

0

(%GDP)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(B

udgeted)

Karachi Stock Exchange

KSE 100 IndexSBP Share Price Index700

600

500

400

300

200

100

0

(2000-01=100)

16000

14000

12000

10000

8000

6000

4000

2000

0

(1991=1000)

Jul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJunJul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJun

2006 2007 2008

Share Turnover & Market CapitalisationMarket Capitalisation Share Turnover

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

0

(Rs.Bn)

9000

8000

7000

6000

5000

4000

3000

2000

1000

0

(Mn)

Jul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJunJul

AugSepOct

NovDecJanFeb

Mar

Apr

MayJun

2006 2007 2008


21/48

21

March - June, 2008

Budgetary Resources

Internal External Total Resources1800

1600

1400

1200

1000

800

600

400

200

0

(Rs.Bn)

(%Growth)

25

20

15

10

5

0

-5

-10

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(Budgeted)

Revenue Budget

Federal Revenue(Net) Current Expenditure1600

1400

1200

1000

800

600

400

200

0

(Rs.Bn)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(Budgeted)

Gross Revenue Receipts

Budgeted Revised

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(Budgeted)

1800

1600

1400

1200

1000

800

600

400

200

0

(Rs.Bn)

FBR Tax Collection

Direct Taxes

Tax Revenue

Indirect Taxes

45

35

25

15

5

-5

%Growth

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(Budgeted)

Current Expenditure

Expenditure GrowthBudgeted Revised

1600

1100

600

100

(Rs.Bn)

50

45

40

35

30

25

20

15

10

5

0

-5

(%)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(Budgeted)

Revenue Expenditure Breakup

Major Sectors

Current Expenditure

Defence Services Debt Servicing

Others

80

60

40

20

0

-20

-40

(%Growth)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(Budgeted)

Public Sector Development Programme

Budgeted Revised600

500

400

300

200

100

0

(Rs.Bn)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00

2008-09

(Budgeted)

Education/Health Expenditure

Education Health3

2

1

0

(%GDP)

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

1999-00


22/48

22

March - June, 2008

Domestic inflationary pressures have gainedmomentum in the last few months. TheConsumer Price Index (CPI) has risen by 17.2

percent in April 08, the highest inflation ina month since April 1995. The increase isattributable to a pronounced increase (25.5%)in food inflation, as compared to 9.4 percentin the corresponding month a year earlier.This has shown a double digit increase sinceSeptember 2007. The State Bank of Pakistansthird quarterly report 2007-08 on the State of

Pakistans Economy, states, rising pricesof key food staples (wheat, rice, edible oiland milk) continued to provide impetus tofood inflation in recent months. It is alsoimportant to note that the pass through ofrising international prices of palm oil hasaccelerated.

The inflation outlook appears to be unfavorablegiven a sharp surge in wheat flour prices amidacute supply shortages in recent months,as well as, likely realization of upward

revision in key fuel prices on food inflation.Moreover, impact of depreciation of rupee islikely to fuel inflationary expectations in thetimes ahead.

Trends in CPI Inflation

Rising Food Prices

The double digit rise in food inflation hasbeen due to a sharp increase in the prices ofsome major food items like wheat flour,rice, vegetables, cooking oil, vegetable ghee,milk fresh. A rise in wheat flour prices in thelast few months has pushed food inflation tonew highs.

Wheat, the staple diet has seen a surge in its price in recent months, with consumerspurchasing wheat flour at a rate above Rs14per kg fixed by the Government.

The domestic wheat crop 2007-08, is expectedto be slightly short of the target of 24 milliontones due to a 2 percent decline in area sown.This is partly attributable to late announcement

of the procurement price of wheat, which thegrowers had been demanding before thecommencement of sowing, alongwith rising

prices of fertilizers, delayed crushing ofsugarcane and extended cotton picking. It wasonly in March that the Government raised the

procurement price of wheat to Rs625 per 40kgs from the prevailing Rs510 per 40 kgs.

Speculative hoarding and smuggling of wheatto neighbouring countries, alongwith itsexports affected its availability in the domestic

market and resulted in a hike in wheat flourprices. The Government would be importingbetween 1.52.0 million tons of wheat to meetdomestic needs.

