Pakistan’s economic recovery has gained further memento in the year 2004-05, with the fastest growth this year then was in the last two decades. This exceptional growth was governed by the following factors accommodative macroeconomic policies, growing domestic demand, renewed confidence of private sector, and competitive exchange rates.

GDP Growth

Pakistan’s real GDP growth of 8.4 percent in 2004-05 is the evidence of its fast growth which had a history of repeating itself for the fifth time that it exceeded 8 percent growth mark against 6.4 percent last year; its per capita income crossed $ 700 mark; Pakistan achieved highest ever production of cotton (14.6 million bales) and wheat (21.1 million tons) in 2004-05; and inflation at 9.3 percent is the highest in 8 years. Large-scale manufacturing grew by 15.4 percent against the target of 12.2 percent and last year’s achievement of 18.2 percent.

Agriculture

After four years of weak and fragile growth, a growth of 7.5 percent on the back of an unprecedented rise in the production of cotton (14.6 million bales) and wheat (21.1 million tons) crops signifies that this sector has not been an exception. These two crops account for over 24 percent of the value added in agriculture.

Manufacturing

This sector continued to maintain its impressive performance contributing 18.3 percent of GDP. It registered an impressive growth of 12.5 percent against the target of 10.2 percent and last year’s achievement of 14.1 percent. A 15.4 percent growth in large-scale manufacturing over a very high base of last year is one of the important developments of fiscal year 2004-05.

Construction

As against a sharp down fall of 6.9 percent last year, this sector has recorded equally sharp upward movement of 6.2 percent this year. Last year’s decline was mainly caused by a massive global increase in the prices of iron and steel because of the ‘China factor’.

Implicit deflator for construction increased by 28.2 percent last year, resulting in decline of 6.9 percent in value added of construction at constant price of 1999-2000, despite the fact that this sector grew by 19.4 percent at current price that year.

Investment

During the fiscal year 2004-05, gross fixed capital formation or domestic fixed investment grew by 15.6 percent as against a sharp rise of 17.4 percent last year. Private sector investment grew by 19.3 percent this year as against a growth of 9.6 percent last year which signifies that the growth in domestic investment was largely a public sector phenomenon last year but this year, it was entirely private sector driven.

Inflation

Inflation, as measured by the Consumer Price Index (CPI), averaged 9.3 percent during the first ten months (July – April) of the current fiscal year as against 3.9 percent in the same period last year. At 9.3 percent, inflation is at 8 year highest in 2004-05. Food inflation recorded at 12.8 percent. Non-food inflation rose to 6.9 percent as against 3.3 percent in the same period last year.

Economic growth in succession has given rise to the income levels of various segments of society. The rising levels of income have strengthened domestic demand which contributed to the rise in inflationary pressure.

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 persistent rise in this index has contributed substantially to the increase in CPI – inflation. From a level of 3.8 percent last year, the index recorded an increase of 11.1 percent.

Stock Market

Stock market in Pakistan has witnessed extra-ordinary volatility during the year. The Karachi Stock Exchange KSE-100 index rose from 5210 in July 2004 to peak at 10,303 on March 15, 2005 – an increase of 5093 points or 98 percent. The accelerated rise was witnessed since January 2005 and until March 15, 2005 when index rose by 65 percent in a short period of 2.5 months. Most of these increases were contributed by OGDC, PTCL, PSO, POL and NBP, of which three are on privatization list (OGDC, PTCL and PSO) and their share prices jumped upward mainly on report of good buying interest from foreign strategic buyers. The stock market turned bearish since March 16, 2005 as the KSE 100 index dropped to as low as 6939 on April 12, 2005 from its peak of 10303 – showing a decline of 3364 points or 32.7 percent. Such a sharp rise in index and a subsequent steep decline represented abnormal and unhealthy movements in the equity market.

Per Capita Income

Per capita income grew by an average rate of 13.5 percent per annum during the last three years – rising from $579 in 2002-03 to $736 in 2004-05. Per capita income in dollar term registered an increase of 12 percent over last year – rising from $ 657 to $ 736. 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.

This rising trends helps to answer the some of the facts, these are 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 buying powers – good for business expansion. Third, extra-ordinary rise in consumer spending over the last two years appears to have contributed, in part to building inflationary expectations in Pakistan.

