OVERVIEW OF THE ECONOMY

Fiscal year 2007-08 has been a difficult year for

Pakistans economy. Several political and
economic events, both on domestic and external
front, occurred unexpectedly. These events
include: disturbed political conditions; an unstable
law and order situation; supply shocks; soaring oil,
food and other commodity prices; softening of
external demand; and turmoil in the international
financial market. All these events have adversely
affected the key macroeconomic fundamentals of
Pakistan during the fiscal year 2007-08. The most
important aspect, however, has been the nonresponsive stance on account of political
expediency in addressing domestic and external
challenges during most part of the fiscal year,
further accentuating macroeconomic difficulties.
Notwithstanding these extraordinary developments
Pakistans economy posted a robust growth of 5.8
percent in 2007-08, as against 6.8 percent last year
and this years target of 7.2 percent. When viewed
in the medium-term perspective, Pakistans growth
performance is still striking, with real GDP
growing at an average rate of 7.0 percent per
annum over the last five years (2004-08). The
growth of this magnitude not only shows its
resilience but also provides a source of optimism
that regaining the growth momentum through a
combination of adjustments and reforms is very
much a plausible assumption.
Economic growth in 2007-08 is principally driven
by the services sector, posting a growth of 8.2
percent as against 7.6 percent last year. The
commodity-producing sector with agriculture and
manufacturing, showing a dismal performance, has
contributed to the slippage in growth for the year
2007-08. Within the commodity producing sector,
agriculture, especially major crops, performed
dismally. While overall agriculture grew by 1.5
percent, major crops infact, posted a negative

growth of 3.0 percent. Livestock, accounting for 52

percent of agriculture, was the saving grace as it
recorded a modest growth of 3.8 percent. The
performance of the other component of the
commodity
producing
sector,
that
is,
manufacturing was hampered by a series of
negative shocks; including soaring oil prices,
severe energy shortages at home, and political
unrest and social disruptions at regular intervals.
Within manufacturing, large-scale manufacturing
printed a relatively feeble growth on the back of
domestic and external shocks. The cumulative
impact of monetary tightening along with a weaker
external demand, also played its role in dampening
this years large-scale manufacturing growth.
Unlike last year when three major components of
the economy namely, agriculture, industry and
services contributed adequately to growth, this
years growth is certainly not broad-based. Infact,
three-fourth contribution to this years growth
came from the services sector alone with only onefourth coming from the commodity producing
sector. It is, therefore, safe to conclude that this
years growth is services sector-led-growth. The
developments on the domestic and external fronts
also influenced the growth patterns for the year.
Unlike last year when consumption, investment
and net exports contributed 38.3 percent, 45
percent and 16.7 percent, respectively; the growth
pattern of this year prints a different picture.
Economic growth for the year 2007-08 is entirely
driven by consumption, particularly private
consumption. The contribution of investment
declined significantly from 45 percent last year to
almost 12 percent this year. Net exports remained a
drag this year with a 20 percent negative
contribution. It would, therefore, be safe to
describe this years growth as a service/
consumption-led growth.
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Pakistan Economic Survey 2007-08

Fiscal year 2007-08 has however, been an extraordinary year in which many exogenous and
endogenous shocks along with policy inactions
during most part of the year, severely impacted the
performance of the economy. Pakistans economy
is currently facing four major challenges, that is,
deceleration
in
growth,
rising
inflation
(particularly food inflation), a growing fiscal
deficit, and the widening of trade and current
account deficits. Among these, fiscal, trade and
current account deficits are largely the outcomes of
external shocks of extra-ordinary proportions
accompanied by policy inaction during most part
of the fiscal year.
Growth has decelerated to 5.8 percent principally
on account of the poor performance of agriculture
owing to the dismal performances of major crops
such as wheat and cotton (together they contribute
over 20 percent and 4.2 percent to agriculture and
GDP, respectively) and the dismal performance of
manufacturing,
particularly
large-scale
manufacturing at the back of a series of domestic
and external shocks (political instability, a
worsening security environment, severe power
shortages, weaker external demand and the rising
cost of doing business).
Overall inflation, particularly food inflation, at
17.2 percent and 25.5 percent, respectively in April
2008 are the highest increases in over three
decades. The oversized spike in inflation owes to
an unprecedented rise in the prices of food, fuel
and other commodities at the international level.
Poor governance in managing the wheat crises and
the lack of attention paid to minor crops and the
livestock and dairy sector by successive
governments, also contributed to the surge in the
domestic price level. Signs of consumers angst
about the inflation outlook are emerging as prices
of oil, food and other commodities are rising.
Inflationary pressure is not likely to ease, at least,
in the next two / three years owing to the
continuing increase in global food and fuel prices,
the second round effects of previous food / energy
price shocks, a gradual removal of fuel and power
subsidies, a weaker rupee, higher import prices and
monetary overhang from the unprecedented
government borrowing from the SBP for budgetary
financing. A prolonged inflation overshoot will