The Government has in the recent past takena number of measures to ensure wheat flourto consumers at cheaper rates. These stepsinclude among others:-

Ban on the export of wheat.

Imposition of 35 per cent regulatory duty onthe export of wheat products to Afghanistan.

Source: State Bank of Pakistan

2007JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctober

NovemberDecember

2008JanuaryFebruary

March

WheatRs/kg

12.4012.4012.5012.2011.7011.9012.4012.7014.0014.6015.4017.10

17.1017.30

17.00

Monthly Price Trends Basic Food ItemsWheat Flour

Rs/kg

13.9013.9014.0014.0013.8014.0014.7014.9016.2016.2017.0018.50

18.5016.50

17.20

RiceRs/kg

21.4021.4025.5026.1027.6030.4031.1031.5032.5032.7033.1033.70

33.7036.60

38.50

VegetableGheeRs/kg

71.8071.8072.8077.9082.3087.0088.7087.4088.7091.1099.00

100.60

100.60117.70

129.30

CookingOil Rs/Ltr

89.0089.2092.3296.3298.32

103.52103.76107.12110.12110.12111.36115.48

115.48129.00

147.20

CookingOil Rs/Ltr

89.0089.2092.3296.3298.32

103.52103.76107.12110.12110.12111.36115.48

115.48129.00

147.20

SugarRs/kg

31.6031.6030.6030.3029.9028.4029.2030.0029.8029.5028.9027.00

27.0025.70

25.40

MilkRs/Ltr

26.6026.6027.0027.4028.3028.7029.0029.2029.2029.3029.4029.60

29.6029.90

31.20

Food NonFood Food30

25

20

15

10

5

0

(%)

(%)

20181614121086420

2007 2008

Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr


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23

March - June, 2008

Food Prices and Inflation in Developing Asia:Is Poverty Reduction Coming to an End?

Box

We give below excerpts from the above mentioned Report.

For decades, food prices has been declining in real terms, allowingmillions of people around the globe to escape from the trap ofpoverty. This long-term trend took place despite rapid incomeand population growth, as agricultural productivity rose steadily.However, productivity gains began to stagnate in the face ofcontinuing growth in demand, bringing about a reversal of thislong-term trend. Rising food prices contributed to an accelerationof inflation across the Asia and Pacific region during 2007, andin 2008 the further rise in food prices has reached alarmingproportions.

Three sets of factors must be taken into account in order toexplain what is happening to food prices in developing Asia.First is the distinction between structural and cyclical factors;second is the distinction between supply and demand; and thirdis the relationship between international and domestic markets.

Structural factors are fundamental in explaining what has happenedto international rice and food grain prices in recent years. Fallingglobal stocks of rice and other cereals are indicative of the factthat production growth has fallen below consumption growthfor several years. Rice and wheat stocks have ebbed and noware about 200 million metric tons, compared with 350 millionmetric tons in 2000, a decline of about 43 percent (USDA 2008).

Another structural factor is the rising scarcity of oil driven bythe stagnation of supplies from the Organization of the PetroleumExporting Countries (OPEC) and decline in production in non-OPEC economies.

Cyclical factors as well have been unkind in influencing pricetrends. Adverse weather including the drought-related harvestfailure of wheat in Australia in 2007 and the flooding in SouthAsia have harmed production as did outbreaks of brownplanthopper infestation in Vietnam.

The most important demand factors in the rise in food prices inrecent years are long-term in nature and can also be thought ofas supporting the view that structural rather than cyclical factors

are predominant. Among these demand-side factors are growingworld population and strong income growth in emergingeconomies around the globe. Another important structural demandfactor is the competing use of food grain to produce ethanol asa substitute for oil. Biofuel demand is rising and is leading todiversion of grain, soybeans, sugar, and vegetable oil from useas food or feed.

On the supply side, urbanization and competing demand for landfor commercial as opposed to agricultural purposes is an importantfactor, as is the increasing scarcity of fresh water for agriculture.Neglect of investment in agricultural technology, infrastructure,and extension programs is also to blame for the tepid growth inthe supply of rice (IRRI 2008).

