Highlights
of Budget 2006 -2007 |
Highlights
INTRODUCTION
Pakistan’s economy has delivered yet another
year of solid economic growth in 2005-06 in the
midst of an extra-ordinary surge in oil prices and
the devastating earthquake of October 8, 2005. With
economic growth at 6.6 percent in 2005-06, Pakistan’s
economy has grown at an average rate of almost 7.0
percent per annum during the last four years (2002/03
– 2005/06) and over 7.5 percent in the last
three years (2003/04 – 2005/06), thus positioning
itself as one of the fastest growing economies of
the Asian region. The growth momentum that Pakistan
has sustained for the last four years is underpinned
by dynamism in industry, agriculture and services,
and the emergence of a new investment cycle with
investment rate reaching new height at 20.0 percent
of GDP. Therefore, the pre-requisites for sustained
economic growth appear to have gained a firm footing
during the last four years.
The outgoing fiscal year (2005-06) has been an extra-ordinary
year for the economy of Pakistan. At the very onset
of the year the economy faced headwinds from rising
oil prices, hovering around $ 70 – 75 per
barrel and putting severe strains on the country’s
trade balance and the budget. The massive earthquake
of October 8, 2005 also caused extensive damage
to property, infrastructure, school, hospital etc.
and a loss of over 70,000 human lives. The rescue
and relief operations and reconstruction of earthquake
affected areas also put Pakistan’s budget
under severe stress. Despite these constraints,
Pakistan’s economy has proved itself as remarkably
resilient in the face of shocks of extra-ordinary
proportions.
Major
Achievement Of Economic Performance (2005-06)
The most important achievements of this year include:
(i) a solid pace of economic expansion
in an extra-ordinary environment, underpinned by
weaker-than-targeted performance of large-scale
manufacturing and robust performance of services;
(ii) three or four years of strong
economic growth has positioned Pakistan as one of
the fastest growing economies in Asian region;
(iii) real per capita GDP grew
by 4.7 percent and per capita income in current
dollar term was up by 14.2 percent, reaching $ 847;
(iv) a sharp pick up in overall
investment reaching at a new height of 20 percent
of GDP and most notably, private sector investment
remained buoyant owing to a rare confluence of various
positive developments in the economy;
(v) a robust consumer spending
ably supporting the on-going growth momentum;
(vi) the credit to private sector
continue to rise at the back of improving investment
climate, the private sector has borrowed over Rs.1100
billion in less than three years (2003/04 and until
April 22, 2006) while their cumulative borrowing
in the previous eighteen years (1984 – 2003)
have been Rs.921 billion;
(vii) a significant abatement of
price pressure indicating a steady deceleration
in overall inflation, especially food inflation,
the overall inflation decelerating from 9.0 percent
in July 2005 to 6.2 percent in April 2006 and food
inflation decelerating from 9.7 percent to 3.6 percent
in the same period;
(viii) energy consumption, particularly
electricity and gas continue to rise at double-digit
level, reflecting strong buoyancy in the economy;
(ix) despite pressure emanating
from the earthquake-related expenditures the underlying
fiscal deficit performed better than the target;
(x) the Central Board of Revenue
(CBR) collecting taxes more than the target;
(xi) a sharp reduction in public
and external debt burden;
(xii) the record public sector
development program (PSDP) remained on track despite
massive spending on earthquake-related activities;
(xiii) exports and imports continue
to grow at high double-digit level;
(xiv) workers’ remittances
at around $ 4.5 billion continue to remain one of
the largest sources of external finance for Pakistan;
(xv) a continued accumulation of
foreign exchange reserves;
(xvi) exchange rate continued to
remain stable despite extra-ordinary increase in
imports and deterioration in trade balance;
(xvii) privatization program achieved
unprecedented success with the strategic sale of
some difficult and complicated public sector units;
(xviii) highest ever foreign direct
investment flows, exceeding $ 3.0 billion; and
(xix) the successful launch of
new 10 year and 30 year 144A sovereign bond in international
debt capital markets, totaling $ 800 million and
reflecting a vote of confidence by the international
investor community on Pakistan’s economic
policies, reform agenda and future outlook.
III.
Sectoral Review Of Performance (2005-06)
a. Growth and Investment
v Real GDP grew by 6.6 percent in 2005-06 as against
8.6 percent last year and fell short of the target
(7.0%). With economic growth at 6.6 percent in 2005-06,
Pakistan’s economy has grown at an average
rate of almost 7.0 percent per annum during the
last four years and over 7.5 percent in the last
three years, thus enabling it to join the exclusive
club of the fastest growing economies of the Asian
region.
b.
