PAKISTAN ECONOMIC SURVEY 2010-11 CHAPTER NAME CHAPTER AUTHOR S.Ejaz Wasti Overview of the Economy Economic Adviser Zafar-ul-Hassan Growth and Investment Joint Economic Adviser Omer Farooq Agriculture Research Officer Attaullah Shah Manufacturing Research Officer Nazia Gul Fiscal Development Research Officer Nazia Gul Money and Credit Research Officer Norina Bibi Capital Market Research Officer Ahmed Khan Inflation Assistant Economic Adviser Mushtaq Ali Hub Trade and Payments Assistant Economic Adviser Nazia Gul External and Domestic Debt Research Officer Omer Farooq Education Research Officer Ahmed Khan Health & Nutrition Assistant Economic Adviser Norina Bibi Population, Labor Force and Employment Research Officer Absar Hassan Siddique Poverty Deputy Economic Adviser Attaullah Shah Transport and Communications Research Officer Muhammad Usman Raja Energy Research Officer S.Natiq Hussain Naqvi Environment Deputy Economic Adviser Special Section 1: Cost of War on Terror for Pakistan Economy Special Section 2: Pakistan: Flood Impact Assessment Contingent Liabilities Tax Expenditure Economic and Social Indicators Download Statistical Appandix Highlights of the Economic Survey Overview of the Economy I. Introduction under flood waters and the circular debt problem). Inevitably, the overall quantum of economic The economy of Pakistan has been undergoing a activities, captured by services sector was also stabilization phase since the last three years. The affected, with a growth of 4.1 percent, originally restoration of macroeconomic stability is targeted at 5.4%. important and necessary to provide the platform for generating growth, jobs, and improving the The challenges posed by exogenous shocks quality of life of the people. affected the pace of the reforms process as the government was forced to make difficult trade- This period has been marked by the continuing -- offs and cater to unexpected demands for flood and intensified --security challenges the country rehabilitation and the impacts of increasing oil has confronted since 2001. In addition, the prices. The government, while pursuing a regime country faced multiple adverse shocks of of deregulation of pricing of key products was commodity and oil prices and the fallout of the nevertheless forced to intervene in the energy and global financial crisis. The year under review saw commodity markets to keep prices from getting the unprecedented calamity of the great floods. completely out of the reach of the public. This These floods wiped out about 2 percentage points burden of subsidies, though significantly reduced from the growth as well as inflicted a massive from previous years, exerted continuing pressure damage of $10 billion on country’s economic on the fiscal system and the adjustment path was structure. Some 20 million people were displaced affected. In the second half of the year, due to a as more than 50,000 Sq. Km area was submerged combination of austerity, resource mobilization in water. During the year oil prices also shot up measures and bold decisions on pricing the from $70/barrel to $125/barrel creating a new macro-framework was stabilized and the threat to the macro framework. anticipated damage to the overall fiscal position Viewed in this background the growth rate of 2.4 was avoided. However, more work will be percent registered during the year 2010-11 seems required to rebuild the reforms programs, and to reasonable. Although much below its potential, remain engaged with the development partners. the performance signifies the enormous resilience The most significant development during the year in the economy as it was tested several times by was the historic performance of the external one crisis after another beginning with the sector, which is heading to register a surplus in the earthquake of 2005. With some reprieve and current account. First, exports registered a growth continuing effort, there is reason to believe that of 28 percent in the first 10 months of the year the country will revert to its potential growth compared to same period last year. Crossing the trajectory. $20 billion mark for the first time, exports are set The destruction of major crops, particularly rice to exceed $24 billion. Second, the remittances and cotton, led to a negative growth of 4% in this have also recorded a strong performance by sector. The manufacturing sector growth was crossing the double digit mark and are set to reach adversely affected --and was negligible --due to the historic level of more than $11.2 billion. Third reduced output in the textiles and petroleum --and this is partly attributable to moderated products (affected by submersion of refineries demand for imports --the current account shows a i Economic Survey 2010-11 surplus of nearly $748 million. Finally, the percent in the Net Foreign Assets (NFA) which is combined effect of these positive developments reflective of the positive developments in the was reflected in the growth of external reserves