Zardaris Government2007-2008

GDP Growth:Real GDP grew at a robust rate of 5.8 percent in 2007-08 as against the revised estimates of 6.8 percent last year and the 7.2 percent target for the year. When viewed in the backdrop of major disruptions of extraordinary nature, economic growth in 2007-08 appears satisfactory.

Agriculture:

Notwithstanding its declining share in GDP, agriculture is still the single largest sector of the economy, contributing 21 percent to GDP. Agriculture performed poorly in 2007-08, growing at 1.5 percent against the target of 4.8 percent and 3.7 percent of last year. The poor performance of agriculture can be attributed to an equally poor performance in major crops and forestry, registering a negative growth of 3 percent and 8.5 percent, respectively. Livestock, minor crops and fishing have been the saving grace for agriculture as these sectors have performed reasonably well to compensate the poor performance of the major crops and forestry. Major crops, accounting for 34 percent of agriculture and 7.1 percent of GDP, suffered on account of poor showing of wheat and cotton and a less than satisfactory performance of the rice crop. Sugarcane and maize, being the other two major crops, performed impressively in 2007- 08.Manufacturing:Manufacturing is the second largest sector of the economy, accounting for 19 percent of GDP. This sector has recorded its weakest growth in a decade during fiscal year 2007-08. Overall manufacturing posted a growth of 5.4 percent during the first nine months (JulyMarch) of the current fiscal year against the target of 10.9 percent and last years achievement of 8.2 percent. When viewed in the medium-term perspective, the performance of the manufacturing sector has been impressive as it posted an average growth of 10.4 percent per annum during the last five years.Investment:After reaching a record level of 22.9 percent of GDP in 2006-07, total investments declined to 21.6 percent - a decline of 1.3 Overview of the Economy ix percentage points. Fixed investment decreased to 20 percent of GDP from 21.3 percent last year. While public sector investment remained at last years level of 5.7 percent, private sector investment however, registered a decline of 1.4. percentage points - declining from 15.6 percent to 14.2 percent.

Inflation:The CPI-based inflation during July-April 2007-08 averaged 10.3 percent as against 7.9 percent in the same period last year. The single largest component of the CPI is the food group, which makes up 40.34 percent of the CPI, and it showed an increase of 15.0 percent. This was higher than the 10.2 percent food inflation observed over the corresponding period of last year. A further breakdown of food inflation into perishable food items and non-perishable food items reveals some interesting facts. The rise in the price of perishable food items stood at 8.7 percent whereas nonperishable food items stood at 13.6 percent. Based on the current trend observed, the contribution of food inflation to the overall CPI is estimated at 59 percent and non-food inflation at 40 percent as against 52.4 percent and 47.2 percent, respectively in the comparable period last year. On the other hand, the non-food prices grew at a slower pace compared to last year. Non-food inflation averaged 6.8 percent during July-April 2007-08 while it stood at 6.2 percent in the corresponding period last year. The non-food-non-energy inflation (core inflation) was also higher at 7.5 percent in first ten months of the fiscal year 2007-08 as against 6.0 percent in the same period last year, on account of the rising house rent and Medicare sub-indices.Monetary Policy:

During FY08 sbp continued a tight monetary policy, thrice raising the discount rate and increased the cash reserve requirement (CRR) and statutory liquidity requirement (SLR). The objective of this was to give incentives to commercial banks to mobilize long term deposits. In the light of a continued inflationary buildup and increasing pressures in the foreign exchange market, the SBP announced a package of monetary measures on May 21, 2008 that includes; (i) an increase of 150 bps in discount rate to 12 percent; (ii) an increase of 100 bps in CRR and SLR to 9 percent and 19 percent, respectively for banking institutions (iii) introduction of a margin requirement for the opening of letter of credit for imports (excluding food and oil) of 35 percent, and (iv) establishment of a floor of 5 percent on the rate of return on profit and loss sharing and saving accounts. The money supply growth during July- May 10th 2007-08 (henceforth July-May) of the current fiscal year slowed to 9 percent compared to 14 percent during the corresponding period of FY07. Credit to private sector grew by 14.9 percent during July-May FY08 as against 12.2 percent in the same period of last year. Credit to private sector as percent of GDP is continuously rising since 2001-02. The key factors contributing to this years acceleration in private sector credit growth include: (i) rise in working capital requirements due to higher input costs; (ii) the need for bridge financing to settle price differential claims of the OMCs and IPPs; and (iii) the higher fixed investment in the month of March 2008. Fiscal policy:

Fiscal year 2007-08 proved to be a difficult year for Pakistan, with several political and economic events transpiring unexpectedly. These events include heightened political tensions, soaring global oil prices, the international and domestic food inflation phenomena, a slowdown in global economic activity, and the troubled law and order situation prevalent in the country. The total revenue collected during FY 2007-08 stood at Rs. 1545.5 billion, higher than the targeted level of Rs 1476 billion (based on information till May 23, 2008). This increase of Rs 69.5 billion from the budgeted revenues was mainly due to higher-than-targeted non-tax collections. Tax revenues however, exhibited a disappointing performance. Political disturbances and a less than satisfactory law and order situation seriously hampered the revenue collection efforts of the FBR. There are expectations that the FBR may fall short of its targeted level, and the year is most likely to end with tax collection amounting to Rs. 1.0 trillionRs. 25 billion less than the original target. Notwithstanding the shortfall, the government has made an extraordinary effort to collect more resources from the non-tax revenue side. There are expectations that the government may collect an additional Rs. 103 billion in non-tax revenues, reaching to Rs. 483 billion. Slippages in provincial tax revenues amount to Rs. 8 billion. The total expenditure for 2007-08 was budgeted at Rs. 1875 billion -- 11.9 percent higher than last year. Current expenditure on the other hand was budgeted at Rs. 1378 billion (almost equivalent to last years level), of which, Rs. 862 billion was earmarked for the federal government and the remaining Rs. 416 billion was allocated for provincial governments. Development expenditure (after Overview of the Economy xv adjusting for net lending) was targeted at Rs. 496 billion 16.7 percent higher than last year. On the basis of revenue and expenditure projections, the overall fiscal deficit was targeted at Rs. 398 billion or 4 percent of GDP as against 4.3 percent last year. 2008-2009Growth and investments:

Real GDP grew by 2.0 percent in 2008-09 as against 4.1 percent last year and growth target is met 4.5%. The modest growth of just 2.0 percent is shared between Commodity Producing Sector (CPS) (0.08) and services sector (1.92). Agriculture sector has depicted a stellar growth of 4.7 percent as compared to 1.1 percent witnessed last year and target of 3.5 percent for the year. Manufacturing sector has contracted by 3.3 percent in 2008-09 as compared to expansion of 4.8 percent in last year and over-ambitious target of 6.1 percent. The services sector grew by 3.6 percent as against the target of 6.1 percent and last years actual growth of 6.6 percent.

Inflation:

This year the increase in the price level has been extraordinary in Pakistan. The inflation rate measured through the Consumer Price Index (CPI) has climbed to 22.3 percent during (July-April) 2008-09 over the corresponding increase of 10.3 percent. Inflation accelerated at a rapid pace mainly because of raising food prices; a weaker rupee/dollar exchange rate; the gradual withdrawal of subsidies on gas, electricity and petroleum; the imposition of custom duty on the imports of various items; and an upward revision in the support price of wheat and sugarcane crops.Monetary Policy:

The SBP has kept its tight monetary policy stance in the period July 01, 2008-April 20, 2009. The policy rate was adjusted upward in November 2008 to shave-off some aggregate demand from the economy and kept constant in January 2009. However, noticing visible signs of demand compression enabled the SBP to reduce 100 basis points on April 20, 2009. During July 01, 2008- May 16, 2009, money supply (M2) expanded by 4.6 percent against the target of expansion of 9.3 percent for the year and last year expansion of 8.1 percent in the comparable period of last year. The reserve money witnessed growth of 2.4 percent in this period as against expansion of 13.2 percent in the comparable period of last year.Fiscal Policy: The government has decided in the economic stabilization program to adhere to the fiscal deficit target reverently and during the first nine months (July-March) the fiscal deficit hovered around 3.1 percent of the projected GDP for 2008-09 which is consistent with annual fiscal deficit target of 4.3 percent. The fiscal improvement in the first nine months (July-March 2008-09) has largely based on reduction of oil subsidies and a cut in development spending. All meaningful efforts to expand revenues particularly by broadening the tax base will only work in the medium-term. There has been significant improvement in fiscal performance during 2008-09 due to the policy shift, with the overall fiscal deficit estimated to have dropped to 4.3 percent of annual GDP. The fiscal improvement in 2008-09 has largely based on reduction of oil subsidies and a slash on development spending.2009-2010

