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2005-06

Economic Survey of Pakistan

An Accountancy Publication
http://www.accountancy.com.pk

OVERVIEW OF THE ECONOMY


Pakistans economy has delivered yet another year of solid economic growth in 2005-06 in the midst of an extraordinary surge in oil prices and the devastating earthquake of October 8, 2005. Pakistani corporates and consumers continue to be the bright spot. Consumer spending remained buoyant and investors remained upbeat on the strength and sustainability of the current growth momentum, despite higher energy prices and natural calamities. With economic growth at 6.6 percent in 2005-06, Pakistans 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 countrys 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 Pakistans budget under severe stress. Despite these constraints, Pakistans economy has proved itself as remarkably resilient in the face of shocks of extraordinary proportions. Growth has remained buoyant with real GDP growing at 6.6 percent in 2005-06 as against the revised estimates of 8.6 percent last year and the 7.0 percent target for the year. The key drivers of this years growth have been the service sectors and industry. Large-scale manufacturing grew weaker-than-expected by 9.0 percent as against 15.6 percent of last year and 14.5 percent target for the year, perhaps exhibiting signs of moderation on account of higher capacity utilization on the one hand and a strong base effect on the other. The services sector continued to perform strongly at 8.8 percent. Construction also continued to show strong performance, partly due to the activity in the private housing market, spending on physical infrastructure, and reconstruction activities in the earthquake affected areas. Consumer spending remained strong and investment spending gained further traction. Pakistans economy continues to maintain a solid pace of expansion since the fiscal year 2002-03. The recovery has been strong, rapid and sustained. During the fiscal year 2005-06, Pakistans economic fundamentals have gained further strength. 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 ongoing 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

Economic Survey 2005-06 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 July 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 earthquakerelated 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; (xix) and 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 Pakistans economic policies, reform agenda and future outlook. The ultimate objectives of the governments socio-economic policy are to create jobs, raise incomes of the people and reduce poverty. This year has seen major successes on all these fronts. The pace of job creation has been brisk on the back of a sustained high economic growth, real per capita income has grown at an average rate of 5.7 percent per annum during the last three years, and accordingly, the overall poverty as well as rural and urban poverty has registered sharp declines. While the economy of Pakistan has gained further traction in 2005-06, there are however, some weaker areas that need to be highlighted. First and foremost is the sharp pick up in the prices of some of the essential food items, particularly during the second half of the fiscal year. Although, this year has seen significant abatement of price pressure resulting in a steady deceleration in inflation from as high as 11.1 percent in April 2005 to 6.2 percent in April 2006 and food inflation from 15.7 percent to 3.6 percent in the same period, yet the prices of some of the essential food items (out of the CPI basket of 370 items) such as sugar, pulses, milk, beef, mutton, and some vegetables items have witnessed sharp increases, adversely affecting the low and fixed income groups. In particular, the expenditure on food items constitutes bulk of the monthly expenditure of the poor segment of society. Within the food group, a significant proportion of the income of the poor are devoted to the consumption of the items listed above. Most of these items are part of minor crops (various kinds of pulses and vegetables) and livestock and dairy products (beef, mutton, milk). Both market and extra-market forces were responsible for the surge in prices of these food items. Infact, inadequate supplies of essential commodities provided rooms to extra-market forces to play their roles. Therefore, the challenge for the government is to maintain a balance between the supply and demand of these commodities through enhancing the production and imports. The key to addressing this challenge is to give due importance to minor crops and livestock and dairy sector. Currently there is a total disconnect between the importance given to these sub-sectors of agriculture and the relative roles they play in stabilizing overall inflation in general, especially food inflation. Notwithstanding the sharp pick up in prices of some of the food items in the second half of the fiscal year; it is equally true that the prices of essential commodities in Pakistan are still relatively cheaper in the region. For example, the prices of wheat, wheat flour, rice basmati broken, masoor pulse, gram pulse, chicken, and red chillies in Pakistan are the lowest in the South Asian region. However, this does not mean that we have to pause or rest. The government is fully aware of the fact that there is an urgent need to take necessary measures not only to stabilize but also to reduce the prices of essential food items. Secondly, four years of strong economic growth complemented by the benign interest rate environment have injected new life into domestic spending. The strengthening of domestic demand in conjunction with extra-ordinary surge in international price of oil, fueled import demand, which more than offset the improved outcomes for exports. Accordingly, this year has witnessed record trade deficit and widening of current account deficit mainly on account of

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Overview of the Economy higher oil bill, imports of machinery and raw materials. Although financing of current account deficit is not an issue yet it requires closer monitoring over the next few years. Thirdly, although the number of people living below the poverty line has declined substantially, the consumption inequality has increased marginally during the period 2001-05. More attention will be required in skill development in both the urban and rural areas. While socio-economic and macroeconomic policies pursued during the year have had a strong influence on across-the-board improvement, an increasingly broad and dynamic global recovery has aided Pakistan in this endeavor. Global Economic Environment While solid pace of economic expansion this year was underpinned by the macroeconomic policies pursued by the government, Pakistan has also benefited from the buoyant global economic environment undeterred by the rising and volatile energy prices. The global economy continued its strong expansion, becoming geographically more broad-based, and global growth is expected to remain strong over the near term. Inflation and inflationary expectations remained well contained but there is no room for complacency as there are downside risks, including those related to continued high and volatile oil prices, and abrupt tightening of global financial conditions, and a rise in protectionism. Where reforms have been undertaken, the benefits have been enhanced by an expanding world economy. In 200405, global growth at 5.3 percent was the strongest in thirty years. Growth in 2005-06 though more moderate, was around 4.8 percent and similar strong growth is expected in 2006-07. The remarkable expansion we have seen in the past couple of years has been worldwide with almost every region of the world experiencing buoyant growth including South Asia. The United States and China remain the main engines of global economic growth, and that growth prospects in Japan and in some members of the euro area have steadily improved. The performance of many emerging economies and developing countries continue to be strong. As stated earlier, the United States continues to be a major driving force for global growth. Real GDP grew by 4.2 percent in 2004-05 and 3.5 percent in 2005-06 and is likely to moderate at around 3.3 percent in 2006-07. The buoyancy of the US economy has helped fuel growth in other regions. The pace of growth in emerging Asian countries especially in China, India and Pakistan, has also contributed to strong global performance in the past few years and this, too looks set to continue with growth in Asian emerging market forecast to exceed 7.0 percent this year. In those parts of the world, where growth has been persistently sluggish, the future already holds a promising picture. The Japanese economy appears better poised for a strong recovery than for many years, with deflation almost squeezed out of the system, and more buoyant consumer demand. In some European countries, growth seems to be picking up, albeit slowly. South Asia, particularly India and Pakistan, appear to have overtaken the ASEAN region, in terms of their growth performance. Barring China, Hong Kong SAR, and Vietnam all the other Asian economies have fallen short to the South Asian giants (India and Pakistan) in terms of their growth performance. The Middle Eastern and African countries showing strong to modest growth for the last few years. The performance of oil rich countries (Saudi Arabia, Iran and Kuwait) was expected to be strong in the Middle East region owing to massive influx of petro dollars. With the exception of Nigeria (another oil producing country), all other countries in the African region showing a modest to weak growth performance. There are many reasons for the global economic expansion. A major one is the reduction in inflation rates worldwide. For a long period, high inflation inflicted great harm on many countries. But in recent years, an extraordinary decline in inflation rates was observed worldwide. This has been a significant factor in the healthier rates of growth in many parts of the world. The low inflation environment has contributed significantly to the buoyancy of the global economy. The recent expansion has, after all, taken place against a backdrop, which might have been expected to hamper global growth. Continuing geopolitical uncertainty, a sharp rise in oil prices and continuing concern about global imbalances, the collective impact of these concerns so far, has been significantly less than many had predicted.

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Economic Survey 2005-06 Overall, the current outlook, both at the global and at the regional level, is favourable. But there are nevertheless, some important downside risks to which all policy makers need to be ready to respond. High oil prices are clearly at or close to the top of the list. So far, the rise in oil prices has been satisfactorily absorbed in most countries. This is partly a reflection of the fact that unlike the price rises of the 1970s the current increases have been demand rather than supply driven; and it partly also reflects the fact that policy makers have taken to heart the lessons of the 1970s and have gradually reduced their dependence on oil to run the machines of their economies. Global imbalances continue to pose a risk to continuing global growth. The current account deficit of the United States, now in excess of 6.0 percent of GDP, continues to increase and therefore, fuels concerns about sustainability. But the payment imbalances are part of a wider problem of imbalances in the global economy, with rapidly rising foreign exchange reserves in Asia, and sluggish growth in Europe and Japan. The main risk posed by these global imbalances is a disorderly resolution of the problem, for example, an abrupt adjustment of exchange rates and US interest rates, with obvious implications for emerging market debt. GDP Growth Real GDP grew strongly at 6.6 percent in 2005-06 as against the revised estimates of 8.6 percent last year and the 7.0 percent target for the year. When viewed at the backdrop of rising and volatile energy prices and the extensive damage caused by the earthquake of October 8, 2005 Pakistans growth performance for the year has been impressive. The key drivers of this years growth have been the service sectors and industry. Within industry, large-scale manufacturing grew weaker-than-expected by 9.0 percent as against 15.6 percent of last year and 14.5 percent target for the year, perhaps exhibiting signs of moderation on account of higher capacity utilization on the one hand and a strong base effect on the other. Construction also continued its strong performance, partly helped by buoyant activity in private housing market, spending on physical infrastructure, and reconstruction activities in the earthquake affected areas. This sector has posted a growth of 9.2 percent in 2005-06 over an extra-ordinary growth of 18.6 percent last year. Electricity and gas distribution, however registered a high negative growth of 8.4 percent purely on account of high operating expense of the WAPDA offsetting its gross value of sale. The operating expense has grown twice as fast as gross value of sale of the WAPDA. The services sector continued to perform strongly and grew by 8.8 percent over an equally robust growth of last year. All the components of services sector registered strong growth with the exception of ownership of dwellings and public administration and defense. Finance and banking sector posted a remarkable growth of 23.0 percent over an equally strong growth of 29.7 percent last year. The wholesale and retail trade and transport, storage and communication registered strong growth of 9.9 percent and 7.1 percent, respectively. The performance of agricultural sector remained weak this year as major crops registered a negative growth of 3.6 percent. This is once again a reminder that exclusive focus on few major crops, heavily dependent on Mother Nature is not a viable policy. Due attention must be given to other components of agriculture, such as, livestock, minor crops, fishing and forestry. With economic growth at 6.6 percent in 2005-06, Pakistans economy has grown at an average rate of almost 7.0 percent per annum during the last four years and over 7.5 percent per annum in the last three years and hence positioned itself as one of the fastest growing economies in the Asian region. Agriculture The performance of agriculture remained weak this year as it grew by only 2.5 percent, as against 6.7 percent of last year and the 4.2 percent target for the year, with major crops and forestry registering a negative growth of 3.6 percent and 5.7 percent, respectively. Agriculture, this year was subjected to adverse weather conditions. Major crops, accounting for 32.5 percent of agricultural value added, depicted a negative growth of 3.6 percent as against an impressive 17.8 percent growth of last year. Besides measuring from a high base of last year, major crops registered a decline primarily on account of a 13.0 percent less production of cotton (12.4 million bales as against 14.3 million bales last year) owing to adverse weather conditions. Sugarcane is another major crop which registered a negative growth of 6.2 percent (from 47.2 million tons to 44.3 million tons). Rice and maize, the two other major crops, however performed well with rice production increasing by 10.4 percent and maize production was up by 27.3 percent. Despite the impressive performance of these two crops, they failed to compensate the decline in production of cotton and sugarcane. Wheat production remained more or less at last years level with a marginal increase of 0.4 percent (21.7 million tons as against 21.6 million tons). Livestock with almost 50 percent contribution

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Overview of the Economy in agriculture has been the only saving grace as this sector grew by 8.0 percent, as against 2.3 percent of last year and hence took the overall agricultural growth to a positive side. Furthermore, during the current fiscal year (2005-06), the availability of water for Kharif 2005 (for the crops such as rice, sugarcane and cotton) has been 5.5 percent more than the normal supplies and 19.8 percent more than last years Kharif. Excessive winter rainfalls, (January March 2005) along with melting of snow on mountains top were responsible for higher than normal availability of water during Kharif 2005. The water availability for Rabi season (for major crop such as wheat) was 17.3 percent less than the normal availability but 29.8 percent more than last years Rabi. Manufacturing Manufacturing is the second largest sector of the economy, accounting for 18.2 percent of GDP, and registered a growth for the third year in a row, albeit at a relatively slower pace of 8.6 percent as against 12.6 percent last year. Large-scale manufacturing, accounting for 69.9 percent of overall manufacturing, registered weaker-thanexpected growth at 9.0 percent as against the target of 14.5 percent and last years achievement of 15.6 percent. The relatively slower pace of expansion perhaps exhibits signs of moderation on account of higher capacity utilization on the one hand and a strong base effect on the other. Several other factors contributed to the slower pace of expansion of large-scale manufacturing. Firstly, as a result of 13.0 percent decline in cotton production the overall performance of textile and apparel sector remained subdued. As against a hefty growth of 24.7 percent, textile and apparel grew by only 4.0 percent and production of cotton cloth remained flat. This sector has large weight in largescale manufacturing. Sugar production with large weight also registered a decline of 2.4 percent. Basic metal industries registered a sharp contraction of almost 59 percent because two coke oven batteries of the Pakistan Steel Mill went out of order in July 2005 and the Mill was operating at around one-third of its capacity. Consequently, the production of basic metal industries badly suffered. The performance of petroleum group also remained lackluster with 2.3 percent growth this year as against 9.4 percent last year. Per Capita Income Per capita income is one of the main indicators of development. It simply indicates the average level of prosperity in the country or average standard of living of the people in a country. Per capita income defined as Gross National Product at market price in dollar term divided by the countrys population, grew by an average rate of 13.9 percent per annum during the last four years rising from $582 in 2002-03 to $847 in 2005-06. Per capita income in dollar term registered an increase of 14.2 percent over last year rising from $ 742 to $ 847. The main factor responsible for the sharp rise in per capita income include: a sharp pick up in real GDP growth, stable exchange rate, and rise in inflow of workers remittances. Consumption Pakistans economy is undergoing structural shifts that are fueling rapid changes in consumer spending patterns. In particular, the middle classes are becoming an increasingly dominant force. Pakistans per capita real GDP has increased at an average of 5.6 percent per annum during the last three years (5.5% in 2003-04, 6.7% in 2004-05 and 4.7% in 2005-06), 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. As opposed to an average annual increase of 1.4 percent during 2000-2003, the real private consumption expenditure has grown at an average rate of 10.9 percent per annum during the last three years. (11.5% in 2003/04, 13.1% in 2004/05, and 8.1% in 2005-06). The extra-ordinary strengthening of domestic demand during the last three years points to the following facts. Firstly, the higher consumer spending feeding back into economic activity is likely to support the on-going growth momentum. Secondly, it suggests the emergence of a strong middle class with strong buying powers good for business expansion. Thirdly, extra-ordinary rise in consumer spending over the last three years appears to have contributed, in part to building inflationary expectations in Pakistan. Investment Investment is a key determinant of growth. During the fiscal year 2005-06, gross fixed capital formation or domestic fixed investment in real term grew by 10.3 percent as against 9.3 percent last year. The real private sector investment grew by 11.0 percent this year as against an increase of 9.6 percent last year. Public sector investment on the other hand registered a substantial increase of 22.5 percent as against a robust growth of 10.0 percent last year.

Economic Survey 2005-06 As percentage of GDP, total investment is provisionally estimated at 20.0 percent - the highest in the last 12 years and is up from 18.1 percent last year. Fixed investment is estimated at 18.4 percent of GDP this year versus 16.5 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. 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 (JulyApril 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. The measures taken by the Government, particularly since April 2005, when overall inflation reached 93 months high at 11.1 percent (the lasttime inflation was at this level in July 1997) and food inflation peaked at 15.7 percent in April 2005 (last-time it was at 15.7 percent in May 1994), yielded handsome dividend in the shape of overall inflation decelerating to 6.2 percent and food inflation to 3.6 percent in April 2006. Notwithstanding a steady deceleration in inflation, the prices of some of the essential food items (out of the basket of 370 items in CPI) registered sharp increases, particularly during the second half of the fiscal year and therefore adversely affected the low and fixed income groups. The expenditure on food items constitutes bulk of the monthly expenditure of the poor segment of the society. Sharp increases in the prices of some of the strategic food items put pressure on the poor. The higher inflationary trend in Pakistan over the last two years has been the outcome of pressure that emanated from demand and supply sides. Four years of strong economic growth has given rise to the income levels of various segments of the society. The rising level of income have strengthened domestic demand and put upward pressure on prices of essential commodities. Supply side pressure emanated from a variety of factors, prominent among those are: increase in support price of wheat for three years in a row, shortage of wheat owing to less than the targeted production, mis-management in wheat operation in one of the wheat deficit province, inter-provincial ban on the movement of wheat resulting in sharp increases in prices of wheat and wheat flour. The prices of other food item such as beef, mutton, chicken, milk etc also registered sharp increases owing to sympathy effect on the one hand and demand pressure on the other. Lower production of sugar due to a relatively lower production of sugarcane and a sharp increase in the international prices of sugar brought about by a significant diversion of sugarcane into ethanol (petroleum substitute), by the largest producer, Brazil, also contributed in building inflationary pressure in Pakistan. In recent months, prices of various kinds of pulses also registered sharp increases owing to a significant decline in domestic production as well as shortages in international markets. This inadvertently kept the prices of pulses at record high level. An unprecedented rise in international oil prices also contributed to the build up in inflationary pressure in Pakistan. 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

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Overview of the Economy 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. Monetary Policy An important lesson that we learnt from the experience of the decade of the 1990s is the importance of a healthy banking and financial sector. This is a key element of macroeconomic stability. A weak financial sector can undermine efforts to achieve stability through prudent fiscal and monetary policies. A strong and well-functioning financial and banking sector is also critical for sustained higher economic growth. They can provide credit to those investments that offer the highest risk adjusted rates of return. In recent years the banking industry in Pakistan has been transformed from state owned sector to a vibrant private sector industry. Banking industry has not only gained strength from the positive interplay of economic and political factors, but also has become an engine of growth for the economy. The State Bank of Pakistan has taken a number of steps in various areas to further enhance the effectiveness of banking industry in Pakistan. The easy and accommodative monetary policy stance that had been pursued during the last few years by the SBP underwent considerable changes during the fiscal year 2004-05, switching from a broadly accommodative' to aggressive tightening in the second half of the last fiscal year, more so since April 2005 to tame inflation. Overall inflation in general and core inflation in particular, continued to exhibit a rising trend during the fiscal year 2004-05; the overall inflation reaching as high as 11.1 percent and core inflation at 7.8 percent in April 2005. In order to arrest the rising trend in inflation, the SBP changed its monetary policy stance to aggressive tightening in April 2005 by raising discount rate from 7.5 percent to 9.0 percent. The same tight monetary policy stance continued during the current fiscal year despite declines in both core and overall inflation. Notwithstanding the tight monetary policy stance the SBP continued to strike a balance between promoting growth and controlling inflation on the one hand and maintaining a stable exchange rate environment on the other. Tight monetary policy stance is likely to continue until inflationary pressures are significantly eased off. According to the credit plan for 2005-06, the SBP has set the target for monetary expansion to the tune of Rs.380 billion or 12.8 percent higher than last year (FY05) on the basis of a growth target of 7.0 percent and inflation target of 8 percent. The growth target of broad money (M2 definition) was deliberately kept below the growth of nominal GDP to absorb monetary overhang of the last few years. The money supply during July-April 22, 2006 of the current fiscal year expanded by Rs 294.9 billion or 9.9 percent as against an expansion of Rs 332.4 billion or 13.34 percent in the same period last year. The pace of monetary expansion remained well within the Credit Plan target for the year (12.8%) primarily because of the moderate build up in net domestic assets (NDA). Within the NDA, both net budgetary and borrowings for commodity operations have also remained well within the credit plan targets. However, credit to private sector has exceeded the target and stood at Rs 345.1 billion as against Rs.330 billion envisaged for the year in credit plan reflecting the buoyancy in the economy. Expansion in net foreign assets (NFA) on the other hand exceeded the target (Rs.15 billion) and stood at Rs.37.8 billion owing mainly to the receipts of privatization proceeds and issuance of sovereign bond. The proceeds from privatization and sovereign bond not only helped build NFA but it also helped in containing the growth in NDA through the retirement of government debt held by the SBP. The net credit to government for budgetary purposes which had peaked at Rs.162.2 billion during July-March 11, 2006 sharply reduced to Rs.43.3 billion compared to the annual credit plan target of Rs.98 billion and Rs.15.0 billion borrowed in the corresponding period of last year. The net budgetary support to government decreased by about Rs.115 billion between March 31, and April 13, 2006 due to the inflow of proceeds from privatization and sale of bonds in the international capital market. Higher government borrowing for budgetary support reflects a large

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Economic Survey 2005-06 spending on earthquake related activities. Monetary expansion in fact, picked up substantially after the October 8, 2005 earthquake when broad money supply grew by 5.6 percent after a contraction of 1.2 percent during the first quarter (July-September) of the current fiscal year. The tight monetary policy stance of the SBP was reflected in the slower pace of credit expansion to the private sector. The credit to private sector grew by 20.2 percent (Rs.345.1 billion) during July-April 22, 2006 compared with the growth of 28.0 percent or Rs.357.4 billion during the same period of last year. Credit to private sector continued to exhibit strong demand, reflecting the confidence of the private sector on the continuously improving macroeconomic fundamentals of the country. During the last three years (2003/04 to April 22, 2006) the cumulative credit flow to the private sector amounted to Rs.1108 billion, surpassing the total credit flow of Rs.921 billion in the previous 18 years (1984 - 2003). The distribution of credit to the private sector during July-March FY06 has been broad-based. The manufacturing sector continued to be the largest recipient of bank credit amounting to Rs.130.0 billion during July-March 2005-06, 17.1 percent more than the comparable period of last year. The overall manufacturing sector accounted for almost 47.9 percent of the credit to private sector businesses. Within the manufacturing sector, textile industry received Rs.69.5 billion or 53.5 percent followed by cement (Rs.15.1 billion), leather (Rs.2.2 billion), and fertilizer (Rs.3.6 billion). Commerce - related activities also picked up strongly as their credit off-take rose by 35.4 percent to Rs.51.2 billion. Wholesalers and retail traders as well as exporters received three fourth of the credit under commerce related activities. The growth in consumer loans remained robust, and their scale expanded by 27 percent to Rs.67.2 billion. Most of the consumer loans were acquired to finance a range of products including automobiles (Rs.23.2 billion) followed by personal loans (Rs.21.5 billion), credit cards (Rs.10.4 billion) and house building (Rs.10.1 billion). Three major reasons may be given to account for higher growth in consumer loans. First, banks are more interested in consumer loans due to relatively higher spreads. Second, consumers find these loans still affordable amid expectations that interest rates may rise in the near future. Third, some of the banks are working more aggressively to tap their potential customers for consumer loans. The tight monetary policy is also reflected in the rise of the weighted average lending rate. The average lending rate increased by 193 bps to 10.14 percent during July-March FY06 due to the lagged impact of 5-6 percentage point increases in cut-off yields on various TBs last year. It is for the first time in many years that the inflation adjusted average lending rate has turned positive. It is expected that the private sector would now be more selective and prudent in terms of availing bank credit. The tight money market conditions also led the banking industry to raise the average deposit rate by 90 bps to 2.75 percent. However, this rise was not enough as the banking spread further rose by 103 bps to 7.39 percent since July 2005. Stock Market The stock market continued to maintain its strong performance and achieved new heights by creating many new records during the fiscal year 2005-06. The KSE-100 Index crossed the barrier of 12000 marks for the first time in the history of capital market and touched an all time high on April 13, 2006. The KSE-100 Index made further inroad and reached 12274 points on April 17, 2006, showing a growth of 64.7 percent over June 2005. Similarly, the total market capitalization also increased to Rs.3419.4 billion on April 17, 2006 (US$ 57.0 billion) from Rs.2013.2 ($ 33.7 billion) showing a growth of 70 percent over June 2005. At current levels, KSEs market capitalization is equivalent to about 46 percent of estimated GDP of FY06. The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth; a successful privatization process attracting foreign investors in prestigious organization like PTCL and National Refinery; sound monetary policy of the SBP, maintenance of fiscal discipline and the capital market reforms including development measures introduced by the stock exchanges with full support of the SECP. The governments economic policies and capital market reforms helped in promoting a fair, efficient and transparent capital market and restoring investors confidence. The privatization of the government

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Overview of the Economy entities through the bourses helped broad-basing the equity ownership to a significant level. The buying euphoria in the stock market has been spurred by a number of other favourable factors, including the continuation of the present policies on the banking sector by the SBP, renewed interest of large number of buyers of shares, bright prospect of reaping dividends, good capital gains and presence of institutional investors in the market. The KSE saw robust activity especially during the first 4 months of 2006, with all vital indicators pointing in the right direction. The Securities and Exchange Commission of Pakistan (SECP) has been actively pursuing a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market, based on sound regulatory principles that provide impetus for high economic growth. The reforms introduced over recent years in the fields of risk management, governance and transparency have contributed significantly towards the growth and development of capital market and building investor confidence. Fiscal Policy Fiscal policy primarily deals with the levels and composition of taxation, spending and borrowing by the Government. A sound fiscal policy is essential for preventing macroeconomic imbalances and realizing the full growth potential. Pakistan has witnessed serious macroeconomic imbalances in the 1990s mainly on account of its fiscal profligacy. Persistence of large fiscal deficit resulted in unsustainable levels of public debt, adversely affecting the countrys macroeconomic environment. Pakistan, accordingly paid, a heavy price for its fiscal indiscipline in terms of deceleration in economic growth and investment, and the associated rise in the levels of poverty. Considerable efforts have been made over the last six years to inculcate financial discipline by pursuing a sound fiscal policy. Pakistans hard earned macroeconomic stability is underpinned by fiscal discipline. In order to address the structural problems in the tax system and tax administration, the government has been introducing wide-ranging tax and tariff reforms, as well as reforms in tax administration. These reforms have already started yielding handsome dividends. During the last seven years, tax collection by the CBR has increased by 130.0 percent that is, more than doubled. The revenue deficit (the difference between total revenue and total current expenditure), a measure of government dis-saving, was 2.2 percent of GDP in 2000-01 but it has almost been eliminated in 2005-06. Under the Fiscal Responsibility and Debt Limitation Act 2005, the government was bound to eliminate revenue deficit by 2007-08. This target has almost been achieved two years in advance. The primary balance (total revenue minus non-interest total expenditure) was in surplus from 2000-01 to 2004-05. However, primary balance has entered into deficit zone in 2005-06, though the number is small (0.2% of GDP). Pakistan must not allow primary deficit to get entrenched. The share of indirect taxes declined from 82 percent to 69 percent since 1990-91 and until 2005-06. Even within the indirect taxes, dramatic changes have taken place. The collection from custom duty used to account for 45 percent of total tax collection and 55 percent of indirect taxes in 1990-91, its share has now been reduced to 19.3 percent and 28 percent, respectively. This is the consequence of the tariff reform implemented by successive governments since 1990-91. The share of sales tax increased at a tremendous pace from 14.4 percent to 40 percent of total taxes and from 17.6 percent to 60.2 percent of indirect taxes during the same period. Central excise as a tax is loosing its importance and gradually being faded out. Its shares in total taxes and indirect taxes were 22.5 percent and 27.5 percent, respectively in 1990-91. These have now been reduced to 8.4 percent and 11.9 percent, respectively during the same period. The total expenditure remains more or less stable in a narrow band of 17.0 to 18.8 percent of GDP during the last six years. A substantial decline in interest payments from as high as 7.5 percent of GDP in 1998-99 to 3.1 percent of GDP in 2005-06, has provided fiscal space to re-orient expenditure in favour of development expenditure. Resultantly, the share of current expenditure in total expenditure declined from 89 percent of total expenditure in 1998-99 to 78 percent in 2005-06. In addition, the share of development expenditure doubled from 11 percent to 22 percent in the same period. During the last six years the development expenditure improved from 2.2 percent of GDP in 2000-01 to 4.2 percent of GDP in 2005-06 and is likely to make a further jump to 4.7 percent of GDP in 2006-07.

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Economic Survey 2005-06 The second largest component of the current expenditure, namely, defence spending remained stagnant at around 3.1 percent to 3.3 percent of GDP during the last six years. It is more useful to analyse the trend in expenditure after adjusting for inflation. The analysis in trend in expenditure in real term reveals some interesting facts. During the last six years, the real growth in current expenditure averaged 3 percent per annum as compared with 4.5 percent in the 1990s. Total expenditure in real term grew by 3.4 percent in the first three years (2000-03) but accelerated to 5.6 percent during the last three years (2003-06). The main contribution has come from development expenditure which grew by 7.4 percent per annum in first three years (2000-03) and by 23.8 percent in recent three years (2003-06). Non-defence non-interest expenditure in real term grew by 13.9 percent and 11.2 percent in these two periods, respectively. This tremendous growth is mainly contributed by massive fall in real incidence of interest payments which depicted negative growth of 7.4 percent and 7.2 percent in first and second three years period. Defence spending, in real term grew by an average rate of 1.5 percent per annum during the last six years. Development expenditure in real term on the other hand grew by an average rate of 15.6 percent per annum during the same period. This fact, hopefully, will dispel some misconception in the minds of various analysts on the issue of defense versus development expenditure. The fiscal policy stance remained decidedly growth-oriented during the fiscal year 2005-06, providing for strong public sector spending, intensification of spending on poverty alleviation and investing in infrastructure. Pakistan has made considerable progress in recent years on fiscal side. The overall fiscal deficit that averaged nearly 7.0 percent of GDP in the 1990s has declined to 3.3 percent in 2004-05. Fiscal deficit was targeted at 3.8 percent of GDP for the current fiscal year (2005-06) which was higher than the deficit of previous year (3.3% of GDP). Higher deficit was targeted to finance higher public sector development program (PSDP), particularly towards financing infrastructure projects. Better than the targeted revenue position helped Pakistan over perform in achieving the underlying fiscal deficit. The underlying fiscal deficit for the year is estimated at Rs.261.6 billion or 3.4 percent of GDP as against the target of Rs.285 billion or 3.8 percent of GDP. The earthquake-related expenditure for the year amounted to Rs.65.8 billion or 0.85 percent of GDP. Thus, including the earthquake-related spending, Pakistans overall fiscal deficit stood at Rs.327.4 billion or 4.2 percent of GDP. In the next two years, Pakistan will continue to report overall fiscal deficit with and without earthquake-related spending to keep track of its underlying deficit. Total revenues are estimated at Rs.1095.6 billion in 2005-06 compared with Rs.900 billion in 2004-05, thereby showing an increase of 21.7 percent. Tax revenue is provisionally estimated to have risen by 22.2 percent while nontax revenue is estimated to rise by 16.9 percent. The Central Board of Revenue (CBR) was targeted to collect Rs.690 billion but it is likely to collect Rs.710 billion Rs.20 billion more than the target and over 20 percent more than last year. Total expenditure without earthquake-related spending on the other hand is estimated to grow by 21.5 percent. The higher growth in expenditure was mainly on account of a 43.4 percent increase in development spending which simply points toward the fact that the fiscal policy stance adopted by the government was growth-oriented. The government has provided almost Rs.66 billion for earthquake - related spending this year and will continue to provide adequate resources for the rehabilitation of the affected people and for the reconstruction of the affected areas. Public debt burden continues to decline rather sharply for the sixth year in a row on account of prudent fiscal management. Public debt was 85 percent of GDP in 1999-2000 but has declined sharply to 54.7 percent in 2005-06 a decline of over 30.0 percentage points 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 points decline in one year in the midst of earthquake-related spending is other stellar occurrences of the current fiscal 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 384.9 percent this year a decline of 64 percentage points in one year is not a mean achievement. External Sector Pakistans external sector is being affected both by structural and cyclical factors. On the domestic side, four years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending, has led to a massive surge in imports. On the external side, the global economy continues its

Overview of the Economy strong and broad based expansion with growth reaching close to 5 percent in 2006 with similar expansion projected for the next year which will be the fifth successive year that the world economy has grown by more than 4.0 percent. A strong and geographically broad based growth has helped world trade to expand strongly and at the same time the rapid expansion of global trade has been a key driving force for growth in almost every part of the world. Like many other developing countries, Pakistan has also benefited from a strong and sustained growth in world economy. Notwithstanding global economic expansion, the sound macroeconomic policies that Pakistan pursued coupled with wide ranging structural reforms, particularly in the areas of trade and tariff that it implemented over the last six or seven years have helped Pakistan doubled its exports in seven years. Exports Exports were targeted at $ 17 billion or 18.1 percent higher than last year. Exports during the first nine months (July-March) of the current fiscal year are up by 18.6 percent rising from $ 10.18 billion to $ 12.07 billion in the same period last year. The exports of primary commodities were up by 22 percent; prominent among those are exports of rice (33.6%), fish and fish preparation (30.2%) and fruits (20.6%). Exports of textile manufactures grew by 19.2 percent; prominent among those are exports of bedwear (58.4%), readymade garments (31.0%), cotton yarn (29.4%), cotton cloth (16.5%) and towels (12.0%). Exports of other manufactures also registered a high double digit growth of 19.2 percent. Within this category, exports of petroleum products grew by 80.8 percent and leather manufactures were up by 44.0 percent. In recent years, Pakistan has also entered in the exports of engineering goods. Though relatively small in numbers, exports of engineering goods were up by 10.3 percent. The overall exports posted an increase of $ 1890.2 million, in absolute term in the first nine months, of the current fiscal year over the same period of last year. Of this increase, 61.4 percent or $ 1160.5 million has come alone from textile manufactures followed by other manufactures (20.9% or $ 395.7 million), primary commodities (11.1% or $ 209.6 million) and other exports (6.5% or $ 124.5 million). In other words, over 82 percent incremental exports in the first nine months (July-March) of the current fiscal year owe to textile and other manufactures and the remaining 18 percent to primary and non-traditional exports. It is encouraging to note that exports this year have been largely quantity driven and with firming up of the price of exportable, Pakistans exports may rise substantially in the mediumterms. During the first nine months (July-March) of the current fiscal year, over 88 percent increases in exports are driven by quantity (quantity effect) and the remaining 12 percent are due to the increase in unit values of exports (price effect). Pakistan's exports are highly concentrated in few items namely, cotton, leather, rice, synthetic textiles and sports goods. These five categories of exports account for 74.5 percent of total exports during the first nine months of the year with Cotton manufacturers alone contributing 58.4 percent, followed by leather (6.1%), rice (6.9%) and synthetic textiles (1.2%). Pakistans exports are also highly concentrated in few countries. The seven countries, namely USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia account for 50 percent of its exports. The United States is the single largest export market for Pakistan, accounting for 27 percent of its exports followed by the United Kingdom, Dubai, Germany and Hong Kong. Japan as Pakistans export destination is fast loosing its significance less than one percent of its exports entering Japan. Pakistan needs to diversify its exports not only in terms of commodities but also in terms of markets. Heavy concentration of exports in few commodities and few markets could cause serious export instability. Imports Pakistans imports continue to be pushed higher by unprecedented rise in oil prices and continued strength of non-oil imports owing to buoyant domestic demand. Imports were targeted to grow by 4.25 percent for the fiscal year 2005-06 rising from $ 14.4 billion to $ 20.7 billion. Imports are up by 43.2 percent in the first nine months (JulyMarch) of the current fiscal year rising from $ 14.45 billion to $ 20.69 billion in the same period last year. Disaggregation of total imports suggests that food imports grew by 35.9 percent - up from $ 990.7 million to $ 1346.7 million. Major contributors to the substantial rise in food imports include wheat, sugar and pulses; they together contributed 93 percent to the rise in food imports. Imports of petroleum group have played a key role in taking Pakistans import to a new height. Emerging as a single largest item in countrys import bill, Petroleum group import amounted to $ 4.6 billion during the first nine months

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Economic Survey 2005-06 (July-March) of the current fiscal year as against $ 2.8 billion in the same period last year, thus registering an increase of 64.5 percent. Although the quantity of imports of crude as well as petroleum products are down by 2.3 percent and 5.8 percent, respectively, the prices of these two items were up by 76.6 percent and 62.9 percent compared with last year, causing import of these two items to rise by 64.5 percent in value terms. Despite reduction in quantity, Pakistan was forced to pay $ 1.9 billion more to import crude and petroleum products a very heavy price for a developing country like Pakistan. Overall imports during the first nine months (July-March) of the current fiscal year grew by 43.2 percent. In other words, imports in absolute terms have increased by $ 6.25 billion. Major contributions to this years incremental imports have come from petroleum group, raw materials and machinery. Almost 35 percent contribution came from machinery and raw materials, and 29 percent from petroleum group. Therefore, these three items alone are responsible for 64 percent additional import and 27.6 percentage points to the 43.2 percent growth in total import this year. Consumer durables including cars, have contributed only 6.4 percent to the additional increase in total imports and 2.8 percentage points to the 43.2 percent growth in total import this year. Within this category of imports, electrical machinery and appliances contributed merely 1.7 percent while the contribution of cars has been 4.7 percent only. More importantly, had the price of oil in international market remained at last years level, the growth in overall imports would have been 30.7 percent, that is, 12.5 percentage points less than what is currently estimated. On the contrary, had the total value of import of car would have been at last years level or had there been no growth in import of cars in value term, the growth in total imports would have been 40.4 percent instead of 43.2 percent. Car has merely contributed 2.8 percentage points to the overall growth in imports. Like exports, Pakistan's imports are also highly concentrated in few items namely, machinery, petroleum & petroleum products, chemicals, transport equipments, edible oil, iron & steel, fertilizer and tea. These eight categories of imports accounted for 72.5 percent of total imports during 2005-06. Among these categories machinery, petroleum & petroleum products and chemicals accounted for 53.4 percent of total imports. Concentration of imports remained, by and large, unchanged over the last one decade with the exception of 2000-01. Pakistans imports are highly concentrated in few countries. Over 40 percent of them continue to originate from just seven countries namely, the USA, Japan, Kuwait, Saudi Arabia, Germany, the UK and Malaysia. Saudi Arabia is emerging as major suppliers to Pakistan followed by the USA and Japan. Trade Balance Despite sizable export gains, the merchandise trade deficit continues to widen, on the back of Pakistans strong domestic demand fueling non-oil imports. High global price of oil also inflated the oil import bill owing to its increasing dependence of imported crude oil. The merchandise trade deficit stood at $ 8.62 billion by the end of the third quarter (July-March) of the current fiscal year as against $ 4.3 billion in the same period last year, thereby showing a deterioration of over 100.0 percent. Once again, the major contributors to further widening of trade deficit have been the petroleum group, machinery and iron & steel and scrap. These three items alone accounted for 75 percent to the further rise in trade deficit. Contrary to the general perception, the contribution of consumer durables has been 9.2 percent in the increase in trade deficit. Going forward, no one is expecting another 65 percent increase in oil prices in 2006-07 therefore, import growth is likely to decelerate in 2006-07. The sign of deceleration is already visible as import growth has slowed substantially in recent months. Current Account Balance Pakistans current account balance that slipped into red in 2004-05 after posting surpluses for three consecutive years remained in deficit in 2005-06 with gap continued to widen owing to higher oil import bill on the back of high global crude oil prices and hefty rise in non-oil imports fueled by strong demand. Apart from further widening of trade deficit, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost, and growth in personal travel due to the rising level of income of middle and high income groups have also contributed to the widening of current account gap. Deceleration in the growth of net transfers is also responsible for widening of the current account deficit. The current account deficit, excluding official transfers, stood at $ 4.7 billion in the first nine months (July-March) of the current fiscal year, compared to $ 1.18 billion in the same period last year. As percentage of projected GDP for

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Overview of the Economy the year the current account deficit stood at 3.7 percent as against 1.1 percent in the same period last year. Although trade deficit almost doubled over the last year and services balance deteriorated by 27.5 percent, the strong inflows under private transfers fueled by rising workers remittances offset some of the negatives with current account deficit standing at $ 4.7 billion. Workers Remittances Workers remittances, the second largest source of foreign exchange inflow after exports, continue to maintain its rising trend. Workers remittances totaled $ 3.63 billion during the first ten months (July April) of the current fiscal year, as against $ 3.45 billion in the same period last year, depicting an increase of 5.2 percent. The United States continues to be the single largest source of cash workers remittances accounting for 27.4 percent or $995 million, followed by Saudi Arabia ($585 million or 16.1%), UAE ($556 million or 15.3%), UK ($ 346 million or 9.5%) and other GCC countries ($426 million or 13.2%). Given the trend so far, it is likely that workers remittances may touch $ 4.4 billion in 2005-06. Remittances have so far proved remarkably resilient and have hovered around $ 4.0 billion since 2002-03. According to the World Economic Outlook, April 2005 published by the IMF, remittances can help improve the countrys development prospects, maintain macroeconomic stability, mitigate the impact of adverse shock and reduce poverty. The Outlook further states that remittances allow families to maintain or increase expenditure on basic consumption, housing, education, and small-businesses formation. To the extent, the poorer section of the society depend on remittances for their basic consumption needs, increase remittances could be associated with reduction in poverty and possibly inequality. The Outlook also finds strong empirical evidence that suggest that construction activity is highly correlated with remittances inflow. Pakistan has been receiving, on average, over $ 4.0 billion per annum during the last four years. Such a massive inflow of remittances has helped Pakistan builds its foreign exchange reserves which, in turn, have provided stability in exchange rate. For the families, the massive flow of remittances has helped increase their consumption spending, helped improve their housing facility and improve their overall living conditions. It has also played an important role in reducing poverty in Pakistan. Foreign Direct Investment Foreign Direct Investment (FDI) has become an important source of private external finance for developing countries. It is different from other major types of external private capital flows in that it is motivated largely by the investors long-term prospects for making profits in production activities in the host countries. FDI in the first ten months (July-April) of the current fiscal year has reached $3.02 billion the highest ever in the countrys history, as against $ 0.89 billion in the same period last year, thus registering an increase of 238.7 percent. By the end of the current fiscal year, FDI is expected to reach $ 3.5 billion or 2.7 percent of GDP. Almost 75.0 percent of FDI has come from six countries, namely, the UAE, US, Saudi Arabia, Switzerland, UK and Netherlands. The UAE with 42.5 percent ($1284.6 million) has topped the list of foreign investors followed by the US (13.9% or $419.1 million), Saudi Arabia (9.06% or $273.7 million), Switzerland (5.34% or $161.5 million), UK (5.0% or $151.4 million) and Netherlands (2.9% or $87.1 million). Telecom, energy (oil, gas and power), financial services, trade, construction, chemicals, food and personal services have been the major recipient of FDI, accounting for almost 94 percent or $2.082 billion. Telecom sector has been the single largest recipient of FDI with $1.0 billion followed by the energy sector ($304 million), financial services ($265.5 million), trade ($81.9 million), construction ($54.4 million), food ($52.7 million), personal services ($45.2 million) and cement ($33.6 million). Foreign Exchange Reserves Pakistans total liquid foreign exchange reserves stood at $ 13.0 billion at the end of April, 2006. Of which, reserves held by the State Bank of Pakistan amounted to $ 10.6 billion and by banks stood at $ 2.4 billion. Since end-July 2005 ($ 12.6 billion) and until end-April 2006 ($ 13.0 billion), Pakistan has added $ 407.0 million in its foreign exchange reserves. Many factors contributed towards this comfortable position of reserves. The most prominent among those are: private transfers that include remittances, higher export proceeds, floatation of bonds, higher FDI flows and privatization proceeds. With this build up in reserves, Pakistan is in a position to meet any abnormal external shock. Privatization A wide-ranging structural reform introduced during the last six year coupled with macroeconomic

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Economic Survey 2005-06 stability and rapid, strong and sustained economic recovery has transformed Pakistan into one of the ideal locations for foreign investment. Foreign investors are not only entering into the greenfield projects but are also actively participating in Pakistans privatization program. This is also the reflection of the confidence of the global investors on the transparent privatization program that has been followed in the past several years. Since January 1991 and until April 18, 2006, Pakistan has completed 160 transactions with gross proceeds of Rs.395.2 billion. Of which, 57 transactions worth Rs.338 billion were completed during October 1999 to April 2006. During the first ten months (July April) of the current fiscal year, 11 transactions worth Rs.217.9 billion have been completed. The major milestones achieved under the privatization program for the year include the strategic sale of the entities like KESC, Pak-Arab Fertilizers, PTCL, Pakistan Steel Mill, Pak-American Fertilizer, Mustehkam Cement, Javedan Cement and CTI. The upfront payment of $ 1.4 billion by Etisalat and transfer of management control of PTCL has been one of the major achievements of privatization program for the year. The major privatization initiatives which are under process and are likely to be complete soon include: Pakistan State Oil (PSO), Pakistan Petroleum Limited (PRL), Oil and Gas Development Company Limited (OGDCL), Faisalabad Electric Supply Company (FESCO), GENCO-1 Jamshoro, National Investment Trust (NIT) and other industrial units. External Debt Until a few years ago, Pakistan was facing serious difficulties in meeting its external debt obligations. Not only was the stock of external debt and foreign exchange liabilities growing at an average rate of 7.4 percent per annum during 1990-99, but the debt carrying capacity of the country was weakening at a similar pace. Consequently, the debt burden (external debt and foreign exchange liabilities as percentage of foreign exchange earnings) reached an unsustainable level of 335 percent by 1998-99. Following a credible strategy of debt reduction, over the last six years, Pakistan has succeeded in not only slowing the pace of debt accumulation but also succeeded in reducing the countrys debt burden in a substantial manner. Pakistans external debt and liabilities have declined by $ 2.4 billion in seven years down from $ 38.9 billion at the end of the 1990s to $36.5 billion by end-March, 2006. The other indicators of debt burden which are widely monitored by the international financial institutions, rating agencies, and participants of the international debt capital markets, have shown sharp reduction. For example, the external debt and liabilities as percentage of GDP which stood at around 52 percent in end-June 2000, declined to 28.3 percent in end-March 2006. Similarly, the external debt and liabilities as percentage of foreign exchange earnings was reduced from 335.4 percent in 1998-99 to 127.6 percent by end-March 2006. It may also be pointed out that Pakistans external debt and liabilities were 22 times of its foreign exchange reserves in 1998-99 but declined sharply to 3.1 times in just seven years. These statistics suggest that Pakistans external debt burden has declined at a much faster pace than anticipated and that it is now on a solid downward footing. It may also be noted that the maturity profile of the debt has also improved during the period. The short-term debt was 3.2 percent of the external debt and liabilities but declined to 0.9 percent in the same period. Pakistans Link with International Capital Market With the successful implementation of first generation structural reforms and after gaining economic stability, Pakistan decided to give signal to the international capital markets through issuance of debt instruments. On February 12, 2004 Pakistan made a successful return to the international capital markets for the first time in more than five years. Pakistan issued S$500 million 5-year Regulation-S Eurobond due 2009 lead managed by JP Morgan, Deutsche Bank and ABN Amro Bank. This transaction attracted strong demand from high quality and diversified international investors resulting in 4 times over subscription and consequent tightest possible pricing of the bond in comparison to similar rated sovereign offering for 5-year new issues. The success of this transaction reflected a vote of confidence by the international investor community on Pakistans economic policies and reform agenda. Pakistans Eurobond was priced at 370bps above US Treasury to yield 6.750% which looked very tight when compared with emerging market peers. The Pakistani bond was priced some 50bps inside the Philippines, despite the fact that it was rated three notches lower. Pakistani paper was tightly priced when it was also compared with the weighted average spread of 435bps for the Emerging Market Bonds at the time of Pakistani deal. Since the issue of Pakistans Eurobond, due 2009, it has undergone compression by about 201bps as on May 04, 2006. As compared to the issue spread of UST + 370bps, the bond is trading currently at a spread of UST + 169bps, about 54 percent less. In January 2005, Pakistan issued US$ 600 million Islamic Sukuk lead managed by Citi Group and HSBC. The 5

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Overview of the Economy year notes, structured to comply with Islamic law (Shariah) were priced at 6 month US$ Libor + 220 bps benchmark. Pakistans debut Islamic Bond issue saw considerable interest from both conventional as well as Islamic investors across the three regions, Asia, Middle East and Europe. It attracted orders worth $1.2 billion, with more than 80 accounts participating in the transaction. Pakistan decided to increase the transaction size from the original US$ 300-500 million to US$ 600 million to cater for the significant demand and to allocate the bonds to high quality accounts. Pakistan had over 80 accounts with a well-distributed book (Middle East 47%, Asia 31% and Europe 22%). The Pakistan Sukuk 2010 over the past year have witnessed tightening of spreads over US$ Mid Swaps which is the evidence of continued investor confidence in the Pakistan economy. Eurobond of 2016 and 2036 On March 23, 2006, Pakistan successfully issued US$500 million new 10-year Notes 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. This remarkable achievement was completed against a backdrop of increased volatility in the US Treasury and Asian credit markets. With over 170 accounts participating, books closed with total orders exceeding US$2bn. The issue was over 2.5 times oversubscribed. Since the issue of the new Pakistan bonds due 2016 and 2036, the EM credit markets have continued to tighten. The Pakistan 2016 and 2036 bonds have performed in line with the markets with the spread over UST undergoing compression by about 24bps and 36bps respectively, within just over a month since issued. As compared to the issue spread of UST + 240bps, the 2016 bond is trading currently at a spread of UST + 216bps, about 10% less. The 2036 bond, as compared to the issue spread of UST + 302bps, is trading currently at a spread of UST + 266bps, about 12% less. It is important to note that this offering was the largest ever funding exercise of the government. The largest deal, prior to this transaction has been the $ 600 million Sukuk in 2005. It was the longest ever tenor achieved by Pakistan. Both the new 10 and 30 year offerings are debut offerings for Pakistan and the US dollar yield curve was extended out to 30 years in just 2 years. Most emerging market sovereign issuers have taken longer time to extend their yield curve from 5 to 30 years. It took Philippines 4 years and Brazil and Turkey 3 years to extend their yield curve to 30 years. Poverty The fight against poverty represents the greatest challenge of our times. Considerable progress has nevertheless been made in different parts of the world in reducing poverty. The proportion of people living in extreme poverty on global level fell from 28 percent in 1990 to 21 percent in 2001 (on the basis of $1 a day). In absolute numbers the reduction during the period was 130 million with most of it coming from China. In Sub-Saharan Africa, the absolute number of poor actually increased by 100 million during the period. The Central and Eastern Europe and the CIS also witnessed a dramatic increase in poverty. While incidence of poverty declined in South Asia; Latin America and the Middle East witnessed no change. The recent trends in global and regional poverty clearly suggest one thing and that is, that rapid economic growth over a prolonged period is essential for poverty reduction. At the macro level, economic growth implies greater availability of public resources to improve the quantity and quality of education, health and other services. At the micro level, economic growth creates employment opportunities, increases the income of the people and therefore reduces poverty. Many developing countries have succeeded in boosting growth for a short period. But only those that have achieved higher economic growth over a long period have seen a lasting reduction in poverty East Asia and China are classic examples of lasting reduction in poverty. One thing is also clear from the evidence of East Asia and China that growth does not come automatically. It requires policies that will promote growth. Macroeconomic stability is therefore, key to a sustained high economic growth. Although extreme poverty on global level has declined, the gap between the rich and poor countries is increasing, even when developing countries are growing at

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Economic Survey 2005-06 a faster pace than developed ones perhaps due to the large income gaps at the initial level. In a world of six billion people, one billion have 80 percent of the income and five billion have less than 20 percent. This issue of global imbalance is at the core of the challenge to scale up poverty reduction. In Pakistan, Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in poverty during 1990s. It consisted of the following five elements:- (a) accelerating economic growth and maintaining macroeconomic stability, (b) investing in human capital, (c) augmenting targeted interventions; (d) expanding social safety nets; and (e) improving governance. The net outcome of interactions among these five elements would be the expected reduction in transitory and chronic poverty on a sustained basis. The reduction in poverty and improvement in social indicators and living conditions of the society are being monitored frequently through large- scale household surveys in order to gauge their progress in meeting the targets set by Pakistan for achieving the seven UN Millennium Development Goals by 2015. Pakistans growth performance over the last four years is enviable in many respects. Sound macroeconomic policies and implementation of structural reforms in almost all sectors of the economy have transformed Pakistan into a stable and resurgent economy in recent years. The real GDP has grown at an average rate of over 7.5 percent per annum during the last three years (2003/04 to 2005/06). With population growing at an average rate of 1.9 percent per annum, the real per capita income has grown at an average rate of 5.6 percent per annum. The strong economic growth is bound to create employment opportunities and therefore reduce unemployment. The evidence provided by the Labour Force Survey 2005 (First two quarters) clearly supports the fact that economic growth has created employment opportunities. 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. In recent years the role of remittances in reducing poverty has been widely acknowledged. Remittances allow families to maintain or increase expenditure on basic consumption, housing, education, and small-business formation. Total remittances inflows since 2001-02 and until 2005-06 have amounted over $ 19 billion or Rs.1129 billion. Such a massive inflow of remittances particularly towards the rural or semi-urban areas of Pakistan must have helped loosen the budget constraints of their recipients, allowing them to increase consumption of both durables and non-durables, on human capital accumulation (through both education and health care), and on real estate. To the extent that the poorer sections of society depend on remittances for their basic consumption needs, increased flow of remittances would be associated with reduction in poverty. Although, growth is necessary but it is not sufficient to make any significant dent to poverty. Realizing this fact the government had launched a directed program under the title of Poverty Related and Social Sector Program some five years ago. 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. Such a huge spending on targeted program is bound to make a significant dent to poverty. The Household Integrated Economic Survey (HIES) a component of Pakistan Social and Living Standards Measurement (PSLM) Survey provides important data on household income, consumption expenditure and consumption patterns at national and provincial level with rural-urban breakdown. The information pertaining to income and expenditure of the households are used to estimate poverty. The HIES is specifically designed to monitor poverty status of population by collecting information on consumption expenditure at the household level. With a representative sample size of 14706 households, it covered 5808 and 8898 households in the urban and rural areas of the country, respectively. The Survey was started in July 2004 and the entire field operations were completed in June 2005. The poverty line is based on 2350 calories per adult equivalent per day. It is also comparable with poverty line of 2000-01 as it was also based on 2350 calories and calculated from Pakistan Integrated Household Survey (PIHS). The poverty line of 2004-05 is adjusted by the inflation rate during the period 2001-2005.

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Overview of the Economy The latest estimate of inflation - adjusted poverty Iine is Rs.878.64 per adult equivalent per month up from Rs.723.40 in 2001. Headcount ratio, i.e., percentage of population living below the poverty line has fallen from 34.46 percent in 2001 to 23.9 percent in 2004-05, a decline of 10.6 percentage points. In absolute numbers the count of poor persons has fallen from 49.23 million in 2001 to 36.45 million in 2004-05. 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 other words, rural poverty has declined by 11.16 percentage points and urban poverty is reduced by 7.79 percentage points. Consumption inequality increased marginally during the period. These findings are consistent with the developments on economic scene that have taken place in Pakistan since 2000-01. A strong growth in economy, rise in per capita income, a large inflow of remittances and massive spending on poverty-related and social sector programs were expected to reduce poverty in Pakistan. It is important to note that the methodology and the estimates of poverty have been endorsed by the development partners such as the World Bank, the Asian Development Bank, the United Nations Development Program (UNDP) and the Department for International Development (DFID), UK. The service of world renowned poverty expert, Professor Nanak Kakwani was hired by the UNDP to independently look into the methodology as well as poverty estimates. He also authenticated both the methodology and estimates. In order to maintain consistency across years, it is essential that we apply the same agreed upon methodology over the years, irrespective of its weaknesses and strengths. Second Generation Reforms Structural reform is the essence of development. Broadly speaking, structural reforms entail measures that change the institutional framework and constraints governing market behaviour and outcomes. In general, structural reforms have been associated with the notion of increasing the role of market forces and reducing the extent to which government regulations or ownership of productive capacity affect the decision making of private firms and households. It would, however, be misleading to equate structural reforms with the goal of abandoning regulation altogether. Structural reforms aim at adapting institutional frameworks and regulations for markets to work properly. But it is well-known that some markets are prone to market failure or inefficiencies, therefore, there is a role of the government to correct the market failure and improve the efficiencies of the markets. Structural reforms, therefore, do not abdicate the government to play its due role. Pakistan has been implementing wide-ranging structural reforms in almost every sector of the economy to improve supply-side response by removing impediments to private sector development, removing irritants to improve investment climate and improving the allocation of resources. The reforms implemented thus far include: financial sector reforms, capital markets reforms, tax and tariff reforms, reforms in tax administration, fiscal transparency, reforms in privatization program, governance reform, particularly with respect to devolution and capacity building, agricultural reform, particularly with respect to agriculture pricing, movement of commodities and introducing private sector in wheat operation, and most importantly, the passing of the Fiscal Responsibility and Debt Limitation Act 2005. The last one was very essential to pursue a rule-based fiscal policy to inject financial discipline. Pakistan has benefited immensely from what is known as first generation reforms. Pakistans economic recovery has been strong, rapid and sustained. Going forward, Pakistan is targeting a growth rate of 6 to 8 percent per annum in the next five years. However, it is clear that a growth of this magnitude would not be achievable automatically. To sustain a growth momentum of 6 to 8 percent per annum more efforts and more growth-critical reforms would be required. Over the next five years the Governments reform agenda include: strengthening institutions, improving the competitiveness of our industry, building a robust financial system in an environment of global financial restructuring, further strengthening of tax administration, promoting transparency in economic policy-making, further reform in capital market and strengthening the countrys physical and human infrastructure. While it is not possible to discuss each element of reform, an attempt has been made to provide some flavour of these reforms. Strengthening of institutions is vital to remove obstacles to higher growth and better social service delivery. As

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Economic Survey 2005-06 part of institutional strengthening the government has already launched major initiatives, prominent among those include reforms in judiciary, police, civil service, and pension, the restructuring of the Central Directorate of National Savings (CDNS), transforming the existing Monopoly Control Authority (MCA) into a Competition Authority Organization, and introduction and adoption of E-Government Strategy. Furthermore, the government has already setup a Commission to assess existing regulations and procedures affecting the interaction between the administration and the business with a view to eliminating red tape and with it, corruption opportunities. It is clear that judicial reform is aimed at strengthening the rule of law and enhancing the transparency and accessibility of the legal system by modernizing the court system at all levels and strengthening capacity, effectiveness, and accountability of law enforcement agents. This is an on-going and difficult reform program. Some progress in police reform has also been made. The civil service reform is also an on-going reform and major progress has been made in enhancing the capacity of our civil servants through training within and outside the country. On pension reform, the government is working towards introducing a contributory Provident/ Pension Fund Scheme for the new entrants. The work on converting the existing CDNS into a corporate body is also at a fairly advance stage. The government believes in free-market system but in recent years the rise of extra-market forces have been observed, leading to market failures and creating hardship for ordinary consumers. It is in this perspective that the government is revamping the existing Monopoly Control Authority by converting it into a Competition Authority with proper powers to deal with extra-market forces. In order to improve the efficiency of various ministries the government is working towards achieving ISO 9001 Certification. A beginning has already been made with Ministry of Finance working towards achieving this certification. The restructuring of the Federal Bureau of Statistics with a view to converting it into an autonomous institution is also high on the agenda of reform. To implement the second generation reform the government is setting up an Economic Reform Unit in the Ministry of Finance with a view to coordinating with other ministries in implementing various reforms. This unit will also serve as Secretariat for the Private Sector Development initiatives. Improving competitiveness of Pakistans industries is central to the reform agenda. It deals with improving investment climate by strengthening microeconomic sources of competitiveness. Improving competitiveness requires understanding of various impediments and policy bottlenecks that affects competitiveness of our industry. Most important element of improving competitiveness is the strengthening of the countrys physical infrastructure, that is, the supply of gas, power, working of ports, roads, rail linkages, telecommunication network, and water availability. Given the resource constraints on the one hand and the role strong infrastructure in enhancing competitiveness on the other, the government has recently setup Infrastructure Project Development Facility in line with public-private partnership. Furthermore, to improve the competitiveness of our industries the Government has commissioned a number of studies with the help of development partners to examine microeconomic constraints in improving investment climate and promoting private sector development. The banking and financial sector of Pakistan is much stronger today than it was some one decade ago or in comparison to other countries in the Asian region. However, further strengthening of the banking system to meet the challenges arising from global financial restructuring is required. Future reforms include: voluntary mergers and consolidation of smaller banks to become effective and strong banks; further strengthening of the legal infrastructure of the banking system; formulation of new Banking Law to deal with current and future challenges; a deposit insurance scheme to protect the small depositors; further liberalization of financial services in the context of TRIMs; promoting transparency and accountability in banking system; and observance of international standards. Tax administration reform is the cornerstone of the reform agenda. A major overhaul of the Central Board of Revenue (CBR) is being implemented. It aims at increasing the CBRs effectiveness, reduce corruption opportunities, and raise the buoyancy of the tax system through organizational restructuring, self assessment, elimination of personal contacts between tax-payers and tax authorities, simplified processes, tax-payers facilitation, revised terms and conditions for employment of the CBR officials and improved IT management. A considerable progress in these areas have been made but much more is required to make CBR an efficient tax administration for which many initiatives have been launched and are at various stages of implementation.

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Overview of the Economy Concluding Remarks Economic success brings fresh challenges. Pakistan has witnessed strong, rapid and sustained economic recovery with growth averaging at 7.0 percent per annum during the last four years. This has positioned Pakistan as one of the fastest growing economies in Asia. The economic landscape of Pakistan has changed altogether therefore; its challenges are also different today. How to sustain the on-going growth momentum in an environment of macroeconomic stability is the biggest challenge going forward. Linked with this are the challenges of job creation, poverty alleviation, improving social indicators and most importantly, strengthening the countrys physical infrastructure to support 6-8 percent growth in the medium-term. An impressive economic recovery from an economic downturn is a good time to enhance the speed of implementation of the second generation reforms. Many economic problems are due to shortcomings in the markets, rather than to resource shortages or an excess or deficiency of overall demand. There is a broad consensus that where there are such problems, structural reforms, that is policy measures that change the institutional and regulatory frameworks governing market behaviour, can lead to a greater efficiency in the allocation of resources. Notwithstanding extra-ordinary successes in the face of headwinds Pakistan still faces many challenges in fully realizing its potential for sustained economic growth, better living standards, and greater resilience to shocks. The moment such as this does not mean that we have time to pause or rest. Although we have made great strides over the last six years, we are fully aware that much remains to be done.

EXECUTIVE SUMMARY
Pakistans economy has delivered yet another year of solid economic growth in 2005-06 in the midst of an extraordinary surge in oil prices and devastating earthquake of October 8, 2005 causing widespread damages. Pakistani corporates and consumers continue to be the bright spot. Consumer spending remained buoyant and investors remained upbeat on the strength and sustainability of the current growth momentum, despite higher energy prices and natural calamities. With economic growth at 6.6 percent in 2005-06, Pakistans 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 sustained for the last four years is underpinned by dynamism in industry, agriculture and services, and the emergence of a new investment cycle supported by strong credit growth. The pre-requisites for a sustained economic growth appear to have gained 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 countrys trade balance on the one hand and budget on the other, and massive earthquake of October 8, 2005 causing extensive damage to property, infrastructure, school, hospital etc. and loss of over 70,000 human lives. The rescue, relief and reconstruction of earthquake affected areas also put budget under severe stress. Pakistans economy has proved itself as remarkably resilient in the face of shocks of extra-ordinary proportions. Growth has remained buoyant. Real GDP grew strongly at 6.6 percent in 2005-06 as against the revised estimates of 8.6 percent last year and 7.0 percent growth target for the year. Key drivers of this years growth have been service sectors and industry. Large-scale manufacturing grew by 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. The services sector continued to perform strongly at 8.8 percent. Construction too continued to perform strong showing, partly helped by activity in private housing market, spending on physical infrastructure, and reconstruction activities in earthquake affected areas. Consumer spending remained strong and investment spending gained further traction. Pakistans economy continues to maintain solid pace of expansion since the fiscal year 2002-03 recovery in the economy has been strong, rapid and sustained. During the fiscal year 2005-06, Pakistans economic fundamentals have gained further strength. The most important achievements of this year include:

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Economic Survey 2005-06 01. GROWTH AND INVESTMENT Pakistans economy continued to maintain solid pace of expansion for the fourth year in a row in the fiscal year 200506 despite facing headwinds from rising energy prices at $ 70-75 per barrel and the widespread damage caused by the earthquake of October 8, 2005. The growth momentum that Pakistan sustained for the last four years is underpinned by dynamism in industry, agriculture and services, and the emergence of a new investment cycle supported by strong credit growth. 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, Pakistans 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. Growth of value addition in Commodity Producing Sector (CPS) slowed to 4.3 percent in 2005-06 as against 9.2 percent last year. Both the important components of the commodity producing sector namely, agriculture and manufacturing performed less than their targets. Within the CPS, agriculture and manufacturing grew by 2.5 percent and 8.6 percent, respectively. Agriculture and particularly its crop sector could not perform up to the expectation especially major crops registered a 3.6 percent contraction in growth. Livestock, 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. Overall manufacturing, accounting for 18.2 percent of GDP, registered an impressive growth of 8.6 percent against the target of 12.0 percent and last years achievement of 12.6 percent. Large-scale manufacturing grew by 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. Small-scale manufacturing grew at estimated 9.3 percent in 2005-06. The Construction sector 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. The services sector grew by 8.8 percent in 2005-06 as against 8.0 percent of last year. Growth in the services sector in 2005-06 was primarily attributable to strong growth in the finance and insurance sector, better performance of wholesale and retail trade, as well as transport and the communications sector. Finance and insurance sector spearheaded the growth in the services sector and registered stellar growth of 23.0 percent during the current fiscal year 2005-06 which is slightly lower than 29.7 percent of last year. Value added in the wholesale and retail trade sector has increased by 9.9% over the previous year, compared to 11.1% growth last year. The transport, storage and communications sector grew by 7.1% compared to 3.5% growth last year. Major contribution towards growth has come from the services sector which has emerged as a new growth power house for some time. The commodity producing sectors (agriculture and industry) has contributed one-third of the GDP growth and the services sector contributed the remaining two-third to the real GDP growth of 6.6 percent. The CPS contributed 31.7 percent or 2.1 percentage point to this years growth while the remaining 68 percent or 4.5 percentage points contribution came from services sector. Within the CPS, agriculture contributed 0.55 percentage points or 8.4 percent to overall growth while industry contributed 1.54 percentage points or 23.3 percent. Within services sector wholesale and retail trade has contributed 27.9 percent or 1.84 percentage points to GDP growth. Pakistans 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

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Overview of the Economy 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 countrys 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 over last year rising from $ 742 to $ 847. As opposed to an average annual increase of 1.4 percent during 2000-03, real private consumption expenditure grew by 13.1 percent in 2004-05 and further by 8.1 percent in 2005-06. 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. Major growth in investment by private sector is witnessed in agriculture (15.3%), manufacturing (14.4%), mining and quarrying (45.5%), construction (9.5%), transport and communication (20.2%), and wholesale and retail trade (424.5%). Public sector investment on the other hand registered massive growth of 46.7 percent as against a hefty 32.9 percent increase last year. The growth in domestic investment was largely a public sector phenomenon last year but this year, it was mainly public-private sector partnership driven. Total investment increased from 18.1 percent of GDP last year to 20.0 percent of GDP in 2005-06. 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. Savings National savings as percentage of GDP stood at 16.4 percent in 2005-06 fractionally lower than last years level of 16.5 percent. Domestic savings stood at 14.4 percent of GDP in 2005-06 slightly lower than 14.5 percent of GDP last year. 02. AGRICULTURE Agriculture is the mainstay of Pakistans economy. Nearly twenty-two percent of total output (GDP) and 44.8 percent of total employment is generated in agriculture. It also contributes substantially to Pakistans exports. Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products. Furthermore, 44.8 percent of countrys work force is employed in agriculture, but 65.9 percent of countrys population living in rural areas is directly or indirectly linked with agriculture for their livelihood. Whatever happens to agriculture is bound to affect not only the countrys growth performance, but to a large segment of the countrys population as well. Over the last five years, growth in agriculture has witnessed a mixed trend. During the first two years (2000-01 and 2001-02), the country experienced the crippling drought, which badly affected its agriculture and eventually overall growth in agriculture turned negative for these two years. In the preceding years (2002-03 to 2004-05), relatively better availability of irrigation water had positive impact on overall agricultural growth and this sector exhibited a modest to strong recovery. However, the performance of agriculture during the fiscal year 2005-06 has been weak. Against the target of 4.2 percent and last years achievement of 6.7 percent, overall agriculture grew by 2.5 percent in 2005-06, due to a relatively poor performance of major crops and forestry, and weaker one of minor crops and fishery. At the same time, Livestock has been the sole saving grace. Major corps, accounting for 35.2 percent of value added in agriculture, registered a decline of 3.6 percent as production of two of the four major crops, namely cotton and sugarcane has been significantly less than last year for a variety of reasons including, excessive rains at the time of sowing, high temperature at the flowering stage, late harvesting of wheat crop, a strong base effect (cotton) and lastly the incidence of frost, damaging sugarcane crop in the month of January, 2006. The production of third major crop, namely wheat, remained more or less at last years level at 21.7 million tons thereby registering a meager growth of

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Economic Survey 2005-06 0.4 percent. The production of rice the fourth major crop has been the sole major crop which registered an impressive growth of 10.4 percent, but failed to turn the negative growth in major crops to a positive one. Minor crops, accounting for 12.3 percent of agricultural value added, barely managed to register a positive growth of 1.6 percent in 2005-06 as against a growth of 3.0 percent last year. The performance of livestock, the single largest sector accounting for almost one half of agricultural value added, has been impressive as this sector grew by 8.0 percent on the back of substantial increase in the population of species, milk etc. The performance of fisheries has been poor as it grew by 1.9 percent only in 2005-06. Forestry has been registering negative growth for three consecutive years registering a negative growth of 9.7 percent in 2005-06 as against a negative growth of 30.4 percent. Pakistans agriculture has been suffering, on and off, from a severe shortage of irrigation water in recent years. As against the normal surface water availability at canal heads of 103.5 million-acre feet (MAF), the overall (both for Kharif and Rabi) water availability has been less in the range of 5.9 percent (2003-04) to 29.4 percent (2001-02). Relatively speaking, the Rabi season faced more shortage of water than Kharif during these periods. During the current fiscal year (2005-06), the availability of water for Kharif 2005 (for the crops such as rice, sugarcane and cotton) has been 5.5 percent more than the normal supplies and 19.8 percent more than last years Kharif. Excessive winter rainfalls (January-March 2005) along with the melting of snow on mountains top were responsible for higher than normal availability of water during Kharif 2005. The water availability during the Rabi season (for major crop such as wheat), as on end of March, 2006 was estimated at 30.0 MAF, which was 17.3 percent less than the normal availability, and 29.8 percent more than last years Rabi. Amongst major crops, cotton production is estimated at 12.417 million bales for 2005-06 lower by 13 percent over the last years production of 14.265 million bales. Wheat production is estimated at 21.7 million tons in 2005-06, as against 21.612 million tons last year, showing an increase of 0.4 percent. Rice production has increased by 10.4 percent in 2005-06 from 5.025 million tons last year to 5.547 million tons in 2005-06. Sugarcane production, however, decreased from 47.244 million tons in 2004-05 to 44.312 million tons in 2005-06, showing a decease of 6.2 percent. As regards the minor crops, the production of chillies and onions increased by 34.8 and 29.0 percent respectively during 2005-06. The production of all the pulses, namely masoor, mung and mash are down by 13.5, 12.6 and 9.8 percent, respectively during 2005-06. Lesser production over last year is due to shortfall in area. The production of potato also decreased by 17.9 percent on account of frost, which affected the potato crop. Agriculture credit disbursement of Rs 91.161 billion during July-March, 2005-06 is higher by 23.5 percent, as compared to Rs 73.811 billion over the corresponding period last year. The fertilizer off-take stood at 2982 thousand nutrient tons in JulyMarch 2005-06 or higher by 6.1 percent, as compared to 2811 thousand nutrient tons for the corresponding period last year. 03. MANUFACTURING, MINING AND INVESTMENT POLICIES 2005-06 The overall manufacturing sector continued to maintain its growth momentum with more vigour during the current fiscal year. Overall manufacturing recorded an impressive and broad based growth of 8.6 percent, against a target of 12.0 percent and last years growth of 12.6 percent. Large-scale manufacturing registered an impressive growth of 9.0 percent in the current fiscal year 2005-06 against a target of 14.5 percent and last years achievement of 15.6 percent. The main contributors to this impressive growth of 9.0 percent in July-March 2005-06 over last year are the automobile group (29.76 percent), engineering goods group (6.46 percent), non-metallic mineral products (9.49 percent), leather products (10.91 percent), chemicals (9.08 percent), pharmaceuticals (14.83 percent) and electricals (11.78 percent). The items that registered positive growth were cotton cloth (0.07 percent) and cotton yarn (11.16 percent) in the textile group; cooking oil (17.6 percent) in the food, beverages and tobacco groups; nitrogenous fertilizer (4.46 percent), in the chemical group, cement (9.75 percent) in the non-metallic mineral products group and

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Overview of the Economy Jeeps & Car (29.9 percent), LCVs (29.3 percent) and motorcycles/scooters (15.04 percent) in the automobile group. The individual items exhibiting negative growth include; sugar (2.40 percent), coke (77.39 percent), power looms (24.67 percent) and billets (47.95 percent). The output of the mining and quarrying sector grew by 3.8 percent this year as against the rise of 9.6 percent last year. The principal minerals which have shown positive growth are: baryte (11.4 percent), limestone (9.9 percent), natural gas (4.5 percent), rock salt (13.2 percent), sulphur (5.4 percent) and gypsum (12.6 percent). While negative growth was exhibited by chromite (6.7 percent) and magnetite (10.7 percent). Foreign direct investment has witnessed an increase of 238.7 percent in the first ten months (July-April, 2005-06), whereas, net foreign private investment stood at US $ 3376 million against US $ 1027 million last year, thereby, showing increase of $ 2349 million. The increase in foreign private investment is because of the inflow of portfolio investment of $ 355.8 million as compared to inflow of $ 135.5 million in the comparable period last year. The privatisation program maintained its pace during 2005-06 and succeeded in privatising some high-ticket items despite an inhospitable global environment. By end April 2006, Pakistan had completed or approved 160 transactions at gross proceeds of Rs 985 billion. This includes 57 transactions for Rs. 337.908 billion completed during October 1999 to April 2006. 04. POVERTY AND INCOME DISTRIBUTION In Pakistan, the Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in poverty during 1990s. Preliminary findings of Pakistan Social and Living Standards Measurement Survey (PSLM 2004-05) on poverty status were released at the end of February 2006, which indicates that the poverty level in Pakistan has been reduced during the last four years. A strong growth (7.5 % on average) for three years in a row, with per capita income growing at an average rate of 5.6 percent; a large inflow of remittances (over $ 4.0 billion per annum) in recent years, a huge expenditure on poverty-related and social sector program, and many other interventions have made a significant dent to poverty in Pakistan. As per HIES survey 2004-05, the percentage of the population living below the poverty line is provisionally estimated at 25.4 percent in 2005 down from 32.1 percent in 2001. This suggests a decline of 6.7 percentage points in poverty in the last four years. More importantly, the rural poverty has declined more than urban poverty. The provisional estimates show that rural poverty has declined from 39.0 percent in 2001 to 31.8 percent in 2005 a decline of 7.2 percentage points. Urban poverty on the other hand is provisionally estimated to have declined from 22.7 percent in 2001 to 17.2 percent in 2005 a decline of 5.5 percentage points. The social sector and poverty related expenditures grew at an average rate of more than 20 percent per annum during 2001-05. There is nearly a three-fold increase in the projected PRSP expenditure for 2006-07 when compared with the actual expenditures of base year 2001-02. Within the various categories of pro-poor expenditure, human development comes out to be the priority item of the Government with expenditures under this head constituting, on average, more than 50 percent of all PRSP related expenditures. Further reduction in poverty, however, serves as a major challenge for the government. A clear lesson from the past four years of Pakistan and from other countries experience is that sustained growth on a consistent basis is needed to reduce poverty. 05. FISCAL DEVELOPMENT Pakistan has gained further strength on fiscal side. Revenues are buoyant, expenditure is rationalized, fiscal deficit is at sustainable level and revenue deficit has almost been eliminated. Resultantly, Public debt is fast moving towards a sustainable level. Much progress has been made towards fiscal consolidation. The wide-ranging tax and tariff reforms as well as reforms in tax administration have started paying dividends. Tax collection by the Central Board of

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Economic Survey 2005-06 Revenue (CBR) has picked up. As a result of prudent fiscal management over the last 5 years, the burden of interest payment in domestic budget has declined sharply, thereby, releasing resources for development and social sector program. During the five years from 2000-01 to 2005-06, tax collection by the CBR increased by 81.0%. The Central Board of Revenue (CBR) was targeted to collect Rs.690 billion but it is most likely to collect Rs.710 billion Rs.20 billion more than the target and 20.6 percent more than last year. The total expenditure remains more or less stable in a narrow band of 17 to 18.8 percent of GDP during the last six years. Substantial decline in interest payments from as high as 7.5 percent of GDP in 1998-99 to 3.1 percent of GDP in 2005-06, has provided fiscal space to reorient expenditure in favour of development expenditure. Resultantly the share of current expenditure in total expenditure declined from 89 percent of total expenditure in 1998-99 to 78 percent in 2005-06. In addition, the share of development expenditure doubled from 11 percent to 22 percent in the same period. During the last six years the development expenditure improved from 2.2 percent of GDP in 2000-01 to 4.2 percent of GDP in 2005-06. Second largest component of the current expenditure, namely, defence spending remained stagnant at around 3.1 percent to 3.3 percent of GDP during the last six years. Government is achieving the goal of fiscal stabilization without compromising spending on the social sector. Non-defence-non-interest expenditure has improved from 7.8 percent of GDP in 1999-2000 to 11.8 percent of GDP in 2005-06. During the last six years the real growth in current expenditure hovered around 3 percent per annum and pace of growth has slowed down. Total expenditure grew by 3.4 percent in the first three years (2000-03) but accelerated to 5.6 percent during the last three years (2003-06). The main contribution is coming from development expenditure which grew by 7.4 percent per annum in first three years (2000-03) and by 23.8 percent in recent three years (2003-06). Total consolidated revenues are targeted at Rs. 1095.6 billion in 2005-06 compared to Rs. 900.0 billion in 2004-05, an increase of 21.7%. This was primarily due to a rise of 22.2 percent in tax revenue on the back of increases in both federal and provincial tax revenues, which grew by 19.8% and 50.1%, respectively. Non-tax revenue increased by 19.3 percent in 2005-06 but remained stagnant at 3.8 percent of GDP. In 2005-06, Pakistan is likely to face an overall fiscal deficit of Rs. 261.6 billion or 3.4% of GDP excluding earthquake effect and if we include earthquake related spending worth Rs.65.8 billion, the size of the deficit stood at Rs.327.3 billion or 4.2 percent of GDP. This revenue-expenditure gap was financed through external and domestic sources. Out of the gap of Rs. 327.3 billion, financing from external sources is expected at Rs 118.4 billion. The remaining gap of Rs. 208.9 billion is likely to be financed from domestic sources. Within domestic sources, financing from non-bank sources amounted to Rs. 22.4 billion while Rs. 96.7 billion would be contributed by the Banking sources, and Rs. 90.0 billion is to be financed through privatization proceeds. The revenue deficit (the difference between total revenue and total current expenditure), a measure of government dis-saving, was at a deficit of 0.7% of GDP in 2004-05 compared to a deficit of 2.2% in 2000-01. It has further progressed towards almost elimination at 0.03 percent of GDP in 2005-06. The public debt- to-GDP ratio, which stood at almost 85 percent in end June 2000, declined substantially to 61.4 percent by the end of June 2005 23.6 percentage points decline in countrys debt burden in 5 years. By end March 2006, public debt further declined to 54.7 percent of the projected GDP for the year. Following the debt reduction strategy in which raising revenue was one of the key elements, the public debt burden in relation to total revenue has declined substantially from 562.5 percent in 1999-2000 to 448.9 percent by end-June 2005 and further to 384.9 percent by end-March 2006 to the projected revenue for the year. During the last six years, the debt servicing liabilities have declined sharply from 65.4 percent of revenue in 1999-2000 to 27.8 percent of revenue and from 53.5 percent to 27.8 percent of current expenditure in 2005-06. The ratios of domestic debt to GDP and to tax revenue both decreased during 2005-06. The stock of domestic debt as

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Overview of the Economy percent of GDP declined from 35.7 percent in 2003-04 to 32.8 percent in 2004-05 and further to 29.4 percent by end March 2006. As a result of prudent fiscal management over the last 6 years, the burden of interest payments on the domestic budget has declined sharply, thereby, releasing resources for development and social sector programs. Interest payments as a percentage of total revenue have been reduced to one-half (41 percent to 20 percent) over the last six years. Similarly, share in total expenditure declined from 30 percent to 16 percent during the same period. Most importantly, as percentage of GDP, interest payments declined from 6 percent to 2.6 percent in the last six years. 06. MONEY & CREDIT The easy and accommodative monetary policy stance that had been pursued during the last few years by the SBP underwent considerable changes during the FY05, switching from a broadly accommodative to aggressive tightening in the second half of the last fiscal year, since April 2005. The same tight monetary policy stance continued during the current fiscal year despite declines in both core and overall inflation. Notwithstanding the tight monetary policy stance the SBP continued to strike a balance between promoting growth and controlling inflation on the one hand and maintaining a stable exchange rate environment on the other. Tight monetary policy stance is likely to continue until inflationary pressures are significantly eased off. The State Bank of Pakistan has taken a number of steps in various areas to further enhance the effectiveness of the banking industry in Pakistan. Going forward, the SBP would continue to take measures aimed at expanding credit to priority sectors such as agriculture, SMEs and export sector. To further revamp the financial sector in line with the global financial system, the State Bank of Pakistan has set out a road map for the implementation of Basel-II. It is the new regulatory capital adequacy regime, which offers a series of approaches ranging from simple to more complex methodologies for capital allocation against credit and operational risk. The credit plan for 2005-06 set the target for monetary expansion at Rs 380 billion or 12.8 percent higher than last year (FY05) on the basis of a growth target of 7.0 percent and inflation target of 8 percent. The money supply during July-April 22, 2006 of the current fiscal year expanded by Rs 294.9 billion or 9.94 percent as against an expansion of Rs 332.4 billion or 13.37 percent in the same period last year. The pace of monetary expansion remained well within the Credit Plan target for the year (12.8%). Within the NDA, both net budgetary borrowings and borrowings for commodity operations remained well within the credit plan targets. The net credit to the Government for budgetary purposes was Rs 43.3 billion compared to the annual credit plan target of Rs 98 billion and Rs 15.0 billion borrowed in the corresponding period of last year. However, credit to the private sector has exceeded the credit plan target and stood at Rs 345.1 billion as against Rs 330 billion envisaged for the year in the credit plan. Expansion in NFA stood at Rs 37.8 billion owing mainly to the receipts of privatization proceeds and issuance of sovereign bond. The proceeds from privatization and sovereign bond not only helped build NFA; it also helped in containing the growth in NDA through the retirement of government debt held by the SBP. Despite the tight monetary policy stance of the SBP, credit to the private sector was broad-based which grew by 20.2 percent (Rs 345.1 billion) during July-April 22, 2006 compared with the growth of 28.0 percent or Rs 357.4 billion during the same period of last year. Credit to the private sector continued to exhibit strong demand, reflecting the confidence of the private sector on the continuously improving macroeconomic fundamentals of the country. The manufacturing sector continued to be the largest recipient of bank credit, amounting to Rs 130.0 billion during JulyMarch 2005-06, -- 17.1 percent more than the comparable period of last year and accounting for almost 47.9 percent of the credit to private sector businesses. The growth in consumer loans remained robust, and their scale expanded by 27 percent to Rs 67.2 billion. The consumer loans were acquired to finance a range of products including automobiles (Rs 23.2 billion) followed by personal loans (Rs 21.5 billion), credit cards (Rs 10.4 billion) and house building (Rs 10.1 billion). Credit disbursement to the agriculture sector, also remained consistent with the previous year trend. Scheduled

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Economic Survey 2005-06 banks and DFIs advances to SME sector witnessed a growth of Rs 40.6 billion during July-February FY06 compared with an expansion of Rs 59.9 billion in the same period of last year. The scheduled banks have opened 304 offices during the period from 01-04-2005 to 31-03-2006. During July-March 2005-06, there was an increase of Rs 303.9 billion (17.3%) in the net advances of the scheduled banks. Their deposits increased by Rs 272.9 billion (11.5%) and their total investments increased by Rs 77.1 billion during the first nine months of the current fiscal year. In 2005, the banking sector produced impressive results. The year has been unprecedented in terms of profits. Pakistan continues to be at the forefront of the Micro-Finance Sector Development Program (MSDP). Within the overall MSDP framework, Khushhali Bank (KB) is the lead micro-finance institution in Pakistan. The Bank now serves nearly 250,000 clients, with a cumulative disbursement of over Rs 6.0 billion in 75 districts of Pakistan with high poverty incidence. 60 percent of KBs clients are in the rural areas, roughly one-third being women. 07. CAPITAL MARKET During the fiscal year 2005-06, the stock market continued to maintain its strong performance and achieved new heights by creating many new records. The KSE-100 Index crossed the barrier of 12000 mark for the first time in the history of capital market and touched an all time high on April 13, 2006. The KSE-100 index made further inroad and reached 12274 points on April 17, 2006 showing a growth of 64.7 percent over June 2005. Between December 2005 and April 2006 alone, the KSE share index increased by 25 percent. Similarly, the total market capitalization also increased to Rs 3419.4 billion on April 17, 2006 (US$ 57.0 billion) from Rs 2013.2 billion ($ 33.7 billion) showing a growth of 70 percent over June 2005. At current levels, KSEs market capitalization is equivalent to about 44.3 percent of estimated GDP of FY06. The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth; a successful privatization process attracting foreign investors in prestigious organization like PTCL and National Refinery; sound monetary policy of the SBP, maintenance of fiscal discipline and the capital market reforms including development measures introduced by the stock exchanges with full support of the SECP. The governments economic policies and capital market reforms helped in promoting a fair, efficient and transparent capital market and restoring investors confidence. The privatization of the government entities through the bourses helped to broad base the equity ownership to a significant level. The buying euphoria in the stock market has been spurred by a number of other favourable factors including continuation of the present policies on banking sector by the SBP, renewed interest of large number of buyers of shares, bright prospect of reaping dividends, good capital gains and presence of institutional investors in the market. The KSE saw robust activity especially during the first 4 months of 2006, with all vital indicators pointing in the right direction. The Securities and Exchange Commission of Pakistan (SECP) has been actively pursuing a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market, based on sound regulatory principles that provide impetus for high economic growth. The reforms introduced over recent years, the fields of risk management, governance and transparency have contributed significantly towards the growth and development of capital market and building investor confidence. During July-March 2005-06, the listed capital on KSE increased from Rs 438.49 billion to Rs 486.49 billion, reflecting an increase of around 11 percent. The market capitalization increased from Rs 2,071.18 billion to Rs 3,257.06 billion, reflecting an increase of over 57 percent in the value of shares. Similarly, the average daily turnover of shares increased from 430 million to 462 million shares. Unprecedented growth in the leading market indicators was also witnessed in Lahore and Islamabad Stock Exchanges.

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Overview of the Economy During the calendar year 2004, total profit before taxation of the 12 trading groups amounted to Rs 229.5 billion, which increased to Rs 326.3 billion in 2005 recording a growth of 42.2 percent. Fuel and energy, banks and other financial institutions, transport and communications and cement were the trend setters in the stock market during the current fiscal year. 08. INFLATION For the first ten months of the current fiscal year (July - April ) 2005 -06, the inflation as measured by the Consumer Price Index (CPI), declined to 8.0% from 9.3% in the same period last year . Food price inflation averaged at 7.0% compared to12.8% for the same period last year. Non-food inflation increased to 8.8% versus 6.9% in the comparable period of last year. Core inflation, which excludes food and energy costs from the headline CPI, also reflected a favorable trend and remained almost at last years level of 7%. The larger contribution toward the overall CPI inflation come from Non-food, House rent, Energy and transport components of CPI. However, based on current trends, and barring any adverse shocks, it is expected that inflation would be within the target of 8% set by the government for the full year Factor contributing to the build-up in inflationary pressures is the increase in aggregate demand in the economy, which is compounded by supply shortages of principal commodities. The supply side factors responsible for pushing the local price up, include an increase in support prices of wheat, wheat shortage resulting from inadequate production and lastly, the mis management of wheat. Other issues to consider include, the significant increase in prices of pulses and the lower production of sugarcane and sugar. Furthermore, the high increase in International prices of sugar owing to a global shortfall in supplies, brought about by the production of ethanol in Brazil, have also led to inflationary pressures this year. The continuous surge in International oil prices, coupled with an unprecedented rise in world prices of other commodities, also impacting prices in Pakistan. Cognizant of the impact of inflation on the economy and its disproportionate effect on the poor and fixed income groups of society, the government has responded in a multi-pronged manner to the rise in the price level. A strategy of regular monitoring of domestic stocks of key commodities and their prices was adopted, by which the government was able to respond in a timely manner to shortages by importing substantial quantities of wheat, sugar, pulses and other essential commodities. 09. TRADE AND PAYMENTS Pakistans foreign trade sector is being affected both by structural and cyclical factors. On the domestic side, four years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending, have led to a massive surge in imports. On the external side, the global economy continues its strong and broad based expansion with growth reaching close to 5 percent in 2006, with similar expansion projected for the next year which will be the fifth successive year that the world economy has grown by more than 4.0 percent. Export during the first nine months (July-March), of the current fiscal year, are up by 18.6 percent rising from $ 10183 million to $ 12073 million in the same period last year. Thus, Pakistan is gradually moving towards higher value added in exports of textile manufacturers. The shares of value added exports have also increased. Pakistan doubled its exports in seven years and has increased its trade-to-GDP ratio from close to 26 percent in 1999-2000 to an estimated 34 percent in 2005-06. Imports, on the other hand, have risen by 43.2 percent, in the first nine months (July-March) of the current fiscal year rising from $ 14446 million to $ 20693 million in the same period last year. Pakistans imports continue to be pushed higher by unprecedented rise in oil prices and continued strength of non-oil imports owing to buoyant domestic demand. Major contributors to the substantial rise in food imports include wheat, sugar and pulses. Owing to domestic shortage, the government has liberalized its import regime and allowed duty free import of these three items to augment their supplies with a view to reducing food inflation in the country. Sugar alone contributed 74 percent to the rise in food imports. At the same time, sugar also contributed 26.6 percentage points to the 35.9

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Economic Survey 2005-06 percent growth in food imports. Altogether, Wheat, sugar, and pulses alone contributed 93 percent to the rise in food imports and 33.4 percentage points to the 35.9 percent growth in food imports. In fact, if sugar production had remained normal and no shortages had emerged during the year, food imports would have risen only by 9.3 percent. The unprecedented surge in domestic demand has fueled an exceptional increase in non-oil imports, registering a growth of 38.1 percent in the first nine months (July-March) of the current fiscal year. Non-food non-oil imports also grew by 38.3 percent, reflecting continued strong domestic demand. Major contributors to the rise in machinery imports include power generation machine (44.8%), agriculture machinery (109.2%), construction and mining machinery (29.0%) and other machinery (51.7%). A surge in imports of machinery reflects a growth in domestic investment driven imports, thus allowing the expansion of the countrys production base. Imports of petroleum group have also played a key role in taking Pakistans import to a new height. Emerging as the single largest item in the countrys import bill, the Petroleum group import amounted to $ 4615.8 million, during the first nine months (July-March), of the current fiscal year, as against $ 2806.6 million in the same period last year. Thus an increase of 64.5 percent resulted in an increase in trade deficit to $82620.3 million, in comparison to $ 4263.4 million in the same period last year. Current Account Balance Pakistans current account balance that slipped into red in 2004-05 after posting surpluses for three consecutive years remained in deficit in 2005-06, with a widening gap due to a higher import bill. This was brought about by high global crude prices and a hefty rise in non-oil imports. Furthermore, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost, and growth in personal travel due to the rising level of income of middle and high income groups, have also contributed to the widening of current account gap. Deceleration in the growth of net transfers is also responsible for widening of the current account deficit. The current account deficit, excluding official transfers, stood at $ 4696 million in the first nine months (July-March) of the current fiscal year as $ 1181 million in the same period last year. As percentage of projected GDP for the year the current account deficit stood at 3.7 percent as against 1.1 percent in the same period last year. Although trade deficit (fob) almost doubled over the last year and services balance deteriorated by 27.5 percent, the strong inflows under private transfers fueled by rising workers remittances and resident foreign currency accounts offset some of the negatives with current account deficit standing at $ 4696 million. The flow under long term capital (net) improved markedly and risen to $ 3905 million from $ 1633 million last year. 10. EXTERNAL DEBT AND LIABILITIES Pakistans total stock of external debt and foreign exchange liabilities grew at an average rate of 7.4 percent per annum during 1990-99 rising from $ 20.5 billion in 1990 to $ 38.9 billion by end June 1999 but declined slightly to $ 37.9 billion in 1999-2000. It exhibited a declining trend thereafter. Pakistans external debt and liabilities have declined by $ 3.1 billion down from $ 38.9 billion in 1998-99 to $ 35.834 billion by 2004-05. However, external debt and liabilities increased to $ 36.557 billion by end-March 2006, thus showing a rise of $ 0.723 billion in the first nine months of the current fiscal year. The rise is mainly on account of issuance of Sovereign bonds worth $ 800 million in March 2006. External debt and foreign exchange liabilities, instead of growing at the pace of the 1990s, were in fact reduced from U.S. $38.9 billion in 1998-99 to $ 36.5 billion by end-March 2006 a reduction of $ 2.4 billion in seven years. Most importantly, the burden of the debt has declined substantially during the same period. For example, the external debt and liabilities as a percentage of foreign exchange earnings which stood at 335.4 percent in 1998-99, declined to 127.6 percent by end-March 2006. The external debt and liabilities stood at 64.1 percent of GDP in end-June 1999, declined to 28.3 percent in end-March 2006. The annual debt servicing payments made during the period 1999-2000 to 2003-04 averaged just above $ 5 billion per annum. This amount has drastically come down to around $ 3 billion in 2004-05. An amount of $ 2.4 billion has been paid during July-March 2005-06 and the amount rolled over declined

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Overview of the Economy from $ 4.1 billion in 1999-2000 to $ 1.1 billion in July-March 2005-06. On March 23, 2006, Pakistan successfully issued US$500 million new 10year Eurobond and US$300 million new 30year Bonds in the international debt capital markets lead managed by JP Morgan, Citi group and Deutsche Bank. This transaction, which represented the first international 144A bond issued by Pakistan since 1999, raised significant interest amongst international Institutional investors. The 10year notes were priced with a coupon of 7.125%, framing a spread of 240bps over the relevant 10-year US Treasury benchmark and 187bps over the US$ mid-swap rate. The 30year bonds were priced with a coupon of 7.875% to, framing a spread of 302bps over the relevant 30-year US Treasury benchmark and 256bps over the US$ mid-swap rate. Pakistan was able to achieve spreads on both the new 10 and 30year bonds that were tighter than its previous 5year issues. By issuing 10 and 30 year tranches, Pakistan completed its primary objective of establishing a full Pakistani International yield curve in record time. With over 170 accounts participating, books closed with total orders exceeding US$2bn. The issue was over 2.5 times oversubscribed. 11. EDUCATION Right to education is the basic requirement of every individual. Nations all over the world reached high levels of prosperity and human development through investing and prioritizing provision of quality and equitable health and education faculties to their citizens. East Asian economies are a recent example that, show how nations can benefit from an educated and productive labor force. Pakistan is in fact, entering into that phase of demographic transition, where in few years massive influx in the working age population (60 million) is expected. Thus, Investing in providing quality education to the upcoming working age population, is the only way to cash the demographic dividend. Currently, the literacy rate is 53 percent which is much below the targets set to be achieved in 2005 (60 percent ESR and 58 percent in PRSP) and far away from reaching the Millennium Development Goals (MDGs) target of 80 percent literacy till 2015. Looking at the gender disaggregated data for overall literacy, 65 percent of males and 40 percent of females were literate in the year 2004-05. District disaggregated data for adult literacy show that, in Punjab Rawalpindi with 75 percent is ranked at the top and Lohdran with 34 percent at the bottom. Karachi with 78 percent literacy is ranked at the top while Jacobabad with 43 percent is ranked at the bottom in Sindh. In NWFP, Abbotabad (65%) is at the top and Kohistan (25%) at the bottom. Finally, in Balochistan Quetta (65 %) at the top and Jhal Magsi (20%) and Qilla Saifullah (20%) are at the bottom. The key impediments to the progress in reaching a higher level of literacy in Pakistan are the low enrollment rates and poor quality of education provided by the public sector. In case of enrollments, Net Enrollment Rate (NER) has seen a considerable increase of 10 percentage points from 42 percent in 2001-02 to 52 percent in 2004-05. The MDG targets to reach 100 percent NER till 2015. This requires almost 50 percent increase in enrollment in next 10 years, which is a huge challenge for the policy makers. Another factor that contributes to lower literacy rates is the high dropout rate at all levels. Major reasons behind dropout include poor quality of infrastructure, teachers absenteeism, quality of education and the value of returns attached to sending children to schools.There exist wide gender gaps especially in the rural areas in enrollments at all levels. In the past year, 2187 new primary schools were established, 1221 in the public sector and 881 in the private sector. This increase has occurred in both rural and urban areas. Enrollment at the primary level increased from 19.92 million in 2001-02 to 21.33 million in 2004-05, 4.28 million to 4.55 million at the middle level and 1.79 million to 1.88 million at the secondary level during 2001-02 to 2004-05. During the past four years 249 additional technical and vocational institutions were established. There is a significant increase of 35 universities during the period 2001-02 to 2004-05 including 13 new public and 22 new private universities. Government of Pakistan is currently spending 2.1 percent of its GDP on education sector which is very low as compared to other countries in the region. The share of education sector has not seen much change in the past several years, infact it has stagnated to about 2 percent from 2003-2005. Government has launched several

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Economic Survey 2005-06 programs to increase coverage by increasing enrollment and to improve the overall quality of education but these initiatives need proper implementation and constant monitoring for their timely completion. 12. HEALTH Importance of the health in the social lives of the people makes it such an important area that it cannot be considered in isolation and it is inextricably tied to other socio economic and political realities. The Constitution of Pakistan in its article 38 titled promotion of social and economic wellbeing of the people ensures the provision of basic necessities of life including health and medical relief for all citizens, irrespective of sex, caste, creed or race. Government of Pakistan recognizes and acknowledges the access to essential health care as a basic human right that is why the public health sector has always been a priority area of the government activities. Government of Pakistan is fully aware of its commitment to achieve Millennium Development Goals (MDGs) regarding health and initiatives have been taken to address health issues under PRSP and MTDF. There is a considerable improvement in health care facilities over the past year as the existing vast network of health care facilities consist of 946 hospitals, 4554 dispensaries,5290 basic health units/sub health centres (BHUs/SHCs), 552 rural health centers (RHCs), 907 maternal and child health centers (MCHs) and 289 TB centres (TBCs). Available human resource for the fiscal year 2005-06 turn out to be 118160 doctors, 6761 dentists and 33427 nurses which makes the ratio of population per doctor as 1310, population per dentist 25297 and population per nurse as 4636.The new health facilities added to overall health services include construction of 56 new facilities (42 BHU and 14 RHCs ),upgrading of 59 existing facilities (18 RHCs and 41 BHUs) and addition of 3500 new doctors ,1900 nurses, and 15000 lady health workers. The total outlay on health sector is budgeted at Rs. 40 billion which shows an increase of 5.3% over the last year and turns out to be 0.51% of GDP. To reduce incidence of disease and to alleviate their suffering and pain so as to improve the health status of people, various health programmes like Lady health worker program, Malaria, Tuberculosis, HIV/AIDS control progam, the expanded program on immunization, National Maternal and child Health Program, Prime Minister Program for prevention and Control of Hepatitis in Pakistan, Drug Abuse, Cancer Treatment program remained operative during fiscal year 2005-06. During the fiscal year 2005-06 the caloric availability per day is likely to increase from 2271 to 2328 and protein availability from 65.5 to 66.9 grams PSLM 2004-05 reports district level data for major indicators in the health sector such as sickness/injuries, immunization, pre and post natal consultation etc . In the case of immunization, the top ranked districts are Jhelum (Punjab), Hyderabad (Sindh) ,Chitral (N.W.F.P) and Gwadar (Balochistan).The districts reporting lowest immunization are Muzaffar Garh ( Punjab), Jacobabad (Sindh), Shangla (N.W.F.P) and Qilla Saifullah (Balochistan). Government of Pakistan needs to address the problem of the adversely affected districts and focus on policies to solve the problems and initiate immediate remedial measures. 13. POPULATION, LABOUR FORCE & EMPLOYMENT Achieving a world population in balance with its environmental resources is crucial to the future of our planet and the welfare of its people. Population growth is a complex issue that directly or indirectly impacts all aspects of our lives and the conditions under which we live----from the environment and global stability to women's health and empowerment. Pakistan being a developing country also faces the problem of over population. During the past 25 years, cultivable land has increased by 27 percent compared to 98 percent increase in population, resulting in reduced individual land holdings in Pakistan. Due to a high birth rate urban population will double in the next 20 years causing more and more forests to be cut to make way for humanity. Even now each year, deforestation occurs at the rate of 2.5 percent. In addition, since only 60 percent of our population has sewerage facility, the remaining 40 percent churn out wastes damaging the environment and causing a lot of diseases. Rising levels of income on the one hand and easy availability of loan facility/financing on the other has lead to an increase in motorization in the country and almost 70

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Overview of the Economy percent of our on-the-road vehicles have outlived their life span and emit unburnt monoxide gases. In Pakistan, labour force participation is estimated on the basis of the Crude Activity Rate (CAR) and the Refined Activity Rate (RAR). The CAR is the percentage of the labour force in the total population while RAR is the percentage of the labour force in the population of persons 10 years of age and above. The figures both for CAR (32.8%) and RAR (46.9%) for the first half of 2005-06 fare higher than LFS 2003-04 (30.4% and 43.7%). This phenomenon is more obvious for rural areas and women. Augmentation of the rates for the set of economic activities carried out within the house precincts also depicts the same scenario (42.8 Vs 38.5%). Agriculture still accounts for the largest source of employed work force. The share of agriculture in employment has increased from 43 percent in 2003-04 to almost 45 percent by mid of 2005-06. Sector wise break up of employed labour force shows that female labour force participation is on the rise for most sectors especially agriculture, fishery and telecom sectors. It is important to note that the employment of the rural females increased despite a considerable rise in female Labour Force Participation Rate. The increase in rural female employment was mainly in the category of unpaid family helpers, which may be due to enhanced growth rates in agriculture in recent years or due to the combined efforts of various NGO. 14. TRANSPORT AND COMMUNICATIONS A strong, efficient and affordable infrastructure is a critical element of a good investment climate and therefore, is a pre-condition to sustain the growth momentum. Transport and Communications both are important elements of infrastructure services and are essential in maintaining economic growth and competitiveness. In fact, the transport and communication sector in Pakistan account for about 11 percent of GDP, 16 percent of fixed investment, 6 percent of employment and about 15 percent of the Public Sector Development Programme. Road transport is a backbone of Pakistans transport system, accounting for 90 percent of national passenger traffic and 96 percent of freight movement. Over the past ten years, road traffic both passenger and freight has grown much faster than the countrys economic growth. The 9,518 km long National Highway and Motorway network contributes about 3.7 percent of the total road network and carries 90 percent of Pakistans total traffic. The total length of roads in Pakistan was 258,340 Km, including 165,762 Km of high type (64 percent) and 92,578 Km of low type roads (36 percent) by the end of March, 2006. During the outgoing fiscal year, the length of high type roads has increased by 1.8 percent over the last year but the length of low type roads has declined by 2.9 percent. The construction work on IslamabadPeshawar Motorway (M-1) however, is still in progress. Furthermore, the Pakistan Railways have carried 61.3 million passengers and 4.3 million tons freight, with its gross earnings stood at Rs.12.5 billion during July-March 2005-06. In comparison, PIA carried 3.972 million passengers during July-February 2005-06 as against 3.571 million in the same period last year, showing an increase of 11.2 percent. Both passenger capacity and traffic volume also increased by 2.4 percent and 8.7 percent, respectively. in addition, Its fleet consists of 41 aircrafts of various types. In addition, there are three private airlines, operating in the country and provide both domestic and international services. Karachi Port has also handled 24,572 thousand tons of cargo during July-March, 2005-06, compared to 21,845 thousand tons during the same period last year, showing an increase of 12.5 percent. Port Qasim has handled 16.8 million ton of cargo during July-March 2005-06 compared to16 million cargo handled during the corresponding period last year, registering a growth of 5 percent. The Gwadar Port is also being built with Chinese assistance and its first phase has almost been completed. In 1999-2000, there were only 0.3 million cellular mobile subscribers in Pakistan which jumped to 2.4 million by 2002-03 as a result of introduction of CPP regime and addition of another mobile operator (Ufone). Mobile

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Economic Survey 2005-06 subscribers continued to rise at an unprecedented pace, reaching 12.8 million by 2004-05. A major turnaround was witnessed when the mobile companies started giving free mobile connections and bearing the cost of government levies themselves. In a short period of 9 months in the outgoing fiscal year, more than 16 million new subscribers have been added to the list, reaching over 29.6 million by end April 2006. In other words, a more than 131 percent increase in subscribers in just 9 months was unprecedented. Accordingly, the total teledensity (Fixed + Cellular + WLL) has jumped form 3.7 percent in 2001-02 to 23.1 percent by end March 2005-06. For promotion of Information Technology, 2339 cities/towns/villages have been provided Internet facility, by March, 2006. Total fixed telephone lines installed by March 2006 were 5.2 million as against 5.1 million up to June 2005 last year. 15. ENERGY Global energy consumption is expected to increase steadily over the next twenty years. According to the International Energy Outlook 2001, the actual growth of world energy consumption increased from 207 quadrillion Btu in 1970, to 382 quadrillion Btu in 1999 which is anticipated to further increase to 607 quadrillion Btu in 2020. Over this fifty-year period, the consumption of energy will likely increase by about 200 percent, from 207 quadrillion Btu in 1970, to 607 quadrillion Btu in 2020. The largest increase in energy use will occur in the developing world. From 1999 to 2020, energy consumption in the developing countries is expected to climb 122 quadrillion Btu to 264 quadrillion Btu, depicting an increase of 116 percent. In other words, the increase in energy use in the developing world is roughly double that of all countries in the global economy. Because, firstly many developing countries are striving towards economic development and industralization and will thus require additional energy. Secondly, virtually all of the increase in the worlds population over the next twenty years, will take place in the developing world. Population growth will add over 1 billion people to the poorer regions, thus expanding the energy requirements for these regions. Production of crude oil per day has decreased to 65,385 barrels during July-March 2005-06 from 66,199 barrels per day during the same period last year, showing a decline of 1.2 percent. The overall production of crude oil has decreased to 17.9 million barrels during July-March 2005-06 from 18.1 million barrels during the corresponding period last year, showing a decline of 1.1 percent. On an average, the transport sector consumes 49.7 percent of the petroleum products, followed by power sector (32.3 percent), industry (11.8 percent), household (2.5 percent), other government (2.3 percent), and agriculture (1.4 percent) during last 10 years i.e. 1995-96 to 2004-05. The average production of natural gas per day stood at 3,825 million cubic feet during July-March, 2005-06, as compared to 3,663 million cubic feet over the same period last year, showing an increase of 4.4 percent. The overall production of gas has increased to 1,048,190 million cubic feet during July-March 2005-06 as compared to 1,003,189 million cubic feet daily in the same period last year, showing an increase of 4.5 percent. On average, the power sector consumes 36.6 percent of gas, followed by fertilizer (22.5 percent), industrial sector (18.8 percent), household (18.4 percent), commercial sector (2.8 percent) and cement (1.3 percent) during last 10 years i.e. 1995-96 to 2004-05. Total installed capacity of electricity (WAPDA, KESC, KANUPP AND IPPs) stood at 19,439 MW during July-March 2005-06, compared to 19,389 MW during July-March 2004-05. Total installed capacity of WAPDA stood at 11,363 MW during July-March 2005-06 of which, hydel accounts for 56.9 percent or 6,463 MW, thermal accounts for 43.1 percent or 4,900 MW. During the first three quarters of current fiscal year, 63,978 GWh electricity has been generated as against 61,758 GWh were produced in the same period last year. The number of villages electrified increased to 99,595 by March 2006 from 90,467 upto 2004-05, showing an increase of 10 percent. Presently, some 930 CNG stations are operating in the country, while 200 are under construction. By March 2006 about one million vehicles were converted to CNG as compared to 700,000 vehicles during the same period last year, showing an increase of 43 percent. With these developments Pakistan has become the leading country in Asia and the third largest user of CNG in the world after Argentina and Brazil.