lead to a sustained deterioration in inflationary

expectations, with a growing demand for wage
hikes, in turn causing a wage-price spiral to gain
strength. Such a scenario will ultimately require a
more aggressive tightening in fiscal and monetary
policies to bring inflation back to the targeted
level.
The hard earned macroeconomic stability,
underpinned by fiscal discipline, is under threat
because of the large slippages in the Budget 200708. As against the target of 4.0 percent of GDP,
fiscal deficit for the year is likely to be 6.5 percent
(based on information available till May 23, 2008)
because of the slippages in revenue and
expenditures. Slower-than-the targeted real GDP
growth and the adverse law and order situation
resulted in lower-than-the targeted tax collection.
Failure to pass on the increases in the international
prices of oil and food to domestic consumers
severely affected current expenditures as the
government continued to finance these increases
through the budget, with subsidies rising to an
unsustainable level. A subsidized power tariff also
added to the slippages. The extra-ordinary increase
in development spending was not consistent with a
stable macroeconomic framework. The increase in
fiscal deficit coincided with a sharp decline in the
external financing flows. Consequently, the
government was forced to rely on SBP for
budgetary financing. Government borrowing from
the SBP has reached an all time high, leading to
excessive monetary expansion and thus becoming
one of the principal sources of inflationary build up
in the country. In other words, financial
indiscipline during the year, mainly on account of
political expediency, has already caused severe
macroeconomic imbalances, for which, Pakistan is
likely to pay a heavy price in terms of deceleration
in growth and investment, and the associated rise
in poverty; the widening of current account deficit
and the attendant rise in public and external debt; a
loss of foreign exchange reserves and the
associated pressure on the exchange rate, and most
importantly, higher inflation and the accompanying
rise in interest rates. There is no better way to
explain the central importance of fiscal discipline
in promoting growth and investment. Fiscal year
2007-08 has reminded us clearly that even one year

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Overview of the Economy

of fiscal indiscipline is enough to damage several
years of efforts to restore macroeconomic stability.
The slippages in the fiscal account as well as the
unprecedented rise in the prices of oil and food
items have contributed to the widening of both
trade and current account deficits. The current
account deficit during the first ten months of the
fiscal year amounted to $ 11.6 billion up by 75
percent over the same period last year. The impact
of the rising current account deficit on the
countrys overall balance of payments was further
compounded due to a decline in financial and
capital account flows on account of a drop in net
portfolio investment, delays in the planned
floatation of a sovereign bond and Global
Depository receipts (GDRs) and putting on hold
the floatation of an Exchangeable Bond.
Accordingly, the overall balance of payments is in
deficit which is partly financed through reserves
draw-down. Such a large current account deficit is
not sustainable.
As stated early, fiscal year 2007-08 has been a
challenging year for the economy of Pakistan.
Even in the midst of the most difficult times the
performance of some of the key economic
indicators has been robust, reflecting the resilience
of the economy. Firstly, though economic growth
missed the target for the year, a growth of close to
6.0 percent on the back of extra-ordinary
developments at home and abroad is by no means a
small achievement. Secondly, the services sector
continued to maintain a solid pace of expansion at
8.2 percent. Thirdly, the country produced 63.9
million tons sugarcane the highest production
level in the countrys history. Fourthly,
construction and banking and insurance
components of GDP, continued their stellar
performance, posting growths of 15.2 percent and
17.0 percent, respectively. Fifthly, Pakistans per
capita income, in current dollar terms crossed the $
1000 mark and stood at $ 1085, depicting an
increase of 17.2 percent. Sixthly, despite
continuous monetary tightening, private sector
credit has grown consistently and has even
outpaced last years growth. In particular, credit to
manufacturing has been steady. Seventhly, despite
adverse domestic and external developments
throughout the year, Pakistans exports posted a