Monetary Sector

A net retirement of bank credit by the private sector occurred in the first few months of the fiscal year, followed by a fairly strong uptick in subsequent months. As of third week of April, utilisation of bank credit by the private sector had increased to 4.8%, as against 1.6% in the corresponding period of 200809. Part of the subdued increase is accounted for by a sharp rise in provisioning by banks for nonperforming loans, which is deducted from gross lending to arrive at the reported net figure of borrowing.x However, the rise in private sector credit demand is concentrated in two sectors: textiles and energy.The trend in the former is in line with improving external demand for yarn, while in the Economic Survey 200910 66 case of the latter, the circular debt issue has accounted for a large increase in borrowing requirements for the affected companies. In response to several years of excessive money supply growth and fiscal profligacy, SBP reversed course of its monetary policy from end2007 onwards. Initially, the stance was modified very incrementally (see Table 5.1), but in the face of persistent excessive demand pressures in the economy, SBP began a rather more aggressive tightening phase from May 2008.

Inflation:

After declining for much of calendar 2009, inflationary pressure has intensified of recent on account of a number of adverse developments. From a low of 8.9 percent in October 2009, yearonyear Consumer Price Index (CPI) inflation has accelerated to 13.3 percent as of April 2010 (Figure 6.1).Food inflation has remained elevated in the past few months, stabilising at around 14.5 percent (from 7.5 percent in October 2009), while the rate of change in prices of NonFood items has been recorded at 12.2 percent for April (from 10 percent in October). Core inflation, defined as inflation in the nonfood, nonenergy (NFNE) component of the CPI basket, has reversed its path of moderate decline, and stood at 10.6 percent in April.On a periodaverage basis, overall inflation was recorded at 11.5% for July to April. For the corresponding period in 200809, average inflation stood at 22.3%.

Fiscal Policy:

Pakistans fiscal deficit vastly improved over the years after averaging 7.0 percent of GDP during the 1980s and 1990s, to 4.0 percent on average during 20002007. Given the predicament being faced by Pakistans economy during fiscal year 200708 and its effects carried forward into 200809, the fiscal policy stance of the government remained geared towards fiscal consolidation and stabilization. 2010-2011

GDP Growth:

The Real GDP growth is estimated to remain at around 2.4 percent compared to the target of 4.5 percent. The set back was due to the agriculture sector which was badly affected by floods. However, the strong performance of services sector which grew at 4.1 percent has kept the overall growth in a reasonable range.Monetary Developments:

The SBP has kept its tight monetary policy stance for some time. The SBP has raised the policy rate by 150 basis points (bps), staggered in three stages of 50 bps each, since July 2010. SBP raised the policy rate by 50 bps to 13 percent on 2nd August 2010. Soon after this the economy experienced an exogenous shock in the form of massive Floods which engulfed almost one-fifth of the country. The inflation became a challenge in the aftermath of the floods which compelled the SBP to raise the policy rate further by cumulative 100 bps points to 14 percent up to 30th November 2010. Since then the need for further adjustment in policy rate was not felt simply because the inflation had started moderating and fiscal discipline was restored, with government borrowing from SBP significantly brought down.Fiscal Developments:

Fiscal performance both revenues and expenditures have been affected by the floods and the policy adjustments in the face of global rise in prices of energy. The original estimates had to be revised in the light of these unprecedented happenings. Preliminary data suggests that the fiscal deficit is likely to remain between 4-4.5 percent of GDP in the first nine months of the current fiscal year. Part of the increase in the fiscal deficit is explainable on account of higher security related expenditures and the floods, however significant contribution to this increase came from higher subsidies, delay in adoption of tax measures, nonrealization of auction of 3-G license and several petroleum related incomes which were affected due to non-resolution of circular debt problem in full. The emerging fiscal situation has reinforced the urgent need to broaden the tax base, rationalize expenditure and to better insulate the economy from shocks.