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Overview of the Economy 16. ENVIRONMENT AND HOUSING I. Environment Sustainable development remains the cornerstone of government policies, and the concern for environment, its protection, renewal and enrichment is recognized as an obligation for the betterment of all citizens. The povertyenvironment nexus has been of particular interest in the recent years, as poverty in Pakistan, like in many other middle-income countries, plays an important role in increasing the vulnerability of the poor to pollution and environmental degradation. Several policies, plans, programs and projects have been initiated for environmental protection and conservation in the sectoral areas of water and air pollution control, land use, forest management, energy efficiency, biodiversity conservation, and waste management, etc. One of the major achievements during 2005-06 was the formulation of the National Environmental Policy 2005 which addresses the sectoral issues such as (a) water management and conservations, (b) energy efficiency and renewable, (c) agriculture and livestock, (d) forestry and plantation, (e) biodiversity and protected areas, (f) climate change, air quality and noise, and (g) pollution and waste management. The key factors contributing to air pollution in Pakistan are: a) rapidly growing energy demand; b) increasing industrial and domestic demand and c) a fast growing transport sector. In the cities, widespread use of low-quality fuel, combined with a dramatic expansion in the number of vehicles on roads, has led to significant air pollution problems. Air pollution levels in Pakistans most populated cities are among the highest in the world, causing serious health issues in the process. The government is promoting the use of CNG in a big way to reduce the pollution level. Presently, some 935 CNG stations are operational through out the country, while another 200 are under construction. As of April 2006, the total number of CNG vehicles stood at 950,000, compared to 700,000 vehicles in April 2005, making Pakistans CNG fleet the largest in Asia and the third largest in the world after Argentina and Brazil. Water availability in Pakistan continues to decrease, both in total amount of water as well as in the per capita water availability in Pakistan. In 1951, when population stood at 34 million, per capita availability of water was 5300 cubic meter, which has now decreased to 1105 cubic meter, just touching water scarcity level of 1000 cubic meter. With a present growth in population and the low rainfall, the threshold limit of water scarcity i.e. 1000 m3 of water per capita per year may be reached as early as the year 2010. Various mega initiatives have been planned especially under WAPDA vision 2025. The estimates show that the current water shortage of 9 million acre feet would aggravate to 25 MAF if all planned dams under Vision 2025 are not constructed by 2016. The Government is committed to supply safe drinking water to its people and in this regard has started implementation of a Clean Drinking Water Initiative Project in 2005, which caters for the installation of 544 water purification plants of 2000 gallons/ hour capacity, one in each Tehsil of Pakistan. A new project on Clean Drinking Water for All under Khushal Pakistan Programme, has been recently approved and caters for installation of around 6035 water purification plants of different capacities (500/ 1000/ 2000 gallons/ hour), one in each union council of Pakistan. Like many other developing countries, dry lands in Pakistan are severely affected by land degradation and desertification due to unsustainable land management practices and increasing demand of natural resources causing enormous environmental problems. The situation is further aggravated by scarcity of water, frequent droughts and miss-management of land resources, contributing to expansion of deserts, reduced productivity and consequently increases in rural poverty. In order to address the problems of land degradation and desertification, the Ministry of Environment, Government of Pakistan has taken an initiative and designed a full-scale project on Sustainable Land Management to Combat Desertification in Pakistan. The project aims at combating desertification and improving land management practices to eradicate poverty in arid and semi-arid regions of Pakistan. Forestry sector plays an important role in soil conservation, water regulation for irrigation and power generation, reduction of sedimentation in water conveyances and reservoirs, employment and maintenance of ecological

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Economic Survey 2005-06 balance. Under the Millennium Development Goals of the Forestry Sector, Pakistan is committed to increase forest cover from existing 5 % to 5.7% by the year 2011 and to 6% by the year 2015. This implies bringing an additional 1.051 million hectares land area under forest. The Government of Pakistan is implementing a number of Policies and programs in the Environment Sector. National Environment Action Plan (NEAP) remains the Flagship program of the Ministry of Environment. The main objectives of NEAP are to safeguard public health, promote sustainable livelihood and enhance quality of life for the people of Pakistan. It focuses on clean air, clean water, solid waste management and eco-system management. II. Housing Sector Housing is one of the basic human requirements, as every family needs a roof. Providing shelter to every family has become a major issue as a result of rapid urbanization and higher population growth. According to the housing census 1998, the housing backlog, which stood at 4.30 million, has been currently projected at 6.19 million. It is estimated that to address the backlog and to meet the housing shortfall in the next 20 years the overall housing production has to be increased to 500,000 housing units annually. The present housing stock is also rapidly aging and estimates suggest that more than 50 percent stock is over 50 years old. It is also estimated that 50 percent of the urban population now live in slums and squatter settlements. Meeting the backlog in housing, besides replacement of out-lived housing units is beyond the financial resources of the Government. This necessitates putting in place a framework to facilitate financing in the formal private sector and mobilize non-government resources for a market based housing financed system. The government of Pakistan is, therefore, encouraging participation of local as well foreign investors/developers and private sector companies in housing sector to build more and more housing projects to meet the demands of a vast segment of society. Having realized the importance of the housing sector in the overall economic development of the country, the government, as an immediate measure, declared Housing and Construction as a priority industry and simultaneously formulated a pragmatic and workable National Housing Policy. This is aimed at revitalizing the housing sector, providing therein various incentives for the construction industry and the private sector builders/developers. The salient features of this policy include (i) Identify the state and other lands for housing development, (ii) To encourage the financial institution to give mortgage loans for housing at market rates. Commercial banks shall also be encouraged to advance loans for housing, by earmarking a substantial percentage of their loan portfolio (iii) The annual disbursement of HBFC loans shall be enhanced from the present Rs 1.2 billion to Rs 7.00 billion over the next 5 years. (iv) Simplification of procedures for land transactions and standardization of mortgage documents to facilitate sale and purchase of housing. (v) Stamp duties and registration fees, which are exceptionally high as compared to other countries, shall be adequately reduced to an aggregate total of 1% to enhance registration, improve documentation and increase revenue receipts. (vi) Property tax on rented property shall be reduced from the current high rate of 25% to 5%. (vii) All new construction of houses on plots measuring upto 150 sq.yds. & Flats/apartments having an area of 1000 sft shall be exempt from all types of taxes for a period of 5 years. (viii) Provincial Governments shall develop packages in which prime state land within urban centers, occupied by the katchi abadies, shall be offered to the private developers for commercial use provided they arrange and finance upgradation or relocation of katchi abadies As a result of the coordinated efforts of Federal and Provincial Governments and concerned private sector stakeholders, a large number of policy measures have so far been implemented resulting in the improvement of overall housing situation in the country besides availability of affordable housing finance to the extent of Rs 34 billion in the market.

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Chapter 1.

GROWTH AND INVESTMENT


Pakistans economy continued to maintain solid pace of expansion for the fourth year in a row in the fiscal year 2005-06 despite facing headwinds from rising energy prices at $ 70-75 per barrel and the widespread damage caused by the earthquake of October 8, 2005. With economic growth at 6.6 percent in 2005-06, Pakistans 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 (see Fig-1). The growth momentum that Pakistan sustained for the last four years is underpinned by dynamism in industry, agriculture and services, and the emergence of a new investment cycle supported by strong credit growth. The prerequisites for a sustained economic growth appear to have gained firm footing during the last four year.
Table-1.1:Regional Growth Performance Real GDP Growth (%) Region/Country 2003-04 2004-05 2005-06 World GDP 4.1 5.3 4.8 Euro Area 0.7 2.1 1.3 United States 2.7 4.2 3.5 Japan 1.8 2.3 2.7 Germany -0.2 1.6 0.9 Canada 2.0 2.9 2.9 Developing Countries 8.4 8.8 8.6 China 10.0 10.1 9.9 Hong Kong SAR 3.2 8.6 7.3 Korea 3.1 4.6 4.0 Singapore 2.9 8.7 6.4 Vietnam 7.3 7.7 7.5 ASEAN Indonesia 4.7 5.1 5.6 Malaysia 5.4 7.1 5.3 Thailand 7.0 6.2 4.4 Philippines 4.5 6.0 5.1 South Asia India 7.2 8.1 8.0 Bangladesh 5.8 5.9 5.8 Sri Lanka 6.0 5.4 5.9 Pakistan 7.5 8.6 6.6 Middle East Saudi Arabia 7.7 5.2 6.5 Kuwait 13.4 6.2 8.5 Iran 6.7 5.6 5.9 Egypt 3.1 4.1 5.0 Africa Algeria 6.9 5.2 5.3 Morocco 5.5 4.2 1.8 Tunisia 5.6 6.0 4.2 Nigeria 10.7 6.0 6.9 Kenya 2.8 4.3 4.7 South Africa 3.0 4.5 4.9 Source: World Economic Outlook (IMF), April 2006.

The current economic upturn is substantially different in three key respects from the occasional economic rebound of short duration that Pakistan witnessed in the 1990s. Firstly, consumer spending has been boosted by both structural and cyclical factors. Pakistani consumers are exerting their influence on domestic demand owing to rising incomes and benign domestic interest rate environment. Secondly, business expectations are more realistic. The gradual build-up of the investment upturn this time also suggests that investment recovery is likely to be more sustainable. Thirdly, the policy makers are likely to be more guarded in their response to rising inflationary pressures. The government and the State Bank of Pakistan (SBP) are likely to ensure that no heavy handed policy response that could derail the ongoing economic upturn is undertaken. The SBP has thus far avoided its sledgehammer policy response in the wake of rising inflation during the last two years and preferred to strike a balance between sustaining the growth momentum and containing inflation. This policy has yielded handsome dividends.

Economic Survey 2005-06 Real GDP grew strongly at 6.6 percent in 2005-06 Fig-1: Real GDPGrowth as against the revised estimates of 8.6 percent last year and 7.0 percent growth target for the year. 10 When viewed at the backdrop of rising and volatile 9 energy prices and the extensive damage caused 8 by the earthquake of October 8, 2005 Pakistans 7 growth performance for the year has been 6 impressive. Key drivers of this years growth have been service sectors and industry. Large-scale 5 manufacturing grew by 9.0 percent as against 15.6 4 percent of last year and 14.5 percent target for the 3 year, exhibiting signs of moderation on account of 2 higher capacity utilization on the one hand and 1 strong base effect along with several other factors 0 on the other hand. The services sector continued to perform strongly and grew by 8.8 percent. Construction too continued its strong showing, partly helped by activity in private housing market, spending on physical infrastructure, and reconstruction activities in earthquake affected areas. Consumer spending remained strong with real spending rising by 8.1 percent and investment spending maintaining its strong momentum at 10.3 percent increase in real investment. Agriculture, and particularly its crop sector could not perform up to the expectation and registered a contraction in growth. Livestock, 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.
7.5 8.6 6.1 4.9 4.0 1.8 3.1 4.7

While solid pace of economic expansion this year was underpinned by the macroeconomic policies pursued by the government, Pakistan has also benefited from the buoyant global economic environment undeterred by the rising and volatile energy prices. The global economy continued its strong expansion. The expansion is becoming geographically more broad-based, and global growth is expected to remain strong over the near term. Inflation and inflationary expectations remained well contained but there is no room for complacency as there are downside risks, including those related to continued high and volatile oil prices, and abrupt tightening of global financial conditions, and a rise in protectionism. Where reforms have been undertaken, the benefits have been enhanced by an expanding world economy. In 200405, global growth, at 5.3 percent was the strongest in thirty years. Growth in 2005-06 though more moderate, was around 4.8 percent and similar strong growth is expected in 2006-07. The remarkable expansion we have seen in the past couple of years has been worldwide with almost every region of the world experiencing buoyant growth including South Asia. The United States and China remain the main engines of global economic growth, and that growth prospects in Japan and in some members of the euro area have steadily improved. The performance of many emerging economies and developing countries continue to be strong. As stated earlier, the United States continues to be a major driving force for global growth. Real GDP grew by 4.2 percent in 2004-05 and 3.5 percent in 2005-06 and is likely to moderate at around 3.3 percent in 2006-07. The buoyancy of the US economy has helped fuel growth in other regions. The pace of growth in emerging Asian especially but not only in China, India and Pakistan, has also contributed to strong global performance in the past few years and this, too looks set to continue with growth in Asian emerging market forecast to exceed 7.0 percent this year. There is also welcome news in those parts of the world where growth has been persistently sluggish. The Japanese economy appears better poised for a strong recovery than for many years, with deflation almost squeezed out of the system, and more buoyant consumer demand. And in the euro area, there are signs that in some countries, at least,

6.6

1980's

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1990-II

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2005-06 P

Growth and Investment growth may be picking up, albeit slowly. South Asia, particularly India and Pakistan, appear to have overtaken ASEAN region in terms of their growth performance. Barring China, Hong Kong SAR, and Vietnam all the other Asian economies have fallen short to the South Asian giant (India and Pakistan) in terms of their growth performance. Middle Eastern and African countries showing strong to modest growth for the last few years. The performance of oil rich countries (Saudi Arabia, Iran and Kuwait) was expected to be strong in the Middle East region owing to massive influx of petro dollars. With the exception of Nigeria (another oil producing country) all other countries in African region showing a modest to weak growth performance (see Table-1.1). There are many reasons for the global economic expansion. A major one is the reduction in inflation rates worldwide. Over a long period high inflation inflicted great harm on many countries. But in recent years an extraordinary decline in inflation rates were observed worldwide. This has been a significant factor in the healthier rates of growth in many parts of the world. The low inflation environment has contributed significantly to the buoyancy of the global economy. The recent expansion has, after all, taken place against a backdrop, which might have been expected to hamper global growth. Continuing geopolitical uncertainty, a sharp rise in oil prices and continuing concern about global imbalances, thus far the collective impact of these concerns has been significantly less than many had predicted. The current outlook, both at the global and at the regional level, is good. But there are nevertheless, some important downside risks to which all policy makers need to be ready to respond. High oil prices are clearly at or close to the top of the list. So far, the rise in oil prices has been satisfactorily absorbed in most countries. This is partly a reflection of the fact that unlike the price rises of the 1970s the current increases have been demand rather than supply driven; and partly it reflects the fact that policy makers have taken to heart the lessons of the 1970s and have gradually reduced their dependence on oil to run the machines of their economies. Global imbalances continue to pose a risk to continuing global growth. The current account deficit of the United States now in excess of 6.0 percent of GDP, continue to increase and so, fuel concerns about sustainability. But the payment imbalances are part of a wider problem of imbalances in the global economy, with rapidly rising foreign exchange reserves in Asia, and sluggish growth in Europe and Japan. The main risk posed by these global imbalances is a disorderly resolution of the problem for example, an abrupt adjustment of exchange rates and US interest rates, with obvious implications for emerging market debt. Pakistans economy is undergoing structural shifts that are fueling rapid changes in consumer spending patterns. The ease of access to credit is boosting new entrepreneurship as well as consumers. In particular, the middle class is becoming an increasingly dominant force in the economic activity. Pakistans 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. 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 by 8.1 percent in 2005-06. Relatively slower growth in consumption in 2005-06 is mainly the result of inflationary pressure in the economy. The extraordinary strengthening of domestic demand during the last three years points to the following facts. First, the higher consumer spending feeding back into economic activity is likely to support the on-going growth momentum. Second, it suggests the emergence of a strong middle class with purchasing power which is a healthy sign for business expansion. Third, extra-ordinary rise in consumer spending over the last three years appears to have contributed, in part to building inflationary expectations in Pakistan. Having discussed the overall growth and consumer spending, it is imperative to look into the growth performance of the various components of Gross National Product for the outgoing fiscal year 2005-06. The performance of the various components of national income over the last two and a half decades is summarized in Table 1.2. Commodity Producing Sector (CPS) Commodity Producing Sector (CPS) was the main contributor to the strong growth of 8.6 percent in the last fiscal

Economic Survey 2005-06 year. This was spearheaded by the agriculture sector. During the fiscal year 2005-06, the mother nature was not as facilitative to agricultural growth as it was last year. Growth of value addition in CPS sector slowed to 4.3 percent in 2005-06 as against 9.2 percent last year. Both the important components of the commodity producing sector namely, agriculture and manufacturing performed less than their targets. Within the CPS, agriculture and manufacturing grew by 2.5 percent and 8.6 percent, respectively.
Table 1.2: Growth Performance of Components of Gross National Product (% Growth At Constant Factor Cost) 1980s 1990s 2002-03 2003-04 2004-05 2005-06 Commodity Producing Sector 6.5 4.6 4.3 9.2 9.2 4.3 1. Agriculture 4.4 4.3 2.3 6.7 2.5 5.4 - Major Crops 3.4 3.5 6.7 1.9 17.8 -3.6 - Minor Crops 4.1 4.6 1.8 4.0 3.0 1.6 - Livestock 5.3 6.4 3.0 2.5 2.3 8.0 - Fishing 7.3 3.6 3.4 2.0 2.2 1.9 - Forestry 6.4 -5.2 11.1 -3.2 -30.4 -9.7 2. Mining & Quarrying 9.5 2.7 6.6 15.6 9.6 3.8 3. Manufacturing 8.2 4.8 6.9 14.0 12.6 8.6 - Large Scale 8.2 3.6 7.2 18.1 15.6 9.0 - Small Scale * 8.4 7.8 7.5 7.5 7.5 9.3 4. Construction 4.7 2.6 4.0 -10.7 18.6 9.2 5. Electricity & Gas Distribution 10.1 7.4 -11.7 56.8 3.5 -8.4 Services Sector 6.6 4.6 5.2 5.9 8.0 8.8 6.2 5.1 4.3 3.5 3.6 7.2 6. Transport, Storage and

Communications
7. Wholesale & Retail Trade 8. Finance & Insurance 9. Ownership of Dwellings 10.Public Administration & Defence 11.Services 12.GDP (Constant Factor Cost) 13.GNP (Constant Factor Cost) * Slaughtering is included in small scale sector 7.2 6.0 7.9 5.4 6.5 6.1 5.5 3.7 5.9 8.4 11.1 9.9 5.8 -1.3 9.0 29.7 23.0 5.3 3.3 3.5 3.5 3.5 2.8 7.7 3.2 0.6 4.7 6.5 6.1 5.6 5.9 6.5 4.6 4.7 7.5 8.6 6.6 4.0 6.3 7.3 8.3 6.4 Source: Federal Bureau of Statistics and Economic Advisers Wing

i) Agriculture Agriculture Agriculture remains the single largest sector of the national economy. Although its share in GDP is declining since 2002-03, it still accounts for 21.6 percent of GDP and employed bulk of the total work force. Agriculture contributes to growth as a supplier of raw materials to industry as well as a market for industrial products and is the main source of foreign exchange. Approximately 66.7% of the countrys population live in rural areas and are directly or indirectly reliant on agriculture for their livelihood. The agriculture sector consists of crops, livestock, fishing and forestry sub-sectors. The crop sub-sector comprises major crops (primarily wheat, cotton, rice, sugarcane as well as maize and gram) and minor crops (such as pulses, potatoes, onions, chillies and garlic). The internal composition of the agriculture sector has changed over time and the share of crops sub-sector in agriculture has gradually declined from 65.1% in 1990-91 to 47.5% in 2005-06. By contrast, the share of livestock in the agriculture has increased from 29.8% to 49.6% in the same period. The contributions of fishing and forestry have been insignificant with only 1.3% and 1.6%, respectively. Growth in the agricultural sector was restrained during the outgoing fiscal year 2005-06. The performance of the agricultural sector remained less than satisfactory as it grew by only 2.5% with major crops and forestry registering negative growth of 3.6% and 9.7% respectively [See Table-1.2].

Growth and Investment The Governments long-term aim to improve the productivity of the agriculture has resulted in a number of incentives being offered to the sector in recent years. The Government announced a package of measures to boost agriculture which included proposals to line watercourses, reduce the price of fertilizers, provide over 600 bull-dozers for land development over three years, tax and duty relief for tractors and agricultural implements, loan and mark up relief and the extension of agricultural credit facilities. In order to address the countrys future water needs, existing dams are being upgraded and new dams are to be constructed. This includes upgrading the Mangla Dam, Gomal Zam Dam, Mirani Dam, Subak Zai Dam and Sadpara Dam. The agriculture sector was subjected to adverse weather conditions and grew by 2.5 percent as against the target of 4.2 percent and actual achievement of 6.7 percent last year. Two out of four major crops showed significant slippages and the major contribution to growth came alone from the livestock sector. The performance of various sub-sectors in detail is given in subsequent paragraphs. Major crops, Major crops, accounting for 35.2 percent of agricultural value added, depicted a negative growth of 3.6 percent as against impressive 17.8 percent growth last year. Besides measuring from a high base, value added in major crops registered a decline primarily on account of a 13.0 percent decrease in cotton production (12.4 million bales as against 14.3 million bales of last year) mainly on account of adverse weather conditions. Sugarcane is another major crop which registered negative growth of 6.2 percent (from47.2 million tones to 44.3 million tones). Rice and maize, the two major crops, registered a growth of 10.4 percent and 27.3 percent, respectively but failed to compensate the decline in two major crops. Wheat production marginally increased by 0.4 percent and stood at 21.7 million tons as against 21.6 million tons in 2005-06. It may be pointed out that these five crops account for over 90 percent of value addition in major crops. Minor crops, Minor crops, accounting for 12.3 percent of value added in overall agriculture, grew by 1.6 percent slight decline from last years growth of 3.0 percent. Production of pulses such as masoor, mung, and mash registered a sharp decline of 13.5%, 12.6%, and 9.8 percent respectively. Vegetables such as potatoes and onions exhibited mixed performance as the former registered a decline of 17.9 percent while the later posted a rise of 29.0 percent. Chillies, being an important minor crop, registered a sharp rise of 27.9 percent during the year under review. Livestock. Because livestock is less vulnerable to adverse weather conditions as compared to crops, it provides an alternative source of rural income. This sub-sector has grown by an average rate of 5.8% in the past ten years. In 2005-06 livestock accounted for 49.6% of agricultural value added and about 10.7% of GDP. The role of livestock in the rural economy is critical, with approximately 35 million people located in rural areas engaged in raising livestock, which generates approximately 30-40% of their income. Livestock includes: cattle, buffalos, sheep, goats, camels, horses, asses and mules. The livestock sector grew by 8.0 percent during 2005-06 as against 2.3 percent last year. Fisheries. The fisheries sector witnessed a growth of 2.1 percent against 2.0 percent last year. Components of fisheries such as marine fishing and inland fishing, contributed to an overall increase in value added in the fisheries sub-sector. Forestry. Forestry plays an important role in the Pakistani economy. Forests are important for the protection of land and water resources, particularly in prolonging the lives of dams, reservoirs and the irrigation network of canals. Forestry is also essential for maintaining a sustained supply of wood and wood products. Pakistan has only 5% of its total land area under forest which is very low as compared to other Asian countries. Of the 5% of total landmass that has forest cover, 85% is public forest, which includes 40% coniferous and scrub forests on the northern hills and mountains. The balance is made up of irrigated plantations and river rain forests along major rivers on the Indus plains, mangrove forests on the Indus delta and trees planted on farmlands. The value addition in forestry sector witnessed decline of 5.7 percent as against decline of 33.2 percent last year. This is the third year in a row when forestry is depicting negative growth.

Economic Survey 2005-06 Manufacturing Manufacturing is the second largest sector of the economy, accounting for 18.2% of GDP in 2005-06. Large-scale manufacturing, accounted for 69.9% of overall manufacturing, registered growth of 9.0% in 2005-06 against the target of 14.5% and last years achievement of 15.6%. Although large-scale manufacturing has lost some of the growth momentum but still the high levels of liquidity in the banking system, a stable exchange rate, comfortable foreign exchange reserves, stronger domestic demand for consumer durables, and high business confidence are supporting the growth momentum at high level of 9.0 percent. The main contributors to the 9.0% growth in 2005-06 were the textile and apparel group (7.0%), chemicals (14.8%), petroleum group (2.3%), tires and tubes group (12.2%), non-metallic mineral products (9.5%), engineering goods group (6.5%), electrical items group (11.8%), and automobile group (29.8%). The items that registered positive growth were cotton yarn (11.2%), vegetable ghee (13.2%), nitrogenous fertilizer (4.5%), phosphatic fertilizer (12.0%), cooking oil (17.6%), cement (9.8%), cigarettes (4.7%), jeeps and cars (29.9%), tractors (16.3%), L.C.Vs (29.3%), motorcycles/scooters (15.0%), paper and paper board (11.9%), T.V sets (12.2%), motor tyres (10.0%), refrigerators (11.3%) and caustic soda (5.9%). The individual items exhibiting negative growth include: sugar (2.4%), cotton ginned (10.9%) and billets (47.9%). Mining and Quarrying Pakistan has economically exploitable reserves of coal, rock salt, limestone and onyx marble, china clay, dolomite, fire clay, gypsum, silica sand and granite, as well as precious and semi-precious stones. Mineral deposits which may have sizeable reserves but require greater exploration including gold, copper, tin, silver, antimony, the platinum group of elements, tungsten, lead, bauxite and fluorite. The mining and quarrying sector grew by 3.8% in 2005-06 as against 9.6 percent growth last year. However, the sector contributed only 2.6% to GDP in 2005-06 which is slightly lower than last years 2.7 percent contribution. The main contribution to the growth of the mining and quarrying sector came from mining of aragonite marble, fire clay, limestone, coal and the extraction of natural gas which grew by 70.0%, 24.0%, 7.7%, 8.0% and 4.5%, respectively, in the first nine months of 2005-06. Because much of the countrys mining reserves exist in remote areas, infrastructure improvements are necessary to attract higher investment in this sector. Since 2000, the Government has implemented a mining policy under which imports of machinery have been allowed free of tariffs and restrictions on repatriation of profits by foreign investors have been removed. These measures have been successful in attracting foreign investment in the mining and quarrying sector. Services Sector The services sector in Pakistan consists primarily of wholesale and retail trade; transport, storage and communications; and financial and insurance services. In 2005-06, the services sector accounted for over 52.3% of GDP and absorbed approximately one-third of workforce in Pakistan. The services sector has been an important contributor to Pakistans economic growth over the past five years. The services sector grew by 5.9% in 2003-04, by 8.0% in 2004-05 and by 8.8% in 2005-06. Growth in the services sector in 2005-06 was primarily attributable to strong growth in the finance and insurance sector, better performance of wholesale and retail trade, as well as transport and the communications sector. Finance and insurance sector spearheaded the growth in the services sector and registered stellar growth of 23.0 percent during the current fiscal year 2005-06 which is slightly lower than 29.7 percent of last year. Value added in the wholesale and retail trade sector is based on the margins taken by traders on the transaction of commodities traded in the wholesale and retail market. In 2005-06, the gross value added in whole and retail trade increased by 9.9% over the previous year, compared to 11.1% growth in 2004-05. Value added in the transport, storage and communications sector is based primarily on the profits and losses of

Growth and Investment Pakistan Railways, Pakistan International Airlines and other airlines, Pakistan Posts & Courier Services, Pak Telecom and motor vehicles of different kinds on the road. In 2005-06, this sector grew by 7.1% from the previous year compared to 3.5% growth in 2004-05. The increase in the growth rate resulted primarily from strong consumer demand for mobile phones, internet services of Pak Telecom, and motor vehicles on road. Public administration and defense posted a growth of 4.7 percent while ownership of dwellings grew by 3.5 percent and social services sector maintained a growth rate of 6.5 percent. Sectoral Contribution to Real GDP Growth The economic growth is broad-based and is shared Table-1.3: Sectoral Contribution to the GDP growth (% Points) by all the major sectors of the economy. However, Sector 2002-03 2003-04 2004-05 2005-06 major contribution towards growth has come from Agriculture 1.04 0.55 1.54 0.55 the services sector which has emerged as a new Industry 1.01 3.84 2.91 1.54 - Manufacturing 1.10 2.28 2.17 1.53 growth power house for some time. The commodity Services 2.69 3.09 4.12 4.51 producing sectors (agriculture and industry) has 4.73 7.48 8.57 6.61 Real GDP (Fc) contributed one-third of the GDP growth and service Source: Federal Bureau of Statistics. sector contributed the remaining two-third to the real GDP growth of 6.6 percent. The CPS contributed 31.7 percent or 2.1 percentage point to this years growth while the remaining 68 percent or 4.5 percentage points contribution came from services sector. Within the CPS, agriculture contributed 0.55 percentage points or 8.4 percent to overall growth while industry contributed 1.54 percentage points or 23.3 percent (See table 1.3 and fig. 2 for details). The services sector is contributing bulk of growth for some time. The reliance on agriculture is minimizing with the passage of time. It is encouraging to note that the contribution of wholesale and retail trade is increasing. It has contributed 27.9 percent or 1.84 percentage points to GDP growth. This sector is a highly labour-intensive sector and this higher growth may have contributed to the rise in employment and income level of the people attached with the sector.
Fig-2: Contribution to the Real GDP Growth
2004-05
Other Industries 9% Agriculture 18%
Other Industries 0%

2005-06

Agriculture 8%

Services 48%

Manufacturing 25%
Services 69%

Manufact. 23%

Composition of the GDP The composition or the structure of the GDP has undergone considerable changes during the last three and a half decades (see Table 1.4 for details). The commodity producing sector (CPS) which accounted for almost 62 percent of the GDP in 1969-70, its share declined to almost 48 percent in 2005-06 - a decline of 14 percentage points. The decline in the share of CPS is fully accounted for by the equal rise in the share of services sector. Within the CPS, the contribution of agriculture is shrinking over the years. It has declined from almost 39 percent in 1969-70 to 21.6

Economic Survey 2005-06 percent in 2005-06 - a decline of 17 percentage points in three and a half decade. The share of agriculture in GDP has declined by 4.3 percentage points in the last 6 years alone. The exclusive concentration of the successive governments to four major crops, namely, wheat, cotton, sugarcane and rice and no or little effort to increase yield per acre or no policy support to diversification of agriculture sector are mainly responsible for the decline in the share of this sector. These four major crops only account for one - third of agricultural value added while rest of the two - third has received almost no attention from all the governments. Most importantly, livestock, which accounts for almost one - half of the agricultural value added, has been the major victim of the total neglect of the governments all along. As long as the government continues to concentrate on four major crops and neglect the rest, the contribution of agriculture to overall GDP will shrink rapidly in the next five to ten years because industry has been growing two to three times faster than agriculture and services sector has outpaced the growth in agriculture. During the last six years, the bulk of the impetus to growth is coming from the services and the manufacturing sector. The share of manufacturing in GDP has remained stagnant at around 16 percent for 33 years until 2002-03. Its contribution to GDP has surged only during the last three years - rising from 16.3 percent in 200203 to 18.2 percent in 2005-06. Almost two percentage points or 11.6 percent increase in just three years is an impressive performance. Within the services sector, almost all the components have raised their contribution over the last three and half decades but remained more or less stagnant since 2000-01. This simply suggests that the decline in the share of agriculture is fully compensated by the equal rise in the share of manufacturing with contribution from the services remaining more or less stagnant.
Table 1.4: Sectoral Share of Various Sectors in Gross Domestic Product (At Constant Factor Cost) (Percent) Commodity Producing Sector 1. Agriculture - Major Crops - Minor Crops - Livestock - Fishing - Forestry 2. Mining & Quarrying 3. Manufacturing - Large Scale - Small Scale 4. Construction 5. Electricity & Gas Distribution Services Sector 6. Transport, Storage and Communication 7. Wholesale and Retail Trade 8. Finance and Insurance 9. Ownership of Dwellings 10. Public Admn. & Defence 11. Other Services 12.GDP (Constant Factor Cost) P) Stands for provisional. 1969-70 61.6 38.9 23.4 4.2 10.6 0.5 0.1 0.5 16.0 12.5 3.5 4.2 2.0 38.4 6.3 13.8 1.8 3.4 6.4 6.7 100.0 2001-02 47.9 24.1 8.0 3.1 12.0 0.3 0.7 2.4 15.9 10.4 4.1 2.4 3.0 52.1 11.4 17.8 3.5 3.2 6.4 9.8 100.0 2002-03 2003-04 2004-05 2005-06 47.1 48.4 48.7 47.7 24.0 22.9 22.5 21.6 8.2 7.8 8.4 7.6 3.0 2.9 2.8 2.7 11.8 11.2 10.6 10.7 0.3 0.3 0.3 0.3 0.7 0.6 0.4 0.3 2.5 2.6 2.7 2.6 16.3 17.3 17.9 18.2 10.6 11.7 12.4 12.7 4.2 4.2 4.2 4.3 2.4 2.0 2.1 2.2 2.4 3.7 3.5 3.0 52.3 51.6 51.3 52.3 11.4 10.9 10.4 10.5 18.0 18.2 18.6 19.2 3.3 3.4 4.0 4.6 3.1 3.0 2.9 2.8 6.6 6.3 5.9 5.8 9.9 9.7 9.5 9.5 100.0 100.0 100.0 100.0 Source: Economic Advisers Wing, Finance Division

Growth and Investment Per Capita Income


Fig-4: Per Capita Income ($)

Per capita income is one of the main indicators of 860 847.0 820 economic well-being. It is historically regarded as a 780 simple reflection of the average level of prosperity in 742.0 740 the country or average standards of living of the 669.0 700 people in a country. Per capita income, defined as 660 Gross National Product at market price in dollar term 620 582.0 divided by the countrys population, grew at a much 580 slower pace of 1.4 percent per annum in the 1990s, 526.0 503.0 540 501.0 due mainly to slower economic growth, declining 500 trend in workers remittances and fast depreciating 460 exchange rate. The pendulum swung to other 420 extreme during the last few years and the per capita 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 income grew at a tremendous pace. The per capita income in dollar term has grown at an average rate of 13.6 percent per annum during the last three years rising from $ 669 in 2003-04 to $ 742 in 2004-05 and further to $ 847 in 2005-06. The main factor responsible for the sharp rise in per capita income include acceleration in real GDP growth, stable or even appreciation in exchange rate and four fold increase in the inflows of workers remittances. Per capita income in dollar term rose from $ 742 last year to $ 847 in 2005-06, depicting an increase of 13.6 percent. Fig. 4 shows the improvement in per capita income during the last six years. Investment and Savings Fixed investment is the key to sustain growth momentum. Fixed investment grew by 24.7 percent on average during the last three years (2003-06) while private investment grew by 24.6 percent per annum during this period. In the fiscal year 2005-06, gross fixed capital formation or domestic fixed investment grew by 30.7 percent as against 28.6 percent last year. The composition of investment between private and public sector has changed considerably during the last three years. Private sector investment grew by 31.6 percent this year as against 29.1 percent increase in last year. Public sector investment has also increased by 24.9 percent per annum during the last three years and 28.2 percent during the current fiscal year. Public sector investment has created spillovers for private sector investment through massive rise in public sector development program and infrastructure investment. In other words, the growth in domestic investment in the current year was largely a public-private partnership based growth where both sectors are working in tandem to augment growth spree in the economy. The government has vacated space for the private sector in the past but now the government is active player in infrastructure building and social sector development.
Table 1.5: Structure of Savings and Investment (As Percent of GDP) Description 2000-01 2001-02 2002-03 Total Investment 17.2 16.8 16.9 Changes in Stock 1.4 1.3 1.7 Gross Fixed Investment 15.8 15.5 15.3 - Public Investment 5.7 4.2 4.0 - Private Investment 10.2 11.3 11.3 Foreign Savings 0.7 -1.9 -3.8 National Savings 16.5 18.6 20.8 Domestic Savings 17.8 18.1 17.6 P: Provisional 2003-04 16.6 1.6 15.0 4.0 10.9 -1.3 17.9 15.7 2004-05 2005-06 (P) 18.1 20.0 1.6 1.6 16.5 18.4 4.4 4.8 12.1 13.6 1.6 3.7 16.5 16.4 14.5 14.4 Source: Economic Advisers Wing

Like growth, private sector investment was highly broad-based. Major growth in investment by private sector is witnessed in agriculture (15.3%), manufacturing (14.4%), mining and quarrying (45.5%), construction (9.5%),

Economic Survey 2005-06 transport and communication (20.2%), and wholesale and retail trade (424.5%). As a result of the sharp rise in private sector investment, its share in domestic fixed investment rose by 9.6 percentage points over last six years, that is, from 64.2 percent to 73.8 percent. Public sector investment lost as much ground in favour of private sector. All sectors of the economy witnessed double digit increase in investment. In the public sector investment, only post office and telegraph witnessed negative growth. On the other hand, public sector investment rose sharply by 185.5 percent in electricity and gas distribution. General government investment was however, up by 11.6 percent in 200506. As percentage of GDP, total investment provisionally estimated at 20.0 percent as against 18.1 percent last year. 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. The contribution of national savings to the domestic investment is indirectly the mirror image of foreign savings required to meet investment demand. The requirement for foreign savings simply reflects the current account deficit in the balance of payments. National savings were not able to finance the demand for the growing economy and the recourse to foreign savings to the extent of 3.7 percent of GDP reflects the saving-investment gap. National savings as percentage of GDP stood at 16.4 percent in 2005-06 fractionally lower than last years level of 16.5 percent.

10

TABLE 1.1 GROSS NATIONAL PRODUCT AT CONSTANT FACTOR COST OF 1999-2000


(Rs million) % Change 2005-06/ 2004-05 4.3 2.5 -3.6 1.6 8.0 1.9 -9.7 5.9 3.8 8.6 9.0 9.3 2.4 9.2 -8.4 8.8 7.2 9.9 23.0 3.5 4.7 6.5 6.6 0.0 0.0 6.2 -3.6 6.4 6.0 1.9 4.5

Sectors COMMODITY PROD. SECTOR 1 Agriculture Major Crops Minor Crops Livestock Fishing Forestry A1. INDUSTRIAL SECTOR 2 Mining & Quarrying 3 Manfacturing Large Scale Small & Household Slaughtering 4 Construction 5 Electricity and Gas Distrubution SERVICES SECTOR 6 Transport, Storage & Communication 7 Wholesale & Retail Trade 8 Finance & Insurance 9 Ownership of Dwellings 10 Public Admn. & Defence 11 Services 12 GDP (fc) 13 Indirect Taxes 14 Subsidies 15 GDP(mp) 16 Net Factor Income from abroad 17 GNP(fc) 18 19 GNP (mp) Population (in million) 20 Per Capita Income(fc-Rs) 21 Per Capita Income(mp-Rs) R: Revised

1999-00 1,754,474 923,609 342,200 125,679 417,120 15,163 23,447 830,865 81,052 522,801 338,602 132,369 51,830 87,386 139,626 1,807,546 400,983 621,842 132,454 110,425 220,291 321,551 3,562,020 295,815 31,724 3,826,111 -47,956 3,514,064 3,778,155 137.5 25,551 27,471

2000-01 1,768,695 903,499 308,474 121,673 433,066 14,715 25,571 865,196 85,528 571,357 375,687 142,310 53,360 87,846 120,465 1,863,396 422,195 649,564 112,455 114,593 225,152 339,437 3,632,091 301,920 32,050 3,901,961 -47,285 3,584,806 3,854,676 140.4 25,540 27,463

2001-02 1,792,972 904,433 300,911 117,217 448,968 12,901 24,436 888,539 90,431 596,841 388,859 152,997 54,985 89,241 112,026 1,952,146 427,296 667,615 131,761 118,604 240,585 366,285 3,745,118 312,886 30,227 4,027,777 22,594 3,767,712 4,050,371 143.2 26,316 28,291

2002-03 1,869,406 943,223 321,038 119,359 462,330 13,346 27,150 926,183 96,418 638,044 416,955 164,487 56,602 92,789 98,932 2,052,901 445,552 707,145 130,081 122,466 259,148 388,509 3,922,307 355,323 54,451 4,223,179 127,050 4,049,357 4,350,229 146.8 27,594 29,644

2003-04 2,041,635 964,827 327,057 124,121 473,745 13,611 26,293 1,076,808 111,473 727,439 492,632 176,841 57,966 82,818 155,078 2,173,947 461,276 766,693 141,768 126,764 267,321 410,125 4,215,582 372,029 53,488 4,534,123 90,721 4,306,303 4,624,844 149.7 28,776 30,904

2004-05 R 2,229,509 1,029,845 385,119 127,822 484,684 13,916 18,304 1,199,664 122,178 818,809 569,325 190,121 59,363 98,190 160,487 2,347,552 477,701 851,744 183,900 131,214 268,826 434,167 4,577,061 383,827 63,954 4,896,934 88,766 4,665,827 4,985,700 152.5 30,590 32,687

2005-06 P 2,325,295 1,055,240 371,140 129,903 523,489 14,185 16,523 1,270,055 126,813 889,036 620,507 207,723 60,806 107,219 146,987 2,554,201 512,198 936,091 226,113 135,820 281,496 462,483 4,879,496 383,827 63,954 5,199,369 85,572 4,965,068 5,284,941 155.4 31,956

2004-05/ 2003-04 9.2 6.7 17.8 3.0 2.3 2.2 -30.4 11.4 9.6 12.6 15.6 7.5 2.4 18.6 3.5 8.0 3.6 11.1 29.7 3.5 0.6 5.9 8.6 3.2 19.6 8.0 -2.2 8.3 7.8 1.9 6.3

34,015 5.8 4.1 Source : Federal Bureau of Statistics

TABLE 1.2 SECTORAL SHARE IN GDP


Sector COMMODITY PROD. SECTOR 1. Agriculture Major Crops Minor Crops Livestock Fishing Forestry A1. INDUSTRIAL SECTOR 2. Mining & Quarrying 3. Manfacturing Large Scale Small & Household Slaughtering 4. Construction 5. Electricity and Gas Distrubution SERVICES SECTOR 6. Transport, Storage & Communication 7. Wholesale & Retail Trade 8. Finance & Insurance 9. Ownership of Dwellings 10. Public Admn. & Defence 11. Services 12. GDP (fc) R: Revised P: Provisional 1999-2000 49.3 25.9 9.6 3.5 11.7 0.4 0.7 23.3 2.3 14.7 9.5 3.7 1.5 2.5 3.9 50.7 11.3 17.5 3.7 3.1 6.2 9.0 100.0 2000-01 48.7 24.9 8.5 3.3 11.9 0.4 0.7 23.8 2.4 15.7 10.3 3.9 1.5 2.4 3.3 51.3 11.6 17.9 3.1 3.2 6.2 9.3 100.0 2001-02 47.9 24.1 8.0 3.1 12.0 0.3 0.7 23.7 2.4 15.9 10.4 4.1 1.5 2.4 3.0 52.1 11.4 17.8 3.5 3.2 6.4 9.8 100.0 2002-03 47.7 24.0 8.2 3.0 11.8 0.3 0.7 23.6 2.5 16.3 10.6 4.2 1.4 2.4 2.5 52.3 11.4 18.0 3.3 3.1 6.6 9.9 100.0 2003-04 R 48.4 22.9 7.8 2.9 11.2 0.3 0.6 25.5 2.6 17.3 11.7 4.2 1.4 2.0 3.7 51.6 10.9 18.2 3.4 3.0 2004-05 P 48.7 22.5 8.4 2.8 10.6 0.3 0.4 26.2 2.7 17.9 12.4 4.2 1.3 2.1 3.5 51.3 10.4 18.6 4.0 2.9 (%) 2005-06 P 47.7 21.6 7.6 2.7 10.7 0.3 0.3 26.0 2.6 18.2 12.7 4.3 1.2 2.2 3.0 52.3 10.5 19.2 4.6 2.8

6.3 5.9 5.8 9.7 9.5 9.5 100.0 100.0 100.0 Source: Federal Bureau of Statistics.

TABLE 1.3 REAL GDP / GNP GROWTH RATES


Sector COMMODITY PROD. SECTOR 1. Agriculture Major Crops Minor Crops Livestock Fishing Forestry A1. INDUSTRIAL SECTOR 2. Mining & Quarrying 3. Manfacturing Large Scale Small & Household Slaughtering 4. Construction 5. Electricity and Gas Distrubution SERVICES SECTOR 6. Transport, Storage & Communication 7. Wholesale & Retail Trade 8. Finance & Insurance 9. Ownership of Dwellings 10. Public Admn. & Defence 11. Services 12. GDP (fc) R: Revised P: Provisional 2000-01 0.8 -2.2 -9.9 -3.2 3.8 -3.0 9.1 4.1 5.5 9.3 11.0 7.5 3.0 0.5 -13.7 3.1 5.3 4.5 -15.1 3.8 2.2 5.6 2.0 2001-02 1.4 0.1 -2.5 -3.7 3.7 -12.3 -4.4 2.7 5.7 4.5 3.5 7.5 3.0 1.6 -7.0 4.8 1.2 2.8 17.2 3.5 6.9 7.9 3.1 2002-03 4.3 4.3 6.7 1.8 3.0 3.4 11.1 4.2 6.6 6.9 7.2 7.5 2.9 4.0 -11.7 5.2 4.3 5.9 -1.3 3.3 7.7 6.1 4.7 2003-04 9.2 2.3 1.9 4.0 2.5 2.0 -3.2 16.3 15.6 14.0 18.1 7.5 2.4 -10.7 56.8 5.9 3.5 8.4 9.0 3.5 2004-05 R 9.2 6.7 17.8 3.0 2.3 2.2 -30.4 11.4 9.6 12.6 15.6 7.5 2.4 18.6 3.5 8.0 3.6 11.1 29.7 3.5 (%) 2005-06 P 4.3 2.5 -3.6 1.6 8.0 1.9 -9.7 5.9 3.8 8.6 9.0 9.3 2.4 9.2 -8.4 8.8 7.2 9.9 23.0 3.5

3.2 0.6 4.7 5.6 5.9 6.5 7.5 8.6 6.6 Source: Federal Bureau of Statistics.

TABLE 1.4 EXPENDITURE ON GROSS NATIONAL PRODUCT AT CONSTANT PRICES OF 1999-2000


(Rs million) % Change 2004-05/ 2005-06/ 2003-04 2004-05 13.12 1.67 9.26 9.29 9.59 40.49 7.29 -2.15 8.09 4.83 10.33 5.99 12.94 23.91 6.23 -3.60

Flows Private Consumption Expenditure General Govt. Current Consumption Expenditure Gross Domestic Fixed Capital Formation Change in Stocks Export of Goods and Non-Factor Services Less Imports of Goods and Non-Factor Services Expenditure on GDP at Market Prices Plus Net Factor Income from the Rest of the World Expenditure on GNP at at Market Prices Less Indirect Taxes Plus Subsidies GNP at Factor Cost R: Revised P: Provisional

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05 R 3,678,649 396,818 674,954 80,552 878,886 845,118 4,864,741 88,766 4,953,507 358,455 69,889 4,664,941

2005-06 P 3,976,319 415,985 744,654 85,381 992,587 1,047,161 5,167,765 85,572

2,791,346 390,691 607,410 51,700 514,280 561,990 3,793,437 -47,957 3,745,480 295,815 31,724 3,481,389

2,856,556 312,070 634,423 58,138 576,936 574,130 3,863,993 -47,284 3,816,709 301,920 32,050 3,546,839

2,900,987 358,968 632,134 53,491 634,399 591,602 3,988,377 22,594 4,010,971 312,886 30,227 3,728,312

2,915,436 384,825 658,070 71,051 814,425 657,983 4,185,824 127,050 4,312,874 355,323 54,451 4,012,002

3,251,947 390,319 617,731 73,703 801,982 601,559 4,534,123 90,721 4,624,844 372,029 53,488 4,306,303

5,253,337 7.11 6.05 376,449 -3.65 5.02 87,357 30.66 24.99 4,964,245 8.33 6.42 Source: Federal Bureau of Statistics.

TABLE 1.5 GROSS NATIONAL PRODUCT AT CURRENT FACTOR COST


(Rs million) % Change 2004-05/ 2005-06/ 2003-04 2004-05 18.2 8.3 20.0 2.1 22.6 19.2 18.8 10.4 4.6 4.6 -25.6 9.0 -14.7 19.2 22.7 20.9 26.2 25.0 10.7 11.0 24.8 10.5 32.8 16.6 7.9 17.5 22.6 41.8 13.1 10.0 15.7 18.2 2.9 39.5 16.7 8.0 17.9 16.5 1.9 15.7 14.3 10.9 4.8 23.8 23.6 33.1 12.0 13.5 15.3 17.6 16.1 38.2 17.2 12.6 17.5 17.1 1.9 15.3 15.0 14.1

Sectors Agriculture Major Crops Minor Crops Livestock Fishing Forestry 2. Mining & Quarrying 3. Manfacturing Large Scale Small & Household Slaughtering 4. Construction 5. Electricity and Gas Distrubution 6. Transport, Storage & Communication 7. Wholesale & Retail Trade 8. Finance & Insurance 9. Ownership of Dwellings 10. Public Admn. & Defence 11. Services 12. GDP (fc) 13. Indirect Taxes 14. Subsidies 15. GDP(mp) 16. Net Factor Income from abroad 17. GNP(fc) 18. GNP (mp) 19. Population (in million) 20. Per Capita Income(fc-Rs) 21. Per Capita Income(mp-Rs) 22. Per Capita Income(mp-US $) 23. GDP Deflator Index Growth R: Revised P: Provisional 1.

1999-00 923,609 342,200 125,679 417,120 15,163 23,447 81,052 522,801 338,602 132,369 51,830 87,386 139,626 400,983 621,842 132,454 110,425 220,291 321,551 3,562,020 295,815 31,724 3,826,111 -47,956 3,514,064 3,778,155 137.53 25,551 27,471 526 100.00

2000-01 945,301 325,579 130,679 446,058 16,546 26,439 59,151 608,132 410,879 143,463 53,790 94,670 133,091 512,997 691,854 116,997 124,359 235,039 354,434 3,876,025 320,669 34,040 4,162,654 -54,482 3,821,543 4,108,172 140.36 27,227 29,269 501 106.72 6.72

2001-02 968,291 316,857 133,136 476,310 16,377 25,611 65,997 642,850 424,089 161,734 57,027 95,197 134,350 542,828 720,812 142,424 126,454 260,042 395,967 4,095,212 339,262 32,775 4,401,699 23,665 4,118,877 4,425,364 143.17 28,769 30,910 503 109.35 2.47

2002-03 1,059,316 370,117 130,450 512,976 16,625 29,148 84,238 725,434 481,374 244,060 0 100,880 120,556 609,929 785,776 144,989 135,139 285,854 429,301 4,481,412 403,221 61,791 4,822,842 151,812 4,633,224 4,974,654 146.75 31,572 33,899 579 114.25 4.49

2003-04 R 1,164,751 411,836 126,372 578,218 16,728 31,597 208,290 902,486 621,899 200,626 79,961 115,497 190,713 675,623 896,357 165,230 146,264 312,105 473,211 5,250,527 455,549 65,496 5,640,580 124,478 5,375,005 5,765,058 149.65 35,917 38,524 669 124.55 9.01

2004-05 R 1,377,147 494,266 154,932 686,939 17,490 23,520 177,658 1,107,077 785,100 222,176 99,801 153,333 205,814 793,680 1,098,758 234,215 165,441 343,348 547,418 6,203,889 468,573 91,359 6,581,103 134,490 6,338,379 6,715,593 152.53 41,555 44,028 742 135.54 8.83

2005-06 P 1,491,972 504,868 184,707 758,470 18,290 25,637 211,851 1,338,353 981,518 246,588 110,247 178,819 215,662 982,353 1,358,309 311,741 185,376 389,545 631,229 7,295,210 544,120 126,266 7,713,064 151,411 7,446,621 7,864,475 155.37 47,928 50,618 847

149.51 10.30 Source : Federal Bureau of Statistics

TABLE 1.6 EXPENDITURE ON GROSS NATIONAL PRODUCT AT CURRENT PRICES


(Rs million) % Change 2004-05/ 2005-06/ 2003-04 2004-05 22.61 10.25 28.62 16.67 15.40 54.05 16.67 8.04 22.31 14.31 30.73 17.20 17.26 48.26 17.20 12.58

Flows

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05 R 5,131,051 509,864 1,086,684 105,298 1,019,771 1,271,565 6,581,103 134,490 6,715,593 468,573 91,359 6,338,379

2005-06 P 6,275,651 582,832 1,420,595 123,409 1,195,770 1,885,193 7,713,064 151,411

Private Consumption Expenditure 2,851,346 3,163,874 General Government Current Consumption Expenditure 330,691 327,562 Gross Domestic Fixed Capital Formation 607,410 659,325 Change in Stocks 51,700 56,200 Export of Goods and NonFactor Services 514,280 617,148 Less Imports of Goods and Non-Factor Services 561,990 661,455 Expenditure on GDP at Market Prices 3,793,437 4,162,654 Plus Net Factor Income from the rest of the world -47,957 -54,482 Expenditure on GNP at Market Prices 3,745,480 4,108,172 Less Indirect Taxes 295,815 320,669 Plus Subsidies 31,724 34,040 GNP at Factor Cost 3,481,389 3,821,543 R: Revised P: Provisional Note: Private Consumption Expenditure has been taken as residual

3,278,905 388,446 680,373 58,000 677,855 681,880 4,401,699 23,665 4,425,364 339,262 32,775 4,118,877

3,548,157 428,689 736,433 80,629 815,158 786,224 4,822,842 151,812 4,974,654 403,221 61,791 4,633,224

4,184,717 462,462 844,847 90,249 883,704 825,399 5,640,580 124,478 5,765,058 455,549 65,496 5,375,005

7,864,475 16.49 17.11 544,120 2.86 16.12 126,266 39.49 38.21 7,446,621 17.92 17.48 Source: Federal Bureau of Statistics.

TABLE 1.7 GROSS FIXED CAPITAL FORMATION (GFCF) IN PRIVATE, PUBLIC, AND GENERAL GOVERNMENT SECTORS BY ECONOMIC ACTIVITY AT CURRENT MARKET PRICES
Sector 1999-2000 2000-01 659,325 423,097 169,242 66,986 592,339 67,147 33,694 151,020 128,826 22,194 13,589 67,628 104,679 8,589 5,104 87,448 53,441 2001-02 680,373 496,464 113,523 70,386 609,987 69,604 48,996 168,055 143,005 25,050 15,163 56,865 86,360 10,375 10,158 87,833 56,579 2002-03 736,433 545,104 104,051 87,278 649,155 75,681 77,430 164,920 136,066 28,854 7,130 57,562 82,864 12,533 23,366 91,379 56,290 2003-04 844,836 616,514 103,536 124,786 720,050 81,159 18,651 203,929 164,572 39,357 10,113 25,261 148,646 17,192 27,945 110,398 76,754 2004-05 R 1,086,684 796,086 137,562 153,036 933,648 88,420 18,162 247,166 195,655 51,511 17,821 48,035 231,061 21,379 31,989 129,247 100,368 2005-06 P 1,420,595 1,048,035 201,803 170,757 1,249,838 101,939 24,822 288,784 221,359 67,425 19,971 74,833 305,335 112,142 42,284 151,055 128,673 2004-05/ 2003-04 28.6 29.1 32.9 22.6 29.7 8.9 -2.6 21.2 18.9 30.9 76.2 90.2 55.4 24.4 14.5 17.1 30.8 (Rs million) % Change 2005-06/ 2004-05 30.7 31.6 46.7 11.6 33.9 15.3 36.7 16.8 13.1 30.9 12.1 55.8 32.1 424.5 32.2 16.9 28.2 (Contd.)

GFCF (A+B+C) 607,410 394,749 A. Private Sector 146,912 B. Public Sector C. General Govt. 65,749 Private & Public (A+B) 541,661 SECTOR-WISE: 1. Agriculture 75,434 2. Mining and Quarrying 18,221 3. Manfacturing (A+B) 140,345 120,532 A. Large Scale 19,813 B. Small Scale* 4. Construction 15,117 5. Electricity & Gas 67,354 6. Transport and Communication 80,081 7. Wholesale and Retail Trade 7,111 8. Finance & Insurance 9,992 9. Ownership of Dwellings 77,973 9. Services 50,033 P: Provisional R: Revised * Slaughtering is included in small scale sector

TABLE 1.7 GROSS FIXED CAPITAL FORMATION (GFCF) IN PRIVATE SECTOR BY ECONOMIC ACTIVITY AT CURRENT MARKET PRICES
Sector 1999-2000 2000-01 423,097 66,468 13,230 137,127 114,933 22,194 11,360 15,258 31,697 8,589 87,448 2,827 49,093 2001-02 496,464 65,636 26,710 166,657 141,607 25,050 11,689 35,141 31,476 10,375 87,833 7,996 52,951 2002-03 545,104 74,293 48,252 163,520 134,666 28,854 4,178 26,417 51,381 12,533 91,379 20,897 52,254 2003-04 616,514 81,050 12,701 200,521 161,162 39,359 6,608 3,039 86,951 17,192 110,398 26,599 71,455 2004-05 R 796,086 88,304 12,272 245,026 193,515 51,511 13,415 9,108 153,067 21,379 129,247 30,660 93,608 2005-06 P 1,048,035 101,798 17,852 280,273 212,848 67,425 14,691 26,005 183,974 112,142 151,055 40,262 119,983 (Rs million) % Change 2004-05/ 2005-06/ 2003-04 2004-05 29.1 31.6 9.0 -3.4 22.2 20.1 30.9 103.0 199.7 76.0 24.4 17.1 15.3 31.0 15.3 45.5 14.4 10.0 30.9 9.5 185.5 20.2 424.5 16.9 31.3 28.2 (Contd.)

PRIVATE 394,749 SECTORS 1. Agriculture 72,513 2. Mining and Quarrying 13,108 3. Manufacturing 119,158 Large Scale 99,345 Small Scale* 19,813 4. Construction 12,373 5. Electricity & Gas 15,169 6. Transport & Communication 23,868 7. Wholesale and Retail Trade 7,111 8. Ownership of Dwellings 77,973 9. Finance & Insurance 6,312 10.Services 47,164 R: Revised P: Provisional * Slaughtering is included in small scale sector

TABLE 1.7 GROSS FIXED CAPITAL FORMATION (GFCF) IN PUBLIC AND GENERAL GOVERNMENT SECTORS BY ECONOMIC ACTIVITY AT CURRENT MARKET PRICES
Sector Public Sector and General Govt. (A+B) A. Public Sector 1. Agriculture 2. Mining and Quarrying 3. Manufacturing Large Scale Small Scale 4. Construction 5. Electricity & Gas 6. Transport and Communication Railways Post Office & PTC Others 7. Wholesale and Retail Trade 8. Finance & Insurance 9. Services B. General Govt. Federal Provincial Local Bodies R: Revised P: Provisional - Nil .. Not available 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 R 290,598 137,562 116 5,890 2,140 2,140 4,406 38,927 77,994 3,439 10,762 63,793 1,329 6,760 153,036 38,938 71,567 42,531 2005-06 P 372,560 201,803 141 6,970 8,511 8,511 5,280 48,828 121,361 4,458 4,220 112,683 (Rs million) % Change 2005-06/ 2004-05/ 2003-04 2004-05 27.3 32.9 6.4 -1.0 -37.2 -37.2 25.7 75.2 26.4 3.1 84.5 21.5 28.2 46.7 21.6 18.3 297.7 297.7 19.8 25.4 55.6 29.6 -60.8 76.6 -

212,661 146,912 2,921 5,113 21,187 21,187 2,744 52,185 56,213 369 27,438 28,406 3,680 2,869 65,749 24,980 31,763 9,006

236,228 169,242 680 20,463 13,893 13,893 2,229 52,370 72,982 2,473 31,239 39,270 2,277 4,348 66,986 24,029 31,371 11,586

183,909 113,523 3,968 22,285 1,398 1,398 3,474 21,724 54,884 5,376 26,440 23,068 2,162 3,628 70,386 29,657 17,729 23,000

191,329 104,051 1,388 29,178 1,400 1,400 2,952 31,145 31,483 3,133 6,699 21,654 2,469 4,036 87,278 31,581 26,689 29,008

228,322 103,536 109 5,950 3,410 3,410 3,505 22,222 61,695 3,336 5,834 52,525 1,346 5,299 124,786 41,304 50,059 33,423

2,022 -1.3 52.1 8,690 27.6 28.6 170,757 22.6 11.6 51,133 -5.7 31.3 74,856 43.0 4.6 44,768 27.3 5.3 Source: Federal Bureau of Statistics.

TABLE 1.8 GROSS FIXED CAPITAL FORMATION (GFCF) IN PRIVATE, PUBLIC AND GENERAL GOVERNMENT SECTORS BY ECONOMIC ACTIVITY AT CONSTANT MARKET PRICES OF 1999-2000
Sector 1999-2000 2000-01 634,422 406,003 163,175 65,244 228,419 64,965 32,610 142,550 120,952 21,598 12,283 65,582 101,023 8,369 4,957 84,926 51,915 2001-02 632,133 459,634 105,388 67,111 172,499 64,953 45,169 153,417 129,781 23,636 13,347 52,804 80,582 9,925 9,552 82,596 53,006 2002-03 658,070 485,849 91,475 80,746 172,221 66,762 66,738 149,275 120,969 28,306 6,606 50,119 74,151 11,692 21,265 83,163 49,996 2003-04 617,731 447,212 72,763 97,756 170,519 55,779 12,232 144,010 115,700 28,310 7,919 16,934 105,851 13,760 22,025 87,010 54,455 2004-05 R 674,954 489,968 80,073 104,913 184,986 49,918 9,512 148,169 117,187 30,982 13,153 25,978 137,577 15,163 22,118 89,364 59,089 2005-06 P 744,655 543,727 98,081 102,847 200,928 47,216 10,371 146,168 112,262 33,906 13,962 32,628 193,513 17,875 25,655 91,648 62,770 2004-05/ 2003-04 9.3 9.6 10.0 7.3 8.5 -10.5 -22.2 2.9 1.3 9.4 66.1 53.4 30.0 10.2 0.4 2.7 8.5 (Rs million) % Change 2005-06/ 2004-05 10.3 11.0 22.5 -2.0 8.6 -5.4 9.0 -1.4 -4.2 9.4 6.2 25.6 40.7 17.9 16.0 2.6 6.2 (..Contd.)

GFCF (A+B+C) 607,410 A. Private Sector 394,749 B. Public Sector 146,912 C. General Govt. 65,749 Private & Public (A+B) 212,661 SECTOR-WISE: 1. Agriculture 75,434 2. Mining and Quarrying 18,221 3. Manfacturing 140,345 Large Scale 120,532 Small Scale* 19,813 4. Construction 15,117 5. Electricity & Gas 67,354 6. Transport and Communication 80,081 7. Wholesale and Retail Trade 7,111 8. Finance & Insurance 9,992 9.Ownerships of Dwellings 77,973 10. Services 50,033 R: Revised P: Provisional - Not available * Slaughtering is included in small scale sector

TABLE 1.8 GROSS FIXED CAPITAL FORMATION (GFCF) IN PRIVATE SECTOR AT CONSTANT MARKET PRICES OF 1999-2000
Sector PRIVATE SECTOR 1999-2000 394,749 2000-01 406,003 64,307 12,805 129,506 107,908 21,598 10,268 14,796 30,590 8,369 84,926 2,745 47,691 2001-02 459,634 61,250 24,624 151,822 128,186 23,636 10,289 32,632 29,370 9,925 82,596 7,519 49,607 2002-03 485,849 65,537 41,589 145,588 119,724 25,864 3,871 23,001 45,979 11,692 83,163 19,018 46,411 2003-04 447,213 55,704 8,330 141,613 113,303 28,310 5,175 2,044 61,918 13,760 87,010 20,964 50,695 2004-05 R 489,967 49,853 6,427 146,887 115,905 30,982 9,901 4,926 91,138 15,163 89,364 21,199 55,109 2005-06 P 543,728 47,151 7,459 141,852 107,946 33,906 10,271 11,339 133,174 17,875 91,648 24,428 58,531 (Rs million) % Change 2004-05/ 2005-06/ 2003-04 2004-05 9.6 11.0 -10.5 -22.8 3.7 2.3 9.4 91.3 141.0 47.2 10.2 2.7 1.1 8.7 -5.4 16.1 -3.4 -6.9 9.4 3.7 130.2 46.1 17.9 2.6 15.2 6.2 (..Contd.)

1. Agriculture 72,513 2. Mining and Quarrying 13,108 3. Manufacturing 119,158 Large Scale 99,345 Small Scale* 19,813 4. Construction 12,373 5. Electricity & Gas 15,169 6. Transport & Communication 23,868 7. Wholesale and Retail Trade 7,111 8.Ownership of Dwellings 77,973 9. Finance & Insurance 6,312 10.Services 47,164 R: Revised P: Provisional - Nil * : Slaughtering is included in small scale sector.

TABLE 1.8 GROSS FIXED CAPITAL FORMATION (GFCF) IN PUBLIC AND GENERAL GOVERNMENT SECTORS AT CONSTANT MARKET PRICES OF 1999-2000
Sector Public and General Government (A+B) A. Public Sector 1. Agriculture 2. Mining and Quarrying 3. Manufacturing 4. Construction 5. Electricity & Gas 6. Transport and Communication Railways Post Office & T&T Others 7. Wholesale and Retail Trade 8. Finance & Insurance 9. Services B. General Govt. Federal Provincial Local Bodies R: Revised P: Provisional 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 R 184,987 80,074 65 3,085 1,282 3,252 21,052 46,439 2,048 6,408 37,983 919 3,980 104,913 26,694 49,062 29,157 2005-06 P 200,926 98,079 65 2,912 4,316 3,691 21,290 60,339 2,216 2,098 56,025 (Rs million) % Change 2004-05/ 2005-06/ 2003-04 2004-05 8.5 10.0 -13.3 -20.9 -46.5 18.5 41.4 5.7 -13.8 54.3 1.6 8.6 22.5 0.0 -5.6 236.7 13.5 1.1 29.9 8.2 -67.3 47.5 -

212,661 146,912 2,921 5,113 21,187 2,744 52,185 56,213 369 27,438 28,406 3,680 2,869 65,749 24,980 31,763 9,006

228,419 163,175 658 19,805 13,044 2,015 50,785 70,433 2,387 30,148 37,898 2,211 4,224 65,244 23,404 30,555 11,285

172,499 105,388 3,703 20,545 1,265 3,058 20,173 51,212 5,016 24,671 21,525 2,033 3,399 67,111 28,277 16,904 21,930

172,221 91,476 1,224 25,149 1,245 2,735 27,118 28,173 2,804 5,992 19,377 2,247 3,585 80,745 29,217 24,691 26,837

170,518 72,762 75 3,902 2,397 2,745 14,890 43,933 2,376 4,154 37,403 1,061 3,759 97,756 32,357 39,216 26,183

1,227 -13.4 33.5 4,239 5.9 6.5 102,847 7.3 -2.0 30,797 -17.5 15.4 45,086 25.1 -8.1 26,964 11.4 -7.5 Source: Federal Bureau of Statistics.

Chapter 2.

AGRICULTURE

Agriculture is the mainstay of Pakistans economy. Nearly twenty-two percent of total output (GDP) and 44.8 percent of total employment is generated in agriculture. It also contributes substantially to Pakistans exports. Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products. Not only that 44.8 percent of countrys work force is employed in agriculture but 65.9 percent of countrys population living in rural areas is directly or indirectly linked with agriculture for their livelihood. Whatever happens to agriculture is bound to affect not only the countrys growth performance but to a large segment of the countrys population as well. Over the last five years agriculture growth has witnessed a mixed trends. During the first two years (2000-01 and 2001-02), the country experienced the crippling drought, which badly affected its agriculture and eventually overall growth in agriculture turned negative for these two years. In the preceding years (2002-03 to 2004-05), relatively better availability of irrigation water had positive impact on overall agricultural growth and this sector exhibited modest to strong recovery (Table 2.1).
Table 2.1: Agriculture Growth (Percent) Year Agriculture Major Crops Minor Crops 2000-01 -2.2 -9.9 -3.2 2001-02 -0.1 -2.5 -3.7 2002-03 4.1 6.9 0.4 2003-04 2.3 1.9 4.0 2004-05 6.7 17.8 3.0 2005-06 (P) 2.5 -3.6 1.6 P= Provisional. Source: Federal Bureau of Statistics

The performance of agriculture during the fiscal year 2005-06 has been weak. Against the target of 4.2 percent and last years achievement of 6.7 percent, overall agriculture grew by 2.5 percent in 2005-06 on the back of poor showing of major crops and forestry, and weaker performance of minor crops and fishery. Livestock has been the sole saving grace. Major corps, accounting for 35.2 percent of value added in agriculture, registered a decline of 3.6 percent as production of two of the four major crops, namely cotton and sugarcane has been significantly less than last year for a variety of reasons including excessive rains at the time of sowing, high temperature at flowering stage, late harvesting of wheat crop, strong base effect (cotton) and incidence of frost, damaging sugarcane crop in the month of January, 2006. The production of third major crop, wheat remained more or less at last years level at 21.7 million tons thereby registering a meager growth of 0.4 percent. The production of rice the fourth major crop has been the sole major crop which registered an impressive growth of 10.4 percent but failed to turn the negative growth in major crops to a positive one. Minor crops, accounting for 12.3 percent of agricultural value added barely managed to register a positive growth of 1.6 percent in 2005-06 as against a growth of 3.0 percent last year. The performance of livestock, the single largest sector accounting for almost one half of agricultural value added, has been impressive as this sector grew by 8.0 percent on the back of substantial increase in the population of species, milk etc. The performance of fisheries has been poor as it grew by 1.9 percent only in 2005-06. Forestry has been registering negative growth for three consecutive years registering a negative growth of 9.7 percent in 2005-06 as against a negative growth of 30.4 percent. Pakistans agriculture has been suffering, off and on, from severe shortage of irrigation water in recent years. As shown in Table 2.2, against the normal surface water availability at canal heads of 103.5 million-acre feet (MAF), the overall (both for Kharif and Rabi) water availability has been less in the range of 5.9 percent (2003-04) to 29.4

11

Economic Survey 2005-06 percent (2001-02). Relatively speaking, Rabi season faced more shortage of water than Kharif during these periods. During the current fiscal year (2005-06), the Table: 2.2 Actual Surface Water Availability availability of water for Kharif 2005 (for the crops Period Kharif Rabi Total such as rice, sugarcane and cotton) has been 5.5 Normal (1977-01) 67.1 36.4 103.5 percent more than the normal supplies and 19.8 2001-02 54.7 18.4 73.1 percent more than last years Kharif (see Table 2.2). 2002-03 62.8 25.0 87.8 Excessive winter rainfalls (January-March 2005) 2003-04 65.9 31.5 97.4 along with melting of snow on mountains top were 2004-05 59.1 23.1 82.2 2005-06 70.8 30.0 100.8 responsible for higher than normal availability of Source: Ministry of Food and Agriculture. water during Kharif 2005. The water availability during Rabi season (for major crop such as wheat), as on end of March, 2006 was estimated at 30.0 MAF, which was 17.3 percent less than the normal availability, and 29.8 percent more than last years Rabi. I. Crop Situation There are two principal crop seasons in Pakistan, namely the "Kharif", the sowing season of which begins in AprilJune and harvesting during October-December; and the "Rabi", which begins in October-December and ends in April-May. Rice, sugarcane, cotton, maize, mong, mash, bajra and jowar are Kharif" crops while wheat, gram, lentil (masoor), tobacco, rapeseed, barley and mustard are "Rabi" crops. Major crops, such as, wheat, rice, cotton and sugarcane account for 90.1 percent of the value added in the major crops. The value added in major crops accounts for 35.2 percent of the value added in overall agriculture. Thus, the four major crops (wheat, rice, cotton, and sugarcane), on average, contribute 31.7 percent to the value added in overall agriculture. The minor crops account for 12.3 percent of the value added in overall agriculture. Livestock contribute almost 50 percent to agriculture much more than the combined contribution of major and minor crops (47.5%).
Table 2.3: Production of Major Crops Year Cotton (000 bales) 10613 2001-02 (-1.1) 10211 2002-03 (-3.8) 10048 2003-04 (-1.6) 14265 2004-05 (45.3) 12417 2005-06 (P) (-13.0) P: Provisional. (July-March) *: Figures in parentheses are growth rates (000 Tons) Sugarcane Rice Maize Wheat 18226 1664 3882 48042 (-4.2) (1.3) (-19.2) (10.2) 19183 1737 4478 52056 (5.2) (4.4) (15.3) (8.3) 19500 1897 4848 53419 (1.6) (9.2) (8.3) (2.6) 21612 2797 5025 47244 (10.8) (46.3) (3.6) (-15.2) 21700 3560 5547 44312 (0.4) (27.3) (10.4) (-6.2) Source: Ministry of Food, Agriculture & Livestock, Federal Bureau of Statistics.

a) Major Crops: i) Cotton: Cotton is not only an export-earning crop but also provides raw material to the local Textile Industries. It accounts for 8.6 percent of the value added in agriculture and about 1.9 percent to GDP. The area and production target for cotton crop during the current fiscal year were 3247 thousand hectares and 15.0 million bales, respectively. The crop was however, sown on the area of 3096 thousand hectares 4.6 percent less than the target and 3 percent less than last year (3193 thousand hectares).

12

Agriculture The production of cotton is provisionally estimated at 12.417 million bales for 2005-06, lower by 13 percent over the last years production of 14.265 million bales. Factors responsible for the decline in cotton production include: excessive rain at the time of sowing, high temperature at flowering stage, late wheat harvesting resulting in decline of area under the crop, and pest attack in some cotton growing areas of Punjab and Sindh. Area, production and yield of cotton for the last five years are given in Table 2.4.
Fig-1: Cotton production (000 bales)
15000 14000 13000 12000 11000 10000 9000 8000 7000 6000 5000 '05-06(P) '03-04 '04-05 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03

Table 2.4: Area, Production and Yield of Cotton Area Production Yield % % % Year (000 Hectare) (000 Bales) (Kgs/Hec) Change Change Change 2001-02 3116 6.5 10613 -1.1 579 -7.2 2002-03 2794 -10.3 10211 -3.8 622 7.4 2003-04 2989 7.0 10048 -1.6 572 -8.0 2004-05 3193 6.8 14265 42.0 760 32.9 2005-06 (P) 3096 -3.0 12417 -13.0 682 -10.3 P=Provisional (July-March) Source: Ministry of Food, Agriculture & Livestock, Federal Bureau of Statistics.

ii) Rice: Rice is an important food cash crop. It is also one of the main export items of the country. It accounts for 6.1 percent of the total value added in agriculture and 1.3 percent to GDP. Area and production target of rice for the year 2005-06 were set at 2533 thousand hectares and 5000 thousand tons, respectively. Area sown for rice is estimated at 2620 thousand hectares 3.4 percent higher than the target and 4 percent higher than last year.
Fig-2: Rice production (000 Tons)
6000 5500 5000 4500 4000 3500 3000 2500 2000 '03-04 '04-05 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 05-06(P)

The size of the crop is estimated at 5547 thousand tons almost 10.4 percent higher than last year and 10.9 percent higher than the original target. The higher production is due to favourable weather condition. Area, production and yield of rice for the last five years are given in Table 2.5.
Table 2.5: Area, Production and Yield of Rice Year Area (000 Hectare % Change -11.1 5.2 10.6 2.3 4.0

01-02 2114 02-03 2225 03-04 2461 04-05 2519 05-06 (P) 2620 P: Provisional. (July-March)

Yield % % (000 Tons) (Kgs/Hec.) Change Change 3882 -19.2 1836 -9.1 4478 15.3 2013 0.6 4848 8.3 1970 -2.1 5025 3.6 1995 1.2 5547 10.4 2117 6.1 Source: Ministry of Food, Agriculture and Livestock, Federal Bureau of Statistics.

Production

13

Economic Survey 2005-06 iii) Sugarcane: Sugarcane crop serves as a major raw material for production of white sugar and gur. Their share in value added of agriculture and GDP are 3.4 percent and 0.7 percent respectively. For 2005-06, the area under sugarcane crop was targeted at 955 thousand hectares as against 966 thousand of last year. However, sugarcane has been sown in the area of 907 thousand hectares 5 percent below the target and 6.1 percent less than last year. Sugarcane production for the year 2005-06 is estimated at 44.3 million tons against the 47.2 million tons last year. Thus sugarcane production is estimated to be lower by 6.2 percent over the last year.
Fig-3: Sugarcane Production (000 Tons)
60000 55000 50000 45000 40000 35000 30000 05-06(P) '02-03 '03-04 '04-05 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02

Factor responsible for decline in sugarcane production include late harvesting of wheat, farmers shifting to other competing crops and frost affecting the crop in Punjab and NWFP. The area, production and yield per hectare for the last five years are given in Table 2.6.
Table 2.6: Area, Production and Yield of Sugarcane Area Production Yield % % % Year (Kgs/Hec.) (000 Tons) (000 Hectare Change Change Change 01-02 1000 4.1 48042 10.2 48042 5.9 02-03 1100 10.0 52056 8.3 47324 -1.5 03-04 1074 -2.4 53419 2.6 49738 5.1 04-05 966 -11.8 47244 -15.2 48906 -3.8 05-06(P) 907 -6.1 44312 -6.2 48856 -0.1 P: Provisional. (July-March) Source: Ministry of Food, Agriculture and Livestock, Federal Bureau of Statistics.

iv) Wheat: Wheat is the main staple diet of the people of Fig-4 : Wheat Production (000 tons) Pakistan. It contributes 13.7 percent to the value 24000 added in agriculture and 3.0 percent to GDP. Area and production target of wheat for the year 2005-06 22000 were set at 8415 thousand hectares and 22.0 20000 million tons, respectively. Wheat was cultivated on an area of 8303 thousand hectares, showing a 0.7 18000 percent decrease over last year and 1.3 percent 16000 lower than target. The size of the wheat crop is 14000 provisionally estimated at 21.7 million tons which is 0.4 percent higher than last year and 1.4 percent 12000 lower than the target as the area under wheat crop decreased due to late picking of cotton, delayed crushing of sugarcane by the sugar mills, less rains during early stage of the crop and erratic high temperature during the month of February, 2006 when the formation of wheat grain takes place. The yield per hectare increased by 1.1 percent. The area, production and yield for the last five years are given in Table 2.7.
90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04

14

05-06 (P)

04-05

Agriculture
Table 2.7: Area, Production and Yield of Wheat Area Year % (000 hectares) Change 01-02 8058 -1.5 02-03 8034 -0.3 03-04 8216 2.3 04-05 8358 1.7 05-06(P) 8303 -0.7 P= Provisional. (July-March).

Yield % % (000 tons) (Kgs/Hec.) Change Changes 18226 -4.2 2262 -2.7 19183 5.2 2388 5.6 19500 1.6 2375 -0.5 21612 10.8 2586 8.9 21700 0.4 2614 1.1 Source: Ministry of Food, Agriculture & Livestock, Federal Bureau of Statistics

Production

v) Other Major Crops Except maize, tobacco and bajra all other major crops have decreased as compared to the last years production. The production of gram, jowar, rapeseed & mustered and barley is provisionally estimated to have declined by 39.3 percent, 17.7 percent, 7.4 percent and 5.4 percent, respectively. The main reason for decline in production as compared to last year has been the shortfall of respective area of these crops. The production of gram is 39.3 percent lower than last year mainly because of the less rains during crop growth period and at crop development stage. Moreover, adequate soil moisture was not available at the time of sowing in the main gram growing districts i.e. Bhakkar, Layyah, Khushab and Mianwali which also affected the gram crop. The production of maize, tobacco and bajra grew by 27.3 percent, 18.8 percent and 14.5 percent respectively. The details are given in Table 2.8.
Table 2.8: Area and Production of Other Major Kharif and Rabi Crops 2004-05 2005-06(P) Area Production Area Production (000 % Change In Crops (000 hectares) (000 tons) (000 hectares tons production KHARIF Maize 982 2797 1022 3560 27.3 Bajra 343 193 438 221 14.5 Jawar 308 186 250 153 -17.7 RABI Gram 1094 868 1064 527 -39.3 Barley 93 92 87 87 -5.4 Rapeseed & 243 203 234 188 -7.4 Mustard Tobacco 51 101 57 120 18.8 P=Provisional (July-March), Source: Ministry of Food, Agriculture & Livestock; Federal Bureau of Statistics.

b) Minor Crops i) Oilseeds The major oilseed crops include cottonseed rapeseed/mustard, sunflower and canola etc. The total availability of edible oils in 2004-05 was 2.764 million tons. Local production stood at 0.857 million tons which accounts for 31 percent of total availability while the remaining 69 percent was made available through imports. During 2005-06 (July to March) local production of edible oil is provisionally estimated at 0.809 million tons. During the same period 1.269 million tons of edible oil was imported and 0.216 million tons edible oil was recovered from imported oilseeds. The total availability of edible oil from all sources amounted to 2.294 million tons during (July to March) 2005-06 (provisional estimates). The production of oilseed crops during 2004-05 and 2005-06 is given in the Table 2.9.

15

Economic Survey 2005-06


Table 2.9: Area and Production of Major Oilseed Crops 2004-05 Crops Area (000 Acres) Cottonseed Rapeseed/ Mustard Sunflower Canola Total Oil P: Provisional 7979 601 780 288 Production Seed (000 Tons) 4470 203 569 144 Oil (000 Tons) 536 64 205 52 857 Area (000 Acres) 7660 578 850 323 2005-06 (P) Production Seed (000 Tons) 3980 188 595 162 Oil (000 Tons) 478 59 214 58 809

Source: Pakistan Oilseed Development Board

ii) Other Minor Crops: The production of all the pulses namely masoor, mung and mash are down by 13.5 percent, 12.6 percent and 9.8 percent respectively during 2005-06. The main reason for decline in production of all these pulses as compared to last year has been the short fall of respective area of these crops, which declined by 17.8, 15.2 and 23.7 percent respectively. The production of potato was also lower than last year on account of frost which affected the potato crop during the month of January, 2006. However, the production of onion and chillies increased by 29 percent and 34.8 percent, respectively over the last year. Details are given in Table 2.10.
Table-2.10 : Area and Production of Other Minor Crops 2004-05 Crops Masoor Mung Mash Potato Onion Chillies P= Provisional (July-March) Area (000 hectares) 48.8 245.4 45.2 110.5 122.3 38.4 Production (000 tons) 25.9 130.0 18.3 2024.9 1764.8 90.4 2005-06(P) Area (000 hectares) 40.1 207.9 34.5 124.7 145.9 59.4 Production (000 tons) 22.4 113.6 16.5 1662.7 2275.9 121.9 %Change in production -13.5 -12.6 -9.8 -17.9 29.0 34.8

Source: Ministry of Food, Agriculture and Livestock. Federal Bureau of Statistics.

II. Farm Inputs i) Fertilizer: Fertilizer is one of the basic input of agriculture and its timely availability is very crucial for agricultural production. The fertilizer off-take is increasing at a brisk pace and will increase further in the medium term. The domestic production of fertilizer during the first nine months (July-March, 2005-06) of the current fiscal year was up by 5.3 percent. On the other hand, the import of fertilizer also increased substantially by 77.7 percent, hence, the total availability of fertilizer was increased by 21.1 percent in the current fiscal year. The off- take of fertilizer was therefore, higher by 6.1 percent The details are given in Table 2.11.

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Agriculture
Table 2.11 : Production and Off-take of Fertilizer (000 N/tons) % Domestic % Import Year Change Production Change 2001-02 2286.0 -0.5 626.0 8.1 2002-03 2315.0 1.3 766.1 22.4 2003-04 2539.0 9.7 764.1 -0.3 2004-05 2718.0 7.1 785.0 2.7 2004-05 P 2024.0 564.0 2005-06 P 2132.0 5.3 1002.0 77.7 P = Provisional (July March) % % Off-take Change Change 2912.0 1.2 2929.0 -1.2 3081.0 5.8 3020.0 3.1 3303.1 7.2 3222.0 6.7 3503.0 6.1 3694.0 14.6 2588.0 2811.0 3134.0 21.1 2982.0 6.1 Source: National Fertilizer Development Centre Total

ii) Improved Seed: Certified seed plays a pivotal role in boosting agricultural production both in market oriented and subsistence farming. Certified seed in Pakistan is limited to wheat, cotton, paddy as major crops besides maize, gram, pulses fodder and oilseeds as well as minor crops. The Federal Seed Certification & Registration Department regulates quality during the flow of seed from the breeder to the growers. The Department performs its functions through seventeen Seed Testing Laboratories and Field Offices, established in various ecological zones of the country. To provide certified crop seeds to the growers from the public sector, the Seed Corporation in the Punjab and Sindh and the Departments of Agriculture in Balochistan and NWFP have been entrusted the task of seed production, processing and marketing. Government has permitted about 550 National Seed Companies for production and marketing of certified seeds. Their seed production activities are mostly confined to the above-mentioned major crops. Private seed sector has not developed any research and development programme. They multiply varieties, developed by public sector. Research Institutes are mostly maintained by Foundation Seed Cell of Punjab Seed Corporation. Multinational seed companies mostly import Hybrid corn, sunflower and Forages seed. During (July-March, 2005-06) 228.1 thousand tons of improved seed was procured and 202 thousand tons of improved seed was distributed, while 190.6 thousand tons of improved seed was distributed during the same period last year. iii) Mechanization: Intensive use of agriculture machinery needs to be popularized among farmers with a view to improving the average yield. It may be noted that population density is increasing, land-to-man ratio is deteriorating and food requirement is growing. It is well known that effective use of agricultural machinery not only speeds up cultivation process but also accelerate harvesting and threshing operations. It also results in considerable saving of fodder and feed through a reduction in bullock population. Thus, a transition from subsistence farming to commercial farming can only be achieved through the transfer of the latest, most efficient and cost effective technology to the farming system. The efficient use of scarce agriculture resources and accelerated agriculture mechanization is, therefore, vital and demand comprehensive strategic planning for the future. In consideration of the role of precision in farm operations, the use of machinery has been encouraged through the provision of credit availability by commercial banks. The demand for tractors has outstripped local production. Time lag in delivery of tractors is reportedly 4-6 months. As such shortage of 15,000 20,000 tractors per annum has been noted in the country against the existing production capacity of manufacturing units. In order to meet tractors demand, new investors have been encouraged through reducing deletion programme to 40 percent from the 60 percent (Presidents package for farmers). Further, Federal Government allowed one-time import of 10,000 tractors at zero tariffs.

17

Economic Survey 2005-06 There was no significant increase in prices of locally manufactures tractors as compared to last year, except an increase of 8 percent, 7.5 percent, 6.7 percent and 5.9 percent in the prices of MF-375 S (78-H.P), MF-260(60H.P.), MF-385(85-H.P.) and MF-240(5-H.P) respectively. iv) Plant Protection:
Table 2.12: Price of Locally Manufactured Tractors (In Rs.) % Tractor Model 2004-05 2005-06 Change 5.9 339,000 320,000 MF-240 (50-H.P) 7.5 429,000 399,000 MF-260 (60 H.P) 8.0 539,000 499,000 MF-375S (78 H.P) 6.7 639,000 599,000 MF-385 (85 H.P) 0.0 320,000 320,000 FIAT-480 (55-H.P) 0.0 459,000 459,000 FIAT-640 (75-H.P) 0.0 435,000 435,000 KOREAN LT-400D 0.0 436,800 436,800 UNIVERSAL U-640(65 HP) 0.0 320,000 320,000 UNIVERSAL U-530(53-HP) Source: Ministry of Food, Agriculture and Livestock.

Plant protection measures help in increasing per hectare yield by protecting crops from damages because without effective protection against the attack of pests and diseases, the beneficial outcome of other inputs may not be realized either. In this regard, the Department of Plant Protection provides facilities, such as, Locust Survey and Control, Aerial pest Control, Pesticide Registration and Testing etc. while the private sector carries plant protection measures including ground sprays. The department did not receive any emergent demand from the provincial government for aerial spraying. The regular aerial spray on orchards is conducted during April every year. During (July-March, 2005-06) 17.9 and 36.0 thousand tons of agricultural pesticides were imported and locally formulated. v) Irrigation:

It is well-known that an efficient irrigation system is a pre-requisite for increasing agricultural production since water is a basic input for agriculture. It provides food security against the vagaries of nature and enables the cropping intensity to be increased. Despite the existence of good irrigation canal network in the world, Pakistan still suffers from wastage of a large amount of water in the irrigation process. During the monsoon season (July-September, 2005) the normal rainfall has been 137.5 mm while the actual rainfall received stood at 100.3 mm, indicating a fall of 37.0 percent. Likewise, during winter (January to March 2006), the actual rainfall received was 41.9 mm while the normal rainfall during this period has been 70.5 mm indicating a decline of 40.6 percent over the normal rainfall. The details are in Table 2.13.
Table 2.13: Rainfall Recorded During 05-06 Winter Rainfall (Jan-Mar) 2006 Normal 137.5 70.5 Actual 100.3 41.9 Shortage (-)/excess (+) -37.2 -28.6 % Shortage (-)/excess (+) -27.0 -40.6 Source: Pakistan Meteorological Department Monsoon Rainfall (Jul-Sep) 2005

The canal head withdrawals in kharif 2005 (April-September) have increased by 19.8 percent and stood at 70.75 million acre feet (MAF), as compared to 59.12 MAF during the same period last year. During the Rabi season 2005-06 (October-March), the canal head withdrawals also increased by 29.8 percent, as it remained at 30.06 MAF compared to 23.15 MAF during the same period last year. Province-wise details are given in Table 2.14.
Table 2.14: Canal Head Withdrawals (Below Rim Station) (Million Acre Feet (MAF)
Kharif (Apr-Sep) 2004 Kharif (Apr -Sep) 2005 % Change in Kharif 2005 over 2004 Rabi (Oct-Mar) 2004-05 Rabi (Oct -Mar) 2005-06

Provinces
Punjab Sindh Baluchistan NWFP (CRBC) Total

% Change in Rabi 2005-06 over 2004-05

30.33 25.65 2.18 0.96 59.12

36.43 31.18 2.16 0.99 70.75

20.1 21.6 -0.9 3.1 19.8

11.54 10.41 0.72 0.48 23.15

16.40 42.1 12.13 16.5 0.89 23.6 0.64 33.3 30.06 29.8 Source: Indus River System Authority.

18

Agriculture Government has given top priority to the development of water resources in order to uplift the agro-economy on the national level which will be achieved by maximizing crop production, through progressively increasing surface water supplies and conserving them using the latest technologies available and protecting land and infrastructure from water logging, salinity, floods and soil erosion. The main objectives are overcoming the scarcity of water through augmentation and conservation means i.e. by construction of medium and large dams and by efficient utilization of irrigation water, restoring the productivity of agricultural land through control of water logging, salinity and floods. Strategies The strategies being adopted in achieving these objectives are: a) Implementation of high priority projects like Raising of Mangla Dam, Gomal Zam Dam, Mirani Dam, Sat Para Dam, Sabakzai Dam, Kurram Tangi Dam, Diamer Basha Dam and other small and medium reservoirs. b) Efficient use of stored water through construction/extension of new irrigation canals and improvement in the existing Irrigation System which includes Greater Thal Canal, Rainee Canal, Kachhi Canal, Extension of Pat Feeder Canal, Khirther Canal, and construction of 43 minors in Balochsitan, Irrigation system Rehabilitation Programme in Punjab, Sindh & NWFP, Modernization of Barrages in Punjab and Lining of Irrigation Channels in Punjab, Sindh and NWFP. c) Implementation of the National Drainage Strategy aiming at adoption of effective management measures to reduce effluent generated at source and to dispose off the generated effluent outside the Indus Basin preferably to the sea in an environmentally safe manner. RBOD-I, II & III are being constructed to drain the effluent generated from water logged areas directly into the sea. d) On farm drainage system is being constructed by the Farmers Organizations (FO) with the government sharing a part of the expenditure. e) An integrated programme approach is being adopted and programmes like the National Drainage Programme, On-farm Water Management and Flood Control Programme are being implemented. f) Water conservation is being ensured through rehabilitation, remodeling and lining of canals and watercourses. g) To ensure equitable distribution of water telemetering and flow gauging systems will be further strengthened. Major water sector projects under implementation are given in Table 2.15.
Table 2.15: Water Sector Projects under Implementation Project Gomal Zam Dam Greater Thal Canal * Rainee Canal * Kachhi Canal * Mirani Dam Sabakzai Dam Raising of Mangla Dam (30 ft) Satpara Dam Multipurpose Diamer Basha Dam Project Kurram Tangi Dam Location NWFP Punjab Sindh Balochistan Balochistan Balochistan AJ&K Skardu N.A & NWFP NWFP Cost (US$m) 214 500 229 538 98 17 1000 35 6500 Storage (MAF) 1.14 0.30 0.02 2.90 0.08 6.40 Area Under Irrigation (Acres) 183,086 1534000 412000 713000 33200 6680 15536 Not yet Firmed 360,000 Completion Date April, 2009 June, 2008 Sept., 2008 Dec., 2008 Sept., 2006 Dec., 2006 Sept., 2007 June, 2008 2015-16

* Date of completion for all three canals is for Phase-I

June, 2009 0.914 290 (or Rs. 17206 m) Source: Water Resources Section, Planning & Development Division.

Upon completion, the above-mentioned projects will provide a quantum jump in agricultural growth, necessary to

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Economic Survey 2005-06 sustain an overall real GDP growth of 7-8 percent in the next few years. Higher agricultural growth would also help in alleviating poverty. vi) Agricultural Credit: Agricultural credit provides financial resources to the farming community particularly, for the purchase of primary inputs like fertilizer, seed, pesticides, machinery, equipment etc. Government considers it an important instrument for achieving higher production and attaches high priority to ensure its timely availability to the farmers. Credit requirements of the farming community have shown an increasing trend over the years. Therefore, government has enhanced agricultural credit allocation for the year 2005-06 to Rs.130 billion from Rs 85 billion last year indicating impressive increase of 52.9 percent. Institutional Credit to the farmers is being provided through Zarai Taraqiate Bank Limited (ZTBL), Commercial Banks, Cooperatives and Domestic Private Banks. The agricultural loans extended to the farming community during July-March, 2005-06 are discussed below: a) Production and Development Loans Agricultural loans amounting to Rs.91.2 billion were disbursed during (July-March, 2005-06) as against Rs.73.8 billion during the corresponding period last year, thereby registering an increase of 23.5 percent. The share of ZTBL in supply of total agricultural credit by institutions decreased and was 31.8 percent during (JulyMarch, 2005-06) while it was 34.1 percent during the same period last year. However, the share of Commercial Banks has surpassed the share of ZTBL; it was 51.5 percent of the total agricultural credit disbursed during JulyMarch, 2005-06. While the share of cooperative has declined, the share of domestic private bank has increased; it was 12 percent as compared with 10.4 percent in the corresponding period of last year. Supply of agricultural credit by various institutions since 2000-01 to 200506 (July-March) is given in Table 2.16.
Table 2.16: Supply of Agricultural Credit by Institutions (Rs. in million) Commercial Domestic Total Year ZTBL Cooperatives Banks Private Bank Rs. Million %Change 12.8 44789.4 5124.2 12055.0 27610.2 2000-01 17.1 52446.3 578.5 5273.7 17486.1 29108.0 2001-02 12.3 58918.7 1421.0 5485.4 22738.6 29270.2 2002-03 24.8 73560.0 2702.0 7653.0 33248.0 29933.0 2003-04 108733.0 12407.0 7607.0 51310.0 37409.0 2004-05 73810.8 7680.2 5641.3 35391.7 25197.6 2004-05 (Jul-Mar) 23.5 91161.0 10980.0 4181.0 46973.0 29027.0 2005-06 (Jul-Mar) Source: Ministry of Food, Agriculture and Livestock. State Bank of Pakistan.

b) Loans to Small Farmers and Priority Items: ZTBL disbursed Rs 24.334 billion to small farmers having land holding upto 25 acres sharing 84% of the total disbursements during 2000-06 (July-March). Bank has identified number of priority items i.e. orchards, nurseries/floriculture, production of improved seeds, oil seed crops, multi-cut-fodder, off season vegetables, production of tobacco, working capital for fruit grading/waxing units, micro credit, seed processing units, tubewell/lift pumps, improvement of irrigation facilities, drip/sprinkler irrigation, mini/check dams, water de-salination plants, animal breeding, citrus/mango, dates, covered horticulture/green houses, cut flowers, on farm godown/storage, milk chilling centers and land dev./land leveling (laser/scraper), which contribute not only in the development of agriculture sector but overall economy of the country. During (July March, 2005-06) loans of Rs. 2.210 billion have been disbursed for priority items. c) Loan under One Window Operation: In order to provide credit facilities particularly to small farmers to cater for input requirements at their doorstep during

20

Agriculture peak sowing season of both Rabi and Kharif Crops, One Window Operation is launched by ZTBL with the collaboration of Provincial Governments, Revenue Officials and Postal Authorities. Agriculture Pass books are issued at the spot to intending new borrowers. Their land record is entered and loans are sanctioned at focal points whereas payments are released on the very next day from the concerned branch. d) Revolving Finance Scheme/sada Bahar Scheme: For providing timely input loans for crops and working capital for dairy, poultry and fisheries, the ZTBL launched Sada Bahar Scheme (SBS). Under this scheme inputs requirements for the whole year is assessed and made available to the borrower. The Managers are authorized to sanction such loan limits upto Rs. 0.5 million. During (JulyMarch, 2005-06), Bank has disbursed loans of Rs. 22.604 billion under Revolving Finance Scheme (RFS) and Sada Bahar Scheme (SBS) as against Rs. 15.309 billion disbursed during corresponding period of last year indicating a substantial increase of 47.6 percent. e) Credit to Women Program: This Program aims at making credit more accessable to rural women through Female Mobile Credit Officers (MCOs). Under Credit to Women Program, women can meet their credit needs through both Micro Credit & General Credit Scheme. Presently, 18 FMCOs are exclusively looking after credit needs of women in 17 branches of the Bank, whereas female borrowers may also obtain loan through male MCOs throughout the country. During (JulyMarch, 2005-06) loans of Rs. 58.592 million have been disbursed by female MCOs and Rs. 896.371 million through male MCOs. f) Micro Credit Scheme: Under the Micro Credit Scheme, all the Mobile Credit Officer working in the branches process micro credit cases both for men and women to engage rural poor in income generating activities/cottages industries. Financing under this program is provided for 136 loanable items. All loans are recovered within 18 months of their advancement. During the period (JulyMarch, 2005-06) loans of Rs. 34.196 million were disbursed in 1434 loan cases. g) Crop Maximization Project: In order to augment the efforts of the Government to enhance productivity on sustainable basis, Zarai Taraqiati Bank Limited (ZTBL) has signed an agreement with Ministry of Food, Agriculture and Livestock (MINFAL) under the title Crop Maximization Project. Under the project, MINFAL has to provide funds of Rs. 299.893 million to the Bank for disbursing loans to the farmers for purchase of inputs. These funds are to be revolved for meeting input credit needs in the project villages till 30th June, 2014. A total of 109 villages are being covered under this project. In the project villages, Village Organization (VOs) have been established which organize the farmers and assist them with the collaboration of Agri. (Ext) Staff in achieving the maximum productivity through proper use of inputs, water saving devices and modern agri. Technology. Farmers owning upto 25 acres land are entitled to receive loan from project credit line under Revolving Finance Scheme through Mobile Credit Officers. Under this project Rs 70.759 million have been disbursed during (JulyMarch, 2005-06). III. Forestry Pakistan has 4.01 million hectares covered by forests, which is equivalent to about 5 percent of the total land area. Eighty-five percent of this is a public forest, which includes 40 percent coniferous and scrub forests on the northern hills and mountains., The balance is made up of irrigated plantations and Riverain forests along major rivers on the Indus plains, mangrove forests on the Indus delta and trees planted on farmlands. Though the forest resource is meager, it plays an important role in Pakistans economy by employing half a million people and one-third of the nations energy needs. Forests and Rangelands support about 30 million herds of livestock, which contributes more

21

Economic Survey 2005-06 than US$ 400 million to Pakistans annual export earnings. Forestry sector plays an important role in soil conservation, regulates flow of water for irrigation and power generation, reduction of sedimentation in water conveyances and reservoirs, employment and maintenance of ecological balance. Under Millennium Development Goals of Forestry Sector, Pakistan is committed to increase forest cover from existing 5 percent to 5.7 percent by the year 2011 and to 6 percent by the year 2015. This implies bringing an additional 1.051 million hectares land area under forest. Total forests area of Punjab, NWFP, Sindh and Balochistan is 0.48, 1.33, 0.84 and 1.36 million hectares respectively. Pakistan being an agricultural country relies on sustained supplies of water and fertile soil. This is only possible when our forests and watersheds in the high hills are intact. Pakistan being a forest deficient country is facing timber and fire wood shortage to the tune of about 29 million cubic meters. There is need to increase the area under tree cover not only to meet the material needs of the growing population but also to enhance the environmental and ecological services being provider by the forests. During the year 2005-06, forests have contributed 139 thousand cubic meters of timber and 305 thousand cubic meters of firewood as compared to 183 thousand cubic meters of timber and 336 thousand cubic meters of firewood in 2004-05. In order to motivate people to plant more trees and to highlight the importance of forest, tree planting campaigns are organized twice a year in spring and monsoon seasons. During spring and monsoon season year 2005, 97.657 million saplings (spring 67.003 million and monsoon 30.654 million were planted IV. Livestock and Poultry a) Livestock Livestock sector contributes almost 50 percent to the value addition in the agriculture sector, and almost 11 percent to Pakistans GDP, which is higher than the contribution made by the crop sector (47.4% in agriculture and 10.3% in GDP). The role of livestock sector in the rural economy of Pakistan is very critical as 30-35 million rural population of the country are engaged for their livelihood. Within the livestock sector, milk is the largest and the single most important commodity. Despite decades of neglect, Pakistan is the fifth largest milk producer in the world. The total value of milk produced is higher than the value of two major crops, that is, wheat and cotton. The livestock population and production for the last five years are given in Tables 2.17 and 2.18.
Table 2.17 Livestock Population Species Cattle Buffalo Sheep Goat Camel Horses Asses Mules E. Estimated 2001-02 22.8 24.0 24.4 50.9 0.8 0.3 3.9 0.2 2002-03 23.3 24.8 24.6 52.8 0.8 0.3 4.1 0.2 2003-04 23.8 25.5 24.7 54.7 0.7 0.3 4.1 0.2 2004-05 24.2 26.3 24.9 55.6 0.7 0.3 4.2 0.3 (Million No.s) 2005-06 (E) 25.5 28.4 25.5 61.9 0.7 0.3 4.3 0.3

Source: Ministry of Food, Agriculture & Livestock (Livestock Wing)

Table 2.18 : Livestock Products

22

Agriculture
Products Milk Beef Mutton Poultry Meat Wool Hair Bones Fat Blood Eggs Hides Skin E: Estimated Units (000 Tons) " " " " " " " " Million Nos. " " 2001-02 27031.0 1034.0 683.0 355.0 39.4 19.3 339.4 126.5 42.9 7679.0 7.9 39.3 2002-03 27811.0 1060.0 702.0 370.0 39.7 19.9 347.6 129.7 44.0 7860.0 8.2 40.3 2003-04 28624.0 1087.0 720.0 378.0 40.0 20.7 356.2 132.9 45.2 8102.0 8.4 42.4 2004-05) 29438.0 1115.0 739.0 384.0 40.2 20.7 365.1 136.3 45.2 8529 8.4 42.6 2005-06 (E) 31294.6 1174.4 782.1 462.5 40.7 23.2 384.0 143.5 49.0 9057.0 9.1 45.2

Source: Ministry of Food, Agriculture & Livestock (Livestock Wing)

b) Poultry Poultry sector faced a tough challenge on account of avian influenza outbreaks in the country. Avian Influenza (AI) H5N1 sporadic occurrence were reported in Pakistan in February, 2006. They were detected/reported in layer and breeder poultry farms at Charsada, Abbottabad and NWFP, Attock, Pindi Bhatian, of Punjab and Sehala and Tarlai areas of Islamabad. The flocks were destroyed under the supervision of state veterinarians and district administration. Forty-nine (49) farm workers and persons residing in and around farms were tested and found negative for A1. No human case could be detected. Zero tolerance policy was observed regarding Avian Influenza. Approximately 100, 000 birds were culled. The direct and indirect losses ran into billion of rupees. Consumers shift towards other sources of meat (beef/mutton) imbalanced the supply situation which led to duty free import of meat and livestock. An amount of Rs 100 million has been allocated initially to handle the bird flu outbreak and for compensation of poultry birds destroyed on account of bird flu. This amount was disbursed to Provincial Livestock Department. Poultry Research Institute, Karachi and Veterinary Research Institute (VRI), Lahore have released funds for the production of Avian Influenza Vaccine. The production of commercial poultry and poultry products 2004-05 and 2005-06 is given in Table 2.19
Table 2.19:Production of Commercial Poultry and poultry products. (Million Nos). Production Units 2004-05 2005-06(*E) 386.5 372.0 Millions Nos Day Old Chicks 23.2 22.7 Layers 303.9 292.1 Broilers 6.9 6.8 Breeding Stock 463.0 384.0 (000 Tons) Poultry Meat 5107.0 4992.0 Million Nos Eggs E: Estimated Source: Ministry of Food, Agriculture & Livestock (Livestock Wing).