decent growth (10.3%) compared to last year (3.6

%). Eighthly, at the back of political instability and
adverse law and order conditions, workers
remittances recorded a commendable growth, up
by 19.5 percent to $ 5.3 billion. Ninthly, at the
backdrop of extreme political instability and
heightened security concern, Pakistan succeeded in
attracting $ 3.5 billion FDI in the first ten months
(July-April) of the current fiscal year almost $
700 million less than last year. Another
approximately $ 800 million FDI in financial
business has been transacted in May 2008 which
include a $ 680 million Maybank strategic
investment in MCB bank and a $ 100 million
investment by Barclays bank , reflecting continued
investors confidence in Pakistans economy. The
year is likely to end with a respectable amount of
FDI.
Notwithstanding these positive developments
taking place in a most difficult circumstances
during 2007-08, there are however several key
macroeconomic
indicators
which
have
understandably missed their targets for the year.
The key indicators that missed their targets are
summarized as: (i) economic growth at 5.8 percent
remained below the target of 7.2 percent, (ii)
agriculture performed poorly at 1.5 percent against
the target of 4.8 percent on the back of the lessthan-targeted production of wheat and cotton and
marginal increase in rice production. (iii)
manufacturing in general and large-scale
manufacturing in particular, after growing at a
torrid pace in recent years, decelerated to 5.4
percent and 4.8 percent against the targets of 10.9
percent and 12.5 percent, respectively (iv) overall
investment, after gaining a new height of 22.9
percent of GDP last year, declined to 21.6 percent
against the target of 23.3 percent, (v) national
savings as percentage of GDP declined sharply to
13.9 percent against the target of over 18.3 percent;
(vi) government borrowing from the State Bank of
Pakistan (SBP) reached an all time high of Rs.544
billion during the fiscal year until May 19, 2008
with stocks of borrowing from the SBP reaching at
Rs.946 billion or 9.0 percent of GDP, the highest
ever in Pakistans history and more than double of
last years level; (vii) overall fiscal deficit is likely
to be 6.5 percent of GDP against the target of 4.0
percent, with almost 80 percent of this year deficit
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Pakistan Economic Survey 2007-08

financed from the SBP borrowing; (viii) under the
Fiscal Responsibility and Debt Limitation Act
2005, the revenue deficit (total revenue minus
current expenditure) was to become zero by endJune 2008. As a consequence of large fiscal
slippages, the revenue deficit is likely to be Rs.287
billion or 2.7 percent of GDP a violation of the
Act; (ix) the Federal Board of Revenue (FBR)
target (Rs.1025 billion) is likely to be missed by at
least Rs.25 billion first time a slippage in several
years; (x) the overall CPI-based inflation is
averaging 10.3 percent during the first ten months
of the fiscal year, surpassing the target of 6.5
percent by a wide margin, whereas food inflation is
averaging at 15 percent while non-food inflation
stood at 6.8 percent; (xi) both trade and current
account deficits deteriorated substantially against
their targets, creating severe financial imbalances;
(xii) until last year, Pakistans debt profile
continued to improve but is likely to deteriorate
this year. The declining trend in the public and
external debt burden is likely to be reversed this
year; (xiii) the Fiscal Responsibility and Debt
Limitation Act 2005 requires that public debt as
percentage of GDP must decline by 2.5 percentage
points. Instead of declining, the public debt is
likely to increase over the last year - a clear
violation of the Act; (xiv) external debt as
percentage of GDP is likely to remain at last years
level, however, as percentage of foreign exchange
earnings, this has already increased over last year;
(xv) the exchange rate has come under severe
pressure since December 2007 but more so during
April 2008 onward on account of a widening
current account deficit and an uncertain political
environment in the country; (xvi) foreign exchange
reserves witnessed significant depletion
declining from 30.6 weeks of import cover to 19.4
weeks; (xvii) domestic and external factors
prevented Pakistan from launching sovereign and
exchangeable bonds.
Global Economic Environment
While unsettled domestic political conditions and a
heightened security environment have adversely
impacted the performance of Pakistans economy,
the external developments have equally played an
important role in accentuating Pakistans
macroeconomic imbalances.