Poverty and Unemployment
The strong economic growth has created employment
opportunities and therefore has reduced unemployment.
According to Labour Force Survey 2005 (First two
quarters), since 2003-04 and until the first half
of 2005-06, 5.82 million new jobs have been created
as against an average job creation of 1.0–1.2
million per annum. Consequently, unemployment rate
which stood at 8.3 percent in 2001-02 declined to
7.7 percent in 2003-04 and stood at 6.5 percent
during July– December 2005. The rising pace
of job creation is bound to increase the income
levels of the people. The IT sector alone has created
114,737 new jobs in 2005-06.
Over
the last five years the government has spent Rs.1332
billion on poverty-related and social sector program
to cater to the needs of poor and vulnerable sections
of the society.
Headcount ratio, i.e., percentage of population
living below the poverty line has fallen from 34.46
percent in 2000-01 to 23.9 percent in 2004-05, a
decline of 10.6 percentage points. The percentage
of population living below the poverty line in rural
areas has declined from 39.26 percent to 28.10 percent
while those in urban areas, has declined from 22.69
percent 14.9 percent in this period.
c. Agriculture
Agriculture, and particularly, its crop sector could
not perform up to the expectation especially, major
crops registered a negative growth of 3.6 percent.
Livestock with 8.0 percent growth, a major component
of agriculture, exhibited strong showing and pulled
the overall growth in agriculture to 2.5 percent
as against the target of 4.2 percent. Livestock
has been the only saving grace as far as the performance
of agriculture is concerned this year.
d. Manufacturing
Overall manufacturing, accounting for 18.2 percent
of GDP, registered a robust growth of 8.6 percent
against the target of 11.0 percent and last year’s
achievement of 12.6 percent.
Large-scale manufacturing grew weaker-than-the expected
at 9.0 percent as against 15.6 percent of last year
and 14.5 percent target for the year, exhibiting
signs of moderation on account of higher capacity
utilization on the one hand and strong base effect
along with several other factors on the other hand.
e. CONSTRUCTION
v Construction continued its strong showing, partly
helped by activity in private housing market, spending
on physical infrastructure, and reconstruction activities
in earthquake affected areas. The construction sector
is estimated to grow by 9.2 percent in 2005-06 as
against extraordinary growth of 18.6 percent last
year.
f. Per Capita Income
Pakistan’s per capita real GDP has risen at
a faster pace during the last three years (5.6%
per annum on average in rupee terms) leading to
a rise in average income of the people. Such increases
in real per capita income have led to a sharp increase
in consumer spending during the last three years.
Per capita income defined as Gross National Product
at market price in dollar term divided by the country’s
population, grew by an average rate of 13.9 percent
per annum during the last four years – rising
from $579 in 2002-03 to $847 in 2005-06. Per capita
income in dollar term registered an increase of
14.1 percent in 2005-06 over last year – rising
from $ 742 to $ 847.
g.
Private Consumption Expenditure
As
opposed to an average annual increase of 1.4 percent
during 2000-2003, real private consumption expenditure
grew by 13.1 percent in 2004-05 and further by 8.1
percent in 2005-06.
h. Investment
During the fiscal year 2005-06, gross fixed capital
formation or domestic fixed investment grew by 30.7
percent as against a sharp rise of 28.6 percent
last year.
Private
sector investment grew by 31.6 percent this year
as against a growth of 29.1 percent last year. Public
sector investment on the other hand registered massive
growth of 46.7 percent as against a hefty 32.9 percent
increase last year.
Total
investment increased from 18.1 percent of GDP last
year to 20.0 percent of GDP in 2005-06 — highest
in the last 12 years. Fixed investment as percentage
of GDP is estimated at 18.4 percent as against 16.5
percent last year. Both public sector investment
and private sector investment as percentage of GDP
have increased to 4.8 percent and 13.6 percent respectively,
up from 4.4 percent and 12.1 percent last year.
Almost
2.0 percentage points jump in investment is consistent
with the rise in credit to private sector this year.
This also reflects the confidence of the private
sector on the improving macroeconomic conditions
in the country.
i.
Monetary Policy
Large expansion of private sector credit (Rs 345
billion in 10 months of 2005-06)
The extremely buoyant attitude of the private sector
can be viewed from the fact that the cumulative
borrowing by this sector during the last three years
amounted to over Rs.1100 billion as against the
cumulative borrowing by this of Rs.921 billion in
the previous 19 years (1984-2003). More importantly,
credit to private sector as percentage of GDP surged
from almost 20 percent in 1999-2000 to over 26 percent
in 2005-06 – almost 6 percentage point’s
increase in the last six years.
j.