The production of rural poultry for 2004-05 and 2005-06 is given in Table 2.20.

23

Economic Survey 2005-06


Table 2.20: Rural Poultry Production Day Old Chick Cocks & Cockribs Layers E: Estimated (Million Nos.) 2004-05 2005-06(E) 35.0 36.5 11.1 12.1 35.2 36.5 Source: Ministry of Food, Agriculture & Livestock (Livestock Wing).

Because of the importance of livestock for rural economy, the Government is launching several initiatives which are documented below: A new Livestock Development Policy has been approved by the Prime Minister in principle. It addresses legal framework and development strategies and action plan for farmers using livestock as supplementary source of income groups and development of small and medium enterprises (SME) and large businesses. The policy will bring radical changes in the current livestock production system and help in exploitation of potentials of livestock sector. Two private sector led companies namely Livestock and Dairy Development Board and Pakistan Dairy Development Company have been established to increase the pace of development in livestock sector. Board of Directors of these companies includes all stakeholders. Import of dairy and livestock machinery/equipment, not manufactured locally, is allowed duty free subject to certification by Ministry of Food, Agriculture and Livestock. To provide access to credit to small holders, micro credit schemes have been initiated through commercial banks i.e. Zarai Taraqiati Bank . Punjab Cooperative Bank and Punjab Small Industries Corporation for distribution of loan. Government of Punjab has disbursed approx. Rs 2.0 billion under the budget 2004-05 for small and medium term projects. Federal Government is further working with stakeholders and other scheduled banks to facilitate credit to livestock farmers. In order to organize dairy sector, cooperative milk production/collection system is encouraged and milk processors have reported 35 percent increase in milk collection than the previous year. Establishment of slaughterhouses and temporary quarantine station are encouraged is private sector. Six slaughterhouse and temporary quarantine stations have been established in the private sector. In the wake of Avian Influenza, 12 laboratories in different poultry concentrated areas have been established/equipped for surveillance diagnosis. A central laboratory at National Agricultural Research Centre, Islamabad has been especially developed to address Avian Influenza surveillance and monitoring. So far during the last one year, it has analyzed more than 28000 samples from poultry and more than 700 samples from migratory birds. The Ministry of Food, Agriculture and Livestock is constantly monitoring the situation on daily basis.

Following development projects have been launched/in pipeline. A. Projects under Implementation (total cost Rs 4.52 Billion) a) Strengthening of livestock Services Project (cost 25.942 million euro) (approx. Rs 1992.51 million). b) Prime Minister s Special Initiative for Livestock (cost Rs 1696.4 million) c) Construction of Animal Quarantine Facilities at various places including Northern Area, Wahga Border Lahore and Khokhrapar (Rs 300 million). d) Livestock and Dairy Development Board (cost Rs 54.28 million).

24

Agriculture e) Pakistan Dairy Development Company - Dairy Pakistan (cost Rs 481 million). B. Pipeline Projects (Total Cost Rs 3.731 Billion) a) Livestock Production and Development for Meat Production (cost Rs 1747.154 million). b) Milk Collection Processing and Dairy Production and Development Programme (cost Rs 1984.25 million) V. Fisheries Fishery as a sub-sector of agriculture plays a significant role in the national economy and towards the food security of the country, as it reduces the pressure on demand for mutton, beef and poultry. It is also considered to be the principal source of livelihood for the communities inhabitating at the long coasts of Sindh and Balochistan as well as along the major rivers, lakes and dams. It contributes, on an average, about 0.3 percent to the total GDP and 1.3 percent to agricultural. It has been estimated that about 400 thousand fishermen and their families are dependant upon the fisheries for their livelihood. Marine Fisheries Department (MFD) is responsible for management, development and sustainable exploitation of the fisheries resources in exclusive economic zones. MFD provides intelligentsia to fisheries sector and as a result, the primitive small-scale fishery has developed to a modern fishery industry through use of sustainable methods. By implementing effective quality control measures, Pakistan is now exporting fish and fishery products to 61 countries including US, Japan and other important countries. The emphasis is to enhance production of fish and shellfish to reduce pest harvest losses to increase seafood export earnings, to improve quality control service and to upgrade the socio-economic conditions of the fishermen. During the year 2005-06, a total of 105,000 M. tons of fish and fishery products were estimated to be exported, earning US$ 160 million. The Government is taking a number of steps to improve fisheries sector. A number of initiatives are also being taken by the Federal and Provincial Fisheries Departments which, inter-alia, include strengthening of extension services, introduction of new fishing methodologies, development of value added products, enhancement of per capita consumption and up-gradation of socio-economic condition of the fishermen's community. During the year 2005-06, the total marine and inland fish production is estimated to be 581,000 M. tons of which, 406,000 M. tons is marine production and remaining 175,000 M. tons catch come from inland waters while during 2004-05, the total marine and inland fish production was 574,000 M. tons. Out of which 403,000 M. tons were marine production and 171,000 M. tons were inland fish. Government of Pakistan is taking a number of steps to improve fisheries sector. Number of initiatives are being taken by Federal and Provincial Fisheries Department which inter alia include construction of coastal highways, strengthening of infrastructure, introduction of aquaculture in coastal area, improvement in freshwater fish culture facilities, strengthening of extension services, introduction of new fishing methodologies, development of value added products, enhancement of per capita consumption of fish, upgradation of socio-economic conditions of the fishermens community etc. Marine Fisheries Department is executing four development projects. These are: a) Monitoring of deep Sea Fishing Vessels Through Establishment of 03 Base Stations and Deputation of MFD Representative on each vessel which is aimed at controlling poaching and management of deep sea fishing vessels. b) Project entitled: Strengthening of Quality Control Laboratories is being, implemented to improve quality

25

Economic Survey 2005-06 control system in Pakistan. c) Under Reduction in Seafood Post Harvest Losses by Improvement of Fish holds of Local Fishing Boats, fish holds of the existing fishing boats are being improved which will help in reducing the post harvest losses and making available additional raw material for processing. d) A project entitled Additional Improvement in MFD Labs in view of WTO Requirements is being implemented to further upgrade laboratories of Marine Fisheries Department to cope with requirements under WTO regime.

26

TABLE 2.1 (A) INDEX OF AGRICULTURAL PRODUCTION


Fiscal Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P P. Jul-Mar All major crops 143.7 141.0 155.0 165.4 163.3 155.3 186.2 189.8 178.4 165.9 172.1 185.4 190.7 1980-81 Base Food Fibre crops crops 122.5 305.9 124.0 216.0 123.6 191.8 133.1 207.5 137.0 252.8 136.5 223.6 150.2 219.1 147.6 209.7 167.7 268.2 152.8 256.0 142.9 253.2 153.9 243.6 159.6 239.7 Other crops 120.5 118.0 137.5 146.0 140.1 130.3 164.5 170.9 143.7 135.1 148.7 160.9 165.1 All major crops 93.1 96.4 103.4 106.1 105.3 101.8 1999-2000 Base Food Fibre Other crops crops crops 91.2 95.5 94.0 85.2 94.4 103.6 91.8 90.8 112.1 94.9 89.4 115.1 106.4 126.9 101.9 110.0 110.5 95.6 Source: Federal Bureau of Statistics.

TABLE 2.1 (B) BASIC DATA ON AGRICULTURE


Fiscal Year Cropped Area (million hectares) 21.82 21.72 22.44 21.87 22.14 22.59 22.73 23.04 23.07 22.74 22.04 22.12 21.85 22.94 22.51 22.51 not available Provisional, Jul-Mar At farm gate Improved seed distribution (000 Tonnes) 83.27 65.93 63.93 63.27 76.87 145.10 137.67 130.50 167.38 194.30 193.80 191.57 172.07 178.77 213.75 202.03 Water* Availability (MAF) 119.62 122.05 125.12 128.01 129.65 130.85 132.05 122.15 133.78 133.28 134.77 134.63 134.48 134.78 135.68 137.78 Fertilizer off-take (000 N/T) 1892.90 1,884.00 2,147.61 2,146.50 2,183.06 2,515.05 2,413.01 2,646.00 2,583.00 2,833.50 2,966.03 2,929.00 3,020.00 3,222.00 3,694.04 2,981.84 Credit disbursed (Rs million) 14,915.29 14,479.31 16,198.11 15,674.05 22,373.27 19,187.31 19,547.67 33,392.30 42,852.00 39,687.60 44,790.40 52,446.30 58,915.10 73,546.00 108,733.00 91,161.00 (Contd.)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P .. P: *:

TABLE 2.1 (B) BASIC DATA ON AGRICULTURE


Fiscal Year Number of Production of Tubewells Tractors (a) (Nos) 339,840 13,841 355,840 10,077 374,099 16,628 389,493 15,129 463,463 17,063 485,050 16,218 489,601 10,121 531,699 14,242 531,692 26,885 541,839 35,038 545,569 32,553 680,473 24,311 762,902 27,101 941,752 36,059 954,842 44,095 931,048 37,042 not available Provisional (July-March) Public and private tubewells. Milk Fish Production ProducProducof meat tion tion (000 Tonnes) (000 Tonnes) (000 Tonnes) 1,581 15,481 483.0 1,685 16,280 518.7 1,872 17,120 553.1 2,000 18,006 621.7 2,114 18,966 558.1 1,841 22,970 541.9 1,908 23,580 555.5 1,841 24,215 589.7 1,906 24,876 597.0 1,957 25,566 654.5 2,015 26,284 629.0 2,072 27,031 654.5 2,132 27,811 562.0 2,188 28,624 567.0 2,271 29,472 574.0 2,419 31,295 581.0 Source: 1. Federal Bureau of Statistics. 2. Ministry of Food, Agriculture and Livestock. Total Forest Production (000 cu.mtr.) 1,072 491 691 703 684 720 557 490 383 670 736 726 823 819 519 444

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P .. P: (a)

TABLE 2.2 LAND UTILIZATION


Not Available for Culturable Cultivation Waste Cultivated Area Current Net Area Fallow Sown (Million hectares) Total Cropped Total Area Area Sown Cultivated more than Area (8+10) (7+8) once 8 9 10 11 16.11 20.96 5.71 21.82 16.19 21.06 5.53 21.72 16.45 21.40 5.99 22.44 16.22 21.51 5.65 21.87 16.13 21.55 6.01 22.14 16.49 21.68 6.10 22.59 16.50 21.98 6.23 22.73 16.48 21.96 6.56 23.04 16.58 21.93 6.28 22.86 16.29 21.96 6.45 22.74 15.40 22.13 6.64 22.04 15.67 22.27 6.45 22.12 15.60 22.21 6.25 21.85 15.89 22.12 7.05 E 22.94 15.54 22.15 6.97 E 22.51 15.54 22.15 6.97 22.51 Source: Ministry of Food, Agriculture & Livestock

Fiscal Year

Total Area

Reported Forest Area Area

1 2 3 4 5 6 7 8.85 4.85 1990-91 79.61 57.61 3.46 24.34 8.86 4.87 1991-92 79.61 57.87 3.47 24.48 8.83 4.95 1992-93 79.61 58.06 3.48 24.35 8.74 5.29 1993-94 79.61 58.13 3.45 24.43 8.91 5.42 1994-95 79.61 58.50 3.60 24.44 8.87 5.18 1995-96 79.61 58.51 3.61 24.35 9.06 5.48 1996-97 79.61 59.23 3.58 24.61 1997-98 79.61 59.32 3.60 24.61 9.15 5.48 9.23 5.35 1998-99 79.61 59.27 3.60 24.52 9.09 5.67 1999-00 79.61 59.28 3.78 24.45 9.17 6.73 2000-01 79.61 59.44 3.77 24.37 8.95 6.60 2001-02 79.61 59.33 3.80 24.31 8.95 6.61 2002-03 79.61 59.45 4.04 24.25 9.10 6.23 2003-04 79.61 59.46 4.01 24.23 9.00 6.61 2004-05 79.61 59.48 4.01 24.23 9.00 6.61 2005-06 P 79.61 59.48 4.01 24.23 P: Provisional E : Estimated Note: TOTAL AREA REPORTED is the total physical area of the villages/deh, tehsils or districts etc. FOREST AREA is the area of any land administered as forest under any legal enactment dealing with forests. Any cultivated area which may exist within such forest is shown under heading cultivated area. AREA NOT AVAILABLE FOR CULTIVATION is that uncultivated area of the farm which is under farm home steads, farm roads and other connected purposes and not available for cultivation. CULTURABLE WASTE is that uncultivated farm area which is fit for cultivation but was not cropped during the year under reference nor in the year before that. CURRENT FALLOW (ploughed but uncropped) is that area which is vacant during the year under reference but was sown at least once during the previous year CULTIVATED AREA is that area which was sown at least during the year under reference or during the previous year. Cultivated Area = Net Area sown + Current Fallow. NET AREA SOWN is that area which is sown at least once during (Kharif & Rabi) the year under reference. AREA SOWN MORE THAN ONCE is the difference between the total croped area and the net area sown. TOTAL CROPPED AREA means the aggregate area of crops raised in a farm during the year under reference including the area under fruit trees.

TABLE 2.3 AREA UNDER IMPORTANT CROPS


Total Food Grains 11,934 11,667 12,191 11,919 12,297 12,473 12,113 12,618 12,599 12,734 12,359 12,000 11,989 12,657 12,603 12,720 (000 hectares) Rapeseed Sugarand Sesacane Mustard mum Cotton Tobacco 884 304 53 2,662 44 896 287 70 2,836 54 885 285 82 2,836 58 963 269 73 2,805 57 1,009 301 80 2,653 47 963 320 90 2,997 46 965 354 100 3,149 49 1,056 340 96 2,960 53 1,155 327 71 2,923 57 1,010 321 72 2,983 56 961 273 101 2,927 46 1,000 269 136 3,116 49 1,100 256 88 2,794 47 1,074 259 60 2,989 46 966 243 66 3,193 50 907 234 82 3,096 57 1. Ministry of Food, Agriculture and Livestock 2. Federal Bureau of Statistics

Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P Note P

Wheat Rice Bajra 7,911 2,113 491 7,878 2,097 313 8,300 1,973 487 8,034 2,187 303 8,170 2,125 509 8,376 2,162 407 8,109 2,251 303 8,355 2,317 460 8,230 2,424 463 8,463 2,515 313 8,181 2,377 390 8,058 2,114 417 8,034 2,225 349 8,216 2,461 539 8,358 2,519 343 8,303 2,621 438 1 ha = 2.47 acres Provisional (Jul-Mar).

Jowar 417 383 403 365 438 418 370 390 383 357 354 358 338 392 308 250

Maize 845 848 868 879 890 939 928 933 962 962 944 942 935 947 982 1,022

Barley 157 149 160 151 165 171 152 163 137 124 113 111 108 102 93 86

Gram 1,092 997 1,008 1,045 1,065 1,119 1,100 1,102 1,077 972 905 934 963 982 1,094 1,064 Source:

TABLE 2.4 PRODUCTION OF IMPORTANT CROPS


Total Food Bajra Jowar Maize Barley Grains 196 239 1,185 142 19,588 139 225 1,203 140 20,634 203 238 1,184 158 21,056 138 212 1,213 146 20,917 228 263 1,318 164 22,422 162 255 1,504 174 22,968 146 219 1,491 150 22,962 211 231 1,517 174 25,160 213 228 1,665 137 24,773 156 220 1,652 118 28,380 199 219 1,643 99 25,987 216 222 1,664 100 24,311 189 202 1,737 100 25,889 274 238 1,897 98 26,855 193 186 2,797 92 29,905 221 153 3,560 87 31,268 (000 tonnes) Rapeseed and SesaCotton Mustard mum (000 tonnes) (000 Bales) obacco T 228 21.4 1,637 9,628 75 220 28.7 2,181 12,822 97 207 34.0 1,540 9,054 102 197 32.3 1,368 8,041 100 229 36.2 1,479 8,697 81 255 39.5 1,802 10,595 80 286 44.9 1,594 9,374 92 292 42.5 1,562 9,184 99 279 32.1 1,495 8,790 109 297 35.4 1,912 11,240 108 230 50.7 1,826 10,732 85 221 69.6 1,805 10,613 94 215 19.3 1,737 10,211 88 221 25.0 1,709 10,048 86 203 30.0 2,426 14,263 101 188 34.0 2,122 12,417 120 1. Ministry of Food, Agriculture and Livestock. 2. Federal Bureau of Statistics

Fiscal Year Wheat Rice 1990-91 14,565 3,261 1991-92 15,684 3,243 1992-93 16,157 3,116 1993-94 15,213 3,995 1994-95 17,002 3,447 1995-96 16,907 3,966 1996-97 16,651 4,305 1997-98 18,694 4,333 1998-99 17,858 4,674 1999-00 21,079 5,156 2000-01 19,024 4,803 2001-02 18,226 3,882 2002-03 19,183 4,478 2003-04 19,500 4,848 2004-05 21,612 5,025 2005-06 P 21,700 5,547 P: Provisional (Jul-Mar)

Gram 531 513 347 411 559 680 594 767 698 565 397 362 675 611 868 527

Sugarcane 35,989 38,865 38,059 44,427 47,168 45,230 41,998 53,104 55,191 46,333 43,606 48,042 52,056 53,419 47,244 44,312 Source:

TABLE 2.5 YIELD PER HECTARE OF MAJOR AGRICULTURAL CROPS


(Kg/Hectare) Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P P: Provisional Wheat 1,841 1,990 1,946 1,893 2,081 2,018 2,053 2,238 2,170 2,491 2,325 2,262 2,388 2,375 2,568 2,614 Rice 1,543 1,546 1,579 1,826 1,622 1,835 1,912 1,870 1,928 2,050 2,021 1,836 2,013 1,970 1,995 2,117 Sugarcane 40,720 43,371 43,024 46,144 46,747 46,968 43,521 50,288 47,784 45,874 45,376 48,042 47,324 49,738 48,906 48,856 Maize Gram Cotton 1,401 486 615 1,419 514 769 1,364 344 543 1,380 393 488 1,481 524 557 1,602 607 601 1,607 540 506 1,626 696 528 1,731 648 511 1,717 581 641 1,741 439 624 1,766 388 579 1,858 701 622 2,003 622 572 2,848 793 760 3,483 495 685 Source: Ministry of Food & Agriculture and Livestock Federal Bureau of Statistics.

TABLE 2.6 PRODUCTION AND EXPORT OF FRUIT


Fiscal Year Citrus Mango 776 787 794 839 884 908 915 917 916 938 990 1,037 1,035 1,056 1,674 1,888 Production of Important Fruit (000 tonnes) Apple Banana Apricot Almonds Grapes 243 295 339 442 533 554 568 573 589 377 439 367 315 334 352 375 202 44 52 53 80 82 83 94 95 125 139 150 143 175 148 151 81 109 122 153 178 191 188 189 191 120 126 125 130 211 215 220 32 38 40 45 49 49 49 49 50 32 33 26 24 24 23 23 Source: Export (000 Value tonnes) (Mln. Rs) 33 355 112 935 36 373 125 966 38 384 121 1,179 40 402 127 1,324 43 420 139 1,256 72 442 135 1,487 74 448 219 2,776 74 455 202 2,793 76 468 181 2,773 40 494 240 4,130 51 526 260 4,586 53 538 290 5,097 52 532 263 4,861 51 550 354 5,912 49 571 206 4,202 50 593 262 5,394 Ministry of Food, Agriculture and Livestock Federal Bureau of Statistics Guava

1990-91 1,609 1991-92 1,630 1992-93 1,665 1993-94 1,849 1994-95 1,933 1995-96 1,960 1996-97 2,003 1997.98 2,037 1998.99 1,861 1999.00 1,943 2000-01 1,865 2001-02 1,830 2002-03 1,702 2003-04 1,760 2004-05 1,944 2005-06 P 2,257 P: Provisional (Jul-Mar)

TABLE 2.7 CROPWISE COMPOSITION OF VALUE ADDED OF MAJOR AGRICULTURAL CROPS (AT CONSTANT FACTOR COST-BASE 1999-2000)
Fiscal Year/ Crops All Major Crops Food Crops Rice Wheat Barley Jowar Bajra Maize Gram Fibre Crops Cotton Cash Crops Sugarcane Other Crops Sesamum Rape Seed & mustard Tobacco 1999-00 100.00 63.30 15.40 41.30 0.20 0.40 0.30 2.80 2.80 24.00 24.00 11.00 11.00 1.60 0.20 0.80 0.60 2000-01 100.00 62.32 15.62 40.39 0.20 0.44 0.45 3.10 2.11 24.89 24.89 11.27 11.27 1.52 0.34 0.70 0.84 2001-02 100.00 60.34 14.54 39.48 0.21 0.46 0.50 3.21 1.95 25.26 25.26 12.63 12.63 1.77 0.47 0.75 0.55 2002-03 100.00 62.66 15.85 39.26 0.19 0.39 0.41 3.13 3.41 22.98 22.98 12.95 12.95 1.41 0.12 0.81 0.48 2003-04 (%age share) 2004-05 2005-06

100.00 100.00 100.00 63.52 61.56 64.59 16.94 15.29 17.23 38.98 37.58 38.84 0.19 0.15 0.15 0.46 0.31 0.27 0.59 0.36 0.42 3.32 4.14 5.33 3.05 3.73 2.35 22.06 27.19 24.37 22.06 27.19 24.37 13.00 9.95 9.66 13.00 9.95 9.66 1.43 1.31 1.38 0.15 0.19 0.19 0.81 0.65 0.62 0.46 0.47 0.57 Source: Federal Bureau of Statistics

TABLE 2.8 CREDIT DISBURSED BY AGENCIES


(Rs million) Fiscal ZTBL(a)* Taccavi Domestic CooperCommercial Total Year Private Banks tives Banks (b) 56.30 3,017.45 3,517.59 14,915.29 1990-91 8,323.95 56.80 3,247.01 4,179.56 14,479.31 1991-92 6,996.44 50.80 2,978.00 4,525.91 16,198.11 1992-93 8,643.40 .. 2,621.49 4,063.30 15,674.05 1993-94 8,989.26 .. 3,756.74 4,040.79 22,373.27 1994-95 14,575.74 .. 3,803.38 5,044.66 19,187.31 1995-96 10,339.27 .. 3,431.13 4,429.43 19,547.67 1996-97 11,687.11 .. 4,928.93 6,109.70 33,392.30 1997-98 22,353.60 .. 5,439.97 7,236.00 42,852.00 1998-99 30,175.96 .. 5,951.23 9,312.50 39,687.60 1999-00 24,423.89 2000-01 27,610.20 .. 5,124.20 12,056.00 44,790.40 .. 578.50 5,273.70 17,486.10 52,446.30 2001-02 29,108.00 .. 1,421.00 5,485.40 22,738.60 58,915.10 2002-03 29,270.10 .. 2,702.00 7,664.00 33,247.00 73,546.00 2003-04 29,933.00 .. 12,407.00 7,607.00 51,310.00 108,733.00 2004-05 37,409.00 10,980.00 4,181.00 46,973.00 91,161.00 2005-06 P 29,027.00 .. not Available Source : i) State Bank of Pakistan a: Including Agribusiness ii) Ministry of Food, Agriculture & Livestock b: including Tobacco Marketing P: Provisional(Jul-Mar) *: Zarai Taraqiate Bank Limited, formerly Agriculture Development Bank of Pakistan

TABLE 2.9 FERTILIZER OFFTAKE AND IMPORTS OF PESTICIDES


Fiscal N Year 1990-91 1,471.63 1991-92 1,462.60 1992-93 1,635.34 1993-94 1,659.36 1994-95 1,738.12 1995-96 1,990.90 1996-97 1,985.10 1997-98 2,075.00 1998-99 2,097.00 1999-00 2,217.80 2000-01 2,264.49 2001-02 2,285.30 2002-03 2,349.11 2003-04 2,526.73 2004-05 2,796.42 2005-06 P 2,265.40 P Provisional, (Jul-Mar) Fertilizer off-take (000 N/Tonnes) P K 388.50 398.02 488.20 464.24 428.40 494.45 419.51 551.00 465.00 597.16 676.73 624.54 650.17 673.46 865.11 694.92 32.75 23.30 24.07 23.17 16.54 29.70 8.40 20.00 21.00 18.50 22.75 18.75 20.49 21.79 32.51 21.52 Total Import of Import of Insecticides fertilizers Quantity Value 000 N/T (Tonnes) (Mln Rs) 1,892.88 685.00 13,030.14 1,489.43 1,883.92 632.00 15,258.30 1,945.98 2,147.61 759.10 14,434.80 1,730.60 2,146.77 903.00 12,100.40 1,706.30 2,183.06 261.00 21,776.10 2,978.10 2,515.00 581.00 30,479.00 5,080.70 2,413.01 878.10 30,855.90 5,272.49 2,646.00 714.00 29,224.90 4,801.19 2,583.00 866.00 31,893.40 5,515.12 2,833.50 662.80 26,123.90 4,691.71 2,966.03 579.10 21,255.00 3,476.50 2,928.60 625.70 31,783.20 5,320.49 3,019.76 766.10 22,242.00 3,420.93 3,221.98 764.10 41,406.00 7,145.00 3,694.04 784.71 33,968.00 6,303.00 2,981.84 1,002.17 25,353.00 5,481.00 Source: 1. Federal Bureau of Statistics. 2. National Fertilizer Development Centre.

TABLE 2.10 AVERAGE RETAIL SALE PRICE OF FERTILIZERS


Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P .. P AN/CAN ASN AS NP AS Urea AN/CAN (46% N) (26% N) (21% N) 90.0 85.0 195.0 95.0 90.0 195.0 109.0 96.0 205.0 .. 125.3 210.1 150.0 164.0 235.0 172.0 172.0 267.0 209.0 197.0 340.0 223.6 232.5 341.0 231.0 275.0 346.0 231.0 286.0 327.0 363.0 233.0 300.0 268.0 308.0 394.0 282.0 344.0 411.0 208.0 373.0 420.0 353.0 .. 468.0 396.0 742.0 506.0 Not available Provisional (Jul-Apr) Ammonium nitrate/calcium ammonium nitrate. Ammonium super nitrate. Ammonium sulphate. Nitrophosphate. NP (23:23) 173.0 173.0 196.0 202.6 250.0 320.0 384.0 396.6 457.0 464.0 468.0 519.0 539.0 622.0 704.0 712.0 (Rs per bag of 50 Kgs/110lbs) SSP(G) DAP SOP NPK (18%) (18:46) (50% K) (10:20:20) 93.0 249.0 150.0 176.0 93.0 272.0 150.0 176.0 93.0 264.0 195.0 247.0 95.8 269.0 195.0 247.0 150.0 379.0 195.0 247.0 183.0 479.0 331.0 .. 211.0 553.0 532.0 .. 200.0 564.6 540.0 .. 234.0 665.0 541.0 .. 298.0 649.0 543.0 .. 253.0 670.0 682.0 .. 280.0 710.0 765.0 .. 287.0 765.0 780.0 .. 329.0 913.0 809.0 .. 373.0 1,001.0 996.0 .. 338.0 1,088.0 1,174.0 .. Source: Federal Buearu of Statistics. National Fertilizer Dev. Centre. SSP: single super phosphate. DAP: Diammonium phosphate. SOP: Sulphate of potash. NPK: Nitrogen phosphate and potash.

TABLE 2.11 AREA IRRIGATED BY DIFFERENT SOURCES


Canal Wells 0.08 0.11 0.10 0.09 0.10 0.11 0.11 0.13 0.09 0.09 0.10 0.16 0.17 0.15 0.19 (Million hectares) Canal Tubewells Others Total 5.87 0.22 16.75 5.93 0.21 16.85 6.23 0.24 17.33 6.22 0.17 17.13 6.41 0.18 17.20 6.58 0.22 17.58 6.61 0.26 17.85 6.74 0.18 18.00 6.88 0.16 17.95 6.99 0.18 18.11 7.22 0.17 17.82 7.24 0.18 18.04 7.21 0.20 18.22 7.50 0.21 18.78 7.70 0.24 18.84 Source: Ministry of Food, Agroculture and Livestock

Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 P P: Provisional

Canals 7.89 7.85 7.91 7.73 7.51 7.60 7.81 7.79 7.67 7.56 6.98 6.81 7.06 7.22 7.00

Wells 0.13 0.16 0.18 0.14 0.17 0.18 0.18 0.16 0.17 0.18 0.16 0.20 0.21 0.22 0.25

Tubewells 2.56 2.59 2.67 2.78 2.83 2.89 2.88 3.00 2.98 3.11 3.19 3.45 3.37 3.48 3.46

TABLE 2.12(A) PROCUREMENT/SUPPORT PRICES OF AGRICULTURAL COMMODITES


(Rs per 40 kg) Fiscal Year Rice Wheat Basmati 385 283.00 308.00 340.00 360.00 389.00 419.80 461.78 .. .. .. .. .. .. .. .. .. Irri-6 (F.A.Q) 127.00 140.00 150.00 157.00 170.00 183.00 210.45 .. .. .. .. .. .. .. .. .. Paddy Basmati Irri-6 385 (F.A.Q) 143.50 73.00 155.00 78.00 175.00 85.00 185.00 90.00 210.90 102.60 222.00 112.00 255.30 128.80 310.00 153.00 330.00 175.00 350.00 185.00 385.00 205.00 385.00 205.00 385.00 205.00 215.00 # 400.00 # 415.00 .. .. 300.00 NWFP Sugarcane Punjab Sind Baluchistan 15.75 .. 17.75 17.00 17.50 14.75 18.25 18.25 20.75 20.75 21.75 21.75 24.50 24.50 36.00 36.00 36.00 36.00 36.00 36.00 36.00 36.00 43.00 43.00 43.00 ! 43.00 45.00 ! .. 45.00 42.00 60.00 .. (Contd.)

1990-91 112 15.25 15.25 1991-92 124 16.75 16.75 1992-93 130 17.50 17.50 1993-94 160 18.00 18.00 1994-95 160 20.50 20.50 1995-96 173 21.50 21.50 1996-97** 240 24.00 24.00 1997-98 240 35.00 35.00 1998-99 240 35.00 35.00 1999-00 300 35.00 35.00 2000-01 300 35.00 36.00 2001-02 300 42.00 42.00 2002-03 300 42.00 42.00 ! 42.00 42.00 ! 2003-04 350 2004-05 400 42.00 40.00 2005-06 415 48.00 45.00 FAQ Fair Average Quality .. Not applicable ** Rs.240/- w.e.f. April 3, 1997. # Indicative Prices announced by the Government for 2003-04 crop. ! Prices of sugarcane for 2002-03 has been repeated, since the Federal Government has not fixed its price in these years. However, Government of the Punjab and sindh had fixed the minimum Prices of sugarcane at Rs. 41 per 40 Kgs for 2001-02, at millgate. The same are being continued so far.

TABLE 2.12(B) PROCUREMENT/SUPPORT PRICES OF AGRICULTURAL COMMODITES


(..Contd.) Cotton Lint Sarmast Qallandri Deltapine MS39-40 690 745 * 800 * 831 * 1055 * 1055 .. .. .. .. .. .. .. .. .. .. Seed Cotton (Phutti) (Rs per 40 Kg) Sarmast QallanB-557 dri DeltaAC-134, B-557 AC-134, F-149 pine MSDesi NT 149-F Desi NT Niab-78 39-40 Potato Onion 550 615 645 220 235 245 260 55 52 662 685 715 255 270 280 290 65 60 695 .. 770 275 .. 300 * 310 67 65 726 .. 801 290 .. 315 * 325 77 78 795 .. 986 340 .. 400 * 423 84 78 795 .. 986 340 .. 400 * 423 84 85 .. .. .. 440 .. 500 * 540 115 100 .. .. .. 440 .. 500 * 620 145 112 .. .. .. .. .. 825 * .. 145 140 .. .. .. .. .. 725 * .. 145 .. .. .. .. .. .. 725 * .. 145 .. .. .. .. .. .. 780 ** .. .. .. .. .. .. .. 800 ** .. .. .. .. .. .. .. 850 ** .. .. .. .. .. .. .. 925 ** .. .. .. .. .. .. .. .. 976 ** .. .. .. not applicable Source: Ministry of Food, Agriculture & Livestock Niab-78, CIM (APCOM) An intervention price of seed cotton (Phutti Crop) for the base grade 3 with staple length 1-1/32" and micronaire range of 3.8 - 4.9 NCL fixed.

Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P .. * **

TABLE 2.13 PROCUREMENT, RELEASES AND STOCKS OF WHEAT AND RICE


Fiscal Year Wheat(May-April) Releases Stocks (on 1st May) 5,417.0 1,492.0 5,293.0 969.0 5,044.0 504.0 5,809.0 1,007.0 6,004.0 776.0 5,434.0 385.0 6,006.0 396.0 6,212.0 327.0 6,165.0 841.0 6,131.0 1,174.0 5,537.0 702.0 3,376.0 3,683.0 5,137.8 992.0 4,104.0 161.0 4,480.5 373.9 2,106.6 2,110.1 * Rice Procured Basmati Others 142.7 121.6 500.5 144.9 284.0 50.8 .. .. .. .. .. .. .. .. 673.8 370.3 454.0 681.4 .. 154.6 .. .. .. .. .. .. .. .. (000 tonnes) Stocks Balance (on 1st July) Basmati Others 719.3 486.8 285.2 224.8 236.4 494.3 159.4 .. .. .. .. .. .. .. 117.5 314.7 540.5 541.2 848.5 117.7 187.9 .. .. .. .. .. .. ..

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 T 2005-06 T .. not available * Stocks as on 1st May 2006. T : Target

Procurement 4,412.4 3,159.0 3,249.0 4,120.0 3,644.0 3,740.0 3,448.0 2,725.0 3,984.0 4,070.0 8,582.0 4,081.0 4,045.0 3,514.0 4,730.0 5,000.0

Source: Ministry of Food, Agriculture and Livestock.

TABLE 2.14 LIVESTOCK POPULATION


(million numbers) Fiscal Year Buffaloes 17.8 18.3 18.7 19.2 19.7 20.3 20.8 21.4 22.0 22.7 23.3 24.0 24.8 25.5 26.3 28.4 Cattle 17.7 17.7 17.8 17.8 17.8 20.4 20.8 21.2 21.6 22.0 22.4 22.8 23.3 23.8 24.2 25.5 Goats 37.0 38.7 40.2 42.0 43.8 41.2 42.6 44.2 45.8 47.4 49.1 50.9 52.8 54.7 56.7 61.9 Sheep 26.3 27.4 27.7 28.3 29.1 23.5 23.7 23.8 23.9 24.1 24.2 24.4 24.6 24.7 24.9 25.5 Poultry 146.9 156.2 182.6 250.0 318.8 350.0 382.0 276.0 278.0 282.0 292.4 330.0 346.1 352.6 366.0 386.5 Camels 1.1 1.1 1.1 1.1 1.1 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.7 0.7 0.7 Asses 3.5 3.8 3.8 3.9 4.0 3.6 3.6 3.2 3.8 3.8 3.9 3.9 4.1 4.1 4.2 4.3 Horses Mules 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P P Estimated (Jul-Mar) 0.4 0.1 0.5 0.1 0.4 0.1 0.4 0.1 0.4 0.1 0.3 0.1 0.3 0.1 0.3 0.1 0.3 0.1 0.3 0.2 0.3 0.2 0.3 0.2 0.3 0.2 0.3 0.2 0.3 0.3 0.3 0.3 Source: Livestock Division

TABLE 2.15 LIVESTOCK PRODUCTS


(000 tonnes) Fiscal Milk Beef Mutton Poultry Wool Hair Bones Fat Blood Eggs Hides Skins Year Meat (Mln.Nos.) (Mln.Nos.) (Mln.Nos.) 1990-91 15,481 765 665 151 48.1 7.9 259.0 101.8 40.1 4,490 5.9 32.7 265.0 104.5 42.5 4,914 6.0 33.9 1991-92 16,280 803 713 169 49.3 8.3 271.0 107.2 45.1 5,164 6.1 36.0 1992-93 17,120 844 763 265 50.5 8.1 277.0 110.0 47.3 5,740 6.2 37.8 1993-94 18,006 887 817 296 51.7 9.0 283.0 113.0 50.7 5,927 6.3 39.3 1994-95 18,986 931 875 308 53.1 9.4 32.7 1995-96 22,970 898 587 355 38.1 15.6 295.7 110.1 32.0 5,757 7.0 34.5 1996-97 23,580 919 602 387 38.3 16.2 302.3 112.6 32.8 6,015 7.1 35.3 1997-98 24,215 940 617 284 38.5 16.7 309.2 115.2 33.6 5,737 7.3 36.3 1998-99 24,876 963 633 310 38.7 17.3 316.3 117.8 34.4 8,261 7.5 37.2 1999-00 25,566 986 649 322 38.9 17.9 324.0 120.6 40.9 7,321 7.6 2000-01 26,284 1,010 666 339 39.2 18.6 331.4 123.5 41.8 7,505 7.8 38.2 39.2 2001-02 27,031 1,034 683 355 39.4 19.3 339.4 126.5 42.9 7,679 7.9 40.3 2002-03 27,811 1,060 702 370 39.7 19.9 347.6 129.7 44.0 7,860 8.2 42.4 2003-04 28,624 1,087 720 378 39.9 20.7 356.2 132.9 45.2 8,102 8.4 42.6 2004-05 29,438 1,115 739 384 40.0 20.7 365.1 136.3 45.2 8,529 8.4 45.2 2005-06 P 31,294 1,174 782 463 40.7 23.2 384.0 143.5 49.0 9,057 9.1 P: Provisional (Jul-Mar) Source: Livestock Division Note: Livestock Population and Products have been revised from 1995-96 onwards due to livestock census held in 1995-96.

Chapter 3.

MANUFACTURING, MINING AND INVESTMENT POLICIES


The overall manufacturing sector continued its positive trend during the current fiscal year. Overall manufacturing recorded an impressive and broad based growth of 8.6 percent, against a target of 12.0 percent and last years growth of 12.6 percent. Large-scale manufacturing, Table 3.1: Group-Wise Growth Performance (Percent) accounting for 69.5 percent of overall manufacturing Group 2003-04 2004-05 2005-06* registered an impressive growth of 9.0 percent in the Food, Beverages & Tobacco 15.64 (1.7)** 6.95 current fiscal year 2005-06 against a target of 14.5 Textile and Apparel 5.66 24.7 3.98 percent and last years achievement of 15.6 percent. Leather Products 31.69 (5.6) 10.91 There has been a slight decline in growth in the Paper & Board 8.07 3.7 11.85 manufacturing sector due to multiple reasons like Pharmaceutical 20.91 6.6 14.83 Chemicals 35.64 11.2 9.08 reduced production of cotton crop, sugar shortage, Petroleum Group 4.38 9.4 2.32 steel and iron problems and the last but not the least Tyres & Tubes 0.26 6.7 12.20 global oil prices. All of these reasons contributed to Non-Metallic Mineral Products 19.39 16.8 9.49 reduced growth in 2005-06 but high levels of liquidity Basic Metal Industries 2.18 (5.0) (58.6) in the banking system, an investment friendly Light Engineering Goods 7.18 14.9 6.46 interest rate environment, a stable exchange rate, Electricals 53.59 44.8 11.78 low inflation, comfortable foreign exchange reserves, Automobile 50.26 32.8 29.76 stronger domestic demand for consumer durables Overall Growth 18.2 15.6 9.00 * July-March Source: Economic Adviser Wing, Finance Division and high business confidence among other things will again boost the manufacturing sector growth rate ** Bracketed figure indicates negative growth. up to a reasonable level. The main contributors to this impressive growth of 9.0 percent in July-March 2005-06 over last year are the automobile group (29.76 percent), engineering goods group (6.46 percent), non-metallic mineral products (9.49 percent), leather products (10.91 percent), chemicals (9.08 percent), pharmaceuticals (14.83 percent) and electricals (11.78 percent). The items that registered positive growth were cotton cloth (0.07 percent) and cotton yarn (11.16 percent) in the textile group; cooking oil (17.6 percent) in the food, beverages and tobacco groups; nitrogenous fertilizer (4.46 percent), in the chemical group, cement (9.75 percent) in the non-metallic mineral products group and Jeeps & Car (29.9 percent), LCVs (29.3 percent) and motorcycles/scooters (15.04 percent) in the automobile group. The individual items exhibiting negative growth include; sugar (2.40 percent), coke (77.39 percent), power looms (24.67 percent) and billets (47.95 percent). According to statistics both sugar and metallic billets have registered a negative trend during the year under review. Whereas T.V sets have shown a marked increase by posting a growth of 12.25 percent. In the same context the production of motorcycles in the country has also increased tremendously. The production and sale of motorcycles is taken as an indirect measure to ascertain the standard of living of the middle class of Pakistan. Since motor cycles are one of the cheapest means of transport especially in rural areas due to not only its price tag but its durability and affordable petrol consumption. The production of motorcycles remained more or less stable during the late nineties but has sky rocketed in 2000-01 and further projections show it to be increasing even at a faster rate. Since

27

Economic Survey 2005-06 production and sale of motor cycles have been taken as being synonymous with the standard of living of the middle class thus we can safely say that the outstanding growth and economic stability achieved by the country during the last couple of years has slowly but steadily started trickling down to the masses.
Table 3.2: Production of Selected Industrial Items of Large-Scale Item Cotton Yarn Cotton Cloth Sugar Nitrogenous Fertilizer Phosphatic Fertilizer Soap & Detergent Vegetable Ghee Cooking Oil Cement Cigarettes Jeep& Cars Tractors L.C.V Motorcycles/Scooters Bicycles Paper & Paper Board T.V Sets Motor Tyres Billets Refrigerators Caustic Soda Units 000 tonnes Mln.Sq. Mtr 000 tonnes 000 N. tonnes 000 N .tonnes 000 tonnes 000 tonnes 000 tonnes 000 tonnes Billion Nos. Nos. Nos. Nos. Nos. 000 Nos. 000 tonnes. 000 Nos. 000 Nos. 000 tonnes 000 Nos. 000 tonnes 2003-04 1929.1 683.3 4020.8 2234.3 285.4 186.8 888.0 189.8 12862 55.39 100070 36103 14089 327446 664.1 404.6 843.0 1302 429.1 617.4 187.5 2004-05 2280.6 880.8 3092 2315.4 393.3 212.7 917 218.6 15038 61.08 128381 43746 23613 476333 587.9 419.8 908.8 1488 314.7 784.6 206.7 July-March 2004-05 2005-06 % Change 1712.2 1903.3 11.16 689.5 690.0 0.07 2958.2 2887.4 (2.40) 1732.1 1809.5 4.46 283.9 318.1 12.03 151.6 178.6 17.79 761.2 861.3 13.16 162.1 190.6 17.60 11154 12242 9.75 44.1 46.2 4.74 87992 114309 29.91 31663 36838 16.34 16041 20743 29.31 343397 395056 15.04 418.3 449.4 7.43 313.3 350.4 11.85 650.5 730.2 12.25 3881 4269 10.01 271.9 141.5 (47.97) 512.0 569.7 11.27 152.3 161.2 5.85 Source : Federal Bureau of Statistics

EVALUATION OF SELECTED LARGE-SCALE MANUFACTURING INDUSTRIES The post quota scenario has dramatically altered the global trading patterns. With the complete phasingout of quotas, the textile and clothing sector has been experiencing another global revolution. With the opening of world markets and increased global competition, new focus is required for textile industry to compete globally. In this context, both the government and the textile manufacturers, will have to work together to come out with a workable solution to enhance productivity and to reduce cost of doing business so that they become competitive in global market and increase their market share.
Table-3.3 : Role of Textile Industry in Promotion of Export, Export Countries in Asia Exports US $ Billion - 2004 Total Start Textile Clothing Country Exports Date China 33.43 61.86 95.29 Hong Kong 1950 14.30 25.10 39.40 India 6.85 6.62 13.47* Indonesia 1970 3.15 4.45 07.76 S. Korea 1950 10.84 3.39 14.43 Malaysia 1970 1.23 2.33 03.56 Pakistan 1950 6.12 3.03 09.15 Taiwan 1950 10.04 1.95 11.99 Thailand 1960 2.63 4.05 06.68 * 2003 Source: Textile Commissioners Organization

Many developing countries are highly dependent on textile and apparel exports, which often accounts for a significant share of their total export earnings and thus creating a high degree of dependency on this sector. The developing countries including Pakistan are most prone to this dependence and are equally prone to sensitivity of global market becoming highly competitive.

28

Manufacturing, Mining and Investment Policies Textile Industry The share of textile industry in the economy along with its contribution to exports, employment, foreign Fig-1 : Composition of Pakistan Textile Exports 2004-05 (Million $) exchange earnings, investment and value added makes it the single largest manufacturing sector for Art Silk Pakistan. It contributes around 8.5 percent to GDP, Tents & Syntax, 268 Other textile, Canvas, 61 employs 38 percent of the total manufacturing 137 labour force, and contributes between 60-70 Towels, 462 Raw Cotton, percent to total merchandise exports. Indeed, with 108 exports reaching about $8.6 billion in 2004-05, Yam, 983 Madeups Pakistan is one of the largest textile exporters in the Incl. world. The variety of products ranges from cotton Bedwear, 1679 yarn to knitwear. Garment made-ups and bed wear Fabrics, 1924 are the most important export products with an Knitwear (Hosiery), export value of about $1.35 billion each. Knitwear, Ready Made 1467 ready made garments and cotton yarn also have Garments, 984 important shares in total exports. Overall, the US Source: Textile Commissioners Organization and the EU are Pakistans largest trading partners accounting for 25 percent and 20 percent share of Pakistani exports respectively. Other major importers include China, UAE and Saudi Arabia. Textile trade is classified into two broad categories i.e. textile which include yarn, fabric and made-ups, and clothing which represents readymade garments. Investment in Textile Sector Textile industry has made an investment of about $6.0 billion during the last six years. This investment includes both investments through bank loans as well as own sources. This investment has been made in the form of BMR expansion and new capacity. Textile machinery worth US$ 0.6 billion has been imported during 2005-06. the import of textile machinery for the last seven years are documented in Table 3.4 and Sector wise Investment is shown in Fig-2.
Fig-2 : Sectoral Shares in Total Investm ent in the Sector ($ 6.0 billion), 1999-2006

Table-3.4 : Import of Textile Machinery Year 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 (Jul-Mar) Total Million US $ 210.9 370.2 406.2 531.9 597.9 700 654.2 3472 Source: Federal Bureau of Statistics % Change 28.6 75.5 9.9 30.7 12.4 17 -6.5

Knitw ear & Garments, 5% Textile Processing , 10.50%

Made Ups, 8% Synthetic Textiles, 5.20%

Weaving, 26.30%

Spining, 47%

Reforms in the Textile Sector The government is providing support for the local production of textile machinery. A wide ranging campaign to

missioner's

29

Economic Survey 2005-06 produce contamination free cotton in the country with a view to promoting value addition has already been started. As a result, the cotton prices are now being quoted on a PSCI grade standard basis. To ensure an abundant supply within the country, cotton is allowed to be imported and exported freely. To stabilize prices in the domestic market, the Trading Corporation of Pakistan (TCP) has been intervening as and when required. In order to prepare the textile industry in the post quota regime the government has set up a high level Federal Textile Board with Textile Commissioners Organization serving as its Secretariat. The Board has been entrusted the task of looking into the issues of clean cotton, labour, social and environment laws, modernization of ginneries, rationalization of tariffs, facilitation in sales tax issues and developing a package to promote garment sector, especially by improving their competitiveness in international market. Some progress has been made but much more needs to be done. Performance of the Ancillary Textile Industry Textile production is comprised of cotton ginning, cotton yarn, cotton fabric, fabric processing (grey-dyed-printed), home textiles, towels, hosiery & knitwear and readymade garments. These components are being produced both in the large-scale organized sector as well as in unorganized cottage / small & medium units. The performance of these various ancillary textile industries is evaluated below:i. Cotton Ginning Sector

Cotton is a natural vegetable fiber used primarily as a raw material for textiles. Cotton's strength, absorbency, and capacity to be washed and dyed also make it adaptable to a considerable variety of textile products. Leading producers of cotton include USA, China, India, Pakistan, Uzbekistan and Turkey. The current market share of cotton is 56 percent in all fibers. Textile fibers are divided into three basic types according to their sources such as Cotton Fiber, Man Made Fiber and Wool. In the last ten years, the percentage share of cotton has shrunk from 48% to 39% in the total world fiber consumption. Man-made fibers that include polyester, acrylic, nylon, rayon and viscose have taken more than 58% of the total share. Polyester has by far the largest share within the man-made fibers, which is more than 80%. Ginning is the first mechanical process involved in the processing of cotton. Ginning is the process for separating lint from seed to cotton. The ginning industry has mushroomed in the cotton growing areas of Pakistan informally, without adequate regulations. There are 1,221 ginning factories in the country. Ginning industry has installed capacity of more than one million bales on a single shift basis and a total capacity of around 20 million bales on three shift bases, part of which lies unutilized. The ginning industry faces peculiar issues and problems in Pakistan. Cotton is entirely hand picked and use of gin process monitoring and controls are not there. Being producer of good quality medium to long staple cotton varieties, Pakistan suffers from a number of problems related to non-application of standards, ginning practices and poor management. The machinery being used is locally made and is very old. Hence the efficiency and productivity of the process is one-fifth of that of machines currently being used in US or in other competing countries. However, the government is undertaking some serious measures to up grade this sector of the industry. Establishment of cotton standards through PCSI, setting up of Ginning Institute and contamination free cotton are positive steps towards the right direction. ii. Cotton Spinning Sector Spinning is the process of converting fibers into yarn. This is the first process of value chain that adds value to cotton by converting into a new product i.e. conversion from ginned cotton into cotton yarn. If spinning industry produces sub-standard yarn, its effect goes right across the entire value chain. Pakistan is the third largest player in Asia with a spinning capacity of 5% of the total world and 7.6% of the capacity in

30

Manufacturing, Mining and Investment Policies Asia. Pakistans growth rate has been 6.2% per annum and is second only to Iran amongst the major players. At present, cotton-spinning sector is comprised of 458 textile units (50 composite units and 408 spinning units) with 8.8 million spindles and 77 thousand rotors in operation with capacity utilization of 87 percent and 49 percent respectively, during July-Feb 2005-06. iii. Weaving & Made-up Sector The pattern of cloth production is different than spinning sector. There are three different sub-sectors in weaving viz, Integrated, independent Weaving Units, and Power Loom Units. Investment has taken place in shuttle less loom, both in integrated and independent weaving sector. Further investment in this sector will be forthcoming in the medium term. The Power Loom Sector has modernized and registered a phenomenal growth over the last two decades. The growth in power loom sector owes to a larger extent on the government policies pursued this far as well as increased demand for the product. This sector is producing comparatively low value added Grey Cloth of mostly inferior quality. Problems of the power loom sector revolve mainly around the poor technology, scarcity of quality yarn and lack of institutional financing for its development from unorganized sector to an organized one. There is need for training facilities and guidance to diversify their products, especially to cater the needs of the garment industry. However, the performance of cloth sector remained far better than last year.
Table-3.5 : Installed and Capacity Worked in Weaving Sector Category Installed Capacity a) Integrated Textile Units 9050 b) Independent Weaving Units 27500 c) Power Loom Sector 295442 Total 331992 (Nos.) Effective / Capacity Worked 4350 27000 285442 316792 Source : Textile Commissioner Organization

iv. Cotton Cloth While the production of cloth in mill sector is reported the same is not true with production of non-mill sector, and therefore, their numbers are estimated. What is surprising is that the production of non-mill sector which is seven times more than mills sector is not being reported. The production of cloth, both from mills and non-mills sector have registered an impressive growth of 14.0 percent during July-March 2005-06, thereby serving as the main strength for down stream sectors like bed wear, made ups and garments (see Table 3.6).
Table-3.6: Production of Cloth Category Mill Sector Non-Mill Sector Total (M. Sq. Mtrs) 2005-06 (Jul-Mar) % Change 697.300 1.13 5268.700 15.90 5966.000 13.95 Source : Textile Commissioner Organization.

2004-05 (Jul-Mar) 689.500 4546.000 5235.500

v. Textile Down-Stream Industry This is the most dynamic segment of Textile Industry. The major product groups are Towels, Tents & Canvas, Cotton Bags, Bed-Wear, Hosiery & Knitwear and Readymade Garments including Fashion Apparels. a. Hosiery Industry There are about 12,000 Knitting Machines spread all over the country. The Capacity utilization is approximately 70%. There is greater reliance on the development of this industry as there is substantial value addition in the

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Economic Survey 2005-06 form of knitwear. Besides locally manufactured machinery, liberal import of machinery under different modes is also being made and the capacity based on exports is being developed. This sector has tremendous export potential. b. Readymade Garment Industry Pakistan with total exports of around US$ 1 billion has a meager share of 1% in the global apparel market. The apparel export product mix from Pakistan is heavily tilted towards men's wear and knitted garments.
Fig-3 : Sector w ise Export Perform ance 2005-06 (July-March) US$ m illion 1600 1400 1200 1000 800 600 400 200 0

The major thrust of garments and made-ups exports from Pakistan is on the USA market. The European Union is the second largest market for garment manufacturers from Pakistan. Major markets that Pakistani manufactures have so for not been able to explore are the Japanese, Far East and Middle East markets. These markets demand high product standards and in return offer higher unit price realizations. The shift towards newer product and non-traditional markets can only be brought about by more emphasis on synthetic garments, development of a marketing and research infrastructure for the industry.
Towels Canvas

The production of garments and made-ups in Pakistan is concentrated mainly in Lahore, Faisalabad & Karachi. These three clusters have their own specialties. Faisalabad caters more to Home Textile; Lahore is the home of Knitwear and Karachi lives up to its reputation of being mini Pakistan. Karachi has established itself both in Knit as well as Woven side of the industry. In Lahore all major units are vertically integrated and are involved in knitting, dyeing, finishing & stitching. Major reasons to set up vertically integrated units is the desire of the manufacturer to have full control over all the processes involved and to ensure that right products are delivered at the right time. Specialized and commercial units have not been successful to position themselves to cater to the needs of the export oriented garment industry. This has hindered the growth of a parallel and independent downstream industry. At the same time it has limited the growth of the parent garment industry. Karachi industry on the other hand is divided into specialized commercial units. There are specialized units for fabric development and for commercial dyeing. This enables the industry to take the advantage of specialization that eventually reflects into product flexibility and cost competitiveness. c. Towel Industry There are about 7500 Towel Looms in the country in both Organized and unorganized sector. This Industry is dominantly export based and its growth has all the time depended on export outlets. Over 300% increase in Export of Towels in the past few years indicate that tremendous possibilities exist for further expansion provided the existing towels manufacturing factories are up graded to produce higher value towels. The Pakistani towel industry at large is using locally manufactured power looms. There are some 9000 locally manufactured looms being used by the industry. However some units are also equipped with imported auto looms and their number is about 250. Of the total production, 91.5% were from power looms and remaining from imported auto looms. d. Tarpaulin & Canvas Canvas exports can be subdivided into five categories i.e. tarpaulins, awnings and sun blinds, tents, sails,

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Other Made-ups

Bed Wear

Hoisery Knitwear Ready made

Manufacturing, Mining and Investment Policies pneumatic mattresses and camping goods. Although all of the different types of canvas are being manufactured in Pakistan but Pakistan has acquired a degree of specialization in the manufacture of tarpaulins and canvas. Being the highest raw cotton consuming sector its production capacity is more than 100 million square meters and around 90 percent of its production is exported. vi. Synthetic Fiber Manufacturing Sector This sector has made progress in line with demand of the textile industry. Presently there are seven polyester fiber units with production capacity of 625,000 tons per annum, two acrylic fiber units of which one unit has started its commercial production in December 1999 with rated capacity of 25,000 tons per annum while other unit of crescent group is under installation. One unit of viscose fiber with a capacity of 10,000 tons has also gone into production. Besides, import of fibers is also permissible to supplement the local production. vii. Filament Yarn Manufacturing Industry The synthetic filament yarn manufacturing industry picked up momentum during 5th Five Year Plan when demand and hence imports increased and private sector was permitted to make feasible investment in the rising market conditions. Following three kinds of filament yarn are manufactured locally: Production capacity of polyester filament yarn has Table 3.7 Capacity of Synthetic Filament Yarn increased while the demand for local synthetic Production Type of Yarn No. of Units Capacity weaving industry is stagnating. The production of (Metric Tons) filament fabrics are not picking up as their export Accetate Rayon sales are not feasible and local market is heavily 1 3, 000 Yarn flooded with smuggled goods. The production of Nylon Filament Yarn 3 2, 000 polyester filament yarn is approximately 78000 tones Polyester Filament 21 95, 000 per annum. The duty on filament yarn was reduced Yarn last year. While it was helpful to the synthetic Total 100, 000 weaving units, its impact on the filament industry is evident in the form of closure. Recently hosiery sector has started consuming synthetic yarns for export of knitted garments, which are, both value added as well as diversified in product. viii) Art Silk and Synthetic Weaving Industry Art silk and synthetic weaving industry has developed over the time on cottage based power looms units comprising of 8-10 looms spread all over the country. There are approximately 90, 000 looms in operation of which 30, 000 looms are working on blended yarn and 60,000 loom on filament yarn. Besides there are some mobile looms which become operational on market demand. The major concentration is in Karachi, Faisalabad, Gujranwala, and Jalalpur Jattan as well as in the unsettled area (Bara, Sawat, Khyber Agency and Waziristan). B. ENGINEERING SECTOR Engineering sector accounts for 63% share in world trade. Achieving any significant share of the world trade in engineering goods and services Pakistan will have to do many things which include gearing up our universities, polytechiniques and factories for the kind of manufacturing prowess and design capabilities required by the world market, which now stands spoilt for choices. In this context an important step has been taken by the restructuring of the Engineering Development Board. In Pakistan, large-scale manufacturing companies in the engineering sector lack export strategies as well as export developments. While Japan, Korea and Malaysia rely on their large-scale companies to spearhead the export push, in Pakistan this is being conveniently left to the SME sector. The government needs to look at this deficiency and

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Economic Survey 2005-06 bring the prowess of large scale manufacturing sector into play for a quantum jump in export of engineering goods and services. a. Automobile Sector Auto industry is globally considered as the mother of all industries. The automobile industry is the largest segment in world trade. The annual size of the automotive exports has grown over US$600 billion, which accounts for about 10 percent of world exports. In todays fast globalizing world, changing models, improving fuel efficiency, cutting costs and enhancing user comfort without compromising on quality are the most important challenges of the industry. The auto industry in Pakistan is fast growing and may soon begin to achieve economies of scale. This mechanical Fig-4 : Cars / 1000 Persons revolution has been aided in part to sound macro economic policies pursued during the 900 765 last seven years. Furthermore e-pass scheme 800 619 641 for electronic goods, unchanged auto policy 700 543 560 600 over the last few years, liberal adjustment of 426 500 336 tax regime to lower duties on raw materials 400 193 300 and intermediate products have also helped in 200 rapid expansion of the auto sector. The 21 23 25 31 67 100 8 10 12 tremendous rise in automobile demand has 0 resulted in increased production, giving a healthy impetus to the industrial output and generating over 150, 000 direct employment opportunities besides contributing tax revenue Source: Sector Profile, Atlas Investment to the national exchequer.
Turkey UAE Pakistan India Iran UK S-Arabia Japan Australia N.Zeland Srilanka China Indonesia Phillipines Malaysia

Notwithstanding a manifold increase in car production in Pakistan during the last few years, Pakistan still stands relatively low in terms of motorization when compared globally and even to its neighbors. The automakers need to take into account, as the demand is lot greater then the supply. The graph below illustrates the comparison of motorization in Pakistan with some developed and developing countries of the world. Since 2001-02 the automobile market is growing rapidly by over 40 percent per annum and if an average annual growth of 30 percent per annum is maintained, Pakistans market will cross the milestone of 500,000 units by the year 2010. Long-term investment friendly policies of the government and up-gradation of production facilities are considered as pre-requisite by experts for achieving the automobile vision 2010 of 500, 000 units. Major automobile companies in Pakistan have set up as joint ventures with foreign multinational companies, thus encouraging the inflows of FDI in Pakistan.
Table 3.8 Major Joint Ventures in Auto Industry Company Indus Motor Company Honda Atlas Cars Pak Suzuki Dewan Farooq Motors Ltd

Joint Venture Toyota, Japan Diahatsu, Japan Honda, Japan Suzuki, Japan Kia and Hyundai, Korea

Product Toyota Cars Diahatsu Coure Cars Honda Cars Suzuki Cars Kia and Hyundai Cars Source: Auto Sector Profile, Atlas Investment Bank

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USA

Manufacturing, Mining and Investment Policies In view of the rising gap in supply and demand and with an outlook to lessen the hardship being faced by the tail-end buyers or users, the government allowed import of new and used cars at a reduced rate of duty. Recently the government has allowed overseas Pakistanis to gift cars to their kin under gift baggage or transfer of residence scheme as well. Latest figures of the market share of each player in the car-manufacturing segment are given below. Pak Suzuki takes the lead with a share of 49 percent followed by Indus Motor at 25 percent. The rest is being shared by Honda Atlas Cars and Dewan Motors at 21 percent and 5 percent respectively.

Fig-5 : Market Share during FY06


Dew an Motors, 5%

Honda Atlas Cars, 21%

Indus Motors, Pak Suzuki, 49% 25%

Source: Auto Sector Profile, Atlas Investment Bank

The automobile sector of Pakistan has shown significant growth in the last couple of years. Sales performance of different segments is given below. Production of cars in first nine months of 2005-06 increased from 87,104 to 112,478 units. Another 16, 885 different types of vehicles were imported during July-Feb, FY06 under transfer of residence, baggage and gift schemes as compared to only 5,177 units in the same period last year, showing an increase of 230 percent. Despite ongoing import of cars units from other Fig-6 : Production of Cars countries and increase in the production of cars in the country, the demand of cars in market is 140000 increasing day by day. The production of cars has 120000 registered a staggering increase of 127738 units as 100000 compared to last years figure of 100213 (27.5%). 80000 Production of truck units also increased to 3746 60000 from 1999 (87.4%) in 2005-06 (July-April). 40000 Production of motor cycles increased by 10.4 20000 percent during July-April 2005-06 reaching to an all 0 time high of 426,607 (see Table 3.9). The production and sale of motorcycles is taken as an indirect measure to ascertain the standard of living of the middle class of Pakistan. Motor cycles are Fig-6 : Production of Motorcycles considered as one of the cheapest means of transport especially in rural areas for its price tag 1400000 as well as its durability and affordable petrol 1200000 consumption. The production of motorcycles 1000000 remained more or less stable during the late 800000 nineties but has sky rocketed since 2000-01 and 600000 further projections show it to be increasing even at 400000 a faster rate. Since production and sale of motor 200000 cycles have been taken as being synonymous with 0 the standard of living of the middle class, we can safely say that the outstanding growth and economic stability achieved by the country during the last couple of years has slowly but steadily started trickling down to the masses.
1998-99 1999-00 2000-01 2001-02
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

2002-03

2003-04

2002-03

2003-04

2004-05

2005-06

2006-07

2004-05
2007-08

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Economic Survey 2005-06 The automobile industry of Pakistan can achieve sustained growth, as there is a growing demand from local consumers along with potential to export in foreign markets. The future of this Industry of Industries can be quite promising for the overall economy provided that there is a balance between production levels of vendors and assemblers, stable policies, continuity of governmental policies and assistance in financing investment and taxation.
Table 3.9: Installed and Operational Capacity of Automobile Industry (Numbers) Inst. Capacity July-April Item 2004-05 (Single Shift ) 2004-05 2005-06 % Change Cars 164000 126403 100213 127738 27.5 Trucks 17500 3204 1999 3746 87.4 Buses 3900 1762 1503 4371 190.8 LCVs / Jeeps 32500 25177 18459 25510 38.2 Tractors 50000 43200 35308 39249 11.2 Motorcycles 733000 416189 386589 426607 10.4 Source: Pakistan Automobiles Manufacturers Association (PAMA).

C. THE FERTILIZER INDUSTRY The use of fertilizer in Pakistan was limited in the 1950s and 1960s with total consumption of 30,000 tons in 1960. In order to promote the use of fertilizer, the government offered various incentives, which ultimately resulted in the excessive demand for fertilizer. For meeting this demand, production was increased gradually and new plants were set up. The fertilizer use in Pakistan is a growth story in the field of agriculture. Pakistan had attained temporary surplus in urea previously but continued to meet DAP demand through import, to a large extent. However, urea demand has surpassed supply during 2005. This situation seems alarming because the current international prices of urea are on an increasing trend. Presently there are 10 manufacturing units in operation. Out of these, four units are located in the public sector and six are operating in the private sector. Major investment in fertilizer sector started to flow in 1990 when seven more fertilizers plants became operational. During the last decade an investment of US$ 1.2 billion has been made in this sector. Total investment in the fertilizer sector stands at Rs. 87 billion. The average annual growth of the fertilizer sector stands at 6% per annum.
Table 3.10 Major Indicators of Fertilizer Industry Number of Manufacturing Units in Pakistan 10 Installed Capacity (000 tons) 5,655 Employment on Sectoral Basis (persons) 7,563 Average Annual Growth Rate 6% Share in GDP 0.4-0.5% Total Sector wise Investment (Rs.) 87 billion Share in Total Indirect Tax Receipts 0.95% Source of Machinery Italy, UK, Denmark, USA & Japan Source: National Fertilizer Development Centre (NFDC), Expert Advisory Cell (EAC)

D. PAINT AND VARNISH There are around 22 units in the organized and over 400 units in the unorganized sector for the manufacturing of paints and varnishes. Around 50 percent of the domestic demand for paints and varnishes is met through production in the organized sector while the remaining comes from the unorganized sector. The per capita consumption of paints in Pakistan is low at 0.8 kg per annum compared to 4 kgs in the South East Asian nations, 22 kgs in the developed world and 15 kgs per capita for the world. The demand for paints and varnishes is rising due to the resurgence of housing and construction sector. During July-March, 2005-06, the production of paints and varnishes both solid and liquid grew by 10.97 percent and 12.78 percent, respectively.

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Manufacturing, Mining and Investment Policies E. CEMENT INDUSTRY The cement industry in the country has shown significant growth. The rise in construction activity is equally shared by the private construction sector and the Public Sector Development Program (PSDP). At the moment there are 25 cement manufacturing units in the country. Production capacity has doubled from 8.9 million tones to 20 million tones during the last 7 to 8 years. In this regard the policy of the government has been to bring down the cost of construction. The total production of cement was recorded at 12.2 million tones during 2005-06 compared with 11.2 million tones last year, a growth of 9.75 percent. The boost during the period (July-March) 2005-06 in the performance of the cement industry activity is because of the high level of construction activity in the country and increased development expenditure by the Government. Due to an enormous increase in demand of cement in recent years almost all of the cement units working in Pakistan are on the path to future expansions. It is estimated that in 2007-08 cement production capacity will be enhanced to 42 million tones to be consumed within and abroad. F. HOME APPLIANCE INDUSTRY Riding high on rapidly growing demand, the home appliance industry is expected to double its capacity of producing TV, refrigerators and deep freezers by 2009. Refrigerators leads the figure of current year with 569,756 units. The production of TV, refrigerators and deep freezers amounted to 372192, 233000 and 120000 respectively in 2000-01. Production of these items has almost doubled in a short span of three years. If this trend continues the home appliance industry would double its production and will increase its contribution to GDP, and accordingly be contributing revenue to national exchequer. An added benefit is the increase in direct jobs in the industry and the vendor industry. The pace of growth in demand for home appliances is the direct result of the banks and leasing companies policy of consumer financing package together with the relaxation through and e-pass schemes. Many dealers have initiated their own schemes of easy installments thus further escalating demand. Public Sector Industries The information given below is based on Fig-8 : Production of Consumer Durables the data received from the units, operating under the Ministry of Industries, 2500000 Production and Special Initiatives. It is 2000000 based on actual performance of these units, for the period July-March 20051500000 2006.Performance of the corporation such 1000000 as NFC, SEC and Pakistan Steel has been reviewed. Key performance 500000 indicators present the following picture for 0 July-June 2005-2006 based on 9 months 2000-01 2001-02 2002-03 2003-04 2004-05 actual figures and three months projections. In case of SEC the performance is based on 6 months actual figures and 6 months projections. Production Value Production value in aggregate of all operating units under three corporations excluding Pakistan Steel increased by 5.24% against the same period last year. SEC showed an increase of 11.22%, National Fertilizer Corporation showed a decline of 0.69%, while PACO has shown an increase of 11.0%.

Air Cinditioner Deep Freezer Refrigirator TV

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Economic Survey 2005-06


Table 3.11 Performance of Public Sector Industries (Excluding Pakistan Steel) (July-June) (Rs. in million) 2004-2005 2005-2006 Expected/Actual Inc/(Dec)% Change Production Value 6,208 6,533 5, 24 Net Sales 7,526 8,550 13. 61 Pre-tax profit 768 519 -32.42 Taxes and duties 965 891 -7.67 No of employees ** 6,294*** 6,434*** 2.22 * : Production Value of PACO is at current prices while NFC & SEC are at Constant prices of 1999-2000 and 1992-93 respectively, ** : Including daily wagers, *** : excluding holding corporations.

Net Sales Net sales (excluding Pakistan Steel) increased to an estimated amount of Rs.8, 550 million for July-June, 2005-2006 as against Rs.7, 526 million for the same period last year showing an increase of almost 13.60%. All the three corporations i.e. NFC, PACO and SEC have shown an increasing trend in net sales. The increasing trend is evident in PACO, SEC and NFC where sales improved by 27.50%, 23.12% and 3.30% respectively. Pre-Tax Profit/ (Loss) During July-June 2005-2006 an aggregate profit (including operational/non-operational units and excluding Pak Steel) Rs 519 million was recorded as against an aggregate profit of Rs 768 million during the same period last year. Decline in pretax profit was mainly due to the decrease in the pretax profit of NFC by Rs. 256.92 million and increase in loss of PACO by 0.04 million. Overall pretax profit decreased by Rs 251 million. Profit, however increased at SEC by Rs 11.51 million (7%). Taxes and Duties During July-June 2005-2006, taxes & duties paid by all operating units under the sector corporations excluding Pakistan Steel decreased to Rs 891 million from Rs 965 million paid during the same period last year, showing a decrease of 7.7% mainly due to decline in taxes and duties in NFC & SEC which registered a decline of 12.67% and 9% respectively as compared to last year. Employment Total number of employees with all operational/non-operational units (including daily wagers) excluding Pak Steel, as on 30th June,2006 stands at 6,434 as against 6,294 as on 30th June 2005. The numbers of employees at NFC, SEC have increased. Decline was, however, observed in PACO. On overall basis, there was an increase of 140 employees in the corporations under MOIP&SI. Overall Performance of Operating Public Sector Industries (Including Pakistan Steel) Overall performance of public sector industries (including Pakistan Steel) is presented in the following table for July-June 2005-2006 in comparison to same period last year:
Table-3.12 (Rs in million) 2005-2006 2004-2005 % Change (Expected / Actual) Production Value* 18,074 16,152 -10.63 Net Sales 38,288 29,307 -23.46 Pre-tax profit 10,960 2,456 -77.59 Taxes and duties 9,641 5,741 -40.45 No of employees** 22,816 19,299 -15.41 * Production value of PACO is at current prices. NFC & Pak Steel is at constant prices of 1999-2000 while SEC at 1992-93. ** Including Daily Wagers

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Manufacturing, Mining and Investment Policies As can be observed from the table above, Steel Mills performance has pulled down the performance of the Public sector. Performance of Pakistan Steel The production capacity of Pakistan Steel is 1.1. Million tons of raw steel per annum with builtin potential to expand to over 3 million tons. The Steel Mill is producing Coke, Pig Iron, Billets, Hot Rolled Coils/Sheets, Cold rolled Coils/Sheets, formed sections like Channels, Angles, Galvanized sheets etc. Major performance indicators of Pakistan Steel during the period July-June 2004-05 & 2005-06) are summarized in table below:Table 3.13 : Performance of Pak Steel, (July-June) 2004-2005 2005-2006 (Expected / Actual) 9,618,871 20,756,278 1,937,000 4,850,420 12,865 (Rs in Million) %Change

Production Value * 11,866,071 -18.94 Net Sales 30,761,632 -32.53 Pre-tax profit 10,191,802 -80.99 Taxes and duties 8,675,310 -44.09 No of employees 16,522 -22.13 * At constant prices of 1999-2000 * Pakistan Steel capacity utilization went down by 34 percent due to technical faults in Coke oven batteries resulting in decline in production/sales / taxes and duties etc.

Small and Medium Enterprises (SMEs) Small and Medium enterprises (SMEs) constitute bulk of Pakistans business landscape. Nothing portrays the reality of Pakistani business environment better than the nature and complexion of its SME sector. The Economic Census of Pakistan -2005 lists 3.2 million business enterprises and SMEs constitute over 99 percent of all. Their share in industrial employment is estimated at 78 percent, in value addition approximately 28 percent and in manufacturing exports earnings at 25%. Nearly 53 percent of all SME activity is in retail trade, wholesale, restaurants and the hotel business whereas the contribution of industrial establishments and those involved in service provision is 20 percent and 22 percent respectively. Among the SMEs involved in retail, wholesale and restaurant business, 98 percent employ less than 5 persons and 99 percent less than 10 persons. The manufacturing and other sectors also follow a similar pattern with 87 percent employing less than 5 persons and 98 percent less than 10 persons. All in all tremendous room for further growth, rebalancing and productivity enhancement exists in the SME sector. Most of the thinking in the recent years about promotion of the SME sector has converged broadly in two areas namely (a) easing regulatory anxiety through reform of trade, taxation and labour regulatory regimes and b) promoting access to financial, technological and HR resources. This requires a suitable policy framework coupled with appropriate interventions. The Government is in the process of formulating a National SME Policy of Pakistan which outlines its priorities in terms of counterbalancing measures to eliminate disadvantage of size, remove unnecessary regulatory burden, institute SME support mechanism in public & private sectors, human resource development, export market development and technology up-gradation for the SME sector. The efforts for promotion and development of microfinance sector have so far yielded creation of five Micro Finance Banks (FMB) in the country with a combined network of 92 branches and 139 service centres, which are serving the needs of around 270, 000 active borrowers. Moreover, there are 32, 500 depositors of MFBs in the country with a cumulative deposit base of Rs. 670 million by December 2005.

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Economic Survey 2005-06 Small and medium enterprise development authority (SMEDA) is one of the pioneers in the field of Micro Finance in Pakistan. It has stared developing strategies for fast tracked growth in seven priority sectors i.e., gems and jewelry, dairy, sports goods, marble and granite, surgical instruments & fans, light engineering and furniture. The strategies thus evolved will be implemented through management companies set up under the public-private partnership. A Competitive Support Fund (CSF) has simultaneously been established to promote innovation and competitiveness through better technology and management methods. Dairy Pakistan- a public private venture in the dairy sector, has already been incorporated and resourced, while a similar set up for Gem & Jewelry sector will soon be spin off. Afghanistan is becoming an important export destination for SMEs and estimated export volume to that country is over half a billion US dollars, through formal and informal channels. SMEDA now offers a match making facility to SMEs to facilitate business to business linkages for taking advantage of Afghanistan market. SME credit need is estimated as over Rs.500 billion, whereas banks only cater for 6-7 percent of this amount. The major problems of the banks dealing in SME sector market are due to informal accounting system, and the nonavailability of tools for the collateralization of SME business operation. SMEDA advocated the case of SMEs with the regulators to ease the loan qualification criteria and a new set of SME prudential regulations was spelt out by the State bank of Pakistan. On the other hand, to reduce the risk of SME financing for the banks, SMEDA facilitates banks in developing program-lending schemes. These program-lending schemes are sector specific and offer financial products to desiring SMEs based on financially viable unit size or good business practices. Now, SME financing is available through a number of banks for SME business including CNG pumps, health clinics, public transport CNG rickshaws, cutlery, surgical instruments manufacturing, fan manufacturing, power looms upgradation, fishing boats, and gems & jewelry. Foreign Investment Foreign Direct Investment (FDI) has become an important source of private external finance for developing countries. It is different from other major types of external private capital flows in that it is motivated largely by the investors long-term prospects for making profits in production activities in the host countries. While FDI represents investment in production facilities, its significance for developing countries is much greater. Not only can FDI add to resources and capital formation, but, perhaps more importantly, it is also a means of transferring production technology, skills, innovative capacity and organizational and managerial practices between locations, as well as of accessing international marketing network. Given the potential role FDI can play in accelerating growth and economic transformation, developing countries are strongly interested in attracting it. These countries have taken steps to improve their policy environment to attract FDI. Like many other emerging market economies Pakistan, has also taken a number of steps including wide-ranging reforms in various sectors of the economy and restoring macroeconomic stability to attract FDI during the last seven years. The reforms and policies that Pakistan pursued over the last seven years are now paying handsome dividends. As opposed to an average of $350-450 million per annum prior to 1998-99, the overall foreign investment during the first ten months (July-April) of the current fiscal year has crossed $ 3 billion highest ever in the countrys history in the fiscal year 2005-06.
Fig-9 : Pakistan Source of FDI (1990-2005) (Million $) Others, 2542.9 USA, 3264.2

Korea, 198.7 Germany , 256.5 Japan, 431.1 UK, 1725.5 UAE, 877.2

The overall foreign investment stood at $3376 million during the first ten months (July-April) of the current fiscal year

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Manufacturing, Mining and Investment Policies as against $1027 million in the same period last year an increase of 228.7 percent (see Table 3.14). The overall foreign investment has two components FDI and portfolio investment i.e., investment in equity market.
Table 3.14: Inflow of Net Foreign Private Investment (FPI) 2004-05 2004-05 (July-April) Country PortPortTotal Total Direct Direct folio folio USA 326.0 47.0 373.0 200.9 24.5 255.4 UK 181.5 17.6 199.1 150.9 7.8 158.7 UAE 367.5 49.8 417.3 69.1 45.9 115.0 Germany 13.1 2.1 15.2 9.5 9.5 France -3.6 0.1 -3.5 -3.1 0.1 -3.0 Hong Kong 32.3 28.9 61.2 18.7 24.2 42.9 Italy 0.4 0.4 0.3 0.3 Japan 45.2 -3.5 41.7 38.4 -3.4 35.0 Saudi Arabia 18.4 -0.2 18.2 13.5 -0.2 13.3 Canada 1.9 0.1 2.0 4.3 0.1 4.4 Netherlands 36.7 23.2 59.9 32.5 24.9 57.4 Korea 1.4 1.4 1.2 1.2 Singapore 8.0 2.7 10.7 2.8 1.6 4.4 China 0.4 0.4 0.4 0.4 Australia 1.6 1.6 1.3 1.3 Switzerland 137.5 -10.0 127.5 131.6 11.3 142.9 Others 355.7 -5.2 350.5 219.2 -1.3 217.9 Total 1524.0 152.6 1676.6 891.5 135.5 1027.0 (Million US $) 2005-06 (July-April) PortTotal Direct folio 419.1 331.5 750.7 151.4 -16.1 135.3 1284.6 55.1 1339.6 27.0 -4.2 22.7 2.6 2.6 21.9 33.1 55.0 0.0 0.0 37.3 -6.4 30.9 273.7 0.8 274.5 3.9 0.2 4.1 87.1 -0.8 86.4 1.4 1.4 8.9 0.6 9.5 1.6 1.6 26.1 26.1 161.5 -11.9 149.6 512.1 -26.1 486.0 3020.2 355.8 3376.0 Source: State Bank of Pakistan

FDI in the first ten months (July-April) of the current fiscal year has reached $3020.2 million the highest ever in the countrys history, as against $891.5 million in the same period last year, thus registering an increase of 238.7 percent. Almost 75.0 percent of FDI has come from six countries, namely, the UAE, US, Saudi Arabia, Switzerland, UK and Netherlands. The UAE with 42.5 percent ($1284.6 million) has topped the list of foreign investors followed by the US (13.9% or $419.1 million), Saudi Arabia (9.06% or $273.7 million), Switzerland (5.34% or $161.5 million), UK (5.0% or $151.4 million) and Netherlands (2.9% or $87.1 million). Telecom, energy (oil, gas and power), financial services, trade, construction, chemicals, food and personal services have been the major recipient of FDI, accounting for almost 94 percent or $2.082 billion. Telecom sector has been the single largest recipient of FDI with $1.0 billion followed by the energy sector ($304 million), financial services ($265.5 million), trade ($81.9 million), construction ($54.4 million), food ($52.7 million), personal services ($45.2 million) and cement ($33.6 million). Like FDI, Pakistans equity market has also succeeded in attracting portfolio investment. During the first ten months (July-April) of the current fiscal year, Pakistan received $355.8 million as against $135.5 million in portfolio investment in the same period last year. Almost 93 percent or $331.5 million portfolio investment has come from the United States followed by the UAE (15.5% or $55.1 million) and Hong Kong (9.3% or $ 33.1 million). The flow of foreign investment in Pakistan has already crossed $3.0 billion in 2005-06. The real impetus for investment came with the improvements in investment policies and various initiatives taken by the present government to make Pakistan an investors friendly country. Pakistan has been ranked among top ten reforming countries in the world according to the recent World Bank report. Pakistan is at 60th position in terms of ease of doing business in a survey of 155 countries conducted by international financial corporation (IFC) and surpasses even China and India.

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Economic Survey 2005-06


Table 3.15: Inflow of (FDI) Foreign Direct Investment (In Main Economic Group) Economic Group 1. Power 2. Chemical, Pharmaceutical & Fertilizer 3. Construction 4. Mining & Quarrying, Oil and Gas 5. Petro-Chemical & Refining 6. Food, Beverages & Tobacco 7. Textile 8. Transport, Storage & Comm. 9. Machinery other than electrical 10. Electronics 11. Electrical Machinery 12. Financial Business 13. Trade 14. Tourism / Paper & Pulp 15. Cement / Sugar 16. Others Total 2002-03 32.8 92.4 17.6 188.2 3.0 7.0 26.1 114.1 0.4 6.7 10.5 207.5 39.1 1.5 1.3 4938 798.0 2003-04 (14.2) 28.5 32.0 203.5 72.4 4.5 35.4 230.7 0.7 7.5 8.7 242.1 35.6 1.8 2.3 57.9 949.4 (Million US $) JulyApril 2004-05 2004-05 2005-06 73.3 56.1 304.0 92.5 63.2 (39.1) 42.7 19.5 54.4 194.3 151.6 221.5 24.8 15.4 24.0 22.9 12.8 52.7 39.3 22.0 32.3 531.9 99.7 1041.8 2.8 1.3 1.0 10.3 7.4 15.8 3.4 2.2 1.1 269.4 198.1 265.5 52.1 36.6 81.9 2.6 17.3 4.1 37.9 147 102.6 127.3 1524 792.6 2224.7 Source: State Bank of Pakistan

Although Pakistan is open to investment in any sector, the six major sectors identified as the most potent and ripe areas for investment are: 1) Power generation, 2) Oil and Gas Exploration and Development 3) Engineering 4) Housing 5) Hotels and 6) Infrastructure. The government is playing a proactive role to develop power projects in all the areas of Pakistan. There is an immense potential for investing in different kinds of energy sources including hydel, thermal, coal, solar, wind and biogas. Some 27 power projects costing around US $8 billion are in the process of being set up in the country over the next 7-8 years and will require an average of about US $1 billion investment every year. The PPIB has recently received 35 proposals for the construction of three new mega power projects as a result of international competitive bidding (ICB) basis. Oil and Gas is another sector where foreign investment is much desired. It involves offshore and onshore exploration, refining, pipelines and storage. The potential for investment in infrastructure is for building facilities for aviation, ports, highways, roads, bridges, urban mass transport, water supply and sanitation, food streets/parks, Fig-10 : Foreign Investm ent (US$ m illion) housing, desalination plants etc. Light and heavy engineering is also open for foreign investment. The Government of Punjab has 3000 1676.6 been contacted by Korean investors for the 2000 820.1 921.7 establishment of a Korean industrial estate for 474.7 403.3 543.4 1000 182 high-tech manufacturing in Lahore. The industrial 0 estate complex would be established with direct consortium of more than 60 Korean companies and ) 5 4 3 2 1 0 9 (T 4-0 3-0 2-0 1-0 0-0 9-0 8-9 it would be dedicated to the manufacture of value -06 00 00 00 00 00 99 99 2 2 2 2 2 1 1 05 20 added products involving the latest technology and expertise currently not available in Pakistan. A similar proposal, received by Chinese investors, is also being considered by the Government of Punjab. The infrastructure, housing and building sectors are the backbone of any countrys economy and thus play a vital role
4000 3545

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Manufacturing, Mining and Investment Policies in its development. The present government is geared up to further expand the basic infrastructure in the country and had initiated a number of development projects which have led to increased demand for building and construction material in the country. The sector offers numerous investment and new business opportunities with exceptional returns. According to Housing Census 1998 the housing backlog which stood at 4.30 million, has been projected at 6.19 million. The prime minister has issued a number of policy guidelines under Housing For All programme for launching housing schemes for government employees at low cost. The construction sector grew by 9.2 percent against a yearly target of 7.5 percent and 18.6 percent achieved last year. As a result of this impressive growth, the sector has realized an investment of US $89.3 million since July 2004. The government has identified housing and construction as one of the major drivers of growth and has undertaken a number of measures to give impetus to this sector, which has helped revive construction activities in the country. Box-1 High Priority Reforms Deepened Liberalization will allow Pakistan to better serve the investment community. For instance, the continued privatization of utilities will promote competition and serve market needs, more rational tax policy and its administration will attract investors and increase the tax base, reduced red tape surrounding expatriate entry will increase knowledge and technology transfer and increased employment flexibility will allow business to better allocate human capital to respond to market conditions. Examples of possible quick wins achievable through further liberalization include elimination maximum foreign equity and minimum investment capital requirements, sectorspecific investment limitations and stamp duty and treasury challan requirements. Legal Framework Modernization and shedding of colonial-era laws should underpin existing and future reforms in all areas of business regulation. A business-friendly legal and regulatory environment will serve businesses by providing a clear, understandable framework within which to invest. Furthermore, improved court procedures and alternative dispute resolution will improve overall access to and efficiency of commercial justice. One quick win achievable on the legislative front would be modernize the title transfer provisions in the Transfer of Property Act (1882), eliminating any confusion surrounding the application of Sharia-based legal interpretations of conveyancing and hypothecation, eliminating Stamp Duties etc. another one would be to eliminate excessive Boiler Inspection discretion, through legal measures fully delegating physical inspection of boilers to insurers, subject to limited cosupervision of insurers by the Boiler Inspector in this niche area. Enhanced E-Governance has proven effective in cutting red tape, consolidating various regulatory interfaces through the introduction of user-friendly and networked applications. E-governance is now being successfully used on both the local and national scale in many countries around the world. An opportunity for a quick win in the Pakistani context, achievable through an e-governance strategy would be to institute online Sate Bank of Pakistan (SBP) foreign capital registration, reducing the overall administrative compliance burden and eliminating the human interface in the process and thus reducing opportunities for rent-seeking behaviour by less scrupulous officials. Effective One-Stop Shops allow businesses to comply with administrative processes in a more facilitative and timely manner. Such single window solutions can be applied to many different regulatory interfaces, business registration and licensing, land titling , tax administration etc. an example of a possible quick win reform through the application of a one stop shop solution in the Pakistani context would be to institute a joint federal/provincial/local one-stop shop for tax registration and compliance. The SITE Industrial Estate would provide a good site to pilot such an initiative. In the same vein, consideration should be given to establishing an SECP Over-the-counter Market for SMEs, small capital issues at the Karachi Stock Exchange. The Privatization Programme The agenda of reforms initiated by President Pervaiz Musharraf in the late 1999, continued to bear results both on the economic and social fronts. These reforms have been widely acclaimed as great success by the multilateral institutions and the investor community. Improved geo-political conditions coupled with a more conductive economic environment has created an ideal climate for investment in Pakistan. The dynamic change in the global economic

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Economic Survey 2005-06 environment, has consequently spurred the government to invite the private sectors participation so as to enable the private sector to adopt strategies to meet the challenges arising from these trends. By and large the aspect of privatization has been well received in all the quarters as private capital is no longer shy and it can seek its direction in the development of the country. In the financial year 2005-06 Privatization Commission (PC) has achieved unprecedented success on the privatization front as it was able to take giant strides on the strategic sale of mega projects like KESC, Pak Arab Fertilizers, Mustehkam Cement, Javedan Cement, CTI, PTCL, Pak American Fertilizer Limited and Pakistan Steel Mills. For the first time the sale moved beyond the favorite banking and financial sectors. Some of the major activities undertaken by the PC during FY 2005-06 are as under: The privatization commission received a couple of important milestones during 2006. The upfront payment of US$1.4 million by Etisalat and transfer of management control has already taken place. The privatization commission also conducted a two-day road show in Singapore in order to attract investors for the privatization of twin Suis and has extended the last date for submission of Statement of Qualification (SoQ) for both SNGPL and SSGC to March 11, 2006. Furthermore the privatization Commission has decided the pre-bid meeting of Pakistan State Oil to take place on March 2, 2005. The bidding of Pak American Fertilizer Limited (PAFL) was scheduled to take place on the Feb 28, 2006. Last but not the least, the PC has also been reported to have reached the employees package thus making the mills bidding possible by March 10, 2006. During July 2005 to April 2006, 11 transactions were completed for Rs. 217,911 million. Details are as under: Sale of 26 percent shares of PTCL for Rs. 155 billion to Etisalat of the UAE. Sale of Carrier Telephone Industries for Rs. 500 million to Siemens Pakistan Engineering Company Ltd. Sale of GoP shares holding in KESC for Rs. 20,204 million to Consortium of Hassan Associates, Al-Jomiah Holding Co. & Premier Mercantile Services. Sale of 4.2 percent shares of UBL IPO to the general public through the capital market for Rs. 1,040 million. Sale of shares of Pak Arab fertilizers for Rs. 14,125 million and Pak American Fertilizer Ltd for Rs. 19,999 million. Sale of International Advertising (Pvt) Ltd. for Rs. 5.117 million. Strategic sale of 75 percent of Pakistan Steel Mills for Rs. 21,60 million. In addition, privatization of United Industries Ltd, Bolan Textile Mills and Mustehkam Cement also took place in the later half of 2005 for sale proceeds of Rs. 7.7 million, Rs. 128 million and Rs. 3,205 million respectively. During January 1991 to 18th April 2006, 160 transactions have been completed for proceeds of Rs. 395.238 billion. This includes 57 transactions for Rs. 337.908 billion completed during October 1999 to April 2006. Sector wise privatization summery is as under;

Table 3.16: Number of Privatized Transactions (Rupees in Million) From Jul 04 to From 1991 to Jun 04 Jun 05 Sector No. Amount No. Amount Banking 7 41,023

From Jul 05 to Mid April, 06 No. Amount

Total Number of Transaction 7 Amount 241,023

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Manufacturing, Mining and Investment Policies


Capital Market Transaction Energy Telecom Automobile Cement Chemical / Fertilizer Engineering Ghee Mills Rice/Roti Plants Textile Newspapers Tourism Others Total 14 12 2 7 13 18 7 22 23 2 5 3 5 140 19,440 20,904 30,558 1,102 8,606 10,204 183 757 328 87 270 594 152 134,289 3 1 2 2 1 11,204 16,415 49 14,151 81 1 1 2 1 1 1 1 1 1 1 11 1,211 8 43,038 18 31,684 14 57,559 4 186,058 7 1,102 3,205 16 11,860 16,110 22 40,465 21,680 8 21,863 8 24 846 23 328 128 3 215 5 270 4 1,805 6 160 217,911 160 395,238 Source: Privatization Commission 1,040 20,240 155,500

Major Ongoing Transactions It can be observed from the above table that PC has undertaken a fast track privatization program for privatization of State Owned Entities (SOEs) including the Power sector, Oil & Gas and Industrial units. Privatization of Pakistan State Oil Company Limited (PSO), Pakistan Petroleum Limited (PPL), Oil & Gas Development Company Limited (OGDCL), Faisalabad Electric Supply Company (FESCO), GENCO-I Jamshoro, National Investment Trust Limited (NITL) and various other industrial units are in process. In short, the last six years have seen unprecedented privatization efforts with the laying of groundwork for the successful marketing of a number of major transactions. Although some event delayed few privatization transactions the outlook for 2006--07 appears bright and positive with several major privatizations expected to be completed. Box Item-2 : Privatization Process The privatization process, which is aimed at selling government property in an open and transparent way with a view to obtaining the best possible price, varies somewhat depending on the nature of the asset being privatized, on the proportion of shares being offered for privatization, and on whether a transfer of management is involved. The Board of the Privatization Commission decides as to what kind of process will be followed. A brief description of some of the steps common to all transactions is provided below: Identification: The first step is the identification of the entity or list of entities to be privatized. In a typical transaction, the Privatization Commission, in consultation with the relevant ministry, submits a Summary of the proposed transaction to its Board. The Summary justifies the need for privatizing the property, outlines the likely mode of privatization, and sometimes seeks guidance on issues relating to such matters as pricing, restructuring, legal considerations, and the regulatory framework. Once endorsed by the Board, it is submitted to the Cabinet or its subcommittee, the Cabinet Committee on Privatization, for approval. Hiring of a Financial Advisor In major transactions, the process to hire a financial advisor is carried out by the transaction manager with the approval of the Board. Terms of reference for the FA are finalized, expressions of interest from prospective FAs are solicited, an evaluation team is constituted, and short listed firms are invited to submit technical and financial proposals in a common format. The evaluation team scores the technical proposals and the highest ranked firm based on both technical and financial scores is invited for contract negotiations and signing. In November 2001, the Board approved regulations for hiring a financial advisor in order to make more transparent the procedures that were

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Economic Survey 2005-06 largely being followed over the last decade. Due Diligence The next step is to carry out the legal, technical, and financial due diligence. This is aimed at identifying any legal encumbrances, evaluating the condition of the assets, and examining the accounts of the company in order to place a value on the company. For most industrial units and some small transactions, this is done using in-house transaction managers and staff, or by sub-contracting out part of the work to a domestic legal, technical, or accounting firm. However, for major privatizations in banking, infrastructure, or utilities, the FA carries out this function. Following due diligence, the FA finalizes the privatization plan. This may include recommendations on any needed restructuring, in addition to specifying the amount of shares or assets to be privatized. For major privatizations or when the proposed privatization mode is different from the initial plan, the plan is then submitted to the Board, the CCOP, or the full Cabinet for approval. Enacting any Needed Regulatory and Sectoral Reforms For many major transactions, the ability to privatize and the amount of proceeds realizable depend critically on the level of regulated prices for the public enterprises inputs or outputs and other sectoral or regulatory policies. For many monopolies or quasi-monopolies, the rules of the game specifying the competition framework postprivatization, the manner and type of regulation, and the institutions regulating them are key to investor interest. In addition to rules determining prices or tariffs, there may be rules determining standards, penalties for noncompliance, the extent, form and timing of any proposed deregulation, and the evolving structure of the market following liberalization. Clarification of these rules and passage of needed laws and regulations will often be necessary before taking the transaction to market. Valuation of Property In order to obtain an independent assessment of the value of the property being privatized, the Commission relies primarily on external firms. The Financial Advisor, where there is one, carries out the valuation to obtain a reference price for the property. In other cases, the Commission contracts with an external valuation firm or accounting firm as specified in the rules on the valuation of property, which can be obtained from the PC website. The methods used for the valuation vary with the type of business and often more than one method is used in determining the value. These include the discounted cash flow method, asset valuation at book or market value, and stock market valuation. Despite using scientific methods, valuation remains more an art than a science. The true value is dependent on many difficulties to quantify variables such as country risk, corporate psychology and strategy, and perceptions of future macroeconomic performance. Only the market can determine the true value. Therefore it is important to focus on designing appropriate transaction structures, on advertising in relevant media, in choosing and implementing appropriate pre-qualification criteria for bidders, and in following an appropriate bidding process to obtain a fair price for the privatization. Pre-bid and Bid Process Expressions of Interest (EOI) are invited by advertising in the relevant media. The PC Ordinance 2000 spells out some of the advertising procedures. Depending on the kind of transaction, the EOI describes the broad qualifications that potential bidders must possess. Those submitting an EOI and meeting the broad qualifications are provided with the Request for Proposals (RFP) package containing the detailed pre-qualification criteria, instructions to bidders, draft sale agreement, and other relevant documents. Interested parties then submit a Statement of Qualifications (SOQ), which is evaluated to determine whether an interested party meets the requisite qualifications. Pre-qualified bidders are then given a specified period to conduct their own due diligence, following which they are invited to a prebid conference where their questions and concerns can be addressed. The meeting is useful in determining the bidding procedure to be followed (for example, open auction, sealed bids, or some combination) and could even determine the proportion of shares that the Government may want to offload. The bidding itself is done openly, with all bidders and media invited.

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Manufacturing, Mining and Investment Policies Post-bid Matters Following bidding and identification of the highest bidder, the Board of the PC makes a recommendation to the CCOP as to whether or not to accept the bid. The reference price is a major determinant in the recommendation, although the Board may recommend the sale even if the offer price is below the reference price. Once the bid price and bidder are approved, the PC issues a letter of acceptance or a letter of intent to the successful bidder, indicating the terms and conditions of the sale. Following negotiations with the bidder, the PC then finalizes the sale purchase agreement, collects the sale proceeds, and transfers the property. Under PCs current policy, privatization proceeds are required to be paid upfront rather than over time, as had been the case for many earlier transactions. Within 30 days of the sale, the PC is required to publish the summary details of the transaction in the official gazette. Three transactions, namely LPG business of SSGC, LPG business of SNGPL and divestment of shares of MCB, were published in the gazette in 2001. In summary, the privatization process is lengthy for major transactions, mainly to assure transparency in the process. After receiving CCOP approval for the privatization, it typically takes about 18 months to close a major transaction, even when no major restructuring of the company is required. This includes about six or seven months to appoint a Financial Advisor and another three or four months for the FA to complete its legal, technical and financial due diligence and to propose a privatization strategy. Following approval of the strategy, the marketing and bidding process may take five or six months (valuation efforts proceed in parallel), while it may take another two months after bidding to obtain approvals, finalize sale documents, and close the transaction. Additional delays in privatization are often caused by waiting for the necessary regulatory framework and sectoral policies to be put in place and for any needed restructuring to occur.
List of Up-Coming Transactions for Privatization S. No. Name of State Owned Entities/ Transaction Oil and Gas 1. Pakistan Petroleum Ltd (PPL) Oil and Gas Dev Corp Ltd (OGDCL) 2. Pirkoh Gas Company Limited. (PGCL) 3. Pakistan State Oil (PSO) 4. Sui Southern Gas Corp Ltd (SSGCL) 5. Sui Northern Gas Pipelines Ltd. Banking and Finance 6. National Investment Trust (NIT) 7. Investment Corp. of Pakistan (ICP) Power 8. Faisalabad Electric Supply Co (FESCO) 9. Genco 1 (Jamshoro) 10. Peshawar Electric Supply Co. 11. National Power Construction Company Insurance 12. State Life Insurance Corporation 13. Pakistan Re-Insurance Co. Ltd Capital Markets 14. Initial Public Offering of SLIC Industry and Real Estate 15. 16. 17. 18. 19. Pakistan Steel Mills Corporation National Construction Ltd. (NCL) Malam Jabba Pak-American Fertilizer Ltd. Lyallpur Chemical Privatisation Estimated/Expected, Remarks etc. 2nd qtr 2006 After privatisation of PPL. 2rd qtr 2006 3rd qtr 2006 2nd qtr 2006 3nd qtr 2006 3nd qtr 2006 3nd qtr 2006 4st qtr 2006 3nd qtr 2006 To be decided To be decided To be decided Bidding held on 31st March 2006. Further action is in hand. To be decided To be decided Bidding held on 28th Feb. 2006. Further action is in hand. 4rd qtr 2006

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Economic Survey 2005-06


List of Up-Coming Transactions for Privatization S. No. Name of State Owned Entities/ Transaction 20. Hazara Phosphate 21. Republic Motors Ltd. 22. Morafco Industries Faisalabad 23. Lasbella Textile Mills 24. Tomato Paste Plant 25. Printing Corporation of Pakistan Private Limited (PCPL) 26. Sindh Engineering Ltd 27. Heavy Mechanical Complex 28. Heavy Electrical Complex (HMC) 29. Pakistan Machine Tool Factory (PMTF) 30. Services International Hotel 31. Pakistan Mineral Development Corporation Projects Privatisation Estimated/Expected, Remarks etc. 4rd qtr 2006 To be decided 4nd qtr 2006 4nd qtr 2006 4th qtr 2006 4th qtr 2006 4th qtr 2006 3rd qtr 2006 3rd qtr 2006 3rd qtr 2006 2nd qtr 2006 To be decided Source: Privatization Commission

Mining and Quarrying Mining and quarrying represent an important activity in Pakistans economy, contributing around 0.5 percent to Pakistans Gross Domestic Product since 1990. Moreover, as mining has a high presence in the poor areas of Pakistan, employment and income generation in less developed areas would accompany the development of the industry. Deposits are found mostly in NWFP and Balochistan. According to industry sources, there are around 1600 processing units in the country with as many as 932 marble processing factories in the NWFP alone. Most of the processing units in NWFP are micro units with 1-3 cutters with the bulk of processing for export taking place in Karachi.
Table 3.17: FDI Inflow in Mining and Quarrying Marble and Granite is the sixth largest mineral Year US $ million % Share FDI extracted in Pakistan, the others being coal, rock 1997-98 99.1 16.5 salt, lime stone and china clay. According to the 1998-99 112.8 23.9 industry estimates, 1.37 million tons of marble and 1999-2000 79.7 17.0 granite were produced while 97% of it was 2000-01 84.7 26.3 consumed locally. Little efforts were made in the 2001-02 274.8 54.7 past to identify and estimate marble and granite 2002-03 188.2 23.6 reserves in the country. Some of the reserves of 2003-04 203.5 22.3 2004-05 194.3 12.7 marble and granite were however calculated with the 2005-06* 221.5 9.6 efforts made by development projects and * (July - April) Source: Economic Advisers Wing concerned departments. According to estimates, there are 160.2 million tons of marble reserves in the country out of which 98% are in NWFP. Granite reserves, only at one place in Northern areas show a total of 414 million tons while other reserves of granite are spread all over NWFP, Balochistan and Sindh.

In 1999 granite accounted for US$65 thousand in foreign exchange earnings, which was approximately 0.01% of international granite exports. The share reached a high of 0.03% in 1998 when Pakistan exports were US$ 208 thousand, other than that exports were in the range of US$ 61-87 thousand. Pakistan is also a regular importer of granite and sandstone. Pakistans export price per ton was in the range of US$ 106-162 per ton, while import price reached a high of $493 and a low of $80 per ton in the previous five years. Marble exports can be distinguished in three categories i.e. raw marble, rough worked and finished marble. All of these have a comparable share in total exports in Pakistan but finished marble has had the lions share of about 50% throughout the previous six years. All have experienced negative growth but raw marble has increased its share in

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Manufacturing, Mining and Investment Policies total marble exports form 19% to 24% in the previous six years. Pakistan only exports raw marble, and in 1999 it accounted for US$5.1 million in foreign exchange earnings, which was approximately 0.28% of international marble exports. The share has increased from 0.17% (in 1995), while in value the exports have increased by 69% in previous five years. Pakistan raw marble export price per ton was in the range of US$ 234-338 per ton, while imports reached a high of 387 and a low of 28.67 US$ per ton in the previous six years. Pakistan also imported rough worked marble in previous six years. Some of the leading importers from Pakistan include USA, which imported 52% by value of Pakistans marble in 1999 while Taiwan is another major importer sharing 15.12% of Pakistani exports of marble. The quality of the raw marble extracted from Pakistan is of the highest international standard with great potential to bring top end prices. However, only a small number of mines have enough capacity to produce significant orders for the international market. Most mines are micro operations, where the extracted marble is used for producing tiles and handicrafts with a few slabs suitable for high value goods like larger furniture and decorative pieces. On a per capita basis, the Pakistani industry is larger than Indias but the percent of extraction, level of productivity, technology and trade orientation are far behind.
Table-3.18 : Extraction of Principal Minerals July-March Minerals Coal Natural Gas Crude Oil Chromites Dolomite Gypsum Limestone Magnetite Rock Salt Sulphur Baryte Units of the quantity Million tonnes 000 MMCFT Mln. Barrels 000 tonnes 000 tonnes 000 tonnes Mln. tonnes 000 tonnes 000 tonnes 000 tonnes 000 tonnes 2003-04 3.3 34.0 22.6 29 297.4 467 13.1 6.0 1640 23.8 44 2004-05 3.3 38.0 24.1 46 199.6 552 14.8 3.0 1648 24.1 42 2004-05 2.4 28.4 18.1 34 166.5 436 11.1 2.8 1214 18.4 35 2005-06 % Change 2.5 4.2 29.7 4.5 18.7 3.3 31.7 -6.7 167.2 0.4 491 12.6 12.2 9.9 2.5 -10.7 1374 13.2 19.4 5.4 39 11.4 Source: Federal Bureau of Statistics

Despite reserves of high quality marble, over 90 percent of all Pakistans marble is sold in the domestic market or in Afghanistan as compared with India, which exports more than half of production. While growth of production has been high at over 20 percent per annum over the past decade, and exports have quadrupled between 1997 and 2004, in recent years, the construction needs in Afghanistan has led to a doubling of production over the past two years. Even so, Pakistan marble exports account for only about 0.5 percent of global trade at around US$20 million. Moreover, marble producers sell in predominantly low value added segments of the market with marble chips and powder dominating sales to Bangladesh, raw or roughly cut marble sale to markets in Italy, Taiwan and increasingly to china. Yet the bulk of exports are in the form of raw blocks of unprocessed stone. Though the Afghanistan construction boom is temporarily sustaining a production boom in Pakistan, sustained global competitiveness in processed marble products will depend on increased outward orientation or higher value added products, based on the use of rapidly advancing technologies throughout the industry.
Table 3.19 Leases & Reserves in the Country

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Economic Survey 2005-06


No. of Leases NWFP Balochistan Sindh Punjab Northern Areas FATA Total ML 124 4 128 PL 156 4 160 Total 280 203 N.A 8 491 ML 80789 5620 86409 Leased Area PL 34438 3976 38414 Total 115227 104139 N.A 9596 228962 Total Reserves (tones million) Marble Granite 157.9 N.A 2.2 N.A N.A N.A N.A 4140 0.1 160.2 4140 Source: SMEDA

Export Processing Zones Authority The Government of Pakistan has established Export Processing Zones Authority (EPZA) in 1980 under Ordinance IV of 1980 with the mandate to plan, develop, and manage export-processing zones in Pakistan. EPZA is an autonomous body under the ministry of Industries, Production and Special Initiatives. Box Item-3 : Investment Policy on EPZs of Pakistan Charter The Export Processing Zones Authority was established in 1980 with the following objectives: To attract foreign capital, technology, modern management skill for export industrial growth; To provide new employment opportunities for Pakistanis and to upgrade their managerial and technical skill; To provide a growing market at home for countrys raw material, semi manufacture goods, sub-contracting and service industries; To increase the foreign exchange earnings of the country by export of value added items; To provide a show window for displaying the ability and enterprise of countrys work force to attract foreign investment in the country; and To create a source of supply for such components and parts as are imported for domestic needs whether industrial or otherwise. Karachi Export Processing Zone KEPZ Phase I (in operation) Karachi Export Processing Zone is located adjacent to the Landhi Industrial Area (Extension) within a distance of 18 kilometers from the modern Quaid-e-Azam International Airport, 20 Kilometers from Port Qasim and 35 Kilometers from the highly modernized and developed Karachi Seaport. The 211 acres of land developed for industrialization has full infrastructure facilities providing all necessary utility services like electricity, gas water and telephone etc. There are 330 industrial plots and 70 plots for commercial sector (warehousing and trading) and 33 plots for financial sector. So far, 97 industrial units are in operation. KEPZ Phase II The project for development of 100 acres of KEPZ Phase-II was approved by ECNEC with total estimated cost of Rs.311 million on January 7, 2004.The infrastructure of KEPZ Phase-II is being developed and the Zone is likely to be ready by June 2006.