external sector. The NDA of the banking system which also touched a historic high of $17.1 billion has expanded by 9.4 percent in the period. The at the end of April, 2011. tight monetary policy stance adopted by SBP is reflected in the rise in the policy rate which Pakistan has enjoyed sustained period of exchange registered an increase of 150 bases points since rate stability since December 2008. The Real July 2010 in the increments of 50 bases points. Effective Exchange Rate (REER) depicted unprecedented appreciation of 10 percent in 2009- The year was the first in the implementation of the 10 and marginally appreciated in the first ten NFC Award. The award represented a radical months of the current fiscal year. The SBP is not break from the past as it transferred a larger share intervening in the foreign exchange markets and of divisible poor revenues to the provinces. An exchange rate is market determined. estimated additional amount of Rs.325 billion will be transferred to the provinces compared to the The situation regarding inflation remained a key last year. Since many of the primary public concern for the economy. For most of last fiscal services are provided by the provinces, greater year, inflation was coming down, but the shocks availability of resources will facilitate both the of floods and oil price have reversed the declining improvement in quality as well as scale of such trends. It should be noted that with rising services. The passage of 18th Constitutional commodity and oil prices, inflation has affected Amendment has led to the devolution of all countries both regionally and globally. additional subjects to the provinces, especially However, in the second half of the year, the rising those in the social sectors. It is hoped that inflationary trend has been stemmed and inflation undivided responsibility of provinces in social is now hovering around 14 percent. With fiscal sectors and availability of enhanced resources will consolidation and abetment of some pressures lead to much improvement the quality of social from international prices, the inflation outlook sector indicators that have been lagging behind for looks better than in the earlier part of the year. some time. Inflationary pressures inevitably brought pressure Despite many challenges, the overall performance on the interest rate, and with much of the credit of the economy has been moderately satisfactory. flowing in the government sector, private credit, The recent measures announced for fiscal despite some growth over the previous year correction should contribute to a faster recovery remained weak. With development resources and resumption of growth. It was felt by some preempted by unanticipated expenditures on flood observers, that the budget deficit --the key relief and power and petroleum subsidies, fiscal indicator of economic stability--will reach discipline required the government to reduce its unprecedented levels due to the difficult public investment to a low level in many years. circumstances. However, due to sound economic Accordingly, the overall investment in the year management and fiscal discipline, the deficit has was also below its level in the recent past. been contained and is estimated at 5.3% of GDP. To settle the circular debt and get more production The overall monetary survey indicated modest out of the existing energy plants, the government growth in monetary aggregates. The reserves has decided to pay additional Rs. 120 billion money grew by 17.1 percent in the period July- subsidies from for previous years. This will add May 21, 2010-11as against 13.6 percent growth in an additional 0.6 percent to the deficit, bringing it the comparable period of last year on the back of to 5.9%. However, the outlook for the next year strong growth of 73.1 percent in the NFA of the looks bright on this account as the year has fully SBP. The NDA component grew steadily at 11.6 accounted for the subsidies falling due during the percent in the period. Broad money expansion year and substantial correction in such burdens is by11.7 percent in the period July-May 21, 2010- likely to be made in the years ahead. 11 is mainly drive by phenomenal growth 57.3 ii Overview of the Economy A brief review of the economic situation during One reason might be higher prices as urea prices first three quarters and prospects for next quarter soared by 25.8 percent and DAP is expensive by is given below: 46.5 percent in the first nine months of the current fiscal year. Domestic production is up by 2.7 II. Real GDP Sectoral Growth: The Real GDP percent but import of fertilizer is down by 50.4 growth is estimated to remain at around 2.4 percent. percent compared to the target of 4.5 percent. The set back was due to the agriculture sector which Disbursement of credit for agriculture sector has was badly affected by floods. However, the strong increased marginally by 1.4 percent in July-March performance of services sector which grew at 4.1 2010-11.