The large scale manufacturing (LSM) sector registered 0.9 percent growth after a thirteen month period of negative growth and inflation declined to 10 percent by September 2009, which are taken as signs of effective tackling of stagflation that spread optimism within relevant government circles.
Data released by the Ministry of Finance for July-September 2009 titled as Pakistan Economic Update said that the constraints to productivity include a continuing energy shortfall, high cost of borrowing which is reflected by a decline in net bank credit to the private sector by 6.2 percent in August 2009, and disturbed internal security situation, particularly in NWFP. Besides, the continuing concern is the heightened risk aversion on the part of banks following rising loan defaults and payment, the report said.
The main trailblazers with respect to a rise in LSM growth were the auto sector particularly the manufacturers of tractors, jeeps and motorcycles, and cement which provided an unusually large stimulus to LSM growth. PIDE's business barometer, reproduced in the report, states that there has been an improvement in domestic business sentiment based on a survey of companies listed on the Karachi Stock Exchange out of which 60 percent expect higher production for July-December 2009. This buoyancy of expectations is partly attributed to Pakistan's up gradation of credit rating by Standard and Poor's and of the sovereign outlook by Moody's.
This is notwithstanding an exhaustive list of potential risks to growth and investment outlook that include: (i) mismatch between energy supply and demand, (ii) painfully slow pace of materialisation of Friends of Democratic Pakistan pledges, (iii) faster pace of external support which may include the 1.5 billion dollar annual assistance under the Kerry Lugar Act, (iv) projected 24 percent water shortage for Rabi crop in comparison to last year, (v) ongoing attack of leaf curl virus, (vi) seasonal gas shortage, (vii) operation of base effect in agriculture and (viii) further deterioration of internal security.
The rate of inflation year-on-year basis nearly halved in the past six months and declined to 10.1 percent on September 2009. The external current account balance swung to a surplus in September ($174 million) after posting a nominal deficit in August ($19 million). Lower imports and record-breaking inflow of workers remittances have contributed most of the turnaround.
According to the report, a pick up in economic activity, a speedy solution to the energy crisis, an improvement in the internal security situation, a continuation of the trend of improvement in the global economy, and results of the restructuring of tax administration should all contribute towards achievement of the full year tax revenue target.
The report said that a sharp fall in sales and corporate profitability in prior periods, a 19 percent decline in the value of dutiable imports during July to September 2009, the impact of the internal restructuring of Federal Board of Revenue (FBR), the fall out of the internal security situation on business conditions, and a change in the dates for filing advance tax (from September 30 to October 15), have all contributed to a nominal increase of 0.2 percent in overall tax collection.
However, tax collection for the first quarter should be viewed in the context of a 35 percent increase in tax collection during July to September 2008 (versus corresponding period 2007), providing an unusually high base for comparison. In addition, adjusted for the estimated impact of advance tax collection shifted to next quarter (approximately Rs 25-29 billion), the tax collection effort has been above par under challenging circumstances. The economic update concluded that despite the fact that the economy appears to be recovering, however, moving to a sustained expansion is conceivably some way off.
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