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Manufacturing, Mining and Investment Policies Saindak EPZ (in operation) This Gold and Copper Project located at Saindak in Chagai District of Balochistan is being managed by Chinese Company namely Messrs M.C.C and started operation in August 2003. The Saindak Project has the capacity to produce around 20,000 tones of blister copper per year containing about 5 tons of gold and silver from indigenous ores generating foreign exchange revenues of over US$ 45 million annually. The entire product (blister Copper) is being exported outside Pakistan. Risalpur EPZ (in operation) Risalpur Export Processing Zone is a joint venture between Export Processing Zones Authority (EPZA) and Sarhad Development Authority (SDA) located on Nowshera-Mardan Road, Risalpur. So far EPZA has sanctioned 53 project proposals. Sialkot EPZ Sialkot Export Processing Zone is a joint venture between EPZA and Punjab Small Industries Corporation (PSIC).The total cost of the project is Rs. 184 million which has been provided by private entrepreneurs. Development work on an entire area of 238 acres stands fully completed. EPZA has so far sanctioned 217 project proposals.

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TABLE 3.1 RESERVES AND EXTRACTION OF PRINCIPAL MINERALS


Antimony (tonnes) Argonite/ Marble Very large Deposits 281 321 388 460 467 458 459 345 403 579 620 685 1066 994 1280 839 1399 China Clay 4.9 million tons 44 42 37 48 31 43 66 68 67 63 47 54 40 25 38 27 33 Celestite (tonnes) .. 1773 1069 1682 4398 1403 762 812 961 642 802 807 382 402 570 1855 1157 1251 Chromite fairly large Deposits 24 28 23 11 13 27 35 35 18 26 22 24 31 29 46 51 31 Coal 185 billion tonnes 3054 3627 3256 3534 3043 3465 3496 3145 3378 3164 3285 3512 3609 3325 3367 2444 2081 Dolomite (tonnes) Very large Deposits 154591 180987 220241 228090 227079 185115 215556 116046 198831 347583 352689 312886 340864 297419 199653 166589 116151 Fire Clay Over 100 million tons 120 139 132 116 152 112 110 94 153 139 164 171 117 193 254 173 234 Fullers Earth fairly large Deposits 23 21 23 17 15 18 12 18 16 19 13 16 15 14 17 12 11 Gypsum Anhydrite 350 million tons 468 471 533 666 620 420 522 307 242 355 364 402 424 467 552 436 465 (000 tonnes) Lime Stone Very large Deposits 9009 8528 9015 9125 9682 9740 9491 11166 9467 9589 10870 10820 11880 13150 14857 11109 9678 (Contd.)

Reserves/ Years

1990-91 128 1991-92 1992-93 5 1993-94 3 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 95 2001-02 37 2002-03 2003-04 2004-05 5 Jul-Mar 2004-05 2005-06 P - Nil or Insignificant P Provisional

TABLE 3.1 RESERVES AND EXTRACTION OF PRINCIPAL MINERALS


(000 tonnes) Natural Gas (000 m.cu.mtr.) 492 billion cu. metre 14.66 15.57 16.50 17.65 17.77 18.85 19.76 19.82 20.92 23.17 24.78 26.16 28.11 34.06 38.08

Magnesite (tonnes) Reserves/ Years 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Mar 2004-05 2005-06 P

Rock Salt

Silica Sand

Ochre (tonnes)

Sulphur (tonnes) 0.8 million tons 295 215 510 715 510 20 640 22,458 19,103 22,812 17,428 22,580 19,402 23,873 24,158 18,426 16,939

Soap Stone

Baryte

4,242 6,333 5,047 7,000 5,227 14,981 6,679 3,397 3,455 4,513 4,645 4,637 2,645 6,074 3,029 2,836 532

Over 100 Very million large tons deposits 143 736 132 833 158 895 169 916 152 890 184 958 1,066 154 135 971 1,190 158 1,358 167 1,394 155 1,423 157 1,426 185 1,640 259 1,648 309 1,214 1,318 236 304

.. 1,285 1,001 1,000 745 4,623 8,081 2,047 3,147 4,080 4,793 4,691 5,064 6,733 7,861 18,686 6,090 25,824

0.6 5 million million tons tons 32 26 37 30 48 26 44 18 34 20 40 14 45 30 49 30 61 18 48 26 47 28 39 21 66 41 52 44 21 42 29 21 35 39

Bauxite/ Laterite (tonnes) Over 74 million tons 24,644 21,818 18,682 34,984 32,214 19,554 33,583 28,366 41,362 48,237 35,114 37,182 67,536 88,044 78,288 69,816 33,617

Iron Ore (tonnes) Over 430 million tons 318 937 1,922 3,792 8,103 6,046 4,575 5,500 38,151 45,980 24,765 4,942 11,483 84,946 104,278

Crude Oil (m. barrels) 184 million US barrels 23.49 22.47 21.90 20.68 19.86 21.05 21.27 20.54 19.95 20.40 21.08 23.19 23.46 22.62 24.12

78,816 18.18 28.41 81,877 17.88 29.28 Source : Federal Bureau of Statistics.

TABLE 3.2 PRODUCTION INDEX OF MINING AND MANUFACTURING


Mining 1975-76=100 410.3 412.8 420.6 427.1 417.6 445.3 456.3 449.5 448.7 468.8 497.6 532.8 572.4 597.2 .. .. .. Manufacturing 1980-81=100 202.5 218.5 227.5 237.2 240.8 248.4 243.1 261.6 270.8 1999-2000=100 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Mar 2004-05 2005-06 P .. Not available P Provisonal 545.6 576.7 611.3 656.7 709.8 .. .. .. 100.0 98.3 105.5 122.5 134.8 148.7 100.0 101.0 114.8 123.1 145.5 168.14

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

1969-70=100 468 472.1 478 483.4 461.8 504.8 520.1 512.3 509.1

1980-81=100 275.2 277.8 278.4 275.2 270.8 296.7 305.6 302.5 283.1

148.9 171.7 159.8 187.1 Source: Federal Bureau of Statistics

TABLE 3.3 COTTON TEXTILES STATISTICS


Working at the end Installed Capacity of the period No. of No. of No. of No. of Spindles Looms Spindles Looms (000) (000) (000) (000) 5,493 15 4,754 8 6,141 15 5,260 8 6,768 14 5,433 6 8,182 14 5,886 6 8,307 14 5,991 5 8,493 13 6,356 5 8,137 10 6,465 5 8,274 10 6,556 4 8,298 10 6,594 5 8,383 10 6,750 4 8,594 10 7,105 4 8,967 10 7,078 5 9,216 10 7,623 5 9,592 11 8,009 4 10,906 9 8,817 5 10,906 9 8,900 5

Year No. of Mills 247 271 284 320 334 349 357 353 348 351 353 354 363 363 423 430

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 P P: Provisional

Spindle Hours Worked (Million) 39,542 43,606 46,364 47,221 49,734 52,239 53,625 55,005 55,802 57,205 59,219 61,267 64,274 70,214 72,255 73,000

Loom Hours Worked (Million) 60.2 58.8 55.5 44.0 41.8 37.1 36.4 37.7 35.2 34.3 34.1 36.3 38.7 32.6 30.3 30.5

ConsumpTotal Surplus Total Protion of Yarn ProYarn duction Cotton duced of Cloth (mln kg) (mln.kg) (mln. kg) (mln. sq mtr.) 1,197.5 1,041.2 1,001.0 292.9 1,342.8 1,170.7 1,134.7 307.9 1,427.0 1,219.0 1,148.6 325.4 1,483.4 1,309.6 1,272.8 314.9 1,558.9 1,369.7 1,340.6 321.8 1,661.9 1,495.1 1,434.7 327.0 1,670.1 1,520.8 1,473.9 333.5 1,751.0 1,532.3 1,478.9 340.3 1,839.6 1,540.3 1,482.4 384.6 1,961.6 1,669.9 1,604.4 437.2 2,070.1 1,721.0 1,652.7 490.2 2,155.2 1,808.6 1,731.2 568.4 2,371.3 1,934.9 1,855.4 576.6 2,407.6 1,938.9 1,845.8 683.4 2,622.8 2,280.6 2,175.2 920.7 3,055.8 2,546.5 2,544.9 930.3 Source: Federal Bureau of Statistics Textile Commissioner Organization

TABLE 3.4 PRODUCTION OF FERTILIZERS, VEGETABLE GHEE, SUGAR AND CEMENT


(000 tonnes) Super Phosphate 175.1 194.0 205.0 195.1 147.0 103.7 0.1 0.0 21.6 145.8 159.6 161.0 147.2 167.7 163.1 122.4 126.3 Fertilizers Ammonium Nitrate 318.8 300.0 302.2 242.7 313.9 383.5 330.2 316.3 338.8 386.5 374.4 329.4 335.3 350.4 329.9 240 233 Ammonium Sulphate 92.3 92.9 92.9 82.0 79.6 83.7 80.9 Nitro Phosphate 321.0 309.8 297.3 251.4 285.0 336.5 350.3 293.2 285.0 261.3 282.5 305.7 304.9 363.5 338.9 249.0 263.0

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 July-March 2004-05 2005-06 P - Nil P Provisional

Urea 2050.3 1,898.0 2,306.1 3,103.8 3,000.2 3,260.1 3,258.7 3,284.2 3,521.7 3,785.0 4,005.1 4,259.6 4,401.9 4,431.6 4,606.4 3,454.0 3,612.7

Vegetable Ghee 656 639 725 671 711 733 714 719 773 695 835 797 772 888 917

Sugar

Cement

1,934 2,322 2,384 2,841 2,964 2,426 2,383 3,555 3,542 2,429 2,956 3,247 3,686 4,021 3,092

7,762 8,321 8,558 8,100 7,913 9,567 9,536 9,364 9,635 9,314 9,674 9,935 10,845 12,862 15,038

761 2,958 11,154 861 2,887 12,242 Source: Federal Bureau of Statistics

TABLE 3.5 PRODUCTION OF SELECTED INDUSTRIAL ITEMS


Food and Tobacco Beverages (000 doz. bottles) 67,607 85,266 139,823 113,704 143,019 131,114 115,817 149,848 185,014 194,336 211,798 207,646 190,742 224,238 207,803 172,880 245,608 Jute Textiles (000 tonnes) 96.9 100.9 97.5 76.4 68.5 70.6 68.7 95.4 85.5 85.5 89.4 81.7 93.8 102 104.8 78.6 76.6 Rubber Motor Tyres (000 Nos) 952 784 712 783 912 1003 525 767 845 856 884 908 1082 1302 1488 3881 4269 Motor Tubes (000 Nos) 646 618 550 706 833 909 643 665 586 490 520 557 616 587 572 4433 5140 Cycle Tyres (000 Nos) 3,828 3,751 3,826 3,872 3,523 3,988 4,112 1,415 3,665 3,767 4,051 4,569 5,330 4,894 4,900 3,724 3,987 Cycle Tubes (000 Nos) 5,468 5,757 5,612 6,191 5,146 5,594 5,205 4,978 5,529 5,937 5,891 6,938 8,942 8,004 9,611 7,225 7,491 (Contd.)

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Mar 2004-05 2005-06 P P Provisional

Cigarettes (Million Nos) 29,887 29,673 29,947 35,895 32,747 45,506 46,101 48,215 51,578 46,976 58,259 55,108 49,365 55,399 61,089 44,134 46,227

TABLE 3.5 PRODUCTION OF SELECTED SELECTED ITEMS


Chemicals Year Soda Ash
(000 tonnes)

Sulphuric Acid
(000 tonnes)

Caustic Soda
(000 tonnes)

Chlorine Gas
(000 tonnes)

Paints & Varnishes


(tonnes)

Polishes & Creams for Footwear


(mln. grams)

Transport, Machinery & Electrical Appliances Sewing Total Bicycles Machines TV Sets
(000 Nos.) (000 Nos.) (000 Nos.)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Mar 2004-05 2005-06 P

147.2 185.9 196.2 197.0 196.1 221.2 247.0 240.3 239.4 245.7 217.9 215.2 281.5 286.5 297.3 223.5 238.5

93.5 97.6 99.8 102.3 80.4 69.2 30.8 28.1 27.0 57.7 57.1 59.4 56 64.6 92.3 66.8 72

78.5 82.0 81.5 89.0 92.7 109.0 118.2 115.7 120.4 141.3 145.5 150.3 164.4 187.5 206.7 152.3 161.2

6.7 6.1 5.9 5.8 7.8 9.1 9.4 9.7 11.3 14.2 14.5 15.1 15.9 17.2 19.1 14.3 14.1

14,308 18,950 16,626 9,373 6,865 8,030 8,005 5,917 6,500 7,347 10,922 10,341 3,899 5,406 15,496 10,648 11,816

651.1 682.5 638.1 602.8 719.5 836.8 861.1 869.7 888.8 897.7 906.7 920.9 935.3 950.1 959.6 636.5 642.9

428.8 478.4 588.6 563.7 473.4 545.1 432.4 452.1 504.0 534.1 569.6 553.4 629.7 664.1 587.9 418.3 449.4

81.3 85.1 72.3 76.7 68.1 84.1 61.1 36.2 29.7 27.6 26.9 24.0 30.6 35.0 35.9 25.1 28.4

181.7 145.5 162.2 112.5 101.1 277.6 185.6 107.4 128.3 121.3 97.4 450.0 764.6 843.1 908.8 650.5 730.2 Contd.

TABLE 3.5 PRODUCTION OF SELECTED INDUSTRIAL ITEMS


Electrical Appliances Electric Electric Bulbs Tubes
(Mln.Nos) (000 metres)

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Mar 2004-05 2005-06 P P Provisional

Papers & Board Paper Paper Board (All Types)


(000 tonnes) (000 tonnes)

Steel Products Coke


(000 tonnes)

Pig Iron
(000 tonnes)

Billets
(000 tonnes)

49.3 43.2 41.3 42.7 41.6 45.8 56.4 62.5 66.8 63.2 55.2 54.6 58.3 139.4 144.1 109.1 108.3

7,728 4,460 4,205 5,307 5,352 5,417 7,598 8,354 7,991 7,137 10,542 10,441 10,844 14,614 15,521 14,432 15,124

88.6 111.0 154.8 133.2 106.2 110.0 197.6 166.5 173.6 228.0 246.3 187.6 228.2 247.9 256.7 177.0 208.1

64.2 66.0 109.0 129.3 208.4 193.4 149.0 178.3 186.8 206.2 284.8 137.9 148.0 156.8 163.1 121.4 126

723.6 737.2 716.4 771.6 701.5 685.6 663.0 667.7 588.7 675.5 717.3 694.6 775.2 785.5 772.8

1073.9 1048.1 1098.2 1252.7 1044.7 1002.2 1068.6 1015.8 989.3 1106.6 1071.2 1042.9 1140.2 1180 1137.2

330.0 306.7 338.4 403.9 343.5 332.7 378.5 350.1 276.1 345.2 414.7 412.0 408.4 429.2 314.7

624.4 913.3 272 141.2 511.5 141.5 Source: Federal Bureau of Statistics Ministry of Industries

TABLE 3.6 PERCENT GROWTH OF SELECTED INDUSTRIAL ITEMS


Cotton Cotton Jute Veg.Ghee Yarn Cloth Goods 1.15 (3.93) 14.22 (0.65) 4.13 (2.59) 12.44 5.12 5.68 (3.37) 13.46 4.13 (3.23) (21.64) (7.45) 7.43 2.19 (10.34) 5.96 4.59 1.62 3.07 3.09 9.16 1.99 (2.69) (2.59) 1.72 2.04 38.86 0.70 0.76 13.02 (10.38) 7.95 0.52 13.73 (1.87) (9.65) 8.41 12.12 4.56 19.59 3.06 20.09 (8.61) 7.24 5.09 1.66 14.03 (6.75) 6.18 17.39 8.87 15.10 0.73 0.80 3.19 18.22 28.89 (2.47) 13.16 11.16 0.07 July-March Figures in parenthesis represent negative growth. Cigarettes (7.41) (0.72) (0.92) 19.86 (8.77) 38.96 1.31 4.54 6.98 (8.92) 24.02 (5.05) (10.42) 12.22 10.27 4.74 Fertilizers (2.66) (5.52) 14.65 20.96 (1.27) 8.89 (3.53) (3.15) 6.67 4.62 9.21 (0.38) 12.11 7.80 5.86 5.08 Cement 3.66 7.20 2.84 (5.35) (2.31) 20.90 (0.32) (1.80) 2.30 (3.33) 3.87 2.70 12.11 18.60 16.92 9.75 Source: Caustic Sugar Soda 1.53 6.01 4.15 26.29 4.49 20.06 5.54 (0.61) 2.67 (0.41) 9.20 19.17 (0.46) 4.16 4.33 12.80 17.58 (18.15) 11.66 8.44 (1.77) (2.71) (2.12) 49.18 (0.37) 4.06 (0.48) 2.63 17.36 (31.41) (11.30) 2.97 21.70 (1.23) 3.85 9.84 10.09 9.34 13.48 2.22 14.11 9.09 3.86 10.21 (23.10) 6.68 5.85 (2.40) Federal Bureau of Statistics Soda Ash

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06* * Note:

TABLE 3.7 FOREIGN INVESTMENT


Fiscal Year 1990-91 Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio* Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total USA 130.0 5.0 135.0 213.4 50.9 264.3 136.9 25.7 162.6 114.5 34.0 148.5 176.4 370.2 546.6 319.8 35.9 355.7 246.2 111.3 357.5 256.6 64.2 320.8 16.4 11.4 175.3 166.9 -20.0 146.9 92.7 -37.8 54.9 326.4 -1.7 324.7 211.5 15.1 226.6 233.4 21.4 259.8 326 47 373 419.1 331.5 750.7 UK 33.8 -0.3 33.5 20.8 -1.2 19.6 25.7 19.7 45.4 32.0 50.0 82.0 38.7 243.9 282.6 331.7 68.1 399.8 240.1 77.9 318.0 135.3 -106.2 29.1 81.6 -30.5 51.1 169.0 28.7 197.7 90.5 -33.8 56.7 30.3 -32.4 -2.1 219.4 -34.6 184.8 64.9 -23 41.9 181.5 17.6 199.1 151.4 -16.1 135.3 UAE 9.0 1.6 10.6 10.5 47.6 58.1 9.5 0.9 10.4 7.5 2.6 10.1 46.8 34.9 81.7 52.8 -22.3 30.5 54.9 -5.2 49.7 19.2 22.1 41.3 6.9 25.4 32.3 5.7 25.2 30.9 5.2 -10.9 -5.7 21.5 -4.2 17.3 119.7 0.7 120.4 134.6 11.9 146.5 367.5 49.8 417.3 1284.6 55.1 1339.6 Germany 12.5 2.3 14.8 21.4 0.5 21.9 36.2 .. 36.2 92.6 .. 92.6 17.6 11.2 28.8 26.0 3.3 29.3 17.6 19.7 37.3 24.0 0.3 24.3 19.3 0.0 19.3 10.5 0.0 10.5 15.5 15.5 11.2 11.2 3.7 0.1 3.8 7 -3.0 4.0 13.1 2.1 15.2 27 -4.2 22.7 2.6 France 7.1 .. 7.1 8.5 .. 8.5 5.7 5.7 9.1 3.3 12.4 13.5 37.1 50.6 14.0 .. 14.0 10.2 .. 10.2 4.9 0.4 5.3 7.0 7.3 14.3 1.6 0.2 1.8 0.7 0.7 -6.9 0.3 -6.6 2.6 2.6 -5.6 0 -5.6 -3.6 0.1 -3.5 2.6 HongKong 3.3 0.1 3.4 .. 83.7 83.7 12.4 48.8 61.2 11.1 11.1 2.2 173.1 175.3 33.9 -4.3 29.6 7.5 -20.6 -13.1 2.1 229.6 231.7 1.0 0.5 1.5 0.8 9.7 10.5 3.6 -16.3 -12.7 2.8 20.6 23.4 5.6 -0.4 5.2 6.3 -1.3 5 32.3 28.9 61.2 21.9 33.1 55 0 (Contd.) (Million US $) Italy 2.9 .. 2.9 2.0 0.3 2.3 0.6 0.6 1.2 -19.2 -18.0 0.3 8.7 9.0 0.5 0.5 1.8 1.8 0.9 0.1 1 0.2 0.0 0.1 0.5 0.0 0.5 1.3 1.3 0.1 0.1 0.2 0.2 0.4 1.9 -1.9 0 0.4 0.4 0.0

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

TABLE 3.7 FOREIGN INVESTMENT


(Cond..) Fiscal Year 1990-91 Direct Portfolio Total 1991-92 Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Direct Portfolio Total Japan 26.2 -5.3 20.9 17.7 .. 17.7 22 6.3 28.3 0.3 0.3 16.3 4.6 20.9 82.1 13.1 95.2 36.6 6.9 43.5 17.8 -1.2 16.6 57.4 0.0 57.4 17.7 0.2 17.9 9.1 9.1 6.5 0.2 6.7 14.1 14.1 15.1 -3.5 11.6 45.2 -3.5 41.7 Saudi Arabia 0.9 -0.2 0.7 0.1 1.1 1.2 8.2 0.4 8.6 29.7 0.8 30.5 0.9 1.2 2.1 26.9 -1.1 25.8 -17 .. -17 1.2 1.3 2.5 1.1 0.0 1.1 28.6 -5.9 22.7 56.6 -1.7 54.9 1.3 0.1 1.4 43.5 0.1 43.6 7.2 -1.9 5.3 18.4 -0.2 18.2 Canada 1.9 0.2 2.1 3.0 3.0 0.3 4.0 4.3 1.9 1.9 0.4 -17.2 -16.8 0.8 .. 0.8 1.7 0.8 2.5 0.5 0.5 0.3 0.0 0.3 0.2 0.0 0.2 0.1 0.5 0.6 3.5 2.7 6.2 0.5 0.5 0.5 0.0 0.5 1.9 0.1 2 Netherland 2.3 .. 2.3 0.8 1.3 2.1 5.6 5.3 10.9 1.2 8.8 10 4.5 11.5 16 11.9 .. 11.9 7.7 3.5 11.2 26.9 26.9 5.7 0.6 6.3 10.7 9.4 20.1 4.8 -1.3 3.5 -5.1 -0.8 -5.9 3.0 3.0 14 -1.9 12.1 36.7 23.2 59.9 Korea -0.1 0.1 0 40.8 40.8 31.5 .. 31.5 7.3 7.3 5.9 5.9 4.6 0.0 4.6 9.3 0.0 9.3 3.7 3.7 0.5 0.5 0.2 -6.8 -6.6 1 -9.4 -8.4 1.4 1.4 Others 16.1 -12.4 3.7 36.9 34.3 71.2 43.3 25.7 69.0 53.1 208.2 261.3 84.0 210.7 294.7 169.8 112.3 282.1 67.5 73.1 140.6 106.0 10.7 116.7 27.0 12.4 39.4 48.4 26.0 74.4 38.6 -39.1 -0.5 92.6 5.2 97.8 174.0 47.7 221.7 464.1 -15.1 449 503.2 -12.5 490.7 (Million US $) Total 246.0 -9.0 237 335.1 218.5 553.6 306.4 136.8 443.2 354.1 288.6 642.7 442.4 1089.9 1532.3 1101.7 205.0 1306.7 682.1 267.7 949.5 601.3 221.3 822.6 376.0 27.3 403.3 469.9 73.5 543.4 322.4 -140.4 182.0 484.7 -10 474.7 798.0 22.1 820.1 949.6 -27.7 921.7 1524 152.6 1676.6

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06*

.. **July-April

Direct 37.3 273.7 3.9 87.1 1.4 710.2 3020.2 Portfolio -6.4 0.8 0.2 -0.8 -37.4 355.8 Total 30.9 274.5 4.1 86.4 1.4 672.8 3376 Stands for amount less than $ 0.05 million Source: State Bank of Pakistan Not Available Direct investment consists of cash, capital equipment brought in and reinvested earnings.

Chapter 4.

POVERTY AND INCOME DISTRIBUTION


The fight against poverty represents the greatest challenge of our times. Considerable progress has nevertheless been made in different parts of the world in reducing poverty. The proportion of people living in extreme poverty on global level fell from 28 percent in 1990 to 21 percent in 2001 (on the basis of $1 a day). In absolute numbers the reduction during the period was 130 million with most of it coming from China. In Sub-Saharan Africa, the absolute number of poor actually increased by 100 million during the period. The Central and Eastern Europe and the CIS also witnessed a dramatic increase in poverty. While incidence of poverty declined in South Asia, Latin America and the Middle East witnessed no change. The recent trends in global and regional poverty clearly suggest one thing and that is, that rapid economic growth over a prolonged period is essential for poverty reduction. At the macro level, economic growth implies greater availability of public resources to improve the quantity and quality of education, health and other services. At the micro level, economic growth creates employment opportunities, increases the income of the people and therefore reduces poverty. Many developing countries have succeeded in boosting growth for a short period. But only those that have achieved higher economic growth over a long period have seen a lasting reduction in poverty East Asia and China are classic examples of lasting reduction in poverty. One thing is also clear from the evidence of East Asia and China that growth does not come automatically. It requires policies that will promote growth. Macroeconomic stability is therefore, key to a sustained high economic growth. Although extreme poverty on global level has declined, the gap between the rich and poor countries is increasing, even when developing countries are growing at a faster pace than developed ones perhaps due to the large income gaps at the initial level. In a world of six billion people, one billion have 80 percent of the income and five billion have less than 20 percent. In the next 25 years, two billion more people will be added in the world we live. All but 50 million of them will be in the developing countries. In the year 2025, seven out of the eight billion people will be living in developing countries. This issue of global imbalance is at the core of the challenge to scale up poverty reduction. In Pakistan, Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in poverty during 1990s. It consisted of the following five elements:- (a) accelerating economic growth and maintaining macroeconomic stability, (b) investing in human capital, (c) augmenting targeted interventions; (d) expanding social safety nets and (e) improving governance. The net outcome of interactions among these five elements would be the expected reduction in transitory and chronic poverty on a sustained basis. The reduction in poverty and improvement in social indicators and living conditions of the society are being monitored frequently through large- scale household surveys in order to gauge their progress in meeting the targets set by Pakistan for achieving the seven UN Millennium Development Goals by 2015. Among them the most important is halving the population living below the poverty line from 26% in 1990 to 13% by 2015. The improvement in household social indicators and living conditions at the national level during 2001-05, based on information from 76520 households is documented in last year Economic Survey. Preliminary findings of Pakistan Social and Living Standards Measurement Survey (PSLM 200405) on poverty status were released in end February this fiscal year. Pakistans growth performance over the last four years is enviable in many respects. Sound macroeconomic policies and implementation of structural reforms in almost all sectors of the economy have transformed Pakistan into a stable and resurgent economy in recent years. The real GDP has grown at an average rate of over 7.5 percent per annum during the last three years (2003/04 to 2005/06). With population growing at an average rate of 1.9 percent

53

Economic Survey 2005-06 per annum, the real per capita income has grown at an average rate of 5.6 percent per annum. The strong economic growth is bound to create employment opportunities and therefore reduced unemployment. The evidence provided by the Labour Force Survey 2005 (First two quarters) clearly supports the fact that economic growth has created employment opportunities. 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. Agriculture, housing and construction, IT and Telecom sector, and SME are the sectors which have created relatively more jobs. In recent years the role of remittances in reducing poverty has been widely acknowledged1. Remittances allow families to maintain or increase expenditure on basic consumption, housing, education, and small-business formation. Remittances constitute one of the largest sources of external finance for developing countries and Pakistan is no exception. Total remittances inflows since 2001-02 and until 2005-06 have amounted over $ 19 billion or Rs.1129 billion. It has averaged 4.1 percent of GDP during the last four years. Such a massive inflow of remittances particularly towards the rural or semi-urban areas of Pakistan must have helped loosen the budget constraints of their recipients, allowing them to increase consumption of both durables and non-durables, on human capital accumulation (through both education and health care), and on real estate. To the extent that the poorer sections of society depend on remittances for their basis consumption needs, increased flow of remittances would be associated with reduction in poverty and possibly in equality. Although, growth is necessary but it is not sufficient to make any significant dent to poverty. Realizing this fact the government had launched a directed program under the title of Poverty Related and Social Sector Program some five years ago. 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. Such a huge spending on targeted program is bound to make a significant dent to poverty. Summarizing the above discussion it is clear that a strong growth (7.5 % on average) for three years in a row with per capita income growing at an average rate of 5.6 percent; a large inflow of remittances (over $ 4.0 billion per annum) in recent years, a huge expenditure on poverty-related and social sector program, and many other interventions were bound to make a significant dent to poverty in Pakistan. It is with this that we turn to the status of poverty in Pakistan for the period 2000-01 and 2004-05. The Household Integrated Economic Survey (HIES) a component of Pakistan Social and Living Standards Measurement (PSLM) Survey provides important data on household income, consumption expenditure and consumption patterns at national and provincial level with rural-urban breakdown. The information pertaining to income and expenditure of the households are used to estimate poverty. Before we delve into the details of poverty estimates a few words regarding the Survey is in order. HIES Survey 2004-05: Its size and scope The HIES a component of the PSLM Survey 2004-05, is specifically designed to monitor poverty status of population by collecting information on consumption expenditure at the household level. With a representative sample size of 14706 households, it covered 5808 and 8898 households in the urban and rural areas of the country, respectively. The Survey was started in July 2004 and the entire field operations were completed in June 2005. Information on consumption/expenditure of 196 items including 89 food items were collected from each household.

See World Economic Outlook, April 2005, Chapter II, IMF

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Poverty and Income Distribution Consumption aggregate includes food items, frequently used non-food expenses (household laundry, cleaning, personal care product, utilities, fuel and energy and transportation) and other non-food expenses such as clothing, footwear, education, health and house rents. The poverty line is based on 2350 calories per adult equivalent per day. It is also comparable with poverty line of 2000-01 as it was also based on 2350 calories and calculated from Pakistan Integrated Household Survey (PIHS). The poverty line of 2004-05 is adjusted by the inflation rate during the period 2001-2005. Poverty Status 2001 and 2004-05: Survey Evidence Table 4.1 gives a comparative snapshot of poverty status during 2001 and 2005. The latest estimate of inflation adjusted poverty Iine is Rs.878.64 per adult equivalent per month up from Rs.723.40 in 2001. Headcount ratio, i.e., percentage of population living below the poverty line has fallen from 34.46 percent in 2001 to 23.9 percent in 2004-05, a decline of 10.6 percentage points. In absolute numbers the count of poor persons has fallen from 49.23 million in 2001 to 36.45 million in 2004-05. 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 other words, rural poverty has declined by 11.16 percentage points and urban poverty is reduced by 7.79 percentage points. The other two indicators, poverty gap and severity of poverty are aggregate measures of spread of the poor below the poverty line, i.e., they aggregate the distance (proximity or remoteness) of all poor individuals from the poverty line. A lower value indicates that most of the poor are bunched around the poverty line. In line with the improvement in headcount, both the poverty gap and severity of poverty has also declined substantially in the country. These findings are consistent with the developments on economic scene that have taken place since 200001. A strong growth in economy, rise in per capita income, a large inflow of remittances and massive spending on poverty-related and social sector programs were expected to reduce poverty in Pakistan.
Table-4.1 : Poverty Indicators 2001 and 2004-5 Headcount Pakistan Urban Rural Poverty Line (Rs.per adult equivalent per month) 2001 34.46 22.69 39.26 723.40 2005 23.90 14.90 28.10 878.64 Source : CRPRID / Planning Commission. Poverty Gap 2001 7.03 4.55 8.04 2005 4.76 2.87 5.64 Severity of Poverty 2001 2.13 1.35 2.44 2005 1.48 0.84 1.77

The estimation of poverty line enables the policy makers to further identify and group the population into various poverty bands such as extremely poor, vulnerable and non-poor etc. Table 2 presents a comparative profile of 2001 and 2004-05 for the six groups. While the percentage of population classified as extremely poor remain almost identical in the two periods, the proportion of ultra poor and poor have declined appreciably. At the higher end, the percentage of quasi non-poor and non-poor in the economy increased notably.

Table-4.2 : Comparative Poverty Profile 2001 and 2004-05 Percentage of Population 2001 2004-05 Extremely Poor 1.1 1.0 Ultra Poor 10.8 6.5 Poor 22.5 16.4 Vulnerable 22.5 20.5 Quasi Non-Poor 30.1 35.0 Non-Poor 13.0 20.5 Source : CRPRID / Planning Commission.

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Economic Survey 2005-06 Box Item : Endorsement of Poverty Estimates by the Development Partners After the announcements of the preliminary results in February 2006 the Government of Pakistan constituted a committee headed by the Secretary, Planning and Development Division and comprising of the representatives from the development partners i.e., World Bank, Asian Development Bank, United Nations Development Program (UNDP) and the Department for International Development (DFID), UK; experts from the CRPRID / Planning Commission, other Government Agencies and local experts to validate the poverty related estimates obtained from the methodology employed by the CRPRID/Planning Commission. This methodology was formulated at the time of analyzing the data from 1998-99 PIHS. Applying this methodology on the data of PIHS 2000-01 and HIES 2004-05, the World Bank endorsed the poverty line of Rs.723.4 and found that of 34.46 percent people were living below the poverty line in 2000-01. Applying an inflation rate of 21.45 percent for the period 2001-01/2004-05, it also obtained the poverty line of Rs.878.64 and that 24 percent of people were living below the poverty line in 2004-05, almost identical to the CRPRID/Planning Commission estimate of 23.9 percent. The service of world renowned poverty expert Prof. Nanak Kakwani, Director of the UNDP-International Poverty Centre, Brazil was hired by the UNDP to independently look into the estimates of the CRPRID/Planning Commission. He also authenticated the poverty estimates for both the years (2000-01 and 2004-05) as per the methodology used by the CRPRID/Planning Commission. The DFIDs consultants also endorsed the methodology employed by the CRPRID/Planning Commission. In order to maintain consistency across years, it is essential that we apply the same agreed upon methodology over the years, irrespective of its weaknesses and strengths. Needless to state that poverty lines and its estimates are sensitive to the methodologies used and specifically to the manner in which how and what type of price indices are used to inflate the poverty lines. Different methodologies used by different development partners and other experts can throw different numbers. One element is however, common that a substantial decline in poverty has taken place between the two Survey periods.

Detailed analysis of the consumption patterns of the population grouped by quintiles provides strong evidence in support of the observed reduction in poverty levels between 2001 and 2004-05. Table 3 compares mean and median of real monthly consumption expenditure per adult equivalent of the 2 periods. Overall, the growth in real mean expenditure of the population from Rs.1004 to Rs.1171 is 16.6 percent. The growth in real mean expenditure of top 20% percent population at 22 percent is nearly 2 times that of the bottom 20%. The closeness of mean and median values across the bottom 80% of the population indicate that consumption expenditures are bell-shaped normally distributed around the mean and median of each quintiles. Only the top 20% of the population exhibit greater skewness in consumption behaviour as mean and median consumption expenditures are different.
Table-4.3: Consumption expenditure between PIHS 2000-01 and PSLM 2004-05 at the prices of 2001 Growth PIHS 2000-01 PSLM 2004-05 Quintile (mean exp.) Mean Median Mean Median Poorest 20 % 508 524 555 557 9.25 Second 690 690 775 775 12.32 Third 845 843 961 959 13.73 Fourth 1070 1060 1238 1227 15.70 Richest 20 % 1908 1582 2327 1912 21.96 All 1004 843 1171 960 16.63 Source : CRPRID / Planning Commission.

Comparing the share of major food and non-food items in total expenditure across the 2 points in time provides another perspective on the stability of consumption behavior and reliability of the data. Table 4 gives the percentage expenditure share of major items in the monthly per adult equivalent expenditure. Notable increase in shares between the two periods is observed in transport category and other miscellaneous expenditure, e.g., email, internet

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Poverty and Income Distribution etc. The share of medical expenses and education record a marginal decline from 2001 level. In case of education, this may reflect substitution by households of own expenditure with that provided by the government via upscaling and better targeting of expenditures on education in PRSP.
Table-4.4: Percentage of per adult equivalent monthly consumption expenditure by commodity group Commodity Group PIHS 2000-01 PSLM 2004-05 Food 49.5 49.1 Fuel and lighting 8.1 8.0 Personal care articles/services, laundry cleaning, paper articles 3.9 3.8 Personal transport and traveling expenses (not commercial) 3.7 4.9 Other misc. household exp. on goods and services(e-mail, internet etc) 3.9 5.2 Clothing, clothing material/services 5.7 5.0 Medical care 4.5 4.0 Education 3.5 3.0 House rent 12.0 11.9 Other remaining expenditures 5.1 5.1 Total 100.0 100.0 Source : CRPRID / Planning Commission.

Table 5 compares the growth rate in per adult equivalent monthly consumption expenditure on few commodity groups of bottom 20% with the top 20% of the population for the year 2001 and 2004-05. Except for the negative growth in medical care expenses of the richest 20%, all other commodity groups indicate a lower and in some cases, i.e., education, clothing, and personal care, a negative growth rate for the poorest 20% during the period. A marginal negative growth in clothing and items of personal care may reflect cheaper imports from China, while in case of education, increased expenditure on education by the government may have substituted household own expenditure on education. The highest growth (50.4 %) for the poorest 20% occurred in the transport and traveling expenses.
Table-4.5: Comparison of per adult equivalent monthly consumption expenditure between PIHS 2000-01 and HIES 2004-05 at 2001 prices by commodity group and quintile Commodity Group Food Fuel and lighting Personal care articles/services, laundry cleaning, paper articles Personal transport and traveling expenses (not commercial) Other misc. household exp. on goods and services(e-mail, internet etc) Clothing, clothing material/services Medical care Education House rent **2001 288.5 47.3 22.6 11.0 14.3 33.1 19.3 9.0 39.3 Poorest 20 % *2005 322.0 50.0 22.3 16.6 16.4 32.4 22.1 7.8 43.0 Growth 11.6 5.7 -1.4 50.4 15.2 -2.2 14.6 -13.7 9.3 2001 799.8 140.6 66.9 92.1 101.0 93.5 93.4 96.5 313.2 Richest 20 % 2005 951.8 169.9 82.8 153.4 165.3 101.4 87.7 108.0 365.7 Growth 19.0 20.9 23.9 66.5 63.6 8.4 -6.1 11.9 16.8

Source : CRPRID / Planning Commission.

Consumption Inequality The aggregative nature of income data collected in PSLM 2004-05 is strictly not comparable with the corresponding data collected in PIHS 2000-01. Consequently inequalities in consumption expenditure are compared between the two periods. Inequality based on consumption expenditure are generally lower than inequality based on income as

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Economic Survey 2005-06 variations in consumption are less and it is based partly on a subset of homogenous (in terms of quality and price) food items. The consumption inequality is measured by Gini Coefficient and ratio of highest to the lowest quintile. The Gini Coefficient takes on a value between 0 and 1. The higher the value of Gini Coefficient, the greater will be the inequality. Table 6 shows the value of Gini for Pakistan and rural urban divide obtained from the PIHS 2000-01 and PSLM 200405 data. The trend for Gini values indicate that consumption inequality has increased during the period. The empirical evidence in the previous sections also indicates that consumption increased faster for top 20% of the population as compared to the growth rate of bottom 20%. Historically, between 1970 and 1979 decline in absolute poverty was also accompanied by rising inequality in Pakistan.
Table-4.6 : Gini Coefficient and Consumption Shares by quintiles PIHS 2000-01 Urban Rural Pakistan Gini coefficient 0.3227 0.2367 0.2752 Consumption share by Quintile Quintile1 5.3 12.8 10.1 Quintile2 8.1 16.9 13.7 Quintile3 12.1 19.5 16.8 Quintile4 19.4 22.4 21.3 Quintile5 55.1 28.4 38.0 Ratio of Highest to lowest 10.40 2.22 3.76

Urban 0.3388

HIES 2004-05 Rural Pakistan 0.2519 0.2976

4.8 12.6 9.5 7.6 17.1 13.2 11.6 19.7 16.4 18.3 23.0 21.4 57.7 27.6 39.4 12.02 2.19 4.15 Source : CRPRID / Planning Commission.

The estimates also indicate that consumption inequality in urban Pakistan is higher than in rural Pakistan. Moreover urban inequality increased faster than rural inequality during the 2001-05 period. The high urban inequality may be attributed to the fact that urban work force is more diversified in terms of skill and education. The wage income is, therefore more unequally distributed in urban areas than in rural areas. In addition, income from self-employment is more concentrated in urban areas than in rural areas because urban self-employed ranges from wealthy businessmen to petty traders whereas bulk of the rural self-employed are homogeneous in informal sectors. The Gini Coefficient is a broad single aggregative measure. It suppresses the profile of the distribution. Table 6 also reports the percentage share of consumption expenditure by quintile between 2001 and 2005 for overall Pakistan as well as the rural and urban regions. The percentage share of expenditure indicates that while first three quintiles the lowest 60% witnessed few basis points decline in their consumption share, the last two quintilesthe highest 40 percent gained in their consumption share implying that inequality in Pakistan has increased marginally but relatively more in urban areas. The ratio of the highest to the lowest quintile which measures the gap between the rich and the poor also widened to some extent from 3.76 in 2001 to 4.15 in 2005. At regional level, the gap between the rich and poor in urban areas has widened relatively moreincrease from 10.40 to 12.02. In contrast, the gap between the rich and poor in rural area remained more or less unchanged, that is, from 2.22 to 2.19. Furthermore, this also suggests that the gap between the rich and poor in rural area remained low during the period. Poverty-Related and Social Sector (PRSP) Expenditure In recent years the realization that growth alone is not sufficient for poverty reduction is at the centre stage in development policy and practice. During the last five years pro-poor expenditures were the most important fiscal intervention to support the four critical elements of the poverty reduction strategy. In terms of impact on growth, employment and poverty the pro-poor spending can be broadly categorized into 3 types:- i) The impact of increase spending on Education, Health, Population Planning, Governance on chronic poverty is long term, but in the medium

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Poverty and Income Distribution to short term increasing access to these services imply more investment and employment for even lower income strata specially in rural areas. ii) Spending on Irrigation, Roads, Highways, Rural Development, Land Reclamation, Village Electrification increase employment in the short to medium run and mitigate transitory poverty. iii) Spending on Food Subsidies, Social Security, and Food Support Programs directly target the poor and vulnerable by raising their consumption levels. Thus invariably the pro-poor spending through the multiplier have positive impact on growth and reduce poverty directly or indirectly. While the improvement in access to various kinds of social services during 2001-05 have been extensively documented in government publications including the last year Economic Survey, we briefly review the trends in PRSP expenditure in ensuing pages. The PRSP mainly relies on targeted expenditures on pro-poor sectors to cater to the needs of the poor and vulnerable sections of the society. The trends in pro-poor expenditures during the last five years highlights tremendous growth in PRSP related expenditures, which is reflected in Table 7. All together, social sector and poverty related expenditures grew at an average rate of more than 20 percent per annum during the period under review. There is nearly a three fold increase in the projected PRSP expenditure for 2006-07 when compared with the actual expenditures of base year 2001-02 Within the various categories of pro-poor expenditure, human development comes out to be the priority item of the Government with expenditures under this head constituting, on average, more than 50 percent of all PRSP related expenditures. Given the fact that the majority of the poor reside in the rural areas, special initiatives of the government towards rural development have received increasing importance during the last three years, which along with higher expenditure on human development have resulted in substantial increase in rural development expenditures.
Table-4.7: Social Sector and Poverty Related Expenditures (Rs Billion) 2001-02 2002-03 2003-04 Actual Actual Actual Community Services 10.98 16.57 28.53 i. Roads, Highways & Buildings 6.34 13.15 22.75 ii. Water Supply and Sanitation 4.64 3.42 5.78 Human Development 90.67 105.81 134.05 i. Education 66.29 78.61 97.69 ii. Health 19.21 22.37 27.00 iii. Population Planning 1.33 3.12 4.68 iv. Social Security & welfare 3.66 1.30 4.14 v. Natural Calamities 0.19 0.41 0.54 Rural Development 24.30 34.18 44.52 i. Irrigation 10.13 15.54 22.50 ii. Land Reclamation 1.84 1.76 2.00 iii. Rural Development 12.33 16.88 18.60 iv. Rural Electrification 1.42 Safety Nets 8.33 13.75 12.32 i. Food Subsidies 5.51 10.86 8.51 ii. Food Support Program 2.02 2.24 2.80 iii. Tawwana Pakistan 0.80 0.59 0.59 iv. Low Cost Housing 0.06 0.42 Governance 32.98 38.54 41.81 i. Administration of Justice 1.98 2.25 2.44 ii. Law and order 31.00 36.29 39.37 Total 167.25 208.84 261.30 2004-05 2005-06 2006-07 Actual Budget Projected 41.71 45.25 51.67 35.18 37.71 43.06 6.53 7.54 8.61 155.81 196.84 244.6 116.87 148.2 184.75 31.42 39.97 49.95 4.57 5.27 6.02 2.03 2.34 2.67 0.92 1.06 1.21 59.69 68.74 77.93 37.87 43.6 49.2 2.11 2.43 2.78 15.36 17.7 20.22 4.35 5.01 5.73 8.438 9.65 11.03 5.35 6.17 7.05 2.70 3.11 3.56 0.078 0 0 0.31 0.37 0.42 50.52 58.21 66.38 3.11 3.59 4.01 47.41 54.62 62.37 316.24 378.81 452.42 Source: Policy Wing, Finance Division

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Economic Survey 2005-06 Another important aspect of the poverty reduction strategy is employment generation for the poor. In this regard, expenditures on roads and highways the most labour-intensive sector, constitute the major share in community services. These expenditures are projected to rise by almost seven times in 2006-07 as compared to 2001-02, representing an average growth rate of more than 50 percent. The governments commitment towards sustained expenditures on pro-poor sectors is reflected in the Fiscal Responsibility and Debt Limitation Act promulgated in 2005. Under this law, social and poverty related expenditures are not to be reduced below 4.5 percent of the GDP in any given year and budgetary allocations to health and education will be doubled from the existing level in terms of percentage of Gross Domestic Product during the next ten years. Expenditures on pro-poor sectors in 2004-05, at 4.85 percent of GDP was well above the requirement under this Law. Pro-poor expenditure is projected to be 5.02 percent of GDP in 2005-06 and 5.25 percent of GDP in 2006-07. The strategy going forward as enshrined in the Poverty Reduction Strategy Paper for the medium-term (2006/07 2008/09) aims at forging a broad-based alliance with civil society in the quest to alleviate poverty and accelerate development. The complex and multi-dimensional nature of poverty warrants that strategies for poverty reduction encompass plans for rapid pro-poor economic growth, sound macroeconomic management, structural reforms, and social inclusion. The strategy is being enriched by the on-going process of dialogue with civil society and the poor. The strategy places considerable emphasis on taking advantage of the opportunities offered by globalization. Pakistans Poverty Reduction Strategy is underpinned by the following considerations: Continuing to ensure macro-economic stability and sustained high and broad-based economic growth by taking advantage of the opportunities offered by globalization, while at the same time unleashing the potential of domestic commerce, reducing inequalities and maximizing employment generation Directing public policy debate towards the needs of the poor. Bringing about an effective transformation of society, by forging partnerships and alliances with civil society and the private sector. Understanding the nature of poverty, and using that as a guide for all public actions. Empowering the people, especially the women and the most deprived, by increasing access to factors of production, particularly land and credit. Given the significant resources required to fund the Poverty Reduction Strategy (PRS), the Government has prioritized the PRS through the Medium Term Expenditure Framework (MTEF), which has been used to inform the budget. The PRSP process has been completely aligned with the Millennium Development Goals (MDGs) and the Medium Term Development Framework (MTDF). While the MTDF provides a framework for translating the VISION 2030 into action during the period 2005-10; its emphasis is on sustained long term growth. The PRSP on the other hand presents the strategy to ensure that the growth is broad-based and leads to effective poverty reduction. The detailed policies related to growth promotion are presented in the MTDF, while the PRSP takes those interventions as given and focuses on the package of interventions required to ensure that the sustained high growth is translated into effective poverty reduction; and the poor and marginalized are protected. In this regard, the following sub-strategies will be at the core of the Poverty Reduction Strategy of the Government. They will form part of the PRSP-2 currently under finalization, which will become operational from next fiscal year. 1. Maximizing the Gains from Globalization Globalization is a multi-dimensional process which impacts all aspects of life, be it economic, social, cultural, or political. For globalization to lead to poverty reduction, domestic enterprises need to be increasingly competitive in

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Poverty and Income Distribution the international market. This requires increased efficiency and upgrading skills of the labour force to improve its level of human capital. It requires the enforcement of quality control and standards. For domestic enterprises to be competitive in the global economy, good investment climate is essential, in which firms can start up, grow and prosper. 2. Trade Liberalization and Export Promotion The Government has implemented a comprehensive program of trade reforms gradually moving the economy away from protectionism towards greater trade openness and global economic integration. The Government has been taking a number of defensive trade measures in the context of WTO to protect the domestic industry against the dumping of cheap and illegal imports. Sustained export performance is a key priority. Towards this end, the Government is making efforts in the areas of trade facilitation, WTO related issues, export promotion and diversification, and extension of export promotion zones and industrial clusters. The Governments policy will focus on measures to sustain textile exports and promote other sectors that are not yet capable of exporting. The Government is committed to liberalize and deregulate Pakistans trade and widen the export base through further strengthening of industrial activity and strong institutional supply side measures. The trade policy continues to focus on value addition for sustainable growth in export earnings. 3. Employment Generation and Poverty Reduction Economic growth has been quite robust during the last five years and particularly in the tenure of PRSP-I (2003-06). The growth momentum is likely to continue in the medium-term. In order to maximize the poverty reduction impact of growth it needs to be aligned with an employment strategy that can ensure that growth is broad-based. Certain sectors of the economy are critical for sustained employment generation and growth leading to poverty reduction and improved income distribution. These sectors include, in particular: Agriculture (agro-industry, agri-business and livestock) and water sector development; Small and Medium Enterprises (SMEs); and Housing and construction sector. Nearly 67 percent of the people live in the rural areas and majority of them are dependent on agriculture for their livelihood. Therefore, agriculture will continue to receive highest attention. The rural sector also comprises a large and expanding non-farm sector where employment generation is crucial. This also has the beneficial impact of strengthening the farm and non farm linkages and enhancing growth through the multiplier effect. New jobs can be created by accelerating growth in agriculture and by increasing the area under cultivation, raising crop yields, diversification of cropping patterns, production of high value crops such as fruits, vegetables, flowers, etc. Livestock has high potential for job creation and income generation as well. The SME sector has an enormous employment generation potential. This extends to SMEs in both the urban and rural areas. In order for SMEs to play their due role a comprehensive package of venture capital, credit, liberalization of controls, technology and skill upgradation, marketing and management advisory services is needed. The SMEs in the rural areas are best placed to create new job opportunities and for income generation. SMEs can easily be involved in a number of profitable ventures such as fruit and vegetable processing, dairy and livestock, floriculture, fisheries, transportation of agriculture products and their marketing. The growth strategy in the MTDF provides for incentives to promote the whole host of crucial requirements identified above for the promotion of the SMEs. The housing and construction sector has received greater attention for employment creation in both the PRSP-I as well as the MTDF. It has been identified that this sector has linkages with about 40 building material industries. Moreover, this sector helps to further support the investment climate through its overall impact on the economy.

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Economic Survey 2005-06 Given its strong background and forward linkages and large employment potential effects, this sector is crucial for reducing poverty by generating job opportunities for the poor. Equitable growth requires development and implementation of policies which will positively impact all segments of the society in proportion to their requirements. Employment opportunities need to be created in both rural and urban areas, farm as well as non-farm, and for men, women and youth. 4. Micro-Finance Microfinance plays a critical role in improving the lives of the poor people. The poor use financial services not only for business investment in their micro-enterprises but also to invest in health and education, to manage household emergencies, and to meet the wide variety of other liquidity needs that they encounter occasionally. Evidence from the millions of microfinance clients around the world demonstrate that access to financial services enables poor people to increase their household income, build assets and reduce their vulnerability to the crises that are so much a part of their daily lives. In the context of Pakistan, the use of micro-credit holds importance for both the agricultural and non agricultural sector. The need for credit is particularly important for poor farmers. Their requirement for agricultural inputs, seeds, fertilizer, pesticide etc. tends to be cyclical as does their income. However the two cycles do not always coincide. Rural loans for non agricultural purposes include such things as micro enterprises in unorganized sectors of rural economy. Realizing the importance of microfinance as a tool of poverty reduction and social mobilization, the government has accelerated its efforts to establish strong foundations of microfinance in formal sector along with extending support to the informal sector (NGOs) as well. Khushali Bank (KB) was established as the first specialized microfinance institution in 2000 and the Microfinance Institutions (MFI) Ordinance was promulgated in 2001 to provide a separate regulatory framework for microfinance institutions. As a result, during the last five years, four specialized microfinance banks (excluding KB) have started operation, which includes the First Microfinance Bank Limited (FMFBL) and Tameer Microfinance Banks working at the national level, the Rozgar Microfinance Bank Limited (RMFBL) and Network Microfinance Banks Limited (NMFBL) which are operating at the district level. In addition, the Pakistan Poverty Alleviation Fund (PPAF) has been working since 1999 as a distributor/ wholesaler of credit to the NGOs. Conclusions: Pakistans poverty reduction strategy has yielded handsome result in the shape of sharp reduction in poverty. Although, poverty has declined but the fact remains that 23.9 percent people of Pakistan still live below the poverty line. Further reduction in poverty is a major challenge for the government. A clear lesson from the past four years of Pakistan and from other countries experience is that sustained growth on a consistent basis is needed to reduce poverty. Macroeconomic stability is, of course, a prerequisite for the sustained economic growth that brings the poverty reduction and rising living standards that we all want to see. But macroeconomic stability is not sufficient. Rather, it is the foundation on which to build a thriving economy. Successfully targeted social programs, fair and broad based fiscal regimes, labour markets that promote job creation, and high quality education opportunities for the neediest, are also key to poverty reduction.

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Chapter 5.

FISCAL DEVELOPMENT

I. Introduction Fiscal policy primarily deals with the levels and composition of taxation, spending and borrowing by the Government. Fiscal policy encompasses several fundamental policy issues, including the proper role and size of the state, the role of the Government in promoting growth, creating jobs, social development and redistribution of benefits of economic growth, the nature and extent of public services and fairness between the present and future generations. Governments fiscal policy has both microeconomic and macroeconomic objectives. Microeconomic objectives include an improved distribution of income and wealth, equitable access to social services, meeting the basic needs of the poor, promoting investment in public goods, and enhancing the efficiency with which the public and private sectors produce goods and services and their responsiveness to the needs of consumers. Macroeconomic objectives relate to evolution of the economy as a whole national income and output, jobs, inflation and the balance of payments. Fiscal policy must also ensure that the level and structure of taxes promote equity and redistribution, and do not interfere unduly in peoples investment and consumption decisions. The central objective of governments economic policy therefore, is to build a strong economy with a view to creating employment opportunities for all and improve the standards of living of the people of Pakistan. The policies pursued thus far have injected fiscal discipline, reduced the countrys debt burden, created a stable macroeconomic environment, revived economic activity and most importantly have created a strong platform of economic stability which is vital for building prosperity and achieving social justice. Economic stability allows businesses, individuals and the government to plan more effectively for the long term improvement in the quantity and quality of investment. The Government is committed to locking in stability and investing in the countrys future, enabling it to meet the challenges and rise to the opportunities of the global economy. A sound fiscal policy is essential for preventing macroeconomic imbalances and realizing the full growth potential. Pakistan has witnessed serious macroeconomic imbalances in the 1990s mainly on account of its fiscal profligacy. Persistence of large fiscal deficit resulted in unsustainable levels of public debt, adversely affecting the countrys macroeconomic environment. Pakistan accordingly paid a heavy price for its fiscal indiscipline in terms of deceleration in economic growth and investment, and the associated rise in the levels of poverty. Considerable efforts have been made over the last six years to inculcate financial discipline by pursuing a sound fiscal policy. Pakistans hard earned macroeconomic stability is underpinned by fiscal discipline. II. Efficient Tax System: Limitations The tax policy is concerned with the design of a tax system that is capable of financing the necessary level of public spending in the most efficient and equitable way possible. An efficient tax system should raise enough revenue to finance essential expenditures without recourse to excessive public sector borrowing; and raise the revenue in ways that are equitable and that minimize its disincentive effects on economic activities. In developing countries, including Pakistan, the establishment of effective and efficient tax system faces some

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Economic Survey 2005-06 formidable challenges. The first of these challenges is the structure of the economy that makes it difficult to impose and collect certain taxes. For example, the economy of Pakistan is often characterized by a large share of agriculture in total output and employment; by large informal sector activities and occupations by many small establishments; by a small share of wages in total national income, and so on. All these characteristics reduce the possibility of relying on certain modern taxes such as income tax and, to a much lesser extent, on sales tax.
Table 5.1: Fiscal Indicators as Percent of GDP Year GDP Real Growth Overall Fiscal Deficit Expenditure Total Current Development Total Rev. Revenue Tax NonTax 4.2 5.5 4.7 4.1 3.5 3.5 2.4 2.8 2.7 2.8 2.7 3.3 3.4 3.3 3.7 3.8

1990-91 5.4 8.8 25.7 19.3 6.4 16.9 12.7 1991-92 7.6 7.5 26.7 19.1 7.6 19.2 13.7 1992-93 2.1 8.1 26.2 20.5 5.7 18.1 13.4 1993-94 4.4 5.9 23.4 18.8 4.6 17.5 13.4 1994-95 5.1 5.6 22.9 18.5 4.4 17.3 13.8 1995-96 6.6 6.5 24.4 20.0 4.4 17.9 14.4 1996-97 1.7 6.4 22.3 18.8 3.5 15.8 13.4 1997-98 3.5 7.7 23.7 19.8 3.9 16 13.2 1998-99 4.2 6.1 22.0 18.6 3.4 15.9 13.3 1999-00 3.9 5.4 18.7 16.5 2.2 13.5 10.7 2000-01 1.8 4.3 17.2 15.5 1.7 13.3 10.6 2001-02 3.1 4.3 18.8 15.9 2.9 14.2 10.9 2002-03 4.7 3.7 18.6 16.3 2.3 14.9 11.5 2003-04 7.5 2.4 16.7 13.5 3.2 14.3 11.0 2004-05 8.6 3.3 18.2 13.1 3.8 13.7 10.0 2005-06 P 6.6 3.4* 17.6* 13.4 4.2 14.2 10.4 Note: The base of Pakistans GDP has been changed from 1980-81 to 1999-2000, therefore, wherever GDP appears in denominator the numbers prior to 1999-2000 are not comparable. * Expenditure figures do no include the impact of earthquake spending in this table

The structure of the economy in association with low literacy and low human capital make it difficult to develop a good tax administration. When the staffs of tax administration is not well educated and well trained, when resources to pay good salary and to buy necessary equipments are limited, when the tax payers have limited ability to keep accounts, when the use of modern communication network is limited, it is difficult to create an efficient tax administration. The consequence of this situation is that many developing countries, including Pakistan, often end up with too many small tax sources, too heavy reliance on foreign trade taxes, and a relatively insignificant use of personnel income taxes. The non-availability of reliable statistics from the businesses makes it even more difficult for tax administration to assess the potential taxes that need to be collected. As a consequence, marginal changes are often preferred over major structural changes even when the latter would be clearly preferable. This perpetuates the inefficient tax structure. Uneven income distribution is also a major constraint in developing efficient tax system. To generate higher tax revenue, the top deciles are supposed to be taxed significantly more proportionately than the low deciles. But the economic and political powers are concentrated in the top deciles which makes the task of the tax administration rather more difficult to collect taxes from top deciles. This is one of the major reasons that the number of income tax payers in developing countries, including Pakistan, is abysmally low.

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Fiscal Development The above analysis clearly suggests that economic activity has had little relationship with the optimal tax collection in the developing countries. It is not surprising that Pakistan, like many other developing countries, has faced serious difficulties in mobilising resources. The above stated characteristics and the attendant difficulties prevented Pakistan to raise its tax-to-GDP ratio in line with the average of developing countries (17%). Table-1 shows the stagnation of fiscal efforts over the last fifteen years. As consequence, Pakistan sustained a large budget deficit throughout the 1990s. III. Tax and Tariff Reform Realizing the weaknesses of Pakistans tax structure a concerted reform effort was launched in the early 2000. The government began wide-ranging tax and tariff reforms and worked on fiscal transparency, aimed at reducing tax rates, broadening the tax base to hitherto untaxed or under taxed sectors, and shifting the incidence of taxes from imports and investment to consumption and incomes. The reduction in tax rates was intended to stimulate investment and production and promote voluntary tax compliance. Broadening of the tax base was intended to ensure the fair distribution of the tax burden among various sectors of the economy. Among the various tax policy reforms, the most significant are the continuous raising of the basic threshold of income tax, reduction of corporate rate to ensure parity between the rates applicable to private, public, and banking companies, re-introducing uniformity of GST rate, and continuous reduction and rationalization of tariff rates. The wide-ranging tax and tariff reforms as well as reforms in the tax administration have started paying dividends. Tax collection by the Central Board of Revenue (CBR) has picked up, the overall budget deficit as percentage of GDP has declined, the revenue deficit has been narrowed, and the primary surplus has increased in recent years. Consequently, public debt as a percentage of GDP has declined and Pakistan is now moving towards fiscal consolidation. During the last six years, tax collection has increased by 81.0 percent and the overall fiscal deficit which averaged almost 7.0 percent of GDP during the 1990s has been reduced to 3.3 percent in 2004-05 of GDP. The revenue deficit (the difference between total revenue and total current expenditure), has been narrowed from 2.4 percent of GDP in the 1990s to 0.4 percent in 2004-05. Revenue surplus of 0.8 percent of GDP was recorded in 2003-04, but though insignificant it turned into deficit in the next two years. The revenue deficit was recorded at 0.03 percent of GDP in 2005-06. The primary balance (total revenue minus non-interest total expenditure) remained in surplus for the last seven years. However, primary balance turned into negative for the first time in 2005-06 in recent economic history. Pakistan is the only country in South Asia which is generating primary surpluses on sustained basis. An improved tax structure will reduce the deadweight loss associated with raising a given amount of revenue and a reduction in the relative share of trade taxes and increases in the relative shares of taxes on income and consumption could be taken as evidence of an improvement in the tax system. IV. Principles of Tax Policy Widening the tax base by reducing exemptions, incentives and concessions, reducing multiplicity of rates, lowering tax rates, shifting the incidence of tax burden from production to consumption, moving away from the excessive reliance on manufacturing and taxing all value additions including services, enhancing the neutrality between present and future consumption, enhancing the neutrality of the tax system to forms of business organizations and sources of finance, and reengineering business process of the tax system to overcome the culture of tax avoidance and evasion; effecting business process changes in tax administration to establish an effective and efficient tax system are the guiding principles of the tax policy. It is the continuing endeavour of the Government to operationalize these principles. The current phase of high growth provides us an opportunity that should be used to improve the fiscal health of the country. We must increase our revenues without hurting the growth momentum. It is Governments intention to undertake major tax reforms to improve the tax-to-GDP ratio, expand the tax payer base, increase tax compliance and make tax administration more efficient. Government is moving to a tax system that is based on moderate rates and wider base through rationalization of exemptions. Despite the recent reforms, the tax effort remained modest in Pakistan owing to various structural problems. The administrative reforms envisaged by the CBR, especially moving

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Economic Survey 2005-06 toward a functional organizational structure, has helped to enhance tax efficiency, as well as improving the tax climate and governance. However, expanding taxation gradually into the agricultural and service sectors would bring greater yields, as would efforts to reduce evasion. Why tax-to-GDP ratio in Pakistan is low in comparison to many developing countries? Why amidst highest ever growth performance in recent past Pakistans tax-to-GDP ratio has fallen in 2004-05? The answer is simple that GDP grew at a faster pace than tax revenue but actually one has to look into the anatomy of economic growth to find the answer. Table-5.2 gives some break-up of growth and tax incidence into various sectoral contributions. Almost threefourth of contribution to growth (8.6%) came from agriculture (1.5%) and services sector (4.1%) but their contribution to tax revenue is less than 10 percent whereas the contribution in growth from manufacturing is less than one-fourth but its contribution in tax revenue is close to two-third of the total. This uneven mismatch between sectoral contributions to growth and tax revenue tells the story of the fate of all tax reforms ranging from administrative reforms to broad basing the tax revenue. All efforts to enhance tax-to-GDP ratio should begin from equitable distribution of tax burden among various sectors according to their contribution towards economic cake.
Table-5.2: Sharing Tax Burden among Various Sectors Description Agriculture Manufacturing Construction Electricity & Gas Distribution Transport, Storage & Communication Wholesales & Retail Trade Finance & Insurance Public Administration & Defense Social & Community Services Others Total Share in GDP 22.5 Share in Taxes 1.2 (FY 2004-05) Point Contribution to GDP Growth 1.5

17.9 62.2 2.2 2.1 2.9 0.4 3.5 5.3 0.1 10.4 4.5 0.4 18.6 2.8 2.0 4.0 3.9 1.0 5.9 5.0 0.04 9.5 7.8 0.6 4.2 4.4 0.08 100.0 100.0 8.6 Source: Quarterly Report of CBR April-June 2005 &Pakistan Economic Survey 2004-05

V. Tax Administration Reform The tax administration reforms focus on: management and institutional development; improving revenue operations; strengthening revenue services; tax compliance culture; adopting responsive IT system; infrastructure up-gradation and development, and program management. The tax administration reform strategy is concentrated on policy reforms, administrative reforms and Organizational reforms. The policy reforms cover simplification of laws, introduction of universal self-assessment, elimination of exemptions, reducing dependence on withholding taxes, and effective dispute resolution mechanism. The administrative reforms aim at transforming income tax organization on functional lines, re-engineering of manual processes of all taxes with the aim to reduce face to face contact between taxpayers and tax collectors, increasing effectiveness of CBR, and improving skills and integrity of the workforce. The organizational reforms include re-organization of CBR headquarter on functional lines, reduction in number of tiers, reduction in workforce from existing level with enhanced financial packages. Simultaneously, the Government has constituted a Cabinet Committee for Federal Revenue (CCFR) to provide functional autonomy to CBR. CBR has already re-structured its headquarter operations. In the tax administration reform program, substantial investment is being made in infrastructure development, end-toend automation of business processes, and human resource development. Tax administration reforms in the CBR include among others, comprise promulgation of new income tax law, universal self-assessment system for income tax, intensification of GST management, streamlining of refund system of sales tax, introduction of the DTRE

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Fiscal Development Scheme, and establishment of Large Taxpayers Units (LTUs) and Medium Taxpayers Units (MTUs) in the country. Another development that has reduced considerable hassle of the taxpayers is the speedy clearance of goods at Karachi port under the CARE Project. This project has introduced computerized Processing of Customs documents (PACCS) under which the "Goods Declarations" can be filed by an importer "on line" without physical interaction with customs officials. The processing has reduced the clearance time of goods to few hours from more than ten days. This step reduced the up-front the cost of doing business considerably. This new system has revolutionized the working of Pakistan customs, which is now at par with the modern set ups. In the year 2005, the government has launched Tax Administration Reform Project (TARP) at a cost of $149 million with the assistance of World Bank. This program is for five years and aimed at further boosting the ongoing reforms initiatives. Main feature of the TARP is developing an overall human management strategy; promote tax compliance culture, develop a communication program, computerization and appropriate registration system. Thus, the future set up envisages a clear segregation in the operations of domestic and international taxes. Whereas all domestic taxes will operate through Regional Tax Offices (RTOs), the international trade taxes will be handled within a One Window Customs setup. The creation of RTOs will not only lead to co-location of the offices of Income and Sales Taxes (including excise duties), but more so, the strengthening of computerization and networking. The later will thus ensure that sharing of information takes place instantaneously. At the same time, the One-Customs will ensure equal treatment of taxpayers at each entry point, i.e., at sea and dry ports and at airfreight units. VI. Outcomes of Reforms Wide-ranging tax and tariff reforms, as well as reforms in tax administration, have been beneficial. During the five years from 2000-01 to 2005-06, tax collection by the CBR increased by 81.0%. The revenue deficit (the difference between total revenue and total current expenditure), a measure of government dis-saving, was at a deficit of 0.7% of GDP in 2004-05 compared to a deficit of 2.2% in 2000-01. It has further progressed towards almost elimination at 0.03 percent of GDP in 2005-06. Pakistan has attained revenue surplus first time since 1984-85 in 2003-04 when it recorded 0.8 percent of GDP surplus. In the recent two years revenue deficit existed though at an insignificant level as a result of some unavoidable increase in committed expenditure heads. The primary balance (total revenue minus non-interest total expenditure) was at a surplus from 2000-01 to 2003-04 and only registered a surplus of 0.1% of GDP in 2004-05 due to increased spending on social sector development programs. An unwelcome development of the current year is emergence of primary deficit first time since 1996-97. Pakistan economy badly need adequate primary surplus at this critical juncture of fiscal stabilization. The positive aspect of reforms is the structural transformation in the structure of taxes which has undergone considerable changes since the 1990s. Firstly, the share of direct taxes in total taxes (collected by the CBR) has increased from 18 percent to over 31.0 percent in 2005-06. The share of indirect taxes declined from 82 percent to 69 percent during the same period. Even within the indirect taxes, dramatic changes have taken place. The collection from custom duty used to account for 45 percent of total tax collection and 55 percent of indirect taxes in 1990-91, its share has now been reduced to 20.2 percent and 26 percent, respectively. This is the consequence of the tariff reform implemented by successive governments since 1990-91. The share of sales tax increased at a tremendous pace from 14.4 percent to 40 percent of total taxes and from 17.6 percent to 62.5 percent of indirect taxes during the same period. Central excise as a tax is loosing its importance and gradually being faded out. Its shares in total taxes and indirect taxes were 22.5 percent and 27.5 percent, respectively in 1990-91. These have now been reduced to 8.4 percent and 11.5 percent, respectively during the same period [See Table 5.2 and Fig-1].

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Economic Survey 2005-06


Table 5.3: Structure of Federal Tax Revenue Year 1990-91 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 (P) Total (CBR) 111.0 226.0 268.0 282.0 293.7 308.5 346.6 392.3 403.9 460.6 518.8 588.4 710.1 Tax Revenue As % of Direct Taxes GDP 20.0 11.0 [18.0] 62.0 12.0 [27.4] 78.0 13.0 [29.1] 85.0 12.0 [30.1] 103.3 11.0 [35.0] 110.4 10.0 [35.8] 112.6 9.1 [32.5] 124.6 9.4 [31.8] 142.5 9.2 [35.3] 148.5 9.6 [32.2] 165.3 9.2 [31.9] 176.9 8.9 [30.1] 217.6 9.2 [30.6] Indirect Taxes 91.0 [82.0] 164.0 [72.6] 190.0 [70.9] 197.0 [69.9] 190.4 [65.0] 198.1 [64.2] 234.0 [67.5] 267.7 [68.2] 261.6 [64.7] 312.2 [67.8] 353.6 [68.1] 411.4 [68.9] 492.5 [69.4] (Rs. Billion) Break-up of Indirect Taxes Central Custom Sales Excise 25.0 16.0 50.0 (27.5) (17.6) (54.9) 44.0 43.0 77.0 (26.8) (26.2) (47.0) 51.0 50.0 89.0 (26.9) (26.3) (46.8) 55.0 56.0 86.0 (27.9) (28.4) (43.7) 62.0 53.9 74.5 (32.6) (28.3) (39.1) 60.8 72.0 65.3 (30.7) (36.3) (33.0) 55.6 116.7 61.6 (23.7) (49.9) (26.4) 49.1 153.6 65.0 (18.3) (57.4) (24.3) 47.2 166.6 47.8 (18.0) (63.7) (18.3) 47.5 205.7 59.0 (15.2) (65.9) (18.9) 44.6 219.1 89.9 (12.6) (62.0) (25.4) 58.7 235.5 117.2 (14.3) (57.2) (28.5) 58.8 296.7 137.0 (11.9) (60.2) (27.8)
Source: Central Board of Revenue

* Beginning from 1999-2000, Pakistans GDP was re-based at 1999-2000 from a two decades old base of 1980-81. Therefore, wherever GDP appears in denominator the numbers prior to 1999-2000 are not comparable. Note: Figures in square bracket are as percentage of tax revenue. Figures in parentheses are as percentage of indirect taxes.

Fig-1: Structure of Taxes


Custom 45%

1990-91

2005-06

Sales Tax , 41.8

Direct Tax 18%

C.Ex cise, 8.3

Sales Tax C.Ex cise 22% 15%

Direct Tax , 30.6

Custom, 19.3

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Fiscal Development The pace of change in the tax structure, particularly in indirect taxes has gained considerable momentum over the last five years. The share of custom collection has declined from 33 percent to 26.1 percent while the share of central excise has declined from 31 percent to 11 percent since 1998-99. The share of sales tax increased from 36 percent to 62.5 percent. The basic philosophy of tax and tariff reform has been to move away from investment and production based taxes (indirect taxes) to income (direct taxes) and consumption (sales tax) based taxes. Pakistan has succeeded in changing the composition of its taxes but much more effort will be needed to enhance the share of direct taxes in total taxes. VII. Trends in Expenditure We need to reorient expenditure to extract better value for money. The total expenditure remains more or less stable in a narrow band of 17 to 18.8 percent of GDP during the last six years. Substantial decline in interest payments from as high as 7.5 percent of GDP in 1998-99 to 3.1 percent of GDP in 2005-06, has provided fiscal space to reorient expenditure in favour of development expenditure. Resultantly the share of current expenditure in total expenditure declined from 89 percent of total expenditure in 1998-99 to 78 percent in 2005-06. In addition, the share of development expenditure doubled from 11 percent to 22 percent in the same period. The development expenditure bore the brunt of structural adjustment of the 1990s and it declined from as high as 7.5 percent of GDP in 1991-92 to 2.5 percent of GDP by 1999-2000. During the last six years the development expenditure improved from 2.2 percent of GDP in 2000-01 to 4.2 percent of GDP in 2005-06. Second largest component of the current expenditure, namely, defence spending remained stagnant at around 3.1 percent to 3.3 percent of GDP during the last six years. This shows strong focus of the government on removing infrastructural bottlenecks and building physical assets. The Government is achieving the goal of fiscal stabilization without compromising spending on the social sector. Nondefence-non-interest expenditure has improved from 7.8 percent of GDP in 1999-2000 to 11.8 percent of GDP in 2005-06. The historical trends in the expenditure are documented in Table-5.4:
Table 5.4: Trends in Components of Expenditure (As % of GDP) Non-Defence Non-Interest Period Defence Expenditure 1980-81 5.5 15.3 1984-85 6.7 14.5 1989-90 6.9 13.6 1994-95 5.6 12.0 1999-2000* 4.0 7.8 2002-03 3.3 10.4 2003-04 3.3 9.4 2004-05 3.2 9.9 2005-06 3.1 12.2 Source: EA Wing Finance Division Note: The GDP was rebased w.e.f. 1999-2000, so figures thereafter may not be comparable with earlier years Total Expenditure 22.9 24.7 25.9 22.8 18.9 18.6 16.7 17.0 17.6 Current Expenditure 13.6 17.7 19.3 18.4 16.5 16.4 13.6 14.3 13.4 Development Expenditure 9.3 7.7 6.5 4.4 2.4 2.2 3.1 3.5 4.2 Interest Payments 2.1 3.5 5.5 5.2 6.9 4.9 4.0 3.9 3.1

The above Table is a clear reflection of the state of affairs prevailed during the two decades of the 1980s and the 1990s. One thing was common between these two decades that development expenditure was the victim of all sorts of fiscal consolidation and expenditure rationalization. The current expenditure increased substantially in the 1980s but could not keep pace because of slowdown in the growth and stagnation of revenues in the 1990s. Defence expenditure in terms of as percent of GDP was rising in the 1980s but since then declined throughout the 1990s but stabilized during the last six years. The non-defence non-interest expenditure persistently declining since 1980s

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Economic Survey 2005-06 because of rising spending requirement on defence and interest payments shrank fiscal space for other priority sectors. The combined impact of two committed expenditure items (defence and interest payments) went as high as 59 percent of total expenditure and 66 percent of current expenditure in 1998-99. This has declined to just 35 percent in 2005-06 which manifest paradigm shift in allocation of expenditure among priority sectors and availability of fiscal space. Trends in Real Expenditure The nominal monetary value of expenditure is a direct charge on budget but the composition of expenditure in real terms provides real food for thought. An analysis in real growth patterns in expenditure reveals some interesting facts. Total real expenditure grew at a brisk pace of 7.7 percent per annum on average in the 1980s owing to sharp acceleration of 10.5 percent in real current expenditure. Development expenditure grew by modest 2.7 percent on average in real terms but interest payments grew by 18.1 percent, reflecting tremendous pace of accumulation of public debt. Interestingly, real defence spending followed the higher growth path and grew by 8.9 percent on average. The level of fiscal indiscipline and imprudence that necessitated the Structural Adjustment in 1989 is selfexplanatory from the composition of overall real expenditure in this period. The pace of growth of real expenditure slowed down in the first half of the 1990s but at the expense of the development expenditure which has to decelerate by 1.7 percent on average to contribute 2.4 percent growth in real expenditure in the period. The current expenditure on the other hand grew by 3.9 percent thanks to only 0.7 percent growth in defence spendings and a relatively slower growth of 4.2 percent witnessed in interest payments. Nondefence non-interest expenditure also grew by modest 3.0 percent in real terms. Even the sharp fall in real development expenditure which decelerated sharply by 3.5 percent in the second half of the 1990s could not restrict current expenditure to grow at a faster pace of 5.0 percent mainly because of massive 13.7 percent average growth in interest payments. Resultantly, total expenditure grew by 3.1 percent per annum in the period, however, noninterest non-defence expenditure decelerate by 1.2 percent per annum. The second major item defence spending inched up by marginal 0.1 percent.
Table 5.5: Trends in Real Expenditure (1999-2000=100) Period 1980s 1990s 1990-I 1990-II 2000-03 2003-06 Total Expenditure 7.7 2.8 2.4 3.1 3.4 5.6 Current Expenditure 10.5 4.5 3.9 5.0 3.2 2.9 Development Expenditure 2.7 -2.6 -1.7 -3.5 7.4 23.8 Interest Payments 18.1 8.9 4.2 13.7 -7.4 -7.2 (% Growth) Non-Defence Defence Non-Interest Expenditure 8.9 4.9 0.4 0.9 0.7 3.0 0.1 -1.2 -1.9 13.9 4.8 11.5 Source: EA Wing Finance Division

During the last six years the real growth in current expenditure hovered around 3 percent per annum and pace of growth has slowed down. Total expenditure grew by 3.4 percent in the first three years (2000-03) but accelerated to 5.6 percent during the last three years (2003-06). The main contribution is coming from development expenditure which grew by 7.4 percent per annum in first three years (2000-03) and by 23.8 percent in recent three years (200306). Non-defence non-interest expenditure grew by 13.9 percent and 11.2 percent in these two periods, respectively. This tremendous growth is mainly contributed by massive fall in real incidence of interest payments which depicted negative growth of 7.4 percent and 7.2 percent in first and second three years period. Defence spending, however, bounced back after deceleration of 1.9 percent in 2000-03 to posing positive real growth of 4.8 percent, mainly because of security concerns on eastern and north-western borders. Contrary to common perception defence expenditure has remained depressed during the period 1990 to 2003 owing to relatively favourable security environment existed in the period.

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Fiscal Development VIII. Fiscal Performance during the Year Revenues. The structure of Pakistans taxation changed considerably since the 1990s. The share of direct taxes in tax revenues increased from 18.0% in 1990-91 to 31.0% in 2005-06. The share of indirect taxes in tax revenues declined from 82.0% to 69.0% during the same period. The basic philosophy of tax and tariff reforms has been to move away from investment and production based taxes towards income and consumption based taxes. During the 1990s Pakistan was confronted with lower tax-to-GDP ratio primarily due to the existence of a narrow tax base, over-reliance on taxes on imports, the complexity of the tax regime and weak tax administration. In 2000-01, the Government tightened fiscal management and implemented structural reforms across all major sectors of the economy. Tax administration reforms were focused on improving tax compliance. Improvements in tax collection were sought by implementing a tax amnesty scheme and extending the general sales tax to the services sector. The tax revenue has surpassed the target for the third year in a row but nominal GDP is increasing at a faster pace then tax collections, so tax-to-GDP ratio remained almost stagnant. Total revenues are targeted at Rs. 1095.6 billion in 2005-06 compared to Rs. 900.0 billion in 2004-05, an increase of 21.7%. This was primarily due to a rise of 22.2 percent in tax revenue on the back of increases in both federal and provincial tax revenues, which grew by 19.8% and 50.1%, respectively. Non-tax revenue consists of receipts from civil administration and defence, profits of SBP, PSE and user charges of services, etc. The reason for the significant Rs. 50.6 billion increase in non-tax revenue was increase in SBP profits and defence receipts. The federal tax receipts consist of revenue collected by the CBR, surcharges (gas and petroleum) and some other minor collections.
Table 5.6: Consolidated Budget (Federal and Provincial) 2002-03 A. Total Revenue 720.8 a) Tax Revenue 555.8 i) Federal 534 - CBR 461.6 - Surcharges 68.2 - Other 4.2 ii) Provincial 21.8 b) Non-Tax Revenue 165 B. Total Expenditure 898.2 - of which Earthquake Effect a) Current Expenditure 791.7 i) Federal 579.9 - Interest 207.2 - Defense 159.9 - Civil Govt. 67.4 - All Others 145.4 ii) Provincial 191.9 b) Dev. Expenditure 129.2 PSDP** 129.2 Net Lending -22.7 c. Statistical Discrepancy 3.2 C. Overall Fiscal Deficit - Excl. Earthquake Effect -180.6 - Incl. Earthquake Effect -180.6 Financing 180.6 i) External 113 ii) Domestic 67.6 - Bank -55.6 - Non-Bank 119.5 - Privatization Proceeds 3.7 2003-04 805.8 617.9 583.4 518.8 62.4 2.2 34.1 187.9 940.4 763.1 582.4 196.3 180.4 75.5 130.2 180.7 161.0 161.0 16.3 -134.5 -134.5 134.5 -4.5 135.9 63.7 64.1 11.2 2004-05 R 900 659.4 624.7 588.4 27.1 9.2 34.5 248.4 1117 943.1 688.6 210.2 211.7 81.4 185.3 254.5 227.8 227.8 24.8 78.5 -217 -217 217 120.4 135.9 60.2 8.1 28.3 2005-06 B 1095.6 805.6 762.8 710.1 32.5 20.1 42.8 290.3 1422.9 65.8 1097.9 782.1 241.2 241.1 103.1 157.2 315.8 326.7 326.7 -1.7 -261.6 -327.4 327.4 118.3 209.1 96.7 22.4 90.0 (Rs. Billion) % Change 22.4 22.2 22.1 20.7 19.9 118.5 24.1 19.3 26.8 16.7 13.9 14.7 12.5 26.7 -15.2 24.1 41.7 41.7 -

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Table 5.6: Consolidated Budget (Federal and Provincial) 2002-03 2003-04 As % of GDP (mp) Total Revenue 14.9 14.3 - Tax Revenue 11.5 11.0 - Non-Tax Revenue 3.4 3.3 Total Expenditure 18.6 16.7 - Earthquake Spending Current Expenditure 16.4 13.5 - Interest Payment 4.3 3.5 - Defense 3.3 3.2 PSDP 2.2 3.1 C. Overall Fiscal Deficit - Excl. Earthquake Effect - Incl. Earthquake Effect 3.7 2.4 GDP at Market Price (Rs Bln) 4823 5641 2004-05 R 13.7 10.0 3.8 17.0 14.3 3.2 3.2 3.5 2005-06 B 14.2 10.4 3.8 18.4 0.8 14.2 3.2 3.2 4.2 (Rs. Billion) % Change -

3.4 3.3 4.2 6581 7713 16.7 Source: Budget Wing, Finance Division

Analysis of CBR Tax Collection CBR has successfully achieved the revenue target of Rs. 536.1 billion fixed for the first ten months of the current fiscal year by collecting Rs. 547.0 billion. The net revenue gain has been Rs. l0.9 billion. The real strength has come from the vibrant performance of two future taxes, i.e., direct taxes and GST. In the case of the former, the target has been surpassed by 7.7% and it has been exceeded by 2.7% in the case of sales tax.
Table 5.7: Federal Gross and Net Revenue Receipts: A Comparison FY 05-06 FY 04-05 Gross Net Gross July 41.5 34.6 38.4 August 50.3 44.9 41.5 September 78.4 72.5 68.5 October 56.3 49.2 48.0 November 53.5 47.5 46.4 December 86.6 75.1 66.6 January 53.4 45.9 50.4 February 56.0 49.5 45.5 March 79.2 70.5 71.6 April 63.6 57.1 57.3 July - April 618.8 547.0 534.2 Note: (1) Figures are rounded to one decimal place (Revenue Receipts in Rs.Billion) Growth (%) Gross Net 8.0 12.8 21.5 31.4 14.5 19.2 17.2 20.2 15.1 23.5 30.2 31.0 5.8 11.3 23.0 32.9 10.7 17.0 10.8 14.7 15.8 21.3 Source: CBR

Net 30.7 34.2 60.8 40.9 38.5 57.4 41.3 37.2 60.3 49.8 451.1

The gross collection has increased by 15.8%, raising the collection from Rs. 534.2 billion to Rs. 618.8 billion, reflecting an increase of Rs. 84.6 billion. The net collection has escalated from Rs. 451.1 billion to Rs. 547.0 billion, indicating an addition of Rs. 95.9 billion [See Table 5.8]. The overall refund/ rebate payments during first ten months of current fiscal year stood at Rs.71.9 billion as against Rs. 83.1 billion paid back during the corresponding period of last year. It is encouraging that this growth has been broad-based. The highest growth of 26.1 percent has been recorded in direct tax collection, followed by sales tax (22.3%), customs duties (17.5%), and CED (9.0%). The two policy initiatives, i.e., the introduction of USAS in income tax and zero-rating of the five major exports oriented industries have been helpful not only in promoting voluntary compliance in income tax, but also reducing the magnitude of sales tax refunds. Resultantly, the collection with returns has registered an all time high growth of 81.2% and the sales tax (domestic) collection has also recorded a significant growth of 37.2 % at the end of the third quarter (July-March) of current fiscal year.

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Fiscal Development
Table 5.8: Direct Taxes Gross & Net Revenue Receipts: A Comparison FY 05-06 Gross Net July 8.9 7.6 August 10.3 9.0 September 34.2 31.6 October 12.9 11.1 November 12.3 10.2 December 41.0 34.9 January 12.9 10.1 February 12.7 10.5 March 31.7 27.8 April 17.2 14.9 July - April 194.2 167.6 Note: (1) Figures are rounded to one decimal place FY 04-05 Gross 7.0 7.6 30.4 8.6 9.7 25.6 12.1 10.7 27.6 15.7 155.0 ( Rs. Billion) Growth (%) Gross Net 25.9 22.6 36.0 35.4 12.6 9.3 50.8 64.4 27.5 37.8 60.0 54.8 7.4 11.1 18.3 18.6 14.8 20.1 9.3 10.5 25.3 26.1 Source: CBR

Net 6.2 6.7 28.9 6.7 7.4 22.5 9.1 8.9 23.1 13.5 133.0

Detailed Analysis of Individual Taxes Direct Taxes: Overall direct tax collection has been very impressive as compared to the last year [See Table-5.8] which confirms its buoyant nature. The gross collection has registered a robust growth of 25.3 percent by increasing from Rs. 155.0 billion during July-April 2004-05 to Rs. 194.2 billion during the comparable period of current fiscal year. However, net collection has been 26.1 percent higher owing to higher refund payments of 20.4 percent in the period under review. The net receipts have increased from Rs. 132.9 billion to Rs. 167.6 billion during this period. One of the important features of the direct tax collection has been the double-digit growth in its two components namely voluntary payments and withholding taxes which increased by 27.9 percent and 27 percent respectively. Sales Tax: GST has gained importance as one of the major sources of federal tax receipts in recent years because of greater focus of the Government on taxes on income and consumption. It has contributed 41.8percent of the total net revenue collection during the July-April 2005-06. The gross and net sales tax collection has been Rs. 257.8 billion and Rs. 228.5 billion, respectively showing growth of 9.8 percent and 22.3 percent over the corresponding period of last year [See Table 5.9]. The refund payments has declined by 39 percent, mainly because of the fact that five major export oriented industries which were the major claimants of sales tax refund are now been declared zero-rated. This drastic policy change was adopted to address the misuse of refund facility. The policy intervention clearly paid dividend by lowering refunds on the one hand and improved the cash flow of the exporters and the amount so saved is contributing towards re-enforcing the growth process.
Table 5.9: Sales Taxes Gross & Net Revenue Receipts: A Comparison FY 05-06 FY 04-05 Gross Net Gross July 20.0 15.7 20.3 August 24.4 22.8 21.0 September 26.2 24.5 24.3 October 27.2 23.6 23.8 November 25.8 23.5 23.9 December 26.4 22.6 25.0 January 25.3 22.2 23.9 February 26.7 23.6 21.7 March 27.2 23.9 25.5 April 28.5 26.1 25.3 July - April 257.8 228.5 234.7 Note: (1) Figures are rounded to one decimal place (Rs .Billion) Growth (%) Gross Net -1.4 6.4 16.0 41.5 8.1 25.7 14.1 19.6 8.1 21.9 5.6 13.3 5.8 15.3 23.3 42.2 6.6 18.2 12.6 22.0 9.8 22.3 Source: CBR

Net 14.8 16.1 19.5 19.7 19.3 20.0 19.2 16.6 20.2 21.4 186.8

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Economic Survey 2005-06 Customs Duties: The gross and net collection from customs duties has exhibited healthy growth during July-April 2005-06, by collecting Rs. 121.3 billion gross and Rs. 105.5 billion net collections, showing a tremendous growth of 17.9% and 17.5%, respectively over the comparable period of last year [See Table 5.10]. The refunds/ rebates amounted to Rs. 15.8 billion which is 20.4 percent higher than comparable period of the last year. The growth in collection is attributable to a number of factors including the record quantum of international trade transactions, incentives to investors and traders, and the continuous improvement in customs business processes.
Table 5.10: Customs Duty Gross & Net Revenue Receipts: A Comparison FY 05-06 FY 04-05 Gross Net Gross July 9.7 8.4 8.0 August 11.6 9.1 8.9 September 12.6 11.2 9.6 October 11.5 9.9 11.3 November 11.2 9.7 9.1 December 14.8 13.3 11.6 January 10.9 9.5 10.2 February 11.7 10.5 9.4 March 15.0 13.6 13.6 April 12.1 10.4 11.0 July - April 121.3 105.5 102.7 Note: (1) Figures are rounded to one decimal place ( Rs. Billion) Growth (%) Gross Net 21.4 28.1 29.1 19.7 31.9 35.3 1.5 -3.2 22.9 21.3 27.4 25.2 7.0 9.3 24.9 30.1 10.6 12.0 10.1 7.9 17.9 17.5 Source: CBR

Net 6.5 7.6 8.3 10.2 8.0 10.6 8.7 8.1 12.1 9.6 89.7

Federal Excise: Notwithstanding the fading nature of federal excise tax, the significant growth in collection is a clear reflection of improvement in the industrial growth in the country. The overall performance of Central Excise Duty (CED) in the period under review is above expectations. The net collection of CED during July-April 2006 has been Rs. 45.3 billion against Rs. 41.6 billion during the corresponding period of last year, thereby depicting a growth of 9.0 percent. This growth has been generated by major commodities groups that generate close to 90% of CED receipts. These revenue, spinners are cigarettes, cement, POL products, natural gas and beverages. The Month wise comparison of gross and net collection is reflected in table 5.11.

Expenditure. Total expenditure is targeted at Rs. 1,422.9 billion in 2005-06, which is 27.4% higher than 2004-05 mainly because of Rs.65.8 billion spending on earthquake related expenditure by the Government. Out of the total expenditure for 2005-06, current expenditure (interest payments, defense, and expenditure on civil administration) was Rs. 1097.9 billion or 77.2% of total expenditure compared to Rs. 943.1 billion or 84.4% of total expenditure in 2004-05. Development expenditure increased to Rs. 326.7 billion or 23.8% of total expenditure in 2005-06, compared to Rs. 227.7 billion or 22.6% of total expenditure in 2004-05.

Table 5.11: Central Excise Net Revenue Receipts ( Rs .Billion) FY 05-06 FY 04-05 Growth (%) July 2.9 3.1 -8.6 August 4.1 3.9 5.3 September 5.3 4.2 25.3 October 4.6 4.3 8.6 November 4.1 3.8 8.9 December 4.4 4.3 2.1 January 4.1 4.2 -1.9 February 4.9 3.7 30.6 March 5.3 4.8 9.3 April 5.7 5.3 8.1 July April 45.3 41.6 9.0 Note: (1) Figures are rounded to one decimal place

Interest Payments. Interest payments as a percentage of total expenditure continued to decline from 20.5% in 200304 to 19.3% in 2005-06. In absolute terms, however, interest payments increased from Rs. 210.2 billion in 2004-05 to Rs. 241.2 billion in 2005-06 an increase of 14.7%. This increase was attributable to less rollover policy. Defense Expenditure. Defense expenditure in 2005-06 is targeted at Rs. 241.1 billion compared to Rs. 211.7 billion in 2004-05, an increase of 13.9%. Defense spending as a percentage of GDP has, however, been continuously

74

Fiscal Development declining in recent years from 6.0% of GDP in 2000-01 to 4.3%, 3.5% in 2003-04 and further to 3.2 percent of GDP in 2005-06, respectively. Defense expenditure as a percentage of GDP is targeted to decline further to 3.1% under the 2005-06 budget. General Administration. After interest payments and defense, the third major component of current expenditure is expenditure on general administration including pensions. Expenditure under this item is budgeted at Rs. 103.1 billion in 2005-06 which is 26.7% higher than in 2004-05. The increase is mainly on account of enhancement of salaries and perks of government employees. It accounted for 1.3% of GDP during 2005-06 as against 1.2% of GDP in 2004-05. Provincial Current Expenditure. Provincial current expenditure is expected to grow by 24.1% in 2005-06, increasing from Rs. 254.1 billion in 2004-05 to Rs. 315.8 billion. However, provincial current expenditure as percentage of total expenditure has declined over the last three years. As a percentage of GDP, provincial current expenditure has remained stable at 4.0% between 2000-01 and 2005-06. Public Sector Development Program. The size of the PSDP has increased substantially. The overall size of PSDP in 2005-06 was Rs. 326.7 billion compared to Rs. 228.0 billion in 2004-05, an increase of 41.7%. This amount is contributed by both federal and provincial governments. An amount of Rs. 231.7 billion is allocated by the Federal Government and Rs. 95.0 billion by the Provincial Governments. At least 60% of the resources were provided for social sectors. Fiscal Deficit. In 2005-06, Pakistan is likely to face an overall fiscal deficit of Rs. 261.6 billion or 3.4% of GDP excluding earthquake effect and if we include earthquake related spending worth Rs.65.8 billion, the size of the deficit stood at Rs.327.3 billion or 4.2 percent of GDP. This revenue-expenditure gap was financed through external and domestic sources. Out of the gap of Rs. 327.3 billion, financing from external sources is expected at Rs 118.4 billion. The remaining gap of Rs. 208.9 billion is likely to be financed from domestic sources. Within domestic sources, financing from non-bank sources amounted to Rs. 22.4 billion while Rs. 96.7 billion would be contributed by the Banking sources, and Rs. 90.0 billion is to be financed through privatization proceeds. Higher deficit tolerance is because of higher development expenditure to augment and strengthen existing infrastructure of the country and unanticipated earthquake related spending worth Rs.66 billion. The government is not compromising long-term goal of fiscal consolidation. IX. Federal Budget 2005-06 2005-06 Budget. The 2005-06 budget represents a significant departure from past trends as it did not seek to further compress the fiscal deficit. The 2005-06 fiscal deficits, was budgeted to rise to Rs. 318.5 billion or 4.3% of (projected) GDP. However, owing to massive earthquake of October 08, 2006, the government was compelled to enhance the fiscal deficit target of the Federal government to Rs.352.3 billion or 4.6 percent of the GDP, increased from Rs.286.5 billion or 3.7 percent of GDP. The net impact on the fiscal position of the Federal government is estimated at Rs.65.8 billion by the end of March 2006. The government is not compromising long-term development goals for the sake of fiscal prudence. This change resulted from the Governments increased focus on raising poverty related spending as well as public investment to improve infrastructure, in order to sustain high growth rates in the long-term. The budget reduces taxes and the number of tax bands as well as lowering import tariffs. Moreover, in order to expand such expenditures, the Government plans to reduce public debt to below 60.0% of GDP earlier than originally contemplated by the Fiscal Responsibility and the Debt Limitation Act 2005. The following table highlights the salient features of Federal Budget 2005-06 and a comparative budgetary position of 2004-05:

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Economic Survey 2005-06


Table-5.12: Comparative Budgetary Positions for 2004-05 and 2005-06 RESOURCES Total Internal Resources Revenue Receipts (Net) Capital Receipts (Net) Financing of PSDP by Provinces Change in provincial cash balance External Resources EXPENDITURE Total Current Expenditure Development Expenditure (PSDP) PRIVATIZATION PROCEEDS BANK BORROWING (Rs. Million) 2005-06 Budget Actual Budget 842,620 891,804 980,464 686,266 713,670 768,092 557,166 610,222 643,080 64,439 1,834 50,557 33,110 89,842 41,001 31,551 20,772 33,454 156,355 178,134 212,372 902,770 980,320 1,081,400 700,770 752,602 845,600 202,000 227,718 231,700 15,000 28,327 90,000 45,149 60,189 96,700 Source: Ministry of Finance, Budget Wing. 2004-05

X. PROVINCIAL BUDGETS The total outlay of the four provincial budgets for 2005-06 stood at Rs.471.7 billion, which is 8.7 percent higher than the outlay for last year (Rs.434.0 billion). NWFP witnessed the highest increase of 23.3 percent in budgetary outlay followed by the Punjab (5.7%), Sindh (5.5%) and Baluchistan (12.7%). The overall provincial revenue receipts for 2005-06 are estimated at Rs. 506.5 billion, which is 39.4 percent higher than last year. Tax revenue accounting for 64.3 percent of overall revenue receipts, amounted to Rs.325.7 billion which is 16.9 percent higher than last year and non-tax revenue is estimated at Rs.34.9 billion which is 52.4 percent higher than last year. The total budget outlay of Rs. 471.7 billion is shared in the ratio of 77 percent and 23 percent between current and development expenditures, respectively. The allocations for development expenditure are 11.0 percent lower than last year and for current expenditure, they are higher by 16.5 percent. The main components of the Provincial budgets 2005-06 in comparison with revised estimates of last year are presented in Table-5.13.
Table.5.13: Overview of Provincial Budgets Sindh N.W.F.P Item 04-05 05-06 04-05 05-06 (R.E) (B.E) (R.E) (B.E) 2.5 2.3 13.4 12.1 Provincial Taxes 34.1 29.2 86.4 75.8 Share in Federal Taxes 20.9 15.7 17.3 17.3 All Others 36.6 31.5 99.8 87.9 Total Tax Revenues 2.4 2.2 6.6 4.9 Non-Tax Revenues 59.9 49.4 110.1 127.9 Total Revenues 51.0 42.6 105.7 118.9 a) Current Exp. 21.0 15.8 24.0 29.7 b) Development Exp. 3.9 2.5 2.1 4.5 i) Rev. Account 17.1 13.3 21.9 25.2 ii) Cap. Account 72.0 58.4 135.4 142.9 Total Exp. (a+b) Punjab 04-05 05-06 (R.E) (B.E) 25.8 19.1 143.6 122.8 24.0 17.1 169.4 141.9 25.1 15.0 218.5 174.0 157.5 136.3 53.0 62.8 23.3 38.9 29.7 23.9 210.5 199.1 (Rs. billion) Baluchistan Total 04-05 05-06 04-05 05-06 (R.E) (B.E) (R.E) (B.E) 42.6 34.4 0.9 0.9 284.3 245.3 20.2 17.5 76.8 62.0 10.4 11.9 326.9 279.7 21.1 18.4 34.9 22.9 0.8 0.8 438.6 364.6 32.3 31.1 362.0 310.8 34.6 26.2 109.7 123.2 11.7 14.9 29.3 45.9 0.0 0.0 80.4 77.3 11.7 14.9 471.7 434.0 46.3 41.1 Source: Finance Division, (PF Wing)

XI. Allocation of Revenue between the Federal Government and Provinces. The Constitution governs the relationship between the Government and the provinces with respect to the distribution of a divisible pool of taxes. According to the Constitution, every five years, the President forms a National Finance Commission (NFC) consisting of the Minister of Finance of the Government, the Minister of Finance of each of the

76

Fiscal Development provincial governments and other presidential appointees in consultation with the Governors of the provinces. The NFC then recommends to the President the distribution to be made between the Federal Government and the provinces with respect to the divisible pool of taxes consisting of income tax, sales tax, export duties on cotton, customs duties, excise duties (excluding excise duty on natural gas) and any other tax that may be specified by the President. Soon after the receipt of the recommendations of the NFC, the President implements these through a Presidential order specifying the share of the net proceeds of the taxes to be allocated to the provinces and the federal government. [The recommendations of the NFC together with an explanatory memorandum of action taken thereon are required to be sent to both Houses and to Provincial Assemblies]. Under the Constitution, the President has the power to amend or modify the distribution of revenues as may be necessary or expedient. Since 1997, the share of the Government in the divisible pool has been fixed at 62.5% while the share of the provincial governments has been fixed at 37.5%. Beginning 2006-07, the share of the provincial governments in the divisible pool will rise annually to 41.5%, 42.5%, 43.75%, 45.0% and 46.25% thereafter in coming years. XII. Public Debt Pakistans public debt grew at an average rate of 18 percent and 15 percent per annum during the 1980s and 1990s, respectively much faster than the growth in nominal GDP (11.9% and 13.9% respectively). Resultantly, public debt rose from 56 percent of GDP at the end of the 1970s to 92 percent by the end of the 1980s. In other words, it increased by 36 percentage points of GDP during the 1980s [See Table-5.10]. Public debt was 85 percent of the GDP (on the basis of the new GDP series with the 1999-2000 base) by the end of the 1990s.
Fig-2:Trends in Public Debt
95 85 75
(As % of GDP)

GDP

Revenue

650 600 550 500 450 400 350

65 55 45 35

1980 1990 1995 2000 2001 2002 2003 2004 2005 2006 The root cause of rising debt burden has been the (Mar) persistence of large fiscal and current account deficits. Pakistan, on average, sustained fiscal and current account deficits of almost 7 percent and 5 percent of GDP, respectively during 1990-99. In many developing countries including Pakistan, the twin deficits have been the prime cause of low economic growth. An important channel through which fiscal deficits damage growth performance is by reducing national saving and crowding out domestic investment. National saving rate declines because of the negative public savings (revenue deficit). Low national saving rate forces government to resort to foreign savings to achieve investment and growth targets. Greater reliance on foreign savings leads to greater accumulation of external debt. This is exactly what has happened in Pakistan in the 1990s. Large fiscal and current account deficits led to the accumulation of domestic and external debt which increased countrys vulnerability to external shocks, reduced investment rate, and consequently slowed economic growth. Thus, there exist a strong negative relationship between fiscal deficits and economic growth. When a country like Pakistan sustains such a large fiscal and current account deficits for so long a period is bound to experience deceleration in economic growth.

It is in this background that the first and foremost challenge for the government six years ago had been to arrest the rising trends of debt. The government had set-up a high level Debt Committee which examined the root cause of the rising debt burden and suggested debt reduction strategy to stabilize debt situation. The government is following the debt strategy as suggested by the Committee. Reduction in the fiscal and current account deficits, lowering the cost of borrowing, raising revenue and foreign exchange earnings, and debt re-profiling from the Paris Club have been the key features of the debt reduction strategy. To provide legal cover to debt reduction strategy a Fiscal Responsibility and Debt Limitation Act 2005 has been promulgated in June 2005 [Box-1]. As a result of the credible strategy being followed by the Government, the public debt- to-GDP ratio, which stood at

(% of Revenue)

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Economic Survey 2005-06 almost 85 percent in end June 2000, declined substantially to 61.4 percent by the end of June 2005 23.6 percentage points decline in countrys debt burden in 5 years. By end March 2006, public debt further declined to 54.7 percent of the projected GDP for the year. In absolute terms public debt grew by a meager 4.4 percent during July-March 2005-06 amidst substantially higher fiscal and current account deficits observed in the economy.
Table-5.14: Trends in Public Debt End June 2000 2003 1575.9 1853.7 (52.2) (51.2) [41.5] [38.4] 1442.0 1769.4 (47.8) (48.8) [38.0] [36.7] 3017.9 3623.1 3793.4 4822.8 624.1 720.8 (Rs Billion)

1980 1990 1995 2004 2005 2005* Debt Payable in Rupees 59.8 373.6 789.7 1978.8 2132.6 2248.7 As % of i) Public Debt (38.5) (46.6) (47.5) (52.3) (52.8) (53.3) ii) GDP [21.5] [42.8] [42.3] [35.1] [32.4] [29.2] Debt Payable in F.Exchg. 95.6 427.6 872.5 1807.7 1907.5 1968.3 As % of i) Public Debt (61.3) (53.4) (52.5) (47.7) (47.2) (46.7) ii)GDP [34.0] [48.9 [46.8] [32.0] [29.0] [25.5] Total Public Debt 155.4 801.2 1662.2 3786.6 4040.0 4217.0 GDP (MP) 278.2 873.8 1865.9 5640.6 6581.1 7713.1 Total Revenue 49.0 158.8 322.9 805.8 900.0 1095.6 Public Debt As % of i) GDP (MP) 55.9 91.7 89.1 79.6 75.1 67.1 61.4 54.7 ii) Total Revenue 317.1 504.6 514.7 562.5 502.7 469.9 448.9 384.9 * End March Source: Debt Office, Ministry of Finance Note: Beginning from 1999-2000, Pakistan's GDP was rebased at 1999-2000 Prices from two decades old base of 1980-81.Therefore, wherever, GDP appears in denominator the number prior to 1999-2000 are not comparable.

