Pakistan's strong macroeconomic policies in recent years, high growth rates, increases in pro-poor spending, and burgeoning overseas Pakistani's remittances have all contributed to a steep decline in the incidence of poverty and the unemployment rate, says Asian Development Outlook (ADO) report 2007.
According to official statistics, the proportion of the population living below the poverty line fell sharply from 34.5 percent in FY 2001 to 23.9 percent in FY 2005, in absolute terms, the number of poor people fell from 49 million to 37 million. The unemployment rate declined from 7.7 percent in FY 2004 to 6.2 percent in FY 2006.
It further said that buoyant growth, improved macroeconomic fundamentals and strengthened international credit ratings have been the hallmark of Pakistan's economy in recent years. Though the medium-term outlook for Pakistan's economy remains positive, macroeconomic stability has to be maintained and structural issues addressed, it added.
The ADO 2007 report encompassing 43 developing Asian economies, forecasts Asian economies to expand at 7.6 percent in 2007 and 7.7 percent in 2008. It also states that the region achieved an economic expansion of 8.3 percent in 2006, which is the fastest rate in more than a decade. It also includes a special chapter on 'Change Amid Growth in Developing Asia'.
In fiscal year (FY) 2006, high oil prices, a weak agricultural performance, as well as the effect of the October 2005 earthquake, trimmed the expansion of Pakistan, while strong demand side pressures had exposed the macroeconomic stresses, the report said.
INFLATION AND BUDGET DEFICIT: The economy is expected to pick up slightly in FY 2007, reflecting some strengthening in agriculture and manufacturing. Inflation is set to be moderate after a further tightening of monetary policy, but is still above the central bank's target. Spurred by an expansionary, pro-growth fiscal policy, the budget deficit will widen slightly, as will the current account deficit. The medium-term outlook remains positive, but macroeconomic stability has to be maintained and structural issues addressed.
Regarding economic performance of Pakistan, the report said that it has grown strongly over the past 3 years, at an average pace of 7.5 percent. After expanding at high rates in the preceding 2 years, the economy slowed in FY 2006, but still maintained a robust outturn of 6.6 percent.
On the demand side, private consumption, boosted by continued rapid expansion in consumer credit and higher workers' remittances, continued to be a lead contributor to GDP growth for the consecutive third year. It said that private sector credit expanded by about 24 percent, total investment spending (fixed and inventories) rose to 20.0 percent of GDP in nominal terms, mainly because of a sharp increase in private investment.
The report further said that over the last 3 years, improved business confidence and rising inflows of foreign direct investment (FDI) had buoyed private investment, but negative real interest rates on bank deposits and rising consumer demand helped push down national savings, further widening the investment-savings gap.
With a sharp rise in the current account deficit, the contribution of net exports of goods and non-factor services became negative for the first time in 6 years, it added. On the supply side, GDP's deceleration in FY 2006 was due to a sharp decline in agricultural growth and slower year-on-year growth in manufacturing, attributable to capacity constraints and the high-base effect.
Contrary to this, services accounted for slightly more than half of GDP, gained further steam and recorded their fastest-ever growth rate of 8.8 percent. Strong demand, catalysed by increased investment and consumption expenditure, as well as the rise in workers' remittances, outstripped supply and helped stoke inflationary pressures.
Inflation, after peaking at 9.3 percent in FY 2005, remained high at 7.9 percent in FY 2006. The first half of FY 2007 witnessed no change in inflation, as rising food prices offset easing oil and non-food commodity prices. Food inflation rose to 12.7 percent at end-December 2006 from 7.8 percent at end-June, lifted by higher prices of milk as well as by edible oil and wheat, pulled by rising international levels.
With the monetary tightening policy of State Bank of Pakistan in 2005 and 2006, Pakistan succeeded in reducing growth in private sector credit and resulted in monetary growth that was below the increase in nominal GDP for the first time in 5 years.