Exports

Exports were to grow by 11.3 percent in 2004-05 — from $12.3 billion last year to $ 13.7 billion in the current year. During the first nine months of the current fiscal year exports were up by 14.6 percent, thus registering an increase of $ 1.3 billion in absolute terms. The textile manufactures contributed 9.4 percent towards additional export earnings. Sustaining a high double-digit growth in exports for three consecutive years is one of the major achievements of the outgoing fiscal year. Given the performance of the first nine months, exports are likely to touch $ 14 billion mark by the end of this fiscal year. With firming up of prices in the international market, exports are likely to rise further. However, within textile manufactures, knitwear, towels and made-up articles have registered an impressive growth of over 20 percent each. Their exports in quantity term also registered a sharp increase, ranging between 10 – 32 percent. Although bases were low, exports of engineering goods, petroleum products and chemicals and pharmaceutical products have exhibited impressive performance.

Imports

Pakistan’s imports are up by 37.8 percent in the first nine months of the current fiscal year — rising from $ 10.5 billion to $ 14.5 billion, showing an increase of almost $ 4.0 billion this year. Major contributions to this year’s additional import bill have come from machinery, chemical and petroleum groups. Over one-half of the increases have come from machinery and chemicals and over 16 percent has come from petroleum group. In particular, import of machinery, chemicals and metal groups are up by 55 percent, 33 percent and 80 percent, respectively as domestic investment has come back to life owing to stronger domestic and external demand. These three groups combined accounted for over one-half of total imports, clearly reflecting the growing level of domestic investment.

Like exports, Pakistan’s imports are also highly concentrated in few items. Machinery, petroleum and petroleum products, chemicals, transport equipments, edible oil, iron and steel, fertilizer and tea account for over 70 percent of Pakistan’s total imports. The share of machinery, chemicals and metal group has increased from 36 percent in 1999-2000 to 39 percent in 2002-03. Thereafter, the composition of imports has undergone sharp changes, mirroring the rising level of investment and economic activity in the country. The share o these three items jumped from 39 percent to 68 percent in a short period of three years.

Trade Balance Pakistan’s trade deficit has increased for the current fiscal year owing to a much faster increase in imports compared with exports. The widening of trade gap is not worrisome as long as it is caused by rising import which is enhancing the production base of the economy. It should be a matter of concern if it is caused by rising imports of consumer durables and altering exports. In the case of Pakistan, the trade gap has widened because of the extra-ordinary surge in investment driven imports, which is enhancing the production base of the economy.

Foreign Direct Investment

Pakistan has succeeded in attracting $ 891.5 million in as against $ 760 million in the same period last year, showing an increase of 17.2 percent. By the end of the current fiscal year, FDI is expected to cross $ 1.0 billion mark. Over 70 percent of FDI has come into power sector; telecom sector; chemicals, pharmaceutical and fertilizer; oil and gas; and banking and finance. Almost 70 percent of FDI has come from USA, UK, Switzerland, Japan, UAE and Netherlands.

Foreign Exchange Reserves Pakistan’s total liquid foreign exchange reserves touched all time high at $ 13.0 billion — up from $ 12.5 billion in the same period last year. Of which, reserves held by the State Bank of Pakistan amounted to $ 10.23 billion and by bank stood at $ 2.8 billion. The most important factors contributing are private transfers that include remittances, higher export proceeds, floatation of Islamic bond (Sukuk) and higher FDI flows. The inter bank exchange rate per US dollar averaged rupees 59.4 per US dollar on end - April 2005 as against Rs.57.5 averaging on the same period last year, reflecting a depreciation of 3.2 percent. In general, Pakistan’s exchange rate vis-à-vis US dollar has remained stable during the period under review.

External Debt

Pakistan was facing serious difficulties in meeting its external debt obligations a few years back. Not only was the stock of external debt and foreign exchange liabilities growing at a breakneck pace, but the debt carrying capacity remained stagnant. Following a strategy of debt reduction, Pakistan has succeeded in reducing the rising trend in external debt and foreign exchange liabilities. Pakistan’s external debt and liabilities have declined by $ 1.24 billion — down from $37.9 billion at the end of the 1990s to $36.62 billion by end-March, 2005. The country’s debt burden defined as a ratio of external debt and liabilities to GDP stood at around 52 percent in end-June 2000, declined to 36.7 percent in end-June 2004 and further to 33.1 percent by end-March 2005. Similarly, the country’s debt burden defined in a different way, that is, external debt and liabilities as percentage of foreign exchange earnings was 297 percent in 1999-2000, declined to 164.6 percent in 2003-04 and further to 145.9 percent by end-March 2005. It may also be pointed out that Pakistan’s external debt and liabilities were 22 times of its foreign exchange reserves in 1998-99 but declined sharply to 2.8 times in just six years.