Asian Development Bank, April 2008

Pricing policies may have played a role by discouraging farmersfrom increasing marketed supplies. Also, poor and marginalfarmers may not have the means to respond and may also behurt if they are net buyers rather than net sellers of food.

Government short-term responses have made matters worse byattempting to paper over relative price changes and shieldconsumers through beggar-thy-neighbor policies of restrictingexports and using administrative measures in an attempt to controlprices. Price subsidies are also widely applied throughout theregion for staple foods such as rice and for suppression of food

prices.

Food prices have been rising since 2007, but in the first threemonths of 2008, the rate of increase has accelerated. The WorldBanks food price index climbed 57.5 percent in the first quarterof 2008 relative to the corresponding figure a year ago. Somegrain prices have increased by much more wheat prices areup by over 100 percent during the same period. At the sametime, energy prices have also been on an upswing, with the WorldBanks oil price index growing by 66.5 percent in the first quarterof 2008. These global developments are likely to cascade todeveloping Asian economies growth and inflation prospects.

The previous subsection explored the potential macroeconomicimpacts of a global food price rise for Asian economies. To

protect the poor from the impact of global food price rise,governments in many developing countries run food-based safetynet programs by importing or procuring food gains from farmersat specified prices to sell at subsidized prices to consumers.These subsidies contribute to the budgetary costs of thegovernments. Rising global food and oil prices are directly addingto these food subsidies in food-importing countries.

The effects of rising food prices will differ across households.There will be some households that may benefit from higherprices; there may be households that are adversely affected.Rising food prices may lead to income gains for net producerswho are in rural areas. Rising food prices may be expected toadversely affect even the rural poor. Certainly the urban poor,

who are food consumers and unlikely to be food producers, canbe expected to suffer the most from rising food prices.

Concerns over high prices are mounting because inflation eatsinto real incomes and expenditures and can undermine the gainsfrom poverty reduction and human development that developingcountries have achieved over the last decade or so.

Subsidies on a continuing basis are not sustainable. Instead,enhancing access to financial services for the poor and under-nourished can help to reduce hunger. An analysis of 50 countriesbetween 1980 and 2003 shows that a 1 percent increase in privatecredit to GDP would reduce the prevalence of undernourishmentby 0.22-2.45 percent.


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24

March - June, 2008

Sale of atta at Utility Stores at subsidised

rates (USC price Rs260 per 20 kgs). Anti-smuggling measures beefed up.

Import of 1.7 million tons of wheat.

Increase in monthly releases to flour mills.

The overall wheat stock position as on April6, 2008 was 0.320 million tons, substantially

below the 0.844 million tons of stocks in thecomparable period last year. The decline isattributable to nil balances with PASSCO,against 395 thousand tons last year.

The food import bill has risen by nearly 49percent to $3.52 billion during the first tenmonths (July-April) 2007-08 over $2.37 billona year earlier, primarily because of higher

payments made on account of import of wheatand palm oil/soyabean oil, due to domesticshortages.

During this period, 1.68 million metric tonsof wheat was imported for $818.6 million, orat a unit price of $485.2 per metric ton, againstimports of 0.136 million metric tons imported

for $41.6 million at a unit value of $305.7 permetric ton in the corresponding period ofFY07. Similarly import of palm oil is nowcosting $1.22 billion, as the unit price permetric ton has risen from $512.1 to $853 inthe same period. Prices of both commoditieshave risen in the international market and thishas had an adverse impact on the domesticimport bill.

Rising food prices is not specific to Pakistan,but has been witnessed in many developingcountries, where prices of basic foodcommodities have risen. Food price increaseshave been caused in part by drought inAustralia and central Europe, as well asincreased demand for food in Asian countries,

and the increased use of grains especially

corns to produce biofuels. World financershave also contributed to the food price

problem. Commodities have attractedinvestors looking for a safe haven. The lackof confidence in the US dollar has ledinvestment funds to look for higher returnsin commodities.