The year 2007-08 has been a turbulent year for the

world economy as well. This year has seen soaring
energy prices, an unprecedented surge in food
inflation and a financial market crisis to match the
Great Depression. These developments have had
adverse consequences of differing degrees for
economies in different parts of the world. The
global economy is in the midst of one of the
biggest oil shocks in history. Since 2000, oil price
has risen from $ 15 /bbl to $ 130 /bbl. The current
oil shock is comparable in magnitude to that of
1970s that ushered in a period of stagflation. On
the contrary, despite the surge in oil prices, there
are scant signs that the current oil shock is
affecting the global economy in a manner similar
to the 1970s. A lot has changed since the 1970s.
For example, energy efficiency has improved, the
underlying global productivity growth has
remained strong, and inflation expectations are
better anchored today. As such, despite a surge in
oil prices, the global economy continues to grow at
a healthy pace.
Inflation is uncomfortably high in almost every
corner of the world, creating serious difficulties for
policy makers. Everywhere, the root cause is rising
food and fuel prices underpinned by surging
demand from fast growing developing economies
like China and India. The longer food and energy
prices keep pushing up overall inflation, the greater
the chance that expectations of higher inflation
would lead to bigger pay demands, thereby
triggering a wage-price spiral, as witnessed in the
1970s.
The world stands on the brink as agricultural
commodity prices surge, triggering food riots in
countries from Haiti to Bangladesh. Food demand
is rising as the worlds population expands and a
swelling middle class has emerged in countries
such as China and India, consuming more proteins
(dairy and livestock). The development of the biofuel industry reduced the availability of food,
leading to surge in their prices. Raising agricultural
productivity at the global and national levels is the
only viable solution to address this challenge. If
there is no increase in yields there will be hunger
and famine in most part of the world.

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On the back of these developments, the world
economy is still enjoying a period of healthy
growth with every region doing well. The world
economy posted a solid growth of 4.9 percent in
2007 0.5 percentage point lower than last year.
The US economy is projected to grow by 0.5
percent in 2008 from 2.2 percent this year,
primarily on account of the collapse of the subprime market. The Euro zone is projected to grow
by 1.4 percent in 2008 compared with 2.6 percent
in 2007, mainly on account of rising oil prices,
appreciation of the Euro resulting in sluggish
export growth, and the decline in real disposable
income on account of the financial crisis leading to
the deterioration of consumer and business
sentiment.
Growth in the emerging and developing
economies, though remaining strong, showed some
signs of deceleration compared with last year. For
emerging economies as a group, the performance
has been encouraging as foreign exchange inflows,
foreign exchange reserve growth, and FDI
remained strong. The loss of trade due to the global
financial crisis has been limited. Against this
backdrop, developing and emerging economies
have outperformed advanced economies by
growing at a brisk pace of 7.9 percent in 2007 but
likely to moderate to 6.7 percent in 2008.
The year 2007-08 saw China and India accounting
for more than one-half of growth in world output.
The performance of these two economies have
been hampered by rising energy and food prices,
supply-side shocks in the form of bad weather and
a devastating earthquake in China, and a mild spillover from the global financial crisis. A deliberate
effort is also underway to avoid over-heating of the
Chinese economy. On the other hand, the softening
of external demand and the cumulative impact of
monetary tightening will likely moderate growth in
India. Chinas growth is likely to decelerate from
11.4 percent in 2007 to 9.3 percent in 2008.
Similarly, Indias growth is poised to decelerate
from 9.2 percent to 7.5 percent during the same
period. Other countries in developing Asia also
recorded modest-to-strong growth in the range of
4.8 percent (Thailand) to 7.3 percent (Philippines)
with Pakistan, Sri Lanka, Malaysia and Indonesia
taking a middle ground.