1991-92

1983-84

1997-98

1993-94

1989-90

1985-86

1980-81

1987-88

1995-96

99-2000

The rising stock of public debt has had serious implications for debt service obligations during the 1990s. In 1980-81, almost 12 percent of total revenues were consumed for debt servicing and by 1989-90 this increased to almost 39 percent. By end of 1990 (in 1999-2000), almost 69 percent of total revenues were being consumed by one budgetary item, namely, debt servicing, leaving only 31 percent to be spent on development programs, the social sector, civil administration, defence etc. Quite naturally, it was highly inadequate to finance these budgetary items. The development budget faced the burden of adjustment as it continued to shrink from over 9.0 percent of GDP in 1980-81 to 6.5 percent in 1990-91 and further to 2.5 percent by the end of the 1990s. The high and growing public debt burden is the major source of the sharp slowdown in Pakistans economic growth, to less than 4 percent per annum in the 1990s and the consequent increase in poverty incidence by 1999-2000. Consequently, the Governments annual development budget continued to shrink from 6.4% of GDP to 2.5% of GDP during the same period. Both physical and human capital deteriorated sharply during the period, constraining the countrys future growth potential. During the last six years, the debt servicing liabilities have declined sharply from 65.4 percent of

78

2003-04 2005-06 E

2001-02

It may be pointed out that public debt is a charge on the budget and therefore it must be viewed in relation to government revenue. Public debt was 317 percent of total revenue in end-June 1980, increased to 505 percent by the end of the 1980s and further to 562.5 percent by the end of the 1990s. Following the debt reduction strategy in which raising revenue was one of the key elements, the public debt burden in relation to total revenue has declined substantially to 448.9 percent by end-June 2005 and further to 384.9 percent by end-March 2006 to the projected revenue for the year. Although Public debt is now on a solid downward footing, sustaining the momentum will be a continuing challenge.

Fig-3: Trends in Debt Servicing 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

Revenue

(As % of)

Cur. Exp

Fiscal Development revenue in 1999-2000 to 27.8 percent of revenue and from 53.5 percent to 27.8 percent of current expenditure in 2005-06. The subsequent fiscal space created by bridging the revenue-expenditure gap and low debt servicing cost has enabled the Government to increase poverty and social sector related expenditures from Rs. 89.8 billion or 2.2% of GDP in 2000-01 to Rs. 326.7 billion or 4.2% of GDP in 2005-06. Box-1: Fiscal Responsibility and Debt Limitation Act 2005
The Government has sought to reduce the fiscal deficit through a number of reforms. These reforms include the enactment of the Fiscal Responsibility and Debt Limitation Act that has been approved by the legislature. The Act provides measures to eliminate the revenue deficit and minimize public debt to a prudent level by effective debt management. The principles included in the Act are: (a) (b) to eliminate the revenue deficit by not later than June 30, 2008 and to thereafter maintain a revenue surplus; to ensure that within a period of ten fiscal years beginning from July 1, 2003, the total public debt at the end of the tenth fiscal year (ending June 30, 2013) does not exceed 60% of estimated GDP for that year and thereafter to maintain total public debt below 60% of GDP for any given fiscal year; by June 30, 2013, to reduce the total public debt by not less than 2.5% of the estimated GDP in every fiscal year, provided that the social and poverty related expenditures are not reduced below 4.5% of the estimated GDP for any given fiscal year; and to not issue any new guarantees, including those on Rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments that may be prescribed from time to time for any amount exceeding 2.0% of the estimated GDP in any fiscal year. The renewal of existing guarantees will be considered as issuing new guarantees.

(c)

(d)

In addition to the above, budgetary allocation, expressed as a percentage of GDP, to education and health must be doubled from the existing level within ten years. The Government may depart from any of the above principles on grounds of unforeseen demand on the finances of the Government caused by a national security emergency or a natural calamity, as determined by the National Assembly. The law provides that any such departure shall be temporary and the Minister for Finance of the Government shall in accordance with the law, specify (i) the reasons for the Governments departure from the law, (ii) the approach or measures the Government intends to take to return to the requirements of the law; and (iii) the period of time that the Government expects to take to come within the parameters of the law again.

Dynamics of the Public Debt Burden What are the main factors behind the increase in public debt Table-5.15: Real Cost of Borrowing Public Debt over the last two decades? The rise appears to be largely Real Cost of Borrowing for accounted for by the high real cost of borrowing and stagnant External Domestic Public Debt government revenue. As stated earlier, public debt consists Debt Debt of debt payable in rupees and debt payable in foreign 1980s 3.4 1.0 2.3 exchange. The real cost of borrowing for these two 1990s 2.7 3.2 2.9 components of public debt is measured differently. As shown 1990-I -3.0 -1.9 -2.4 in Table-5.15, the real cost of Pakistans domestic debt has 1990-II 5.5 5.7 5.6 varied greatly over the last two decades. During the 1980s, 2000-03 1.7 6.3 4.3 the real cost of domestic public debt was only 1.0 percent. 2003-06 -4.1 1.0 -1.3 The premature financial sector liberalization under the assistance of the World Bank in 1989 caused the interest rate on domestic debt to rise sharply to 11.4 percent in

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Economic Survey 2005-06 1993-94. However, the much higher interest rate to a large extent was wiped out by the sharp acceleration in inflation in the 1990s. The average real cost of borrowing for the domestic component of the public debt was 3.2 percent because of double digit inflation for most of the 1990s. Further dis-aggregation of the 1990s suggests that the real cost of domestic borrowing was negative (1.9%) in the first half of the 1990s but rose sharply (5.7%) in the second half, mainly because of a decline in inflation. During the first three years of the decade (2000-03), the real cost of borrowing for domestic debt 6.3 percent owing to lower inflation but in the last three years (2003-06) the cost of borrowing declined to 1.0 percent mainly due to rising inflationary pressure in the economy. The issue of measuring the real cost of foreign Table-5.16: Dynamics of Public Debt Burden borrowing (debt payable in foreign exchange) is Real complex. In the case of the rupee component of Primary Real Cost Real Real Growth of Fiscal of Growth of Growth of debt only the interest cost is taken into account but Debt Balance Borrowing Debt Revenues in the case of foreign borrowing, interest cost as Burden well as the cost emanating from the depreciation As % of % Per % Per % Per % Per of the rupee (or capital loss on foreign exchange) GDP Annum Annum Annum Annum 1980s -3.7 2.3 10.6 7.6 3.0 are taken into account. Thus, the capital loss on -0.3 2.9 4.9 2.9 2.0 foreign exchange is added to the real interest cost. 1990s 1990-I -1.8 -2.4 3.6 3.2 0.4 The average real cost of foreign borrowing was 1990-II 1.1 5.6 6.2 2.5 3.7 3.4 percent and 2.7 percent per annum in the 2000-03 1.6 4.3 1.4 6.9 -5.5 1980s and 1990s respectively [See Table-5.16]. 2003-06 0.7 -1.3 -3.3 5.7 -9.0 Further dis-aggregation reveals that the real cost of borrowing was much higher (5.5%) in the second half of the 1990s mainly on account of a sharp depreciation of the rupee viz the US dollar and falling domestic inflation. Interestingly, the real costs of both the domestic and foreign debt averaged more or less the same in the second half of the 1990s. During the first three years of the current decade (2000-03), the real cost of borrowing for foreign exchange denominated loan declined to 1.7 percent and further turned into negative 4.1 percent in the forthcoming three years (2003-06). During the first three years (200003), the interest rates appreciation along-with domestic inflation contributed to lowering of interest rates but in the next three years (2003-06), the depreciation of rupee along-with higher inflation contributed to negative incidence of real cost of borrowing. The lower implied cost of external borrowing has contributed to overall declining trend in real cost of borrowing during the last six years. As a result of the sharp fluctuation in the real cost of borrowing for both domestic and foreign debt, the dynamics of the growth in public debt also changed over the last two decades. The changing dynamics of public debt is welldocumented in Table-5.13. The growth in the public debt burden averaged 3.0 percent and 2.0 percent per annum during the 1980s and 1990s. Although, public debt grew in real terms at a very high rate of almost 11 percent per annum in the 1980s; it did not immediately lead to a sharp rise in debt burden because the debt carrying capacity (real growth in revenues) of the country was rising by around 8.0 percent per annum. However, it sowed the seeds for future difficulties because real growth in revenue continued to decelerate in the 1990s. Interestingly, the rate of real growth in public debt decelerated to 4.9 percent but the decline in the public debt burden was not substantial because of a slowdown in the real growth of revenues. Real public debt grew at a faster pace of 6.2 percent during the second half of the 1990s as did the public debt burden which rose by 3.7 percent against a marginal rise of 0.4 percent during the first half of the 1990s. The real cost of borrowing was highest at 5.6 percent per annum, on average, during the second half of the 1990s. A sharp real depreciation in the exchange rate causing real cost of borrowing to rise, slower real growth in revenue and a low level of international as well as domestic inflation have been responsible for the rise in the public debt burden in the second half of the 1990s. The pendulum swung to other extreme during 2003-06 when the real cost of foreign borrowing turned negative (4.7%) from 1.7 percent in 2000-03. The parameters witnessed considerable changes in the first three years and the last three years. During the first three years (2000-03), the interest rates and inflation were benign alongwith

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Fiscal Development appreciation of Pak-rupee. On the other hand in the last three years (2003-06) interest rate and inflationary pressure bounced back, and rupee depreciated against major currencies. The real cost of borrowing for domestic debt increased substantially to 6.3 percent on average during 2000-03 as against 5.7 percent in the second half of 1990, mainly on account of a sharp deceleration in inflation. However, the real cost of borrowing for public debt averaged 4.3 percent during 2000-03, slightly lower than 5.6 percent in the second half of the 1990s. The improvement in the real cost of borrowing for external debt on the one hand and fiscal consolidation effort on the other resulted in a sharp decline in the debt burden during 2000-03. The main contributor to this decline came from massive increase in real revenues and a slower real growth in debt. During 2003-06 the real growth in revenues slowed down owing to inflationary pressure in the economy, however, the public debt declined witnessed a negative growth in real terms by 3.3 percent which helped in deceleration in debt burden to the extent of 9.0 percent. As shown in Table 5.16, the primary fiscal balance remained in surplus to the extent of over one percent of the GDP in 2003-06 and the real growth of debt also registered a decline of 3.3 percent and at the same time revenue grew at an average rate of 2.3 percent per annum. The combined effect of growth in revenue and sharp reduction in debt growth resulted in a sharp decline of (7.2% per annum) in the countrys debt burden during the last six years. An analysis of the dynamics of the public debt burden provides useful lessons for policy-makers to manage the countrys public debt. First, every effort should be made to maintain a primary surplus in the budget. Second, the interest rate and inflation environment should remain benign. Third, the pace of revenue growth must continue to rise to increase the debt carrying capacity of the country. Center to all these lessons is the pursuance of prudent monetary, fiscal and exchange rate policies. Domestixc Debt The outstanding stock of domestic debt rose by Rs 108.6 billion during 2005-06, compared to an increase of Rs 146.0 billion in the preceding year the rise is primarily due to rise in the nominal value of the fiscal deficit. The Government has also showed greater deficit tolerance in terms of its ratio to GDP, mainly because of releasing more resources towards social sector. However, this does not imply fiscal indiscipline, since the budget deficit as a percent of GDP is still targeted at 3.4 percent of GDP during the year 2005-06 which is slightly higher than the actual achievement of 3.3 percent of GDP in 2004-05. The inclusion of earthquake effect give boost to the fiscal deficit for the current year by 0.7 percent of GDP or the deficit would be 4.1 percent of GDP in 2005-06. This has contributed to rise in quantum of domestic debt to some extent. In fact, this moderate growth of domestic debt compared to the trend growth rate of 1990s, together with the increasing revenues and accelerating economic growth, implies that the economys debt carrying capacity has been improving for the last six years. The increase mainly emanates from floating debt while other two components unfunded and permanent witnessed decrease or stagnation even in absolute terms. The rise in the debt stock during the last nine months is because of financing requirement for massive earthquake related expenditure (Rs. 54 billion) incurred to rehabilitate the affected people. However, the stock of domestic debt as percent of GDP declined from 35.7 percent in 2003-04 to 32.8 percent in 2004-05 and further to 29.4 percent by end March 2006. Composition of Domestic Debt The domestic debt in Pakistan consists of permanent debt (medium and long-term), floating debt (short-term) and unfunded debt (medium and long-term, mostly national saving scheme-related). The increase in the domestic debt during 2005-06 in absolute terms was primarily came from a rise in the stock of floating debt, which offset a decline in stock in the other two debt classes, permanent and unfunded. The share of floating debt which was undergoing substantial decline during the last five years, bounced back and escalated to 34.3 percent in 2004-05 and by end March 2006 it escalated to 40.0 percent. While the stock of unfunded debt continued to decline for three years in a row and then stagnated in March 2006, mainly because of lowering of interest rates and the ban on institutional investments in NSS schemes, the fall in stock of permanent debt stemmed from reluctance by the government to issue long-term PIBs to subside speculative element and keep long-term interest rate hospitable to long-run investment. As a result of the conscious decision of the Government not to issue PIBs, although short term interest rates increased significantly, but long term interest rates did not rise as much.

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Economic Survey 2005-06 A slower rise in domestic debt combined with an increase in GDP growth and a fall in debt servicing cost led to an improvement in Pakistans debt servicing capacity. The ratios of domestic debt to GDP and to tax revenue both decreased during 2005-06. The following tables provide a summary of outstanding domestic debt and domestic debt service requirements for the periods indicated.
Table-5.17: Outstanding Domestic Debt 2001 349.1 737.8 712.1 1799.0 43.2 2002 424.8 557.8 792.1 1774.7 40.3 End June 2003 468.8 516.3 909.5 1894.5 39.3 2004 570.0 542.9 899.2 2012.2 35.7 2005 526.2 778.2 854.0 2158.4 32.8 (Rs. Billion) End March 2006 501.1 906.3 859.7 2267.0 29.4

Permanent Debt* Floating Debt** Unfunded Debt*** Total Total Domestic Debt as % of GDP
*

Market Loans, Federal Government Bonds, Income Tax Bonds, Government Bonds (L.R. 1977), Special Government Bonds For SLIC (Original), Special Government Bonds for SLIC (Capitalization), Bearer National Fund Bonds (BNFB), Special National Fund Bonds, Fe ** Treasure Bills (3 Months), Market Treasury Bills, MTBs for Replenishment. *** Defence Savings Certificates, National Deposit Certificates, Khas Deposit Certificates, Special Savings Certificates (Reg), Special Savings Certificate (Bearer), Regular Income Certificates, Bahbood Savings Certificates, Khas Deposit Accounts, Saving P = Provisional. Source: Debt Management Section, Ministry of Finance.

Unfunded Debt The stock of unfunded debt continued its downward slide for last three years in a row started since 2002-03. The decline in unfunded debt in 2002-03 was the first ever decline in stock of unfunded debt for last three decades. The decline of Rs 55 billion during 2004-05 was much larger than Rs 10.2 billion witnessed during 2003-04. By March 2006, the stock of unfunded debt went marginally up by Rs.4 billion over its June 2005 level. This type of debt instrument is comprise of National Savings Schemes (NSS) and net sales of NSS instruments declined during both years largely on account of reduction in rate of return on various NSS schemes and partly availability of other relatively high yielding financial products in the market. The linkage of rates of return on NSS instruments with the PIB yields has helped in reducing the interest rate distortions in the economy. Since the government rejected all the bids in every auction during 2004-05 to keep long-term interest rates under control amidst higher inflation, the benchmark yield on PIBs remained unchanged. As a result, the rates of return on NSS instruments were kept unchanged as well. The unfunded nature of this component of debt had severely complicated the management of domestic debt in the past and the lingering impact of very expensive long-term debt taken in few years ago continue to affect debt servicing liability on domestic debt.
Fig-4: Structure of Domestic Debt
100% 80% 60% 40% 20% 0% 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 19992000 2000-01 2001-02 2002-03 2003-04 2004-05 2006(Mar) Floating Permanent Unfunded

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Fiscal Development Floating Debt and Permanent Debt The stock of floating debt continued to rise in 2005-06 also and reached Rs 906.3 billion. However, the stock of permanent debt declined by Rs 25.1 billion, in comparison with a steady average increase of Rs 56.0 billion per annum during the last 5 years. The decline was seen across all major components of permanent debt except prize bonds. The increase of Rs 3.3 billion in the stock of prize bonds was far smaller than the outflow from maturing FIBs and PIBs. The Government has not decided to tap money from further auction of PIBs amidst rising interest rate scenario and close gap between one year T-bill yield of 8.8 % against 10-year PIB yield of 9.29%. Only issuance of corporate bonds could help in provision of much needed stability in appetite for long-term paper and secondary market development. If the treasury bill yield fell in the course of time, it would encourage the banks to invest in reasonable positive cost carry papers, giving them good interest arbitrage opportunities which effectively will help the Government to raise long term funds at a better price. In the current highly leveraged market the auction of PIBs would result in substantial addition to debt servicing liability of the Government on account of NSS payments. The trade-off between short-run and longer run maturity is intricately designed to keep debt servicing cost lower. Maturity Profile
Table 5.18: Maturity Profile of Domestic Debt (% Share in Total) Pakistan was able to improve its overall maturity Short-term Medium-term Long-Term profile during early years of this decade, however, (One Year or (3 Years or (Greater than maturity profile has underwent deterioration during Less) less) three Years) the outgoing fiscal year (2004-05). The average 1991-92 43.7 14.2 42.1 maturity of Pakistans domestic debt shortened a 1994-95 43.9 7.4 48.7 little during the last year because of over 156.9 1999-2000 44.9 0.1 55.0 percent of the increase in domestic debt during the 2001-02 37.7 1.7 60.6 year constituted short-term issues, with the issue of 2002-03 34.6 2.1 63.3 long-term rupee debt being held to a mere Rs 0.8 2003-04 35.0 2.5 62.5 2004-05 44.0 1.2 54.8 billion during 2004-05, as against the Rs 107.7 2005-06* 47.9 0.8 51.3 billion issued last year. Indeed, since 2004-05 also * End December Source: Budget Wing, Ministry of Finance saw substantial decline of maturities of long tenor debt as the stock of long-term debt instruments declined.

The shortening of the average maturity profile of domestic debt has exposed the country to interest rate risk. The vulnerability of debt servicing cost to interest rates shocks has increased somewhat in 2004-05 but the credibility gains as a result of keeping benchmark interest rate for long-run financing are more than the cost of resorting to debt instruments of shorter durations. Notwithstanding the vulnerability to interest rate shocks in the long run, the reduction in the maturity profile of domestic debt did help drive a fall in the governments debt servicing costs during 2004-05. The non-issuance of long-term debt instrument of Pakistan and frequent resort to short-maturity debt instrument has again caused further decline in the share of long-term debt from 54.8 percent in 2004-05 to 51.3 percent in 2005-06. The share of short-term debt on the other hand increased from 44 percent in 2004-05 to 47.9 percent in 2005-06. Classification of Domestic Debt by Owner The share of domestic debt held by banking sector increased for a third successive year in 2005-06, at the expense of non-banks whose share is declining gradually. The reasons for increasing share of banking sector for three years are altogether different. The rise in the share of banking system in debt holding during 2003-04 was due to increased investment of scheduled banks in PIBs while the increase in 2004-05 was primarily due to the heavy reliance of the government on borrowings from SBP for its financing requirement. The share of non-bank debt declined in the first year because of diversification of debt instrument while in the last one and half year or so it is because of relative fall in interest rates on NSS schemes. In absolute terms, the SBP T-bill holdings reached Rs 337.7 billion by the endJune 2005 after touching an (annual) low of Rs 110.1 billion in 2002-03. It is important to note that the banking systems holdings of domestic debt has reached almost 50 percent mark in 2005-06 after falling as low as 38.7 percent by 2002-03.

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Economic Survey 2005-06


Table-5.19: Stock of Domestic Debt SBP 359.5 551.4 604.6 326.2 110.1 133.3 324.9 444.5 Bank Com. Bank 314.0 213.5 228.1 388.5 607.6 652.3 618.1 639.5 Total 673.5 764.9 832.7 714.7 717.7 785.6 1109.7 1084.0 Non-Bank 702.4 813.9 898.3 1003.2 1136.0 1193.9 1022.9 1164.7 (Rs. Billion) Total Domestic Debt 1375.9 1578.8 1731.0 1717.9 1853.7 1979.5 2129.1 2248.7 Source: State Bank of Pakistan

1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06* * End March

Domestic Debt Burden The government strategy to substitute the long-term domestic debt by short-term debt meant that governments domestic debt servicing cost continued to fall in 2005-06. While the 2.6 percent decline seen in 2004-05 is lower than the 14.6 percent decline in 2003-04, this must be viewed in the context of the rising stock of the debt as well as the slight adjustment in the composition of the stock towards short-term debt. This shows an increase in the interest payments on floating debt, while those on permanent debt and unfunded debt declined. The latter was due to a combination of: (1) maturities of expensive long term debt issued in past years; and (2) the net decline in the stock of long-term domestic debt. The maturity profile of domestic debt has also undergone considerable changes over the last six years. The share of short-term debt has increased by almost 13 percentage points from 35 percent to 48 percent. Accordingly, the share of long-term debt has decreased by the same margin. More importantly the maturity profile of domestic debt has shifted sharply from longer term (5 to 10 years) to short term (less than one year) during the last two years [See Table 5.20]. Changing the profile of debt from shorter-end maturity to longer-end had been the critical element of the debt reduction strategy during the last six years. However, the makeshift arrangements of last two years to make the economy more immunized against interest rate shocks, the recourse to long-term instrument was reduced in favour of short-term domestic source of financing.
Table 5.20: Domestic Debt & Its Interest Payment Domestic Interest Payment (As % of) Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06*
* Budget Estimate Domestic Outstanding Debt (Rs.bln) Interest Payments (Rs.bln) Tax Revenue Total Revenue Total Expenditure Current Expenditure GDP (mp)

448.2 531.5 615.3 711.0 807.7 920.3 1056.1 1199.7 1452.9 1642.4 1799.0 1774.7 1894.5 2012.2 2158.4 2267.0

35.7 50.3 62.7 77.5 77.9 104.5 126.5 167.5 175.3 210.2 183.5 184.6 160.5 154.8 180.1 200.6

27.5 30.6 35.2 37.2 30.2 34.2 39.0 47.2 44.9 51.8 41.6 38.5 28.9 25.4 27.3 24.9

20.8 21.7 26.0 28.4 24.1 27.5 32.9 39.0 37.4 41.0 33.2 29.6 22.3 19.6 20.0 18.3

13.7 15.6 18.0 21.3 18.2 20.2 23.4 26.4 27.1 29.6 25.6 22.3 17.9 16.5 16.1 14.3

18.2 21.9 23.0 26.4 22.5 24.7 27.3 31.6 32.0 33.5 28.4 26.4 20.3 20.3 19.1 18.3

3.5 4.2 4.7 5.0 4.2 4.9 5.2 6.3 6.0 5.5 4.4 4.2 3.3 2.7 2.7 2.6

Source: Finance Division (Budget wing)

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Fiscal Development As a result of prudent fiscal management over the last 6 years, the burden of interest payments on the domestic budget has declined sharply, thereby, releasing resources for development and social sector programs. A cursory look at the table-5.17 is sufficient to see that interest payments as a percentage of total revenue have been reduced to one-half (41 percent to 20 percent) over the last six years. Similarly, share in total expenditure declined from 30 percent to 16 percent during the same period. Most importantly, as percentage of GDP, interest payments declined from 6 percent to 2.7 percent in the last six years. XIV. Conclusion A sound fiscal policy is essential for preventing macroeconomic imbalances and realizing full growth potential. Pakistan has made considerable progress in fiscal consolidation over the last six years. The overall fiscal deficit is down from an average of 7.0 percent of GDP in the 1990s to 3.3 percent last year. However, the fiscal deficit was 3.4 percent of GDP in 2005-06 as against the target of 3.8 percent of GDP, mainly on account of better revenue performance. The earthquake spending impacted the budget by 0.8 percent of GDP, thereby; fiscal deficit with earthquake spending is likely to be around 4.2 percent of GDP. The associated public debt burden also declined sharply from over 100 percent of GDP to close to 54.7 percent in the same period. Fiscal consolidation has undoubtedly contributed to a sharp recovery in economic growth accompanied by macroeconomic stability. Every effort must be made towards further consolidation of our fiscal balance. Fiscal balance is under pressure in the current fiscal year owing to massive earthquake-related spending. Revenue performance on the other hand is better than the target and will help ease some pressure on the earthquake-related spending. Going forward, Pakistan will have to allocate substantially large resources for strengthening the countrys physical and human infrastructure to sustain the growth momentum. With current undoubtedly narrow tax base, it will be difficult to generate enough resources to finance infrastructure development. The government will therefore, has to make efforts to broaden the tax base i.e. to hitherto untaxed or under taxed sectors. Broadening of tax base will enable the government to reduce marginal tax rates which will help further stimulate investment and production and will promote voluntary tax compliance. Broadening of tax base will also ensure the fair distribution of the tax burden among various sectors of the economy. The overall services sector including wholesale and retail trade as well as agriculture are potential candidates for broadening the tax bases.

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TABLE 4.1 FEDERAL GOVERNMENT OVERALL BUDGETARY POSITION


(Rs Million) Fiscal Year/ Item A. REVENUE 1. Direct Taxes 2. Indirect Taxes i. Customs ii. Sales Tax iii. Federal Excise 3. Total Tax Revenue (1+2) 4. Surcharges i. Natural Gas ii. Petroleum 5. Non-Tax Revenue 6. Total Revenue Receipts Gross (3+4+5) B. EXPENDITURE 9. Current Expenditure* i. Defence ii. Debt Servicing iii. Grants iv. General Administration @ v. Subsidies vi. Other 10. Development Expenditure(PSDP) 11. Total Expenditure (9+10) RE- Revised Estimate B.E.- Modified Budget Estimate @ : Include Law and Order, Social, Economic and Community Services * Current expenditure here includes earthquake related spendings 2004-05 (R.E) 176,930 411,446 117,243 235,533 58,670 588,376 620,930 32,554 16,618 15,936 149,800 770,730 2005-06 (B.E) 217,613 492,487 136,982 296,687 58,818 710,100 728,300 18,200 17,200 1,000 247,200 975,500

688,600 845,600 211,700 241,100 210,200 241,200 94,700 162,500 81,400 95,300 57,800 86,300 32,800 19,200 135,300 228,500 823,900 1,074,100 Source: Budget Wing, Finance Division, Islamabad

TABLE 4.2 SUMMARY OF PUBLIC FINANCE (CONSOLIDATED FEDERAL AND PROVINCIAL GOVERNMENTS)
(Rs Million) % Change 2005-06 2005-06/ (M.B.E) 2004-05 1,095,600 21.7 1,010,000 19.8 85,600 50.1 805,600 22.2 762,800 22.1 42,800 23.7 290,000 20.5 247,200 13.3 42,800 91.0 1,423,000 27.4 65,800 1,097,900 16.4 782,100 13.6 315,800 24.1 326,700 43.5 -1,600 0 -327,400 327,400 118,300 209,100 22,400 96,700 90,000 -261,600 2,678 2,938 3,793 4,163 4,402 4,823 (As Percent of GDP at Market Price) 13.5 13.3 14.2 14.9 10.7 10.6 10.9 11.5 2.8 2.7 3.3 3.4 18.9 17.6 18.5 18.7 16.5 15.5 15.9 16.3 2.5 2.2 2.9 2.2 5.4 4.3 4.3 3.7 5,641 6,581 7,713 16.7

Fiscal Year/ Item Total Revenues (I+ii) Federal Provinical I) Tax Revenues Federal Provinical ii) Non-Tax Revenues Federal Provinical Total Expenditures (a+b+c) Of which Earthquake Effect a) Current Federal Provinical b) Development(PSDP) c) Net Lending to PSE's d) Statistical Discripency Overall Deficit Financing (net) External (Net) Domestic (i+ii) i) Non-Bank ii) Bank iii) Privatization Proceeds Overall Deficit Excl. Earthquake Spending Memorandum Item GDP (mp) in Rs. Billion

1997-98 429,454 400,342 29,112 354,754 338,042 16,712 74,700 62,400 12,300 634,014 529,919 407,219 122,700 104,095 -204,560 204,992 38,761 166,231 118,202 48,029 -

1998-99 468,601 429,691 38,910 390,726 375,078 15,648 77,875 54,613 23,262 647,778 547,279 424,443 122,836 98,286 2,213 -179,177 179,177 97,070 82,108 155,919 -73,811 -

1999-00 512,500 477,600 34,900 405,600 386,800 18,800 106,900 90,800 16,100 709,100 626,400 477,900 148,500 95,600 -12,900 9,700 -206,300 206,300 69,700 136,600 96,700 39,900 -

2000-01 553,000 514,000 39,000 441,600 422,500 19,100 111,400 91,500 19,900 717,900 645,700 479,000 166,700 89,800 -17,600 14,800 -179,700 179,700 120,700 59,000 92,000 -33,000 -

2001-02 624,100 584,000 40,100 478,100 459,300 18,800 146,000 124,700 21,300 826,250 700,200 524,600 175,600 126,250 -200 -11,700 -190,450 190,450 83,100 107,350 85,000 14,000 8,350

2002-03 720,800 673,600 47,200 555,800 534,000 21,800 165,000 139,600 25,400 898,200 791,700 599,800 191,900 129,200 -22,700 3,200 -180,600 180,600 113,000 67,600 119,500 -55,600 3,700

2003-04 805,827 745,895 59,932 617,899 583,818 34,081 187,928 162,077 25,851 940,359 763,077 582,380 180,697 160,988 16,294 -134,532 134,532 -4,475 139,007 64,097 63,698 11,212

2004-05 R.E. 900,038 843,023 57,015 659,363 624,752 34,611 240,675 218,271 22,404 1,117,042 943,064 688,603 254,461 227,718 24,763 78,503 -217,004 217,004 120,432 96,572 8,056 60,189 28,327

Total Revenue 16.0 15.9 14.3 13.7 14.2 Tax Revenue 13.2 13.3 11.0 10.0 10.4 Non-Tax Revenue 2.8 2.7 3.3 3.7 3.8 Expenditure 23.7 22.0 16.7 18.2 18.4 Current 19.8 18.6 13.5 13.1 14.2 Development @ 3.9 3.3 3.1 3.8 4.2 Overall Deficit Incl. E.quake Exp. 7.7 6.1 2.4 3.3 4.2 Excluding Earthquake 3.4 M.B.E: Modified Budget Estimates Source: Budget Wing, Finance Division, Islamabad R.E: Revised Estimates @ From 1998-99 onward, also include lending to PSEs Beginning from 1999-2000, Pakistan's GDP was rebased at 1999-2000 Prices from two decades old base of 1980-81 Therefore, wherever, GDP appears in denominator the number of prior to 1999-2000 are not comparable.

TABLE 4.3 CONSOLIDATED FEDERAL AND PROVINCIAL GOVERNMENTS REVENUES


(Rs Million) % change 2005-06/ 2004-05 21.7 19.8 50.1 22.2 22.1 23.7 21.7 23.0 -3.0 21.5 1.5 0.3 36.8 26.0

Fiscal Year/ 1997-98 1998-99 Item Total Revenue (I+II) 429,454 468,601 Federal 400,442 429,691 Provincial 29,012 38,910 I. Tax Revenues (A+B) 354,754 390,726 Federal 338,042 375,078 Provincial 16,712 15,648 A. Direct Taxes (1+2) 105,098 105,588 Federal 103,182 103,476 Provincial 1,916 2,112 B. Indirect Taxes (3+4+5+6+7) 249,656 285,138 3. Excise Duty 62,922 62,691 Federal 62,011 60,572 Provincial 911 2,119 4. Sales Tax* 53,942 68,680 5. Taxes on International Trade 74,496 78,654 6. Surcharges* 42,911 61,927 6.1 Gas 6,364 9,855 6.2 Petroleum 36,547 52,072 7. Other Taxes ** 15,385 13,186 7.1 Stamp Duties 4,814 5,287 7.2 Motor Vehicle Taxes 2,113 2,368 7.3 Foreign Travel Tax* 1,464 1,769 7.4 Others 6,994 3,762 II. Non-Tax Revenues 74,700 77,875 Federal 62,400 54,613 Provincial 12,300 23,262 * Revenues under these heads are exclusively Federal. ** Mainly include Provincial Revenues. M.B.E Modified Budget Estimate R.E. Revised Estimates.

1999-00 512,500 477,600 34,900 405,600 386,800 18,800 115,672 112,600 3,072 289,931 56,934 55,600 1,334 116,767 61,600 38,912 13,500 25,400 15,718 6,397 2,803 1,350 5,168 106,900 90,800 16,100

2000-01 553,000 514,000 39,000 441,600 422,500 19,100 128,556 124,585 3,971 315,732 50,325 49,000 1,325 153,500 65,000 30,200 12,300 17,900 16,707 5,230 3,121 1,048 7,308 111,400 91,500 19,900

2001-02 624,100 584,000 40,100 479,335 460,224 19,111 147,403 142,649 4,754 331,932 48,572 47,189 1,383 166,618 47,817 54,854 18,867 35,987 14,071 5,721 3,195 1,097 4,058 146,000 124,700 21,300

2002-03 720,800 673,600 47,200 555,800 534,000 21,800 157,886 151,976 5,910 396,109 45,437 44,002 1,435 195,138

2003-04 791,100 740,900 50,200 608,400 580,300 28,100 169,858 165,300 4,558 439,996 46,228 44,600 1,628 219,100

2004-05 2005-06 (R.E) (M.B.E) 900,038 1,095,600 843,023 1,010,000 57,015 85,600 659,363 805,600 624,752 762,800 34,611 42,800 186,473 226,865 176,930 217,613 9,543 9,252 467,821 60,813 58,670 2,143 235,533 568,617 61,750 58,818 2,932 296,687

68,835 89,900 117,243 136,982 16.8 68,230 61,400 27,145 32,554 19.9 21,358 16,800 16,273 16,618 2.1 46,872 44,600 10,872 15,936 46.6 18,469 23,368 27,087 40,644 50.0 6,631 7,564 10,573 15,110 42.9 3,893 4,638 5,749 8,206 42.7 4,054 2,088 2,050 3,510 71.2 3,891 9,078 8,715 13,818 58.6 165,000 182,700 240,675 290,000 20.5 139,600 160,600 218,271 247,200 13.3 25,400 22,100 22,404 42,800 91.0 Source: Budget Wing, Finance Division, Islamabad

TABLE 4.4 CONSOLIDATED FEDERAL AND PROVINCIAL GOVERNMENTS EXPENDITURES


Fiscal Year/ Item Current Expenditure Federal Provincial Defence Interest Federal Provincial Current Subsidies Federal Provincial Gen. Administration* Federal Provincial All Others** Development Expenditure Net Lending to PSEs Total Expenditure Memorandum Items: Current Expenditure Defense Interest Current Subsidies General Administration# All Others Development Expenditure Total Expenditure Current Expenditure Defense Interest Current Subsidies General Administration All Others Development Expenditure@ Total Expenditure * ** # @ Note: 1997-98 529,911 407,211 122,700 136,164 202,356 196,251 6,105 8,840 6,268 2,572 61,431 27,344 34,087 121,120 104,095 634,006 16.4 6.8 25.6 -25.8 33.8 11.2 21.7 17.2 83.6 21.5 31.9 1.4 9.7 19.1 16.4 100.0 1998-99 547,279 424,443 122,836 143,471 220,100 213,259 6,841 15,035 9,533 5,502 66,950 26,650 40,300 101,723 98,286 2,213 647,778 3.3 5.4 8.8 70.1 9.0 -16.0 -5.6 2.2 84.5 22.1 34.0 2.3 10.3 15.7 15.5 100.0 1999-00 2000-01 2001-02 2002-03 791,700 599,800 191,900 159,700 235,304 209,700 25,604 57,114 50,000 7,114 100,210 60,900 39,310 239,372 129,200 -22,700 898,200 13.1 7.0 -14.1 95.5 10.1 52.7 2.3 8.7 88.1 17.8 26.2 6.4 11.2 26.7 11.9 100.0 2003-04 763,077 582,380 180,697 184,904 226,256 202,500 23,756 67,920 62,500 5,420 120,023 75,500 44,523 163,974 160,988 16,294 940,359 -3.6 15.8 -3.8 18.9 19.8 -31.5 24.6 4.7 2004-05 RE 943,064 688,603 254,461 211,717 255,028 220,459 34,569 66,673 57,800 8,873 130,531 81,400 49,131 279,115 227,718 24,763 1,117,042 23.6 14.5 12.7 -1.8 8.8 70.2 41.5 18.8 (Rs million) 2005-06 (M.B.E) 1,097,900 782,100 315,800 241,100 273,109 241,192 31,917 92,678 86,300 6,378 157,353 103,100 54,253 333,660 326,700 -1,600 1,423,000 16.4 13.9 7.1 39.0 20.5 19.5 43.5 27.4

626,400 645,700 700,200 477,900 479,000 524,600 148,500 166,700 175,600 150,400 131,200 149,254 262,247 249,252 273,894 245,100 234,500 245,300 17,147 14,752 28,594 23,239 29,028 29,221 14,700 19,900 25,488 8,539 9,128 3,733 92,108 100,981 91,024 47,500 70,700 56,300 44,608 30,281 34,724 98,406 135,239 156,807 95,600 89,800 126,250 -12,900 -17,600 -200 709,100 717,900 826,250 (Percent Growth over Preceeding period) 14.5 3.1 8.4 4.8 -12.8 13.8 19.1 -5.0 9.9 54.6 24.9 0.7 37.6 9.6 -9.9 -3.3 37.4 15.9 -2.7 -6.1 40.6 9.5 1.2 15.1 As % of Total Expenditure 88.3 89.9 84.7 21.2 18.3 18.1 37.0 34.7 33.1 3.3 4.0 3.5 13.0 14.1 11.0 13.9 18.8 19.0 11.7 10.1 15.3 100.0 100.0 100.0

81.1 84.4 77.2 19.7 19.0 16.9 24.1 22.8 19.2 7.2 6.0 6.5 12.8 11.7 11.1 17.4 25.0 23.4 18.9 22.6 22.8 100.0 100.0 100.0 Source: Budget Wing, Finance Division

Include Law & Order. Include mainly Provincial Expenditures. Also include law & order, social, Economic and Community Services. Include net lending Variation in figures of interest payments of table 4.4 and 4.5 is on account of different methodology and sources of data collection used by Budget Resource Section and Debt Management Section of Finance Division. MBE: Modified Budget Estimates RE: Revised Estimates

TABLE 4.5 DEBT SERVICING


(Rs million) %Change 2005-06/ 2004-05 6.2 8.3 11.4 -4.7 -4.8 -100.0 172.6 22.3 33.5 -7.7 53.3 17.2 1387.6 14.6

Fiscal Year/ Item A. Interest Payments A.1 Federal Interest on Domestic Debt Interest on Foreign Debt Foreign Loans IMF Drawings Food Credit/Short Short Term Borrowings Euro Bonds $ Denomination Bonds A.2 Provincial B. Repayments/Amortization of Foreign Debt. Foreign Loans Food Credits C. Total Debt Servicing (A+B)

1997-98 202,356 196,251 167,513 28,738 24,836 1,555 2,347 6,105 83,961 59,327 24,634 286,317

1998-99 220,100 213,259 175,273 37,986 30,335 1,707 3,133 2,811 6,841 122,980 77,431 45,549 343,080

1999-00 273,909 256,762 210,155 46,607 34,691 2,513 6,167 3,236 17,147 97,071 78,608 18,463 370,980

2000-01 249,252 234,500 183,500 51,000 40,355 2,909 4,187 4,690 14,752 96,160 74,623 21,537 345,412

2001-02 273,794 245,200 184,600 60,600 68,134 2,483 2,483 4,812 28,594 164,905 68,134 96,771 438,699

2002-03 235,304 209,700 160,500 49,200 45,571 0.0 1,840 3,609 429 25,604 64,234 46,207 18,027 299,538

2003-04 230,109 196,200 154,800 41,400 111,258 1,295 705 2,242 265 33,909 69,765 45,978 23,787 299,874

2004-05 R.E. 257,235 222,666 180,066 42,600 35,030 423 445 4,720 198 34,569 55,724 54,258 1,466 312,959

2005-06 (M.B.E) 273,109 241,192 200,590 40,602 33,349 0 1,213 5,774 264 31,917 85,411 63,603 21,809 358,520

(As Percent of GDP) MEMORANDUM ITEMS Interest on Domestic Debt (Federal) 6.3 6.0 5.5 4.4 4.2 3.3 2.7 2.7 2.6 Interest on Foreign Debt 1.1 1.3 1.2 1.2 1.4 1.0 0.7 0.6 0.5 Repayment of Foreign Debt 3.1 4.2 2.6 2.3 3.7 1.3 1.2 0.8 1.1 Total Debt Servicing 10.7 11.7 9.8 8.3 10.0 6.2 5.3 4.8 4.6 nil Source: D.M. Section, Finance Division,Islamabad M.B.E: Modified Budget Estimates R.E. Revised Estimates Note: Variation in figures of interest payments of table 4.4 and 4.5 is on account of different methodology and sources of data collection used by Budget Resource Section and Debt Management
Section of Finance Division.

Beginning from 1999-2000, Pakistan's GDP was rebased at 1999-2000 Prices from two decades old base of 1980-81 Therefore, wherever, GDP appears in denominator the number of prior to 1999-2000 are not comparable.

TABLE 4.6 INTERNAL DEBT OUTSTANDING (AT END OF PERIOD)


(Rs million) % Change 2005-06/ 2004-05 -2.5 8.6 1.5 3.1

Fiscal Year/ Type of Debt Permanent Debt Floating Debt Un-funded Debt Total Memorandum Items: Permanent Debt Floating Debt Un-funded Debt Total Debt as % of GDP (mp) R.E: Revised Estimates

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05 R.E. 526,179 778,163 854,044 2,158,385

2005-06 M.B.E. 512,990 845,062 866,865 2,224,917

286,637 473,850 439,187 1,199,674

317,402 561,590 573,945 1,452,937

325,569 647,428 671,783 1,644,780

349,212 737,776 712,010

424,767 557,807 792,137

468,768 516,268 909,500

570,009 542,943 899,215 2,012,167

1,798,998 1,774,711 1,894,536 (Percent Share in Total Debt) 19.4 41.0 39.6 23.9 31.4 44.6 24.7 27.3 48.0

23.9 39.5 36.6

21.8 38.7 39.5

19.8 39.4 40.8

28.3 27.0 44.7

24.4 36.1 39.6

23.1 38.0 39.0

44.8

49.4

43.4

43.2

40.3

39.3

35.7 32.8 28.8 Source: D.M. Section, Finance Division,Islamabad

Chapter 6.

MONEY AND CREDIT

The easy and accommodative monetary policy stance that had been pursued during the last few years by the SBP underwent considerable changes during the FY05, switching from a broadly accommodative to aggressive tightening in the second half of the last fiscal year, more so since April 2005. Overall inflation in general and core inflation in particular continued to exhibit a rising trend during the fiscal year 2004-05; the overall inflation reaching as high as 11.1 percent and core inflation at 7.8 percent in April 2005. In order to arrest the rising trend in inflation, the SBP changed its monetary policy stance to aggressive tightening in April 2005 by raising discount rate from 7.5 percent to 9.0 percent. The same tight monetary policy stance continued during the current fiscal year despite declines in both core and overall inflation. Notwithstanding the tight monetary policy stance the SBP continued to strike a balance between promoting growth and controlling inflation on the one hand and maintaining a stable exchange rate environment on the other. Tight monetary policy stance is likely to continue until inflationary pressures are significantly eased off. However, the SBP will review its stance for the next fiscal year by taking all available information regarding inflationary expectations as well as other macroeconomic developments. In recent years the banking industry in Pakistan has been transformed from state owned sector to a vibrant private sector industry. Banking industry has not only gained strength from the positive interplay of economic and political factors, but also has become an engine of growth for the economy. State Bank of Pakistan has taken a number of steps in various areas to further enhance the effectiveness of banking industry in Pakistan. Going forward, the SBP would continue to take measures aimed at expanding credit to priority sectors such as agriculture, SMEs and export sector. Small and Medium Enterprises (SMEs) is regarded as the breeding ground for new entrepreneurs and instrument of employment promotion. SMEs constitute 90 percent of businesses in Pakistan. SMEs represent a significant component of Pakistans economy in terms of value addition, employment generation, and poverty reduction activities. For SMEs, a separate set of regulations have been specifically tailored, aimed at encouraging banks/DFIs to develop new financing techniques and innovative products which can meet the financial requirements of SMEs. Towards the end of 2005, a separate set of prudential Regulations were issued for agriculture financing in order to facilitate and encourage the flow of bank credit to the agriculture sector. To further revamp the financial sector in line with global financial system, the State Bank of Pakistan has set out a road map for the implementation of Basel-II. It is the new regulatory capital adequacy regime which offers a series of approaches ranging from simple to more complex methodologies for capital allocation against credit and operational risk. It also requires banks to establish a comprehensive risk management framework commensurate with the complexity and diversification of their business. Credit Plan, 2005-06 According to the credit plan for 2005-06, the SBP has set the target for monetary expansion to the tune of Rs 380 billion or 12.8 percent higher than last year (FY05) on the basis of a growth target of 7.0 percent and inflation target of 8 percent. The growth target of broad money (M2 definition) was deliberately kept below the growth of nominal GDP to absorb monetary overhang of the last few years. Broad money supply grew by 19.3 percent and 19.6 percent, respectively during the last two fiscal year. The net domestic assets (NDA) and net foreign assets (NFA) of the banking system were set to increase by Rs 365 billion and Rs 15 billion, respectively. Within the NDA, the credit to private sector was projected to expand by Rs 330 billion, accounting for 86.8 percent rise in broad money supply

87

Economic Survey 2005-06 (M2). The net foreign assets (NFA) of the banking system were expected to show a moderate growth of only 2.3 percent or Rs 15 billion, owing to the expected deceleration in net foreign inflows. It was also assumed at the beginning of the current fiscal year that the realization of the expected inflows of privatization proceeds (e.g. PTCL etc) would not impact the overall monetary expansion because the resulting rise in NFA was to be offset by the corresponding decline in NDA. Monetary and Credit Development The money supply during July-April 22, 2006 of the current fiscal year expanded by Rs 294.9 billion or 9.94 percent as against an expansion of Rs 332.4 billion or 13.37 percent in the same period last year (see Table-6.1). The pace of monetary expansion remained well within the Credit Plan target for the year (12.8%) primarily because of the moderate build up in NDA. Within the NDA, both net budgetary and borrowings for commodity operations have also remained well within the credit plan targets. However, credit to private sector has exceeded the credit plan target and stood at Rs 345.1 billion as against Rs 330 billion envisaged for the year in credit plan. Expansion in NFA on the other hand exceeded the target (Rs 15 billion) and stood at Rs 37.8 billion owing mainly to the receipts of privatization proceeds and issuance of sovereign bond. The proceeds from privatization and sovereign bond not only helped build NFA but it also helped in containing the growth in NDA through the retirement of government debt held by the SBP. The stock of reserve money (RM) also expanded moderately by 9.3 percent (Rs 84.2 billion) compared with an expansion of 14.9 percent (Rs 114.9 billion) in the same period of last year. The growth of RM remained moderate primarily on account of substantial trade deficit that reduced the NFA of the SBP, and shifting of some of he government debt away from SBP to banks, which also reduced the NDA of the SBP. The main factors causing changes in monetary assets are given in Table-6.1 and cumulative growth of monetary indicators in Table-6.2..
Table-6.1 : Factors Causing Changes in Monetary Assets Sector/Factor Domestic Credit i) Government Sector Borrowing (Net) - Net Budgetary Support - Commodity Operations - Effect of Zakat Fund Non-Government Sector - Net credit to Private Sector & PSCEs a) Private Sector b) PSCEs c) Other Financial Institutions (SBP credit to NBFIs) iii) Other Items (net) Credit Plan Target 2005-06 365.0 120.0 98.0 20.0 2.0 320.0 320.0 330.0 -10.0 0 -75.0 15.0 380.0 (12.81) 01-07-2004 to Actual 2005-06 (July-April 22) 257.1 7.3 43.3 -35.6 -0.4 346.8 348.1 345.1 3.0 -1.3 -97.0 37.8 295.0 2004-05 (July-April 23) 260.5 14.3 15.0 -3.0 2.2 339.0 345.4 357.4 -12.4 -6.1 -92.8 71.9 332.4 (Rs billion)

ii)

Foreign Assets (net) Total Monetary Expansion (M2) (A+B) (Growth Rate %) Table-6.2 : Monetary Indicators, Cumulative Growth (Percent) 01-07-2005 Sectors to

(9.94) (13.37) Source: State Bank of Pakistan. FY05 FY04 FY03

88

Money and Credit


Money Supply (M2) Reserve Money Credit to private Sector Net Borrowing by Government Net Domestic Assets 9NDA) Net Foreign Assets (NFA) P: Provisional 22-04-2006 p 9.94 9.26 20.16 0.97 11.04 5.94 23-04-2005 13.37 14.86 28.05 2.18 13.69 12.32 19.30 17.62 34.36 14.59 22.38 9.22 19.62 15.44 34.27 9.71 23.67 8.07 18.02 14.52 20.88 -13.57 -0.55 133.91 Source: SBP

Bank Credit to Government The net bank credit to the government, used for financing commodity operations and budgetary expenditures, amounted to Rs 7.3 billion during July-April 22, 2006 against the annual target of Rs 120 billion and net borrowing of Rs 14.3 billion during the same period last year (Table-6.1). While credit to government for commodity operations continued to decline throughout the year, credit to government for budgetary purposes continued to rise (primarily from SBP) until the receipt of funds from privatization and issuance of bonds between March 31, and April 13, 2006. The net credit to government for budgetary purposes which had peaked at Rs 162.2 billion during July-March 11, 2006 (credit to government from SBP had also peaked at Rs 168.2 billion during the same period) sharply reduced to Rs 43.3 billion compared to the annual credit plan target of Rs 98 billion and Rs 15.0 billion borrowed in the corresponding period of last year. The net budgetary support to government decreased by about Rs 115 billion between March 31, and April 13, 2006 due to the inflow of proceeds from privatization ($1.12 billion) and sale of bonds in the international capital market ($0.8 billion). If these proceeds had not been materialized the credit to government for budgetary purpose from SBP would have totaled Rs 170 billion. Higher government borrowing for budgetary support reflects a large spending on earthquake related activities. Monetary expansion in fact picked up substantially after the October 8, 2005 earthquake when broad money supply grew by 5.6 percent after a contraction of 1.2 percent during the first quarter (July-September) of the current fiscal year. Bank Credit to private Sector Despite tight monetary policy stance of the SBP, credit to the private sector increased substantially; it grew by 20.2 percent (Rs 345.1 billion) during July-April 22, 2006 compared with the growth of 28.0 percent or Rs 357.4 billion during the same period of last year. Credit to private sector continued to exhibit strong demand, reflecting the confidence of private sector on the continuously improving macroeconomic fundamentals of the country. During the last three years (2003-05) the cumulative credit flow to the private sector amounted to Rs 931 billion, surpassing the total credit flow of Rs 580 billion in the previous ten years (1993-2002) by 61 percent. Net private sector credit-toGDP ratio also rose from 0.5 percent in 1999-2000 to 5.9 percent in 2003-04, and further to 6.7 percent in 2004-05 (Table-6.4). In the first nine months of the current fiscal year, the net private sector credit-to-GDP was 4.7 percent and is likely to rise further by the end of the current fiscal year. Although, the credit demand of the private sector remained strong its growth has nevertheless slowed considerably, declining from 28.0 percent to 20.2 percent owing to the tight monetary policy pursued by the SBP. The weighted average lending rate increased by 193 bps to 10.14 percent. It is worth pointing out here that despite considerable credit off-take the distribution of credit to the private sector is still heavily tilted towards capital-intensive sectors and hence the flow of credit to priority sectors like SMEs and agriculture including livestock is still low. Therefore, there is a need to channel more bank credit to these sectors for greater job creation and poverty alleviation. The distribution of credit to the private sector during July-March FY06 has been broad-based (Table-6.3). The manufacturing sector continued to be the largest recipient of bank credit amounting to Rs 130.0 billion during JulyMarch 2005-06, -- 17.1 percent more than the comparable period of last year. The overall manufacturing sector accounted for almost 47.9 percent of the credit to private sector businesses. Within the manufacturing sector, textile industry received Rs 69.5 billion or 53.5 percent followed by cement (Rs 15.1 billion), leather (Rs 2.2 billion), and

89

Economic Survey 2005-06 fertilizer (Rs 3.6 billion). Increase in the credit to cement industry is the result of rising construction activities in the country that prompted cement manufacturers to expand their capacity as credit off-take of construction industry stood at Rs 9.0 billion. Commerce -- related activities also picked up strongly as their credit off-take rose by 35.4 percent to Rs 51.2 billion. Wholesalers and retail traders as well as exporters received three fourth of the credit under commerce -- related activities. The growth in consumer loans remained robust, and their scale expanded by 27 percent to Rs 67.2 billion. Most of the consumer loans were acquired to finance a range of products including automobiles (Rs 23.2 billion) followed by personal loans (Rs 21.5 billion), credit cards (Rs 10.4 billion) and house building (Rs 10.1 billion). Three major reasons may be given to account for higher growth in consumer loans. First, banks are more interested in consumer loans due to relatively higher spreads. Second, consumers find these loans still affordable amid expectations that interest rates may rise in the near future. Third, some of the banks are working more aggressively to tap their potential customers for consumer loans. Sub-sectoral credit flow to the private sector is given in table-6.3.
Table-6.3: Scheduled Banks Credit to the private Sector Sector Overall Credit A. Advances to Private Sector Business 1. 2. 3. Agriculture Mining and Quarrying Manufacturing a) Textiles and Textile Products 1. Cotton b) Manufacturing of Leather c) Non metallic mineral Manufactures - Manufacturing of Cement d) Miscellaneous Construction Power Commerce a) Wholesale and retail trade b) Exporters c) Importers July-March FY05 347928 287104 14004 -5866 150880 94761 58928 873 15198 11773 35649 9000 2738 38605 28703 638 7094 20874 31523 25121 -1506 62331 (Rs million) July-March. FY06 340233 271372 -1952 1231 129862 69535 49147 2226 16780 15080 37952 9015 2375 51226 25886 12762 5060 5737 21586 51076 1628 67232 Source: SBP

4. 5. 6.

7. Transport, storage and communication 8. Services 9. Other private business B. Credit to trust and NPOs C. Personal loans

Credit Disbursement to Agriculture Credit disbursement to agriculture sector remained consistent with the previous year trend as the commercial banks maintained the lead in terms of credit disbursement over the traditional dominance of Zarai Taraqiati Bank Limited (ZTBL). The commercial banks disbursed the largest amount (Rs 57.9 billion or 63.6 percent) while the ZTBL extended credit of Rs 29 billion (or 31.8 percent) to agriculture sector during July-March FY06 (the latest available data). Private domestic banks disbursed credit amounting to Rs 10.9 billion compared to Rs 7.6 billion in the same period of last year. Banks disbursed development loans amounting to Rs 15 billion compared with Rs 13.7 billion last

90

Money and Credit year. Production loans stood at Rs 76.1 billion compared to Rs 60 billion in the corresponding period last year. Banks Credit to SMEs Sector Scheduled banks and DFIs advances to SME sector Table-6.4: Credit to Private Sector (CPS) witnessed a growth of 12.8 percent (Rs 40.6 billion) as percentage of GDP during July-February FY06 compared with an CPS (Stock) CPS (Net) expansion of 24.5 percent (Rs 59.9 billion) in the Year As % of As % of (Rs bln) (Rs bln) GDP GDP same period of last year. The break up of bank credit 1999-2000 754 19.9 18 0.5 to SMEs revealed that commerce and trade sector 2000-01 750 18.0 49 1.2 consumed the largest share of 54 percent (Rs 21.9 2001-02 841 19.1 53 1.2 billion). It was followed by manufacturing sector 2002-03 949 19.7 168 3.5 (35.7 percent or Rs 14.5 billion) due primarily to 2003-04 1274 23.0 325 5.9 higher demand from textile millers and ginners. 2004-05 1703 26.0 438 6.7 Commerce and Manufacturing sectors combined 2005-06* 2043 27.4 345 4.7 together accounted for 89.7 percent share in total * July-April 22, 2005-06 advances to SMEs as compared to 77.4 percent during the same period of last year. The other notable sectors, which obtained credit, included Services 10.8 percent (Rs 4.4 billion), and Transport and Communications 3.4 percent (Rs 1.4 billion). Components of Monetary Assets (M2) The components of monetary assets (M2) include: (i) currency in circulation, (ii) demand deposits, (iii) time deposits, (iv) other deposits (excluding IMF A/C, counterpart), and (v) residents foreign currency deposits. The developments in these components during the first nine months of the current fiscal year are presented below (Table-6.5, Fig-1). Currency in Circulation: In the first nine months of the current fiscal year, currency in circulation increased by 13.6 percent (Rs 90.7 billion), against 17.0 percent (Rs 98.4 billion) in the same period last year. As of 31st March 2006, currency in circulation constituted 23.3 percent of the money supply (M2), compared to 24.1 percent on the same date of last year (Table-6.5). The growth in currency-in-circulation was thus stable and quite compatible with the currency requirement of the economy.
Table-6.5 : Stock of Components of Monetary Assets (M2) Items Currency in Circulation Demand Deposits with banks(a) Other Deposits with SBP Time Deposits with banks(a) Residents Foreign Currency Deposit Money Supply (M2) As Percent of M2 Currency in Circulation 2003 494.6 (14.0) 608.2 (41.7) 3.5 (-74.7) 846.3 (16.4) 126.1 (-19.9) 2078.7 (18.0) 23.8 End June 2004 578.1 (16.9) 791.4 (30.1) 2.1 (-40.0) 969.2 (14.5) 145.7 (15.5) 2486.6 (19.6) 23.2 2005 665.9 (15.2) 955.0 (20.7) 3.3 (57.6) 1161.8 (19.9) 180.3 (23.7) 2966.4 (19.3) 22.4 (Rs billion) End March 2005 2006 756.6 676.5 (13.6) (17.0) 919.5 (16.2) 4.8 (128.2) 1029.0 (6.2) 172.1 (18.1) 2801.9 (12.7) 24.1 992.6 (3.9) 3.6 (7.0) 1305.4 (12.4) 190.0 (5.4) 3248.2 (9.5) 23.3

91

Economic Survey 2005-06


Table-6.5 : Stock of Components of Monetary Assets (M2) Items Demand Deposits Other Deposits Time Deposits Residents Foreign Currency Accounts (RFCD) M2/GNP (MP) Note: (a) 2003 29.3 0.2 40.7 6.1 36.8 End June 2004 31.8 0.1 39.0 5.9 37.0 2005 32.2 0.1 39.2 6.1 44.2 (Rs billion) End March 2005 2006 32.8 0.2 36.7 6.1 30.6 0.1 40.2 5.9

41.3 41.7 Source: State Bank of Pakistan.

Figures in parentheses represent growth in percent. Excluding inter-bank deposits, deposits of government and foreign constituents.

Deposits with Scheduled Banks: Scheduled banks Fig-1: Composition of M2 in March 2006 demand deposits witnessed subdued growth of 3.9 percent (Rs 37.6 billion) during July-March 2005-06, compared to their growth of 16.2 percent (Rs 128.1 billion) in the comparable period of last year. Slow down in deposit growth RFCD CC was mainly due to the deceleration in growth of foreign 6% 23% currency deposit. During most of July-February FY05, the DD upward pressures on exchange rate and the expectations of 31% the Rupee depreciation made foreign currency depositsTD FCDs rather attractive. Therefore, around 20.4 percent of 40% total mobilization was comprised of FCDs during that period. However, during July-February FY06, FCDs constituted 8.3 CC = Currency in Circulation DD= Demand Deposits percent of total deposit mobilization reflecting the TD= Time Deposits RFCD= Resident Foreign Currency Deposits expectations of exchange rate stability. Within the FCDs, the growth in deposits denominated in US dollars registered major slow down whereas those denominated in Euro witnessed a sharp growth. During July-March 2005-06 time deposits of the scheduled banks grew by 12.4 percent (Rs 143.6 billion) compared to their growth of 6.2 percent (Rs 59.8 billion) in the comparable period last year. As of end March 2006, time deposits constituted 40.2 percent of M2, compared to 36.7 percent in the same period last year. This reflects depositors preference for time deposits motivated by expectation of rise in the fixed deposit rates. The liquid reserves to money supply ratio (LRM) is another measure of monetary stability and is used to assess the vulnerability of domestic interest rates to fluctuations in the countrys external account. The LRM has been increasing since June 2000, which is an indication of a stable financial sector. It was only 5 percent in June 2000, increased to 28.8 percent in June 2004. LRM however, came down to 23 percent in March 2006 (Table-6.6, Fig-2 & 3). Gross liquid reserves have slightly come down from $ 12612.6 million in June 2005 to $12484.3 million in March 2006. While M2 stock has increased by 9.5 percent during the same period.
Table-6.6 : Key Indicators of Pakistans Financial Development Years 1990-91 M2/GDP 39.2 M1/M2 70.4 DD+TD/M2 65.1 TD/M2 31.5 (Percent) LRM 3.3

92

Money and Credit


1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00* 2000-01 2001-02 2002-03 2003-04 2004-05 July-March 2004-05 2005-06 41.7 44.4 44.7 43.8 43.3 43.8 45.1 43.6 36.9 36.7 40.0 43.1 44.9 45.1 42.6 42.1 66.2 59.9 55.1 51.0 51.3 42.1 39.8 50.2 52.8 49.9 49.8 53.2 55.2 54.8 57.1 54.0 69.3 71.2 73.0 73.3 74.3 76.8 77.4 77.5 74.6 75.4 75.4 76.2 76.8 77.6 75.9 76.7 31.6 34.6 35.9 36.0 36.7 36.7 37.1 40.3 39.2 40.0 41.3 40.7 39.0 39.2 36.7 40.2 5.0 1.8 9.9 10.2 7.4 4.5 3.3 6.3 5.0 7.9 16.8 29.9 28.8 25.4 27.1 23.1

Source: State Bank of Pakistan. * It may be noted that from 1999-2000 onward, GDP at new base (1999-2000) is used in the denominator; therefore, the earlier numbers are not comparable as they are based on 1980-81.

The M2/GDP ratio, which is an indicator of financial development continued to exhibit a rising trend increasing from 36.9 percent in 1999-00 to 44.9 percent in 2003-04 and further to 45.1 percent in 2004-05. In March 2006, M2/GDP ratio was 42.1 percent as compared to 42.6 percent on the corresponding date last year. Similarly other indicators of financial depth like the ratio of total deposits to M2 have also improved over the period (Table-6.6).
Fig-3:Trends in Liquid Reserves to M2
35 30 25 20

Fig-2: Trends in Money Supply


49 46 43

% of GDP

40

LRM/M2
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

37 34 31 28 25

15 10 5 0 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

M2/GDP

LRM

Measures of Money Supply and their Behaviour The annual trends of M1, M2 and M3 since June 1991 to March 2006 are given in Table-6.7, Fig-4.

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Economic Survey 2005-06


Table-6.7 : Stocks of Monetary Aggregates End Period Money Supply & Monetary Assets Stock (M1) (M2) (M3) June 1991 June 1992 June 1993 June 1994 June 1995 June 1996 June 1997 June 1998 June 1999 June 2000 June 2001 June 2002 June 2003 June 2004 June 2005 End March 2005 2006 265.1 302.9 327.8 358.8 423.1 448.0 443.6 480.3 643.0 739.0 761.4 876.8 1106.2 1371.6 1624.2 1600.9 1752.8 400.6 505.6 595.4 703.4 824.7 938.7 1053.2 1206.3 1280.5 1400.6 1526.0 1761.4 2078.7 2486.6 2966.4 569.40 679.2 777.3 923.4 1083.6 1246.3 1430.1 1696.8 1913.4 2137.2 2313.9 2640.9 3102.0 3519.4 3975.5 (Rs billion) (Percentage Change) (M1) (M2) (M3) 10.4 14.2 8.2 9.4 17.9 5.9 -1.0 8.3 33.9 14.9 3.0 15.2 26.2 24.0 18.4 7.4 26.2 17.8 18.1 17.2 13.8 12.2 14.5 6.2 9.4 9.0 15.4 18.0 19.6 19.3 12.9 19.3 14.4 18.8 17.3 15.0 14.8 18.6 12.8 11.7 8.3 14.1 17.5 13.5 13.0

12.7 16.7 3785.9 2801.9 7.6 9.5 7.9 4267.1 3248.2 7.3 Source: State Bank of Pakistan & E.A. Wing, Finance Division

M1 consists of the outstanding stock of Fig-4: Stock of Monetary Aggregates currency in circulation, the demand 4500 4250 4000 deposits of scheduled banks and the 3750 3500 other deposits with the State Bank of 3250 3000 Pakistan. M2 is M1 plus the outstanding 2750 2500 2250 stock of time deposits of scheduled 2000 1750 banks and the outstanding stock of the 1500 1250 1000 RFCDs. M3 includes: the outstanding 750 500 stock of the M2, outstanding deposits of 250 0 the national saving schemes (NSS), and 1993 1994 1995 1996 1997 1998 1999 outstanding deposits of the provincial M1 cooperative banks of the Punjab, Sindh, NWFP, Balochistan, AJK and the Northern Areas.
Rs. Billion

2000

2001

2002

2003

2004

2005

2006

M2

M3

During the first nine months of the current fiscal year, M1 increased by 7.9 percent against 16.7 percent last year. M2 has recorded a growth of 9.5 percent compared to 12.7 percent last year. The broadest monetary aggregate, M3, has increased by 7.3 percent during the first 3 quarters of 2005-06, compared to 7.6 percent in the comparable period last year. During July-March 2005-06 M3 increased by Rs 292 billion of which 96.6 percent was contributed by net changes in M2 and only 3.4 percent was contribution by the net accruals of NSS and provincial cooperative banks (Rs 10 billion). During the same period last year the entire growth in M3 was due to M2 as net accrual of NSS and deposits of provincial cooperative banks was negative. The SBP has taken a number of proactive and forward looking steps to strengthen the prudential regulations and monitoring framework. These measures are also meant to facilitate the farming community, ensure participation of non-banks in the secondary market for government papers/bonds, induce private sector to invest in the infrastructure

94

Money and Credit development projects, promote consumer and housing finance, SME sector and for improved governance of the financial system. Important policy measures taken by the State Bank during July-March 2005-06 are at Annexure-A. Interest Rate Trends SBP continued to exercise tight monetary policy stance and therefore it intervened quite frequently in the interbank money market to achieve the desired results; it conducted 82 OMOs and withdrew liquidity to the extent of Rs 486 billion (with average maturity of 8.3 days) against the injections of Rs 383 billion (with average maturity of 4.3 days) during July-April FY06. Therefore, average overnight rates remained above 7.8 percent for most of time since July 2005. Cut-off yields on 6-month and 12-month TBs since July 2005 rose by 30 bps to 8.29 percent and 34 bps to 8.79 percent, respectively (see Table-6.8). The average lending rate increased by a hefty margin, i.e., 193 bps to 10.14 percent during July-March FY06 (Table-6.9) due to the lagged impact of 5-6 percentage point increases in cut-off yields on various TBs last year. It is for the first time in many years that the inflation adjusted average lending rate has turned positive. It is expected that the private sector would now be more selective and prudent in terms of availing bank credit. The tight money market conditions were also reflected in rising interest rates in the secondary market, particularly the short-term interest rates as 6-month and 12-month KIBOR rose by 110 bps to 9.56 percent and 67bps to 9.75 percent, respectively. The long-term interest rates did not experience any significant changes from their trend levels due to lack of activity in long-term papers in the absence of PIB auctions for two consecutive fiscal years. Therefore, the higher pace of hike in short-term interest rates relative to long-term rates flattened the yield curve.
Table-6.8 : Auction of Market Treasury Bills (W.A. Yield) 2004-06 Date 6 Months 12 Months June 2004 2.08 2.69 July 2004 2.52 2.69 August 2004 2.62 2.83 September 2004 3.01 2.97 October 2004 3.19 3.84 November 2004 3.73 4.43 December 2004 4.16 4.43 January 2005 4.79 4.96 February 2005 5.18 5.49 March 2005 5.51 5.72 April 2005 7.08 7.10 May 2005 7.82 7.91 June 2005 7.94 8.40 July 2005 7.97 8.69 August 2005 8.12 8.78 September 2005 8.14 8.79 October 2005 8.14 8.77 November 2005 8.26 8.77 December 2005 8.25 8.76 January 2006 8.29 8.75 February 2006 8.29 8.78 March 2006 8.29 8.79 Source: State Bank of Pakistan
Fig-5: Rate of Return on T.Bills (2004-06)
10 9 8 7 6 5 4 3 2 1 0

The tight money market conditions also led the banking industry to raise the average deposit rate by 90 bps to 2.75 percent. However, this rise was not enough as the banking spread further rose by 103 bps to 7.39 percent since July 2005. (Table-6.9, Fig-6). The yields of T. bills are given in Table 6.8 and Fig-5.
De c04 O ct -0 4 04 05 Ju n04 Ju n05 r-0 5 Au gFe b6 Months

De c05

O ct -0 5

05

Au g-

12 Months

Table-6.9 : Interest Rate Structure in the Country (Percent) (June 2004 to March 2006)

(Weighted Average Rate)

Fe b-

Ap

06

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Economic Survey 2005-06


Lending Rate June 2004 December 2004 January 2005 February 2005 March 2005 April 2005 May 2005 June 2005 July 2005 August 2005 September 2005 October 2005 November 2005 December 2005 January 2006 February 2006 March 2006 5.05 5.92 6.68 6.17 6.57 6.78 7.66 8.21 9.07 9.00 9.46 9.74 9.77 9.53 9.76 10.17 10.14 Deposit Rate 1.21 1.30 1.35 1.37 1.43 1.55 1.71 1.85 2.06 2.16 2.21 2.31 2.37 2.55 2.62 2.75 2.75 Spread T. Bills (6 Months) 3.81 2.08 4.62 4.16 5.33 4.79 4.80 5.18 5.14 5.51 5.23 7.08 5.95 7.82 6.36 7.94 7.01 7.97 6.84 8.12 7.25 8.14 7.43 8.14 7.40 8.26 6.98 8.25 7.14 8.29 7.42 8.29 7.39 8.29 Source: State Bank of Pakistan

Strong demand for T. bills continued in the current fiscal year also. The SBP accepted Rs 688.8 billion from the primary market of T. bills during the first nine months of the current fiscal year compared to Rs 1052.0 billion in the last year (Table-6.10). During July-March 2005-06, 65.1 percent of the bid amount (Rs 1058 billion) was accepted by the SBP, compared to 65.0 percent of the bid amount during 2004-05. No PIB auction held during the JulyMarch 2005-06 period of the current fiscal year.

Figure-6: Weighted Average Monthly Lending and Deposit Rates (June 2004 to March 2006)
14 12 10 8 6 4 2 0
Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06

Spread

Deposit Rate

Lending Rate

Table-6.10 : Purchase and Sale of T.Bills 2004-05 Market Treasury Bills (MTBs) a) 3 Months b) 6 Months c) 12 Months Total MTBs * Average of minimum and maximum rates. Offered 1011.7 470.9 136.7 1619.3 Accepted 724.4 256.9 70.7 1052.0 W.A.* Rate 4.7 5.2 5.5 -

(Rs billion) 2005-06 (July-March) Offered 382.1 176.4 499.5 1058.0 Accepted 208.4 68.8 411.6 688.8 W.A.* Rate 7.8 8.1 8.6 -

Source: State Bank of Pakistan

96

Money and Credit Performance of Banks The financial sector in Pakistan comprises of commercial banks, foreign banks development finance institutions (DFIs), micro finance companies (NBFCs) (leasing companies, investment banks, discount houses, housing finance companies, venture capital companies, mutual funds), modarabas, stock exchange and insurance companies. As of 31st December 2005 there were 4 public sector banks, 4 specialized banks, 20 local private commercial banks, 11 foreign banks, 7 DFIs and 5 micro finance banks.
Table-6.11 : Branches of Domestic & Foreign Banks Dece Bank wise data shows that the share of the large five June June June June June mber banks in the incremental credit has increased from 2001 2002 2003 2004 2005 2005 48.8 percent during July-February FY05 to 55.9 i)Domestic 7272 7280 6819 6872 7089 7301 percent during FY06. As a result, the institutional Bank concentration in lending activities has increased. ii)Foreign 80 78 70 67 82 105 This can be attributed to: (1) rising credit to deposit Bank ratio, especially of the private sector banks and (2) iii) Total 7352 7358 6889 6939 7171 7406 the banks response to capital requirements. Source: State Bank of Pakistan. Specifically, due to strong sustained credit growth, the average credit to deposit ratio of the banking industry has increased substantially in the preceding three years.

74

00

76

The number of domestic bank branches, which was 6872 in June 2004, and 7089 in June 2005 further increased to 7301 in December 2005. The number of foreign bank branches also increased from 67 in June 2004, to 105 in December 2005 (Table-6.11 and Fig: 7).

Fig-7: Branches of domestic & foreign banks


82 80 00 00

80

78

00

78

105 82 70 67

Due to liberalized branch licensing policy, the branch network of banks has started increasing. The increase in branch network is particularly 7280 7272 7301 6872 6819 skewed towards private banks. The banks have opened 304 offices during the period from 01-042005 to 31-03-2006. Due to the instructions for opening of 20 percent of their branch expansion Domestic Banks Foreign Banks outside the big cities/Tehsil Headquarters by the large banks (with network of more than 100 branches) the reach of the financial services is expanding further and the banking services will be available to people living in rural/less developed areas. Due to the positive economic outlook the foreign banks have also started expanding their branch network. As of 31-03-2006, the total number of banks/offices in Pakistan is 7501.
00 62 00 64 00 66 00 68 00 70 00 72 00 60
01 02 03 04

00

During the first six months of the current fiscal year, total assets of all the scheduled banks increased by Rs 299 billion (8.9%) from Rs 3350 billion in June 2005 to Rs 3649 billion in December 2005. During July-March 2005-06, there was also an increase of Rs 303.9 billion (17.3%) in the net advances of the scheduled banks, from Rs 1759.6 billion in June 2005 to Rs 2063.5 billion in March 2006. Scheduled banks deposits have increased by Rs 272.9 billion (11.5%) during July-March 2005-06 or from Rs 2377.5 billion in June 2005 to Rs 2650.4 billion in March 2006. Total investments of all the scheduled banks have increased by Rs 77.1 billion during the first nine months of the outgoing fiscal year. In 2005, the banking sector produced impressive results. The year has been unprecedented in terms of profits. Higher lending rates and increased demand for private sector credit contributed significantly to the profitability of banks. The increase in profits has had a positive impact on return on assets and return on equity of the sector. As a result of on-going privatization and restructuring drive, majority of public sector banks have been privatized. In

20

20

20

20

20

05

97

Economic Survey 2005-06 2005, from the remaining 49 percent shares of Government in UBL, another 4.22 percent shares were offered to general public and recently the Government has announced another 10 percent divestment of UBL shares. IPO for shares of HBL owned by the Government is under consideration. Further, the government is contemplating to offload its remaining share holding in public sector banks through the local stock exchanges. Once this will happen, the percentage of banking sector in the private hands will increase even further. Non-Performing Loans The non-performing loans (NPLs) of commercial banks, specialized banks, and DFIs have declined during the first six month of 2005-06 from Rs 205.4 billion in June 2005 to Rs 195.7 billion in December 2005 - a reduction of 4.7 percent. The NPLs of commercial banks have declined from Rs 139.5 billion in June 2005 to Rs 136.4 billion in December 2005 and those of the public sector commercial banks have come down from Rs 39.8 billion to Rs 37.3 billion. The NPLs of the local private banks have come down from Rs 97.3 billion in June 2005 to Rs 96.7 billion in December 2005. The NPLs of the specialized banks have declined from Rs 61.9 billion in June 2005 to Rs 55.2 billion in December 2005. There was no major change in the stock of NPLs with respect to foreign banks and the DFIs during the period under review. Khushali Banks (KB) Around the globe micro-finance institutions is revolutionizing access to financial services to some of the poor and excluded segments of the market and establishing a niche within the financial services industry. Not only are these Institutions reaching out to the majority of the population especially in our part of the world but also their performance in terms of efficiency, productivity and portfolio quality continues to improve. Pakistan continues to be at the forefront of these developments and the Micro-finance Sector Development Program (MSDP) of the Government of Pakistan initiated some five years ago has had a profound impact on the micro-finance (MF) sector in Pakistan through the establishment of a pro-poor market-based formal financial sector oriented system. The new regulatory framework has facilitated the emergence of six licensed Micro-finance Institutions at district and national levels. With the support and guidance provided through MSDP, SBP has established a separate policy unit for MF and is proactively promoting a sound environment for sustainable MF operations within the country. Within the overall MSDP framework Khushhali Bank is the lead micro-finance institution in Pakistan and has since its establishment in August 2000, rapidly expanding its micro credit outreach and has well established its position as the largest MF bank in the country in terms of its clients and portfolio. The bank now serves nearly 250,000 clients, with cumulative disbursements of over Rs 6.0 billion through its branch network in 75 districts with high poverty incidence. The majority of KB clients are in rural areas (60%) and includes the very poor and roughly one-third of the beneficiaries being women. A study concluded by the ADB states that MF hold promise for the millions of poor households in Pakistan and demonstrate that given a supportive regulatory environment, it is possible for commercial micro-finance banks to meet a double bottom line of simultaneously pursuing profits and a humanitarian social mission. Perhaps other countries can follow the path of Pakistan in promoting the development of a sustainable micro-finance sector that improves the welfare of the poor. However, despite these successes, the MF sector in Pakistan is still at an early stage of development and the current outreach of MF services in the country is relatively low given the fact that nearly 25 percent of the countrys population is living below the national poverty line, estimated six million Pakistani households are in potential need of MF services. MFIs in Pakistan serve approximately 700,000 households and hold $ 100 million in loans outstanding, these figures indicate MFIs in Pakistan covers less than 12 percent of the potential market in terms of outreach. Women are still disadvantaged in terms of access to MF services representing only 45 percent of the total MF borrowers. Accordingly, the Government of Pakistan envisages the launch of the second phase of the Micro-finance Sector Development program MSDP in 2006 with the objective of facilitating further growth of a sustainable MF

98

Money and Credit system to provide permanent and diversified MF services for rural economic growth and poverty alleviation. Khushhali Bank will continue to play a lead role. SME Bank The year 2005 was a very challenging year for the SME Bank, as major restructuring of the bank, which started in 2004 continued in 2005. However, the bank completed another profitable year, and 2005 saw the SME Bank continue to strengthen its position as a small but key player in the SME Sector. Despite the difficult operating environment, the bank has posted a consolidated operation pre-tax profit of Rs 369.1 million in 2005 compared to last years pre-tax profit for Rs 711.3 million. (Table-6.12)
Table-6.12 : Key Financial And Operational Data of SME Bank 2005 Total Assets 7860.1 Total Income 872.3 Total Expenses 846.0 Profit before Tax 369.1 Earning per Share 1.66 2004 8411.0 819.9 750.6 711.0 4.17 2003 8225.3 1473.4 718.3 43.7 0.92 (Rs Million) 2002 15140.3 1558.2 895.3 49.8 0.94 Source: SME Bank

The bank has been assigned a long-term credit rating of BBB+ (Triple B Plus) and short term rating of A-2 (A Two) with stable outlook by JCR-VIS credit rating agency for the year 2005. Previously, the bank was assigned BB- & A-3 rating by the same rating agency. During the year under review SME Bank has improved its operating result and posted a pre-tax profit of Rs 369 million in 2005 (2004: Rs 703 million; which included an extraordinary accounting adjustment of Rs 421 million). Total income amounted to Rs 873 million (2004: Rs 820 million) of which treasury business generated Rs 414 million (2004: Rs 428 million) while performance of lending operations generated Rs 419 million (2004: Rs 366 million). Rs 344 million was generated through recoveries of old portfolio of defunct SBFC & RDFC (2004: Rs 224 million). Due to prudent fund management policies and utilization of surplus liquidity, the Bank was able to sustain its operation and remain profitable. Average lending rate of the bank for the year was 14.32 percent as compared to 13.82 percent in 2004. Gross advances extended showed steady growth and stood at Rs 1185 million in 2005 (2004: Rs 1136 million). Total disbursement of credit for 2005 stood at Rs 555 million as compared to Rs 388 million in 2004. Recovery from the stuck up portfolio of defunct RDFC and SBFC amounted to Rs 221 million and Rs 401 million, respectively as against Rs 176 million and Rs 370 million respectively last year. For enhancement of skill/knowledge base of human capital adequate funds were allocated for training and development of human capital in the year 2005. Given the focus of SME lending main emphasis of the training programme has been given to the development and up-gradation of credit skills of field officials. Housing Finance The Government of Pakistan, with a view to reviving and revitalizing the housing sector has recently notified the Housing and Construction as priority industry in category C of the Investment policy besides benefits related to relief in duty on construction equipments and some building materials. Even foreign investment has now been allowed in this sector. HBFC has played a very vital ole in economic development more significantly by financing construction of almost 434,298 housing units against total disbursement of Rs 37.167 billion. The Government is focusing for enhancing housing stock in the country to meet the annual demand as well as to clear the backlog, therefore 85 percent financing is needed for new construction units whereas 15 percent financing for the existing construction. HBFC has always been having a primary focus on low and middle-income groups of

99

Economic Survey 2005-06 population. The new management has re-affirmed this under its new Mission statement to be a socially responsible and commercially viable housing finance entity, maintaining its business focus on low and middle-income groups of population. During 2005-06 HBFC disbursed an amount of Rs 1312 million. HBFC has recovered an amount about Rs 3 billion in year 2005, which is the highest ever recovery in the history of the corporation. There are about 100,000 accounts (borrowers) as of December 2004, which were non-performing and were showing long outstanding defaults/overdues. A Relief Package was announced in the Budget 2005 for defaulting borrowers/partners, which has received positive response and 24335 HBFC partners have benefited by the scheme. In order to promote housing for low income and very poor people, a Social Housing Company is proposed to be set up by HBFC, to build low cost houses on the concept of incremental housing, which is also known as progressive housing. The housing projects based on this concept have been set up by an NGO, Saiban and are popularly known as Khuda ki Basti in Karachi and Hyderabad. Similar low cost housing scheme is being planned for Lahore, Gawadar and other cities.

100

Money and Credit Annexure-A Monetary and Credit Control Measures, 2005-06 I. II. III. IV. To prevent utilization of clean loans for Subscription in Initial Public Offering (IPO), SBP has advised banks/DFIs in July 2005 to institute necessary checks. In December 2005 SBP, directed all banks/DFIs to ensure that all advertisements in media soliciting deposit from the general public should explicitly indicate the annualized rate of expected return. For frequency and timelines of financial disclosure, on 1st September 2005, SBP decided that all banks/DFIs should prepare their quarterly financial statements within 30 days of the end of the respective quarter and ensure proper circulation among all shareholders. On 23rd September 2005, SBP clarified that the clean exposure to an SME entity, allowed under Prudential Regulations (PRs) for SME Financing, will not include the clean consumer financing limits. However, the banks/DFIs aggregate exposure on account of different clean facilities under the three heads of Corporate, SMEs and consumer financing should not exceed equity of the bank/DFIs. In order to provide a broader regulatory framework to the banks/DFIs and to set minimum standards, SBP has issued Prudential regulations for Agriculture Financing on 22nd October 2005. The banks/DFIs have been advised to take initiatives to ensure that agricultural financing is undertaken in a prudent manner. On 22nd October, the SBP decided to withdraw/cancel, with immediate effect, all redundant instructions issued through various circulars/circular letters on the subjects of (i) Norms of Efficiency; (ii) Bank Charges; (iii) Donations by Banks; (iv) Depreciation of Fixed Assets & Control on Expenditure; and (v) Rate of Interest/Rate of profit on PLS Deposits/Service Charges on PLS Deposit Account. Consequently, commercial banks do not have to take prior approval from SBP to make business and operational decision. On 28th October 2005, SBP has issued time frame to gradually raise the minimum paid up capital as well as Capital Adequacy Ratio based on Risk Weighted Assets (CAR) to further strengthen the solvency of individual banks/DFIs (both domestic and foreign). In order to encourage transparency, promote consistency in the market based pricing and improved management of the market risks undertaken by the banks, all the banks/DFIs were advised by SBP to use KIBOR of different tenors as a benchmark rate for determining pricing of all Rupee based Corporate/Commercial lending to their clients. SBP has decided in January 2006, that henceforth, the markup rate for financing provided by banks to the Governments and their agencies under commodity operations shall be negotiated bilaterally on the basis of KIBOR of relevant tenor. In February 2006 WAPDA Sukuk will be eligible for counting towards Statutory Liquidity Requirement (SLR) by Islamic Banks (IBs)/Islamic Banking Branches (IBBs). To encourage the participation of the private sector in wheat procurement, SBP decided on March 14, 2006, that the banks may provide financing facilities to their eligible borrowers (licensed wheat traders and the flour mills) for procurement of indigenous wheat only during the wheat procurement seasons 2006, subject to the following conditions; (a) The banks will be free to determine the markup for wheat procurement, depending upon the risk profile of borrower, which would be in excess of the rates charged by banks to the government agencies. (b) The banks may fix minimum margin requirement of 10% of the value of the wheat stock. (c) The loans provided to the private sector will be for the procurement of indigenous wheat only and shall be repayable on or before 31st January 2007 positively.

V.

VI.

VII. VIII.

IX. X.

101

TABLE 5.1 COMPONENTS OF MONETARY ASSETS


(Rs million) Stocks at end June (a) 1. Currency Issued 2. Currency held by SBP 3. Currency in tills of Scheduled Banks 4. Currency in circulation (1-2-3) 5. Scheduled Banks demand deposits (b)
6. Other Deposits with SBP (c)

1993 178,933 768 11,301 166,864 156,509 4,449 327,822 206,294 61,274 595,390 17.8

1994 199,070 624 13,738 184,708 168,554 5,506 358,768 252,497 92,134 703,399 18.1

1995 232,589 647 16,363 215,579 202,505 5,055 423,139 296,521 105,073 824,733 17.2

1996 253,908 470 19,328 234,110 207,108 6,791 448,009 344,713 145,958

1997 262,589 627 17,821 244,141 192,275 7,135 443,551 386,801 222,882

1998 293,263 1,572 18,769 272,922 200,997 6,412 480,331 447,433 278,556

1999 308,542 1,955 18,870 287,717 349,115 6,212 643,044 516,586 120,917

2000 376,997 1,851 19,468 355,677 375,397 7,959 739,033 549,124 112,475

7. M1 (4+5+6) 8. Scheduled Banks Time Deposits (b) 9. Resident Foreign Currency Deposits 10. Total Monetary Assets(M2) (7+8+9) 11. Growth Rate (%) Memorandum Items 1. Currency/Money Ratio 2. Demand Deposits/Money Ratio 3. Time Deposits/Money Ratio 4. Other Deposits/Money Ratio 5. RFCD/Money ratio 6. Income Velocity of Money (d)

938,680 1,053,234 1,206,320 1,280,547 1,400,632 13.8 12.2 14.5 6.2 9.4

28.0 26.3 34.6 0.7 10.3 2.3

26.3 24.0 35.9 0.8 13.1 2.4

26.1 24.6 36.0 0.6 12.7 2.4

24.9 22.1 36.7 0.7 15.5 2.5

23.2 18.3 36.7 0.7 21.2 2.4

22.6 16.7 37.1 0.5 23.1 2.4

22.5 27.3 40.3 0.5 9.4 2.3

25.4 26.8 39.2 0.6 8.0 2.4 (Contd.)

a. Last working day. b. Excluding inter-bank deposits and deposists of federal and provincial governments and foreign constituents. c. Excluding IMF A/C Nos 1&2, SAF Loans, deposits money banks. counter-part funds, deposits of foreign central banks, Foreign governments and International organizations. d. Income velocity of money is defined by the State Bank as GDP at current factor cost/quarterly average of Monetary Assets. Note: Totals may not tally due to rounding.

TABLE 5.1 COMPONENTS OF MONETARY ASSETS


Stocks at end June (a) 1. Currency Issued 2. Currency held by SBP 3. Currency in tills of Scheduled Banks 4. Currency in circulation (1-2-3) 5. Scheduled Banks demand deposits (b) 6. Other Deposits with SBP (c) 7. M1 (4+5+6) 8. Scheduled Banks Time Deposits (b) 9. Resident Foreign Currency Deposits 10. Total Monetary Assets(M2) (7+8+9) 11. Growth Rate (%) Memorandum Items 1. Currency/Money Ratio 2. Demand Deposits/Money Ratio 3. Time Deposits/Money Ratio 4. Other Deposits/Money Ratio 5. RFCD/Money ratio 6. Income Velocity of Money (d) 2001 396,548 1,905 19,178 375,465 374,675 11,292 761,432 610,458 154,154 1,526,044 9.0 2002 462,095 1,865 26,414 433,816 429,175 13,847 876,838 727,076 157,456 1,761,370 15.4 2003 527,557 2,565 30,415 494,577 608,170 3,499 1,106,246 846,321 126,138 2,078,705 18.0 2004 617,508 2,960 36,432 578,116 791,413 2,116 1,371,645 969,217 145,694 2,486,556 19.6 2005 712,480 3,107 43,472 665,901 954,998 3,335 1,624,235 1,161,823 180,295 2,966,352 19.3 (Rs million) End March 2005 717,086 3,199 37,376 676,510 919,539 4,827 1,600,876 1,028,967 172,074 2,801,918 12.7 2006 P 802,153 2,793 42,753 756,607 992,579 3,570 1,752,756 1,305,430 190,033 3,248,219 9.5

24.6 24.6 40.0 0.7 10.1 2.4

24.6 24.4 41.3 0.8 8.9 2.2

23.8 29.3 40.7 0.2 6.1 2.3

23.2 31.8 39.0 0.1 5.9 2.2

22.4 24.1 23.3 32.2 32.8 30.6 39.2 36.7 40.2 0.1 0.2 0.1 6.1 6.1 5.9 2.2 Source: State Bank of Pakistan

a. Last working day. b. Excluding inter-bank deposits and deposists of federal and provincial governments and foreign constituents. c. Excluding IMF A/C Nos 1&2, SAF Loans, deposits money banks. counter-part funds, deposits of foreign central banks, Foreign governments and International organizations. d. Income velocity of money is defined by the State Bank as GDP at current factor cost/quarterly average of Monetary Assets. P. Provisional Note: Totals may not tally due to rounding.

TABLE 5.2 CAUSATIVE FACTORS ASSOCIATED WITH MONETARY ASSETS


(Rs million) 1991 1 Public Sector Borrowing (net) ( i + ii + iii + iv + v + vi + vii ) i Net Budgetary Support ii Commodity Operations iii Zakat Fund etc. iv Utilization of privatization proceeds by Govt./WAPDA v Use of Privatization proceeds/ NDRP Fund for Debt Retirement vi Payment to HBL on A/C of HC&EB 2 Non-Government Sector i Autonomous Bodies1 ii Net Credit to Private Sector & PSCEs a. Private Sector b. Public Sector Corp. other than 2(i) 3 Counterpart Funds 4 Other Items (Net) 5 Domestic Credit (1+2+3+4) 6 Foreign Assets (Net) 7 Monetary Assets (5+6) 1992 1993 1994 1995 1996 1997 1998

A. End June Stock 201174 194501 18675 -12002 260962 9374 251588 221062 30526 -330 -36857 424949 -24305 400644 270165 257074 22869 -9778 292381 10661 281720 251311 30409 -151 -41500 520895 -15326 505569 345167 322772 30204 -7809 352954 14594 338360 309595 28765 -546 -52846 644729 -49339 595390 373433 345917 36786 -9270 392820 13744 379076 352363 26713 -388 -46537 719328 -15930 703398 426520 382336 41519 -11465 14130 462357 16955 445402 416094 29308 -464 -74705 813708 11027 824735 495047 434062 47377 -12522 26130 531064 20121 510943 478701 32242 -617 -58844 966650 -27971 938679 574023 504562 53079 -15392 36434 -4660 602828 29196 573632 546814 26818 -736 -61621 1114494 -61260 1053234 630745 552580 63664 -18518 37657 -5749 287 696672 28302 668370 632025 36345 -650 -45290 1281477 -75157 1206320

B. Changes over the year (July-June) 8 Public Sector Borrowing (net) ( i + ii + iii + iv + v + vi + vii ) i Net Budgetary Support ii Commodity Operations iii Zakat Fund etc. iv Utilization of privatization proceeds by Govt./WAPDA v Use of Privatization proceeds/ NDRP Fund for Debt Retirement vi Payment to HBL on A/C of HC&EB vii Others 9 Non-Government Sector i Autonomous Bodies1 ii Net Credit to Private Sector & PSCEs a. Private Sector b. Public Sector Corp. other than 2(i) 10 Counterpart Funds 11 Other Items (Net) 12 Domestic Credit Expansion (8+9+10+11) 13 Foreign Assets (Net) 14 Monetary Expansions (13+14) 27438 38332 -5315 -5579 2 2

68991 62573 4194 2224 -

75002 65698 7335 1969 -

28266 23145 6582 -1461 -

53087 36419 4733 -2195 14130

68527 51726 5858 -1057 12000 63429 3166 60263 57329 2934 -153 21139 152942 -38998 113944
3

80933 72457 5702 (2870) 10304 -4660 0 61879 -242 62121 59907 2214 -119 5152 147845 -33289 114556

56722 48018 10585 (3126) 1223 -1089 287 0 83414 -894 84308 74781 9527 86 26761 166983 (13897) 153086 (Contd.)

21702 592 21110 25096 -3986 178 4362 53680 5712 59392
2 2

31419 1287 30132 30249 -117 179 -4643 95946 8979 104925

60573 3933 56640 58284 -1644 -395 -11346 123834 -34013 89821

39866 -850 40716 42768 -2052 158 6309 74599 33409 108008

69537 3211 66326 63731 2595 -76 -28168 94380 26957 121337

4,9 7

* *

7,9

4,9

TABLE 5.2 CAUSATIVE FACTORS ASSOCIATED WITH MONETARY ASSETS


1999 1 Public Sector Borrowing (net) (i + ii + iii + iv + v + vi + vii) i Net Budgetary Support ii Commodity Operations iii Zakat Fund etc. iv Utilization of privatization proceeds by Govt./WAPDA v Use of Privatization proceeds/ NDRP Fund for Debt Retirement vi Payment to HBL on A/C of HC&EB 2 Non-Government Sector i Autonomous Bodies1 ii Net Credit to Private Sector & PSCEs a. Private Sector b. Public Sector Corp. other than 2(i c. PSEs Special Account Debt Repay d. Other Financial Institutions (NBFI 3 Counterpart Funds 4 Other Items (Net 5 Domestic Credit (1+2+3+4) 6 Foreign Assets (Net) 7 Monetary Assets (5+6) 2000 2001 A. Stock End June 583598 505887 67309 (21793) 37657 (5749) 287 816710 41351 775359 735887 43124 (3652) 0 (589) (73544) 1326175 (45629) 1280546 661832 545850 107403 (23616) 37657 (5749) 287 842752 68637 774115 754190 28826 (8901) 0 (611) (59087) 1444886 (44254) 1400632 601870 4998888 95311 (25524) 37657 (5749) 287 902603 75240 827363 750211 37036 (12241) 52357 (562) (6202) 1497707 28338 1526046 677054 567208 100642 (22991) 37657 (5749) 287 921596 60159 861437 841057 35563 (15183) 37877 (536) (67463) 1530651 230718 1761370 598623 511186 74047 (18805) 37657 (5749) 287 1048162 55370 992892 949030 32386 (18802) 30278 (586) (107258) 1539041 539664 2078704 2002 (Rs million) 2003

B. Changes over the year (July-June) 8 Public Sector Borrowing (net) (i+ii+iii+iv+v+vi+vii) i Net Budgetary Support ii Commodity Operations iii Zakat Fund etc. 9 Non-Government Sector i Autonomous Bodies1 ii Net Credit to Private Sector & PSCEs a. Private Sector b. Public Sector Corp. other than 2(i c. PSEs Special Account Debt Repay d. Other Financial Institutions (NBFI 10 Counterpart Funds 11 Other Items (Net) 12 Domestic Credit Expansion (8+9+10+11) 13 Foreign Assets (Net) 14 Monetary Expansions (13+14) (74824) # (75193) 8'#' 3645 (3275) 119214 13049 106165 103038 6779 (3652) 0 61 246 # 44697 29529 74226 78234 39963 40094 (1823) 26044 3125 22916 18303 9862 (5249) 0 (22) 14457 118711 1375 120086 (46731) (32315) (12508) (1908) 69194 11573 57620 48633 12327 (3340) 0 49 30863 53374 72654 126028 22177 14313 5331 2533 18993 (15081) 34074 52969 (1473) (2942) (14480) 26 (12040) 29156 206168 235324 (78361) (55952) (26595) 4186 148539 (4789) 153328 167723 (3177) (3619) (7599) (50) (61674) 8454 308946 317400 (Contd)

8@

@ 7 @ @

TABLE 5.2 CAUSATIVE FACTORS ASSOCIATED WITH MONETARY ASSETS


End March 2004 2005 A. Stock End June 1 Public Sector Borrowing (net) (i + ii + iii + iv + v + vi + vii) i Net Budgetary Support ii Commodity Operations iii Zakat Fund etc. iv Utilization of privatization proceeds by Govt./WAPDA v Use of Privatization proceeds/ NDRP Fund for Debt Retirement vi Payment to HBL on A/C of HC&EB 2 Non-Government Sector i Autonomous Bodies1 ii Net Credit to Private Sector & PSCEs a. Private Sector b. Public Sector Corp. other than 2(i c. PSEs Special Account Debt Repay d. Other Financial Institutions (NBFI 3 Counterpart Funds 4 Other Items (Net 5 Domestic Credit (1+2+3+4) 6 Foreign Assets (Net) 7 Monetary Assets (5+6) 656729 574886 65873 (16224) 37657 (5749) 287 1363669 34293 1329376 1274245 53852 (22108) 23387 (628) (116405) 1903367 583190 2486556 752515 646682 87836 (14198) 37657 (5749) 287 1782368 32224 1750144 1712093 44838 (23714) 16927 (539) (204929) 2329415 636938 2966352 2005 2006 P (Rs million)

667030 588893 59888 (13946) 37657 (5749) 287 1695238 33475 1661763 1622173 45363 (23108) 17335 (530) (192782) 2168956 632961 2801918

880145 807833 54671 (14554) 37657 (5749) 287 2122170 34634 2087535 2052325 42648 (23059) 15622 (536) (297487) 2704291 543928 3248219

B. Changes over the year (July-June) 8 Public Sector Borrowing (net) (i+ii+iii+iv+v+vi+vii) i Net Budgetary Support ii Commodity Operations iii Zakat Fund etc. 9 Non-Government Sector i Autonomous Bodies1 ii Net Credit to Private Sector & PSCEs a. Private Sector b. Public Sector Corp. other than 2(i c. PSEs Special Account Debt Repay d. Other Financial Institutions (NBFI 10 Counterpart Funds 11 Other Items (Net) 12 Domestic Credit Expansion (8+9+10+11) 13 Foreign Assets (Net) 14 Monetary Expansions (13+14) 58106 63700 (8174) 2581 315407 (21077) 336484 325215 21466 (3306) (6891) (42) (9147) 364326 43526 407852 95785 71796 21963 2026 418699 (2069) 420768 437848 (9014) (1606) (6460) 88 (88525) 426048 53748 479796 10301 127630 14008 161151 (5985) (33165) 2278 (356) 331568 339801 (818) 2410 332386 337391 347928 340232 (8489) (2190) (1000) 655 (6052) (1306) 98 3 (76378) (92558) 265590 374877 49772 (93010) 315361 281867 Source: State Bank of Pakistan

Till end June 1996 autonomous bodies consisted of WAPDA, OGDC, PTC, NFC,and 1 PTV, thereafter their composition has been changed as WAPDA, OGDC, PTC, SSGC SNGPL, KESC and Pakistan Railways. 2 3 4 5 6 7 8 9 #

Adjusted for SAF loans amounting to Rs 7371 million Adjusted for Rs 5278 million to exclude the impact arising due to mark up debited to the borrowers account. Adjusted for Rs 8207million being mark up debited to the borrowers account Credit to NHA by commercial Banks. Credit to NHA and CAA by commercial banks The difference in flow data is due to change in the composition of autonomous bodies. Special Account-Debt Repayment Adjusted. Difference in flow data is due to adjustment on account of non-government securities Adjusted for Rs 28.5 billion on account of Adhoc Treasury Bills created to offset the government losses due to the unification of exchange rate @' The difference in flow data is due to change in the total number of PSES Note: Figures in the parentheses represent negative signs. P : Provisional

TABLE 5.3 SCHEDULED BANKS POSITION BASED ON WEEKLY RETURNS: LIABILITIES AND ASSETS
(Rs million) Outstanding Amount at end June 1993 1994 1995 1996 1997 1998 1999 2000

LIABILITIES 1. Capital (paid-up) and Reserves Demand liabilities in Pakistan 36,011 2. Inter-banks Demand Liabilities 12,822 2.1 Borrowing (1,436) 2.2 Deposits (11,386) 3. Deposits (General) 217,711 4. Other Liabilities 9,112 5. Total Demand Liabilities (2+3+4) 239,645 TIME LIABILITIES IN PAKISTAN 6. Inter-banks Time Liabilities 4,937 6.1 Borrowing (3,976) 6.2 Deposits (961) 7. Time Deposits (General) 270,343 8. Other Liabilities 3,920 9. Total Time Libilities (6+7+8) 279,200 10. Total Demand and Time Liabilities 518,845 11. Borrowing From SBP 64,577 12. Borrowing from Banks Abroad 14,614 13. Money at Call and Short Notice in Pakistan 6,584 14. Other Liabilities 505,570 15. Total Liabilities 1,146,201 16. Total Statutory Reserves 26,271 16.1 On Demand Liabilities (12,311) 16.2 On Time Liabilities Assets (13,960) ASSETS 17. Cash in Pakistan 11,301 18. Balances with SBP 48,745 19. Other Balances 8,920 20. Money at Call and Short Notice in Pakistan 7,002 21. 17+18+19+20 as % of 10 14.6 FOREIGN CURRENCY 22. Foreign Currency held in Pakistan 2,194 23. Balances with Banks Abroad 6,190 24. Total Foreign Currency 8,384 BANK CREDIT ADVANCES 25. To Banks 7,830 26. To Others 308,992 27. Total Advances 316,822 28. Bills Purchased and Discounted 44,149 29. Total Bank Credit 360,971 30. 29 as % of 10 69.6 INVESTMENT IN SECURITIES AND SHARES 31. Central Government Securities 140,124 32. Provincial Government Securities 3,727 33. Treasury Bills 35,660 34. Other Investment in Securities & Sahres 31,331 35. Total Investment in Securities and Shares 210,842 36. 35 as % of 10 40.6 37. Other Assets 490,036 38 Advance Tax Paid 39 Fixed Assets 40 Total Assets 1,146,201 41 Excess Reserves (18-16) 22,474

43,770 14,532 (2,878) (11,654) 256,188 12,578 283,298 7,181 (3,333) (3,848) 342,368 4,812 354,361 637,659 70,583 14,217 6,721 640,164 1,413,114 32,219 (14,501) (17,718) 13,959 63,746 14,814 7,062 15.6 4,261 7,899 12,160 8,616 347,868 356,484 52,483 408,967 64.1 147,076 3,345 83,443 32,632 266,496 41.8 625,910 1,413,114 31,523

50,533 16,787 (5,104) (11,683) 296,739 16,500 330,026 9,059 (5,998) (3,061) 405,882 3,388 418,329 748,355 82,668 14,280 8,350 743,430 1,647,616 37,835 (16,919) (20,916) 16,363 78,503 11,012 8,814 15.3 3,017 8,163 11,180 13,482 413,811 427,293 59,649 486,942 65.1 166,687 3,340 90,059 35,210 295,296 39.5 739,506 1,647,616 40,668

56,255 13,281 (115) (13,166) 339,408 19,224 371,913 5,509 (2,965) (2,544) 495,677 4,737 505,923 877,836 56,914 13,424 8,070 897,892 1,910,391 44,295 (18,999) (25,296) 19,328 63,502 14,516 8,989 12.1 3,667 16,545 20,212 5,449 474,731 480,180 62,511 542,691 61.8 144,922 3,338 137,110 42,512 327,882 37.4 913271.0 1,910,391 19,207

60,935 13,722 (407) (13,315) 358,457 21,654 393,833 5,422 (3,618) (1,804) 571,574 5,369 582,365 976,198 77,999 14,622 5,370 993,960 2,129,084 49,078 19,960 (29,118) 17,821 89,756 16,864 5,772 13.2 4,647 10,918 15,565 3,690 552,522 556,212 70,675 626,887 64.2 134,417 2,399 167,945 39,023 343,784 35.2 1,012,645 2,129,084 40,678

91,060 10,991 (78) (10,913) 411,361 25,120 447,472 10,658 (7,744) (2,914) 628,076 7,141 645,875 1,093,347 113,919 16,518 7,768 264,981 1,587,593 55,056 (22,762) (32,294) 18,769 84,740 18,210 8,903 11.9 2,706 21,798 24,504 5,687 644,049 649,736 63,073 712,809 65.2 123,647 2,148 235,388 40,900 402,119 36.8 254,970 49,332 13,237 1,587,593 29,684

75,632 7,968 (61) (7,907) 454,072 38,491 500,531 8,633 (5,845) (2,788) 661,401 8,329 678,363 1,178,894 142,147 22,089 17,528 298,019 1,734,309 59,821 (25,903) (33,918) 18,870 100,335 19,116 18,095 13.3 2,981 39,019 42,000 4,402 725,852 730,254 63,774 794,028 67.4 115,671 1,969 204,160 69,069 390,869 33.2 255,378 69,564 26,054 1,734,309 40,514

79,648 8,580 (43) (8,537) 475,281 47,420 531,281 6,300 (5,674) (626) 652,279 10,759 669,338 1,200,619 141,016 16,657 42,469 321,224 1,801,633 59,287 (26,135) (33,152) 19,468 153,371 18,250 43,509 19.5 2,222 46,619 48,841 5,788 801,154 806,942 69,554 876,496 73.0 115,536 1,730 103,790 65,993 287,049 23.9 252,114 72,941 29,594 1,801,633 94,048 Contd.