There are other factors also like, bad weather,historically high price for oil and transportationthat are shaping price variations acrosscountries. In some, like, Azerbaijan, South

Africa and neighbouring countries, soaring petroleum prices have contributed to theincrease in prices of most agricultural crops,while in Kenya, Uganda, and Chad civil unresthas affected production and transportation offood stuffs. As energy prices are likely toremain high, they would continue to be asource of trouble for food prices.

The World Bank has recently cautioneddeveloping countries that the gains made inovercoming poverty and malnutrition arethreatened by high food prices. The Bankestimates that about a 100 million people in

poorer developing countries would be pushedfurther into poverty, as global wheat pricesrise 181 percent over the past 36 months toFebruary, with overall food prices up 83

percent. Higher prices are expected to lastthrough at least the end of 2009.

In many countries, progress in reducingpoverty has been difficult, and a price rise forstaple foods would badly affect the household

budget, especially for the rural poor. In such

a scenario, households start reducing theirnon-staple foods (meat, oil etc.) and devotea greater proportion of resources to food bycutting back on consumption.

In the long run, the notion of food security should move beyonda relatively static focus on food availability and access to oneof higher productivity. As the majority of the poor in developingAsia live in rural areas and depend on agriculture, higheragricultural growth will provide food security by increasingsupply, reducing prices, and raising incomes of poorerfarm households.

The impacts of higher food prices will be moderated as supplyresponds to prices over the medium term of say, 6 months to 2years. To facilitate this response, much neglected agriculturalsector reforms need to be put in place to promote the use ofmodern technology, new seed varieties, and better financialsystems.

Box Continued from page 41


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25

March - June, 2008

Market Analysis

Fortunately, after a short-lived decline, theIndex staged a small rebound on the back ofslight buying interest in oil stocks because ofthe record high levels of international crudeoil prices. In addition, there was buying activityin cement stocks due to expectations of higherexport sales in the immediate term andimproved quarterly financial performance.From April 10 to 18, the KSE-100 Index gained371 points to 15,676.

However, the market experienced a major

bear attack for the next 6 weeks from April18 to May 30 because of speculation regardingthe imposition of capital gains tax on sharesand further tightening in the monetary policy

by the SBP. The KSE-100 Index plunged byaround 3,500 points or 23% to 12,130. Thiswas the first time since September 18, 2007that the Index closed below the 13,000-level.The main reasons for the bearish trend in this

period as follows:

Uncertainty regarding the stability of thecoalition government as the PML-N, thesecond largest party in the coalition, decidedto resign from the federal cabinet due tothe stalemate with the PPP over therestoration of the judges as the deadline ofMay 12 passed without any resolution tothis issue.

In the middle of May, both the S&P andMoodys rating agencies downgradedPakistans credit rating due to politicaluncertainty and widening twin deficits(fiscal and current account). S&P lowered

Market Review

During the month of March, the KSE-100Index went into a sideways pattern, tradingwithin a consistent band of 14,700 to 15,300.The uncertainty over the governmentformation and the naming of the PrimeMinister candidate by the PPP led to somenervousness among investors.

This was evident among foreign investors asdepicted by the SCRA figures, as there wasconsistent net outflow on a daily basis. Thenet outflow based on SCRA figures duringMarch (up to March 28) was $17.41 million.The KSE-100 Index during March gained only192 points to close at 15,125 on average dailyturnover of 238.5 million shares.

At the end of 1QCY08, the KSE-100 Indexwas one of the best performing indices in theregion as well as the world. Also, the

formation of a new government in the end ofMarch led to new hope that the economywould get back on track with renewed vigorand policy by the government.

There were positive sentiments that the marketwould continue its ascent from the last quarter,

but this did not come to fruition due to theeconomic and political issues that arose at the

beginning of April that adversely impactedinvestor sentiments and thus, resulted in themarket being flat and lackluster for the first

3 weeks of the quarter.

There was a 169 point decline in the KSE-100Index from April 8 to 10. Regarding theeconomic issues, the grim picture painted bythe then Finance Minister Ishaq Dar, especiallythe fiscal deficit being more than double fromthe original target of 4% ofGDP also raisedsome concerns about future tax measures inan attempt to plug this gap. This led toincreasing speculation about imposition ofcapital gains tax on shares.