Inflation
Among the most appreciated developments, during
fiscal year 2005-06, was the significant abatement
of price pressure over the course of the year. For
the first ten months of the current fiscal year
(July–April 2005-06), all important barometers
of price pressure in the economy indicated a steady
deceleration in inflation.
Inflation
during the first ten months (July-April) of the
current fiscal year is estimated at 8.0 percent
as against 9.3 percent in the same period last year.
Food inflation is estimated at 7.0 percent as against
12.8 percent in the same period last year.
Non-food inflation at 8.8 percent is on higher side
compared with 6.9 percent in the same period last
year.
The core inflation which excludes food and energy
costs from the headline CPI, moved up and estimated
at 7.7 percent as against 7.0 percent in the same
period last year.
House rent index also played an important role in
building inflationary pressure this year. With second
largest weight in the CPI (23.4%) after food (40.3%),
the house rent component of the CPI registered a
marginal decline to 10.3 percent as against 11.1
percent in the same period last year.
When viewed in the context of year-on- year performance
of inflation, the current fiscal year exhibits significant
abatement of price pressure and declaration in overall
inflation as well as its sub-indices. The current
fiscal year, started with an inflation rate of 9.0
percent in July 2005, but continued to decelerate,
reaching at 23 months low at 6.2 percent in April
2006. Food inflation was closed to 9.7 percent at
the beginning of the current fiscal year but decelerated
sharply to 3.6 percent in April 2006- the lowest
in the last 31 months.
In order to keep the prices of essential commodities
under control, the government has been taking various
measures throughout the year. These measures include:
a liberal import regime for food items including
zero rating of the imports of these commodities.
In order to provide relief to the low and fixed
income groups, the government has been selling wheat
flour and sugar through the outlets of the Utility
Stores Corporation (USC) at much lower prices than
the market. In order to augment supplies of essential
commodities in shortest possible time and at lower
freight charges, the government has also allowed
the import of various items through land routes
from neighbouring countries. The role of the Trading
Corporation of Pakistan (TCP) has been enhanced.
The TCP is active in importing sugar from around
the world to build up strategic reserves with a
view to continue selling sugar at less than the
market price through the USC. The TCP has also been
asked to import various kinds of pulses to meet
the domestic consumption requirements and stabilize
their prices in the country.
k.
Fiscal Policy
The overall fiscal deficit that averaged nearly
7.0 percent of the GDP in the 1990s has been reduced
to 2.3 percent in 2003-04 but increased to 3.4 percent
in 2005-06 as against the target of 3.8 percent
of GDP, mainly on account of better than expected
revenue performance. The fiscal deficit including
earthquake spending is estimated at 4.2 percent
of GDP in the current fiscal year.
The
Central Board of Revenue (CBR) is targeted to collect
Rs.690 billion but it is likely to collect Rs.710
billion – Rs.20 billion more than the target
and 20.6 percent more than last year.
l.
Public Debt Burden
Public
debt burden continues to decline rather sharply
over the last six years with significant improvement
in fiscal situation.
The public debt to GDP ratio, which stood at 85
percent in 1999-2000, has declined sharply to 54.7
percent in 2005-06 – almost 30 percentage
points reduction in debt burden in just six years
is one of the significant achievements of the government.
During
the year, public debt as percentage of GDP declined
from 61.4 percent to 54.7 percent – a 6.7
percentage decline in one year is other stellar
occurrences of the current year.
Since
public debt is a charge on the budget, its burden
must be viewed in relation to government revenue.
Public debt was 448.9 percent of total revenue last
year but declined to 414.9 percent this year –
a decline of 34 percentage points is not a mean
achievement.
m.
External Sector
Exports
were targeted to grow by 18.1 percent in 2005-06
— rising from $14.4 billion last year to $
17.0 billion this year.
During
the first nine months of the current fiscal year
exports were up by 18.6 percent, rising to $ 12.1
billion from $ 10.2 billion in the same period last
year, given the performance of the first nine months,
exports are likely to touch $ 17 billion mark by
the end of this fiscal year.
Imports
were targeted to grow by 26.0 percent in the current
fiscal year — rising from $ 14.4 billion to
$ 20.7 billion.