TABLE 5.3 SCHEDULED BANKS POSITION BASED ON WEEKLY RETURNS: LIABILITIES AND ASSETS
Outstanding Amount at end June 2001 LIABILITIES 1. Capital (paid-up) and Reserves Demand liabilities in Pakistan 88,581 2. Inter-banks Demand Liabilities 12,282 2.1 Borrowing (34) 2.2 Deposits (12,248) 3. Deposits (General) 527,672 4. Other Liabilities 42,870 5. Total Demand Liabilities (2+3+4) 582,824 TIME LIABILITIES IN PAKISTAN 6. Inter-banks Time Liabilities 4,705 6.1 Borrowing (3,668) 6.2 Deposits (1,037) 7. Time Deposits (General) 712,978 8. Other Liabilities 9,494 9. Total Time Libilities (6+7+8) 727,177 10. Total Demand and Time Liabilities 1,310,001 11. Borrowing From SBP 139,367 12. Borrowing from Banks Abroad 15,169 13. Money at Call and Short Notice in Pakistan 30,293 14. Other Liabilities 400,517 15. Total Liabilities 1,983,928 16. Total Statutory Reserves 64,651 16.1 On Demand Liabilities (28,527) 16.2 On Time Liabilities Assets (36,124) ASSETS 17. Cash in Pakistan 19,178 18. Balances with SBP 147,962 19. Other Balances 18,033 20. Money at Call and Short Notice in Pakistan 31,179 21. 17+18+19+20 as % of 10 16.5 FOREIGN CURRENCY 22. Foreign Currency held in Pakistan 4,788 23. Balances with Banks Abroad 70,856 24. Total Foreign Currency 75,644 BANK CREDIT ADVANCES 25. To Banks 3,657 26. To Others 866,490 27. Total Advances 870,147 28. Bills Purchased and Discounted 75,504 29. Total Bank Credit 945,651 30. 29 as % of 10 72.2 INVESTMENT IN SECURITIES AND SHARES 31. Central Government Securities 101,161 32. Provincial Government Securities 1,836 33. Treasury Bills 123,889 34. Other Investment in Securities & Sahres 70,048 35. Total Investment in Securities and Shares 296934 36. 35 as % of 10 22.7 37. Other Assets 340,220 38. Advance Tax Paid 78,205 39 Fixed Assets 30,922 40. Total Assets 1,983,928 41. Excess Reserves (18-16) 83,311 *: Excluding Contra Items Note: Figures in the parentheses represent negative sing. P: Provisional 2002 2003 2004 2005 (Rs million) End March 2005 2006 P

85,886 13,261 (10) (13,251) 609,657 47,333 670,251 2,104 (659) (1,445) 803,749 12,808 818,661 1,488,912 135,556 12,642 31,877 546,159 2,301,032 73,677 (32,850) (40,828) 26,414 124,883 27,268 32,831 14.2 5,003 89,416 94,419 1,626 894,524 896,150 75,588 971,738 65.3 154,292 1,728 231,507 83,493 471020 31.6 456,377 64,270 31,812 2,301,032 51,206

112,230 9,937 (1) (9,936) 785,333 53,352 848,622 3,991 (621) (3,370) 903,153 16,020 923,164 1,771,786 137,882 21,243 28,551 468,312 2,540,004 87,893 (41,934) (45,959) 30,415 140,077 31,306 28,686 13.0 5,435 68,578 74,013 253 988,572 988,825 80,687 1,069,512 60.4 191,709 1,234 412,449 118,234 723626 40.8 353,842 49,789 38,738 2,540,004 52,184

131225 20755 (15) (20740) 1014947 56532 1092234 4806 (1878) (2928) 1026919 20703 1052428 2144662 162335 9872 27479 527452 3003025 105955 (53574) (52381) 36432 151406 36762 30444 12.0 4806 60976 65782 63 1258022 1258085 99924 1358009 63.3 240842 77 408438 132026 781383 36.4 442162 53879 46766 3003025 45451

190,652 22,993 (99) (22,894) 1,211,674 70,107 1,304,774 10,756 (1,024) (9,732) 1,231,745 27,288 1,269,789 2,574,563 185,068 6,245 22,243 645,616 3,624,387 127,041 (64,089) (62,952) 43,462 188,092 49,021 22,166 11.8 6,777 116,627 123,404 190 1,680,491 1,680,681 120,480 1,801,161 70.0 173,788 77 415,016 140,453 729334 28.3 563,552 42,386 61,809 3,624,387 61,051

174,285 11,629 (142) (11,487) 1,158,257 63,749 1,233,635 9,396 (1,338) (8,058) 1,090,199 23,782 1,123,377 2,357,012 177,220 7,245 31,466 595,393 3,342,621 116,799 (61,100) (55,699) 37,376 174,876 31,453 31,010 11.7 6,327 129,901 136,228 135 1,575,142 1,575,277 113,322 1,688,599 71.6

318,318 15,090 0 (15,090) 1,213,803 93,005 1,321,898 21,776 0 (21,776) 1,399,759 31,083 1,452,619 2,774,517 188,813 4,855 122,791 163,106 3,572,399 136,882 (65,340) (71,542) 42,753 203,623 37,020 132,540 15.0 7,595 62,233 69,828 0 1,969,452 1,969,452 127,120 2,096,572 75.6

191,816 177,173 77 65 318,787 410,053 141,793 156,088 652473 743378 27.7 26.8 490,250 171,057 45,346 7,204 55,010 68,425 3,342,621 3,572,399 58,077 66,741 Source: State Bank of Pakistan

TABLE 5.4 INCOME VELOCITY OF MONEY


Money Supply (M1) (Rs million) 73,560 80,926 96,542 103,445 118,968 134,831 159,625 185,080 206,359 240,157 265,141 302,908 327,822 358,768 423,139 448,009 443,551 480,331 643,043 739,033 761,432 876,838 1,106,246 1,371,645 1,624,235 1,600,876 1,752,756 Monetary Assets (M2) (Rs million) 104,621 116,510 146,025 163,267 183,905 211,111 240,023 269,514 290,457 341,251 400,644 5,055,569 595,390 703,399 824,733 938,680 1,053,234 1,206,320 1,280,546 1,400,632 1,526,044 1,761,370 2,078,705 2,486,556 2,966,352 2,801,918 3,248,219 Source: State Bank of Pakistan (Rs million) Income Velocity of Monetary Assets (M2) 2.7 2.7 2.7 2.7 2.7 2.6 2.5 2.6 2.7 2.7 2.7 2.7 2.3 2.4 2.4 2.4 2.5 2.3 2.4 2.7 2.6 2.5 2.3 2.2 2.2

End June Stock 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 End March 2004-05 2005-06 P P:Provisonal

TABLE 5.5 MONEY SUPPLY (M1, M2, M3)


End Period Stocks (last working day) 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 End March 2004-05 2005-06 P (P) Provisional Narrow Money (M1)a 73.56 80.93 96.54 103.45 118.97 134.83 159.63 185.08 206.36 240.16 265.14 302.91 327.82 358.77 423.14 448.01 443.55 480.33 643.04 739.03 761.43 876.84 1,106.25 1,371.64 1,624.12 1,600.88 1,752.76 % Change Monetary Assets (M2)a 104.62 116.51 146.03 163.27 183.91 211.11 240.02 269.51 290.46 341.25 400.64 505.57 595.39 703.4 824.73 938.68 1053.23 1206.32 1280.55 1400.63 1526.04 1761.37 2078.71 2486.56 2966.35 2801.90 3248.20 % Change Broad Money (M3)a 116.80 133.87 176.68 206.90 238.87 277.63 330.87 392.67 432.19 504.16 569.40 679.17 777.37 922.22 1083.73 1254.23 1435.48 1669.23 1921.47 2137.19 2313.87 2640.94 3102.00 3517.00 3975.50 (Rs billion) % Change

18.7 10.0 19.3 7.2 15.0 13.3 18.4 15.9 11.5 16.4 10.4 14.2 8.2 9.4 17.9 5.9 (1.0) 8.3 33.9 14.9 3.0 15.2 26.2 24.0 18.4 16.7 7.9

13.2 11.4 25.3 11.8 12.6 14.8 13.7 12.3 7.8 17.5 17.4 26.2 17.8 18.1 17.2 13.8 12.2 14.5 6.2 9.4 9.0 15.4 18.0 19.6 19.3 12.7 9.5

13.2 14.4 32.0 17.1 15.5 16.2 19.2 18.7 10.1 16.6 12.9 19.3 14.4 18.6 17.5 15.7 14.5 16.3 15.1 11.7 8.3 14.1 17.5 13.4 13.0

3785.90 7.6 4267.10 7.3 Source: Finance Division/SBP

TABLE 5.6 LIST OF DOMESTIC, FOREIGN BANKS AND DFIs (As on 31-12-2005)

Nationalized Scheduled Banks 1 First Women Bank Ltd. 2 National Bank of Pakistan 3 The Bank of Khyber 4 The Bank of Punjab Specialized Scheduled Banks 1 Industrial Development Bank of Pakistan 2 Punjab Provincial Co-operative Bank 3 SME Bank Limited 4 Zarai Taraqiati Bank Limited Private Local Banks 1 Allied Bank Limited 2 Askari Commercial Bank Limited 3 Bank Al Falah Limited 4 Bank Al Habib Limited 5 Bolan Bank Limited 6 Creacent Commercial Bank Limited 7 Dawood Bank Limited 8 Faysal Bank Limited 9 Habib Bank Limited 10 KASB Bank Limited 11 MCB Bank Limited 12 Meezan Bank Limited 13 Metropolitan Bank Limited 14 NDLC-IFIC Bank limited 15 PICIC Commercial Bank Limited 16 Prime Commercial Bank Limited 17 Saudi Pak Commercial Bank Limited 18 Soneri Bank Limited 19 Union Bank Limited 20 United Bank Limited

Foreign Banks 1 ABN Amro Bank N.V. Al-Baraka Islamic Bank B.S.C. (E.C.) 2 American Express Bank Limited 3 4 Bank of Tokyo Mitsubishi Limited 5 Citibank N.A. 6 Deutshe Bank A.G. 7 Habib Bank A.G. Zurich 8 Hong Kong & Shanghai Banking Corporation Limited 9 Oman International Bank S.A.O.G. 10 Rupali Bank Limited 11 Standard Chartered Bank Development Financial Institutions 1 House Building Finance Corporation 2 Investment Corporation of Pakistan 3 Pak Kuwait Investment Company of Pakistan (Pvt) Limited 4 Pak Labya Holding Company (Pvt) Limited 5 Pak Oman Investment Company (Pvt) Limited 6 Pakistan Industrial Credit & Investment Corp. Ltd. 7 Saudi Pak Industrial & Agricultural Investment company (Pvt) Limited Micro Finance Banks 1 Khushhali Bank 2 Network Micro Finance Bank Limited 3 The First Micro Finance Bank Limited 4 Rozgar Micro Finance Bank Limited 5 Tameer Micro Finance Bank Limited

Source: State Bank of Pakistan and Finance Division.

TABLE 5.7 SCHEDULED BANKS IN PAKISTAN (Weighted Average Rates of Return on Advances)
(Percent) As at the Precious End of Metal I. INTEREST BEARING 1999 Jun 13.39 (15.57) Dec 11.41 (16.50) 2000 Jun 11.10 (11.81) Dec 11.53 (12.73) 2001 Jun 11.75 (13.87) 2002 Jun 8.10 (8.14) 2003 Jun 12.01 (12.01) 2004 Jun 9.20 (9.20) 2005 Jun 8.51 (8.51) Dec 5.98 (6.05) II. ISLAMIC MODES OF FINANCING 1999 Jun 11.27 (10.01) Dec 10.91 (16.28) 2000 Jun 10.61 (11.10) Dec 11.24 (11.32) 2001 Jun 11.02 (11.28) 2002 Jun 9.30 (9.50) 2003 Jun 11.43 (11.43) 2004 Jun 10.86 (10.86) 2005 Jun 9.03 (9.03) Dec 7.72 (7.72) Stock Exchange Securities 14.15 (14.16) 13.79 (13.44) 13.76 (13.45) 13.57 (12.82) 13.54 (14.06) 11.27 (11.70) 11.97 (11.82) 6.01 (6.01) 6.86 (8.29) 8.01 (8.50) Merchandise 13.89 (13.91) 14.56 (14.35) 13.67 (13.83) 12.88 (13.68) 13.69 (13.59) 13.12 (13.13) 9.39 (9.67) 6.89 (7.08) 6.09 (6.01) 5.76 (5.47) Real Estate 14.08 (14.49) 13.75 (14.78) 12.23 (13.73) 12.90 (13.62) 12.84 (13.86) 12.72 (12.98) 12.63 (12.86) 9.08 (9.08) 6.68 (6.68) 8.47 (8.47) Financial Obligations 14.95 (15.13) 13.14 (13.25) 13.65 (14.03) 13.49 (13.56) 13.07 (13.00) 13.88 (13.81) 7.74 (7.66) 7.08 (7.03) 6.76 (6.70) 9.69 (9.69) Total Advances* 14.47 (14.88) 14.09 (14.75) 13.25 (13.77) 13.08 (13.58) 13.07 (13.64) 13.00 (13.29) 11.87 (12.35) 8.41 (8.54) 7.01 (7.01) 8.18 (8.16)

Machinery 15.19 (15.18) 14.17 (14.30) 13.15 (13.15) 13.82 (13.74) 13.50 (13.55) 13.56 (13.67) 15.66 (15.68) 11.21 (11.77) 4.59 (4.07) 7.53 (7.57)

Others 14.29 (16.11) 14.07 (16.29) 13.34 (13.98) 12.93 (13.36) 12.05 (13.87) 12.47 (13.39) 10.66 (11.49) 9.04 (9.05) 8.86 (9.02) 9.79 (9.80)

15.69 (15.39) 14.42 (14.51) 13.12 (13.48) 13.51 (13.68) 13.47 (13.57) 13.09 (13.33) 5.92 (5.77) 4.86 (5.28) 7.15 (7.17) 9.94 (10.00)

15.12 (15.03) 14.82 (14.68) 13.48 (14.07) 13.54 14.01 13.39 (13.88) 12.85 (12.73) 7.50 (7.95) 5.73 (5.96) 7.93 (7.95) 9.65 (9.68)

15.75 (15.92) 15.41 (15.45) 14.31 (14.39) 14.48 (14.53) 14.53 (14.42) 13.70 (13.81) 9.39 (9.54) 6.61 (6.81) 7.80 (7.88) 9.27 (9.25)

13.76 (14.92) 13.57 (14.84) 13.08 (14.39) 12.97 (14.24) 13.31 (14.52) 13.47 (14.05) 11.47 (12.08) 9.27 (9.68) 10.16 (10.22) 10.88 (10.90)

14.49 (14.57) 13.89 (13.86) 13.42 (13.40) 13.15 (13.09) 13.84 (13.86) 13.32 (13.22) 7.79 (8.62) 5.88 (5.82) 8.21 (8.19) 9.47 (9.44)

15.00 (15.87) 14.74 (15.82) 13.83 (14.94) 14.07 (15.09) 14.03 (14.78) 13.32 (14.00) 10.31 (10.84) 8.34 (9.01) 10.15 (10.67) 11.31 (11.80)

14.82 (15.23) 14.49 (14.96) 13.54 (14.27) 13.59 (14.24) 13.65 (14.24) 13.20 (13.52) 9.19 (9.71) 7.19 (7.60) 8.94 (9.13) 10.33 (10.47)

Source: State Bank of Pakistan * Weighted average rates shown in parentheses represent Private Sector.

TABLE 5.8 SALE OF GOVERNMENT SECURITIES THROUGH AUCTION


(Rs Million) Fiscal Year/ Securities 1993-94 MARKET TREASURY BILLS* A. Three Months Maturity Amount Offered ) Face Value i) Discounted Value Amount Accepted ) Face Value i) Discounted Value Weighted Average Yield Accepted ) Minimum % p.a. i) Maximum % p.a. B. Six Months Maturity Amount Offered ) Face Value i) Discounted Value Amount Accepted ) Face Value i) Discounted Value Weighted Average Yield Accepted ) Minimum % p.a. i) Maximum % p.a. C. Twelve Months Maturity Amount Offered ) Face Value i) Discounted Value Amount Accepted ) Face Value i) Discounted Value Weighted Average Yield Accepted ) Minimum % p.a. i) Maximum % p.a. 2 Pakistan Investment Bonds(PIBs)** A. Amount Offered 03 Years Maturities 05 Years Maturities 10 Years Maturities B. Amount Accepted a) 3 Years Maturities i) Amount Acepted(Face Val ii) Weighted average Yield # a) Minimum % p.a. b) Maximum % p.a. b) 5 Years Maturities i) Amount Acepted(Face Val ii) Weighted average Yield # a) Minimum % p.a. b) Maximum % p.a. c) 10 Years Maturities i) Amount Acepted(Face Val ii) Weighted average Yield # a) Minimum % p.a. b) Maximum % p.a. Note *: MTBs was introduced in 1998-99 **: PIBs was introduced in 2000-01 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01

147,735 143,719 45,985 44,893 6.660 14.616

82,245 80,670 21,085 20,725 6.931 8.958

107,720 105,147 72,720 70,984 6.849 12.221

343,937 322,564 102,669 96,161 10.599 15.740

205,980 197,165 85,515 81,909 7.092 10.355

115,753 109,916 69,538 66,066 7.138 12.876

283,038 247,934 78,960 69,148 10.098 16.000

181,014 164,416 51,200 46,514 7.584 10.871

75,122 67,584 54,017 48,431 7.777 12.935 58,814 8,534 6,674 43,606 46,123 4677

12.427 12.486 5,317 12.946 13.000 36,129 13.955 14.004 (Contd.)

Table 5.8 SALE OF GOVERNMENT SECURITIES THROUGH AUCTION


(Rs. million) July-March 2005-06

No. 1 A

Securities Market Treasury Bills Three Month Maturity Amount Offered i) Face value ii) Discounted value Amount Accepted i) Face value ii) Discounted value Weighted Average Yield i) Minimum % p.a. ii) Maximum % p.a.

2001-02

2002-03

2003-04

2004-05

128,358 125,693

109,106 108,332

216,637 214,315

1,011,659 1,002,708

382,139 375,153

72,862 71,429

29,231 29,042

115,575 115,174

724,359 716,768

208,406 204,673

5.362 12.150

1.658 5.815

0.995 1.702

2.017 7.479

7.549 8.100

Six Month Maturity Amount Offered i) Face value ii) Discounted value Amount Accepted i) Face value ii) Discounted value Weighted Average Yield i) Minimum % p.a. ii) Maximum % p.a.

287,853 276,882

747,018 731,354

328,990 326,114

470,885 460,185

176,412 168,495

163,665 157,934

349,009 341,225

158,430 157,256

256,914 251,166

68,803 66,182

5.645 12.555

1.639 12.404

1.212 2.076

2.523 7.945

7.968 8.291

Twelve Month Maturity Amount Offered i) Face value ii) Discounted value Amount Accepted i) Face value ii) Discounted value Weighted Average Yield i) Minimum % p.a. ii) Maximum % p.a.

202,984 187,339

695,425 665,337

476,719 466,729

136,713 128,569

499,507 457,491

84,568 78,444

264,938 253,908

241,019 236,421

70,688 65,799

411,590 378,652

6.383 11.984

2.356 6.941

1.396 2.187

2.691 8.401

8.456 8.791 (Contd.)

Table 5.8 SALE OF GOVERNMENT SECURITIES THROUGH AUCTION


(Rs. in million) July-March 2005-06

No. 2 A.

Securities Pakistan Investment Bond Amount Offered 03 Years Maturity 05 Years Maturity 10 Years Maturity 15 Years Maturity 20 Years Maturity Amount Accepted (a) 03 Years Maturity. (i) Amount Accepted (ii) Weighted Average Yield # (1) Minimum % p.a. (2) Maximum % p.a. (a) 05 Years Maturity. (i) Amount Accepted (ii) Weighted Average Yield # (1) Minimum % p.a. (2) Maximum % p.a. (a) 10 Years Maturity. (i) Amount Accepted (ii) Weighted Average Yield # (1) Minimum % p.a. (2) Maximum % p.a. (a) 15 Years Maturity. * (i) Amount Accepted (ii) Weighted Average Yield # (1) Minimum % p.a. (2) Maximum % p.a. (a) 20 Years Maturity. * (i) Amount Accepted (ii) Weighted Average Yield # (1) Minimum % p.a. (2) Maximum % p.a.

2001-02

2002-03

2003-04

2004-05

238,360 46,124 47,346 144,890 107,695

211,963 26,074 45,620 140,268 74,848

221,291 38,514 58,840 93,041 14,316 16,579 107,658

8,016 2,400 2,603 3,013 0 0 771

0 0 0 0 0 0 0

B.

24,819 8.356 12.475

9,651 1.792 7.952

14,533 3.734 4.235

100 0.000 0.000

0 0.000 0.000

24,382 9.392 12.994

14,369 3.119 8.887

27,765 4.867 5.270

427 0.000 0.000

0 0.000 0.000

58,194 10.420 13.981

50,828 4.014 9.587

51,606 6.168 7.127

244 0.000 0.000

0 0.000 0.000

6,996 7.683 8.994

0 0.000 0.000

0 0.000 0.000

6,757 8.706 8.993

0 0.000 0.000

0 0.000 0.000

Chapter 7.

CAPITAL MARKETS

Capital market in Pakistan have two main components namely; (i) an equity market represented by the stock exchanges and; (ii) an intermediated financial system dominated by an increasing number of non-bank financial institutions (NBFIs). The capital market in Pakistan has been witnessing rapid progress over the years amidst structural reforms in both its institutional set-up and operational matters since 1999-2000. The Government has promoted capital market developments through various fiscal incentives and policy inducement. Extensive reforms are aimed at strengthening the system and bringing the stock market of Pakistan at par with the leading stock exchanges of the world. The booming stock market of Pakistan is providing a breeding ground to the prospective investors for new and promising joint ventures. The buoyant mood in Pakistans stock markets prevailed for the last two years has broadened investor base. The Karachi Stock Exchange (KSE) share index and aggregate market capitalization (AMC) recorded an increase of 41.1 percent and 48.3 percent, respectively in FY05 and the Karachi Stock Market remained as one of the best performing markets around the world, for the last two years. In the fiscal year 2004-05, 15 new companies listed their shares worth Rs 26.06 billion on the KSE. Some mega offerings of Pakistan Petroleum, Kot Addu Power and United Bank were made through the privatization process. Likewise, debt securities also witnessed 7 new listings worth Rs 9.13 billion. Despite the high volatility experienced at the end of the third quarter of fiscal year 2004-05, the market gained its momentum and remained as one of the Best performing Stock market among some of the top equity markets of the world in 2005. Stock market in Pakistan has emerged as an important source of new capital for industrial and commercial establishment. Fiscal year 2005-06 continued to maintain its strong performance and achieved new heights by creating many new records. The KSE-100 Index crossed the barrier of 12000 mark for the first time in the history of capital market and touched an all time high on April 13, 2006. The KSE-100 index made further inroad and reached 12274 points on April 17, 2006 showing a growth of 64.7 percent over June 2005. Between December 2005 and April 2006 alone, the KSE share index increased by 25 percent. Similarly, the total market capitalization also increased to Rs 3419.4 billion on April 17, 2006 (US$ 57.0 billion) from Rs 2013.2 ($ 33.7 billion) showing a growth of 70 percent over June 2005. At current levels, KSEs market capitalization is equivalent to about 44.3 percent of estimated GDP of FY06. The improved performance of the stock market can mainly be attributed to consistent and transparent economic policies resulting in strong economic growth; a successful privatization process attracting foreign investors in prestigious organization like PTCL and National Refinery; sound monetary policy of the SBP, maintenance of fiscal discipline and the capital market reforms including development measures introduced and adopted by the stock exchanges with full support and guidance of the apex regulator, SECP. The governments economic policies and capital market reforms helped in promoting a fair, efficient and transparent capital market on the one hand, and also resulted in attracting investment and restoring investors confidence in the capital market on the other hand. The privatization of the government entities through the bourses helped to broad base the equity ownership to a significant level, indicative by as many as 1.4 million applications received for offering of Kot Addu Power Company. The buying euphoria in the stock market has been spurred by a number of other favourable factors including continuation of the present policies on banking sector by the SBP, renewed interest of large number of buyers of shares, bright prospect of reaping dividends, good capital gains and presence of institutional investors in the market. While, OGDC, cement and the banking sectors led the rally at KSE, taking it to historically high at 12274 points on

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Economic Survey 2005-06 17th April 2006, banking and cement were the most sought after stocks and OGDC was the volume leader. The KSE saw robust activity especially during the first 4 months of 2006, with all vital indicators pointing in the right direction. The stock market is likely to maintain its bullish trend by the end of the current fiscal year. The monthly trends of the leading stock market indicators are given in Table 7.1 and Fig: 1 (a) and (b).
Table-7.1 : Leading Stock Market Indicators on KSE, (KSE Index: November 1991=1000) 2004-05 2005-06 (July-April) Market Turnover of Market Turnover of KSE Index Capitalization Shares KSE Index Capitalization Months Share (end month) (Rs. billion) (billion) (end month) (Rs. billion) (billion) (end month) (end month) July 5209.9 1410.2 5.4 7179.0 2013.7 3.1 August 5346.2 1440.5 4.6 7796.9 2132.5 5.0 September 5217.7 1425.8 4.7 8225.6 2329.7 7.9 October 5332.2 1456.8 5.2 8247.3 2340.8 6.5 November 5567.8 1524.2 3.9 9025.9 2551.2 7.5 December 6218.4 1696.1 10.4 9556.6 2709.5 7.4 January 6747.4 1840.5 12.2 10524.2 2990.3 8.5 February 8260.1 2262.7 14.0 11456.3 3221.2 10.3 March 7770.3 2114.8 11.2 11485.9 3218.5 8.1 April 7104.7 2022.9 4.9 11342.2 3198.6 6.1 May 6857.7 1792.8 6.1 June 7450.1 2013.2 5.6 Source: Karachi Stock Exchange
Fig-1 (a): Trends in KSE Index
13,917 12,426 10,936 9,445
Rs. Billion

Fig 1. (b) Market Capitalization in KSE


3600 3400 3200 3000 2800 2600 2400 2200 2000 1800 1600 1400 1200 Jul(04-05) Sept Nov Jan Mar May Jul(05-06) Sept Nov Jan Mar

Basis Pts.

7,954 6,463 4,972 3,482 1,991 500

May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06

Market Capitalization

Out of the 16 leading stock markets in the world, the KSE share index increased by 53.6 percent in terms of US dollar during July-May 11, 2005-06, surpassed only by India and South Korea (Table-7.2 and Fig-2). The KSE 100 has been one of the best performing emerging markets in the recent past. In the past four years, with compound annual growth rate (CAGR) of 56 percent, it has performed better than many emerging markets. It is pertinent to mention here that all the 16 leading stock markets of the world posted positive growth in the current fiscal year ranging from 4.5 percent (New Zealand) to 67.5 percent (India). This indicates that the world economic recovery continued in the current fiscal year.

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Capital Markets
Table-7.2 : Performance of Global Stock Markets during July-May 11, 2005-06 Index (in local currency terms) Country May 11, 2006 30-June 2005 Pakistan 11,531.31 7,450.12 India 12,435.41 7,193.85 Indonesia 1,553.06 1,122.38 Taiwan 7,361.45 6,241.94 South Korea 1,464.70 1,008.16 Hong Kong 17,140.78 14,201.06 Malaysia 966.05 888.32 Japan 16,862.14 11,584.01 Singapore 2,620.58 2,212.66 Sri Lanka 2,235.50 1,897.78 China 1,545.69 1,080.94 Philippines 2,550.79 1,924.33 Australia 5,318.20 4,229.90 US 1,305.92 1,191.33 UK 6,042.00 5,113.20 New Zealand 3,738.15 3,246.49

% Change in USD 53.6 67.5 54.3 18.7 60.5 21.0 15.4 46.4 27.8 14.8 47.8 44.3 28.4 9.6 24.2 4.5 Source: Invisor Securities.

The Securities and Exchange Commission of Pakistan (SECP) has been actively pursuing a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market, based on sound regulatory principles that provide impetus for high economic growth. The reforms introduced over recent years in the fields of risk management, governance and transparency have contributed significantly towards the growth and development of capital market and building investor confidence. Various reform initiatives introduced during the outgoing fiscal year are documented in Annexure-1. Sectoral Performance

Fig-2: Performance of Global Markets (June-May 11, 2005-06)

60

% Change in US $

40

20

0
Pakistan Hong Kong South Korea Malaysia Japan Singapore Sri Lanka China Philippines Australia UK New Zealand India Indonesia Taiwan US

During the period from July 2005 to March 2006 the listed capital on KSE increased from Rs 438.49 billion to Rs 486.49 billion, reflecting an increase of around 11 percent. The market capitalization increased from Rs 2,071.18 billion to Rs 3,257.06 billion reflecting an increase of over 57 percent in the value of shares. Similarly, the average daily turnover of shares increased from 430 million to 462 million shares. The KSE 100 Index increased from 7450.1 points in June 2005 to 11485.9 as on March 31, 2006, reflecting an increase of about 54.2 percent. The KSE 100 index surpassed all the previous record and touched all time high on April 17, 2006 and stood at 12277.8 points. During the calendar year 2004, total profit before taxation of the 12 trading groups amounted to Rs 229.5 billion, which increased to Rs 326.3 billion in 2005 recording a growth of 42.2 percent. All the trading groups and companies except cotton and textile showed unprecedented growth during the first nine months of the outgoing fiscal year. Their performances are discussed below (Tables 7.3-7.6).

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Economic Survey 2005-06


Table-7.3 : Sectoral Performance on Karachi Stock Exchange General Index Sector 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Cotton and other Textiles Pharmaceuticals & Chemicals Engineering Auto & Allied Cables and Electrical Goods Sugar & Allied Paper & Board Cement Fuel & Energy Transport & Communication Banks other Financial Institutions Miscellaneous Overall/Total KSE Share Index July-March (Growth%) 2004-05 19.3 -1.6 46.1 28.7 -2.2 41.2 11.8 2.5 63.7 54.9 0.5 9.6 22.8 47.2 2005-06 -0.8 46.9 42.2 55.6 55.6 44.3 14.1 129.2 19.2 17.3 56.6 13.1 41.7 54.2 (Percent) Market Capitalization AMC July-March (Rs billion)* (Growth %) 2004-05 2005-06 2005* 2006* 34.3 10.4 119.2 113.6 23.3 59.8 195.8 272.6 70.4 40.0 11.5 13.0 22.2 68.2 47.3 67.6 29.2 94.5 9.3 17.7 33.4 46.1 14.8 18.7 -7.8 30.7 15.1 21.7 16.0 145.6 75.5 168.0 87.1 44.6 909.0 1287.9 60.0 11.7 309.7 318.7 59.8 160.3 298.9 770.3 10.5 34.0 108.5 148.7 55.8 59.9 2114.8 3218.5 0 0 0 0 Source: State Bank of Pakistan

* End March 2005 and 2006.

Cotton and Other Textiles: In this group there are three sub-groups: (a) textile spinning, (b) textile weaving & composite, and (c) other textiles. There were 213 companies listed with the KSE under this group in December 2005. The share index of cotton and other textiles slightly declined by 0.8 percent during the first nine months of the current fiscal year as compared to a growth of 19.3 percent in the same period last year. Its market capitalization however increased by 10.4 percent or by Rs 10.7 billion during July-March 2005-06. Pharmaceuticals & Chemicals: A total of 35 companies were listed with the KSE under this group at the end of December 2005. During the first nine months of the current fiscal year its share index has increased by 46.9 percent as compared to a decline of 1.6 percent in the comparable period of last year. Its market capitalization increased by a record 102 billion during July-March 2005-06 and stood at Rs 272.6 billion on 31st March 2006, showing an increase of 59.8 percent over June 2005. Auto and Allied: A total of 25 companies were listed with the KSE under this group at the end of December 2005. Its share index increased by 55.6 percent, while its market capitalization increased by 68.2 percent during the first nine months of the current fiscal year. Sugar and Allied: Under this group, a total of 37 companies were listed with the KSE with a market capitalization of Rs 18.7 billion. During the first three quarters of the current fiscal year. The share index of sugar and allied posted a growth of 44.3 percent as compared to a rise of 41.2 percent in the comparable period last year. Cement: At the end of 2005, there were 21 cement companies listed with the KSE. The cement industry was one of the best performing sectors in the stock market. Its market capitalization increased to Rs 168 billion on March 31, 2006 from Rs 68.4 billion in June 2005, recording a growth of 145.6 percent or an increase of almost Rs 100 billion. Cement was the second fastest growing sector in the KSE after banks and other financial institution. Fuel & Energy: A total of 28 companies were listed with the KSE. It is the most dominant group in the stock market. Its share index grew by 19.2 percent during the first nine months of the current fiscal year. Its market capitalization increased by Rs 397.0 billion to Rs 1287.9 billion in March 2006 from Rs 890.9 billion in June 2005. Its market capitalization constituted 40.0 percent of the aggregate market capitalization in March 2006. In the corresponding

106

Capital Markets date of the last year market capitalization of this group was 43.0 percent. A swelling fuel and energy sector continued to be one of the major market players in the current year along with transport and communication, banking and finance, and cement. The energy sector has been identified as an engine of growth along with 3 other sectors, (agriculture, small and medium enterprises and information technology) by the government. Companies like OGDC, PSO, SNGC, SSGC, Hub Power, and Pakistan Oil Fields etc. led the current years upsurge in the stock market. These companies were the main pillars of the stock market boom in the out-going fiscal year. Transport & Communication: At the end of 2005, there were 17 companies of this group listed with the KSE. Its share index and market capitalization increased by 17.3 percent and 11.7 percent respectively during July-March 2005-06 as compared to their rises of 54.9 percent and 60.0 percent respectively in the same period last year. Its market capitalization at Rs 318.7 billion constituted 9.9 percent of the aggregate market capitalization (AMC) in March 2006. Banks & Other Financial Institutions: In December 2005, a total of 164 companies were listed with the KSE. There are 4 sub groups in this group: banks & investment companies, modarabas, leasing companies, and insurance. During the current fiscal year, the share index of this group has increased by 56.6 percent as compared to a marginal growth of 0.5 percent in the same period last year. Its market capitalization increased by a record 160.3 percent making it the fastest growing business entity at KSE. The combined market capitalization of fuel and energy, and transport & communication and banking and other financial institutions was Rs 2376.9 billion on March 31, 2006, which constituted 73.9 percent of the AMC (Rs 3218.5 billion) as compared to their share of 71.8 percent on the corresponding date of last year. Miscellaneous: The miscellaneous group includes five sub-groups: jute, food & allied, glass & ceramics, vanaspati & allied, and others. In December 2005, a total of 87 companies were listed with the KSE. Its share index and market capitalization posted growth of 13.1 percent and 34.0 percent respectively in the first nine months of the current fiscal year, as compared to their growth of 9.6 percent and 10.5 percent in the same period last year. In December 2005, a total of 661 companies were listed on the Karachi Stock Exchange, including 213 companies in cotton and other textile, 164 in banks and financial institutions, 87 in miscellaneous group. In December 2004 a total of 663 companies were listed with KSE. As per the annual report of the KSE 2005, a total of 78 companies were delisted between 2000-05, including 5 companies in 2000, 12 companies in 2001, 24 companies in 2002, 8 companies in 2003, 18 companies in 2004 and 11 companies in 2005. During the same period a total of 74 companies were also merged including one companies in 2000, 7 companies in 2001, 16 companies in 2002, 8 companies in 2003, 39 companies in 2004 and 3 companies in 2005. In the calendar year 2005, the number of dividend paying companies was 300 compared to 282 companies in 2004. In 2005, 431 companies were profit making and 138 companies were shown as loss making. The ratio was 422 and 141 in 2004. The total before taxation profit of the 12 trading groups, listed with the KSE, amounted to Rs 229.5 billion in 2004, which increased to a record of Rs 326.3 billion in 2005, showing a growth of 42.2 percent. In the year 2005 all the 12 trading groups were shown as profit making ranging from Rs 1.5 billion (engineering) to Rs 110.6 billion, (Fuel & energy). Fuel & energy, banks and other financial institutions and transport & communication groups were the most important players in the stock market, earning highest ever profits. Fuel and energy earned a pre-taxation profit of Rs 110.6 billion in 2005 as compared to Rs 70.2 billion it earned in 2004. Banks and other financial institutions with a pre-taxation profit of Rs 92.8 billion was the second biggest profit-earning group in 2005 as compared to Rs 49.9 billion in 2004. Transport and communication earned pre-tax profit of Rs 42.2 billion during 2005. Commercial Banks with a pre-tax profit of Rs 69.6 billion topped the list followed by oil and gas exploration companies (Rs 68.1 billion). Other sectors, which earned higher pretaxation profit during 2005 were technology and communication (Rs 41.4 billion) and pharmaceuticals and chemicals (Rs 28.3 billion). Profit motivation was the most important force behind the bullish fervour in the stock market during the out going fiscal year. The group-wise number of companies and their performance is given in Table 7.4.

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Economic Survey 2005-06


Table-7.4 : Companies Listed on KSE and their Before Tax Profits S. No 1. 2. 3. 4. 5, 6. 7. 8. 9. 10. 11. 12. No. of Companies 2004 2005 217 213 38 14 25 10 37 13 21 26 14 159 89 663 35 13 25 09 37 12 21 28 17 164 87 661 Profit Before Taxation (Rs billion) 2004 2005 9.0 10.5 22.9 1.7 9.8 1.2 1.1 2.2 4.9 70.2 46.8 49.9 10.4 229.5 28.3 1.5 11.6 1.9 2.5 2.4 10.4 110.6 40.2 92.8 13.6 326.3 Dividend Paying Companies 2004 2005 62 59 24 7 13 4 11 7 10 19 4 81 40 282 24 5 15 5 20 8 9 16 6 99 34 300 Profit Making Companies 2004 2005 111 122 30 9 19 6 23 9 15 22 9 118 28 10 20 5 24 9 16 20 11 120 Loss making Companies 2004 2005 69 55 6 1 3 0 12 2 5 2 3 18 6 0 2 2 12 2 5 7 4 19

Name of Sector Cotton & other Textile Pharmaceutical & Chemical Engineering Auto & Allied Cables & Electric Goods Sugar & Allied Paper & Board Cement Fuel & Energy Transport & Communication Bank & Financial Institutions Miscellaneous Total

51 46 20 24 422 431 141 138 Source: Karachi Stock Exchange

The KSE is primarily influenced by some big blue chip companies including; OGDC, PTCL, Pakistan State Oil etc. During the first three quarters of the current fiscal year, the combined turnover of shares of ten big companies (OGDC, PTCL, Bank of Punjab, D.G. Khan cement, Fauji Fertilizer Bin Qasim, Pakistan Oil Field, National Bank of Pakistan, Muslim Commercial Bank, Pakistan State Oil and Hub Power Company) was 12.1 billion, which constituted 18.8 percent of the total turnover at the KSE. These ten companies earned a profit after taxation of Rs 95.5 billion in the current fiscal year up to March 2006. Out of Rs 95.5 billion profit after tax, the share of PTCL and OGDC was Rs 59.6 billion representing 62.4 percent of the ten big companies. In the first nine months of 2005-06, PTCLs after taxation profit was Rs 26.6 billion. The price-earning ratio of the ten big companies ranged from 4.94 in the case of Hub Power Company to 26.7 in respect of National Bank of Pakistan. This indicates that the business environment in the current fiscal year has improved appreciably for the blue chip companies. (Details in Table 7.5).
Table-7.5 : Price Earning Ratio July 2005 March 2006 No.of Shares (in Company billion) P.T.C.L. 3.8 Oil & Gas Development 4.3 National Bank of Pakistan 0.6 D.G. Khan Cement 0.2 Fauji Fertilizer Bin Qasim 0.9 Bank of Punjab 0.3 MCB Bank Ltd. 0.5 Pakistan State Oil 0.2 Pakistan Oil Fields 0.1 Hub Power Company 1.2 Total/Average 12.1 Profit After Tax (Rs billion) 26.6 33.0 6.2 1.7 1.8 2.4 8.9 5.7 3.8 5.4 95.5

EPS 7.05 7.67 10.57 9.12 1.96 8.21 17.43 33.17 28.63 4.65 1285

Rate

P/E Ratio

65.65 9.31 157.60 20.56 282.50 26.74 151.10 16.56 42.55 21.71 91.00 11.09 225.05 12.91 373.00 11.25 624.50 21.81 23.00 4.94 203.60 Source: Karachi Stock Exchange

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Capital Markets
Table-7.6 : Profile of Karachi Stock Exchange 2002-03 a) b) c) d) e) f) g) Number of Listed Companies New Companies Listed Fund Mobilized (Rs Billion) Listed Capital (Rs Billion) Turnover of Share ( Billion Nos) Average daily Turnover of Share (in million) Aggregate Market Capitalisation (Rs Billion) 702 2 23.8 300.9 53.1 257.0 755.8 2003-04 668 16 70.7 374.1 97.0 420.7 1357.5 2004-05 659 15 54.0 88.3 2013.2 2005-06 (July-March) 663 27 58.2 486.5 64.3 462.4 3215.5

Source: Karachi Stock Exchange.

Unprecedented growth in the leading market indicators was also witnessed in Lahore and Islamabad Stock Exchanges. The turnover of shares on the Lahore Stock Exchange (LSE) during July-March 2005-06 was 11.9 billion compared to 14.0 billion shares in the same period last year. Total paid up capital with the LSE increased from Rs 403.0 billion in June 2005 to Rs 448.0 billion in March 2006. The LSE index, which was 3762 points in June 2005, increased to 5510 points in March 2006. The market capitalization of the LSE has increased from Rs 1995 billion in June 2005 to Rs 3026 billion in March 2006. Six new companies were listed with the LSE during July-March 2005-06, as compared to 7 companies in the same period last year. A profile of LSE is given in Table-7.7.
Table-7.7 : Profile of Lahore Stock Exchange 2002-03 561 Number of Listed companies 2 New Companies Listed 4.1 Fund Mobilized (Rs Billion) 280.1 Listed Capital (Rs Billion) 28.2 Turnover of Share (Billion Nos) 115.5 Average daily shares (in mln) 2034.6 LSE Index 751.2 Market Capitalization (Rs bln) * The LSE launched the new LSE-25 index in December 2002. 2003-04 534 19 51.3 361.5 19.9 80.9 2828.3* 1406.2 2004-05 524 9 402.9 17.5 2005-06 (July-March) 524 6 37.2 447.7 11.9

65.4 69.5 5510.0 3762.3 3025.7 1995.2 Source: Lahore Stock Exchange

The overall trend in the Islamabad Stock Exchange (ISE) remained bullish during the period from July 01, 2005 to March 31, 2006. The ISE 10 index opened at 2438.79 points and while closing at 3387.3 on March 31, 2006; it has showed a growth of 39 percent. The pace of listing remained slow and only five new securities were listed at the ISE. The trade volume of ISE remained low as compared to last year. On regulatory side, some important developments also occurred. The ISE was the first exchange, which complied with the direction of the Federal Government by incorporating the changes in regulations for electing a non-broker Chairman of the Exchange. The ISE started

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Economic Survey 2005-06 functioning in August 1992 and within 14 years it has developed into a vibrant, efficient and stable market. A profile of the ISE is given in Table 7.8.
Table-7.8 : Profile of Islamabad Stock Exchange 2002-03 Number of Listed Companies New Companies Listed Fund Mobilized (Rs billion) Listed Capital (Rs billion) Turnover of Share (In Billion Nos) Average Daily Turnover of Share (in million) ISE Network Index Market Capitalization (Rs.bln) 260 1 11.5 233.0 2.1 8.4 8210.1 547.0 2003-04 248 6 14.5 287.5 1.5 6.0 11894.4 1082.9 2004-05 232 6 23.2 337.3 0.7 2.6 2005-06 (July-March) 239 5 1.2 364.1 0.2 1.7

13479.1 11541.4 2469.8 1558.4 Source: Islamabad Stock Exchange

The total funds mobilized during July-March 2005-06 in the three stock exchanges (KSE, LSE & ISE) amounted to Rs 96.6 billion, as compared to Rs 90.1 billion in the last fiscal year. The total turnover of shares in the three stock exchanges during the first three-quarters of the current fiscal year was 76.4 billion, compared to 88.5 billion shares in the same period last year. Mutual Funds Mutual Funds is an institution established for investing a pool of funds in various type of Securities for the benefit of investors. A small investor is unable to diversify his portfolio of funds simply because of high investment required for diversification. Mutual funds, therefore, provides a means of diversification of investment by small investors. Initially a mutual fund collect the funds from small investors, and when sufficient funds are gathered, then they are invested into the Securities of different types, thus diversifying the portfolio. A management company manages a mutual fund. The management company is a bank of human resources, considered to be professionally qualified personnel. A Portfolio Manager, whose responsibility is to be invested in, and satisfies the desire of the investors, manages the portfolio of mutual fund. There are two types of mutual funds, which are: (i) open-end mutual funds (ii) closed-end mutual funds. Open-end mutual funds are those where subscription and redemption of shares are allowed on a continuous basis. The price at which the shares of open-end funds offered for subscription and redemption is determined by the net asset value (NAV) after adjusting for any sales load or redemption fee. In Pakistan there exists thirteen open ended mutual funds listed at Karachi Stock Exchange. Closed-end mutual funds are those where the shares are initially offered to the public and are then traded in the secondary market. The trading usually occurs at a slight discount to the NAV. Over a period of time, the mutual fund managers have developed a variety of investment products to cater for the requirement of investors, having different needs. A mutual fund can generate profits from three different sources, namely; (i) dividend, (ii) capital gains, (iii) appreciation of share price. Mutual fund generates income from dividends received from other joint stock companies whose shares the fund holds. A mutual fund uses this dividend income to distribute dividend to its own stockholders. The capital gain generated by the mutual fund is also used to pay dividends to the investors of the fund. Mutual funds also increase the wealth/investment of their shareholder through appreciations of share price of the mutual fund.

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Capital Markets Currently thirteen open end and twenty-three closed-ended mutual funds are listed at Karachi Stock Exchange and there are many more funds in the pipeline. The mutual funds industry in Pakistan is worth about Rs 120 billion and about half a dozen open fund management companies are making progress. Presently the number of funds is over 30. During the calendar year 2005, 22 close-end mutual fund made a total profit of Rs 7.55 billion as compared to Rs 5.26 billion profit made by 16 close-end mutual fund during 2004. The State Bank of Pakistan has allowed mutual funds operating in Pakistan to invest abroad. But initially the SBP has placed a cap of $ 15 million on such investment by a single mutual fund at a given time. Development Finance Institutions (DFIs) During 2004-05, the DFIs disbursed Rs 24.7 billion and in the first six months of the current fiscal year (2005-06) they disbursed of Rs 10.6 billion. The loans disbursed by the specialized banks during 2004-05 amounted to Rs 47.0 billion, while, during the first six months of the current fiscal year, their disbursements amounted to Rs 23.1 billion. The Islamic Banks disbursed Rs 43.4 billion during 2004-05 while their disbursements were Rs 24.4 billion during the first six months of 2005-06. During 2004-05, Khushali Bank disbursed an amount of Rs 2.3 billion and during the first six months of 2005-06 its disbursement amounted to Rs 1.4 billion. All other Micro Credit Banks disbursed Rs 0.50 billion in 2004-05 while their disbursement during July-December 2005-06 amounted to Rs 0.4 billion. In the first nine months of the current financial year, sanctions and disbursements of the investment banks were recorded at Rs 8.0 billion and Rs 7.26 billion respectively. Total sanctions and disbursements of the housing finance companies (HFCs) amounted to Rs 0.43 billion and Rs 0.28 billion respectively in the first nine months of 2005-06. The leasing companies sanctioned an amount of Rs 18.55 billion out of which they disbursed Rs 18.28 billion while the modarabas sanctioned Rs 7.13 billion and disbursed Rs 6.94 billion, respectively in the first nine months of 2005-06. National Savings Schemes (NSS) The Central directorate of National Savings (CDNS) is an attached department of the Finance Division and perform deposit bank functions by selling government securities through a network of 367 savings centers, spread all over the country. There are about 6 million investors in national Saving Schemes (NSS). Presently, Defence Saving Certificates, Regular Income Certificates, Special Savings Certificates/ Accounts, Bahbood Saving Certificates, Savings Account, Pensioners Benefit Account and prize Bonds are in operation. Some of the popular schemes are discussed below: Defence Savings Certificates: Defence Savings Certificates were introduced by the Government of Pakistan in the year 1966 and are available in denominations ranging from Rs 500 to Rs 1,000,000/-. These certificates are issued for 10 years but encashable any time after one month. The certificates purchased on or after 01-07-2005 earn compound profit @ 9.46 percent per annum on maturity. The profits on the deposits exceeding Rs 150,000/- is subject to a withholding tax @ 10 percent. Zakat is collected only once at the time of actual encashment. These certificates are available at National Savings Centres, Pakistan Post Offices and the State Bank of Pakistan. There was withdrawal amounting to Rs 19.0 billion during July-March of the out-going fiscal year on this scheme. Bahbood Saving Certificates: This is a new scheme with 10 years maturity and has exclusively been launched for widows only. It offers profit on monthly basis. Presently on an investment of Rs 100,000/- the investor gets a monthly profit of Rs 920/- per months. The profit earned through this scheme is exempt from the compulsory deduction of Zakat and with holding tax. Premature encashment before completion of one, two, three, and four years entails service charges. The certificates are available in the denominations of Rs 5000/-, 10,000/-, Rs 50,000/-, Rs 100,000/-, and Rs 500,000/-. The minimum deposit limit in this scheme is Rs 5000/- while the maximum limit is Rs 3,000,000/-. These certificates are available at the National Saving Centers only. Pensioners Benefit Account: The PBA has specifically been launched for retired employees of government, autonomous bodies and armed forces. It offers profit on monthly basis. Presently on an investment of Rs 100,000/the investor gets a monthly profit of Rs 920/-. The profit earned through this scheme is exempt from a compulsory deduction of Zakat and withholding tax. Premature encashment before completion of one, two, three, and four years

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Economic Survey 2005-06 entails service charges. A maximum of Rs 3,000,000/- can be invested in this scheme in three installments. Prize Bonds: This is a bearer type security available in denominations of Rs 200, Rs 750, Rs 1500, Rs 7,500, Rs 15,000 and 40,000. No fixed return is paid but prize draws are held on a quarterly basis. Tax at the rate of 10 percent of the prize money is deducted at source. During the fiscal year 2004-05, net deposits with National Saving Schemes declined by Rs 39.4 billion as compared to a net increase of Rs 10.6 billion in 2003-04. In 2004-05 huge retirements were made in the case of Special Saving Certificates (Rs 83.3 billion), Regular Income Certificates (Rs 40.7 billion) and Defence Savings Certificates (Rs 8.7 billion). Net accruals on the other hand increased in respect of Bahbood Saving Certificates (Rs 60.7 billion), Pensioners Benefit Accounts (Rs 17.7 billion) and National prize Bonds (Rs 9.4 billion). (Table 7.9)
Table-7.9 : Net Accruals by National Saving Schemes 2002-03 Defence Saving Certificates Special Saving Certificates Registered Special Saving Accounts Regular Income Certificates Pensioners Benefit Accounts Bahbood Savings Certificates National Prize Bonds Others Grand Total 22.0 84.9 5.1 -14.9 10.2 26.8 9.1 143.2 2003-04 3.2 -13.2 2.9 -49.1 13.2 22.7 22.8 13.1 10.6 2004-05 -8.7 -83.3 -1.9 -40.7 17.7 60.7 9.4 7.5 -39.4 (Rs Billion) July-March 2004-05 2005-06 -5.2 -5.4 -42.2 -1.8 -34.1 15.0 49.9 5.2 2.5 -10.9 -45.3 -0.9 -11.4 14.0 50.1 3.3 1.5 6.1

Source: Directorate of National Savings.

Net accruals with the NSS increased by Rs 6.1 billion during July-March 2005-06 as against a decline of Rs 10.9 billion in the same period last year (Table 7.9). The Defence Savings Certificates, Special Saving Certificates, Regular Income Certificates, Savings Account and Special Saving Account have shown negative net receipts while the Bahbood Savings Certificates, Pensioners Benefit Accounts and Prize Bonds have recorded positive net receipts. Massive withdrawals of funds from some aforesaid savings schemes during the current fiscal year is mainly due to ban on institutional investment and better investment opportunities elsewhere, particularly in the stock market and real estate business. Keeping in view the increasing trend of interest rates in the financial market the Government of Pakistan has raised the nominal rates of returns on most of the schemes during the current fiscal year. In the case of Defence Saving Certificates the rate has been increased from 8.15 percent last year to 9.46 percent this year. Nominal rate on special saving certificates has been increased from 6.95 percent last year to 8.60 percent this year, nominal rate on saving accounts from 4.0 percent to 5.0 percent and nominal rates on Bahbood Saving Certificates and Pensioners Benefit Accounts from 10.08 percent to 11.04 percent. As a result of these increase, real deposit rates became positive for all the schemes except saving accounts and Prize Bonds (Table-7.10). During 2004-05 weighted average real

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Capital Markets deposit rate was negative (-2.01%) while in the current fiscal year it became positive (0.39%).
Table-7.10 : Nominal and Real Deposit Rates on Savings Schemes During 2002-2006 2002-03 2003-04 2004-05 Scheme (Maturity) Nominal Real Nominal Real Nominal Real Rate(p.a.) Rate Rate (p.a.) Rate Rate(p.a.) Rate 1. Defence Saving Certificates(10 Years) 2. Special Savings Certificate, Registered (3 Years) Regular Income Certificates (5 Years) Mahana Amdani Accounts (7 Years) Saving Accounts (Running Accounts) Pensioners Benefit Accounts (10 Years) Bahbood Saving Certificates Prize Bonds (Running Account) Weighted Average 10.03 8.67 6.93 5.70 7.96 7.27 3.36 2.67 8.15 6.95 -1.15 -2.35 2005-06 Nominal Real Rate (p.a.) Rate 9.46 8.40 1.16 0.10

3. 4. 5. 6. 7. 8.

9.12 10.41 5.00 11.04 6.00 8.8

6.02 7.31 1.90 7.94 2.90 5.7

6.96 10.41 4.00 10.08 10.08 5.0 7.2

2.36 5.81 -0.6 5.48 5.48 0.4

6.84 10.41 4.00 10.08 10.08 5.00

-2.46 1.11 -5.3 0.78 0.78 -4.30

8.88 10.41 5.00 11.04 11.04 5.00

0.58 2.11 -3.30 2.74 2.74 -3.30

2.6 7.29 -2.01 8.69 0.39 Source: Directorate of National Savings, Finance Division. Average inflation was 3.1% during 2002-03; 4.6% during 2003-04; 9.3% during 2004-05 and 8.3% during July-March 2005-06.

Two newly launched schemes namely Pensioners Benefit Accounts and Bahbood Saving Certificates remained very popular with their combined net accruals of Rs 64.1 billion during July-March 2005-06 as compared to their net accrual of Rs 64.9 billion in the same period last year. The Pensioners Benefit Account has been launched exclusively for retired government/semi government employees, whereas, the Bahbood Savings Certificates have been launched for widows and senior citizens (above the age of 60 years). Moreover, keeping in view the hardship faced by pensioners, senior citizens and widows; the Federal Government has allowed exemption from the deduction of withholding tax on both the schemes with effect from 1st July 2004. In order to provide small savers, an access to the stock market, the Government plans to give maximum administrative and operational autonomy to the CDNS enabling it to launch mutual funds on more professional lines. The accounts of the Directorate are being computerized and National Savings Centres are being shifted to better and specious places. The aforesaid measures will help to further improve the customer services.
National Savings has launched its software development project, the project of uplifting and upgrading the facilities at the offices of the National Savings, data entry project, and the establishment of main IT center and installation of hardware at pilot sites. The processing and selection of all the firms for four projects have already been made by the CDNS.

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Economic Survey 2005-06 Annexure-1 1) Capital Market Developments/Formulation of Securities Laws, Rules and Regulations. (i) Continuous Funding System (CFS): In order to alleviate the problems associated with COT/badla financing, on 22 August 2005 COT was replaced with the continuous financing system (CFS). CFS is an interim measure to enhance the level of liquidity in the market and to facilitate alternative modes of leverage financing such as margin financing and futures and options to develop. The Commission in consultation with the stock exchanges agreed to extend the time by half an hour for the Continuous Funding System (CFS) release session, and one hour for CFS funding after closure of the normal trading session, for the availability of CFS financing after close of the ready market, and to facilitate the market participants. SECP and the Karachi Stock Exchange are working towards separation of CFS and ready markets for risk management purposes. Currently, netting between CFS and ready markets results in reduced (or nil) exposure of a broker, which results in reduced (or nil) margin deposit with the exchange thereby exposing the exchange to greater risk. CDC has developed a functionality in the Central Depository System not only to segregate the book-entry securities held against CFS transactions but also to provide the segregated reports and national clearing company of Pakistan Limited (NCCPL) has developed a daily Surveillance Report of CFS Financier for monitoring compliance by the stock exchange. (ii) Amendments in Proprietary Trading Regulations: For the protection of investors and curbing market abuse, the proprietary trading regulations were amended on 7th October 2005 to disallow brokers from aggregating orders of clients. The amount of penalty for violation of the regulation was also increased from Rs 25,000/- Rs 100,000/- respectively. (iii) Amendments in Listing Regulations of the Stock Exchanges: In order to bring the Listing regulations of the stock exchanges in line with the Code of Corporate Governance, the Commission on 14 November 2005 made amendments in the listing regulations. Further, to protect the interest of the general public, allocation of shares to sponsors in excess of 25 percent and allocation of shares under Pre-IPO placement including employees of the companies/ group companies etc., shall not be saleable for a period of six months from the date of public subscription. (iv) Trading via account of other brokers bared: For the purpose of investor protection, market transparency and promoting fair and efficient market practices the commission issued a directive to exchanges on 23 September 2005 prohibiting brokers to trade through other brokerage houses within the same exchange w.e.f. 10 October 2005. The SECP is currently in the process of finalizing a code of conduct for financial analysts, which seeks to address pertinent areas and establish guidelines for preparing investment research reports and recommendations by analysts. (v) Standardization of Futures Contracts with Multiple Durations: The Commission on 17 October 2005 approved standardized futures contract specifications for thirty, sixty and ninety days futures contract on cash settlement. The standardized futures contract inter-alia includes the contract code, size, contract period, position limits and settlement terms. The Regulations Governing Futures Contract for 30, 60, and 90 days are currently being amended by KSE, in light of the daily settlement definition/methodology, initial

114

Capital Markets deposit, eligibility criteria for selection of scrips and the replacement of deliverables futures contracts with cash settled contracts. 2) Risk Management Governance and Transparency Measures In order to strengthen market integrity and minimize systemic risk, the Commission introduced the following risk management measures during the period under review; Pre-Trade Margin Verification system: KSE was directed to implement pre-trade margin verification to ensure that brokers do not exceed the capital adequacy and deposit requirements and to pre-empt any such move on part of a brokers. KSE implemented pre-trade margin verification systems in the ready market on September 12th 2005 and in the futures market on October 18th 2005. Exit Mechanism: It had been observed that such situations had emerged in the past when investors were unable to exit the market, due to a lock-in effect of the circuit breakers. Many investors have shown their concern on the nonavailability of exit opportunities in the event that share prices remain at the circuit breakers levels. The Commission strongly felt that there was a need for providing exit options to the investors. In this regard, the Commission on 6th December 2005 approved an Exit Mechanism as proposed by KSE for immediate implementation. Regulations for Good Governance: The Commission made regulations for the stock exchanges to provide for the election of the Chairman of the Board of Directors of the stock exchanges from amongst the non-member directors of the Board, to strengthen governance, enhance transparency, and reduce conflict of interest on the Board. Disclosure in Futures Market: SECP has been taking steps to make the futures market more transparent and enable more adequate disclosures of information for the benefit of investors. After looking at various practices from various jurisdictions, the exchanges were directed to disseminate through the exchange website, names of the top members in terms of open interest in futures without indicating whether the open interest is that of sale or purchase. 3) Work-in-Progress Unique Identification Number (UIN): In order to provide for a fair and efficient market and protect the interest of investors, a UIN system is being developed by central depository company. UNI system will create a traceable link between the orders executed through different brokers through the unique identification of the person and distinguish proprietary trades from customers trades. The system is expected to be implemented by 15th June 2006. Free Float Index: In order to ensure that the KSE-100 Index represents a fair picture of the market, the KSE has been advised to review/examine international best practices with respect to the construction of market indices based on parameters such as free float rather than the number of outstanding shares. The Commission in October 2005 granted approval to the KSE concept paper for the KSE-30 Sensitive Index. The companies on the index would be the top companies ranked on the basis of liquidity, market capitalization and a minimum free float of 10 percent. The system shall be ready for implementation by May 1, 2006 and integration and is keeping a close liaison with the stock exchanges and other stakeholders to drive the process. Demutualization of stock exchanges: The SECP set up a committee of local and international experts on demutualization of stock exchanges in the country. The committee submitted its report to the SECP on 2nd September 2004. The committee recommended demutualization and integration of existing exchanges through special legislation. Alternatively, the committee recommended that a new stock exchange sponsored by banks/financial institutions should become a National Exchange whether or not the existing stock exchanges merge into it. SECP is vigorously pursuing the process of demutualization. New Futures Trading Act: The Commission, through the assistance of external consultants under Asian Development Banks Technical Assistance, embarked upon the process of drafting comprehensive futures

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Economic Survey 2005-06 legislation. The draft Futures Trading Act has been prepared in order to protect the investors, provide sound development of the futures market and ensure that the trading is carried out in a fair and smooth manner. The final draft of the Futures Trading Act incorporates various revisions, amendments or additions as a result of the Commissions ongoing review and based on the feedback received from various stakeholders including legal practitioners. New Securities Act: The SECP is working on the Draft Securities Act, 2005 intended to replace the Securities and Exchange Ordinance, 1969. Currently, the SECP is in the process of reviewing/incorporating the comments received from various stakeholders including Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange in order to finalize the draft for onward submission to the Ministry of Finance for requisite approval.

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TABLE 6.1 SECTORAL INDICES OF SHARE PRICES (1990-91 = 100)


1997 1 2 3 4 5 6 7 8 9 10 Cotton and Other Textiles Pharmaceuticals & Chemicals Engineering Auto & Allied Cables and Electric Goods Sugar and Allied Paper and Board Cement Fuel and Energy Transport and Communications 11 Banks and Other Financial Institutions 12 Miscellaneous Sectors General Index of Share Prices Change (%) 84.44 252.20 107.52 104.95 142.12 80.27 125.13 144.71 266.27 82.40 1998 74.39 208.94 101.99 101.40 126.13 69.13 108.80 67.27 146.37 53.46 1999 72.80 189.68 94.70 100.00 112.13 70.79 92.77 68.41 156.01 72.59 2000 93.62 213.23 116.99 128.25 123.42 69.50 125.40 106.22 217.55 68.59 84.51 217.88 128.83 22.40 2001 89.31 203.68 113.34 123.63 116.96 84.45 114.27 87.17 190.75 53.04 2002 113.45 129.59 130.31 140.52 118.22 103.62 126.99 110.05 100.23 94.17 2003 163.80 207.31 248.91 362.53 209.60 181.84 229.46 217.65 194.84 200.00 217.30 223.20 204.10 91.20 2004 257.33 340.55 430.35 572.48 374.15 374.53 280.41 434.20 233.55 348.61 2005 252.20 283.60 573.60 570.20 319.90 336.10 276.70 393.70 341.50 520.40 (Indices) End March 2005 2006 300.07 323.36 629.47 708.60 343.85 370.33 305.77 406.72 387.59 501.74 252.75 415.03 811.42 885.13 507.35 489.79 313.45 895.35 445.89 631.24

104.97 78.10 76.60 209.58 190.31 191.66 143.02 99.47 105.25 (16.00) (30.50) 5.81

77.56 102.72 243.08 122.19 118.72 106.74 * (7.85) 6.74 *

346.86 321.50 329.85 494.99 331.10 349.80 354.48 389.80 312.70 362.80 371.66 510.06 53.20 16.00 18.86 40.59 Source: State Bank of Pakistan

Figures in the parentheses represent negative sign. * Base of share index has been changed from 1990-91 to 2000-01 - and as per old base (90-91) the general index of share price has increased by 6.74% during 2001-02.

TABLE 6.2 MARKET CAPITALIZATION OF ORDINARY SHARES


1997 1 2 3 4 5 6 7 8 9 10 11 1998 1999 2000 43.78 56.05 1.53 8.02 2.10 3.83 3.94 10.21 87.45 106.17 36.10 32.69 391.86 36.91 2001 38.40 47.97 1.52 7.93 2.12 4.53 4.54 10.21 79.68 70.77 38.38 33.20 2002 41.09 50.75 2.06 10.19 2.36 4.52 6.54 15.76 104.48 70.09 55.01 44.79 2003 65.68 108.20 4.30 30.55 4.45 7.22 12.00 33.54 191.54 123.29 99.67 65.99 2004 88.78 158.74 6.75 38.72 7.20 11.08 16.42 65.11 485.75 193.62 187.11 98.20 2005 (Rs billion) End March 2005 2006

Cotton and Other Textiles 35.28 25.13 27.43 Pharmaceuticals 75.57 47.33 48.06 Engineering 1.58 1.48 1.34 Auto & Allied 7.59 6.23 6.52 Cables and Electric Goods 2.68 2.02 1.61 Sugar and Allied 4.77 4.19 4.13 Paper and Board 3.45 2.50 2.82 Cement 14.45 6.51 6.11 Fuel and Energy 116.62 46.52 51.96 Transport and Communications 140.47 64.00 80.27 Banks and Other Financial Institutions 41.68 28.67 29.26 12 Miscellaneous Sectors 24.99 24.74 26.70 Aggregate Market Capitalization 469.15 259.28 286.22 Change (%) 28.40 (44.73) 10.39 - Figure in the parentheses represent negative signs

103.09 117.61 113.61 171.73 183.05 272.62 9.29 10.61 13.02 40.68 43.85 67.63 9.05 8.64 17.71 12.63 14.23 18.73 16.80 14.29 21.68 68.58 70.40 167.96 900.63 1004.88 1287.89 291.39 298.57 318.70 301.64 111.14 279.93 104.71 770.26 148.73

339.25 407.64 (13.42) 20.16

746.43 1357.48 2036.65 2150.77 7218.53 83.10 81.86 50.03 88.14 58.03 Source: State Bank of Pakistan

TABLE 6.3 NUMBER OF LISTED COMPANIES, FUND MOBILISED AND TOTAL TURNOVER OF SHARES IN VARIOUS STOCK EXCHANGES
1995-96 1996-97 1997-98 KARACHI STOCK EXCHANGE i) Total Listed Companies ii) New Companies Listed iii) Fund Mobilized (Rs billion) iv) Total Turnover of Shares (In billion) LAHORE STOCK EXCHANGE i) Total Listed Companies ii) New Companies Listed ii) Fund Mobilized (Rs billion) iv) Total Turnover of Shares (In billion) ISLAMABAD STOCK EXCHANGE a i) Total Listed Companies ii) New Companies Listed ii) Fund Mobilized (Rs billion) iv) Total Turnover of Shares (In billion) * Technical listing - Nil 38 20.77 5.20 24 19.67 2.6 28 11.95 0.2 12 3.3 0.1 10 0.7 2.8 14 15.5 8.1 773 2 2.2 15.0 2 * 0.3 5.6 2 * 11.3 0.5 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 765 1.6 25.5 1 9.8 1 5.0 3.3 0 0 3.1 2 0.4 1.6 762 1 0.4 48.1 747 4 3.6 29.2 614 3 2.5 7.8 281 5 0.8 1.4 712 4 15.2 29.1 581 3 14.2 18.3 267 3 3.7 2.7 702 2 23.8 53.1 561 2 4.1 28.2 260 1 11.5 2.1 668 16 4.2 97.0 647 18 3.1 19.9 251 8 2.6 659 15 54.0 88.3 524 5 42.1 17.5 232 5 27.6 July-March 2005-06 663 27 58.2 64.3 524 6 37.2 11.9 239 5 1.2

1.4 0.7 0.2 Source: SECP, KSE, LSE, ISE.

TABLE 6.4 NATIONAL SAVING SCHEMES (NET INVESTMENT)


(Rs. Million) Name of Scheme 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 July-March 2005-06

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Defence Savings Certificates National Deposit Scheme Khaas Deposit Scheme Premium Savings Scheme Special Savings Certificates (R) Special Savings Certificates (B) Regular Income Certificates Pensioners' Benefit Account Savings Accounts Special Savings Accounts Bahbood Saving Certificates Mahana Amdani Accounts Prize Bonds Postal Life Insurance Grand Total

31,405.3 (932.3) (219.8) 14,902.5 (1,266.5) 16,472.1 (5,588.9) 3,849.9 149.6 9,546.6 1,464.0 69,782.4

32,271.9 (115.8) (48.0) 20,194.7 (1,670.7) 54,408.6 (6,699.7) 2,607.1 48.1 10,510.9 2,138.9 113,647.4

38,349.8 (52.4) (20.5) 24,956.7 (883.0) 59,099.4 2,296.6 5,879.9 16.5 10,125.7 2,548.1 142,241.2

41,212.3 16,580.3 (17.2) (21.5) (52.9) (51.1) 19,395.8 9,431.1 (507.3) 196.3 26,111.6 8,643.2 (196.7) (2,105.0) 5,450.9 3,626.5 13.8 52.8 (32.3) 10,390.6 4,131.0 4,377.4 95,508.9 51,120.5

22,037.3 (6.3) (12.1) 36,443.2 (203.3) 11,046.3 (329.8) 4,266.9 92.8 11,588.0 6,448.3 91,371.3

21,990.5 (5.7) (13.5) 84,899.1 (11.1) (14,923.9) 10,170.0 1,638.1 5,135.0 129.5 26,840.1 7,367.7 143,215.8

3,238.3 (8,759.1) (4,908.6) (6.8) (1.3) (2.2) (23.4) (5.4) 14.2 (13,199.3) (83,311.9) (42,710.5) (2.6) (4.6) (0.3) (49,090.5) (40,663.0) (11,298.1) 13,209.3 17,737.2 13,997.4 (729.6) (2,891.4) (4,855.3) 2,894.1 (1,904.8) (1,098.1) 22,691.0 60,654.6 50,121.9 120.9 85.9 11.6 22,841.9 9,357.0 3,315.6 8,668.7 10,335.2 6,052.7 10,612.0 (39,371.6) 6,840.3 Source : Directorate of NSS

Table 6.5 LOANS DISBURSED BY DFIs AND OTHER FINANCIAL INSTITUTIONS


(Rs. Billion) Name of Institutions 1. DFIs 2. Special Banks 3. Islamic Banks 4. Khushadi Bank 5. Micro Credit Bank 6. Leasing Companies 7. Investment Banks 8. Modarabas 9. Housing Finance 10. Discount Houses * July-March 2004-05 2001-02 2.9 11.3 2.5 0.2 0.0 15.9 4.4 4.8 0.1 0.1 2002-03 8.7 25.2 11.1 1.6 0.1 16.0 7.6 6.1 0.8 0.2 2003-04 13.1 38.8 17.9 1.3 0.3 18.6 7.5 6.5 2.4 2.7 2004-05 24.7 47.0 43.4 2.3 0.5 16.5 7.4 7.3 0.3 2.6 July-Dec. 2005-06 10.6 23.1 24.4 1.4 0.4 * 12.6 * 4.4 * 4.9 * 0.2 * 0.3 Source: SBP & SECP.

TABLE 6.6 MARK UP RATE/PROFIT RATE ON DEBT INSTRUMENTS CURRENTLY AVAILABLE IN THE MARKET
S.No. Schemes Markup/Profit Rate Maturity Period Tax Status

1. Foreign Exchange Bearer Certificate (FEBC) a. If Certificate of Rs 1000 encashed before 1 year investor will get Rs 1000 (face value) b. If Certificate of Rs 1000 encashed after 1 year investor will get Rs 1145 Sale under this scheme has c. If Certificate of Rs 1000 encashed after 2 year investor will get Rs 1310 already been discontinued, from d. If Certificate of Rs 1000 encashed after 3 year investor will get Rs 1520 December 1999 however, on e. If Certificate of Rs 1000 encashed after 4 year investor will get Rs 1740 outstanding balance till maturity, f. If Certificate of Rs 1000 encashed after 5 year investor will get Rs 1990 rate will be applicable g. If Certificate of Rs 1000 encashed after 6 year investor will get Rs 2310 2. Foreign Currency Bearer Certificate (FCBC), 5 years 3. Special US$ Bonds a) 3 year maturity b) 5 year maturity c) 7 year maturity Scheme has already been discontinued w.e.f. February 1999. Only repayment is made

LIBOR+1.00% LIBOR+1.50% LIBOR+2.00%

The rates are effective form Sept. 1999. If bonds are encashed before one year no profit will be paid.

4. Pakistan Investment Bonds: As on 30th June 2001 Tenor Rate of Profit 3-Year Maturity 6.0% p.a 5-Year Maturity 7.0% p.a 10-Year Maturity 8.0% p.a 15-Year Maturity 9.0% p.a 20-Year Maturity 10.0% p.a 5. Unfunded Debt Defence Saving Certificates National Deposits Schemes Special Saving Certificates (R) - For each of 1st five profit - For the last one profit Special Saving Certificates (B) Regular Income Certificates Khas Deposit Scheme Mahana Amdani Accounts Saving Accounts Bahbood Savings Certificate Pensioners' Benefit Account Prize Bonds p.a. Per annum B Bearer R Registered m on maturity

These coupon rates will effective from October, 2003 for PIBs of 3.5 10 years maturity while PIBS of 15 and 20 years maturity launched on Jan 20,2004 the respective coupon rates will effective since then

9.46% p.a (m) 13.00% p.a. 8.40% p.a. 9.60% p.a. 12.36% p.a.(m) 8.88% p.a 13.42% p.a. 10.41% p.a.(m) 5.00% p.a. 11.04% p.a. 11.04% p.a. 5.00% p.a.

10 Years 7 Years 3 Years

Taxable for deposits exceeding Rs.150,000 made on or after 01-07-2002 Taxable and discontinued Taxable for deposits exceeding Rs.150,000 made on or after 01-07-2002 Taxable and discontinued Taxable Taxable and discontinued Taxable on installment exceeding Rs.1000. Taxable for deposits exceeding Rs.150,000 made on or after 01-07-2002 Taxable for deposits exceeding Rs 150,000 Source: SBP and Directorate of National Savings

3 Years 5 Years 3 Years 7 Years Running account 10 Years

Chapter 8.

INFLATION

Introduction Inflation seemed to be a chronic problem in many parts of the world. There is a wide spread recognition that inflation results in inefficient resource allocation and hence reduces potential economic growth. Inflation imposes high cost on economies and societies; disproportionately hurts the poor and fixed income groups and creates uncertainty throughout the economy and undermines macro economic stability. High inflation has always penalized the poor more than the rich because the poor are less able to protect themselves against the consequences, and less able to hedge against the risks that high inflation poses. Lowering inflation therefore, directly benefits the low and fixed income groups. Pakistan has witnessed a low inflation environment for the last several years but experienced a sharp picked up last year at 9.3 percent. Among the more welcome 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 2005 to April 2006), all important barometers of price pressure in the economy indicate a steady deceleration in inflation. Hence, inflation as measured by the Consumer Price Index (CPI) declined from 9.0 percent in the beginning of the fiscal year, to a period-average of 8.0 percent in July-April 2005-06. The salutary trend in prices is reflected in the steeper fall in year-on-year inflation, which declined to 6.2% in April 2006 compared to April 2005 its lowest level in 23 months. On current trends, and barring any adverse shocks, it is expected that inflation, as measured by CPI, would be within the target of 8.0 percent set by the government for the full year. This development with regard to prices is also reflected in the other measures of inflation used in Pakistan, namely core inflation, the Wholesale Price Index (WPI) as well as the Sensitive Price Index (SPI). The flare-up in prices over the past two years had emerged as one of the biggest challenges in macroeconomic management. On the back of the high rate of economic growth generated over the last four years in succession and in combination with negative exogenous shocks, price pressure had built up noticeably in the economy, especially during the preceding fiscal year (2004-05). In terms of generating inflation, the phenomenal rise in aggregate demand in the economy, on the one hand, was compounded by supply shocks on the other. The adverse external developments which impacted the price level for the fiscal year under review included a continuation of the surge in international price of oil to an all-time record of nearly US $ 75 per barrel in April this year, before pulling back somewhat, coupled with an unprecedented rise in world prices of commodities due to demand from fast-growing economies such as China and India. Also impacting price development in Pakistan was the decline in the size of sugarcane crop resulting in relatively lesser production of sugar within the country as well as significant rise in international prices of sugar owing to diversion of large portion of sugarcane into ethanol (a petroleum substitute) by the worlds largest producer, Brazil. These factors combined to spark inflationary pressers not just in Pakistan but in the global economy. Cognisant of the impact of inflation on the economy, most notably its adverse and disproportionate effect on the poor and vulnerable segments of society as well as its wider effect on purchasing power of the fixed-income group, the government responded in a multi-pronged manner to the rise in the price level. More on this will be discussed later.

117

Economic Survey 2005-06 Price Indices Four different price indices are published in Pakistan: the consumer price index (CPI), the wholesale price index (WPI), the sensitive price index (SPI) and the GDP deflator. The CPI covers the retail prices of 375 items in 35 major cities and reflects roughly the cost of living in the urban areas. The WPI is used to measure the price movement of selected items in the primary and wholesale markets. The items covered under the WPI are those which are offered in lots for sale. The WPI covers the wholesale price of 106 major items prevailing in the city of origin of the commodities. The SPI covers prices of 53 essential items consumed by those households whose monthly income ranges from Rs.3000 to Rs.12000 per month. In most countries, the main focus for assessing inflationary trends is placed on the CPI, because it most closely represents the cost of living. In Pakistan, the main focus is placed on the CPI as a measure of inflation as it is more representative with a wider coverage of 375 items in 71 markets of 35 cities around the country. The details are documented in Table-8.1.
Table 8.1: Price Indices in Pakistan Features Cities covered Markets covered Items covered Number of Commodity Groups Number of Quotations Income Groups Occupational Groups Reporting Frequency CPI 35 71 375 10 106,500 Four All Categories combined Monthly Base Year 2000-01=100 SPI WPI 17 18 51 16 53 106 5 10,404 1550 Rs.3000/Month 3 (Urban) Weekly Monthly Source: Federal Bureau of Statistics

Inflation during the 1990s Prices remained volatile during the decade of the 1990s, ranging between 5.7 percent and 13.0 percent mainly because of decelerating economic growth, expansionary monetary policies, output set-backs, higher duties and taxes, a depreciating Pak Rupee, frequent adjustments in the administered prices of gas, electricity and POL products, etc. The changes introduced in the economy added a major element of distortion in economic relations with an inevitable pressure on prices, GDP growth and the performance of the large-scale industrial sector. The pressure on prices intensified in 1994-95 when inflation went up to 13 percent. Both the food and non-food inflation contributed to the persistence of double digit inflation, averaging 12.2 and 10.7 percent, respectively against the overall CPI inflation of 11.4 percent during 1990-97 (See Table 8.2 & Fig-1). However, the inflation rate has started to decelerate over the last three years (1998-2000) because of an improved supply position, strict budgetary measures and depressed international market prices. The inflation rate Fig - 1: 1nflationary Trend which was at 5.7 percent in 1998-99, was reduced to 18 3.6 percent in 1999-2000 and further to 3.1 percent in 16 2002-03 (the lowest in the last three decades). This low 14 level of inflation has been achieved as a result of strict 12 fiscal discipline, the lower monetization of the budget 10 deficit, an output recovery, a reduction in duties and 8 taxes, and appreciation of exchange rate. Inflation 6 began to pick up after the first quarter of 2003-04, 4 reaching as high as 8.5 percent in June 2004 (i.e. at the 2 end of fiscal year 2003-04) for a variety of reasons 0 including the rise in the support price of wheat, shortages of wheat owing to less than the targeted production, mismanagement in wheat operations, and CPI FOOD NON-FOOD ban on inter-provincial movements of wheat.
-0 2

118

05

'0 304 -0 '04 -0 6( Ju 5 l -A pr )

-9 1

-9 7

-0 0

-9 2

-9 3

-9 5

-9 8

-9 4

-9 6

-9 9

-0 1

99

96

97

94

92

91

93

95

98

00

19

20

'0 2

90

01

-0 3

Inflation
Table 8.2: Inflationary Trends* CPI Year Overall Inflation (Headline Inflation) 12.7 10.6 9.8 11.3 13.0 10.8 11.8 7.8 5.7 3.6 4.4 3.5 3.1 4.6 9.3 Food Inflation Non-Food Inflation 12.4 10.5 7.8 11.2 10.2 11.3 11.7 8.0 5.6 4.7 5.1 4.3 3.2 3.6 7.1 8.8 9.3 10.7 6.1 5.4 (Core Inflation) 12.6 7.5 7.5 10.9 10.7 10.9 11.4 7.5 4.5 3.5 4.2 2.0 2.1 3.0 7.2 WPI 11.7 9.8 7.4 16.4 16.0 11.1 13.0 6.6 6.4 1.8 6.2 2.1 5.9 7.9 6.8 SPI 12.6 10.5 10.7 11.1 15.0 10.7 12.5 7.4 6.4 1.8 4.8 3.4 3.6 6.8 11.6 (% Change)

12.9 1990-91 10.6 1991-92 11.9 1992-93 11.3 1993-94 16.5 1994-95 10.1 1995-96 11.9 1996-97 7.7 1997-98 5.9 1998-99 2.2 1999-00 3.6 2000-01 2.5 2001-02 2.9 2002-03 6.0 2003-04 12.5 2004-05 2005-06 7.0 8.0 (July-April) 10.1 9.7 Average of 1990s 12.2 11.4 Average of 1990-97 5.3 5.7 Average of 1998-2000 5.7 5.5 Average of 2000-2006 * Inflation based on CPI, WPI and SPI are at 2000-01 base

6.7 10.3 7.7 9.9 10.0 8.9 12.0 12.2 10.7 5.2 4.9 5.2 6.1 6.1 4.4 Source: Federal Bureau of Statistics

Price Developing during 2005-06 A sharp pickup in the prices of essential commodities and unprecedented rise in international price of oil have led to the re-emergence of inflationary pressure across the globe. After living in a low inflationary environment (4%) for the last five years, Pakistan witnessed higher inflation for a verity of reasons. The higher inflationary trend in Pakistan over the last two years has been the outcome of pressure that emanated from demand and supply sides. Four years of strong economic growth has given rise to the income levels of various segments of the society. The rising level of income have strengthened domestic demand and put upward pressure on prices of essential commodities. Supply side pressure emanated from a variety of factors, prominent among those are: increase in support price of wheat for three years in row, shortage of wheat owing to less than the targeted production, mis-management in wheat operation in one of the wheat deficit province, inter-provincial ban on the movement of wheat resulting in sharp increases in prices of wheat and wheat flour. The prices of other food item such as beef, mutton, chicken, milk etc also registered sharp increases owing to sympathy effect on the one hand and demand pressure on the other. Lower production of sugarcane resulting in relatively lower production of sugar on the one hand and a sharp increase in the international prices of sugar owing to significant diversion of sugarcane into ethanol (petroleum substitute) by the largest producer, Brazil, also contributed in building inflationary pressure in Pakistan .In recent months, prices of various kinds of pulses also registered sharp increases owing to a significant decline in domestic production as well as shortages in international markets, keeping the prices of pulses at record high level. Unprecedented rise in international oil prices also contributed to the build up in inflationary pressure in Pakistan. Table-8.3 documents the information pertaining to inflation in Pakistan.

119

Economic Survey 2005-06


Table 8.3: Changes in CPI According to Commodity Group Commodity Groups CPI Food Non-Food Core Apparel, Textile House Rent Energy Household Transport Recreation Education Cleaning Medicare July-April Weight 100.0 40.3 59.7 52.4 6.1 23.4 7.3 3.3 7.3 0.8 3.5 5.9 2.1 2004-05 9.3 12.8 6.9 7.0 2.6 11.1 6.3 6.1 3.3 -0.2 2.7 4.4 1.0 2005-06 8.0 7.0 8.8 7.7 4.2 10.3 14.7 6.0 9.5 -0.2 6.3 2.9 2.2 (% Change) %age Point Contribution (July-April) 2004-05 2005-06 8.0 9.3 35.0 55.8 65.2 44.3 50.7 40.0 3.2 1.7 30.0 28.2 15.8 5.8 2.4 2.2 6.2 1.9 -0.0 -0.0 2.7 1.0 2.1 2.8 0.6 0.2 Source: Federal Bureau of Statistics

A cursory look at Table-8.4 and Fig.2 is sufficient to see that 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. Core inflation basically represents policy (fiscal, monitory, exchange rate policies) induced inflation. The persistence of relatively high core inflation compelled the State Bank of Pakistan to change its monetary policy stance from accommodative to neutral to aggressive tightening. 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 (See Table 8.3and Fig.3). 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 overall inflation averaged at 9.3 percent in the fiscal year 2004-05 and the last fiscal year ended with an inflation rate of 8.7 percent in June 2005. Keeping in view the fact that inflation, once reached at high level, is difficult to bring it down to a low level in a short period of time. Accordingly, the government had set the average inflation target of 8 percent for the fiscal year 2005-06. The current fiscal year, however, started with an inflation rate of 9.0 percent in July 2005 but continued to decelerate, reaching at 6.2 percent in April 2006 the lowest in the last 23 months (See Fig.4). 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 (See Fig.5). The measure taken by the Government, particularly since April 2005, when overall inflation reached 93 months high at 11.1 percent (the last-time inflation was at this level in July 1997) and food inflation peaked at 15.7 percent in April 2005 (last-time it was at 15.7 percent in May 1994), yielded handsome dividend in the shape of overall inflation decelerating to 6.2 percent and food inflation to 3.6 percent in April 2006. Non-food inflation averaged 7.1 percent in 2004-05, jumped sharply over the preceding year (3.6% in 2003-04). The current fiscal year (2005-06) started with non-food inflation at 8.5 percent in July 2005. By April 2006in ten months time, it has decelerated marginally at 8.0 percent (See Table-8.5 and Fig.6). It is important to note that with the exception of house rent, energy and transport all other sub-indices of the CPI have registered nominal increases. In other words, inflation of these sub-indices remained under control. It would be safe to argue that this years inflation was largely driven by food, energy, transport and house rent. While the government

120

Inflation has little control on energy prices and the attendant rise in transport charges, this years inflation remained relatively high albeit, at a slower pace, primarily on account of food and house rent.

Fig.2: Inflation Rate (CPI)


CPI (General) 14 12 10 Percent 8 6 4 2 0 Jul-April 2004-05 Jul-April 2005-06 9.3 6.9 8.0 7.0 12.8 8.8 Food Group Non-Food Group

Table-8.4: Inflation Rate (CPI) Item CPI (General) Food Group Non-Food Group Core Inflation
2003-04 2004-05

July-April
2004-05 2005-06

4.6 6.0 3.6 3.7

9.3 12.5 7.1 7.0

9.3 12.8 6.9 7.0

8.0 7.0 8.8 7.7

Source: State Bank of Pakistan

Fig-3: Recent Trend in Components of Non-Food Inflation


18 16 14 12 10 8 6 4 2 0 Oct-2003 Oct-2004 Oct-2005 Jul-2003 Jul-2004 Apr-2004 Apr-2005 Jul-2005 Jan-2004 Jan-2005 Jan-2006 Apr-2006
Sep-2004 Jan-2005 Sep-2005 May-2005 Jan-2006

House Rent Energy

Transport

Fig-5:Food Inflation

Fig.4: CPI Month - Wise Inflation


1 5. 0 1 3. 5 1 2. 0 1 0. 5

18 16 14 12 10

9. 0 7. 5 6. 0 4. 5 3. 0 1 .5 0. 0

8 6 4 2 0 -2 Jan-2000 Sep-2000 Jan-2001 Sep-2001 Jan-2002 Sep-2002 Jan-2003 Sep-2003 May-2000 May-2001 May-2002 May-2003 Jan-2004 May-2004

121

Economic Survey 2005-06


Table 8.5: Monthly Inflation Rate 2003-04 Period Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun CPI 1.4 1.8 2.2 3.5 4.2 5.3 5.3 4.3 5.4 6.0 7.1 8.5 Food -0.5 0.4 1.4 4.6 5.4 9.0 7.8 5.8 7.6 7.6 10.2 13.4 Non Food 2.9 2.7 2.7 2.8 3.5 3.1 3.4 3.3 3.9 4.9 4.9 5.0 CPI 9.3 9.2 9.0 8.7 9.3 7.4 8.5 9.9 10..2 11.1 9.8 8.7 (% Change) 2005-06 Non Food 5.7 5.9 6.3 6.3 6.3 7.0 7.2 8.0 8.2 8.0 8.0 8.4 CPI Food Non Food 8.5 9.7 9.0 8.8 7.8 8.4 9.2 7.5 8.5 9.6 6.4 8.3 9.4 5.8 7.9 8.8 8.1 8.5 9.2 8.2 8.8 8.4 7.5 8.1 8.0 5.4 6.9 8.0 3.6 6.2 Source: Federal Bureau of Statistics

2004-05 Food 14.9 14.4 13.1 12.3 13.6 7.9 10.4 12.9 13.3 15.7 12.5 9.3

Inflation by Income Group


Fig-6 : Monthly Non-Food Inflation Rate Price hike affects various sections of the society 10 differently. In most cases, the lower income group of 9 society becomes victim of the severity of inflation on 8 account of their erosion of purchasing power. To assess 7 6 the impact of inflation across all income classes, the 5 CPI is also computed for four income group with income 4 limits ranging from Rs. 3000 to Rs. 12,000 per month. 3 The incidence of inflationary pressure on various 2 income Groups during July-April is documented in Table- 8.6. A cursory look at Table-8.6 is sufficient to see that as compared to last year, inflation for all the four income groups are lower in the current fiscal year. Furthermore, the highest inflation at 8.5 percent is witnessed for the highest income group while rest of the three income groups faced almost the same inflation rate at 7.5 percent (See Fig-7).

Table 8.6: Inflation Rate by Income Groups Overall Upto Period CPI Rs.3000 1995-96 10.8 10.6 1996-97 11.8 11.7 1997-98 7.8 7.9 1998-99 5.7 5.6 1999-00 3.6 3.2 2000-01 4.4 4.5 2001-02 3.5 3.0 2002-03 3.1 2.9 2003-04 4.6 5.3 2004-05 9.3 10.2 200506(Jul-April) 8.0 7.6

Upto Rs.3001-5000 10.7 11.9 7.8 5.6 3.4 4.3 4.9 1.8 5.1 9.8 7.5

Upto Rs.5001-12000 10.8 11.8 7.9 5.9 3.8 4.5 3.4 3.1 4.7 9.4 7.6

Above 12000 11.3 11 8.0 6.2 4.5 4.7 3.6 3.1 4.3 8.9 8.5

Source: Federal Bureau of Statistics

122

Inflation

Fig-7: Inflation by Income Groups


14 12 10 8 6 4 2 0 95-96 96-97 97-98 98-99 99-00 00-01 '01-02 '02-03 '03-04 '04-05 '0506(JulyApril)

3000

3001-5000

5001-12000

above 12000

Wholesale Price Index (WPI) During the first ten months (July-April) of the fiscal year 2005-06 inflation, as measured by changes in WPI, picked up to 10.3 percent as against 6.9 percent in the same period last year. Like in the case of CPI based inflation, food component of the WPI registered decline at 7.2 percent as against 11.0 percent in the same period last year. The non-food component of the WPI registered sharp increase to 12.6 percent as against 4.1 percent last year. Fuel and Lighting component of the WPI rose sharply at 28.0 percent as against 14.6 percent in the same period last year. Manufactures and building material components exhibited smaller increases (See Table-8.7 for details).
Table 8.7: Components of WPI Commodity Groups WPI Food Non-Food Raw Material Fuel & Lubricants Manufacturers Building Materials Weight 100.0 42.12 57.88 7.99 19.29 25.87 4.73 July-April 2004-05 2005-06 6.9 10.3 11.0 7.2 4.1 12.6 -18.0 9.9 14.6 28.0 1.6 2.7 15.6 -0.3 (% Change) %age Point Contribution (July-April) 2004-05 2005-06 6.9 10.3 67.0 29.2 34.2 70.9 -20.8 7.7 40.8 52.5 6.3 6.7 10.7 -0.1 Source: Federal Bureau of Statistics

Sensitive Price Indicator (SPI) The sensitive price indicator consists of 53 essential items. During July-April 2005-06, SPI recorded an increase of 6.7 percent as against 12.0 percent in the same period last year. With 33 food items, the SPI is heavily weighted in favour of food items which have a weight of 68.2 percent followed by utility items (15.4%), non-food items (10.6%) and transport (5.8%). Since the beginning of the current fiscal year and until April 2006, the prices of some essential commodities registered sharp increase while few of them registered decline and also some of them registered nominal increases. The items which have registered sharp increase include Moong, Mash and Gram pulses, beef, mutton and sugar. The items registered sharp decline include chicken, eggs, and red chillies. Minor reduction is also witnessed in the prices of wheat, masur pulse, rice Irri, and cooking oil. Most importantly, the price of wheat flour

123

Economic Survey 2005-06 remained almost unchanged during the last 10 months (See Fig 8 and Table-8.8 for details).
Table 8.8: Prices of Essential Commodities % Change Items Wheat Wheat Flour Rice Irri-6 Masur Pulse Moong Pulse Mash Pulse Gram Pulse Beef Mutton Sugar Milk Fresh Milk Powder Veg. Ghee (Loose) Cooking Oil Chicken (Farm) Eggs (Farm) Red Chilies Onion Potatoes Tomato Garlic Unit Kg Kg Kg Kg Kg Kg Kg Kg Kg Kg Ltr 400 Gm Kg 2.5Ltr Kg Dozen Kg Kg Kg Kg Kg 2003-04 10.2 11.7 13.0 35.4 28.0 35.7 24.2 75.4 154.1 19.0 19.2 94.7 59.8 205.9 57.0 30.0 73.4 11.2 8.6 19.1 32.5 2004-05 11.69 13.26 15.40 42.66 31.57 38.37 29.26 94.37 184.47 23.37 21.24 102.66 59.77 205.48 66.45 37.43 75.41 14.12 14.84 24.77 44.07 July 2005 11.65 13.05 16.19 46.11 39.96 41.91 28.36 101.78 192.35 27.82 23.33 107.27 58.69 204.56 72.99 40.98 74.35 12.24 19.34 15.81 57.88 Dec 2005 11.70 13.12 15.78 45.62 41.98 47.01 28.71 105.03 198.05 28.47 23.61 107.51 58.83 204.49 70.46 51.49 69.97 10.96 16.05 17.08 56.12 April 2006 11.44 13.18 16.10 44.53 60.15 68.38 35.19 113.25 213.90 36.77 24.33 110.66 59.07 204.29 55.80 23.04 67.98 12.35 19.55 17.57 61.62 Dec 05/ July 05 0.45 0.54 -2.51 -1.05 5.07 12.16 1.22 3.19 2.96 2.35 1.22 0.22 0.24 -0.04 -3.46 25.64 -5.89 -10.47 -17.03 8.03 -3.04 Apr 06/ July 05 -1.76 1.02 -0.56 -3.43 50.54 63.15 24.08 11.27 11.20 32.17 4.29 3.16 0.66 -0.13 -23.55 -43.79 -8.56 0.92 1.07 11.14 6.46

Source: Federal Bureau of Statistics

Fig-8: Monthly prices of Pulses


Masur Pulse
60

Moong Pulse
58 56 54 52 50 48 46 44 42 40

Aug-2005

Mar-2006

Nov-2005

Dec-2005

Jul-2005

Jan-2006

Sep-2005

Oct-2005

July-04

Jan-05

May-05

July-05

Mar-05

Jan-06

124

Mar-06

Sep-04

Nov-04

Sep-05

Nov-05

Feb-2006

Apr-2006

48 47 46 45 44 43 42 41 40 39 38 37 36

Inflation
Mash Pulse
70 66 62 (Rs./Kg) 58 54 50 46 42 38 34
Oct-04 Oct-05 Feb-05 Feb-06 Mar-05 Apr-05 May-05 Aug-2004 Mar-06 Jan-05 Jun-05 Nov-04 Dec-04 Nov-05 Dec-05 Sep-04 Aug-05 Sep-05 July-04 Jan-06 Apr-06 Jul-05

Gram Pulse
36 35 34 33

(Rs./Kg)

32 31 30 29 28 27
Oct-04 Oct-2005 Mar-05 July-04 Apr-05 May-05 Feb-05 Sep-04 Nov-04 Dec-04 Feb-2006 Mar-2006 Aug-2004 Aug-2005 Sep-2005 Nov-2005 Dec-2005 Jan-2006 Apr-2006 Jan-05 Jun-05 Jul-2005

Regional price developments The prices of essential commodities prevailing in the first week of May 2006 in the neighbouring countries are reported in Table-8.9. It can be seen from the Table that despite increase in the prices of essential commodities in Pakistan, they are still relatively cheaper in the region. For example, the prices of wheat, wheat flour, rice basmati broken, masoor pulse, gram pulse, chicken, and red chillies in Pakistan are the lowest in the region. The prices of other essential items exhibit mixed trend.
Table-8.9 : Comparative Prices in Regional Countries Items Unit Islamabad New Delhi Wheat Kg 11.13 16.44 Wheat Flour Rice Basmati Broken Masoor Pulse Mash Pulse Moong Pulse Gram Pulse Sugar Beef Mutton Eggs Chicken Potatoes Onion Tomatoes Red Chillies Value in Pak Rupees Kg Kg Kg Kg Kg Kg Kg Kg Kg Dozen Kg Kg Kg Kg Kg 13.16 22.63 47.50 75.50 62.75 40.25 37.88 137.50 257.50 24.25 44.75 26.50 19.25 27.50 73.50 16.44 27.40 49.32 82.20 75.35 43.84 30.14 51.37 205.50 16.44 109.60 13.70 10.96 10.96 137.00 Colombo 36.00 36.00 47.00 29.00 148.00 266.00 57.00 148.00 41.00 20.50 29.00 94.00 Dhaka 15.24 Tehran Kabul 18.15

16.94 24.20 52.52 88.79 42.35 49.13 59.20 60.50 46.59 60.50 60.99 39.46 60.50 42.35 52.62 60.50 49.13 42.75 31.46 118.60 374.91 157.30 169.43 427.53 266.20 42.35 49.33 54.45 80.48 95.37 121.00 11.86 19.73 18.15 13.55 29.60 36.30 16.94 29.60 36.30 67.77 78.93 121.00 Source: Ministry of Commerce

Price Stabilization Measures In order to keep the prices of essential commodities under control, the government has been taking various measures throughout the year. These measures include liberal import regime for food items including zero rating of the imports of these commodities. The government has been expanding the supply of essential items such as sugar and wheat flour through the outlets of the Utility Stores Corporation (USC). Furthermore, 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 USC at much lower prices than the market. In order to augment supplies of essential commodities at shortest possible time and at lower freight charges, the government has allowed the import of various items through land

125

Economic Survey 2005-06 routes from neighbouring countries. The role of the Trading Corporation of Pakistan (TCP) has been enhanced. The TCP is very active in importing sugar from around the world to build strategic reserves with a view to shielding the consumers from the extra-market forces. 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. The specific measures taken by the government during the year include:(a) The government has been selling wheat flour and sugar at Rs. 11.5 per kg and Rs.27.5 per kg, respectively through the USC as well as through its outlets in weekly bazaars and through mobile units. The USCs has hired 59 vehicles to sell wheat flour and sugar to the far flung areas of Pakistan. The government has been selling 3.0 million bags of 10 kg wheat flour as well as 32,000 metric tons sugar through the outlets of the USCs per month. The people of Pakistan are getting wheat flour and sugar at a much cheaper rate than the markets. (b) The government has also allowed duty free imports of wheat and wheat flour, sugar and other essential consumer items such as live animals, beef, mutton, Onion, Tomato, Potato, Garlic etc. with a view to augment their supplies and reduce their prices. (c) Besides these steps, a Prime Ministers Committee has been constitutes to monitor the price situation in the country by keeping a watch on the supply and demand conditions. The Committee has to keep a watch on the price level of various commodities in the country through a proper system of monitoring on daily basis. In addition to this a close vigilance is kept on unusual rise in prices through weekly meetings of the Kitchen Items Committee, now called the Sensitive Items Price Committee (SIPC) and through the fortnightly meetings of the ECC of the Cabinet to ensure price stability in the country.

126

TABLE 7.1 (A) PRICE INDICIES


A. COMBINED CONSUMER PRICE INDEX BY GROUPS Food Apparel House *Energy Household Fur- *Transport Recreation Education Cleaning, LaunBeverages Textile Rent niture, Equip- & CommuEnterdry & Personal & Tobacco & Footwear ments etc. nication tainment Appearance (Base: 2000-01 = 100) 42.14 46.42 45.15 38.95 47.82 41.72 48.68 43.54 46.33 51.97 49.46 39.02 51.97 46.25 51.82 47.25 51.84 56.46 54.60 40.00 5.31 50.31 53.31 51.55 57.72 60.29 59.76 44.84 54.78 54.78 56.48 59.25 67.24 67.64 66.19 49.20 59.17 59.17 61.37 65.50 74.05 75.59 72.37 56.99 64.66 64.66 71.00 75.01 82.86 82.82 79.71 64.10 73.43 73.43 80.49 85.38 89.20 86.50 87.38 71.16 76.93 76.93 88.09 87.67 94.46 92.27 93.21 80.95 76.98 76.98 92.20 92.81 96.56 97.31 97.15 90.36 81.06 81.06 96.46 97.79 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 102.50 103.23 102.80 107.76 103.80 103.80 106.30 104.97 102.50 105.40 106.75 103.80 118.39 105.29 105.29 107.21 109.72 103.37 111.74 109.69 108.20 120.26 115.72 115.72 106.08 114.19 111.29 125.69 112.98 120.42 128.46 120.18 120.18 105.93 117.55 115.90 124.95 133.66 112.46 117.15 119.29 131.58 127.41 146.15 116.79 123.71 119.03 130.36 105.85 105.63 116.95 124.27 115.65 118.95

General Groups/ Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 43.20 47.41 52.07 57.94 65.48 72.55 81.11 87.45 92.46 95.78 100.00 103.54 106.75 111.63 121.98 121.17 130.90

Medicare

42.73 46.77 49.75 64.27 69.61 76.26 86.10 90.57 92.02 93.14 100.00 102.37 105.59 106.89 107.94 107.88 110.24 (Contd.)

Note: The CPI 1990-91 base year series have been converted into series with a base of 2000-01. (1) The Recreation, Entertainment and Education Group has been split into two groups namely (i) Recreation & Entertainment Group; (ii) Education (2) The nomenclature of Medicine Group has been changed to Medicare Group. * Transport & Energy Groups Index is available from July 2003 and onward while prices from 1990-91 upto June 2003 in respect of these two Groups have been converted in to index

TABLE 7.1 (B) HEADLINE & CORE INFLATION


Indices Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Note: General 47.41 52.07 57.94 65.48 72.55 81.11 87.45 92.46 95.78 100.00 103.54 106.75 111.63 121.98 121.17 130.90 Food 46.33 51.84 57.72 67.24 74.05 82.86 89.20 94.46 96.56 100.00 102.50 105.40 111.74 125.69 124.95 133.66 NonFood 48.52 52.31 58.18 64.09 71.36 79.73 86.07 90.89 95.16 100.00 104.28 107.66 111.55 119.47 118.62 129.04 *Core 48.84 52.51 58.21 64.43 71.46 79.62 85.60 89.47 92.59 100.00 101.95 103.50 106.08 113.67 112.88 121.56 General 10.58 9.83 11.27 13.02 10.79 11.80 7.81 5.74 3.58 4.41 3.54 3.10 4.57 9.28 9.27 8.03 Headline & Core Inflation NonFood Food 10.64 10.52 11.74 7.81 11.34 11.22 16.67 10.17 10.13 11.34 11.89 11.73 7.65 7.94 5.90 5.61 2.23 4.69 3.56 5.09 2.44 4.28 2.89 3.24 6.01 3.62 12.48 7.10 12.82 6.97 6.88 8.79

*Core 10.52 7.5 10.9 10.7 10.9 11.4 7.5 4.5 3.5 4.2 2.0 2.1 3.0 7.2 7.0 7.7

Core Inflation is defined as overall inflation adjusted for food and energy.