An international economic crisis of such a nature

has not been witnessed in the past. The fallout has
been complicated further by ever increasing
globalization and inter-linkages in modern day
financial markets. The trend of disappointing data
from the advanced economies continues sending
shock-waves through markets in both developed
and developing nations each time. Until
transparency in financial markets is achieved, the
credit crunch will continue. Policy responses to the
slowdown are harder to achieve given the recent
trend in energy and food prices, fueling inflation.
Advanced economies are focusing on improving
liquidity conditions and providing stimuli to the
economy. There might be no quick fix to the
current situation, as can be seen in the low growth
projections for next year, but all efforts must be
made to couple monetary and fiscal responses with
reforms in the financial sectors, increasing
transparency and providing borrowers and lenders
with more information. Although growing at above
average rates, developing countries need to keep a
close eye on inflation, while guarding against any
spill-over effects from the global slowdown.
GDP Growth: Real GDP grew at a robust rate of
5.8 percent in 2007-08 as against the revised
estimates of 6.8 percent last year and the 7.2
percent target for the year. When viewed in the
backdrop of major disruptions of extraordinary
nature, economic growth in 2007-08 appears
satisfactory. In the medium-term horizon, the real
GDP has grown at an average rate of 7.0 percent
per annum during the last five years (2004-08).
Unlike last year, the growth for the year has not
been broad-based as the performance of agriculture
and manufacturing have been far from satisfactory.
Agriculture grew by 1.5 percent at the back of a
negative (-3.6 %) growth in major crops. The
growth outcome of 1.5 percent for agriculture
would have been higher if not for a decline in
production of wheat and cotton and almost
stagnant production of rice. Livestock, accounting
for 52 percent of agriculture, failed to lift the
growth in agriculture as it posted a modest growth
of 3.8 percent. Major crops and livestock,
contributing 86 percent to agriculture could not
provide enough support to record a decent growth.
Accordingly, the contribution of agriculture in real
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Pakistan Economic Survey 2007-08

GDP growth declined to 5.2 percent in 2007-08 as
against 12 percent last year.
The performance of the manufacturing sector
remained subdued as it was hit hard by domestic
and external factors. The overall manufacturing
sector recorded a modest growth of 5.4 percent as
against 8.2 percent last year. Accordingly, its
contribution to this years growth declined to 17.2
percent as against 22 percent last year. Large-scale
manufacturing, accounting for 70 percent of
overall manufacturing, suffered from a variety of
factors including political instability, frequent
eruptions of incidents detrimental to law and order
and resulting in loss of working hours, incidence of
violence causing damage to property and forcing
industries to remain closed for many days, power
shortages preventing industries from operating at
their capacity level, and higher energy and capital
costs. Accordingly, large-scale manufacturing
recorded feeble growth of 4.8 percent, down from
8.6 percent last year.
This years real GDP growth was also powered by
stellar growth in the construction and banking and
insurance sectors, respectively growing by 15.2
percent and 17.0 percent. Brisk pace of activities in
housing and high-rise buildings, along with large
public sector spending on physical infrastructure,
and on-going reconstruction activities in the
earthquake affected areas contributed to the sharp
pick up in construction value-added. Construction
has been growing at an average rate of 10.2 percent
per annum over the last five year. The on-going
reforms in the banking and financial sector have
made this sector highly attractive to foreign
investors. This sector has been growing at an
average rate of 23 percent per annum over the last
five years. Accordingly, its share in GDP has
almost doubled in the same period. Electricity and
gas distribution continues to be a drag on growth
for the last four years. This sector is contracting at
an average annual rate of 11.0 percent per annum
and accordingly, its share in GDP has fallen by
one-half during the period. Maintaining its past
trend, electricity and gas distribution registered a
negative growth of 14.7 percent in 2007-08 on
account of high operating expenses of the
WAPDA, offsetting its gross value added.