Majorbearattack

KSE-100 Index (March-June 2008)Turnover Index

16000

15500

15000

14500

14000

13500

13000

12500

12000

11500

11000

Index

600

500

400

300

200

100

0

Shares(m)

29-Feb-08 27-Mar-08 22-Apr-08 19-May-08 12-Jun-08


26/48

26

March - June, 2008

Pakistans foreign currency rating from B+

to B while Moodys downgraded the GoPsbond rating from B2 to B1.

Increasing speculation regarding theimposition of capital gains tax on sharesled to jitters among investors that resultedin a KSE delegation going to Islamabad tomeet the Finance Minister to plead theircase against an imposition of such a tax.

On May 22, the SBP Governor announcedan interim monetary policy statement that

further tightened monetary policy in thewake of added inflationary pressure in theeconomy due to higher food and energy

prices as well as massive Pak Rupeedevaluation of 15 percent (July 2007 toMay 21, 2008) against the U.S. dollardespite the greenback weakening againstother world currencies.

The SBP raised the discount rate by 150bpsto 12 percent, increased the CRRrequirement on deposits of less than 1-year

maturity by 100bps to 9 percent and raisedthe SLR requirement on all deposits by100bps to 19 percent. In addition, thecentral bank set a minimum profit rate of5 percent on savings/PLS products, whichwould raise the cost of funds for most large

banks. These measures led to a significantnegative reaction in the bourses with

banking stocks leading the nosedive as theytouched their lower circuit breakerscontinuously during the last week of themonth. The selling pressure in banksled to weakholder selling in other scrips.The KSE-100 Index shed 1,500 pointsduring the last 6 trading days.

At the beginning of June, the market stageda slight recovery ahead of the budget due tothe announcement by the Finance MinisterSyed Naveed Qamar that the capital gains tax(CGT) exemption would be extended for afurther 2 years till June 30, 2010 and that the

Pre andpostbudgetactivity

rate of CVT would remain unchanged for

1year. This led to a 610 point jump in theKSE-100 Index on June 4. However, theactivity from this day to June 12 was flat andlackluster as the daily turnover was light, asit appears that investors wanted to exercisecaution. The immediate reaction on June 12to the FY09 federal budget was volatile with

profit taking in banking and cement sectors,as they were the most negatively impacted bythe proposed fiscal measures. However, therewas renewed buying interest in oil and fertilizersectors, as the budget was perceived as positive

to these sectors. The KSE-100 Index gained895 points from June 1 to June 12 to end at13,025.

There remains uncertainty on the politicalfront as the judicial issue is still unresolvedand may cause further strain on the coalitiongovernment at the center. This could lead tomild turbulence in the market.

The macroeconomic scenario is also slightlygloomy with the ever-widening twin deficits

and high inflationary pressure as the two majorthreats recognized by the SBP and other majorinternational institutions. However, the recentFY09 budget might be able to curtail the fiscaldeficit and to some extent the current accountdeficit through some of the proposed taxmeasures. We believe the targeted GDPgrowth for FY09 of 5.5% is modest and may

be reached if the agricultural target is achieved.

Next month, the quarterly/annual earningsseason will begin and may impact the market

in the immediate term. We expect goodcorporate results for cement on the back ofhigher prices and volumes especially fromexports, oil sectors because of risinginternational crude prices and fertilizer. Forthe banking and auto sectors, we expectearnings to be a mixed bag.

LookingAhead

(Contributed by Taurus Securities Ltd,a subsidiary of National Bank of Pakistan)


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27

March - June, 2008

Sectoral Implications of the Federal BudgetBanking & Insurance Sectors

Budgetary Impact - Banking Sector

Measures

To encourage the amalgamation of bankingcompanies, modarabas and insurancecompanies, they have been allowed to carryforward the losses for six years from thedate of amalgamation.

In case of general power of attorney bybank, no CVT is proposed to be chargedon banks, howeverCVT will be enforcedwhen mortgage of property would beoffered as collateral against loan.

For th

Economic Bulletin March June 2008

Documents

Transcript of Economic Bulletin March June 2008