TABLE 7.1 (C) PRICES INDICES


B. Wholesale Price Index by Groups Raw Fuel, Lighting ManufacFood Materials & Lubricants tures 45.42 43.78 34.09 52.38 50.24 48.67 34.83 54.63 57.23 62.55 40.81 63.67 67.50 72.16 44.90 73.40 75.44 75.95 52.95 79.88 84.37 87.01 62.17 89.41 90.45 93.81 69.65 91.62 96.55 103.21 75.81 94.45 97.09 92.39 83.16 98.76 100.00 100.00 100.00 100.00 101.95 100.31 103.14 101.87 105.62 115.51 115.95 103.67 112.99 135.12 119.23 111.83 125.03 110.44 138.01 113.05 124.18 133.07 110.15 120.97 135.11 173.00 112.87 115.90 3. Sensitive Price Indicator 46.26 51.22 57.26 65.85 72.90 81.98 88.01 93.68 95.39 100.00 103.37 107.06 114.38 127.59

Groups/ Fiscal Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Note:

General 44.84 48.14 56.03 65.00 72.22 81.62 86.99 92.51 94.15 100.00 102.01 107.77 116.29 124.14 123.16 135.86

Building Materials 56.72 57.97 66.47 81.04 87.33 98.63 98.62 99.62 97.15 100.00 101.10 102.90 126.48 143.79

4. GDP Deflator 224.33 244.28 274.73 312.60 338.48 388.00 413.39 437.59 100.00 106.72 109.35 114.25 124.55 135.54

144.00 126.98 143.58 135.45 149.51 Source: Federal Bureau of Statistics 1) WPI and SPI 1990-91 base year series have been converted into series with a base of 2000-01 2) GDP Deflator base year 1980-81 = 100 has been changed with 1999-2000 = 100 as new base year

TABLE 7.2 MONTHLY PERCENT CHANGES IN CPI, WPI AND SPI


Months 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 A. CONSUMER PRICE INDEX (C.P.I) converted into Base year 2000-01 Jul 1.06 1.59 1.38 1.40 0.62 0.86 0.69 0.56 Aug 1.79 0.95 2.02 1.30 0.65 0.87 0.47 -0.06 Sep 0.89 1.49 0.90 1.16 0.63 0.11 0.38 0.98 Oct 1.30 1.50 0.11 1.20 0.40 0.49 0.92 0.45 Nov 0.55 1.40 1.07 1.21 0.74 0.48 0.09 0.9 Dec -0.28 1.00 0.67 0.87 0.11 0.24 -0.11 -0.45 Jan 0.88 1.46 0.37 2.17 -0.05 -0.18 0.2 -0.16 Feb 1.29 -0.06 0.70 1.09 0.36 0.38 -0.02 -0.08 Mar 0.46 0.88 1.35 -0.45 1.77 0.35 0.88 0.48 Apr 2.38 0.12 0.81 2.39 0.45 0.27 0.56 0.34 May -0.15 0.59 0.37 -0.20 0.15 -0.07 -0.11 -0.45 Jun 1.03 0.55 0.11 -0.31 0.47 -0.16 1.05 0.01 B. WHOLESALE PRICE INDEX (W.P.I.) with Base 1990-91 Jul 1.39 -1.06 0.99 1.59 0.33 1.14 0.07 -0.08 Aug 2.28 1.46 1.77 1.82 0.14 1.39 0.18 0.75 Sep 1.52 1.15 0.42 -0.05 0.33 -0.13 0.52 1.55 Oct 0.62 0.60 -0.31 0.27 0.42 0.14 -0.29 0.90 Nov 0.49 2.42 0.68 2.38 0.53 0.79 -1.44 1.18 Dec 0.35 1.68 0.35 1.39 0.30 0.03 -0.31 1.15 Jan 4.23 2.02 1.12 2.30 0.01 0.59 0.30 -0.84 Feb 3.08 -0.55 0.70 0.65 0.34 0.60 1.05 -0.39 Mar 0.78 1.18 1.71 -0.29 1.73 0.28 2.12 -0.16 Apr 4.23 -0.12 1.65 1.48 0.50 -0.53 0.38 0.66 May 0.61 0.86 -0.19 0.35 0.50 0.21 -0.18 -1.38 Jun 0.51 1.38 1.17 -0.41 0.08 0.02 1.01 1.18 C. SENSITIVE PRICE INDICATOR (S.P.I.) converted into Base year 2000-01 Jul 1.24 1.53 1.30 1.72 0.15 0.91 0.33 0.77 Aug 1.32 0.70 1.73 0.98 0.14 1.36 0.49 0.70 Sep 1.26 1.05 0.02 1.42 0.48 -0.49 0.16 0.99 Oct 0.93 1.70 -0.62 0.99 0.36 0.59 -0.45 0.63 Nov 0.47 1.52 0.66 1.46 0.94 1.63 0.13 0.39 Dec -0.14 1.14 1.03 0.78 0.08 -0.31 -0.94 -1.16 Jan 0.72 1.36 -0.12 1.50 -0.24 -0.78 -0.23 0.15 Feb 0.77 -0.36 0.65 1.38 0.30 0.55 0.30 -0.55 Mar 0.73 0.86 1.24 -1.36 0.51 -0.25 0.24 0.27 Apr 3.23 0.72 1.18 3.78 0.69 -0.45 0.77 -0.13 May 0.78 1.68 0.59 0.47 0.13 0.73 0.92 -0.75 Jun 1.85 1.19 0.82 -0.19 2.01 0.57 1.59 0.70 Note: CPI, SPI and WPI 1990-91 base year series converted into Base Year 2000-01. 2001-02 0.52 0.75 0.14 0.53 0.32 -0.61 0.06 0.34 1.36 0.33 -0.67 0.48 1.78 0.30 0.21 -1.15 -0.97 -0.65 0.17 0.19 1.28 0.35 -0.12 1.07 1.25 1.23 0.91 0.54 0.34 -0.73 0.15 1.29 0.57 -0.62 -1.69 1.37 2002-03 1.09 0.31 0.19 0.16 0.31 -0.24 0.06 0.47 0.04 0.33 -0.29 -0.21 1.51 1.66 0.59 0.54 1.66 0.70 0.38 2.39 0.15 -1.17 -1.09 -0.27 2003-04 0.57 0.66 0.60 1.47 0.60 0.90 -0.09 -0.34 1.02 0.96 0.69 1.12 1.31 0.98 0.34 2.72 1.10 1.39 0.21 0.40 1.77 0.32 0.98 0.59 (Percent) 2004-05 1.38 0.58 0.38 1.19 1.12 -0.85 0.97 0.99 1.29 1.74 -0.44 0.10 -1.00 -1.08 0.40 1.42 0.39 -0.25 1.53 1.52 1.39 1.61 -0.59 0.71 2005-06 1.62 0.04 0.50 0.94 0.76 -0.27 1.20 0.33 0.23 1.02

1.99 1.04 0.54 0.77 0.18 -0.13 1.28 0.77 0.07 1.23

1.48 1.34 2.43 1.35 1.09 0.70 1.18 0.26 1.04 0.75 0.29 0.23 -0.24 2.34 0.53 0.05 1.09 2.64 1.94 0.88 -0.64 1.31 -0.98 -0.24 0.23 -0.69 0.91 0.80 0.42 -0.61 0.54 1.46 -0.01 1.30 1.07 0.84 -0.23 -0.51 1.29 1.33 -0.61 2.14 -1.02 0.24 1.31 0.70 Source: Federal Bureau of Statistic.

TABLE 7.3 (A) PRICE INDICES BY CONSUMER INCOME GROUPS


Income Group/ Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Note: All Income Groups 43.20 47.41 52.07 57.94 65.48 72.55 81.11 87.45 92.46 95.78 100.00 103.54 106.75 111.63 121.98 121.17 130.90 Upto Rs 3001 to Rs 3000 5000 Spliced with Base Year 2000-01 = 100 42.43 42.85 47.03 47.40 52.03 52.13 57.80 58.00 65.86 65.73 72.86 72.76 81.37 81.41 87.81 87.43 92.71 92.67 95.66 95.85 100.00 100.00 102.97 104.88 105.95 106.70 111.61 112.18 123.01 123.16 122.30 131.70 122.46 131.69 Rs 5001 to 12000 43.18 47.70 52.11 58.05 65.16 72.22 80.71 87.07 92.18 95.70 100.00 103.44 106.68 111.72 122.26 Above Rs 12,000 43.09 47.51 51.62 57.61 64.18 71.42 79.71 86.05 91.41 95.50 100.00 103.64 106.83 111.39 121.35

121.50 120.47 130.79 130.70 Source: Federal Bureau of Statistics. CPI 1990-91 Base Year series have been converted into Base Year 2000-01.

TABLE 7.3 (B) ANNUAL CHANGES IN PRICE INDICES AND GDP DEFLATOR
Consumer Wholesale Sensitive Fiscal Price Price Price Annual Index1 Index2 Indicator1 GDP Deflator3 Year 1990-91 12.66 11.73 12.59 1991-92 10.58 9.84 10.54 10.07 7.36 10.71 8.89 1992-93 9.83 1993-94 11.27 16.40 11.79 12.47 1994-95 13.02 16.00 15.01 13.78 1995-96 10.79 11.10 10.71 8.28 1996-97 11.80 13.01 12.45 14.63 6.58 7.35 6.55 1997-98 7.81 6.35 6.44 5.85 1998-99 5.74 1999-00 3.58 1.77 1.83 2.78 6.21 4.84 6.72 2000-01 4.41 2.08 3.37 2.47 2001-02 3.54 5.57 3.58 4.49 2002-03 3.10 7.91 6.83 9.01 2003-04 4.57 6.75 11.55 8.83 2004-05 9.28 Jul-Apr 2004-05 9.27 6.89 11.98 10.31 6.67 10.30 2005-06 8.03 * Provisional Source: Federal Bureau of Statistics WPI, CPI & SPI Base Year = 1990-91 series have been converted into Base Year 2000-01. 3. GDP Deflator Base Year 1980-81=100 has been changed with 1999-2000 = 100 as new base year.

TABLE 7.4 AVERAGE RETAIL PRICES OF ESSENTIAL ITEMS


(Rs/Unit) Wheat (Av.Qlty) Kg Wheat Flour (Av.Qlty) Kg Basmati* Moong Gram Rice Pulse Pulse (Broken (Washed) (Av.Qlty) Kg Kg Kg Beef (Cow/ Buffalo with bone) Kg 25.51 29.62 32.49 35.63 40.68 47.29 54.01 55.44 55.83 56.78 56.01 55.19 61.21 75.45 94.83 Mutton Dry (Goat) Eggs Hen Potato Onion Tomato (Av.Qlty) (Farm) (Av.Qlty) (Av.Qlty) (Av.Qlty) Kg Doz. Kg Kg Kg 7.70 4.17 7.16 6.88 7.76 7.65 9.22 10.45 15.32 6.85 10.72 9.59 8.70 11.09 13.82 14.10 12.40 12.52 8.75 11.64 14.64 18.22 14.05 14.35 20.34 19.60 15.25 17.24 17.12 13.30 19.10 25.03 28.71 19.89 (Contd.)

Fiscal Year

Chiken (Farm) Kg

1990-91 3.07 3.66 6.10 12.64 7.85 .. 50.39 13.28 5.19 1991-92 3.62 4.20 6.97 16.16 8.70 .. 53.86 15.95 6.32 1992-93 3.85 4.44 8.06 17.09 11.35 .. 60.09 15.96 5.77 1993-94 4.28 4.93 8.77 17.09 11.72 .. 69.94 18.69 5.81 1994-95 5.07 5.78 9.09 20.24 21.77 .. 81.68 20.64 6.32 1995-96 5.14 5.90 11.27 21.86 21.67 .. 91.71 21.37 10.45 1996-97 6.59 7.32 12.85 21.80 15.00 .. 99.42 24.90 12.08 1997-98 7.96 8.64 13.40 28.45 20.22 57.24 103.37 29.73 9.31 1998-99 7.72 8.35 14.50 32.95 22.08 54.20 106.46 25.98 8.74 1999-00 8.19 8.92 15.71 30.05 25.07 50.90 108.64 24.27 9.38 2000-01 8.67 9.80 15.35 30.30 29.52 50.65 109.38 26.35 9.74 2001-02 8.29 9.67 15.49 34.36 34.89 52.04 111.53 28.57 11.43 2002-03 8.73 10.14 18.07 30.46 31.13 54.01 124.95 30.69 9.43 2003-04 10.25 11.71 19.04 27.98 24.17 57.50 154.31 30.03 8.58 2004-05 11.68 13.28 20.19 31.66 29.35 66.43 185.19 37.45 14.94 Jul-Apr 2004-05 11.78 13.32 20.08 30.31 29.50 93.15 64.68 183.02 38.48 14.28 2005-06 11.63 13.11 20.14 44.54 29.60 105.35 66.51 199.06 37.11 17.74 .. Not Available Note: Data for Period: 1990-91 - 2000-01 is based on 12 centres while data 2001-02 onward is based on 17 centres.

TABLE 7.4 AVERAGE RETAIL PRICES OF ESSENTIAL ITEMS


(Contd.) Mustard Oil (Mill) Kg 20.93 25.85 30.26 33.18 43.93 46.50 47.27 49.65 63.43 61.13 56.92 59.01 60.80 63.51 65.63 65.63 66.57 Vegetable Ghee (Loose) Kg 19.00 20.53 24.08 29.09 38.99 39.38 42.76 45.78 54.00 49.14 44.82 49.20 55.25 59.84 59.60 59.98 58.89 Rock Salt (Powder) Kg 2.00 2.17 2.22 2.25 2.40 2.79 3.13 3.17 3.22 3.35 3.43 3.19 3.21 3.22 3.50 3.47 3.86 Red Chillies (Av.Qlty) Kg 24.38 31.05 41.08 39.33 70.12 82.32 74.15 62.55 89.05 82.72 66.75 78.34 75.87 73.80 76.64 75.64 71.02 Sugar (Open Market) Kg 11.26 11.62 12.29 12.91 13.74 16.76 21.26 19.54 19.09 21.11 27.11 22.87 20.77 19.01 23.45 22.73 30.26 Gur (Sup. Qlty) Kg 8.24 8.67 10.03 10.49 11.07 14.54 18.67 18.91 17.19 19.81 26.31 23.12 20.45 19.79 23.98 23.65 35.00 Milk Fresh (Ltr) 7.71 8.82 9.90 11.07 12.18 13.67 15.12 16.27 17.71 17.91 18.23 17.92 18.35 19.21 21.28 20.91 23.63 (Rs/Unit) Tea in Packet (Sup.Qlty) 250 Gram 20.00 20.04 23.62 27.65 29.08 30.33 38.31 49.88 51.89 48.95 53.73 57.00 61.50 64.68 61.99 60.68 62.09 (Contd.)

Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Note:

Data for Period: 1990-91 - 2000-01 is based on 12 centres while data for Period 2001-02 onward is based on 17 centres.

TABLE 7.4 AVERAGE RETAIL PRICES OF ESSETIAL ITEMS


(Contd.) Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Note: Cigarettes (Pkt) 3.48 3.56 3.60 3.61 3.75 3.69 3.90 3.79 4.19 5.04 5.01 5.82 6.06 6.08 6.90 Coarse Latha (Mtr.) 10.71 12.08 13.46 14.14 15.76 18.31 20.89 22.24 23.20 23.76 24.11 26.81 26.84 28.80 32.08 Voil Printed (Mtr.) 25.24 27.65 27.18 28.56 29.26 27.90 30.01 31.34 31.63 32.20 33.04 33.30 33.74 34.52 36.13 Shoes Gents Concord (Bata) 429.95 149.95 149.95 185.78 224.95 299.95 337.70 339.00 342.96 381.29 399.00 399.00 428.17 499.00 492.33 Firewood (Kikar/ Babul) (40 Kgs.) 50.07 55.68 62.31 67.51 71.83 78.54 88.88 95.00 97.65 99.93 104.04 99.30 104.20 118.40 135.96 Match Box (40/ 50 Sticks) (Each) 0.35 0.44 0.49 0.49 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.51 0.51 0.51 0.53 0.51 0.61 Washing Soap 707/555 (Cake) 2.49 2.72 3.01 3.52 4.14 5.03 5.95 6.18 6.57 6.81 6.90 7.37 7.48 7.48 7.47 7.48 7.70 (Rs/unit) Lifebuoy Soap (Cake) 4.02 4.10 4.64 6.00 6.35 7.29 8.53 8.58 9.21 9.50 9.50 10.02 11.00 10.82 14.00 13.98 13.93 (Contd.)

6.84 31.75 35.94 499.00 112.98 7.20 34.13 36.49 399.00 162.90 Data for Period: 1990-91 - 2000-01 is based on 12 centres while data for 2001-02 is based on 17 centres.

TABLE 7.4 AVERAGE RETAIL PRICES OF ESSENTIAL ITEMS


(Contd.) Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Note: Electric Bulb (60-W) 11.03 11.98 12.00 12.28 13.00 13.29 14.94 14.96 15.42 16.00 14.10 14.00 13.30 12.69 12.07 Cooked Beef Plate 8.22 9.35 10.51 11.59 13.17 14.48 15.84 16.44 17.85 18.30 18.53 18.58 18.88 20.95 24.21 Cooked Dal Plate 5.52 6.08 6.59 7.28 8.36 9.43 9.95 10.40 11.12 11.35 11.87 12.42 13.09 13.86 14.71 Rice Irri-6 Kg 4.84 5.66 6.41 6.62 7.07 9.09 9.99 10.48 12.09 12.51 11.56 11.51 12.23 13.06 15.41 Masoor Pulse Kg 18.77 23.70 21.75 19.87 20.20 28.01 30.79 34.49 35.84 36.03 36.97 38.41 38.41 35.40 43.11 Mash Pulse Kg 14.19 15.75 14.95 14.91 23.93 32.79 31.82 28.59 30.40 38.38 48.38 44.25 37.56 35.57 38.52 37.85 49.06 Garlic Kg 36.02 23.15 18.01 27.02 31.65 27.14 34.34 36.85 38.67 30.16 28.07 39.93 34.11 32.82 44.22 42.29 57.57 Cooking Oil Dalda 2.5 Ltr 57.71 62.83 70.74 87.22 116.83 122.50 134.64 148.95 168.27 166.93 155.64 170.97 199.68 203.98 204.99 205.59 204.42 (Rs/unit) Vegetable Ghee 2.5 Kg 49.07 51.74 62.07 77.95 104.62 109.82 119.06 131.98 157.94 164.95 153.43 169.24 196.77 200.28 204.15 204.17 203.64 (Contd.)

11.94 24.20 14.81 15.28 30.69 11.46 25.75 15.43 16.05 45.21 Data for Period: 1990-91 - 2000-01 is based on 12 centres while data for Period 2001-02 is based on 17 centres.

TABLE 7.4 AVERAGE RETAIL PRICES OF ESSENTIAL ITEMS


(Contd.) Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Note: Curd Kg 9.98 11.22 12.49 13.86 15.25 17.16 18.74 19.91 21.75 21.87 22.43 21.90 23.35 23.33 25.75 Tea Prepared Cup 1.35 1.54 1.72 1.99 2.20 2.55 3.02 3.30 3.61 3.74 4.03 4.18 4.46 4.72 5.12 Banana Doz. 11.66 14.71 19.06 19.28 21.04 21.36 20.37 20.18 21.25 20.88 22.11 22.14 21.96 23.01 25.11 Lawn Hussain Mtr. 33.65 37.64 39.42 42.38 44.63 46.25 52.03 56.02 72.17 76.27 77.77 70.79 69.92 69.96 72.61 Shirting Hussain Mtr. 30.98 35.79 39.54 41.90 45.08 50.59 53.58 55.25 56.85 58.28 59.10 55.17 55.59 56.78 59.94 Shoes Lady Bata 156.20 174.95 174.95 181.68 191.95 211.90 248.03 249.00 269.42 319.00 319.00 319.00 342.23 364.00 252.33 Chappal Gents Spang 33.97 36.95 36.95 46.31 55.95 63.83 78.70 79.00 79.00 79.00 79.00 79.00 79.00 79.00 86.53 (Rs/Unit) Bread Milk PowPlain der Nido M.Size 500 grams 4.34 217.27 5.01 74.59 5.78 84.96 6.55 90.40 7.40 105.47 7.99 79.01 9.09 91.00 10.31 102.40 10.39 105.82 10.96 110.00 11.17 114.03 11.14 116.00 11.16 88.00 ** 11.77 94.75 13.25 102.62

25.44 5.08 23.92 71.95 59.57 202.75 85.79 13.09 102.20 28.06 5.71 27.05 30.65 62.11 299.00 89.00 14.18 108.00 Data for Period 1990-91 - 2000-01 is based on 12 centres while data for Source : Federal Bureau of Statistics. 2001-02 is based on 17 centres. ** The unit has changed from 500 GM to 400 GM

TABLE 7.4 AVERAGE RETAIL PRICES OF ESSENTIAL ITEMS (Average of 12 Centers)


(Contd.) Fiscal Year Kerosene (per ltr.) Gas Charges Elect Charges (upto 50 units) 1.28 1.46 2.18 2.45 2.54 2.47 2.41 2.41 Petrol Super (per ltr.) 28.23 29.34 31.60 33.08 33.69 40.74 Tele Local Call Charges (per Call) 2.10 2.22 2.31 2.31 2.31 2.31

(100 cf) 1990-91 2.57 1991-92 5.90 1992-93 5.96 1993-94 7.01 1994-95 7.36 1995-96 8.27 1996-97 10.66 1997-98 11.60 1998-99 11.72 1999-00 13.00 231.44 2000-01 16.84 248.55 2001-02 18.58 259.26 2002-03 22.48 259.35 2003-04 24.95 79.45 * 2004-05 29.11 84.6* Jul-Apr 2004-05 28.63 84.45 2005-06 35.61 78.76 Note : Data for Period 1990-91 - 2001-01 is based on 12 centres while data for 2001-02 is based on 17 centres. - : Not Available * : The unit has been changed form 100 CM to 100 CF

38.63 2.31 54.57 2.31 Source: Federal Bureau of Statistics.

TABLE 7.5 INDICES OF WHOLESALE PRICES OF SELECTED COMMODITES (Base Year 1990-91 = 100)
Fiscal Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Gram (Whole) 116.50 148.18 220.32 313.71 303.57 199.41 260.78 307.41 370.24 430.67 100.00 84.23 71.40 74.17 95.52 93.45 123.90 Sugar Refined 103.64 110.57 115.96 123.67 152.97 192.12 175.98 173.03 191.58 250.69 100.00 82.36 75.32 67.72 85.18 88.36 116.82 Vegetable Ghee Tea Meat 105.52 100.82 110.71 123.78 119.10 121.02 151.04 136.40 140.28 205.90 148.50 162.40 208.27 157.91 162.86 224.41 197.75 201.85 241.78 255.96 210.00 285.78 266.35 214.95 249.13 254.60 218.60 231.63 270.93 220.17 (Base Year 2000-01 = 100) 100.00 100.00 100.00 114.12 99.28 102.04 130.34 96.93 111.10 141.44 96.94 137.55 137.41 93.78 169.19 137.60 137.10 93.91 92.83 167.50 182.21 Vegetables 96.82 107.36 143.43 155.19 173.71 188.93 231.40 196.69 195.92 201.60 100.00 107.57 101.65 116.00 144.06 149.33 168.15 Fresh Milk 110.71 126.15 142.92 163.96 190.39 218.18 216.25 245.85 252.28 252.86 100.00 99.79 100.50 105.41 113.43 112.48 121.42 Motor Fuels 102.50 103.37 123.39 124.80 139.42 173.35 188.14 204.46 239.48 317.82 100.00 102.90 106.80 111.03 134.78 130.98 179.71 (Contd.)

Wheat 116.48 122.77 136.04 161.26 163.26 206.13 246.80 241.28 258.66 270.76 100.00 96.10 101.12 191.89 137.24 138.49 137.16

Rice 110.40 122.28 130.94 141.25 167.12 185.50 197.08 239.88 245.11 227.63 100.00 109.64 126.09 138.50 153.40 151.77 155.35

Cotton 106.04 119.20 168.20 207.62 210.57 242.89 245.84 261.55 213.72 253.59 100.00 91.31 110.46 144.44 95.23 94.77 103.50

TABLE 7.5 INDICES OF WHOLESALE PRICES OF SELECTED COMMODITIES Base Year (1990-91 = 100)
Fiscal Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Apr 2004-05 2005-06 Other Oils 100.39 101.23 120.72 122.47 141.59 209.46 228.68 229.82 272.45 383.08 100.00 103.59 128.10 139.86 169.56 165.00 224.16 Fire Wood 111.43 124.16 133.68 142.95 153.83 175.15 190.80 199.33 207.73 214.21 100.00 101.33 103.94 115.41 127.94 126.70 149.95 Cotton Yarn 105.40 103.44 137.83 173.62 184.24 201.58 199.64 203.63 200.74 207.98 100.00 95.35 98.06 121.03 106.36 106.72 107.03 FertiSoaps lizers 105.27 109.71 116.70 113.37 140.04 153.70 146.33 178.99 171.03 198.95 209.33 247.69 200.54 256.19 212.66 277.59 222.75 316.24 224.58 302.96 Base Year 2000-01 = 100 100.00 100.00 103.89 102.26 109.00 113.59 110.68 123.64 122.81 140.95 122.62 121.60 140.19 155.94 Transport 103.24 116.55 135.89 167.72 216.71 234.60 234.81 236.57 255.29 265.68 100.00 106.66 106.82 108.70 110.39 110.55 110.90

Matches 107.59 117.63 120.69 120.73 122.99 184.13 208.14 208.14 205.67 206.29 100.00 100.55 100.55 105.61 107.66 107.66 107.67

Leather 109.57 109.58 115.54 124.50 138.98 162.65 152.12 128.27 133.20 140.07 100.00 100.00 95.23 93.64 102.77

Timber 114.90 130.28 144.50 161.57 175.41 202.36 220.08 227.06 239.02 253.52 100.00 101.45 101.25 121.75 140.93

Cement 108.00 114.13 137.61 169.92 166.18 200.32 212.05 216.99 212.65 215.14 100.00 100.42 102.77 102.45 104.82

101.92 140.96 104.41 110.41 141.08 119.43 Source: Federal Bureau of Statistics

Chapter 9.

TRADE AND PAYMENTS

Trade matters more than ever before in a highly integrated world today. Countries that have intensified their links with the global economy through trade and investment have usually grown more rapidly over a sustained period and have consequently experienced larger reduction in poverty. Pakistans foreign trade sector is being affected both by structural and cyclical factors. On the domestic side, four years of strong economic growth strengthening domestic demand and triggering a consequent pick up in investment spending, has led to a massive surge in imports. On the external side, the global economy continues its strong and broad based expansion with growth reaching close to 5 percent in 2006 with similar expansion projected for the next year which will be the fifth successive year that the world economy has grown by more than 4.0 percent. A strong and geographically broad based growth has helped world trade to expand strongly and at the same time the rapid expansion of global trade has been a key driving Fig.1: Trade As Percent of GDP force for growth in almost every part of the world. Like many other developing countries, Pakistan has also 36 34.0 benefited from a strong and sustained growth in world 35 34 economy. Pakistans exports grew at an average rate 31.6 33 32 of 16.45 percent per annum over the last four years. 31 29.0 30 28.4 28.0 Notwithstanding global economic expansion, the 29 27.2 28 25.8 27 sound macroeconomic policies that Pakistan pursued 26 25 coupled with wide ranging structural reforms, 24 23 particularly in the areas of trade and tariff that it 22 21 implemented over the last six or seven years have 20 helped Pakistan doubled its exports in seven years and increased its trade-to-GDP ratio from close to 26 percent in 1999-2000 to estimated 34 percent in 2005-06 (See Fig.1).
19 99 -0 0 20 00 -0 1 20 04 -0 5 20 01 -0 2 20 03 -0 4 20 02 -0 3

Exports Exports were targeted at $ 17 billion or 18.1 percent higher than last year. Export during the first nine months (JulyMarch) of the current fiscal year are up by 18.6 percent rising from $ 10183 million to $ 12073 million in the same period last year (See Table 9.1). The exports of primary commodities are up by 22 percent; prominent among those are exports of rice (33.6%), fish and fish preparation (30.2%) and fruits (20.6%). Exports of textile manufactures grew by 19.2 percent; prominent among those are exports of bedwear (58.4%), readymade garments (31.0%), cotton yarn (29.4%), cotton cloth (16.5%) and towels (12.0%). Exports of other manufactures also registered a high double digit growth of 19.2 percent. Within this category, exports of petroleum products grew by 80.8 percent and leather manufactures are up by44.0 percent. In recent years, Pakistan has also entered in the exports of engineering goods. Though relatively small in numbers, exports of engineering goods up by 10.3 percent. [See Table 9.1].

20 05 -0 6( E)

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Table 9.1: Structure of Exports July-March Particulars A. Primary Commodities Rice Raw Cotton Fish & Fish Preparation Fruits B. Textile Manufactures Cotton Yarn Cotton Cloth Knitwear Bedwear Towels Readymade Garments Made-up Articles Others C. Other Manufactures Carpets, Rugs & Mats Petroleum Products Sports Goods Leather Tanned 2005-006* 1160.9 835.2 53.9 132.1 90.3 7201.5 983.5 1556.5 1269.8 1494.3 421.1 1002.1 309.2 164.9 2460.0 199.8 563.3 228.4 196.8 540.5 117.3 299.6 135.4 1250.6 12072.9 2004-05* 951.3 625.0 96.8 101.5 74.8 6041.0 760.0 1336.3 1217.2 943.2 376.1 765.1 357.6 285.4 2064.3 198.2 311.6 216.1 219.7 375.3 136.5 282.5 122.8 1126.1 10182.7 % Change Absolute Increase Percentage Contribution to Increase in Exports 11.1 ($ Million)

Leather Manufactures

Surgical Goods & Instruments Chemicals & Pham. Products Engineering Goods D. Others Total * Provisional

22.0 209.6 33.6 -44.3 30.2. 20.6 61.4 1160.5 19.2 29.4 16.5 4.3 58.4 12.0 31.0 -13.5 -42.2 20.9 395.7 19.2 0.8 80.8 5.7 -10.5 44.0 -14.1 6.0 10.3 11.1 124.5 6.5 18.6 1890.2 100.0 Source: Federal Bureau of Statistics.

The overall exports posted an increase of $ 1890.23 million in Table 9.2: Export Losses (Fall in Prices) the first nine months of the current fiscal year over the same (July-March 2005-06) ($ Million) period of last year. Of this increase, 61.4 percent or $ 1160.5 Actual Exports at Last Losses million has come from textile manufactures followed by other Commodity Exports Years Prices manufactures (20.9% or $ 395.7 million) , primary -10.4 121.8 132.1 Fish & Fish Prep. -18.4 1538.1 1556.5 Cotton Cloth commodities (11.1% or $ 209.6 million) and other exports -7.1 1487.3 1494.3 Bedwear (6.5% or $ 124.5 million). In other words, over 82 percent 35.5 1305.3 1269.8 Knitwear incremental exports in the first nine months (July-March) of 5.7 426.8 421.1 Towels the current fiscal year owe to textile and other manufactures 11.2 157.4 146.3 Synthetic Textiles and the remaining 18 percent to primary and non-traditional -12.6 187.2 199.8 Carpets exports (See Fig-2). It is encouraging to note that exports this Total 5220.0 5223.9 3.9 year have been largely quantity driven and with firming up of * Provisional Source: Federal Bureau of Statistics. the price of exportables, Pakistans exports may rise substantially in the medium terms. During the first nine months (July-March) of the current fiscal year, over 88 percent increase in exports are driven by quantity (quantity effect) and the remaining 12 percent are due to the increase in unit values of exports (price effect). It is also important to note that when Pakistans exports in current

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Trade and Payments fiscal year was measured at last years prices, the decline in export proceed, was insignificant ($ 3.9 million; See Table 9.2). This simply confirms the fact that this years exports are largely quantity driven. Pakistan succeeded in exporting more in volume and price effect was minimal. Trends in Monthly Exports The monthly exports for the period July-Mar, 2005-06 remained consistently above the corresponding months of last year, averaging $ 1341.4 million per month as against an average of $ 1131.4 million last year. [See Table 9.3 & Fig-3]
Table 9.3: Monthly Exports ($ Million) Month 2004-05 2005-06 July 1183.8 1269.3 August September October November December January February March * Monthly Average 1187.7 1113.4 997.8 908.9 1129.9 1148.2 1166.1 1346.82 1131.40 1400.7 1483.3 1325.0 1113.5 1455.3 1229.9 1274.72 1521.20 1341.4
Fig-2: Major Contributors to Additional Export Earnings (Jul-Mar 05-06)
O t he rs 7% P rim a ry C o m m o dit i es 11%

O t he r M a nuf a c t ur er 21% T e xt ile M a nuf a c t ur er 61%

Fig-3: Monthly Exports


1600 1500 1400 1300

($ Million)

1200 1100 1000 900 800 700


Jul Aug Sep Oct Nov Dec Jan Feb Mar

2004-05

2005-06

Source: Federal Bureau of Statistics

Concentration of Exports Pakistan's exports are highly concentrated in few items namely, cotton, leather, rice, synthetic textiles and sports goods. These five categories of exports account for 74.5 percent of total exports during the first nine months of 200506 with Cotton manufacturers alone contributing 58.4 percent, followed by leather (6.1%), rice (6.9%) and synthetic textiles (1.2%). The degree of concentration reflects little change in the current fiscal year. Further disaggregation reveals that almost all the export earnings of cotton group have originated from textile and clothing. The same degree of concentration, by and large, persisted during 2005-06. The annual percentage shares of the major export commodities are given in Table 9.4 as well as in Figs-4 & 5.

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Table 9.4: Pakistan's Major Exports Commodity 92-93 94-95 Cotton 59.8 58.7 Manufacturers Leather 9.3 8.0 Rice 4.7 5.6 Synthetic Textiles 7.4 7.1 Sports Goods 1.9 3.2 Sub-Total 83.1 82.6 Others 16.9 17.4 Total 100.0 100.0 * July-March (Provisional) (Percentage Share) 04-05 05-06* 57.4 58.4

96-97 61.3 7.7 5.6 6.1 3.7 84.4 15.6 100.0

98-99 59.1 6.9 6.9 5.1 3.3 81.3 18.7 100.0

99-00 61.0 6.3 6.3 5.3 3.3 82.2 17.8 100.0

00-01 58.9 7.5 5.7 5.9 2.9 80.9 19.1 100.0

01-02 59.4

02-03 63.3

03-04 62.3

6.8 6.2 5.4 5.8 6.1 4.9 5.0 5.2 6.5 6.9 4.5 5.1 3.8 2.1 1.2 3.3 3.0 2.6 2.1 1.9 78.9 82.6 79.3 73.9 74.5 21.1 17.4 20.7 26.1 25.5 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Commerce & FBS.

Fig-4:Pakistan's Major Exports (1990-91) [% Share) Others 16.4% Sports Goods 2.2% Synthetic Textiles 5.7% Rice 5.6% Leather 9.1% Cotton 61.0%

Fig-5:Pakistan's Major Exports (2005-06) (July-March) [% Share] Others 25.5% Sports Goods 1.9% Synthetic Textiles 1.2%

Rice 6.9%

Leather 6.1%

Cotton 58.4%

Pakistan is moving gradually towards higher value added in exports of textile manufacturers. The shares of bedwear, knitwear and towels (value added exports) have increased while those of cotton yarn and synthetic textiles have declined. The shares of other components of textile manufactures either remained constant or fluctuated during the last eight years [See Table 9.5].
Table 9.5: Export of Textile Manufactures Item Cotton Yarn Cotton Cloth Knitwear Bedwear Towels Tents, Canvas & Tarpulin Readymade Garments Synthetic Textiles Madeup Articles Others * July-March (Provisional) 1998-99 19.0 22.4 14.9 12.3 3.6 0.8 13.1 8.0 5.1 0.8 100.0 1999-00 19.2 19.6 15.9 12.7 3.5 0.9 13.8 8.2 5.5 0.7 100.0 2000-01 18.7 17.9 15.8 12.9 4.2 0.9 14.4 9.5 5.7 100.0 2001-02 16.1 19.6 14.6 15.9 4.6 0.9 15.1 7.1 6.1 100.0 2002-03 12.9 18.6 15.9 18.4 5.2 1.0 15.1 7.9 5.0 100.0 (% Share) 2005-06 2003-04 2004-05 * 14.0 12.7 13.7 21.3 23.3 21.6 18.1 18.9 17.6 17.2 16.4 20.8 5.0 5.9 5.8 0.9 0.8 0.3 12.4 12.9 13.9 5.9 3.5 2.0 5.2 5.5 4.3 0.1 0.1 100.0 100.0 100.0 Source: FBS & Finance Division

Composition of Exports It has been observed that Pakistans exports composition has changed significantly since 1990s. The major changes

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Trade and Payments encompass sharp decline in the shares of primary and semi-manufactured exports whereas, increase in the share of Manufactured Goods. During July-March of the current fiscal year (2005-06), the share of primary commodities, semi-manufactures and manufactured goods remained more or less at the last years level [See Table 9.6].
Table 9.6: Composition of Exports Year Primary Commodities 1990-91 19 1992-93 15 1994-95 11 1996-97 11 1998-99 12 99-2000 12 2000-01 13 2001-02 11 2002-03 11 2003-04 10 2004-05 11 July-March 2004-05 11 2005-06 * 11 * Provisional Semi-Manufactures 24 21 25 21 18 15 15 14 11 12 10 10 11 Manufactured Goods 57 64 64 68 70 73 72 75 78 78 79 (% Share) Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

79 100.0 78 100.0 Source: Federal Bureau of Statistics

If Semi-Manufactures and Manufactured Goods are taken together, 89 percent of export earnings during 2004-05 and 2005-06 (July-March) originated from Manufactured Exports and only 11 percent came from Primary Commodities. The composition of Pakistans exports reflects that Pakistan does not rely heavily on Primary Commodities for foreign exchange earnings. Direction of Exports Pakistans exports are highly concentrated in few countries as well. The seven countries, namely USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia account for 50 percent of its exports. The United States is the single largest export market for Pakistan, accounting for 27 percent of its exports followed by the United Kingdom, Dubai, Germany and Hong Kong. Japan as Pakistans export destination is fast vanishing as less than one percent of its exports entering Japan [See Table 9.7]. Pakistan needs to diversify its exports not only in terms of commodities but also in terms of markets. Heavy concentration of exports in few commodities and few markets could cause serious export instability.
Table 9.7: Major Export Markets Country USA Germany Japan UK Hong Kong Dubai Saudi Arabia Sub-Total Other Countries Total * July-October 92-93 13.9 7.8 6.8 7.1 6.6 5.9 4.7 52.8 47.2 100.0 94-95 16.2 7.0 6.7 7.1 6.6 4.0 2.7 50.3 49.7 100.0 96-97 17.7 7.5 5.7 7.2 9.4 4.6 2.6 54.7 45.3 100.0 98-99 21.8 6.6 3.5 6.6 7.1 5.4 2.4 53.4 46.6 100.0 99-00 24.8 6.0 3.1 6.8 6.1 5.7 2.5 55.0 45.0 100.0 00-01 24.4 5.3 2.1 6.3 5.5 5.3 2.9 51.8 48.2 100.0 01-02 24.7 4.9 1.8 7.2 4.8 7.9 3.6 54.9 45.1 100.0 02-03 23.5 5.2 1.3 7.1 4.6 9.0 4.3 55.0 45.0 100.0 (Percentage Share) 03-04 04-05 05-06* 23.9 23.9 26.9 4.9 4.8 4.6 1.1 1.1 0.8 7.6 6.2 6.0 4.7 3.9 3.9 7.3 3.3 5.3 2.8 2.5 2.3 52.3 45.7 49.9 47.7 54.3 50.1 100.0 100.0 100.0 Source: Ministry of Commerce

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Economic Survey 2005-06 Imports Pakistans imports continue to be pushed higher by unprecedented rise in oil prices and continued strength of non-oil imports owing to buoyant domestic demand. Imports were targeted to grow by 4.25 percent for the fiscal year 200506 rising from $ 14.4 billion to $ 20.7 billion. Imports are up by 43.2 percent in the first nine months (July-March) of the current fiscal year rising from $ 14446 million to $ 20693 million in the same period last year [See Table 9.8). Disaggregation of total imports suggests that food imports grew by 35.9 percent - up from $ 990.7 million to $ 1346.7 million. Major contributors to the substantial rise in food imports include wheat, sugar and pulses. Owing to domestic shortage, the government liberalized its import regime and allowed duty free import of these three items to augment their supplies with a view to reducing food inflation in the country. The imports of milk and milk food also contributed to the rise in food imports. Sugar alone contributed 74 percent to the rise in food imports. Stated differently, sugar contributed 26.6 percentage points to the 35.9 percent growth in food imports. Wheat, sugar, and pulses alone contributed 93 percent to the rise in food imports. Or, these three items contributed 33.4 percentage points to the 35.9 percent growth in food imports. Had sugar production remained normal and no shortages had emerged during the year, food imports would have risen only by 9.3 percent. Imports of petroleum group have played a key role in Fig-6: Percent Contributors to Additional taking Pakistans import to a new height. Emerging as Import Bill (Jul-Mar 05-06) a single largest item in countrys import bill, Petroleum group import amounted to $ 4615.8 million during the first nine months (JulyFood Machinery Misc./Others March) of the current fiscal year as against 6.0% 17.1% 24.9% $ 2806.6 million in the same period last year, thus registering an increase of 64.5 percent [See Table 9.8]. Although the quantity of imports of crude as well Consumer as petroleum products are down by 2.3 percent and Durable 5.8 percent, respectively, the prices of these two 7.3% Petroleum items are 76.6 percent and 62.9 percent higher than 33.0% Raw Material last year, causing import of these two items to rise by 11.8% 64.5 percent in value terms. Despite reduction in quantity, Pakistan was forced to pay$ 1915 million more to import crude and petroleum products a very heavy price for a developing country like Pakistan. The unprecedented surge in domestic demand has fueled an exceptional increase in non-oil imports, registering a growth of 38.1 percent in first nine months (July-March) of the current fiscal year. Non-food non-oil imports also grew by 38.3 percent, reflecting continued strong domestic demand. Imports of machinery, accounting for 27.0 percent and 19.2 percent to non-food non-oil imports and total imports, respectively, grew by 30.8 percent in the first nine months (July-March) of the current fiscal year rising from $ 3034.6 million to $ 3970.5 million in the same period last year. Major contributors to the rise in machinery imports include power generation machine (44.8%), agriculture machinery (109.2%), construction and mining machinery (29.0%) and other machinery (51.7%). A surge in imports of machinery reflects a growing domestic investment driven imports, expanding the countrys production base. Imports of raw materials, like surge in machinery imports, represents the growing level of economic activity in the country. Imports of raw materials, accounting for 32 percent and 23 percent to non-food non-oil imports and total imports, respectively, are up by 36.1 percent in the first nine months (July-March) of the current fiscal year rising from $ 3447 million to $ 4693 million in the same period last year. With the exception of insecticides, all categories of raw materials registered high double digit growth [See Table 9.8]. Three fourth (75%) rise in imports of raw materials is attributed to iron & steel and scrap, chemical products and fertilizers. Another 13.7 percent contribution came from plastic materials. Thus, almost 89 percent increase in imports of raw materials are attributable to just four items.

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Trade and Payments Fueled by the rising levels of income of the people on account of four years of strong economic growth and aided by the availability of consumer credit, the imports of consumer durables (automobiles, refrigerator, freezer, air conditioner, TV, dishwashing machine etc.) are up by 41.8 percent rising from $ 957.7 million to $ 1358.2 million in the first nine months (July-March) of 2005-06. Within this category of imports, imports of electrical machinery and appliances are up by 44.2 percent and imports of road motor vehicles by 41 percent. Consumer durables account for 9.2 percent of non-food non-oil imports and 6.6 percent of overall imports in 2005-06. Contrary to the general perception, the shares of consumer durables in non-food non-oil imports and total imports remained virtually unchanged over the last year. Furthermore, Consumer durables represent a relatively smaller share in total imports and its high growth has had minimal impact on overall import growth. Other imports include a large number of different categories of imports which are lumped together. Other imports are up by 46.7 percent in the first nine months of the current fiscal year rising from $ 3210 million to $ 4709 million over the same period of last year.
Table 9.8: Structure of Imports July-March 2005-06* 2004-05 1346.7 990.7 38.972 24.32 94.577 70.11 40.736 30.125 180.071 174.383 39.466 37.054 551.855 560.422 275.13 11.03 125.867 83.208 3970.5 3034.6 398.6 275.3 197.9 193.9 654.2 700.0 138.5 107.4 90.9 132.8 91.7 43.9 2398.7 1581.3 4615.8 2806.6 1834.2 1195.4 2781.6 1611.2 1358.2 957.7 344.1 238.5 1014.1 719.2 4692.8 3446.9 188.3 109.1 178.2 100.3 488.5 275.3 91.8 107.1 757.1 587.0 1314.0 793.2 1675.0 1474.9 4709.2 3209.5 20693.2 14446.0 16077.4 11639.4 14730.7 10648.7 Absolute Increase 356.0 % Change ($ Million) Share in total imports 6.5 19.2 22.3

A. Food Group Milk & milk food Wheat Unmilled Dry fruits Tea Spices Edible Oil (Soyabean & Palm Oil) Sugar Pulses B. Machinery Group Power Gen. Machines Office Machines Textile Machinery Const. & Mining Mach. Aircrafts, Ships and Boats Agri. Machinery Other Machinery C. Petroleum Group Petroleum Products Petroleum Crude D. Consumer Durables Electric. Mach & App. Road motor Vehicles E. Raw Materials Synth. Fibre & Regenerated Fibre Synthetic & Artificial Silk Yarn Fertilizer Insecticides Plastic Materials Iron & Steel & scrap Other Chemical Products F. Others Total Imports Non-Oil Imports Non-Food Non-Oil Imports * Provisional

35.9 60.2 34.9 35.2 3.3 6.5 -1.5 2394.4 51.3 935.9 30.8 44.8 2.0 -6.5 29.0 -31.5 109.2 51.7 1809.2 64.5 53.4 72.6 400.5 41.8 6.6 105.6 44.2 1.7 294.9 41.0 4.9 1245.9 36.1 22.7 79.2 72.6 77.9 77.6 213.2 77.4 -15.3 -14.3 170.1 29.0 520.8 65.7 200.1 36.3 1499.7 46.7 22.7 6247.2 43.2 100.0 4438.0 38.1 77.7 4082.0 38.3 71.2 Source: Federal Bureau of Statistics

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Economic Survey 2005-06 Major Contributors to Increase In Imports Overall imports during the first nine months (July-March) of the current fiscal year grew by 43.2 percent. In other words, imports in absolute term have increased by $ 6247.2 million. Which categories of imports are the major contributors to the substantial rise in imports? A cursory look at Table 9.9 is sufficient to see that 29 percent contribution alone came from petroleum group and that too, on account of hefty rise in its price because imports of petroleum products and crude petroleum are down in quantity terms. Petroleum group contributed 12.5 percentage points to the 43.2 percent growth in total imports. Imports of raw material contributed almost 20 percent to the rise in overall imports and 8.6 percentage points to the 43.2 percent growth in total imports. Within this category of imports, four items, namely iron & steel and scrap, fertilizer, chemicals and plastic materials contributed almost 90 percent to raw material imports and 18 percent to overall imports. Over 8 percent contribution to imports came alone from iron & steel scrap because two coke oven batteries of the Pakistan Steel Mill went of out of order in July 2005 and the Mill was operating at around one third of its capacity. In order to meet growing domestic demand Pakistan had to import iron & steel and scrap over and above of its normal requirements. Pakistan Steel is getting back to its normal capacity and as such, imports of iron & steel and scrap would come back to its normal level in the next fiscal year. Machinery imports contributed 15.0 percent to the additional increase in imports and 6.5 percentage points to the overall growth in imports. Major contributors in machinery imports are power generation machine, agriculture machinery, construction and mining machinery, and other machinery. Higher increase in imports of agriculture is a manifestation of higher cash incomes of farmers from last years bumper cotton crop and the higher price of wheat.
Table 9.9: Major Contributors to Increase Imports July-March 2005-06 Imports 2005-06 Total imports Food Group Machinery Group Petroleum Group Raw Materials Consumer Durables - Electrical Machinery & appliances - Road Motor Vehicles Others 20693.2 1346.7 3970.5 4615.8 4692.8 1358.2 344.1 1014.1 4709.2 2004-05 14446.0 990.7 3034.6 2806.6 3446.9 957.7 238.5 719.2 3209.5 Increase 6247.2 356.0 935.9 1809.2 1245.9 400.5 105.6 294.9 1449.7 Percentage Contribution 100.0 5.7 15.0 29.0 19.9 6.4 1.7 ($ Million) Contribution to Import growth % 43.2 2.5 6.5 12.5 8.6 2.8 -

4.7 24.0 10.4 Source : Federal Bureau of Statistics

Consumer durables including cars have contributed only 6.4 percent to the additional increase in total imports and 2.8 percentage points to the 43.2 percent growth in total import this year. Within this category of imports, electrical machinery and appliances contributed merely 1.7 percent while the contribution of cars has been 4.7 percent only. Cars have been imported in the form of completely knocked down (CKD) condition by the local car assemblers as well as in the form of completely built unit (CBU) by the individuals. Cars brought in under the baggage rule, transfer of residence or gift scheme do not burden the countrys foreign exchange reserves as their prices are paid from outside Pakistan. Since cars brought in under these schemes do get cleared from the customs after paying duties and taxes, therefore, they appear as imports and accordingly imports are inflated to that extent. However, the value of the cars also appears under invisible receipts as a counter entry to neutralize its impact on the countrys balance of payments. Therefore, contrary to the general perception, the contribution of cars in overall imports has been minimal at best. Had the total value of import of car would have been at last years level or had there been no growth in import of cars in value term, the growth in total imports would have been 40.4 percent instead of 43.2 percent. Car has merely contributed 2.8 percentage points to the overall growth in imports. On the contrary, if the price of oil would have remained at last years (average of 2004-05) level, the growth in overall imports would have been 30.7 percent, that is 12.5 percentage points less than what is currently estimated.

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Trade and Payments How the surge in international price of commodities including oil have adversely affected the current account of developing countries including Pakistan can be gauged from Table 9.10. Pakistans import was inflated by over $ 2.3 billion in the first nine months (July-March) of the current fiscal year on account of higher international price of commodities including oil. Had the unit values of these few items [See Table 9.10] remained at the last years level, Pakistans total imports would have been $ 18368.4 million instead of $ 20693.2 million and import growth would have been 27.2 percent instead of 43.2 percent.
Table 9.10: Additional Import Bill as a Result of the Rise in Import Prices July-March 2005-06* ($ Million) Additional Actual Imports at Last Gains Commodity Bill Imports Years Prices 0.6 13.8 13.2 Soyabean Oil 47.6 586.2 538.6 Palm Oil 708.3 1125.9 1834.2 Petroleum Products 1206.7 1574.9 2781.6 Petroleum Crude 77.0 411.5 488.5 Fertilizer 78.4 678.7 757.1 Plastic Material 51.5 191.9 243.4 Medicinal Products 202.9 844.7 1047.6 Iron & Steel Total 7704.2 5427.6 48.2 2324.8 * Provisional Source: FBS & E.A. Wing, Finance Division

Trends in Monthly Imports The monthly imports during July-March, 2005-06 remained consistently higher compared to the same months of last year. Imports averaged $ 2299.2 million per month during this period as against $ 1605.1 million for the comparable period last year. Thus, on average, imports have risen by $694.1 million per month during this period. The monthly imports are tabulated in Table 9.11 and Fig-7.
Table 9.11: Monthly Imports ($ Million) Month 2004-05 2005-06 July 1458.7 1996.3 August September October November December January February March * Monthly Average 1475.2 1378.7 1456.4 1477.9 1673.7 1610.3 1783.0 2135.2 1605.1 2234.8 2325.3 2300.0 2475.1 2145.5* 2210.5* 2685.3* 2299.2
1200 700 Jul Aug Sep Oct 2004-05 Nov Dec Jan 2005-06 Feb Mar

Fig-7: Monthly Imports


3200 2700

($ Million)

2322.8

2200 1700

* Provisional Concentration of Imports

Source: Federal Bureau of Statistics.

Like exports, Pakistan's imports are also highly concentrated in few items namely, machinery, petroleum & petroleum products, chemicals, transport equipments, edible oil, iron & steel, fertilizer and tea. These eight categories of imports accounted for 72.5 percent of total imports during 2005-06. Among these categories machinery, petroleum & petroleum products and chemicals accounted for 53.4 percent of total imports. Concentration of imports remained, by and large, unchanged over the last one decade with the exception of 2000-01.[See Table 9.12].

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Economic Survey 2005-06


Table 9.12: Pakistans Major Imports Commodities 92-93 94-95 96-97 98-99 99-00 Machinery * * 24.3 22.8 23.1 17.9 13.9 Petroleum & 15.5 15.3 19.0 15.5 27.2 Products Chemicals @ 12.5 14.0 13.4 16.6 17.5 Transport 12.5 5.9 4.7 5.7 5.5 Equipments Edible Oil 5.9 9.6 5.1 8.7 4.0 Iron & Steel 3.2 3.6 3.9 3.1 3.0 Fertilizer 2.5 1.2 3.2 2.8 1.9 Tea 2.1 1.8 1.1 2.4 2.0 Sub-Total 78.5 74.2 73.5 72.7 75.0 Others 21.5 25.8 26.5 27.3 25.0 Total 100.0 100.0 100.0 100.0 100.0 * July-March (Provisional) ** Excluding Transport Equipments, @ Excluding Fertilizer (Percentage Share) 03-04 04-05 05-06* 17.8 22.5 18.0 20.3 16.1 5.6 19.4 15.5 6.2 22.3 13.4 7.7

00-01 19.3 31.3 20.0 4.0 3.1 2.6 1.6 1.9 83.8 16.2 100.0

01-02 17.1 27.1 15.9 4.8 3.8 3.3 1.7 1.5 75.2 24.8 100.0

02-03 18.5 25.1 15.1 5.6

4.8 4.2 3.7 2.7 3.3 3.3 4.3 5.1 2.1 1.8 2.0 2.4 1.4 1.2 1.1 0.9 75.9 70.3 74.7 72.5 24.1 29.7 25.3 27.5 100.0 100.0 100.0 100.0 Source: Ministry of Commerce & FBS

Composition of Imports The composition of Pakistans imports has not witnessed any appreciable change over the years. The share of raw materials for consumer goods in the total imports continued to be high while that for capital goods remained stagnant. The share of capital goods exhibited upward movement mainly because of higher level of investment in the country. The share of consumer goods has declined owing to higher domestic production. During the first nine months of the current fiscal year (July-March, 2005-06) the share of consumer as well as capital goods stood at 12 percent and 36 percent, respectively, while that of raw material for consumer goods fell by three percentage point due to higher domestic production. The share of raw material for capital goods remained flat at 8 percentage point during this period owing to higher level of investment. The details are given in Table 9.13.
Table 9.13: Composition of Imports Year 1990-91 1992-93 1994-95 1996-97 1998-99 99-2000 2000-01 2001-02 2002-03 2003-04 2004-05 July-March 2004-05 2005-06 * * Provisional Capital Goods 33 42 35 37 31 26 25 28 31 35 36 35 36 Raw Material for Capital Goods Consumer Goods 7 44 6 38 5 46 5 43 6 47 6 54 6 55 6 55 6 53 6 49 8 46 8 8 47 44 Consumer Goods 16 14 14 15 16 14 14 11 10 9 10 (% Share) Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

10 100.0 12 100.0 Source: Federal Bureau of Statistics

Direction of Imports Pakistans imports are highly concentrated in few countries. Over 40 percent of them continue to originate from just seven countries namely, the USA, Japan, Kuwait, Saudi Arabia, Germany, the UK and Malaysia. Saudi Arabia is

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Trade and Payments emerging as major suppliers to Pakistan followed by the USA and Japan [See Table 9.14].
Table 9.14: Major Sources of Imports Country U.S.A. Japan Kuwait Saudi Arabia Germany U.K. Malaysia Sub-Total Other Countries Total * July-March 92-93 9.4 15.9 3.3 5.4 7.4 5.2 5.1 51.7 48.3 100.0 94-95 9.4 9.6 5.8 4.9 6.8 5.1 8.8 50.4 49.6 100.0 96-97 12.0 8.6 6.9 6.0 5.6 5.0 4.7 48.8 51.2 100.0 98-99 7.7 8.3 5.9 6.8 4.1 4.3 6.7 43.8 56.2 100.0 99-00 6.3 6.3 12.0 9.0 4.1 3.4 4.3 45.4 54.6 100.0 00-01 5.3 5.3 8.9 11.7 3.5 3.2 3.9 41.8 58.2 100.0 01-02 6.7 5.0 7.1 11.6 4.3 3.4 4.4 42.5 57.5 100.0 02-03 6.0 6.6 6.6 10.7 4.6 2.9 4.6 42.0 58.0 100.0 03-04 8.5 6.0 6.4 11.4 3.9 2.8 3.9 42.9 57.1 100.0 (Percentage Share) 04-05 7.6 7.0 4.6 12.0 4.4 2.6 2.6 40.8 59.2 100.0 05-06* 5.8 5.6 6.2 11.2 4.7 2.8 3.0 39.4 60.6 100.0

Source: Ministry of Commerce

Trade Balance Despite sizable export gains, the merchandise trade deficit continues to widen on the back of Pakistans strong domestic demand fueling non-oil imports. High global price of oil also inflated the oil import bill owing to its increasing dependence of imported crude oil. The merchandise trade deficit stood at $ 8.62 billion by the end of the third quarter (July-March) of the current fiscal year as against $ 4.3 billion in the same period last year, thereby showing a deterioration of over 100.0 percent. As share of GDP, Pakistans trade deficit is projected to be almost 7.0 percent in 2005-06 as against 4.0 percent last year. What factors contributed to further widening of trade deficit? Are these factors transient or of permanent nature? Answer to these questions are documented in Table 9.15.
Table 9.15: Major Contributors to Increase In Trade Deficit A. Trade Deficit in Jul-March 2004-05 B. Trade Deficit in Jul-March 2005-06 Absolute Increase in Trade Deficit (B-A) Major Contributors Petroleum Group Machinery Group Consumer Durables Raw Materials - Iron Steel and Scrap - Fertilizer - Chemical Products - Plastic Materials Other Absolute Increase 4263.4 8620.2 4356.8 1809.2 935.9 400.5 520.8 213.2 200.1 170.1 107.0 (Million $) % Contribution 100.0 41.5 21.5 9.2 12.0 4.9 4.6 3.9 2.4 Source: Federal Bureau of Statistics

A cursory look at Table 9.15 is sufficient to see that petroleum group alone has contributed 41.5 percent in further widening of trade deficit followed by machinery group (21.5%), iron & steel and scrap (12.0%), consumer durables (9.2%) etc. In other words petroleum, machinery and iron & steel contributed 75 percent to the rise in trade deficit.

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Economic Survey 2005-06 Contrary to the general perception, the contribution of consumer durables has been 9.2 percent in the increase in trade deficit. Going forward, no one is expecting another 65 percent increase in oil prices in 2006-07. Terms of Trade The terms of trade with base year 1990-91 (equal to 100) aggregated to 73.6 during 2004-05 as compared to 78.7 of 2003-04, showing a deterioration of 6.5 percent. The increase in unit prices of petroleum, chemicals and metal groups caused terms of trade to deteriorate. This declining trend has persisted and the terms of trade during the first half of the current fiscal year worsened by 13.2 percent down to 66.4 over the level of 76.5 recorded in the same period last year. The increases in unit prices of major import items, especially edible oil, POL and chemicals, in the international market have adversely impacted the terms of trade. [See Table 9.16]. The trend depicted by the terms of trade is also shown in Fig.8.
Fig-8: Terms of Trade (base year 90-91=100)
130 120 110 100 90 80 70 60
20 01 -0 2 20 04 20 -0 05 5 -0 6 (J ul -D ec ) 19 91 -9 2 19 93 -9 4 19 95 -9 6 19 97 -9 8 19 98 -9 9 99 -2 00 0 20 00 -0 1 20 02 -0 3 20 03 -0 4

Table 9.16: Unit Value Indices and Terms of Trade (Base year 1990-91 = 100) Unit Value Indices Year Exports Imports 1991-92 119.9 131.9 1993-94 142.9 141.2 1995-96 185.4 185.5 1997-98 245.6 198.9 1998-99 258.4 223.3 99-2000 253.8 259.0 2000-01 271.5 298.4 2001-02 271.2 298.6 2002-03 254.0 309.5 2003-04 279.6 355.4 July-December 2004-05 285.2 372.8 2005-06 * 296.1 446.0 * Provisional.

Terms of Trade 90.9 101.2 99.9 123.5 115.7 98.0 91.0 90.8 82.1 78.7 76.5 66.4 Source: Federal Bureau of Statistics

Trade Policy Salient Features of Trade Policy (Exports, Imports and Implementation). Since 1999 Pakistan has embarked on an export - led growth strategy which is being managed through successive trade policies. The government believes that consistency and continuity in policies allied with facilitation, is the key to all successful initiatives in trade related areas. This has translated into emphasis on liberalization of our import regime, and facilitation of our stakeholders i.e. (businessmen and exporters), so that the cost of doing business for them was reduced, and they could create exportable surpluses after adding value. Having put Pakistan on a continuous path as far as exports are concerned the new objective is to significantly increase the rate of export growth by adopting a Rapid Export Growth Strategy (REGS) which has been drawn-up and is based on the following five pillars:

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Trade and Payments Improved market access through trade diplomacy, and new FTAs/PTAs with selected priority countries. Focusing on regions neglected by Pakistani exporters i.e. regions like Africa, Latin America, Eastern Europe, Central Asia and the Far East. iii. Strengthening of trade promotion infrastructure of the Government including the EPB and the trade offices abroad. iv. Improving skill development and productivity through provision of large - scale training. v. Provision of state of the art physical infrastructure by the government to spur investment and FDI. These five basic areas need to be concentrated upon to enhance Pakistani exports in a highly competitive post quota era. Of course, for any strategic thrusts to be taken forward; tactical focus with specific proposals, have to be formulated, and these have been done under eight areas as below: i. ii. i. ii. iii. iv. v. vi. vii. viii. Diversification of Exports Trade Facilitation Increased Market Access Enhancing export competitiveness by reducing cost of doing business. Capacity Building on WTO and Trade Negotiations. Developing Export of Services Improving compliance and quality infrastructure and Techno-legal proposals.

The implementation status of different trade policy initiatives announced in Trade Policy 2005-06 is given below. The Trade Policy 2005-06 is being implemented with letter and spirit. For the rapid growth of export, Ministry of Commerce have taken the following steps, out of which some have already been implemented and other are in process of implementation. Focus on Neglected Regions/countries. The Trade Policy 2005-06 aimed at focusing on neglected regions/countries. The Ministry of Foreign Affairs in consultation with the Ministry of Commerce has appointed Honorary Counsels General in important cities of the region to focus on trade matters to boost export. In this regard the Board of the EMDF has approved the funds for the Pakistans Embassies to hire local Marketing Executives to be funded from the Export Market Development Fund (EMDF). This aspect already stands implemented. Marketing Efforts in U.S.A. and E.U. Another important point of the current trade policy was to boost trade with USA and EU. For this purpose, Market Company for EU and Consultants for USA have been hired and this aspect has also been implemented. Alongwith efforts at international level to increase international trade some local level steps have also been taken to improve local trade. For this purpose, following steps have been taken and their implementation status is as under:i. ii. iii. iv. v. Awareness campaign on trade agreements (a comprehensive programme has been chalked out). Facilitating export from Balochistan (Implemented). Retail sales outlets (Implemented). Simplification of verification procedure for export consignments to Afghanistan (Implemented). Removal of anomaly in re-exports to Afghanistan (Implemented).

139

Economic Survey 2005-06 vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. xxii. xxiii. Textile Garments Skill Development Board (Implemented). Facilitation of export of gems/jewellary, precious/semi-precious stones (Implemented). Development of Footwear Sector (Implementation is in process). Process of organic cotton (Implemented). Facilitation for pharmaceutical export (Implemented). Reducing cost of transportation (Implemented). Assistance for quality standards certification (Implemented). Promotion of Pakistan trade marks (Implemented). Assistance for Mandatory Certification (Implemented). Strategy for Export of Service (Implementation in process). Concessional rate of withholding tax for export of services (Implemented). Capacity building on WTO and regional and bilateral trade negotiations (Implementation in process). Trade Competitiveness Indicators (Implementation in process). Internal Commerce (Implementation in process). Strengthening of National Tariff Commission (Implemented). Promotion of Export of Minerals/Marble and Precious Stones (Implementation in process). Rationalization of the procedure of Defense Exports (Implemented). Facilitation for Leather Exports (Implemented).

Balance of Payments Current Account Balance Pakistans current account balance that slipped into red in 2004-05 after posting surpluses for three consecutive years remained in deficit in 2005-06 with gap continued to widen owing to higher oil import bill on the back of high global crude oil prices and hefty rise in non-oil imports fueled by strong demand. Apart from further widening of trade deficit, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost, and growth in personal travel due to the rising level of income of middle and high income groups have also contributed to the widening of current account gap. Deceleration in the growth of net transfers is also responsible for widening of the current account deficit. The current account deficit, excluding official transfers, stood at $ 4696 million in the first nine months (July-March) of the current fiscal year as $ 1181 million in the same period last year. As percentage of projected GDP for the year the current account deficit stood at 3.7 percent as against 1.1 percent in the same period last year [See Table 9.17]. Although trade deficit (fob) almost doubled over the last year and services balance deteriorated by 27.5 percent, the strong inflows under private transfers fueled by rising workers remittances and resident foreign currency accounts offset some of the negatives with current account deficit standing at $ 4696 million. The flow under long term capital (net) improved markedly and risen to $ 3905 million from $ 1633 million last year.
Table 9.17: Balance of Payments Components Trade balance 2003-04 1208 2004-05 -4352 July-March 2004-05 -3202 2005-06 (P) -6104 ($ Million)

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Trade and Payments


Exports (fob) Imports (fob) Services (net) Private transfers (net) Workers remittances Current account balance Excluding official transfers Long term capital (net) Changes in reserves (- ve = Increase) P: Provisional 12396 -13604 -3584 6116 3871 1314 -201 -826 14401 -18753 -5841 8440 4168 -1753 2552 -372 10641 -13843 -4230 6251 3050 -1181 11854 -17958 -5393 6801 3228 4696

1633 3905 -510 -124 Source: State Bank of Pakistan

Workers Remittances Workers remittances, the second largest source of foreign exchange inflows after exports, continue to maintain its rising trend. Workers remittances totaled $ 3629.7 million during the first ten months (July April) of the current fiscal year as against $ 3451.5 million in the same period last year, depicting an increase of 5.2 percent. The monthly average of remittances in the first ten months stood at $ 363.0 million as against $ 345.2 million in the same period last year, showing an increase of $ 5.2 million every month [See Table 9.18].
Table-9.18: Workers Remittances Monthly Cash Inflow * July August September October November December January February March April July-April Monthly average * Including FEBCs and FCBCs ($ Million) % Change -5.3 2.6 9.0 11.3 5.9 10.3 21.7 5.5 -4.5 0.1 5.2 5.2 Source: State Bank of Pakistan

2004-05 330.5 330.7 312.9 334.8 291.8 336.4 321.4 339.3 443.7 401.0 3451.5 345.2

2005-06 313.1 348.4 341.1 372.5 308.9 371.2 391.3 358.1 423.6 401.5 3629.7 363.0

The United States continues to be the single largest source of cash workers remittances accounting for 27.4 percent or $ 994.78 million, followed by Saudi Arabia ($ 584.64 million or 16.1%),UAE ($ 555.84 million or 15.3%), UK ($ 346.4 million or 9.5%) and other GCC countries $425.95 or 13.2%). Given the trend so far it is likely that workers remittances may touch $ 4.4 billion in 2005-06. Remittances have so far proved remarkably stable and clustered around $ 4.0 billion since 2002-03. (See Table 9.19) Empirical evidence suggests that remittances have helped recipient countries maintain macroeconomic stability and mitigate the impact of adverse shocks.
Table-9.19: Country/Region Wise Cash Workers Remittances Country / Region USA UK July-April 2004-05 1076.22 309.99 July-April 2005-06 994.78 346.40 % Change -7.6 11.75 ($ Million) % Share 27.41 9.54

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Saudi Arabia UAE Other GCC Countries EU Countries Others Countries 506.22 580.87 425.95 83.25 362.49 584.64 555.84 477.30 97.06 443.74 15.5 -4.3 12.2 16.6 19.66 16.11 15.31 13.15 2.67 11.95

Source: State Bank of Pakistan

Foreign Exchange Reserves Pakistans total liquid foreign exchange reserves stood at $ 13,0160.0 million at the end of April, 2006. Of which, reserves held by the State Bank of Pakistan amounted to $ 10,645.3 million and by banks stood at $ 2370.7 million. Since end-July 2005 ($ 12609.0 million) and until end-April 2006 ($13016.0 million), Pakistan has added $ 407.0 million in its foreign exchange reserves. The rising trend depicted by the foreign exchange reserves is shown in Fig-10. Many factors contributed towards this comfortable position of reserves. The most prominent among those are; private transfers that include remittances, higher export proceeds, floatation of bonds and higher FDI flows and privatization proceeds. With this build up in reserves, Pakistan is in a position to meet any abnormal shock on external front. Exchange Rate

Fig 10: Foreign Exchange Reserves (End Period)


14000 13500 13000 12500
($ million)

12000 11500 11000 10500 10000 9500 9000 Apr Mar Feb Jan,06 Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan,05 Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan,04

Fig-11: Average Exchange Rate Rs/$ and Rs/Euro


85 80 75 70 65 60

Dollar

Euro

Exchange rate remained stable during the ten 55 months of current fiscal year ranging between 50 Rs.59.6266 per dollar in July 2005 to Rs.60.0218 April 2006, representing a depreciation of Rupee by 0.6 percent. In the meantime, Rupee Dollar parity in the open market on end-April, 2006 was Rs.60.0, showing a premium of 0.2 percent [See Table 9.20]. As against the corresponding period of last year, Rupee depreciated in the open market by 0.5 percent. On the whole, exchange rate has remained stable in the current fiscal year. The exchange rate of the Euro against the Rupee continued to gain strength. The Pak-rupee exchange rate in terms of one unit of Euro during July, 2005 averaged at Rs.71.8 which rose to an average of Rs.75.8 in April, 2006. Thus, the Pak-rupee depreciated vis-a-vis the Euro from the beginning of the current fiscal year till April, 2006 by 5.3 percent mainly because the single Euro zone currency (Euro) dominated the international market against the US dollar and caused the average parity rate of the Pak-rupee to lose ground in terms of the Euro. The movement of the Pak-rupee exchange rate versus one unit of the US dollar and the Euro is given in Table 9.20 and Fig.11].

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Trade and Payments


Table 9.20: Average Exchange Rates and Premium Inter Bank Rate Rs / $ January, 2004 February March April May June July, 2004 August September October November December January, 20 05 February March April May June July 2005 August September October November December January, 20 06 February March April 57.4 57.4 57.4 57.5 57.7 57.9 58.3 58.8 59.0 60.0 59.9 59.5 59.4 59.4 59.4 59.4 59.5 59.7 59.6 59.7 59.8 59.7 59.8 59.8 59.9 59.9 60.0 60.0 Open Market Rate Rs/$ 57.5 57.4 57.7 57.8 58.3 58.4 58.5 59.1 59.6 60.3 60.2 60.0 59.7 59.6 59.6 59.9 60.4 60.5 60.5 60.2 60.1 60.0 60.0 60.1 59.8 59.9 60.2 60.2 Premium (%) 0.2 0.5 0.5 1.0 0.9 0.3 0.5 1.0 0.5 0.5 0.8 0.5 0.3 0.3 0.8 0.9 0.8 0.9 0.6 0.6 0.3 0.2 0.3 0.0 0.1 0.2 0.2 Rs/ Euro 72.3 72.6 70.4 69.0 69.2 70.3 71.5 71.6 72.0 75.0 77.9 79.7 78.1 77.3 78.3 76.8 76.8 72.6 71.8 73.3 73.3 71.8 70.9 70.9 72.5 71.5 72.2 75.8

Source: State Bank of Pakistan

Real Effective Exchange Rate

143

Economic Survey 2005-06 The Real Effective Exchange Rate (REER), which is an indicator of trade competitiveness and captures the behaviour of the Pak-rupee against a basket of currencies, showed a real depreciation of 1.6 percent during JulyApril, 2005-06. The real depreciation occurred mainly because the Pak-rupee depreciated in nominal terms against most of the basket currencies. Though Pakistan witnessed Table 9.21: Real Effective Exchange Rate Index some pressure on exchange rate during the current fiscal year but Rupee/US dollar parity rate did not adversely impact (Rupee Price of a Basket of 15 Currencies) the export market as Pakistans export competitiveness (2000 = 100) showed an improvement as reflected by the depreciation of End Month Position the REER. Trends of Real Effective Exchange Rate are given Jul-04 92.4767 below in the table indicating that after registering a downward Aug-04 91.6798 trend in January, REER has again started to increase and in Sep-04 90.3555 the month of February, 06 it has increased from 95.97 to Oct-04 85.6293 96.69, but declined again during March and April and stood at Nov-04 86.1226 Dec-04 85.3635 93.0202. (See Table 9.21 & Fig. 12)
Fig-12: Real Effective Exchange Rate Index

100 95 90 85 80

Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06

88.1552 88.4279 90.5168 90.5015 93.3539 94.7894 95.2935 93.8039 93.6156 95.5915 97.3474 96.3669 95.8168 96.1656 95.7936 93.7202 Source: State Bank of Pakistan

144

Ju l,0 4 O ct ,0 4 Ja n, 05 Ap r,0 5 Ju l,0 5 O ct ,0 5 Ja n, 06 Ap r,0 6

TABLE 8.1 BALANCE OF PAYMENTS


(US $ Million) July-March 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2004-05 2005-06 (P) -3704 -3145 -1867 -2085 -1412 -1269 -294 -444 -1208 -4352 -3202 -6104 8311 -12015 -3249 8096 -11241 -3659 8434 -10301 -3264 7528 -9613 -2618 8190 -9602 -2794 8933 -10202 -3142 9140 -9434 -2617 10889 -11333 -2128 12396 -13604 -3594 14401 -18753 -5841 10641 -13843 -4230 11854 -17958 -5393 3383 -8776 (1622) (2413) (4741)

Items 1. Trade Balance Exports (f.o.b) Imports (f.o.b) 2. Services (Net) Receipts Payments Shipment Investment Income Others 3. Private Unrequited Transfers (net) (Workers Remittances) 4. Current Account Balance 5. Long-term Capital (net) Private Capital (net) Official Capital (net)@ 6. Basic Balance 7. Errors and Omissions (net)* 8. Balance Requiring Official Financing 9. Official Assistance & Debt Relief Medium and ShortTerm Capital Other Short-Term Assets/ Liabilities FEBC, DBC FEBC, Euro & Special US $ Bonds (Net) 10 Exceptional Financing

2100 1840 1708 1409 1501 1464 2027 2967 2894 3837 2717 -5349 -5499 -4972 -4027 -4295 -4606 -4644 -5095 -6488 -9678 -6947 (1,045) (978) (921) (844) (802) (877) (809) (951) (1,253) (1,713) (1,281) (2,137) (2,322) (2,454) (1,903) (2,135) (2,274) (2,430) (2,381) (2,394) (2,823) (1,895) (2,167) (2,199) (1,597) (1,280) (1,358) (1,455) (1,405) (1,763) (2,841) (5,142) (3,771)

2378 2958 3210 2274 (1,461) (1,409) (1,490) (1,060) -4575 -3846 -1921 -2429 2599 1534 1065 -1976 1096 -880 2018 1293 725 -1828 605 -1223 1707 617 1090 -214 -514 -728 1836 466 1370 -593 -1375 -1968

3063 3898 4249 5737 (983) (1,087) (2,389) (4,237) -1143 -513 1338 3165 525 277 248 -618 -2282 -2900 171 -68 239 -342 313 -29 1280 -177 1457 2618 961 3579 1035 225 810 4200 909 5109

6116 3,871 1314 -201 691 -892 1113 -137 976

8440 4,168 -1753 2552 1221 1331 799 -854 -55

6251 3,050 -1181 1633 589 1044 452 -440 12

6801 3228 -4695 3905 2945 960 -791 408 -383

449 341

191 -446

422 390

-1174 -863

-996 -221

338 431

-925 -334

-520 -180

-95 -317

482 147

553 110

562 -180

108 0

637 0

32 0 306

-311 3966 -824

-775 3966 -71

-93 692 -1001

-591 138 -2792

-340 620 -5209

222 -55 -826

335 -55 -372

443 -55 -510

742 -55 -124

11. Change in Reserves 431 1032 ( - ve = increase ) @ Includes Official Unrequited Transfers * Includes Private Short-term Capital (P) Provisional

Source : State Bank of Pakistan

TABLE 8.2 COMPONENTS OF BALANCE OF PAYMENTS (AS PERCENT OF GDP)


Current Account Deficit # 3.7 5.0 1.8 3.2 5.4 3.9 2.2 4.4 4.8 4.7 4.8 2.8 7.2 3.8 4.1 7.2 6.2 3.1 4.1 1.6 0.7 +1.9 +3.8 +1.3 1.6

Year 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

Exports ^ 10.5 8.0 9.4 8.9 8.0 9.6 11.1 11.6 11.7 12.4 13.5 14.2 13.3 13.1 13.5 13.8 13.4 13.9 13.3 11.7

Imports ^ 19.3 18.3 18.7 18.3 19.0 17.7 16.1 16.7 17.6 17.4 16.7 19.1 19.4 16.6 17.2 18.7 19.1 16.3 16.1 14.1 15.1 14.4 14.8 15.9 18.5 13.0 16.0

Trade Deficit ^ 8.7 10.3 9.3 9.4 11.0 8.0 5.1 5.0 5.9 4.9 3.3 4.8 6.1 3.4 3.7 4.9 5.7 2.4 2.8 2.4 2.1 1.7 1.3 3.3 5.5 3.8 6.6

Worker's Remittances # 7.5 7.2 10.1 8.8 7.9 8.1 6.8 5.2 4.7 4.9 4.1 3.0 3.0 2.8 3.1 2.3 2.3 2.4 1.8 1.3 1.5 3.3 5.1 3.9 3.7

2000-01 12.9 2001-02 12.8 2002-03 13.5 2003-04 12.5 2004-05 13.0 Jul-Mar 2004-05 * 9.2 2005-06 * 9.4 ^ Based on the data compiled by FBS. # Based on the data compiled by SBP. * : Provisional

2.8 1.1 2.5 3.7 Source: FBS, SBP & E.A.Wing, Finance Division.

TABLE 8.3 EXPORTS, IMPORTS AND TRADE BALANCE


(Rs million) Current Prices Exports Imports Balance 29,280 26,270 34,442 37,339 37,979 49,592 63,355 78,445 90,183 106,469 138,282 171,728 177,028 205,499 251,173 294,741 325,313 373,160 390,342 443,678 53,544 59,482 68,151 76,707 89,778 90,946 92,431 112,551 135,841 148,853 171,114 229,889 258,643 258,250 320,892 397,575 465,001 436,338 465,964 533,792 -24264 -33212 -33709 -39368 -51799 -41354 -29076 -34106 -45658 -42384 -32832 -58161 -81615 -52751 -69719 -102834 -139688 -63178 -75622 -90114 -87930 -73683 -62078 -188789 -369621 -253274 -515444 (US $ million) Current Prices Exports Imports Balance 2,958 2,464 2,694 2,768 2,491 3,070 3,686 4,455 4,661 4,954 6,131 6,904 6,813 6,803 8,137 8,707 8,320 8,628 7,779 8,569 9,202 9,135 11,160 12,313 14,391 10,183 12,073 5,409 5,622 5,357 5,685 5,906 5,634 5,380 6,391 7,034 6,935 7,619 9,252 9,941 8,564 10,394 11,805 11,894 10,118 9,432 10,309 10,729 10,340 12,220 15,592 20,598 -2451 -3158 -2663 -2917 -3415 -2564 -1694 -1936 -2373 -1981 -1488 -2348 -3128 -1761 -2257 -3098 -3574 -1490 -1653 -1740 -1527 -1205 -1060 -3279 -6207

Year

Growth Rate (%) Exports Imports Balance 25.07 -10.28 31.11 8.41 1.71 30.58 27.75 23.82 14.96 18.06 29.88 24.19 3.09 16.08 22.23 17.35 10.37 14.71 4.60 13.66 21.50 4.06 16.28 8.70 20.46 17.78 19.59 14.10 11.09 14.57 12.55 17.04 1.30 1.63 21.77 20.69 9.58 14.96 34.35 12.51 -0.15 24.26 23.90 16.96 -6.16 6.79 14.56 17.46 1.22 12.57 25.68 36.23 41.89 44.40 3.17 36.88 1.50 16.79 31.58 -20.16 -29.69 17.30 33.87 -7.17 -22.54 77.15 40.33 -35.37 32.17 47.50 35.84 -54.77 19.70 19.16 -2.42 -16.20 -15.75 204.12 95.79 176.89 103.51

Growth Rate (%) Exports Imports Balance 25.07 -16.70 9.33 2.75 -10.01 23.24 20.07 20.86 4.62 6.29 23.76 12.61 -1.32 -0.15 19.61 7.01 -4.44 3.70 -9.84 10.15 7.39 -0.73 22.17 10.33 16.88 14.11 3.94 -4.71 6.12 3.89 -4.61 -4.51 18.79 10.06 -1.41 9.86 21.43 7.45 -13.85 21.37 13.58 0.75 -14.93 -6.78 9.30 4.07 -3.63 18.18 27.59 32.11 3.20 28.85 -15.67 9.54 17.07 -24.92 -33.93 14.29 22.57 -16.52 -24.89 57.80 33.22 -43.70 28.17 37.26 15.36 -58.31 10.94 5.26 -12.24 -21.09 -12.03 209.34 89.30

1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

2000-01 539,070 627,000 2001-02 560,947 634,630 2002-03 652,294 714,372 2003-04 709,036 897,825 2004-05 854,088 1,223,079 July-March 2004-05 603,548 856,827 2005-06 (P) 721,799 1,237,243 P: Provisional

14,446 -42633 14.61 37.83 167.68 20,693 -8620 18.56 43.24 102.19 Source: FBS & E. A. Wing, Finance Division.

TABLE 8.4 UNIT VALUE INDICES AND TERMS OF TRADE (T.O.T) (1990-91 = 100)
(Indices) July-December 2004-05 2005-06 285.19 372.76 76.51 293.78 296.49 99.09 162.22 519.51 31.23 296.10 446.01 66.39 317.01 294.69 107.57 198.76 631.28 31.49

Groups All Groups Exports Imports T.O.T. Food & Live Animals Exports Imports T.O.T. Beverages & Tobacco Exports Imports T.O.T. Crude Materials (inedible except fuels) Exports Imports T.O.T. Minerals, Fuels & Lubricants Exports Imports T.O.T. Chemicals Exports Imports T.O.T. Animal & Vegetable Oils, Fats & Waxes Exports Imports T.O.T. Manufactured Goods Exports Imports T.O.T. Machinery and Transport Equipment Exports Imports T.O.T. Miscellaneous Manufactured Articles Exports Imports T.O.T. - Not applicable * Provisional

1998-99 258.40 223.32 115.71 221.84 225.64 98.32 106.30 561.35 18.94

1999-00 253.77 259.03 97.97 234.95 248.38 94.59 143.34 532.21 26.93

2000-01 271.47 298.44 90.96 249.32 278.82 89.42 171.44 698.92 24.53

2001-02 271.18 298.56 90.83 260.55 277.41 93.92 169.82 790.14 21.49

2002-03 254.02 309.52 82.07 258.11 259.76 99.36 146.52 598.00 24.50

2003-04 279.65 355.43 78.68 267.55 282.18 94.82 175.33 521.88 33.60

2004-05 288.80 392.45 73.60 303.93 314.36 96.68 162.96 561.23 29.04

214.68 198.56 108.12 166.47 108.55 153.36 263.37 196.20 134.23

169.85 198.06 85.76 283.63 206.30 137.48 276.51 208.54 132.59

192.12 218.95 87.75 373.65 276.87 134.96 282.36 228.06 123.81

158.90 228.14 69.65 314.40 249.66 125.93 281.54 239.29 117.66

171.58 232.37 73.84 365.14 297.20 122.86 270.05 245.60 109.96

218.86 245.01 89.33 416.09 306.38 135.81 265.61 313.15 84.82

195.64 293.06 66.76 525.75 389.16 135.10 277.23 334.10 82.98

203.01 277.92 73.05 460.79 345.84 133.24 261.57 314.36 83.21

203.01 330.71 61.39 600.87 578.93 103.79 292.40 371.11 78.79

326.86 275.59 226.26 121.80

229.68 266.96 224.61 118.86

195.10 279.04 251.50 110.95

224.82 281.83 244.97 115.05

300.36 248.93 240.82 103.37

347.94 274.02 287.80 95.21 284.72 301.00 94.59 358.48

372.88 284.14 286.61 99.14

342.67 284.73 328.28 86.73

291.07 355.79 81.81

396.34 417.87 94.85

453.20 470.20 96.38

579.13 481.18 120.36

572.31 450.67 126.99

396.09 537.55 73.68

342.97 561.15 61.12

346.00 550.13 62.90

438.76 535.57 81.92

259.80 240.08 108.21

263.04 278.99 94.28

292.47 323.02 90.54

298.40 320.35 93.15

294.67 299.60 98.35

318.55 333.22 95.60

324.17 316.16 350.46 343.13 315.83 403.19 94.47 100.10 86.92 Source: Federal Bureau of Statistics.

TABLE 8.5 ECONOMIC CLASSIFICATION OF EXPORTS AND IMPORTS (A. EXPORTS)


(Rs million) Year Primary Commodities Value Percentage Share 650 1,510 3,366 4,007 4,933 4,902 4,622 4,633 5,475 9,838 12,824 9,112 10,326 10,789 10,981 17,139 16,796 22,163 29,567 21,641 25,820 32,645 26,133 21,321 28,113 47,852 36,452 47,357 45,143 53,833 67,783 60,346 71,194 70,716 92,018 63,262 83,580 33 45 39 39 48 44 41 36 32 42 44 35 30 29 29 35 26 28 33 20 19 19 15 10 11 16 11 13 12 12 13 11 11 10 11 11 11 Semi-Manufactures Value Percentage Share 472 914 2,583 2,294 1,308 2,068 1,888 1,912 3,489 3,519 3,320 3,507 4,618 5,172 6,664 7,892 13,214 15,268 16,937 25,167 33,799 36,731 36,507 48,748 62,624 63,802 66,889 64,683 70,288 68,208 81,288 80,438 71,323 83,361 86,483 61,226 77,264 24 27 30 23 13 18 17 15 21 15 11 13 13 14 17 16 21 20 19 24 24 21 21 24 25 22 21 17 18 15 15 14 11 12 10 10 11 Manufactured Goods Value Percentage Share 876 947 2,602 3,860 4,047 4,283 4,783 6,435 7,963 10,053 13,136 13,651 19,498 21,378 20,334 24,561 33,345 41,012 43,679 59,661 78,663 102,352 114,388 135,430 160,436 183,087 221,972 261,120 274,911 321,637 389,999 420,163 509,777 554,959 675,586 479,060 560,955 44 28 30 38 39 38 42 50 47 43 45 52 57 57 54 49 53 52 48 56 57 60 64 66 64 62 68 70 70 73 72 75 78 78 79 79 78 Total Value 1,998 3,371 8,551 10,161 10,286 11,253 11,294 12,980 16,925 23,410 29,280 26,270 34,442 37,339 37,979 49,592 63,355 78,445 90,183 106,469 138,282 171,728 177,028 205,499 251,173 294,741 325,313 373,160 390,342 443,678 539,070 560,947 652,294 709,036 854,088 603,548 721,799 (Contd.)

1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Mar 2004-05 2005-06 (P) P : Provisional

TABLE 8.5 ECONOMIC CLASSIFICATION OF EXPORTS AND IMPORTS (B. IMPORTS)


(Rs million) Capital Goods Value Percentage Share 1,885 1,482 2,499 3,975 6,152 7,158 8,750 9,316 10,970 16,679 14,882 17,504 21,135 24,419 28,968 33,195 33,841 40,350 49,498 48,420 56,303 96,453 108,993 97,301 112,305 140,405 169,774 139,618 146,450 140,045 157,091 176,702 220,942 316,082 441,528 298,244 442,977 52 42 30 30 29 35 38 34 30 36 28 30 31 32 32 37 37 36 37 33 33 42 42 38 35 35 37 32 31 26 25 28 31 35 36 35 36 Industrial Raw Material For Capital Goods Consumer Goods Value Percentage Value Percentage Share Share 382 367 830 904 1,802 1,261 1,463 1,921 2,160 2,916 4,055 4,861 4,040 4,525 4,859 4,966 6,150 8,021 9,929 10,439 11,621 15,167 14,304 15,692 16,754 22,541 22,259 23,344 25,646 30,712 34,371 39,038 41,216 57,310 101,719 70,554 95,537 11 11 10 7 9 6 6 7 6 6 8 8 6 6 6 5 7 7 7 7 7 7 6 6 5 6 5 5 6 6 6 6 6 7 8 8 8 950 851 2,584 5,386 8,257 7,709 9,148 11,023 15,416 19,834 26,832 28,710 33,383 37,017 41,579 36,353 36,227 48,153 53,055 61,562 76,290 88,791 99,290 110,291 148,419 180,539 202,379 195,528 220,563 287,801 345,770 346,865 380,035 441,586 557,226 399,525 552,362 26 24 31 40 40 28 40 40 42 42 50 48 49 48 46 40 39 43 39 41 44 38 38 43 46 45 43 45 47 54 55 55 53 49 46 47 44 Consumer Goods Value Percentage Share 385 795 2,485 3,214 4,714 4,337 3,651 5,555 7,842 7,500 7,775 8,407 9,593 10,746 14,372 16,432 16,213 16,027 23,359 28,432 26,900 29,478 36,056 34,966 43,414 54,090 70,589 77,848 73,305 75,234 89,768 72,025 72,179 82,847 122,607 11 23 30 24 23 21 16 20 22 16 15 14 14 14 16 18 17 14 17 19 16 13 14 13 14 14 15 18 16 14 14 11 10 9 10

Year

Total Value 3,602 3,495 8,398 13,479 20,925 20,465 23,012 27,815 36,388 46,929 53,544 59,482 68,151 76,707 89,778 90,946 92,431 112,551 135,841 148,853 171,114 229,889 258,643 258,250 320,892 397,575 465,001 436,338 465,964 533,792 627,000 634,630 714,372 897,825 1,223,079

1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Jul-Mar 2004-05 2005-06 (P) P : Provisional

88,504 10 856,827 146,367 12 1,237,243 Source: Federal Bureau of Statistics.

TABLE 8.6 MAJOR IMPORTS


(Rs. Million) Jul-Mar 2004-05 2005-06 120,198 141,283 12,241 8,360 16,347 14,155 169,901 52,837 10,577 10,334 654 5,952 44,495 10,832 166,369 33,230 14,554 9,605 29,190 20,569 227,999 70,034 13,636 10,768 16,446 10,651 75,368 14,489 275,962 32,986

Items 1. Chemicals 2. Drugs and medicines 3. Dyes and colours 4. Chemical Fertilizers 5. Electrical goods 6. Machinery (non-electrical) 7. Transport equipments 8. Paper, board and stationery 9. Tea 10. Sugar-refined 11. Art-silk yarn 12. Iron, steel & manufactures thereof 13. Non-ferrous metals 14. Petroleum & products 15. Edible oils 16. Grains, pulses & flours 17. Other imports Grand Total * : Provisional

1997-98 51,747 10,745 5,927 9,079 13,236 69,341 20,849 5,435 9,818 1,686 1,656 19,003 4,260 67,507 33,304 32,697 80,048 436,338

1998-99 57,613 13,027 6,535 13,311 7,435 75,703 27,208 5,880 11,150 153 2,241 18,370 4,502 68,896 40,536 22,274 91,130 465,964

1999-00 72,797 13,429 6,950 10,227 8,026 66,206 29,202 6,352 10,895 769 2,460 18,864 5,016 145,238 21,402 19,639 96,320 533,792

2000-01 80,106 13,965 7,346 9,842 7,695 88,551 24,918 7,646 12,030 14,488 3,509 20,267 5,964 195,611 19,045 7,987 108,030 627,000

2001-02 82,263 13,988 7,775 10,904 7,835 96,832 30,587 8,608 9,611 1,485 5,054 24,633 6,757 172,578 24,034 11,636 120,050 634,630

2002-03 90,953 12,964 8,419 14,068 12,661 119,256 39,984 10,451 10,095 153 5,375 28,813 8,430 179,317 34,288 9,290 129,855 714,372

2003-04 119,683 15,812 9,218 16,405 14,862 140,907 87,374 12,138 11,078 189 6,793 35,942 10,544 182,332 37,917

2004-05 160,711 17,343 11,101 24,794 21,121 254,452 75,981 14,150 13,202 5,229 7,730 62,444 15,547 237,387 44,975

6,338 26,117 22,164 16,660 190,293 391,573 158,199 257,043 897,825 1,223,079 850,827 1,237,243 Source: Federal Bureau of Statistics

TABLE 8.7 DESTINATION OF EXPORTS AND ORIGIN OF IMPORTS


(% Share) REGION 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

1. Developed Countries Exports 60.8 Imports 58.3 a. OECD Exports 57.2 Imports 55.7 b. Other European Countries Exports 0.6 Imports 0.8 2. CMEA* Exports 3.0 Imports 1.8 3. Developing Countries Exports 39.2 Imports 41.7 a. OIC Exports 12.7 Imports 17.9 b. SAARC Exports 3.5 Imports 1.5 c. ASEAN Exports 5.1 Imports 8.9 d. Central America Exports 0.1 Imports 0.2 e. South America Exports 0.2 Imports 1.6 f. Other Asian Countries Exports 14.6 Imports 9.6 g. Other African Countries Exports 3.0 Imports 2.0 h. Central Asian States Exports Imports Total 100.0

56.7 62.2 54.9 58.7 0.3 0.5 1.5 3.0 44.3 37.8 14.6 16.5 4.7 1.5 5.6 7.3 0.2 0.1 0.5 1.3 14.3 9.5 4.4 1.6 100.0

57.1 58.6 56.7 57.0 0.4 0.3 1.0 1.3 41.9 41.4 16.0 16.9 3.8 1.5 5.2 8.5 0.3 0.1 0.5 1.6 13.0 11.1 3.0 1.7 0.1 100.0

60.3 52.6 60.0 52.1 0.3 0.5 0.5 1.6 39.2 45.8 13.7 20.9 3.1 1.6 3.7 9.5 0.5 0.1 0.9 1.0 14.0 10.8 2.9 1.9 0.4 100.0

58.9 49.3 58.6 48.5 0.3 0.8 0.4 2.1 40.7 48.6 12.9 21.3 3.4 1.4 4.0 12.6 0.4 0.1 1.0 1.4 14.9 9.5 3.6 2.2 0.5 0.1 100.0

55.6 49.9 55.3 49.0 0.3 0.9 0.5 1.9 43.9 48.2 12.9 22.4 2.7 1.5 5.3 11.2 0.3 0.2 1.4 1.2 17.1 9.4 3.8 2.3 0.9 .. 100.0

60.0 48.7 59.7 48.1 0.3 0.6 0.7 1.3 39.3 50.0 11.8 26.0 2.5 2.4 2.5 9.0 0.5 0.2 1.2 1.7 15.6 8.7 4.4 1.9 0.8 0.1 100.0

59.4 46.5 59.5 46.1 0.3 0.4 0.6 0.9 39.6 52.6 12.5 23.3 3.5 2.3 3.2 12.6 0.7 0.1 1.6 1.1 12.9 10.7 4.3 2.5 0.9 -100.0

59.9 42.2 59.6 41.6 0.3 0.6 0.4 1.0 39.7 56.8 12.7 24.3 5.0 2.2 3.2 14.1 0.8 0.3 1.2 2.1 12.8 10.3 3.5 2.8 0.5 0.7 100.0

61.0 36.7 60.6 36.1 0.4 0.6 0.4 1.2 38.6 62.1 14.1 35.2 3.2 1.9 2.8 10.2 0.9 0.2 1.1 1.0 12.4 10.3 3.8 3.0 0.3 0.3 100.0 (Contd..)

TABLE 8.7 DESTINATION OF EXPORTS AND ORIGIN OF IMPORTS


(% Share) Jul-Mar 2004-05 2005-06

REGION

2000-01

2001-02

2002-03

2003-04

2004-05

1. Developed Countries Exports 56.7 Imports 31.0 a. OECD Exports 56.3 Imports 30.5 b. Other European Countries Exports 0.4 Imports 0.5 2. CMEA* Exports 0.4 Imports 0.9 3. Developing Countries Exports 42.9 Imports 68.1 a. OIC Exports 16.5 Imports 39.3 b. SAARC Exports 2.9 Imports 2.9 c. ASEAN Exports 3.6 Imports 10.6 d. Central America Exports 0.8 Imports 0.2 e. South America Exports 1.2 Imports 1.6 f. Other Asian Countries Exports 13.0 Imports 10.6 g. Other African Countries Exports 4.3 Imports 2.8 h. Central Asian States Exports 0.3 Imports 0.1 Total 100.0 .. not available * Council for Mutual Economic Assistance.

58.1 34.3 57.6 33.7 0.5 0.6 0.5 1.1 41.4 64.6 19.2 36.0 2.5 2.4 2.7 11.7 1.0 0.1 0.9 0.7 11.4 10.9 3.5 2.7 0.2 0.1 100.0

56.1 34.4 55.6 33.5 0.5 0.9 0.6 0.8 43.3 64.8 22.3 35.2 2.4 1.9 2.9 12.2 0.9 0.1 0.7 0.6 9.9 12.5 4.0 2.3 0.2 .. 100.0

58.2 35.5 57.5 34.7 0.7 0.8 0.7 1.2 41.1 63.3 20.7 33.7 3.2 3.1 2.7 11.1 0.9 0.1 0.8 0.6 9.4 12.3 3.2 2.3 0.2 0.1 100.0

55.9 38.0 55.2 34.7 0.7 3.3 0.9 2.1 43.2 59.9 21.9 29.2 4.6 3.2 2.1 10.0 0.9 0.1 0.9 1.1 8.7 13.7 4.0 2.4

56.9 38.4 56.2 34.6 0.7 3.8 0.9 2.2 42.2 59.4 20.7 29.0 4.5 3.1 2.2 10.0 0.9 0.1 0.9 1.2 9.0 13.4 3.9 2.4

54.6 34.8 53.7 32.9 0.9 1.9 0.9 2.5 44.5 62.7 22.9 32.0 4.4 2.7 1.7 9.4 0.9 0.2 1.0 1.5 9.1 14.6 4.4 2.2

0.1 0.1 0.1 0.2 0.2 0.1 100.0 100.0 100.0 Source: Federal Bureau of Statistics

TABLE 8.8 WORKERS REMITTANCES


(US$ Million) COUNTRY I. Cash Flow Bahrain Canada Germany Japan Kuwait Norway Qatar Saudi Arabia Sultanat-e-Oman U.A.E. Abu Dhabi Dubai Sharjah Others U.K. U.S.A Other Countries 1990-91 1,626.92 37.20 11.26 32.62 26.84 15.12 21.28 24.27 681.97 74.98 172.03 75.71 68.72 27.60 180.05 190.23 159.07 1991-92 1,252.45 27.75 9.86 33.12 12.96 44.24 16.25 12.87 516.16 60.35 105.07 38.74 49.07 17.26 137.02 150.34 126.46 1992-93 1,238.51 25.42 7.54 40.64 11.62 60.22 15.18 10.91 525.94 51.67 97.76 32.47 47.79 17.50 114.02 157.80 119.79 1993-94 1,093.36 25.92 5.65 28.88 7.13 47.85 11.85 7.57 493.65 46.07 99.36 29.32 51.12 16.73 2.19 101.19 122.49 95.75 1994-95 1,317.73 35.90 4.91 27.71 6.90 57.86 13.40 11.52 554.08 61.49 178.26 51.99 90.09 28.96 7.22 109.96 141.09 114.65 548.37 1,866.10 1995-96 1,227.28 33.23 5.67 26.06 3.65 45.43 11.72 14.08 503.22 64.44 161.93 48.98 81.19 28.95 2.81 109.74 141.92 106.19 233.89 1,461.17 1996-97 1,078.05 29.16 3.59 18.98 3.05 38.38 7.97 9.68 418.44 46.11 164.39 44.91 93.07 22.90 3.51 97.94 146.25 94.11 331.42 1,409.47 1997-98 1,237.68 34.31 4.14 16.62 2.65 52.40 7.16 12.17 474.86 61.97 207.70 75.13 101.01 28.54 3.02 98.83 166.29 98.58 251.87 1,489.55 1998-99 875.55 33.31 3.46 11.93 3.09 106.36 5.26 12.94 318.49 44.67 125.09 38.07 70.57 14.69 1.76 73.59 81.95 55.41 184.64 1,060.19 (Contd.)

II. Encashment* 221.37 215.03 323.73 352.20 Total (I+II) 1,848.29 1,467.48 1,562.24 1,445.56 * Encashment and Profit in Pak Rs. of Foreign Exchange Bearer Certificates (FEBCs) & Foreign Currency Bearer Certificates (FCBCs)

TABLE 8.8 WORKERS REMITTANCES


(% Share) COUNTRY Cash Flow Bahrain Canada Germany Japan Kuwait Norway Qatar Saudi Arabia Sultanat-e-Oman U.A.E. Abu Dhabi Dubai Sharjah Others U.K. U.S.A Other Countries Total 1990-91 2.29 0.69 2.01 1.65 0.93 1.31 1.49 41.92 4.61 10.57 4.65 4.22 1.70 11.07 11.69 9.78 100.00 1991-92 2.22 0.79 2.64 1.03 3.53 1.30 1.03 41.21 4.82 8.39 3.09 3.92 1.38 10.94 12.00 10.10 100.00 1992-93 2.05 0.61 3.28 0.94 4.86 1.23 0.88 42.47 4.17 7.89 2.62 3.86 1.41 9.21 12.74 9.67 100.00 1993-94 2.37 0.52 2.64 0.65 4.38 1.08 0.69 45.15 4.21 9.09 2.68 4.68 1.53 0.20 9.25 11.20 8.76 100.00 1994-95 2.72 0.37 2.10 0.52 4.39 1.02 0.87 42.05 4.67 13.53 3.95 6.84 2.20 0.55 8.34 10.71 8.70 100.00 1995-96 2.71 0.46 2.12 0.30 3.70 0.95 1.15 41.00 5.25 13.19 3.99 6.62 2.36 0.23 8.94 11.56 8.65 100.00 1996-97 2.70 0.33 1.76 0.28 3.56 0.74 0.90 38.81 4.28 15.25 4.17 8.63 2.12 0.33 9.08 13.57 8.73 100.00 1997-98 2.77 0.33 1.34 0.21 4.23 0.58 0.98 38.37 5.01 16.78 6.07 8.16 2.31 0.24 7.99 13.44 7.96 100.00 1998-99 3.80 0.40 1.36 0.35 12.15 0.60 1.48 36.38 5.10 14.29 4.35 8.06 1.68 0.20 8.41 9.36 6.33 100.00 Contd.