The services sector continued to perform strongly

for the fourth year in a row with 8.2 percent
growth in 2007-08. This sector has grown at an
average rate of 7.3 percent per annum over the last
five years. Major contributors to this years
services growth include: wholesale and retail trade,
banking and insurance, public administration and
defense, and social services. All these sectors have
posted strong growth in 2007-08. As stated at the
outset, this years growth is not broad-based.
Infact, three-fourth contribution to this years
growth alone came from the services sector while
the remaining one-fourth contribution owed to the
commodity-producing sectors (agriculture and
manufacturing)
Agriculture: Notwithstanding its declining share
in GDP, agriculture is still the single largest sector
of the economy, contributing 21 percent to GDP.
Agriculture performed poorly in 2007-08, growing
at 1.5 percent against the target of 4.8 percent and
3.7 percent of last year. The poor performance of
agriculture can be attributed to an equally poor
performance in major crops and forestry,
registering a negative growth of 3 percent and 8.5
percent, respectively. Livestock, minor crops and
fishing have been the saving grace for agriculture
as these sectors have performed reasonably well to
compensate the poor performance of the major
crops and forestry. Major crops, accounting for 34
percent of agriculture and 7.1 percent of GDP,
suffered on account of poor showing of wheat and
cotton and a less than satisfactory performance of
the rice crop. Sugarcane and maize, being the other
two major crops, performed impressively in 200708.
The cotton crop suffered for a variety of reasons,
including heavy rainfall in May 2007 causing poor
germination in Punjab, high temperatures during
August and September 2007 causing more
shedding of fruit parts and pest attacks, especially
the
dangerous
mealy
bug
infestation.
Consequently, cotton production declined to 11.7
million bales this year from 12.9 million bales last
year thus registering a negative growth of 9.3
percent. The wheat crop was also adversely
affected by the 23.3 percent shortage of irrigation
water over normal supplies during Rabi, and the
sharp pick up in prices of DAP fertilizer.

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Accordingly, production of wheat declined to 21.7
million tons from 23.3 million tons last year, thus
registering a decline of 6.9 percent. In sheer
contrast, the two other major crops performed
better with sugarcane recording the highest ever
production level of 63.9 million tons, 16.8 percent
higher than last year. The production of rice
witnessed a modest growth of 2.3 percent and
stood at 5.6 million tons. The production of other
major crops such as maize was up by 7.3 percent,
while gram pulse registered a negative growth of
1.8 percent, mainly on account of a higher base
effect as this crop grew by 75 percent last year.
Minor crops, accounting for 12 percent in
agricultural value added, posted a growth of 4.9
percent against the negative growth of 1.3 percent
last year. The performance of livestock, accounting
for 52 percent of agricultural value added, was
satisfactory at best as it grew by 3.8 percent this
year. The performance of fisheries has been
impressive as it grew by 11 percent in 2007-08
while forestry continued its traditional pattern of
negative growth for the fifth year in a row.
The growth performance of agriculture over the
last six years has been of a volatile nature- ranging
from 1.5 percent to 6.5 percent. The volatility in
agricultural growth is mainly caused by the crops
sector which is associated with the vagaries of
Mother Nature, pest attacks, adulterated pesticides
etc. Such volatility is detrimental to income growth
of farmers and hampers government efforts to
reduce poverty.
For Pakistan, the notion of food security should
move beyond a relatively static focus on food
availability.
Higher
agricultural
growth,
particularly emanating from the crop sector, will
provide food security by increasing supply,
stabilizing prices, and raising incomes of poor farm
households. While the current global food crisis is
creating difficulties, primarily for net-food
importing countries, it also provides an enormous
opportunity to gain from recent food price hike.
Pakistan can certainly benefit from the current
global food crisis. What Pakistan needs is a change
in policy orientation from the current practice of
focusing exclusively on price to yield enhancement
and simultaneously address structural issues such