2011-2012

Growth and stabilization:

The economy is now showing signs of modest recovery. GDP growth for 2011-12 has been estimated 3.7 percent as compared to 3.0 percent in the previous fiscal year 2011. The Agriculture sector recorded a growth of 3.1 percent against 2.4 (LSM) growth is 1.1 percent during July-March commodity producing sectors and especially the Agriculture sector have performed better. The Services sector recorded growth of 4.0 percent in 2011-12.Fiscal Policy:

The Medium Term Budgetary Framework has improved the budget preparation process. Medium-term fiscal framework and budget policies have been incorporated into a medium-term Budget Strategy Paper on rolling basis, which include medium-term indicative budget ceilings for the recurrent and development budgets, and provides an opportunity to discuss the budget between technical and political levels prior to the presentation of the annual budget. The political level involvement includes Cabinet, Standing Committees on Finance & Revenue, and political parties. The Output Based Budget (OBB) has also been institutionalized in the federal government which presents policies of the ministries in the shape of goals, outcomes, outputs and medium-term budgets. The OBB also presents key performance indicators for the outputs to introduce government wide monitoring system.Monetary Policy: The SBP lowered the discount rate by cumulative 200 bps points to 12 percent during the first half of fiscal year 2011-12 in line with inflationary trend in the country. During the first eleven months of the current fiscal year (June 2011-11th May 2012) broad money (M2) witnessed an expansion of 9.1 percent as compared to 11.47 percent as compared to last year. The deceleration in money supply is primarily driven by the significant fall in the Net Foreign Assets of the banking system along with increased government borrowing and a one-off settlement of circular debt. Net Domestic Assets (NDA) during July 2011 - 11th May 2012 stood at Rs. 880.9 billion against Rs. 481.6 billion during the same period last year. The expansion in NDA is mainly contributed by a rise in demand for private sector credit and government borrowings.2012-2013Growth and investment:

The framework for economic growth approved by the government in FY11 identified a coherent approach to growth that targets public service delivery, productivity, competitive markets, innovation and entrepreneurship. The strategy was based on sustained reform that builds efficient and knowledgeable governance structure, and markets in attractive and well-connected locations, however, the desired objectives are yet to be realized. Pakistans economic problems are structural in nature. Major structural reforms which are needed contains tax legislation, trade reforms, privatization of State Owned Enterprises (SOEs), financial sector reforms, human resource development and social protection. The real GDP growth for FY 13 has been estimated at 3.6 percent based on nine month data as compared to 4.4 percent (revised) in the previous year after rebasing the national accounts at constant prices of 2005-06. The Agriculture sector recorded a growth of 3.3 percent against the previous years growth rate of 3.5 percent. The Large Scale Manufacturing sector grew by 2.8 percent as compared to the growth of 1.2 percent last year. The Services sector recorded a growth of 3.7 percent as compared to 5.3 percent in FY 12.Fiscal Policy:

Resource mobilization performed remarkably well during the first nine months of fiscal year 2012-13 with the growth rate of 20.8 percent. After the announcement of 7th NFC award, provinces received a significant amount of the federal government taxes as their share from the divisible pool along with additional grants. Government continued its efforts to broaden the tax base and simplifying the tax structure. During the current fiscal year various measures to increase the revenues expected to generate additional tax revenues of Rs 41 billion e.g, the sectors with zero rating facility have been brought under tax as 2.0 percent sales tax was imposed on local supplies of five leading export sectors (Sports, Surgical, Carpet, Textile and Leather, standardized withholding tax regime at the import stage by imposing a uniform rate of 5 percent tax on the imports of commercial and industrial importers, mobile telephone sets, silver, all fibers, yarns, fabrics and goods covered by the five leading export sectors, broadening of sales tax, withholding regime, withdrawal of concessionary rate of 5 percent on tea. FBR tax collection for the fiscal year 2012-13 was targeted at Rs.2,381 billion which was 26.4 percent higher over the actual collection of Rs.1883.0 billion during 2011-12. During first ten months of current fiscal year, FBR tax collection reached to Rs.1505.2 billion against Rs 1,426.2 billion in the same period last year, posting a growth of 5.5 percent.Monetary Policy:

Monetary policy in Pakistan has undergone substantial changes in tandem with volatile economic conditions within the country. The current policy stance has been largely supportive of the dual objective of promoting economic growth and price stability along with the revival of credit to private sector. SBP has adopted relatively an expansionary policy stance for the past two years as the policy rate has been reduced by cumulative 400 basis points from 13.5 percent in August 2011 to 9.5 percent in December 2012. During July-10th May 2012-13, money supply (M2) increased by 9.9 percent against the growth of 9.1 percent in the comparable period last year on account of improvement in Net foreign assets (NFA), rise in Net domestic assets (NDA) and credit off take by the Public Sector Enterprises (PSEs).