Consequently, the average interest rate on new bank loans rose from 10.1 percent in June 2006 to 11.3 percent in December. Monetary growth declined because of the decrease in domestic credit and the Government's reduced bank borrowing.
With relatively high domestic inflation, the real effective exchange rate appreciated which, with strong domestic demand, contributed to the deterioration in the current account. With advances in hand in structural reforms and macroeconomic fundamentals of recent years, the Government since FY 2005 has pursued a pro-growth fiscal policy. Development outlays have sharply risen.
The primary balance, however, which is a more accurate reflection of the Government's discretionary fiscal stance because it excludes the impact of interest payments, turned into a deficit in FY 2006 after being in surplus the preceding 4 years, the report added.
The improved policy environment stimulated a multifold increase in FDI in recent years, which has risen from $483 million in FY 2002 to $3,451 million in FY 2006. The first half of FY 2007 saw an inflow of $1,873 million. About 70 percent of total FDI is concentrated in just four sectors--telecommunications, oil and gas exploration, petroleum refineries, and financial businesses.
Privatisation and domestic stock market increased the FDI, which accounted for billions of dollars. In December 2006, it ventured into the international equity market, for the first time in several years, raising $731 million in global depository receipts issued by the Oil and Gas Development Company on the London Stock Exchange.
Taking into account the economic prospects, the report said, the prognosis for FY 2007 and FY 2008 is based on assumptions that the authorities will continue, or perhaps strengthen, the economic reforms of recent years, and that they will press on with relieving the macroeconomic stresses that have emerged in the last couple of years.
It is assumed that the central bank will continue its tight monetary policy and pursue a flexible exchange rate policy. Globally, economic growth in the United States (US) and the European Union (EU), the country's two largest trading partners, is assumed to slow somewhat, as is the growth of world trade volume.
The sharp rise in investment last year and moderation in oil prices are expected to boost growth in FY 2007. However, shortages of natural gas and suspension of its supply to a number of industrial units to meet the rising demand for household consumption (because of exceptionally cold weather) would likely depress industrial growth, which along with the ongoing slowdown in exports would dampen the expansion. Agriculture and manufacturing have improved in the first half of FY 2007, and services appear to be growing robustly, but somewhat less quickly than last year.
Decrease in the domestic oil price, the petroleum levy will likely continue to yield significant income, as will receipts from the US for logistics support operations for Afghanistan.
Current expenditures, though, are expected to exceed the budget estimate, because of expected overruns in the interest payment on domestic debt. On balance, the fiscal deficit is likely to rise to 4.5 percent of GDP in FY 2007, coming in at the planned level.
Import growth is set to decelerate in FY 2007, on account of moderation in the oil import bill, weaker demand for consumer durable, and some rundown from an apparent build-up of inventories in FY 2006. Nevertheless, sustained growth and the forecast rise in investment are projected to keep import growth at about 9 percent.
Exports, too, will rise, but the high domestic cost of production in the textile and garment sector as well as stiff competition from the People's Republic of China (PRC) and India are likely to restrict total export growth to about 8.0 percent.
The current account deficit is projected to edge up to $6.5 billion, or 4.5 percent of GDP in FY2007. With the expected stabilisation in GDP growth, cooling demand for consumer durables (on higher interest rates), and softening in oil prices, import growth is likely to be moderate in FY2008. As a result, the current account deficit could decline to $6.0 billion, or 3.9 percent of GDP.
In an environment of pro-growth government policies, a continuous increase in the public sector development program, and the projected rise in investment, the medium-term outlook for the economy is positive. Greater trade volumes with countries in the region, including the PRC, will also help. The boom in banking and telecoms is likely to continue, as the policy environment for these sectors is favourable.
Foreign hydrocarbons investments in recent years will have an output payoff. Finally, significantly strengthened through reforms and mergers and acquisitions, the banking system is well positioned to better channel savings to productive uses.
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