as poor crop management and skills of farmers; use

of cheaper seeds; lack of agricultural infrastructure
and higher post-harvest losses; limited research as
well as the gap between available research and
practical applications; and inadequate funding for
research and development.
The emerging economies have become more
affluent as they have sustained higher economic
growth in recent years. Such affluence is impacting
the consumption patterns of households, including
a dietary change towards higher quality food such
as meat and dairy products. As a result, the
production of these items is rising globally. In
Pakistan, however, the livestock and dairy sector
has received little or no attention by the successive
governments in the past despite the fact that it
accounts for 52 percent of agriculture, 11 percent
of GDP, and affects the lives of 30-35 million
people in rural areas. It is an irony that the entire
government machinery has focused its attention on
major crops, that too on only four crops (rice,
wheat, cotton, sugarcane), which accounts for only
34 percent to agricultural value added, while
livestock, which accounts for 52 percent, has never
received similar attention in the past. In order to
achieve higher sustained growth in agricultural
value added, it is absolutely necessary to give due
attention to the livestock and dairy sector (whose
performance does not depend on Mother Nature)
to achieve multiple objectives of attaining food
security as well as poverty reduction.
Manufacturing: Manufacturing is the second
largest sector of the economy, accounting for 19
percent of GDP. This sector has recorded its
weakest growth in a decade during fiscal year
2007-08. Overall manufacturing posted a growth
of 5.4 percent during the first nine months (JulyMarch) of the current fiscal year against the target
of 10.9 percent and last years achievement of 8.2
percent. When viewed in the medium-term
perspective, the performance of the manufacturing
sector has been impressive as it posted an average
growth of 10.4 percent per annum during the last
five years. Large-scale-manufacturing (LSM),
accounting for almost 70 percent of overall
manufacturing, registered a less-than-satisfactory
growth of 4.8 percent in fiscal year 2007-08
against the target of 12.5 percent and last years
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Pakistan Economic Survey 2007-08

achievement of 8.6 percent. The less-thansatisfactory performance this year is a combination
of structural as well as specific issues. The
relatively slower pace of expansion this year
perhaps exhibits signs of moderation on account of
higher capacity utilization, difficulties in textile
and other important sectors such as fertilizer, soap
and detergent, vegetable ghee and cooking oil,
automobile sector, paper and paper board, and
billets.
This years performance has also been adversely
affected by domestic and international factors.
Heightened political tension, frequent eruptions of
incidents detrimental to law and order resulting in
loss of working hours, incidence of violence
causing damage to property and forcing industries
to remain closed for many days, growing power
shortages preventing industries from operating at
their capacity level, higher cost of capital and the
rising cost of doing business have been responsible
for the less than satisfactory performance of LSM
this year. This sector has been growing at an
average rate of almost 12 percent per annum
during the last five years; however, signs of
deceleration have emerged since 2005-06 at the
onset of the monetary policy tightening phase as
well as saturation of the existing capacity level.
Going forward, political stability, improved law
and order situation, and the availability of power
will be the key to regaining the lost growth
momentum in LSM.
Per capita Income: Per capita income is treated as
one of the foremost indicators of the depth of
growth and general well-being of any country.
Despite the array of recent and more sophisticated
tools to measure growth, development and
economic advancement, none match the historical
importance and the simplicity of per capita income
as a measure of the average level of prosperity of
any country. Per capita income, defined as Gross
National Product at current market price in dollar
terms divided by the countrys population, has
grown at an average rate of above 13 percent per
annum during the last five years rising from $586
in 2002-03 to $926 in 2006-07 and further to
$1085 in 2007-08. Per capita income in dollar
terms rose from $926 to $1085 in 2007-08
depicting an increase of 18.4 percent. Real per

capita income in Rupee terms has also increased by

4.7 percent, on average, for the last five years. Real
per capita income grew by 4.2 percent as compared
to 4.8 percent last year. The main factors
responsible for the rise in per capita income over
the years include: acceleration in real GDP growth,
a stable exchange rate and a more than five-fold
increase in the inflow of workers remittances.
Consumption: Pakistans economic growth is
historically characterized as consumption-led
growth and this is also found true for the year
2007-08. In recent years, Pakistans economy has
undergone a structural shift which fuelled rapid
changes in consumer spending patterns. Pakistans
real per capita GDP has increased at an average
rate of 5 percent per annum over the last five years,
giving rise to the average income of the people. A
more than five-fold increase in inflows of workers
remittances have also influenced the domestic
consumption patterns as they have enhanced local
purchasing power, especially in rural areas, and
provided an important hedge against higher
domestic inflation. These two factors have led to a
sharp increase in consumer spending during the
last five years. The real private as well as total
consumption expenditure have grown at an average
rate of 7.5 percent per annum during the last five
years and played an important role in sustaining a
growth of 7 percent per annum during the same
period. Against an average growth of 7.5 percent,
the real private consumption expenditure grew by
8.5 percent in 2007-08 and accordingly, its
contribution to overall GDP growth has been more
than 100 percent which was only neutralized by the
negative contribution of net exports to the extent of
21 percent. Investment contributed approximately
12 percent to this years growth as compared to 45
percent last year. This years economic growth,
therefore, is largely consumption driven and
support from investment has declined substantially.
National savings have shown their inadequacy for
financing the new investment as it witnessed a
sharp decline from 17.8 percent of GDP last year
to 13.9 percent this year, thereby portraying a
sharp increase in the current account deficit.
Investment: After reaching a record level of 22.9
percent of GDP in 2006-07, total investments
declined to 21.6 percent - a decline of 1.3