TABLE 8.8 WORKERS REMITTANCES


(US $ Million) July-April 2004-05 2005-06 3,439.77 3,618.87 76.81 80.41 37.97 64.94 45.34 47.46 5.58 5.26 179.42 198.39 15.74 12.99 70.90 92.43 506.22 584.64 98.82 106.07 580.87 555.84 114.13 114.91 443.80 420.15 22.23 19.70 0.71 1.08 309.99 346.40 1,076.22 994.78 435.89 529.26

COUNTRY I. Cash Flow Bahrain Canada Germany Japan Kuwait Norway Qatar Saudi Arabia Sultanat-e-Oman U.A.E. Abu Dhabi Dubai Sharjah Others U.K. U.S.A Other Countries

1999-00 913.49 29.36 3.86 10.47 1.58 135.25 5.60 13.29 309.85 46.42 147.79 47.30 87.04 12.80 0.65 73.27 79.96 56.79

2000-01 1,021.59 23.87 4.90 9.20 3.93 123.39 5.74 13.38 304.43 38.11 190.04 48.11 129.69 12.21 0.03 81.39 134.81 88.40

2001-02 2,340.79 39.58 20.52 13.44 5.97 89.66 6.55 31.87 376.34 63.18 469.49 103.72 331.47 34.05 0.25 151.93 778.98 293.28

2002-03 4,190.73 71.46 15.19 26.87 8.14 221.23 8.89 87.68 580.76 93.65 837.87 212.37 581.09 42.60 1.81 273.83 1,237.52 727.64

2003-04 3,826.16 80.55 22.90 46.52 5.28 177.01 10.19 88.69 565.29 105.29 597.48 114.92 447.49 34.61 0.46 333.94 1,225.09 567.93 45.42 3,871.58

2004-05 4,152.29 91.22 48.49 53.84 6.51 214.78 18.30 86.86 627.19 119.28 712.61 152.51 532.93 26.17 1.00 371.86 1,294.08 507.27

70.24 64.98 48.26 46.12 II. Encashment* Total (I+II) 983.73 1,086.57 2,389.05 4236.85 * Encashment and Profit in Pak Rs. of Foreign Exchange Bearer Certificates (FEBCs) & Foreign Currency Bearer Certificates (FCBCs)

16.50 11.74 10.81 4,168.79 3,451.51 3,629.68 Source: State Bank of Pakistan

TABLE 8.8 WORKERS REMITTANCES


(% Share) July-April 2004-05 2005-06

COUNTRY Cash Flow Bahrain Canada Germany Japan Kuwait Norway Qatar Saudi Arabia Sultanat-e-Oman U.A.E. Abu Dhabi Dubai Sharjah Others U.K. U.S.A Other Countries Total

1999-00 3.21 0.42 1.15 0.17 14.81 0.61 1.45 33.92 5.08 16.18 5.18 9.53 1.40 0.07 8.02 8.75 6.22 100.00

2000-01 2.34 0.48 0.90 0.38 12.08 0.56 1.31 29.80 3.73 18.60 4.71 12.69 1.20 0.00 7.97 13.20 8.65 100.00

2001-02 1.69 0.88 0.57 0.26 3.83 0.28 1.36 16.08 2.70 20.06 4.43 14.16 1.45 0.01 6.49 33.28 12.53 100.00

2002-03 1.71 0.36 0.64 0.19 5.28 0.21 2.09 13.86 2.23 19.99 5.07 13.87 1.02 0.04 6.53 29.53 17.36 100.00

2003-04 2.11 0.60 1.22 0.14 4.63 0.27 2.32 14.77 2.75 15.62 3.00 11.70 0.90 0.01 8.73 32.02 14.84 100.00

2004-05

2.20 2.23 2.22 1.17 1.10 1.79 1.30 1.32 1.31 0.16 0.16 0.15 5.17 5.22 5.48 0.44 0.46 0.36 2.09 2.06 2.55 15.10 14.12 16.16 2.87 2.87 2.93 17.16 16.89 15.36 3.67 3.32 3.18 12.83 12.90 11.61 0.63 0.65 0.54 0.02 0.02 0.03 8.96 9.01 9.57 31.17 31.29 27.49 12.22 12.67 14.63 100.00 100.00 100.00 Source: State Bank of Pakistan

TABLE 8.9 GOLD AND CASH FOREIGN EXCHANGE RESERVES HELD AND CONTROLLED BY STATE BANK OF PAKISTAN
( US $ Million) Total Period June* December* 272 238 249 279 219 208 197 159 239 311 184 171 286 489 472 418 539 534 832 1210 1815 1589 1527 2770 1715 1452 1446 1405 1258 1419 958 1208 1629 2061 3922 2758 1780 2200 1737 2080 1998 4161 8569 11532 10756 10976 June* 194 204 184 249 206 147 212 114 128 245 233 144 225 396 336 419 546 363 696 414 831 1080 862 1975 1788 585 968 919 479 502 766 674 1069 604 2545 2937 2465 1287 1125 1828 1547 2100 4772 9975 11052 10310 Cash December* 220 185 196 226 166 155 144 106 185 257 130 116 226 422 405 351 471 466 444 279 627 803 971 2010 1074 847 793 545 440 705 277 500 950 1371 3132 2039 1092 1567 1122 1536 1396 3595 7902 10807 9925 10059 June* Gold December*

1960 246 1961 257 1962 237 1963 302 1964 259 1965 200 1966 265 1967 167 1968 182 1969 299 1970 287 1971 199 1972 285 1973 463 1974 403 1975 486 1976 614 1977 431 1978 1010 1979 904 1980 2019 1981 1866 1982 1460 1983 2758 1984 2489 1985 1190 1986 1638 1987 1784 1988 1326 1989 1227 1990 1451 1991 1390 1992 1761 1993 1369 1994 3337 1995 3730 1996 3251 1997 1977 1998 1737 1999 2371 2000 2149 2001 2666 2002 5439 2003 10700 2004 11883 2005 ** 11227 * Last day of the month. ** December 2005

52 52 53 53 53 53 53 53 53 53 53 53 53 53 53 53 54 54 54 54 54 54 55 55 60 60 67 67 67 67 67 67 68 68 68 68 314 388 490 931 1188 1188 786 786 598 598 783 760 701 641 605 605 670 653 865 860 847 818 725 714 685 681 716 708 692 679 765 690 792 790 793 719 786 688 690 633 612 615 543 543 602 603 566 566 667 667 725 725 831 831 917 917 Source: State Bank of Pakistan

TABLE 8.10 EXCHANGE RATE POSITION (Pakistan Rupees in Terms of One Unit of Foreign Currency)
Country Australia Austria Bangladesh Belgium Canada China Denmark France Germany Holland Hong Kong India Iran Italy Japan Kuwait Malaysia Nepal Norway Singapore Sri Lanka Sweden Switzerland S.Arabia Thailand UAE UK USA EMU IMF Currency Dollar Schilling Taka Franc Dollar Yuan Krone Franc Mark Guilder Dollar Rupee Rial Lira Yen Dinar Ringgit Rupee Krone Dollar Rupee Krona Franc Riyal Baht Dirham Pound Dollar Euro SDR 1990-91 17.6004 2.0077 0.6281 0.6860 19.4207 4.4467 3.6852 4.1819 14.1248 12.5333 2.8828 1.1980 0.3357 0.0189 0.1639 .. 5.2463 0.7143 3.6301 12.7847 0.5539 3.8414 16.6698 5.9959 0.8627 6.1231 41.5778 22.4228 31.1323 1991-92 19.1123 2.1433 0.6518 0.7327 21.3864 4.5781 3.8958 4.4402 15.0838 13.3928 3.2047 0.9611 0.3699 0.0201 0.1896 86.4030 9.3259 0.5832 3.8505 14.8944 0.5831 4.1506 16.9154 6.6442 0.9626 6.7874 43.7454 24.8441 34.1379 1992-93 18.2623 3.3550 0.6628 0.8061 20.7982 4.5996 4.3059 4.8939 16.5751 14.7394 3.3574 0.9405 0.3507 0.0190 0.2177 87.2127 10.1692 0.5741 4.0096 15.9865 0.5660 3.9886 18.3825 6.9407 1.0028 7.0923 42.0315 25.9598 35.6217 (Average During the Year) 1993-94 1994-95 1995-96 20.8851 2.5433 0.7536 0.8559 22.5554 4.3316 4.5298 5.2027 17.9039 15.9401 3.9011 0.9609 0.0179 0.0185 0.2843 101.5740 11.5288 0.6121 4.1305 19.0212 0.6120 3.8009 20.8077 8.0642 1.1567 8.2415 45.1600 30.1638 42.2162 22.9083 2.9358 0.7673 1.0045 22.3750 3.6803 5.2534 5.9623 20.6804 18.4547 3.9902 0.9814 0.0176 0.0198 0.3277 104.3749 12.1848 0.6178 4.6915 21.2485 0.6201 4.1543 24.7362 8.2475 1.2174 8.4214 48.6951 30.8517 46.1616 25.4912 3.2639 0.8204 1.1185 24.6581 4.0354 5.9354 6.6921 22.9718 20.5247 4.3345 0.9783 0.0192 0.0212 0.3281 112.5264 13.2905 0.6102 5.3528 23.6411 0.6281 5.0484 28.0734 9.0606 1.2176 9.2329 51.9192 33.5684 49.6416 1996-97 30.5300 3.4694 0.9128 1.1854 28.5449 4.6988 6.3775 7.2196 24.4163 21.7451 5.0391 1.0894 0.0225 0.0250 0.3376 129.6859 15.5861 0.6837 6.0509 27.4575 0.6823 5.5230 28.8164 10.4440 1.2176 10.6639 63.0683 38.9936 55.2477 1997-98 29.3472 3.4242 0.9513 1.1683 30.4828 5.2154 6.3310 7.1856 24.0995 21.3938 5.5762 1.1285 0.0246 0.0246 0.3411 141.7916 12.5285 0.7034 5.8345 27.0557 0.7038 5.5260 29.3698 11.5178 1.1562 11.7623 71.1450 43.1958 58.4654 1998-99 29.3962 3.8557 0.9686 1.2952 31.0445 5.6548 7.0348 7.9685 26.7081 23.7008 6.0440 1.0935 0.0266 0.0271 0.3797 153.8993 12.1327 0.6858 6.1371 27.6043 0.6869 5.8006 32.5174 12.4882 1.2313 12.7583 76.8085 46.7904 (50.0546) * 63.6850 (Contd)

TABLE 8.10 EXCHANGE RATE POSITION (Pakistan Rupees in Terms of One Unit of Foreign Currency)
(Average during the Year) Country Australia Austria Bangladesh Belgium Canada China Denmark France Germany Holland Hong Kong India Iran Italy Japan Kuwait Malaysia Nepal Norway Singapore Sri Lanka Sweden Switzerland S.Arabia Thailand UAE UK USA Currency Dollar Schilling Taka Franc Dollar Yuan Krone Franc Mark Guilder Dollar Rupee Rial Lira Yen Dinar Ringgit Rupee Krone Dollar Rupee Krona Franc Riyal Baht Dirham Pound Dollar 1999-00 32.5665 3.7715 1.0285 1.2866 35.1611 6.2470 6.9724 7.9156 26.5372 23.5571 6.6573 1.1862 0.0295 0.0268 0.4809 169.4791 13.6289 0.7503 6.3421 30.5305 0.7144 6.0786 32.5626 13.8125 1.3490 14.0979 82.4937 51.7709 2000-01 31.3747 3.7942 1.0794 1.2934 38.4434 7.0601 6.9916 7.9536 26.6543 23.6655 7.4906 1.2529 0.0332 0.0269 0.5109 190.4592 15.3871 0.7893 6.4483 33.1605 0.7026 5.9379 34.1098 15.5868 1.3438 15.9133 84.7395 58.4378 2001-02 32.1607 3.9960 1.0826 1.3633 39.1719 7.4149 7.3987 8.3867 28.1084 24.9556 7.8720 1.2787 0.0307 0.0284 0.4884 200.7861 16.1621 0.8033 7.0288 33.9503 0.6624 5.9117 37.1824 16.3792 1.4000 16.7231 88.5691 61.4258 54.9991 78.0627 2002-03 34.2101 na 1.0108 na 38.8234 7.0613 8.2524 na na na 7.4990 1.2219 0.0073 na 0.4888 194.5677 15.3944 0.7515 8.1021 33.3406 0.6057 6.6910 41.4643 15.5961 1.3742 15.9261 92.7433 58.4995 61.3083 79.3198 2003-04 41.0626 na 0.9842 na 42.8526 6.9497 9.2250 na na na 7.3970 1.2682 0.0069 na 0.5203 194.3681 15.1532 0.7802 8.2191 33.5098 0.5920 7.5195 44.2489 15.3488 15.6727 100.1672 57.5745 68.6226 83.2470 2004-05 44.7141 54.8940 0.9774 na 47.5567 7.1676 10.1527 na na na 7.6176 1.3253 0.0067 na 0.5558 202.3816 15.6244 0.8169 9.1841 35.6797 0.5813 8.2949 49.0657 15.8027 1.4763 16.1586 110.2891 59.3576 Average July-April 2004-05 2005-06 44.5246 5.5108 0.9854 na 47.5212 7.1623 10.1932 na na na 7.6101 1.3163 0.0067 na 0.5562 202.0359 15.6123 0.8112 9.1695 35.6403 0.5782 8.3450 49.2638 15.8154 1.4758 16.1462 110.4425 59.3115 44.6625 5.2432 0.9184 na 50.9835 7.3992 9.6726 na na na 7.7058 1.3437 0.0066 na 0.5195 204.8685 15.9572 0.8316 9.1026 36.1040 0.5880 7.6945 46.4067 15.9471 1.4852 16.2829 105.3926 59.8050

EMU Euro IMF SDR 70.1077 74.7760 * Composite Rate * na : Common currency Euro is in use of these countries

75.5359 75.8298 72.1481 88.5631 88.5813 86.5159 Source: State Bank of Pakistan

Chapter 10.

EXTERNAL DEBT AND LIABILITIES


Introduction The relationship between external debt and economic growth has been examined extensively in recent years. These studies have largely focused on the harmful effects of a countrys debt overhang the accumulation of a stock of debt so large as to threaten the countrys ability to repay its past loan. The empirical findings suggest that debt overhang depresses growth by increasing investors uncertainty about actions the government might take to meet its onerous debt-servicing obligations. Debt overhang may also discourage efforts by the government to carry out structural and fiscal reforms that could strengthen the countrys economic growth and fiscal positions, because a government whose financial position is improving almost inevitably finds itself under increasing pressure to repay foreign creditors. This disincentive to reform would exist in any country with a heavy external debt burden, but it is of special concern in low income countries, where structural reforms are essential to sustain higher growth. Another interesting finding suggests that external debt slows growth only after its face value reaches a threshold level estimated to be about 50 percent of GDP or in net present value terms, 20 25 percent of GDP. Pakistans external debt situation of the 1990s is consistent with the findings of the recent literature on the relationship between debt and economic growth. The persistence of a large current account deficit (almost 5.0 percent of GDP) for an extended period of one decade; the imprudent use of borrowed resources; the rising real cost of borrowing,; and stagnant exports and a declining flow of foreign exchange have been responsible for a rapid accumulation of external debt in the 1990s. External Debt and Liabilities: A Historical Perspective Pakistans total stock of external debt and foreign exchange liabilities grew at an average rate of 7.4 percent per annum during 1990-99 rising from $ 20.5 billion in 1990 to $ 38.9 billion by end June 1999. Foreign exchange earnings on the other hand, either remained stagnant or increased at a snails pace during the same period. Despite the accumulation of almost $ 18.4 billion debt in the 1990s, foreign exchange earnings rose by only $ 4.0 billion. Consequently the debt burden (external debt and foreign exchange liabilities as a percentage of foreign exchange earnings) rose from 256.6 percent in 1989-90 to 335.4 percent in 1998-99. Following a credible strategy of debt reduction over the last six years, Pakistan has succeeded in reducing the countrys debt burden. External debt and foreign exchange liabilities, instead of growing at the pace of the 1990s, were in fact reduced from U.S. $38.9 billion in 1998-99 to $ 36.5 billion by end-March 2006 a reduction of $ 2.4 billion in seven years. Most importantly, the burden of the debt has declined substantially during the same period. For example, the external debt and liabilities as a percentage of foreign exchange earnings which stood at 335.4 percent in 1998-99, declined to 127.6 percent by end-March 2006. The external debt and liabilities stood at 64.1 percent of GDP in end-June 1999, declined to 28.3 percent in end-March 2006. External Debt and Liabilities Outstanding external debt and liabilities includes all Government debt denominated in foreign currency, loans contracted by enterprises with Government ownership of more than 50.0%, as well as the external debt of the private sector which is registered with the SBP and benefits from a foreign exchange convertibility guarantee from the SBP. Pakistans total stock of external debt and foreign exchange liabilities grew at an average rate of 7.4 percent per

145

Economic Survey 2005-06 annum during 1990-99 rising from $ 20.5 billion in 1990 to $ 38.9 billion by end June 1999 but declined slightly to $ 37.9 billion in 1999-2000. It exhibited a declining trend thereafter [See Table-10.1]. Foreign exchange earnings on the other hand either remained stagnant or increased at a snails pace during the same period. Despite the accumulation of over $ 18 billion debt in the 1990s, foreign exchange earnings rose by only $ 4.0 billion. Consequently the debt burden (external debt and foreign exchange liabilities as a percentage of foreign exchange earnings) rose from 256.6 percent in 1989-90 to 335.4 percent in 1998-99. This implies that the debt servicing liability had risen to unsustainable level, and rollover of the payments became a norm rather than an exception. Non-debt creating inflows almost dried up and debt creating inflows were the only source of financing current account deficit.
Table 10.1: External Debt and Foreign Exchange Liabilities ($ Billion) Item 1.Public & Publicly Guaranteed Debt A. Medium & long term (Paris Club, Multilateral and Other Bilateral B. Other medium & long term (Bonds, Military & commercial) C. Short Term (IDB) 2. Private Non-guarantee- Debt 3. IMF Total External Debt (1 through 3) 4. Foreign Exchange Liabilities - Foreign Currency Accounts Total External Liabilities (1 through 4) * Provisional 1990 18.2 14.7 2.7 0.8 0.3 0.7 19.2 1.3 (1.1) 20.9 1999 28.3 25.4 1.6 1.3 3.4 1.8 33.6 5.3 (1.5) 38.9 2000 27.804 25.301 2.373 0.13 2.842 1.55 32.196 5.664 1.733 37.86 End June 2001 2003 28.165 29.23 25.606 2.302 0.257 2.45 1.529 32.144 5.015 1.1 37.16 28.07 0.976 2004 29.875 28.627 1.226 2005 31.084 29.177 1.636 End Mar 2005 31.821 29.403 2.210 0.208 1.588 1.494 34.903 1.654 0 36.557

0.187 0.022 0.271 2.028 1.67 1.342 2.092 1.762 1.611 33.35 33.307 34.037 2.122 1.951 1.797 0 0 0 35.47 35.26 35.834 Source: State Bank of Pakistan

Following a credible strategy of debt reduction, Pakistan has succeeded in reducing the rising trend in external debt and foreign exchange liabilities. Pakistans external debt and liabilities have declined by $ 3.1 billion down from $ 38.9 billion in 1998-99 to $ 35.834 billion by 2004-05. However, external debt and liabilities increased to $ 36.557 billion by end-March 2006, thus showing a rise of $ 0.723 billion in the first nine months of the current fiscal year. The rise is mainly on account of issuance of Sovereign bonds worth $ 800 million in March 2006. The debt carrying capacity of the economy improved considerably as evident from the fact that the external Fig-1: External Debt & Liabilities debt and liabilities stood at 51.7 percent of GDP in endJune 2000, declined to 36.0 percent in end-June 2004 55 and further to 32.3 percent by end-June 2005. It has 50 further declined to 28.3 percent in end-March 2006 of 45 the projected GDP for the year. Similarly, external debt 40 35 and liabilities as a percentage of foreign exchange 30 earnings was 335.4 percent in 1998-99, declined to 25 134.3 percent in 2004-05 and further to127.6 percent 20 by end-March 2006 [See Table-10.1 and Fig-1]. There 2000 2001 2002 2003 2004 2005 2006 appears to be a distinct improvement in the composition M ar of the debt profile during the last few years. Not only did the share of expensive external debt and liabilities (EDL) fall during 2005-06, the maturity profile of the debt stock also improved. In fact, the trend decline in the share of expensive debt helped the country to lower its debt servicing costs, even though international interest rates rose in recent years. These improvements, together with strong growth

146

External Debt and Liabilities in nominal GDP and foreign exchange earnings contributed to a significant betterment in the countrys debt carrying capacity for the fifth successive year. Debt Burden A critical appraisal of the external debt and liabilities should not be focused on the variation in the absolute stock but it is the incidence of the debt burden which is important and meaningful from the policy perspective. There are various indicators which are widely used by the international community and financial institutions to determine the debt carrying capacity and the amount of risk associated with a particular country. These indicators include; the stock of external debt and liabilities as percent of GDP, export earning, foreign exchange earning, foreign exchange reserves, and debt servicing as percentage of current account receipts etc. A cursory look at Table-10.2 is sufficient to see that all indicators of debt burden show that Pakistans debt burden has declined significantly over the last six years. During the fiscal year 2005-06, these indicators also demonstrate a marked improvement [See Fig-2].
Table-10.2: TRENDS IN EXTERNAL DEBT AND DEBT BURDEN EDL/ Forex Year EDL/ GDP Earnings % % 1999-2000 51.7 297.2 2000-01 52.1 259.5 2001-02 50.9 236.8 2002-03 43.1 181.2 2003-04 36.7 164.7 2004-05 32.6 134.3 2005-06* 28.3 127.6 * End March EDL: External Debt and Liabilities, CAR: Current Account Receipts EDL/ Forex Reserves Ratio 19.3 11.5 5.8 3.3 3.0 2.7 2.9 Short-Term Debt/EDL % 3.2 3.7 1.4 1.2 0.6 0.8 0.9 Interest Payments/CAR % 11.9 13.7 7.8 5.3 4.9 3.9 3.1

The external debt and liabilities (EDL) declined from 51.7 percent of GDP in 1999-2000 to 28.3 percent of GDP by end-March 2006. Similarly, the EDL was 297.2 percent of foreign exchange earnings but declined to 127.6 percent in the same period. The EDL was over 19 times of foreign exchange reserves in 1999-2000 but declined to 2.9 in end March 2006. Interest payments on external debt were 11.9 percent of current account receipts but declined to 3.1 percent during the same period. The maturity profile improved significantly as is evident from the fact that shortterm debt was 3.2 percent of EDL but declined to 0.9 percent of EDL in the same period. Composition of External Debt and Liabilities Public and Publicly Guaranteed Debt.

Fig-2: Trend in EDL to Foreign Exc hange Earnings


350 325 300 275 250 225 200 175 150 125 100 181.2 164.7 134.3 127.6 236.8 335.4 297.2 259.5

The share of Paris Club debt stock has been in the range of 42 to 45 percent in total public and publicly guaranteed debt since 1999. Of late, its share has declined to 41.9 percent in June 2005 and further to 39.6 percent by March 2006. The US$ 962 million fall in the debt owed to the Paris club creditors was principally driven by the debt relief of US$ 1495 million provided by the US, and other creditors. The US$ 126 million rise in the stock of other bilateral debt

147

Economic Survey 2005-06 was principally due to higher receipts from China. The major projects for which these loans were acquired include: the Gwadar deep water port project (US$ 36.8 million) and acquisition of railway locomotives (US$ 23.95 million). Apart from these developments, the net impact of currency revaluation on Paris club debt stock during the current fiscal year was almost negligible. As of end March 2006, medium and long-term public and publicly guaranteed debt amounted to U.S.$31.6 billion, of which almost 50.2% is owed to multilateral creditors. Approximately 39.6%, or U.S.$12.6 billion, is owed to Paris Club official creditors. Of this amount, approximately 69% was provided to Pakistan on concessional terms, with the balance being provided on non-concessional terms. Medium and long-term public and publicly guaranteed debt also included U.S.$931.0 million owed to official creditors that are not represented in the Paris Club, as well as U.S.$1,908 million of international bonds and U.S.$165.0 million of commercial bank loans. Public and publicly guaranteed short-term debt amounting to U.S. $208.0 million was owed to the Islamic Development Bank. Multilateral Debt The borrowing from multilateral agencies, mainly from the World Bank and the Asian Development Bank (ADB) has outpaced the borrowing from the Paris Club since 1999-2000. Its share in total public and publicly guaranteed debt has increased from 37.5 percent to 51.5 percent in 2002-03. However, after prepayment of expensive debt of $ 1.1 billion to the ADB in 2003-04, its share declined to 48.1 percent in 2003-04, but bounced back to 50.2 percent by end March 2006. The stock of debt from multilateral agencies amounted to $15.9 billion by end-March 2006. A detailed analysis of recent developments in commitments and disbursement in respect of bilateral and multilateral external assistance is given in the subsequent section. Short-term-IDB Loan After declining substantially during 2003-04, the stock of IDB loans rose during 2004-05. The short-term IDB loans are obtained largely for financing oil and fertilizer imports and the rise is a consequence of the termination of the Saudi Oil Facility (a grant that covered a major share of oil imports) in 2003-04, which coincided with the extraordinary rise in crude oil prices in the international market. Resultantly, the stock of short-term debt rose from $ 0.02 billion in 2003-04 to $ 0.27 billion in 2004-05 and but declined to $ 0.21 billion by end March 2005. Private Sector Debt. The stock of private sector non-guaranteed debt is continuously falling since the fiscal year 1999-2000. The stock of private non-guaranteed debt declined from $ 3.4 billion in 1999 to 1.34 billion by June 2005 and further to $ 1.59 billion as of March 2006. Medium and long-term private sector debt registered with the SBP (and benefiting from an SBP foreign exchange convertibility guarantee) amounted to U.S. $964.0 million. No shortterm private sector debt has been registered with the SBP. Foreign Exchange Liabilities Foreign exchange liabilities declined substantially during the last six years from as high as $ 5.7 billion in 1999 to $ 1.8 billion in 2004-05 and further shrank to $ 1.65 billon by end March 2006. This decline is largely due to the encashment of various bonds (on maturity) and Foreign Currency Accounts (FCA). Composition of Foreign Economic Assistance Commitments The declining trend in annual average level of commitments of foreign aid has been reversed in recent years because of improvement in relationship with the International Financial Institutions (IFIs) and donor countries. The commitments bounced back from its lowest ebb at $ 880 million in 2000-01 to $3.4 billion during 2001-02. After hovering around at $ 2 billion for two years, it again rose to $3.1 billion during 2004-05. During the first nine months of the current fiscal year (July-March 2005-06), total commitments stood at $3.0 billion with earthquake relief assistance of $ 1649 million. Quantum and composition of commitments is documented in Table 10.3.

148

External Debt and Liabilities


Table-10.3: Commitments of Aid by Use* 2000-01 2001-02 2002-03 860 1188 22 1158 8 0 2048 2003-04 1233 960 12 943 5 247 1113 I. Project Aid 633 2311 II. Non-Project Aid a) Food Aid 10 41 b) Budgetary Support/ (BOP) 621 2249 c) Relief Assistance for Afghan Refugees 2 21 d) Earthquake Relief Assistance 0 0 Total (I + II) 880 3424 P= Provisional * Excluding IDB Short-term, Commercial Credits and Bonds. (US$ million) 2005-06 2004-05 (July-Mar) 1965 647 1117 2396 0 0 1115 746 2 1

0 0 1649 2193 3082 3043 Source: Economic Affairs Division

Disbursements The disbursement of external assistance maintained its pace at around $2.4 billion per annum during the 1990s as against $1.3 billion during the 1980s. It has risen to $1.8 billion on average during the years 2000-01 to 2005-06 (July-March). From its lowest level of $1270 million in 2003-04, it rose to $ 2275 million in 2004-05 owing to increased disbursement of various Program Loans. During the first nine months of current fiscal year (Jul-Mar 200506) the total disbursement stood at $1.7 billion including the disbursement of $ 676 million for earthquake relief assistance against the commitment of $ 3.0 billion for the period. The summarized position of disbursements is given in Table-10.4.
Table-10.4: Disbursements of Aid by Use* 2000-01 2001-02 2002-03 705 848 10 830 8 0 1553 2003-04 525 745 0 741 4 919 640 Project Aid 680 1676 Non-Project Aid a) Food Aid 0 31 b) Budgetary Support/ (BOP) 678 1624 c) Relief Assistance for Afghan Refugees 2 21 d) Earthquake Relief Assistance 0 0 Total (I + II) 1599 2316 P= Provisional * Excluding IDB Short-term, Commercial Credits and Bonds. ($ million) (July- Mar) 2004-05 2005-06 741 593 1534 1127 0 0 1532 450 2 1 676 1720

0 0 1270 2275 Source: Economic Affairs Division

Debt Service Payments and Net Transfers The inflow of foreign assistance is aimed primarily meant for upgrading the productive capacity of the economy but in real terms they were being utilized for debt service payments. The increased liability of debt service payments has squeezed the net inflow of foreign resources. The net transfers of aid in the 1990s averaged at US$534 million per annum but declined in subsequent years to considerable extent. Net transfers turned to negative by the end of the 1990s and it turned to negative $364 million in 2000-01 due to lower disbursements and ever increasing debt servicing liabilities on external debt. The net transfers turned positive at $1095 million in 2001-02 but fell to $507 million in 2002-03, mainly due to debt rescheduling by the Paris Club and increased disbursement from the developed world. During 2003-04, net transfer turned negative to $1729 million due to lower disbursement and higher debt servicing payments mainly because of making pre-payment of expensive loans from ADB and Japan. However, it turned positive at $1377 million during 2004-05 but lowered to $ 346 million during July-March 2005-06 [See Table 10.5].

149

Economic Survey 2005-06


Table-10.5: Debt Servicing and Net Transfers (US$ million) Gross Year Debt Servicing** Disbursements * 1316 2045 1990-91 1513 2366 1991-92 1648 2436 1992-93 1746 2530 1993-94 2042 2571 1994-95 2136 2555 1995-96 2265 2231 1996-97 2353 2800 1997-98 1530 2440 1998-99 1512 1426 1999-00 1961 1597 2000-01 1200 2295 2001-02 1038 1545 2002-03 2995 1266 2003-04 1767 @ 3144 2004-05 1666 # 2012 2005-06 (July-Mar) (P)

Net Transfers NT as % of Gross (N.T) Disbursements. 36 729 36 853 32 788 31 784 21 529 16 419 -1 -34 16 447 37 910 -6 -86 -23 -364 48 1095 33 507 -137 -1729 44 1377 17 346 Source: Economic Affairs Division

* Excluding relief assistance for Afghan Refugees and Earthquake (2005-06) ** Excluding debt servicing on short-term borrowings, IMF Charges and Euro Bonds up to the years 2003-04. From the years 2004-05 onwards debt servicing in respect of short-term borrowings and Euro Bonds is included. @ Including IDB (ST) US$271 million, Bond US$600 million & excluding Commercial Credits # Including IDB (ST) US$169 million, Bonds US$800 million & excluding Commercial Credits P (Provisional)

The net transfers of foreign aid as percent of gross disbursements continued to decline in the decade of the 1990s due to steep rise in debt service payments. However, it followed uneven pattern in the first six years of this decade (2000-06). For instance, it turned negative at 6 percent and 23 percent in 1999-2000 and 2000-01, respectively due to lower disbursements. In 2001-02, it improved to 48 percent of disbursements due to higher disbursement of nonproject aid and lower debt servicing. During the fiscal year 2002-03, it was 33 percent, but during the year 2003-04 it turned negative again to the extent of 137 percent because of a decline in disbursements on one hand and heavy debt servicing payments (prepayment of expensive debt) on the other. However, it accounted for 44 percent during 2004-05 and 17 percent during the current fiscal year 2005-06 (July-March). Sources of Aid The major sources of foreign economic assistance to Pakistan have been through the aid to Pakistan Consortium (Paris Club Countries and Multilateral Institutions), Non-Consortium (Non-Paris Club Countries) and Islamic Countries. Among these, the Aid-to-Pakistan Consortium, formulated in 1960 and now renamed as the 'Pakistan Development Forum' (including assistance from Consortium sources but outside Consortium umbrella arrangements), is the largest source of economic assistance to Pakistan. In 2004-05, Consortium/PDF provided 75.3 percent of the total commitments. Shares of Non-Consortium, Islamic Countries and Relief Assistance for Afghan Refugees were 23.3 percent, 1.3 percent and 0.1 percent, respectively. During the first nine months of current fiscal year 2005-06 (July-March), the Consortium has provided 41.2 percent of total commitments, whereas, NonConsortium, Islamic Countries and Relief Assistance for Afghan Refugees and Earthquake contributed 0.7 percent, 3.8 percent, 0.1 percent and 54.2 percent respectively. Source-wise commitments and disbursements are summarized in Table-10.6.

150

External Debt and Liabilities


Table-10.6: Sources of Foreign Aid*
Commitments Particulars 2004-05 % Share 2005-06 (JulyMarch) (P) 1253.7 22.3 116.7 1392.7 1.1 1648.8 3042.6 % Share 41.2 0.7 3.8 45.7 0.1 54.2 100 2004-05 2162.9 93.6 16.0 2272.5 2.1 0.0 2274.6 Disbursements % Share 95.1 4.1 0.7 99.9 0.1 0.0 100 2005-06 (JulyMarch) (P) 792..8 97.3 153.2 1043.3 1.1 676.1 1720.5 % Share 46.1 5.6 8.9 60.6 0.1 39.3 100

(US$ million)

Consortium (Paris Club Countries and 2320.3 75.3 Multilateral Institutions) Non-Consortium/Non-Paris Countries 717.5 23.3 Islamic Countries 42.6 1.3 Sub-Total 3080.4 99.9 Relief Assistance for Afghan 2.1 0.1 Refugees Earthquake Relief Assistance 0.0 0.0 Total * 3082.5 100 * Excluding IDB Short-term, Commercial Credits and Bonds. P= Provisional

Source: Economic Affairs Division.

Project Vs Non-Project Aid The share of project aid in the total disbursement has exhibited fluctuating trend over the years. The project aid in the decade of the 1990s averaged at $1736 million per annum as against $810 million during the 1980s, and $706 million during 2000-01 to 2004-05. During current nine months, it was $593 million. The non-project aid averaged at $637 million per annum during the 1990s and increased to $1097 million during 2000-05. The non-project aid during July-March, 2005-06 remained at US$1127 million [See Table-10.7].
Table-10.7: Disbursement of Project and Non-Project Aid* Year Project Aid % Share 65.3 1,408 1990-91 71.5 1,766 1991-92 76.0 1,895 1992-93 76.9 1,961 1993-94 80.0 2,079 1994-95 83.9 2,151 1995-96 81.5 1,821 1996-97 55.4 1,552 1997-98 66.3 1,620 1998-99 77.7 1,110 1999-00 57.5 919 2000-01 27.6 640 2001-02 45.4 705 2002-03 41.3 525 2003-04 32.6 741 2004-05 34.5 593 2005-06 (July-Mar)# # Provisional * Excluding IDB Short-term, Commercial Credits and Bonds. Non-Project Aid 748 705 598 588 521 414 412 1,249 822 318 680 1,676 848 745 1,534 1,127 (US$ million) % Share Total 2,156 34.7 2,471 28.5 2,493 24.0 2,549 23.1 2,600 20.0 2,565 16.1 2,233 18.5 2,801 44.6 2,442 33.7 1,428 22.3 1,599 42.5 2,316 72.4 1,553 54.7 1,270 58.7 2,275 67.4 1,720 65.5 Source: Economic Affairs Division

The share of project aid has declined compared to non-project aid over the period. The share of project aid in the decade of 1990s averaged 73 percent per annum with strong fluctuation ranging between 55 and 84 percent. The share of non-project aid during the same period fluctuated in a much wider range of 16 to 45 percent with an average of 27 percent. The share of project aid during 2000-01 to 2004-05 was 39 percent and that of non-project aid 61 percent. During the first nine months of the current fiscal year 2005-06 (July-March) the project aid accounted for 35 stake while non-project aid share 65 percent of overall external assistance inflows.

151

Economic Survey 2005-06 Composition of External Assistance The composition of external assistance over the years has undergone considerable change from grants and grant like assistance to hard term loans. The share of grant and grant like foreign economic assistance in total commitments continued to exhibit a declining trend over the years. It however, increased to 20 percent in 1999-2000, but declined to 19 percent during 2004-05. During the first nine months (July-March) of the fiscal year 2005-06, the share increased to about 22 percent mainly on account of the Earthquake relief assistance. Earthquake Relief Assistance The Pakistan economy was subjected to a major headwind on October 8, 2005, which was acid test for the resilience of the economy. It caused colossal loss of lives, private properties and infrastructure which was to be restored by the Government with the help of the international community. All parts of the world including foreign countries / multilateral and international donors responded quickly to provide relief in the shape of cash and kind to the victims of earthquake disaster. The foreign donors / institutions pledged an amount of $6.5 billion comprising loans of $4.0 billion and grant assistance of $2.5 billion in the Donors Conference. Out of that pledged amounts, the commitments of $1649 million (through the Government of Pakistan) (comprising $1362 million as loan and $287 million as grant) were made during July 2005-March, 2006. Out of committed amount, $420 million as loan and $151 million as grant have been disbursed up to the end March, 2006. Terms of Loans and Credits From the public debt management perspective, the terms and cost of loan is very important. Over the years the terms and cost of the loans and credits are becoming harder and harder. During the 1980s and the 1990s, the terms at which loans were offered to Pakistan became somewhat harder as compared to the decades of 1960s and the 1970s. The rate of interest averaged 3.6 percent during the 1970s but increased to 4.8 percent during the 1980s. However, in the 1990s, Pakistan benefited from internationally prevailing low interest rates to some extent and its interest declined to 4.4 percent. The repayment period of foreign loans / credits was 28 years including a grace period of 7 years in the 1980s but declined to 21 years including a grace period of 6 years during the 1990s. During the period from 19992000 to 2004-05, the average interest rate was 1.5 percent and repayment period was 26 years including a grace period of 7 years. Debt Servicing of External Debt and Liabilities
Table-10.8: Pakistans External Debt and Liabilities Servicing ($ Million) Years Actual Amount Amount Total Paid Rolled Over 1999-00 3756 4081 7837 2000-01 5101 2795 7896 2001-02 6327 2243 8570 2002-03 4349 1908 6257 2003-04 5274 1300 6574 2004-05 2965 1300 4265 2005-06 * 2360 1100 3460 * July-March Source: State Bank of Pakistan
Fig-3: Pakistan's External Debt and Liabilities Servicing
6500 5500 4500 3500 2500 Actual Amount Paid Amount Rolled Over

The continuous build up in foreign exchange 1500 reserves helped Pakistan retire its expensive debt. In 500 1999-2000, Pakistan paid $ 3.756 billion on account 99-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2006 of debt servicing and $ 4.081 billion worth of (Mar) payments were rolled over. The combination of reprofiling of Paris Club bilateral debt on a long-term horizon, the substantial write-off of the US bilateral debt stock, the prepayment of expensive debt worth $ 1.1 billion and the relative shift in contracting new loans on concessional term has begun to yield dividend. The annual debt servicing payments made during the period 1999-2000 to 2003-04 averaged just above $ 5 billion per annum. This amount has drastically come down to around $ 3 billion in 2004-05.

152

($ Million)

External Debt and Liabilities An amount of $ 2.4 billion has been paid during July-March 2005-06 and the amount rolled over declined from $ 4.1 billion in 1999-2000 to $ 1.1 billion in July-March 2005-06. The trend is likely to persist in the medium term and has eased the pressure on current account amidst rising trade deficit. The gradual improvement in the external liquidity position, leading to a build up in foreign exchange reserves the actual paid amount continued to rise for five years and the rolled over amount continued to decline. By 2001-02, the actual paid amount on account of debt servicing reached as high as $ 6.327 billion and the rolled over amount declined to $ 1.1 billion by March 2006. The prudent management of external debt has enabled the country to retire expensive debt but at the same time lowered the stock of external debt. The trend of lower incidence of debt servicing persisted during the first nine months of the current fiscal year (July-March 2005-06) both the actual paid amount as well as rolled over amount further declined to $ 2.4 billion and $ 1.1 billion respectively [See Table-10.3 & fig-2]. Dynamics of External Debt Burden The dynamics of external debt burden is well-documented in Table 10.4. The real cost of foreign borrowing which includes the interest cost, as well as the cost emanating from the depreciation of the Pak-rupee (or capital loss on foreign exchange) was on average, 3.4 percent and 2.7 percent per annum in the 1980s and 1990s, respectively.
Table 10.9: Dynamics of External Debt Burden Non-Interest Real Cost of Current Account Borrowing Period Deficit/Surplus (% of GDP) (%) 1980s -1.2 3.4 1990s -2.7 2.7 1990s-I -2.7 -3.0 1990s-II -2.8 5.5 2000-03 4.1 1.7 2003-06 -1.3 -4.1

Real Growth of External Debt* (%) 6.4 6.5 7.1 6.0 -1.9 -1.2

* Unit Value of imports of industrialized countries at 2000=100 is used as deflator

Real Growth in Real Growth of Foreign Exchange External Debt Earnings* Burden (%) (%) 4.7 1.7 5.5 1.0 6.6 0.5 4.4 1.6 13.2 -15.1 7.4 -8.6 Source: SBP & Debt Office, Finance Division

The real cost of borrowing declined, on average, by 3.0 percent per annum during the first half of 1990s mainly on the account of a relatively lower nominal implied interest rate (9.2%) and higher inflation rate (11.8%), leading to a negative real interest rate (2.6%). During the second half of the 1990s real interest rate turned a high positive 5.5% and along with sharp depreciation of exchange rate, led to a substantial rise in real cost of borrowing. However, the pendulum swung to other extreme during 2000-03, when real cost of borrowing declined to an average of 1.7 percent per annum on account of benign interest and inflation rates and more so, with the appreciation of the Pakistani rupee. The period 2003-06 witnessed a further decline in the real cost of borrowing, which turned negative mainly because of higher inflation and depreciation of the rupee value. As a result of the sharp fluctuation in the real cost of borrowing, the dynamics of external debt burden have also changed over the last two decades. The changing dynamics of external debt burden as documented in Table 10.9 shows that external debt burden grew at an average rate of 2.1 percent and 1.9 percent respectively during the 1980s and 1990s. Further disaggregation reveals that during the first half of the1990s, although external debt in real term grew by 7.1 percent per annum, it did not immediately lead to a sharp increase in external debt burden because the debt carrying capacity (real growth in foreign exchange earnings) of the country was rising by more than 6.6 percent per annum. Therefore, the real growth of external debt burden declined on average by one percent per annum in the first half of 1990s. However, it initiated future difficulties because real growth in foreign exchange earnings slowed down substantially to an average of 4.4 percent per annum in the second half of the 1990s, causing the debt burden to rise sharply to almost 1.6 percent per annum during the same period. Sharp real depreciation in exchange rate causing real cost of borrowing to rise and slower real growth in foreign exchange earnings have therefore been mainly responsible for the rise in real debt burden in the second half of the 1990s.

153

Economic Survey 2005-06 As stated earlier, pendulum swung to other extreme during 2000-03 when the real growth of external debt burden witnessed a massive decline (15.1% per annum) on account of almost 13.2 percent real growth in foreign exchange earnings, a decline in real cost of borrowing (1.7 percent) and a contraction in real growth of external debt. It may also be noted that Pakistan maintained a non-interest current account surplus (surplus in primary balance) to an average of 4.1 percent per annum which helped reduce the countrys debt burden at a relatively faster pace. During the last three years (2003-06), the current account balance again followed the historical pattern by turning into negative 1.3 percent and real growth in foreign exchange earnings slowed to 7.4 percent, mainly because of the depreciation of currency and a rise in the value of the deflator. However, the real cost of borrowing nosedived to a negative 4.1 percent followed by a massive fall in real growth of external debt which in fact witnessed a negative growth of 1.9 percent. Resultantly, the actual debt burden was again decreased by 8.6 percent. The analysis of dynamics of the external debt burden provides a useful lesson for the policy-makers to manage the countrys external debt. Firstly, the gap in the current account should be minimal so as to limit external borrowing. Secondly, stability in exchange rate is critical for prudent debt management. Thirdly, if there is need to borrow, the interest cost should be minimal. One way to keep interest rate low is to avoid going to bilateral and multilateral donors for large scale borrowing. Finally, the pace of foreign exchange earnings must continue to rise to increase the debt carrying capacity of the country. Centre to all these lessons is the pursuance of prudent monetary, fiscal and exchange rate policies. Pakistans Link with International Capital Market Eurobond 2009 With the successful implementation of first generation structural reforms and after gaining economic stability, Pakistan decided to give signal to the international capital markets through issuance of debt instruments. On February 12, 2004 Pakistan made a successful return to the international capital markets for the first time in more than five years. Pakistan issued S$500mm 5-year Regulation-S Eurobond due 2009 lead managed by JP Morgan, Deutsche Bank and ABN Amro Bank. This transaction attracted strong demand from high quality and diversified international investors resulting in 4 times over subscription and consequent tightest possible pricing of the bond in comparison to similar rated sovereign offering for 5-year new issues. The success of this transaction reflected a vote of confidence by the international investor community on Pakistans economic policies and reform agenda. The government achieved the following objectives: a strategic re-entry in the financial market established pricing benchmarks, something critical for next issue of debt instrument Pakistans bond was very tightly priced because of the rapidly improving Pakistans economic fundamentals Achieved investors diversification. Pakistans Eurobond was priced at 370bps above US Treasury to yield 6.750% which looked very tight when compared with emerging market peers. The Pakistani bond was priced some 50bps inside the Philippines, despite the fact that it was rated three notches lower. Pakistani paper was tightly priced when it was also compared with the weighted average spread of 435bps for the Emerging Market Bonds at the time of Pakistani deal. Performance of 2009 Bond Since the issue of Pakistans Eurobond, due 2009, the emerging markets (EM) credit markets have been on a path of steady decline. The JPMorgan Emerging Market Bond Index (EMBI+) has declined by about 60% since the issue. The Pakistan 09 bond has performed in line with the markets with the spread over UST undergoing compression by about 201bps as on May 04, 2006. As compared to the issue spread of UST + 370bps, the bond is trading currently at a spread of UST + 169bps, about 54% less

154

External Debt and Liabilities


Table-10.10: Selected Secondary Market Benchmarks (as of May 04, 2006) Ratings Issuer Details (Coupon/Maturity) (Moodys/S&P) Brazil Ba3/BB 14.500%/Oct 2009 Turkey Ba3/BB11.750 %/Jun 2010 Philippines B1/BB8.375%/Mar 2009 Pakistan B2/B+ 6.750%/Feb 2009

Spread over UST (bps) 49 128 72 169

Bid - Yield (%) 5.476 6.262 5.668 6.645 Source: Bloomberg

Sukuk (Islamic Bond) In January 2005, Pakistan issued US$ 600 million Islamic Sukuk lead Investor distribution managed by Citi group and HSBC which was then the largest issue by Govt. Agencies: 25% Pakistan, and the first Asian sovereign deal of 2005. The 5 year notes, Asset Managers: 23% structured to comply with Islamic law (Shariah) were priced at 6 month US$ Banks (Islamic): 19% Libor + 220 bps benchmark. Despite the volatility in emerging markets early in Banks & Trusts: 19% the year, Pakistan was able to launch and price the issue at the tight end of the Corporations: 2% indicated price guidance of US$ Libor +220-235 bps. Pakistans debut Islamic Bank (Private): 11% Bond issue saw considerable interest from both conventional as well as Islamic Insurance Companies: 1% investors across the three regions, Asia, Middle East and Europe. It attracted orders worth $1.2 billion, with more than 80 accounts participating in the transaction. Pakistan decided to increase the transaction size from the original US$ 300-500 million to US$ 600 million to cater for the significant demand and to allocate the bonds to high quality accounts. Pakistan had over 80 accounts in the order book with a well-distributed book (Middle East 47%, Asia 31% and Europe 22%) Recent Performance of Sukuk Bond The Pakistan Sukuk 10s over the past year have witnessed tightening of spreads over US$ Mid Swaps evidence of the scarcity of the Pakistan paper, attractiveness of the Pakistan issue and continued investor confidence in the Pakistan economy.
Spread over US$ Mid Swap (bps)
200 190 180 170 160 150 140

N ve b r-0 o me 5

Ja u ry-0 na 6

A g st-0 uu 5

Fb a 6 e ru ry-0

M rch 6 a -0

Sp me 5 e te b r-0

O b r-0 cto e 5

Eurobond of 2016 and 2036 On March 23, 2006, Pakistan successfully issued US$500mm new 10year Notes and US$300mm new 30year

D ce b r-0 e me 5

A ril-0 p 6

M y-0 a 6

Ju 5 ly-0

155

Economic Survey 2005-06 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 10year 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 and 187bps over the US$ mid-swap rate. The 30year 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 and 256bps over the US$ mid-swap rate. Pakistan was able to achieve spreads on both the new 10 and 30year bonds that were tighter than its previous 5 year issues. By issuing 10 and 30 year tranches, Pakistan completed its primary objective of establishing a full Pakistani International yield curve in record time. This remarkable achievement was completed against a backdrop of increased volatility in the US Treasury and Asian credit markets. With over 170 accounts participating, books closed with total orders exceeding US$2bn. The issue was over 2.5 times oversubscribed. Spread compression analysis of the Pakistan bonds
380 Spread over UST 328 276 224 172 120
Spread at issue Current spread (201) bps (24) bps (36) bps

Pakistan 2009

Pakistan 2016

Pakistan 2036

Source: JP Morgan

Recent Performance of 2016 & 2036 Eurobond Since the issue of the new Pakistan bonds due 2016 and 2036, the EM credit markets have continued to tighten. The Pakistan 2016 and 2036 bonds have performed in line with the markets with the spread over UST undergoing compression by about 24bps and 36bps respectively within just over a month since issued. As compared to the issue spread of UST + 240bps, the 2016 bond is trading currently at a spread of UST + 216bps, about 10% less
Table-10.11: Selected Secondary Market Benchmarks (as of May 04, 2006) Issuer Brazil Turkey Vietnam Philippines Pakistan Indonesia Indonesia Indonesia Ratings (Moodys/S&P) Ba3/BB Ba3/BBBa3/BBB1/BBB2/B+ B2/B+ B2/B+ B2/B+ Details (Coupon/Maturity) 7.875%/Mar 2015 7.250%/Mar 2015 6.875%/Jan 2016 8.000%/Jan 2016 7.125%/Mar 2016 7.250%/Apr 2015 7.500%/Jan 2016 6.875%/Mar 2017 Spread over UST (bps) 164 162 128 170 216 165 177 168 Bid - Yield (%) 6.786 6.770 6.435 6.854 7.303 6.796 6.924 7.007 Source: Bloomberg

The 2036 bond, as compared to the issue spread of UST + 302bps, is trading currently at a spread of UST + 266bps, about 12% less

156

External Debt and Liabilities


Table-10.12: Selected Secondary Market Benchmarks (as of May 04, 2006) Ratings Issuer Details (Coupon/Maturity) (Moodys/S&P) Brazil Ba3/BB 7.125%/Jan 2037 Turkey Ba3/BB6.875%/Mar 2036 Philippines B1/BB9.500%/Feb 2030 Philippines B1/BB7.750%/Jan 2031 Pakistan B2/B+ 7.875%/Mar 2036 Indonesia B2/B+ 8.500%/Oct 2035

Spread over UST (bps) 217 215 246 235 266 225

Bid - Yield (%) 7.407 7.393 7.788 7.680 7.995 7.581 Source: Bloomberg

Volatility has been high during the past few weeks owing to the Fed tightening, spikes in oil prices as well as strong economic reports, and these effects have reverberated through the rest of the Asian credit world. Long positions of dealers and lack of liquidity of Pakistan paper have also influenced the bond performance. Despite this, the Pakistan bonds continue to find support amongst investors that can see how the countrys credit story continues to improve. Relative to US treasuries, the Pakistan 2016 and 2036 bonds have outperformed by 2.30% and 6.40% respectively and have marginally outperformed the Asian high grade credits It is important to note that this offering was the largest ever funding exercise of the government. The largest deal, prior to this transaction has been the $ 600 million Sukuk in 2005. It was the longest ever tenor achieved by Pakistan. Both the new 10 and 30 year offerings are debut offerings for Pakistan by the US dollar yield curve was extended out to 30 years in just 2 years. Most emerging market sovereign issuers have taken longer time to extend their yield curve from 5 to 30 years. It took Philippines 4 years and Brazil and Turkey 3 years to extend their yield curve to 30 years.

157

TABLE 9.1 PUBLIC AND PUBLICLY GUARANTEED MEDIUM AND LONG TERM EXTERNAL DEBT DISBURSED AND OUTSTANDING As on 31-03-2006
S.No. Country/Creditor (US $ million) Debt Outstanding as on 31-03-2006

I. Bilateral a. Paris Club Countries 1 Austria 2 Belgium 3 Canada 4 Finland 5 France 6 Germany 7 Italy 8 Japan 9 Korea 10 Netherlands 11 Newzealand (ANZ Bank) 12 Norway 13 Russia 14 Spain 15 Sweden 16 Switzerland 17 United Kingdom 18 USA Sub-Total I.a. Paris Club Countries b. Non-Paris Club Countries 19 Bahrain 20 China (including Defense) 21 Czechoslovakia 22 Kuwait 23 Libya 24 Saudi Arabia 25 Turkey 26 United Arab Emirates Sub-Total I.b. Non-Paris Club Countries Total I. (a+b) II. Multilateral & Others 27 ADB 28 EIB 29 IBRD 30 IDA 31 IDB 32 IFAD 33 NORDIC Development Fund 34 NORDIC Investment Bank 35 OPEC Fund Total II: Multilateral & Others III. Bonds 36 Eurobonds 37 Saindak Total III: Bonds IV. Commercial Banks Grand Total (I+II+III+IV)

68.54 68.87 480.75 6.22 1,921.85 1,629.65 216.50 5,338.82 635.57 107.63 3.90 41.80 129.58 83.02 154.96 85.56 13.97 1,596.67 12,583.86 12.00 814.86 1.29 82.42 5.43 48.82 25.80 76.92 1,067.54 13,651.40 6,367.36 68.96 2,169.77 7,019.07 61.90 127.11 15.80 15.15 31.61 15,876.73 1,900.00 8.00 1,908.00 177.26 31,613.39 Source:Economic Affairs Division

TABLE 9.2 COMMITMENTS AND DISBURSEMENTS OF LOANS AND GRANTS (BY TYPE)
Project Aid Plan/ Fiscal Year VI. 5th Plan 1978-79 1979-80 1980-81 1981-82 1982-83 Sub-Total VII. 6th Plan 1983-84 1984-85 1985-86 1986-87 1987-88 Sub-Total VIII. 7th Plan 1988-89 1989-90 1990-91 1991-92 1992-93 Sub-Total IX. 8th Plan 1993-94 1994-95 1995-96 1996-97 1997-98 Sub-Total 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Jul-Mar (P) Commitments 1,064 1,002 591 887 1,115 4,659 1,580 1,804 1,810 2,035 1,903 9,132 1,979 2,623 1,935 2,219 1,204 9,960 1,822 2,714 2,219 1,351 776 8,882 1,382 264 247 1,113 860 1,233 1,965 647 Disbursements 599 808 676 536 744 3,363 695 903 1,055 1,006 1,223 4,882 1,262 1,312 1,408 1,766 1,895 7,643 1,961 2,079 2,151 1,821 1,552 9,564 1,620 1,110 919 640 705 525 741 593 Non-Food Commit- Disbursements ments 190 121 182 320 174 987 166 161 186 331 390 1,234 663 201 346 43 182 1,435 3 57 1 1 62 0 213 161 103 174 299 950 149 125 93 205 219 791 537 386 451 316 232 1,922 15 23 21 1 1 61 Non-Project Aid Food BOP Commit- DisburseCommitDisbursements ments ments ments 55 55 73 110 120 413 88 196 163 130 230 807 392 258 134 322 454 1,560 329 279 395 405 578 1,986 185 349 10 41 22 12 0 50 21 66 89 80 306 177 79 245 57 218 776 542 287 136 284 309 1,558 251 258 383 409 622 1,923 270 191 31 10 86 419 16 10 531 146 @ 217 @ 50 413 411 750 1,161 650 621 2,249 1,158 943 1,115 746 531 146 @ 217 @ 50 413 303 211 625 1,139 550 125 678 1,624 830 741 1,532 450 86 419 16 10 (US $ million) Total Total Relief Relief Commit- Disburse- Commit- Disburse ments ments ments ments 61 111 293 178 643 155 150 135 130 164 734 132 140 111 105 57 545 19 29 10 2 1 61 2 2 2 21 8 5 2 * 1650 61 111 293 178 643 155 150 135 130 164 734 132 140 111 105 57 545 19 29 10 2 1 61 2 2 2 21 8 4 2 ** 677 1,395 1,658 973 1,620 1,587 7,233 1,989 2,311 2,294 2,626 2,687 11,907 3,312 3,439 2,576 2,689 1,897 13,913 2,581 3,025 2,681 1,759 2,106 12,152 2,219 615 880 3,424 2,048 2,193 3,082 3,043 948 1,470 972 1,102 1,301 5,793 1,176 1,257 1,528 1,398 1,824 7,183 2,619 2,342 2,156 2,471 2,493 12,081 2,549 2,600 2,565 2,233 2,801 12,748 2,442 1,428 1,599 2,316 1,553 1,270 2,275 1,720

- nil @ IMF(SAF) Loan. * Inclusive of Earthquake Relief Assistance $1649 million & relief for Afghan Refugees $ 1 million ** Inclusive of Earthquake Relief Assistance $658 million & relief for Afghan Refugees $ 1 million P= Provisional

Source: Economic Affairs Division

TABLE 9.3 ANNUAL COMMITMENTS, DISBURSEMENTS, SERVICE PAYMENTS AND EXTERNAL DEBT OUTSTANDING (Medium and Long Term)
(US $ million) Debt outstanding Transactions during period Debt Servicing as % of (end of period) Foreign DisUndisCommitDisburseService Payments** Export Exchange bursed bursed* ments ments Principal Interest Total Receipts Earnings GDP 171 .. 479 342 11 6 17 14.9 .. 0.4 225 .. 429 304 20 11 31 27.2 .. 0.7 408 .. 645 501 34 13 47 22.4 .. 1.0 661 .. 526 541 44 18 62 27.4 .. 1.2 1,021 .. 832 706 37 25 62 25.9 .. 1.1 1,325 .. 537 533 41 33 74 29.2 .. 1.1 1,696 .. 628 623 52 44 96 35.2 .. 1.3 2,099 .. 561 729 62 46 108 31.2 .. 1.3 2,532 .. 656 594 93 65 158 44.3 .. 1.8 2,959 .. 555 564 105 71 176 52.1 .. 1.8 3,425 .. 873 612 101 81 182 43.3 .. 1.7 3,766 .. 143 409 71 51 122 20.6 .. 1.3 4,022 .. 543 355 107 86 193 23.6 18.1 3.0 4,427 .. 1,268 498 118 79 197 19.2 14.2 2.2 4,796 1,854 1,115 976 144 104 248 23.9 16.3 2.2 5,755 1,811 951 1,051 141 108 249 21.9 13.7 1.9 6,341 1,914 1,111 960 175 136 311 27.3 15.3 2.1 7,189 2,041 963 856 165 162 327 24.9 11.2 1.8 7,792 2,514 1,395 948 234 203 437 25.6 12.0 2.2 8,658 2,586 1,658 1,470 350 234 584 24.7 11.9 2.5 8,765 2,579 973 972 360 243 603 20.4 10.6 2.1 8,799 2,921 1,620 1,102 288 203 491 19.9 8.8 1.6 9,312 3,087 1,587 1,301 390 244 634 23.5 9.6 2.2 9,469 3,436 1,989 1,176 453 274 727 26.3 10.9 2.3 9,732 4,321 2,311 1,257 513 275 788 31.6 12.9 2.5 11,108 5,242 2,294 1,528 603 303 906 29.5 13.5 2.8 12,023 6,113 2,626 1,399 723 378 1,101 29.9 15.6 3.3 12,913 7,070 2,687 1,824 691 426 1,117 25.1 14.7 2.9 14,190 7,372 3,312 @ 2,619 @ 685 440 1,125 24.1 14.4 2.8 14,730 8,279 3,439 @ 2,342 @ 741 491 1,232 24.9 14.4 3.1 15,471 9,232 2,576 2,156 782 534 1,316 21.5 13.7 2.9 17,361 9,461 2,689 2,471 921 592 1,513 21.9 13.2 3.1 19,044 9,178 1,897 2,493 999 649 1,648 24.2 15.3 3.2 20,322 9,014 2,581 2,549 1,078 668 1,746 25.7 16.2 3.4 22,117 9,806 3,025 2,600 1,294 748 2,042 25.1 16.5 3.4 22,292 7,761 2,681 2,565 1,346 790 2,136 24.5 16.7 3.4 17.6 3.6 22,509 8,583 1,759 2,233 1,520 745 2,265 27.2 17.6 3.8 22,844 6,164 2,106 2,801 1,623 730 2,353 27.3 13.6 2.6 25,423 4,762 2,219 2,442 1,065 465 1,530 19.7 11.9 2.1 25,359 3,421 615 1,428 893 619 1,512 17.6 13.7 2.8 25,608 2,756 880 1,599 1,273 688 1,961 21.3 7.8 1.7 27,215 3,872 3,424 2,316 745 455 1,200 13.1 5.3 1.3 28,301 3,779 2,048 1,553 591 447 1,038 9.3 14.0 3.2 28,900 5,025 2,193 1,270 2,321 674 2,995 24.3 # 30,813 5,205 3,082 2,275 1,077 690 1,767 # 31,613 5,923 3,043 1,720 1,167 499 1,666 not available. Source: Economic Affairs Division Exclusive of grants. Excludes debt servicing in respect of short term borrowings, IMF charges and Euro Bonds up to the year 2003-04. From the years 2004-05 onwards debt servicing in respect of short term borrowings and Euro Bonds is included. Inclusive of IMF(SAF) Loan. Debt outstanding data up to 2003-04 excludes stock of Defence Loans and Bonds, whereas, from the years 2004-05 onward stock of Defence Loans and Bonds are included.

Fiscal Year 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 (Jul-Mar) P .. * ** @ # P: Provisional

TABLE 9.4 DEBT SERVICE PAYMENTS ON FOREIGN LOANS (Paid in foreign exchange)
Fiscal Year/ Country 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 (US $ million) 2004-05 2005-06 (Jul-Mar)

I.CONSORTIUM 1.Belgium Principal 3.973 Interest 1.319 2.Canada Principal 17.958 Interest 3.666 3.France Principal 27.143 Interest 22.716 4.Germany Principal 83.385 Interest 47.237 5.Italy Principal 13.272 Interest 4.692 6.Japan Principal 92.086 Interest 70.222 7.Netherlands Principal 12.382 Interest 5.664 8.Norway Principal 0.254 Interest 0.243 9.Sweden Principal 2.674 Interest 0.670 10.UK Principal 44.103 Interest 6.028 11.USA Principal 255.758 Interest 92.801 TOTAL (I) Principal 552.988 Interest 255.258 II.FINANCIAL INSTITUTIONS 1.ADB Principal 89.292 Interest 106.585 - nil.

6.159 3.696 27.934 4.627 37.266 28.655 80.641 42.954 11.368 4.063 113.299 82.308 19.026 6.202 0.259 0.222 3.891 6.451 19.121 3.890 267.207 81.413 585.912 264.259

6.175 3.088 40.060 4.673 29.278 28.165 89.238 40.419 9.344 4.025 134.769 96.227 12.976 5.358 0.266 1.058 8.285 5.054 0.197 0.406 268.620 77.468 599.208 265.941

7.747 3.178 35.592 3.882 52.212 39.722 107.781 44.253 9.797 4.434 166.826 114.136 16.603 4.418 2.044 1.216 13.311 3.845 0.409 290.310 81.001 702.223 300.494

7.945 2.773 37.213 3.949 67.708 47.659 112.143 43.487 9.674 4.140 181.428 104.946 13.789 5.073 2.322 2.453 14.034 4.778 1.372 291.234 88.313 737.490 308.943

7.233 1.920 26.821 3.858 66.661 44.165 107.998 34.999 9.283 4.111 167.078 97.918 14.076 4.143 2.484 2.349 13.836 5.466 0.369 2.719 333.834 95.359 749.673 297.007

6.033 2.621 23.680 2.774 40.697 22.757 58.662 17.507 13.239 3.620 169.558 98.308 12.273 3.102 2.765 1.892 18.721 7.854 2.880 3.260 431.831 100.959 780.339 264.654

0.782 15.947 2.360 11.227 5.690 42.514 12.242 1.580 0.569 14.796 27.521 1.576 0.562 0.401 0.287 0.591 1.689 1.424 270.515 24.455 359.147 77.581

1.267 15.318 1.302 8.767 9.551 6.532 3.121 0.620 0.538 59.970 0.936 0.630 1.874 1.314 2.207 2.644 1.129 125.515 17.825 159.497 101.563

1.980 2.060 2.870 0.800 80.170 30.450 31.020 9.350 2.260 1.490 35.900 72.070 1.150 0.260 2.940 2.380 10.260 5.370 8.930 3.180 75.960 82.040 253.440 209.450

0.864 1.859 0.034 16.570 1.179 7.461 2.183 1.103 46.384 28.572 0.710 0.637 0.543 4.692 2.644 1.658 7.839 34.534 60.973 98.493

2.072 1.317 47.516 2.344 18.781 2.595 0.319 7.464 1.300 2.125 1.797 1.987 0.334 31.396 4.788 116.559

1.413 1.438 28.766 61.557 7.925 17.575 0.316 2.753 396.646 129.721 2.419 2.124 1.537 1.962 36.203 6.537 1.721 56.098 473.701 283.010

0.000 1.767 0.302 2.766 10.636 82.615 7.253 35.938 0.541 3.605 48.114 149.982 0.221 1.894 3.877 1.321 0.412 3.553 0.959 0.545 10.492 64.334 82.807 348.32

0.000 0.895 0.367 1.992 10.965 39.133 5.556 14.409 0.513 1.839 37.956 45.838 0.215 2.664 2.013 1.027 0.412 3.104 0.948 0.309 10.492 30.502 69.437 141.712

114.355 122.031

129.039 137.192

158.331 160.608

174.253 180.519

194.591 142.960

200.636 138.966

215.193 151.019

237.655 156.565

222.780 166.600

241.442 151.668

245.187 1370.429 169.231 179.919

245.272 75.061

167.628 50.667 (Contd.)

TABLE 9.4 DEBT SERVICE PAYMENTS ON FOREIGN LOANS (Paid in foreign exchange)
Fiscal Year/ Country 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 (US $ million) 2004-05 2005-06 (Jul-Mar)

2.IBRD Principal 116.560 Interest 167.309 3.IDA Principal 22.058 Interest 16.843 4.IFC Principal 5.651 Interest 2.224 5.IFAD Principal 1.282 Interest 0.998 6.IMF Trust Fund Principal Interest 2.358 7.NORDIC Principal Interest 8. CDC Principal Interest TOTAL (II) Principal 234.843 Interest 296.317 III.NON-CONSORTIUM 1.Australia Principal 3.807 Interest 0.390 2.Austria Principal 2.515 Interest 1.279 3.Bulgaria Principal 0.085 Interest 4.China Principal 17.657 Interest 9.940 5.Czechoslovakia Principal 0.292 Interest 0.391 6.Denmark Principal 1.517 Interest - nil. (a) IMF

139.208 189.803 25.045 18.466 5.558 1.738 2.283 1.155 286.449 333.273

162.431 191.709 28.950 20.146 4.159 1.296 2.836 1.300 2.927 327.415 354.570

202.177 209.584 33.108 22.848 3.096 1.116 4.372 1.525 401.084 395.681

226.513 213.720 37.468 24.981 2.884 0.806 4.957 1.675 0.014 446.075 421.715

230.249 204.294 41.444 25.492 2.532 0.513 4.776 2.092 0.346 1.458 473.938 376.809

201.189 176.294 45.713 26.330 2.402 0.289 6.333 2.381 0.346 1.448 469.674 350.527

215.147 184.880 53.737 28.138 1.685 0.105 6.300 2.457 0.914 1.594 492.946 368.193

222.773 182.812 62.631 28.850 8.245 2.376 49.075 1.755 1.806 536.869 421.957

314.930 186.690 61.370 24.090 7.650 2.210 236.36a 40.470 1.920 2.090 1.190 8.180 846.200 430.330

240.984 134.556 72.592 30.054 7.354 1.996 2.023 1.065 1.201 1.175 565.596 320.514

205.393 96.499 83.452 39.885 7.504 1.751 2.232 0.723 -

287.173 94.797 97.926 45.063 7.712 2.106 16.698 2.375 0.565 -

322.704 77.419 112.724 51.049 0.000 0.000 7.962 2.043 0.000 6.242 2.519 0.685 0.000 0.000 691.181 212.499

237.256 88.245 94.264 41.708 0.000 0.000 5.902 1.463 0.000 0.000 1.265 0.446 0.000 0.000 506.315 182.529

543.768 1765.615 308.089 339.148

26.744 1.966 1.833 0.797 22.052 12.632 0.643 1.564 1.630 -

40.708 1.871 4.454 0.884 22.448 10.670 2.425 2.192 1.475 -

20.263 0.919 4.721 1.708 31.388 13.318 2.758 1.878 1.726 -

4.982 0.421 1.627 2.339 50.862 26.641 3.375 2.035 1.729 -

64.360 3.001 5.580 2.530 72.527 30.833 2.763 1.452 1.588 -

186.972 9.551 2.445 1.042 72.356 32.643 3.069 1.378 1.442 -

147.880 5.431 2.991 0.991 0.958 -

147.891 6.692 0.656 11.932 8.136 -

1.230 1.500 117.900 5.820 10.200 0.260 -

0.353 87.793 19.004 -

2.072 17.453 13.534 -

0.695 3.207 14.798 13.980 -

0.000 0.000 0.376 4.212 0.000 0.000 14.390 13.513 0.000 0.000 0.000 0.000

0.000 0.000 0.705 2.037 0.000 0.000 13.775 7.149 0.000 0.000 0.000 0.000 (Contd.)

TABLE 9.4 DEBT SERVICE PAYMENTS ON FOREIGN LOANS (Paid in foreign exchange)
Fiscal Year/ Country 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 (US $ million) 2004-05 2005-06 (Jul-Mar)

7.Finland Principal 1.110 Interest 0.213 8.Korea Principal Interest 1.964 9.Romania Principal 4.439 Interest 0.900 10.Switzerland Principal 1.801 Interest 2.242 11.Yugoslavia Principal 0.139 Interest 0.010 12.USSR Principal 33.932 Interest 12.018 13.Spain Principal Interest 14.European Investment Bank Principal Interest 15. Newzealand (ANZ Bank) Principal Interest TOTAL (III) Principal 67.294 Interest 29.347 IV.ISLAMIC COUNTRIES 1.Iran Principal 13.636 Interest 0.596 - nil.

1.709 0.020 2.010 4.258 0.706 2.141 3.262 23.580 14.896 -

1.839 0.012 1.527 4.191 0.515 2.841 4.012 31.107 15.028 -

1.839 0.207 0.733 2.599 4.154 0.327 3.091 4.759 41.011 12.154 -

2.184 1.224 3.696 1.817 4.154 0.139 9.323 4.905 21.205 8.028 -

1.839 0.007 3.696 1.868 8.400 4.894 41.333 9.788 2.935 1.777

1.838 0.006 3.696 40.579 5.915 3.096 26.363 6.733 5.006 2.316

11.000 4.790 1.160 0.041

0.131 5.063 0.659

0.270 1.230 18.630 4.580 2.050 0.690 4.440 2.140 2.220

0.157 5.232 0.867 3.457 0.860

0.111 0.941 1.681

0.088 44.834 24.884 0.803 0.098 1.753

0.024 0.164 45.272 23.787 0.000 0.000 0.253 1.319 0.000 0.000 0.937 3.367 0.580 2.372

0.024 0.127 95.914 22.066 0.000 0.000 0.234 0.656 0.000 0.000 17.702 20.053 0.823 1.404

84.849 38.075

111.488 36.711

111.684 37.868

103.137 47.549

205.021 56.151

309.102 97.344

167.619 7.623

0.118 159.823 21.455

0.240 0.840 0.080 138.810 35.510

0.527 87.793 30.457

17.453 16.267

0.637 1.722 61.062 46.437

0.679 2.592 0.000 0.000 62.511 51.326

0.649 1.574 0.000 0.000 129.826 55.066

0.000 0.000

0.000 0.000 (Contd.)

TABLE 9.4 DEBT SERVICE PAYMENTS ON FOREIGN LOANS (Paid in foreign exchange)
Fiscal Year/ Country 2.Libya Principal Interest 3.Kuwait Principal Interest 4.Saudi Arabia Principal Interest 5.UAE Principal Interest 6.OPEC Fund Principal Interest 7.IDB Principal Interest 8.Malaysia Principal Interest 9.Turkey Principal Interest TOTAL (IV) Principal Interest V. OTHERS 1. NBP's Principal Interest 2. NBP Bahrain Principal Interest 3. IDB (ST) Principal Interest 4. Cash (ST) Principal Interest 5. Euro Bonds Principal Interest 6. Dollar Bonds Principal Interest TOTAL (V) Principal Interest GRAND TOTAL (I+II+III+IV+V) Principal Interest - nil. 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 (US $ million) 2004-05 2005-06 (Jul-Mar)

1.818 0.390 11.645 2.171 11.808 2.538 7.414 4.027 5.947 0.377 13.163 0.865 65.431 10.964

1.866 0.363 7.781 2.378 11.885 2.395 6.508 3.791 6.097 0.355 7.212 0.826 41.349 10.373

1.564 0.310 7.827 2.732 9.308 2.222 7.413 3.640 6.108 0.335 7.433 0.811 39.756 10.757

9.302 2.496 13.874 2.185 7.413 3.323 6.771 0.423 16.433 2.225 22.319 2.086 78.612 13.874

7.759 2.325 14.877 1.965 6.686 3.115 6.912 0.501 4.995 0.465 16.011 2.804 59.740 12.089

6.158 1.419 7.703 2.121 14.653 1.732 4.606 2.916 15.480 0.884 7.030 0.867 21.702 1.122 91.602 15.101

1.416 0.209 7.016 3.812 13.078 1.351 5.606 2.746 8.770 0.948 16.947 5.713 64.083 17.786

1.156 0.185 0.262 0.058 1.230 0.037 3.606 2.297 8.417 0.919 29.403 7.233 45.324 11.211

8.098 0.804 23.213 5.040 4.797 36.311 11.881

1.000 0.130 2.910 0.950 3.830 0.610 8.000 0.790 18.640 4.500 5.970 34.380 12.950

1.226 0.057 0.336 6.597 0.754 23.083 2.035 2.597 30.906 5.779

3.030 0.900 13.079 2.900 0.677 6.504 0.707 2.466 0.749 25.079 5.933

5.395 2.195 5.424 1.285 1.000 0.824 5.178 0.595 3.208 0.731 20.205 5.630

0.000 0.000 5.733 2.032 5.373 1.122 0.000 0.678 4.800 0.546 2.956 0.612 0.000 0.000 12.900 1.875 31.762 6.865

0.000 0.000 6.495 1.768 2.711 0.561 0.000 0.677 3.589 0.369 1.943 0.475 0.000 0.000 12.900 1.586 27.638 5.436

3.111 0.981 4.286 0.983 8.300 0.243 16.280 7.416 155.458 57.644 21.903 3.326 209.338 70.593

2.945 0.835 4.286 0.552 233.385 9.316 16.280 7.753 155.459 91.287 21.903 4.414 434.258 114.157

920.556 591.886

998.559 1078.000 1293.603 1346.442 1520.234 1623.198 1065.036 648.980 668.000 747.917 790.296 745.067 730.311 464.608

892.500 1272.830 619.093 688.240

745.268 455.243

591.088 2320.583 1077.599 1167.474 446.848 674.225 689.603 498.900 Source: Economic Affairs Division

TABLE 9.5
TERMS OF FOREIGN LOANS/CREDITS CONTRACTED BY PAKISTAN 2004-05 Interest Rate/ Commission(%) 0.75 0.75 1-1.5& LIBOR+60bps LIBOR+50bps 2005-06 (Jul-Mar) Interest Rate/ Commission(%) 2 1.3 0.75 1 & 1.5 LIBOR+50bps

Lending Country/Agency A. Consortium 1. Germany 2. Korea 3. Japan 4. IDA 5. ADB 6. IBRD Sub-Total (A): B. Non-Consortium China Sub-Total (B): Islamic Countries 1. Kuwait-Loans 2. Islamic Development Bank Sub-Total (C): Total (A+B+C)

Amount (US $ Million) 63.2 601.8 735.7 349.3 1750.0 705.4 705.4 34.2 8.4 42.6 2498.0

Amortization (years) 30 35 8-32 15-25 15-20

Amount (US $ Million) 17.3 244.7 968.8 713.5 100.0 2044.3 322.3 322.3

Amortization (years) 30 30 35 15-40 15-20

20

1.5

5-20

2 2.5

20 25 0.0 2366.6 Source: Economic Affairs Division

- nil a: b: c: d: e: f:

2% for Ist 10 years and 3% thereafter Above LIBOR; (London Inter Bank Offered Rate) Above US prime Rate. Above JLTPR Variable not exceeding 12% p.a. Above COP: Cost of Qualified Borrowing

TABLE 9.6 GRANT ASSISTANCE AGREEMENTS SIGNED


1997-98 I. Consortium including outside Consortium arrangements: 1. Australia 2. Canada 3. Germany 4. Japan 5. Netherlands 6. Norway 7. Korea 8. Switzerland 9. UK 10. a) USA (Outside Package) b) USA 11. UN and Specialised Agencies 12. UNDP Special Grant 13. EEC 14. World Food Programme 15. Italy 16. IDA 17. IBRD Sub-Total (I) II Non Consortium 1. China 2. Switzerland Sub-Total (II) III Islamic Countries Islamic Development Bank 1. 2. 3. 4. Iran UAE Oman Saudi Arabia Sub-Total (III) 1.2 98.3 1.6 277.9 5.5 5.5 2.2 124.6 0.6 0.6 47.5 5.4 50 55.4 20 1086.7 3.5 100 103.5 7.8 300.6 50 50 4.9 0.0 116.7 116.7 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 (US $ million) 2005-06 Jul-Mar (P)

0.2 10.6 40.1 5.2 2.8 1.9 7.7 22.6 91.1

4.5 1.6 0.4 36.3 2.8 93.4 41 84.9 5.0 269.9

2.5 1.0 0.5 1.4 0.2 77.2 4.4 23.5 2.6 113.1

5.6 3.3 1.6 17.2 1.7 1.0 3.2 6.9 40.5

3.8 65.9 53 703.9 10.7 45.5 76.1 2.1 961

50.1 6.5 42.3 33.5 8.3 27.5 10.9 179.1

13.8 45.8 10.4 2.1 85.3 29.6 12.4 28.9 12.4 240.7

4.5 113.5 3.9 2.4 50.9 325.8 0.3 68.7 0.3 570.3

0.1 13.5 23.9 139.1 92.3 2.0 0.4 271.3

6.0 6.0

6.4 6.4

3.6 3.8

6.4 6.4

46.9 3.4 50.3

6.0 4.2 10.2

0.2 0.2

12.1 12.1

0.0

IV Relief Assistance for A. Afghan Refugees B. Earthquake 1. AFGHANISTAN 2. ALGERIA 3. AUSTRIA 4. AZERBAIJAN 5. BHUTAN 6. BRUNEI 7. CHINA 8 .CYPRUS / MAURITIUS 9. INDONESIA 10. JORDAN 11. MALAYSIA 12. MOROCCO 13. OMAN 14. PAK-TURK FOUNDATION 15. SOUTH KOREA 16. THAILAND 17. TURKEY 18. ADB 19. IBRD Sub-Total (IV) Total (Grants) - nil EEC: European Economic Community P : Provisional

1.1 0.5 1.0 0.7 1.5 0.1 0.6 32.9 0.1 1.0 1.0 1.0 1.5 5.0 4.0 0.5 0.5 150.0 80.0 5.0 286.9 295.8 582.4 676.0 Source: Economic Affairs Division

TABLE 9.7
TOTAL LOANS AND CREDITS CONTRACTED (US $ million) 2004-05 2005-06 Jul-Mar (P)

Lending Country/Agency

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

A.

Consortium including outside consortium arrangements: (a) Bilateral: 1. Belgium 2. Canada 3. Germany 4. Japan (Regular) (Earthquake) 5. Netherlands 6. Norway 7. Korea 8. Sweden 9. UK 10. USA Sub-Total (a) (b) Multilateral: 1. IBRD 2. IDA (Regular) (Earthquake) 3. ADB (Regular) (Earthquake) 4. IFAD 5. EIB * Sub-Total (b) Sub-Total A (a+b) 250.0 535.2 289.9 14.4 23.0 1112.5 1756.1 350.0 547.8 14.5 912.3 1642.5 88.5 54.1 142.6 427.0 347.6 411.9 17.4 776.9 787.2 839.4 876.1 14.2 1729.7 1778.9 269.4 1193.2 1462.6 1489.0 50.0 690.7 885.6 22.3 1648.6 1648.6 349.3 601.8 735.7 1686.8 1750.0 100.0 226.0 742.8 492.5 221.0 1782.3 2044.3

36.8 30.5 250.0 21.3 305.0 643.6

38.3 16.9 10.1 600.0 11.0 52.9 1.0 730.2

1.7 282.7 284.4

10.3 10.3

7.3 32.6 9.3 49.2

26.4 26.4

0.0

63.2 63.2

146.6 98.1 17.3 262.0

B.

Non-Consortium 1. Austria 2. Australia 3. China (Regular) (Earthquake) 4. Spain Sub-Total (B) Islamic Countries 1. Kuwait 2. Saudi Arabia 3. OPEC Fund 4. Islamic Dev. Bank 5. Abu Dhabi Fund Sub-Total (C)

236.1 236.1

127.0 127.0

63.7 63.7

15.7 232.5 1.8 250.0

118.2 118.2

47.5 47.5

705.4 705.4

22.3 300.0 322.3

C.

16.0 16.0 2008.2

29.5 41.6 71.1 1840.6

0.0 490.7

10.0 33.3 43.3 830.5

15.0 24.8 265.0 304.8 2333.7

0.0 1607.2

25.0 25.0

34.2 8.4 42.6

0.0

Grand Total - nil * European Investment Bank P : (Provisional)

1721.1 2498.0 2366.6 Source: Economic Affairs Division

Chapter 11.

EDUCATION

Access to basic education is the right of every individual. Education is the most important instrument in enhancing human capabilities, and in achieving the desired objectives of economic development. Education enables individuals to make informed choices, broaden their horizons and opportunities and to have a voice in public decision making. It is one of the most important factors that act as a counterweight to social and economic mobility imposed by cultural and historical biases. Education is a vehicle of nation-building through which a nations shared interpretation of history and cultural values are reproduced across generations.1 At the country level, education means strong economic growth due to productive and skilled labor force. At the individual level, education is strongly correlated to higher returns in earning and a more informed and aware existence. The emerging global scenario offers immense opportunities and challenges, and only those nations can benefit from it which have acquired the required knowledge base and skills. Pakistan has committed to all the International declaration to extend the agenda of providing the basic right of education to all of its citizens. Pakistan is among the signatories of Millennium Development Goals (MDGs) as well as the Dakar World Education Forum 2000. The Government of Pakistan has taken several policy and program initiatives to achieve these international goals since then. The National Plan of Action for Education for All was initiated in response to the commitment made at Dakar for World Summit. The Education Reform Action Plan (ESR), which is built upon the National Education Policy 1998-2010 is a long term plan, with three yearly action plans. The ESR addresses the development of the overall education sector through investment in rehabilitation of schools, improving the curriculum and assessment reform system, an adult literacy campaign, mainstreaming the Madrassas, a pilot school nutrition program and technical stream in secondary schools. The Poverty Reduction Strategy Paper (PRSP) views education as a strong policy instrument in bringing poverty down. Three main goals that are the underlying objectives of all of these programs and initiatives include universal access to primary education by increasing the net enrollment and higher rate of survival of children till grade 5, increase in the adult literacy rate and to attain gender equality at all levels. Currently, adult literacy rate is 53 percent; net enrollment at the primary level is 52 per cent, retention rate for 200405 is noted as 61 per cent and significant gender gaps at all levels especially in the rural areas persist. Public spending on education as a percentage of GDP is 2.1 per cent and has approximately increased by less than one percentage point since 2000-01. Pakistan has previously neglected investment in human capital and thus fosters a persistently high population, deceleration of growth and overruling poverty. In education, the problems are low level of enrollments not only at the primary, but also at the middle, secondary, and higher education levels along with poor quality of public education. Pakistan still has to go a long way to reach these targets and until and unless education is given the due priority that it deserves in the policy framework and allocation of financial resources this sector will continue to show weak performance in the coming years.

Millennium project by UNDP

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Economic Survey 2005-06 Literacy Half of the worlds illiterate and 22 percent of the worlds population live in South Asia.2 Pakistan does not fare well on account of literacy within the region. Sri Lanka and Maldives have almost attained full literacy. The adult literacy rate for India is 61 as compared to 53 percent in Pakistan. India, according to a recent study done by the World Bank, has attained 100 percent Gross Enrollment ratio (GER) and 90 percent Net Enrollment Ratio (NER) at the primary level.3 The National Education System of Pakistan has to meet the basic learning needs of our society, emphasizing basic literacy and life skills, increasing access to and completion of quality education, address gender, geographical and structural disparities, and enhance the efficiency of education governance. The overall adult literacy rate of Pakistan for the fiscal year 2004-05 is 53 percent against the ambitious target (according to the Education Reform Action Plan 2001-05) of increasing it from 45 percent in 2001-02 to 60 percent in 2004-05. It is also below the PRSP target of 58 percent for the period of 2004-05. The MDG target is to reach 80 percent literacy till 2015. The literacy rate increased at an average of two percent per annum in the past four years and with this rate it is highly unlikely that Pakistan would be able to reach the MDG target unless and until there is a major change in the policy and implementation framework. The education sector was not given due priority in the past as it was perhaps not recongnized as the engine of growth in the evolving market economy. Scarcity of funds, weak implementation and monitoring of programs, overlapping and high recurring costs, low access to basic education, static curriculum and minimal public-private partnership in this sector (especially in the rural areas) have impeded the development process in the education sector. These constraints and some of the initiatives taken by the government to counter them are discussed in greater detail in the following sections.
Table 11.1: Literacy Rates (10 Yeas & Above): Pakistan and Provinces (%) 1998-99 PIHS 2001-02 PIHS Province/Area Total Male Female Total Male Female Pakistan 45.0 59.0 31.0 45.0 58.0 32.0 Rural 36.0 52.0 20.0 36.0 51.0 21.0 Urban 65.0 73.0 56.0 64.0 72.0 56.0 Balochistan 36.0 54.0 16.0 36.0 53.0 15.0 Rural 33.0 51.0 12.0 32.0 49.0 11.0 Urban 56.0 72.0 39.0 54.0 71.0 36.0 NWFP 37.0 56.0 20.0 38.0 57.0 20.0 Rural 34.0 54.0 16.0 35.0 55.0 16.0 Urban 53.0 66.0 40.0 56.0 70.0 41.0 Punjab 46.0 57.0 34.0 47.0 57.0 36.0 Rural 38.0 52.0 24.0 38.0 51.0 26.0 Urban 64.0 71.0 58.0 66.0 71.0 60.0 Sindh 51.0 65.0 35.0 46.0 60.0 31.0 Rural 35.0 53.0 15.0 33.0 51.0 14.0 Urban 69.0 79.0 58.0 64.0 74.0 54.0 Source: Pakistan Social & Living Measurement Survey 2004-05 2004-05 PSLM Male Female 65.0 40.0 58.0 29.0 78.0 62.0 52.0 19.0 47.0 13.0 74.0 42.0 64.0 26.0 61.0 23.0 75.0 47.0 65.0 44.0 59.0 35.0 78.0 66.0 68.0 41.0 56.0 18.0 80.0 62.0

Total 53.0 44.0 71.0 37.0 32.0 60.0 45.0 41.0 61.0 55.0 47.0 72.0 56.0 38.0 72.0

The discrepancies at the provincial level persist ranging from Sindh with highest literacy rates at 55 percent and Balochistan at 37 percent. Overall adult female literacy increased from 32 percent in 2001-02 to 40 percent in 2004-05. The corresponding change in the male literacy rate is from 58 to 65 percent. Literacy remains higher in the urban areas (71 percent) as compared to the rural areas (44 percent). In absolute terms, the number of illiterates in

2 3

Human Development Report 2003, MHHDC Poverty Reduction Strategy Paper (PRSP- 2), 2006

160

Education ten plus age group is 51.8 million. It is generally recognized that a low net participation rate of about 57 percent at the primary level combined with high inefficiency rate estimated at 45 percent dropouts in the public sector, has contributed to a low national literacy rate.4 The literacy ratio has been negatively exacerbated due to the absence of meaningful and over ambitious literacy programs in the past. The Presidents Education Sector Reforms Table 11.2 Literacy rates (10 years and above) for Pakistan and Provinces 2004-05 (%) emphasize improvement through the implementation of the national literacy guidelines/policy, creating Province/Area Total Male Female awareness about improving literacy, institutionalizing Pakistan 53 65 40 literacy efforts through more efficient and effective Punjab 55 65 44 organizational structure at all tiers of the Sindh 56 68 41 government, to ensure consistent implementation of NWFP 45 64 26 Balochistan 37 52 19 national literacy curriculum and standards. Under Source: PSLM 2004-05 ESR, 6,953 literacy centers have been established throughout the country. So far, 0.278 million youth have been made literate. National Commission for Human Development has also established 6602 Adult Literacy Centers and 160,533 neo-literates have graduated from these centers. USAID assistance has also led to opening of approximately 4000 Adult Literacy Centers in Sindh, Balochistan and 7543 adults have so far passed the literacy program. National literacy guidelines have also been developed. UN Decade Strategies for literacy program have also been developed in close co-operation with UNESCO. Presidents Education Sector Reforms Program emphasizes the provision of education for all school age children and it proposes to achieve 76% net primary enrolment by 2006. Recently, the government has decided to provide at least one primary school to every village along with other initiatives like provision of free text books, free education up to matriculation. Grants and stipend to girl students and the introduction English language teaching from grade 1 are also part of policy measures. Provincial/district comparisons of Literacy rates 2004-05 For the first time, the Government has reported through Social and Living Standards Measurement Survey (PSLM) 2004-05 district level data for the major indicators in the education sector. This (PSLM) district level data shows a more detailed picture of the level of the education in different districts within the provinces and also indicates the areas that require especial attention. This data bank will supplement the policy and implementation framework by devising targeted programs for different areas. The Gross Enrollment Rate (GER) for the primary schools (age 5-9) has increased from 72 per cent in 2001-02 to 86 per cent in 2004-05. Narrowal district in Punjab, Karachi in Sindh, Abbotabad in NWFP and Ketch in Balochistan with GER of 130%, 111%, 117% and 110% respectively have been ranked as top districts within the provinces. On the other hand, district Muzzafargarh with 66% in Punjab, Jacobabad with 43% in Sindh, Kohistan with 52 % in NWFP and Jafarabad with 33% in Balochistan were ranked at the bottom in GER within the provinces. The Net Enrollment Rate (NER) was 42 per cent in 2001-02 and has increased significantly to 52 per cent in 200405. Sialkot (84 %) in Punjab, Karachi (85 %) in Sindh, Abbotabad (70%) in NWFP and Ketch (63%) in Balochistan have been ranked on the top in each province. However, Bahawalpur with 38 % in Punjab, Jacobabad with 25% in Sindh, Kohistan with 24% and Killa Abdulla with 19% in Balochistan are ranked at the bottom within the provinces. Similarly, GER at the middle school level, Chakwal (81 %) and Muzaffargarh with 28% are at the top and bottom respectively in Punjab, Karachi (67%) at the top and Thatta (17%) at the bottom in Sindh, Chitral (77%) at the top and
4

Major Developments in the Education sector, Ministry of Education 2006, Government of Pakistan.

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Economic Survey 2005-06 Kohistan (18%) at the bottom in NWFP, Ketch (62 %) at the top and Kharan (11%) at the bottom in Balochistan. However, NER gives a more realistic picture showing that Sialkot (30 %) is ranked at the top and Rahim Yar Khan (11%) at the bottom in Punjab, Karachi (27 %) is at the top and Thatta (8%) at the bottom in Sindh, Abotabad (29%) at the top and Batagram (5%) and Kohistan (5%) at the bottom in NWFP and Quetta (17 %) is ranked at the top and Qilla Saifullah(3%), Zhob (3%), Kharan (3%) are at the bottom in Balochistan . At the Matric level GER and NER have been (42 to 44 %) and (9 to 11%) respectively during the period of 2001-02 to 2004-05. Rawalpindi (80%) is at the top and Lodhran (23%) at the bottom, Karachi with 79% is at the top and Thatta with 20% is at the bottom, Chitral (83%) at the top and Kohistan and Shangla with 18% at the bottom, Quetta (65%) at the top and Kharan (13%) at the bottom in Punjab, Sindh, NWFP and Balocishan respectively. In NER, Lahore (19%) in Punjab, Karachi (20%) in Sindh, Abbotabad (18%) in NWFP and Punjgur (16%) in Balochistan are top districts in the provinces. However, Lodhran (4%) in Punjab, Mir Pur Khas (3%) in Sindh, Kohistan (1%) and Upper Dir (1%) in NWFP and Qilla Saifulla (1%) and Kharan (1%) in Balochistan are at the bottom within the provinces. Enrollment in public, private and deeni madaris show that the share of primary enrollments in government schools has declined from 74 per cent 2001-02 to 72 per cent in 2004-05. However, some of the poorest districts such as Bhakkar (Punjab), Tharparkar (Sindh), Upper Dir (NWFP) and Jhal Magsi (Balochistan) have almost 100 per cent government enrollment. The literacy level of population (10years & above) has increased from 45 per cent in 2001-02 to 53 per cent in 200405. Adult literacy has also increased from 43% in 2001-02 to 50% in 2004-05. At the district level, Rawalpindi (75 percent) at the top and Lohdran (34%) at the bottom in Punjab, Karachi (78%) at the top and Jaccobabad (34%) at the bottom in Sindh, Abbotabad (65%) at the top and Kohistan (25%) at the bottom in NWFP and Quetta (65 %) at the top and Jhal Magsi (20%) and Qilla Saifullah (20%) at the bottom in Balochistan. The comparison of different GERs and NERs has been carried out using official age group brackets at the primary, middle and matric levels which according to analyst are not realistic. Keeping this in view, tables for GERs and NERs have also been worked out using different age brackets recommended by the technical Committee formed by the government to review PIHS/ HIES. NER with the revised age brackets show improvements over the official age groups. Education Institutions and Enrollment Attainment of Universal Primary Education (UPE) has become a compelling national priority. This is a challenge that has been accepted at the highest level in the federal and provincial governments. UPE is anticipated to increase in access to education by 4%, reduction in gender disparity by 10% and enhancing primary completion rate by 5% per annum. In the past year, 2187 new primary schools were established, 1221 in the public sector and 881 in the private sector. This increase has occurred in both rural and urban areas. Statistical annexure table 9.1 and 9.2, show the number of the girls in the primary and middle school in year 2004-05. The expansion in the number of institutions is inconsistent with the need to provide easy access to the half the countrys school going population. The public sector was able to establish only 999 new primary schools for girls in 2004-05. The responsibility of expanding the primary and middle schools for girls has been devolved to District Governments under the devolution plan. Enrollment at the primary level increased from 19.92 million in 2001-02 to 21.33 million in 2004-05, 4.28 million to 4.55 million at the middle level and 1.79 million to 1.88 million at the secondary level during 2001-02 to 2004-05. During the past four years 249 additional technical and vocational institutions were established. There is a significant increase of 35 universities during the period 2001-02 to 2004-05 including 13 new public and 22 new private universities. These figures demonstrate greater public-private partnership at the higher education level.

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Table 11.3: Education Statistics 2004-05 Level Primary Middle Secondary Higher secondary/ inter colleges (9-12) Secondary Technical/vocational institutions Degree Colleges Universities

Institutions 157,158 30,418 16,590 1,604 747 677 103

Enrollment Teachers 21,333206 450,136 4,550,473 246,666 1,880,021 282,113 268,595 44,663 113,664 7,356 422,931 15,653 520,666 60,633 Source: Ministry of Education 2004-05

Primary education Two main indicators that show the changes in the primary schooling are Gross Enrollment Rate (GER) and Net Enrolment rate (NER). The last four years have witnessed 14 percentage points increase in the gross primary enrollment which is more then 3 percentage point per annum increase on average. This increase from 72 percent in 2001-02 to 86 percent in 2004-05 is a result of targeted and resilient polices of the government. Adoption of free provision of universal basic education polices in the provinces (except Balochistan) is gradually delivering the promised increase in the enrolment rate. In the urban areas, the GER is impressive in all provinces, ranging from 84 percent in Balochistan to 108 percent in Punjab. In the rural areas, Punjab has made a marked progress, particularly in female GER, which increased from 61 percent in 2001-02 to 82 percent in 2004-05. The Gender gap has also seen an improvement at the primary level in Punjab and has been modest in Sindh, NWFP and Balochistan.
Table 11.4: Gross Enrolment Rate at the Primary Level (Age 5 -9) By Provinces & region (excluding kachi class) 2001-02 2004-05 Region/Province Total Male Female Total Male Female Urban Areas 91 94 87 104 107 100 Punjab 94 95 93 110 111 108 Sindh 84 91 78 99 103 94 NWFP 93 100 86 92 100 84 Balchistan 88 98 75 94 101 86 Rural Areas 66 80 52 79 89 68 Punjab 70 80 61 89 96 82 Sindh 53 69 37 58 70 44 NWFP 74 96 52 78 92 62 Balchistan 57 73 38 61 79 41 Pakistan 72 83 61 86 94 77 Punjab 76 84 69 95 100 89 Sindh 63 76 51 75 84 65 NWFP 77 97 56 80 93 65 Balchistan 62 77 44 67 83 49 Source: PSLM 2004-05

The PRSP target for NER was 58 percent for the period 2005-06.The Pakistan MDG report 2004 has set the target of 100 percent NER by 2015. Pakistan seems to have made sound progress in NER at the primary level (age 5-9), which increased by 10 percentage points from 42 percent in 2001-02 to 52 percent in 2004-05. Although NER is six percent below then the PRSP target of next year the achievement is on track. The performance of NER especially female NER in rural areas of Punjab is highly impressive. But this has increased the regional disparities, as NER gap between Punjab and Balochistan has increased from 13 percent in 2001-02 to 21 percent in 2004-05. The gap between Punjab and Sindh doubled from 5 percent to 10 percent in past four years. This highlights the need to improve and accelerate the education programs for rural areas of Sindh, NWFP and Balochistan.

163

Economic Survey 2005-06 Box :1 Primary Education: Increasing Role of the Private Sector The role of the private sector in primary education has increased over time. Out of the total primary-level GER of 86 percent in 2004-05, the government school GER has been computed as 62 percent. The private school GER increased by 33 percent during 2001-02 to 2004-05 as compared to only 15 percent increase in the government school GER. This means that while new enrollment has taken place in both schools, relatively more increase in the private school GER suggests some shifting of children from public to private schools. Consequently, GER declined from 74 percent to 72 percent during the period 2001-02 to 2004-05 in the government schools. Approximately, half of the enrollment in urban areas at primary level is currently in private schools, and it has marginally declined from 49 percent in 2001-02 to 48 percent in 2004-05. In rural areas, where poverty is predominant, private school enrollment increased from 15 percent in 2001-02 to 18 percent in 2004-05 suggesting that the public schools still remain the main source for primary education. This is also true for all provinces with Punjab having slightly higher enrollment of 23 percent in the private schools. Source: PSLM 2004-05 A major focus of the Presidents Education Sector Reforms Program is to make primary schools more functional by providing facilities such as, electricity, drinking water, boundary walls and other basic amenities so that the children do not drop out on account of dysfunctional environment, which is not conducive to learning. School up-gradation through the conventional and non-conventional means is also a core area to narrow the gap between primary, middle and secondary provision for higher transition rates. Government of Pakistan is determined to reduce the current imbalances of school facilities existing at different levels of educational system. Middle and secondary education Middle- level GER has increased from 41 percent in Table 11.5: Schools without basic facilities in 2004-05 2001-02 to 46 percent in 2004-05. This achievement Facilities Number of schools is far below the target of 55 percent set by EFA Shelter less Schools 17,935 2001-05. The major gap is in urban and rural areas No Electricity 107,564 No Drinking Water 68,211 where in middle level GER is 64 percent and 38 No toilet for Students 82,200 percent respectively. The progress in Net Enrollment Without Boundary wall 80,086 Rates has been very slow, increasing from 16 Source: Ministry of Education percent in 2001-02 to 18 percent in 2004-05. The NER is much lower than GER which shows the large number of average children in these classes. High failure rates show the quality of education and capacity of human capital that is being cultivated by the education system and the stagnant curriculum. Curriculum development is an ongoing project by the Government of Pakistan to respond to the development of individuals as well as society. For higher accessibility of education particularly for girls in low income households and to enhance the middle and matric level enrollment, existing primary and middle schools should be upgraded with the provision of the necessary infrastructure.
Table 11.6: Gross Enrolment Rate at the Middle Level (age 10-12) By Provinces& region 2001-02 Region/Province Total Male Female Total Urban Areas 63 58 68 64 Punjab 65 56 74 66 Sindh 59 56 62 61 NWFP 62 73 49 63 Balchistan 61 70 50 53 Rural Areas 32 41 21 38 Punjab 36 42 28 42

2004-05 Male 63 64 64 71 57 46 47

Female 64 68 58 54 49 29 36

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Education
Table 11.6: Gross Enrolment Rate at the Middle Level (age 10-12) By Provinces& region 2001-02 Region/Province Total Male Female Total Sindh 21 31 8 25 NWFP 35 49 19 44 Balchistan 28 41 11 25 Pakistan 41 45 35 46 Punjab 45 46 43 49 Sindh 34 40 28 42 NWFP 38 52 23 47 Balchistan 33 45 18 30

2004-05 Male Female 34 13 59 27 33 14 51 40 52 45 47 35 61 31 37 21 Source: PSLM 2004-05

At the Matric level, GER is at 44 percent and NER is 11 percent with wider gender gaps. Pakistan had a total of 18006 secondary and higher secondary institutions in the public and private sector during 2004-05. The urban- rural data are given in table below.
Table 11.7 Secondary/High Secondary Institutions (2004-05) Level High schools Higher Secondary Schools Total Urban 8207 715 8922 Rural 8383 701 9084 Total 16590 1416 18006

The tier of education has also been devolved to the District Governments. The sub sector needs both management and financial support of the District Governments to improve both output and quality. Gender gap

Source: Ministry of Education

Gender disparity in literacy and enrollment is one of the key concerns of the Government. Pakistans overall record in promoting and delivering gender equality has been weak. There are, however, areas in which significant progress has been made and indicators point to a steady though slow improvement in the ratio of girls to boys at all levels of education, the ratio of literate females to males, share of women in urban employment (as proxy indicator for share of women in wage employment in non-agricultural sector) has improved marginally and improvement in participation of women in national decision making process. Statistics show that gender disparity has been declining since 1998-99, however the recent decline is only marginal from 26 percent in 2001-02 to 25 percent in 2004-05. Reducing gender gap in education at all level will ensure equality of opportunity and economic participation for females. Gender disparity in literacy is lower in urban areas where it is 16 percent, as compared to 29 percent in rural areas in 2004-05. In fact there has been no progress in reducing the gender gap either between the urban and rural areas or between genders in both areas. There are several explanations for this persistent gap in literacy. A recent World Bank Country Gender Assessment Report 2005 highlights the two most important constraining factors that impede female access to education. Distance from school and physical costs of attending schools for girls affect their enrollment. The latest PRHS-2 2004-05 also indicate lack of access of girls. Only 46 percent of the sample villages in Sindh and Punjab had a girls elementary school inside the village. In contrast, 87 percent had a boys elementary school within the village.5 According to Participatory Poverty Assessment (PPA) 2003, in the Northern Areas poor households consider investment in a girls education to be pointless, as they have to get married and go to another house.

Bridging the gender gap: challenges and opportunities, Country Assessment Report 2005, World Bank.

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Economic Survey 2005-06


Table 11.8 Gender Gap in overall Literacy, GER and NER at the primary level (%) 2004-05 Gender Gap in NER at the Region/ Province Gender gap in literacy (%) primary level 2001-02 2004-05 2001-02 2004-05 Urban Areas 16 16 3 3 Punjab 11 12 -1 1 Sindh 20 18 6 5 NWFP 29 28 8 6 Balchistan 35 32 14 6 Rural Areas 30 29 10 11 Punjab 25 24 6 7 Sindh 37 38 16 16 NWFP 39 38 16 15 Balchistan 38 34 15 17 Pakistan 26 25 8 8 Punjab 21 21 4 5 Sindh 29 27 12 11 NWFP 37 38 15 13 Balochistan 38 33 15 15

Gender Gap in GER at the primary level 2001-02 2004-05 7 7 2 3 13 9 14 16 23 15 28 21 19 14 32 26 44 30 35 38 22 17 15 11 25 19 41 28 33 34 Source: PSLM 2004-05

The above table shows an overall decline in the gender gap in the GER at the primary level, from 22 percent in 200102 to 17 percent in 2004-05. This significant decline was due to the relatively greater increase in the female GER than in male GER during 2001-05. The gender disparity declined in all provinces except Balochistan where it increased by one percent. Punjab has the lowest gender gap, of 11 percent and Balochistan has the highest gender disparity at 34 percent. In urban areas gender gap remained seven percent during 2001-02 to 2004-05 because the male and female GER increased by same proportion (13 percent). The gender gap in NER at the primary level remained unchanged during 2001-02 to 2004-05. The gender gap in GER at the primary level declined during the same period. This implies that the number of over age children attending primary school is substantial. Gender disparity increased in Punjab by one percentage point due to relatively larger increase in the NER of boys as compared to girls in 2004-05. Gender gap declined in Sindh and NWFP and remained unchanged in Balochistan. Gender gap of NER at the primary level remained unchanged at eight percent during 2001-02 to 2004-05 in the urban areas and increased by one percent in rural during the same period.
Table 11.9 Gender Disaggregated Enrollment at Middle Level (2004-05) Sector Urban Rural Male Female Male Female Public 634353 5945900 1321252 656052 Private 494690 429020 194917 152423 Other Public 40858 29137 sector* Total 1169901 1053057 1516169 808475 Total Male 1955605 689607 40858 Female 1250952 581443 29137

2686070 1861532 Source: Ministry of Education

In the middle school, 126138 more girls and 102743 boys were enrolled in 2004-05. The gap in public sector female enrollment in rural areas is quite stark and there is a dire need for establishing new girls schools especially, in the rural areas and upgrading primary schools to middle level.

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Education Box: 2 Gender equality : Engendering the PRSP-2 The Government of Pakistan (GoP) and Ministry of Finance (MoF) are currently working on the second-generation Poverty Reduction Strategy Paper scheduled for finalization by June 2006. For PRSP 2 to work as an initiator of social change, gender equality must be an underlying criterion to work out poverty reduction strategies, set up polices and investment priorities. The recommendation forwarded in this regard focus on two main priority areas: engendering PRSP monitoring & reporting and engendering socio-economic development. The targets are to amalgamate PRSP gender indicators and those of Gender Equality Matrix and mainstream them into monitoring of all PRSP and MDG indicators. Secondly, to mainstream gender responsive budgeting (GRB) across sectors and provinces as they serve to measure the gender gap in resource allocation. In case of the socio-economic development several initiatives are purposed to encourage and support the participation of women. To facilitate womens access to meaningful employment a recommendation of 50 percent reservation for womens public sector employment along with provision of women friendly services has been added. In addition, creating skills development opportunities, to develop a comprehensive Women Employment Strategy for PRSP 2 that incorporates all the recommendations related to employment and also to simplify the procedure for obtaining ID cards (as all official schemes require National Identity Cards and majority of the poor women do no have them and get excluded from these schemes). Source: Interagency Gender and Development Group (INGAD) Federal and the provincial governments are making substantial financial provisions for supply of free text books and scholarships for female students at the elementary level. This may lead to increase in the enrollment and retention. Private sectors potential in expanding access to primary education in both rural and urban areas remains unrealized. Public Private Partnership Starting in the mid-1990s, a major shift has occurred in the Government of Pakistans (GoP) approach to the countrys education sector. The government has formally acknowledged that the public sector on its own lacks all necessary resources and expertise to effectively address and rectify low education indicators. Moreover, public policy has been amended to mobilize the private sector and civil society organizations (CSOs) in the financing, management and delivery of education services in Pakistan. Among other initiatives, the GoP has undertaken policy reforms and provided incentives for Public Private Partnerships (PPPs) to flourish in the education sector. From initiating innovative programs to working in tandem with the non-governmental organizations (NGOs) that manage public schools through formal adoption, the government has increased its efforts to include various other stakeholders in the delivery of education. National Education Foundation (NEF) was created in late 1994 to oversee PPP initiatives across country. In early 2002, the agency was re-structured to give it increased autonomy and geological focus (ICT, FATA, FANA and AJ&K). NEFs vision is to provide quality-enabling education through public private partnership for disadvantaged groups. Its programs and interventions are aimed at promoting and addressing critical educational development issues including gender quality, improvement in literacy standards, community participation and socio-economic empowerment. The Community Support Rural Schools Program (CSRSP) is NEFs largest program and it encourages pilot innovations to promote education in rural areas. Notable among them are Child Friendly School Program and Education for Working Children. Currently, 260 schools are running under CSRSP with an enrollment of 23300 students and another 350 schools are established in 2005 supported by NORAD. Moreover, teacher training has been a significant component of CSRSP, with the goal to enable in-service community teachers to re-learn modern pedagogical principles and techniques to manage todays classrooms.

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Economic Survey 2005-06 Higher Education Commission Pakistan is ranked amongst the lowest in the world in higher education enrollment rates at 2.9 percent. Other Asian developing countries, such as India and Korea, stand at 10 percent and 68 percent respectively. According to a report of the steering committee for higher education in 2001, only 2.6 percent of the students between the ages 1723 enrolled in universities which have increased to 2.9 in 2005. The target is to double enrollment in the next five years by increasing the capacity of the existing higher education institutions and also establishing new ones. The quality of education provided is not up to the mark, which can be gauged from the fact that not a single Pakistani university is ranked among the top 500 universities of the world. This Table summarizes the strategic and physical targets to be achieved following the Implementation of the proposed 5-year plan: Core Strategic Targets Physical targets The percentage of faculty members in Universities and Degree Awarding Institutions having Ph.D. degree is to be increased to 40% in 5 years, and thereafter a 10% per annum increase in percentage should occur yearly. 100% of the faculty should have undergone 1 3 month training courses emphasizing pedagogical skills, communications skills and information technology usage skills Enhance enrollment in Universities and Degree Awarding Institutions to 500,000 in five years, excluding distance education programs. Enhance enrollment to 1,000,000 students in distance education programs. Ensure that any student obtaining admission on merit is able to obtain higher education regardless of his/her financial condition Increase the total number of people in Pakistan involved with Research and Development in Science and Engineering from the current level of 69 people / million to 300 people/ million. Increase production of Indigenous Ph.D.s inside the country to 1,500 per year. Introduce Ph.D. programs in at least 50% of the departments in Universities and Degree Awarding Institutions. Have a 40% per annum growth in the number of International publications of faculty members. Have a 25% per annum growth in External Research grants won by Institutions from sources other than Government sources Establi