Pakistan’s
imports are up by 43.2 percent in the first nine
months of the current fiscal year — rising
from $ 14.4 billion to $ 20.7 billion, showing an
increase of almost $ 6.0 billion this year.
Major
contributions to this year’s additional import
bill have come from machinery, chemical and petroleum
groups. Over one-half of the increases have come
from machinery and raw materials groups and over
22.3 percent has come from petroleum group.
In
particular, import of machinery, raw material and
consumer durables groups are up by 30.8 percent,
36.1 percent and 41.8 percent, respectively as domestic
investment has come back to life owing to stronger
domestic and external demand.
Trade
Balance During July-March, 2005-06 trade deficit
amounted to $ 8620.3 million and was up sharply
from $ 4263.3 million in the same period last year
(During the first ten months (July-April) of the
current fiscal year, trade deficit stood at $9427.1
million as against $4868.0 million in the same period
last year).
The
major contribution to trade deficit came from petroleum
group (41.5 percent), machinery group (21.5 percent),
iron and steel scrap (11.9 percent) and consumer
durables (9.2 percent).
Workers Remittances Against the full year target
of $ 4.0 billion, workers remittances totaled $
3.63 billion during the first ten months (July –
April) of the current fiscal year, as against $
3.4 billion in the same period last year, showing
an increase of 5.2 percent. Given the trend so far,
it is likely that workers remittances may touch
$ 4.4 billion in 2005-06.
Current Account Balance The current account deficit,
excluding official transfers, stood at $ 4696 million
(3.7% of GDP) during July-March, 2005-06 as against
a deficit of $ 1181 million in the same period last
year.
Foreign
Direct Investment Pakistan has succeeded in attracting
$ 3020.2 million in FDI during July–April,
2005-06 —the highest ever in the country’s
history, as against $ 891.5 million in the same
period last year, showing an increase of 238.7 percent.
By the end of the current fiscal year, FDI is expected
to reach $ 3.5 billion mark or close to 3.0 percent
of GDP.
Over
90 percent of FDI has come into power sector; telecom
sector; chemicals, pharmaceutical and fertilizer;
oil and gas; and banking and finance.
Almost
75 percent of FDI has come from USA, UK, Switzerland,
Japan, UAE and Netherlands.
Foreign Exchange Reserves By end April 2006, reserves
touched all time high at $ 13.0 billion almost at
the same level as it was in the same period last
year. Of which, reserves held by the State Bank
of Pakistan amounted to $ 10.64 billion and by bank
stood at $ 2.4 billion.
External
Debt Until a few years ago, Pakistan was facing
serious difficulties in meeting its external debt
obligations. Following a credible strategy of debt
reduction, Pakistan has succeeded in reducing the
rising trend in external debt and foreign exchange
liabilities.
Pakistan’s
external debt and liabilities have declined by $
2.3 billion — down from $38.9 billion by end
June 1999 to $36.6 billion by end-March, 2006.
The
country’s debt burden defined as a ratio of
external debt and liabilities to GDP stood at around
52 percent in end-June 2000, declined to 32.3 percent
in end-June 2005 and further to 28.3 percent by
end-March 2006.
The country’s debt burden is also defined
as external debt and liabilities as percentage of
foreign exchange earnings, was 297 percent in 1999-2000,
declined to 134.3 percent in 2004-05 and further
to 127.6 percent by end-March 2006.
It may also be pointed out that Pakistan’s
external debt and liabilities were 22 times of its
foreign exchange reserves in 1998-99 but declined
sharply to 2.9 times in just six years.
These statistics suggest that Pakistan’s external
debt burden has declined at a much faster pace than
anticipated and that it is now on a solid downward
footing.
On
March 23, 2006, Pakistan successfully issued US$500
million new 10-year Eurobond and US$300 million
new 30-year Bonds in the international debt capital
markets lead managed by JP Morgan, Citi Group and
Deutsche Bank. This transaction, which represented
the first international 144A bond issued by Pakistan
since 1999, raised significant interest amongst
US QIBs and international Institutional investors.
The 10-year notes were priced with a coupon of 7.125%
to yield 7.125%, framing a spread of 240bps over
the relevant 10-year US Treasury benchmark. The
30-year bonds were priced with a coupon of 7.875%
to yield 7.875%, framing a spread of 302bps over
the relevant 30-year US Treasury benchmark.
Pakistan
was able to achieve spreads on both the new 10 and
30-year bonds that were tighter than its previous
5-year issues. By issuing 10 and 30 year bonds,
Pakistan completed its primary objective of establishing
a full Pakistani International yield curve in record
time.