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percentage points. Fixed investment decreased to
20 percent of GDP from 21.3 percent last year.
While public sector investment remained at last
years level of 5.7 percent, private sector
investment however, registered a decline of 1.4
percentage points - declining from 15.6 percent to
14.2 percent. Investment is a key determinant of
growth. Total investment has increased from 16.6
percent of GDP in 2003-04 to 21.6 percent this
year, showing an increase of 5 percent of GDP in
the last five years. In fiscal year 2007-08, gross
fixed capital formation or domestic fixed
investment grew by 12.5 percent in nominal terms
as against 18.6 percent last year. In real terms, it
grew by 3.4 percent as against 16 percent last year.
The composition of investment between public and
private sector has remained unchanged over the
last five years as the former continues to account
for approximately 72 percent despite continuous
monetary tightening during the period.
Private sector investment was broad based. The
energy sector has played a key role in attracting
private sector investment. The overall fixed
investment destined to the energy sub-sectors,
namely mining and quarrying and electricity and
gas distribution, witnessed their highest increases
by growing at 29.4 percent and 12 percent
respectively in real terms. Other major contributors
to overall fixed investment growth are: wholesale
and retail trade (9.3 %); services (10.6 %); public
sector and general government investment
collectively grew by 9.7 percent in real terms while
public sector investment alone registered a growth
of 16.1 percent in real terms. Barring transport and
communication, public sector investment in all
other sectors rose sharply at high double-digits,
thus enabling overall public sector investment to
grow at 16.1 percent this year in real terms.
The contribution of national savings to domestic
investments is indirectly the mirror image of
foreign savings required to meet investment
requirements. The requirement of foreign savings
needed to finance the saving-investment gap
simply reflects the current account deficit in the
balance of payments. National savings, at 13.9
percent of GDP, is the lowest since 1999-2000 and
was able to finance only 69.5 percent of fixed
investment in 2007-08 as against 83.6 percent last

year. Domestic savings also declined substantially

from 16 percent of GDP last year to 11.7 percent
this year.
Foreign direct investment has also emerged as the
major source of private external flows in Pakistan
as well as contributing to the growth of domestic
fixed capital formation. Fiscal year 2007-08 has
been a difficult year for foreign investment in
developing countries because of the crisis in the
international financial markets. Overall foreign
investment in Pakistan was affected not only by the
difficult external environment but also domestic
political developments and security concerns. In a
most difficult domestic and external environment,
Pakistan succeeded in attracting $3.6 billion worth
of foreign investment in the first ten months of the
current fiscal year as against $5.9 billion in the
same period last year. It may be pointed out that
last year was an extraordinary year as Pakistan
attracted $8.4 billion of total foreign investment.
Additionally, in the month of May, two more
transactions in the financial business sector have
been completed. These include Maybank of
Malaysia buying shares of Muslim Commercial
Bank amounting to $680 million and Barclays
bringing in approximately $100 million of
investments. These numbers will appear once the
account for the entire fiscal year is completed.
Almost 57 percent of FDI has come from three
countries, namely the U.A.E, US and UK. The
United States, with 33.4 percent share, is the single
largest investor in Pakistan, followed by U.A.E
(15.4 %), UK (8.7%), Norway (4.4%), Switzerland
(4.1%), Hong Kong (3.5%), and Japan (2.9%). The
communications sector, including Telecom, was
the most attractive sector for FDI inflows,
accounting for 30.4 percent followed by financial
businesses (22.6%), energy including oil and gas
and power (16.6%) and trade (4.9%). The three
groups, namely communication, banking, and oil
and gas exploration, accounted for over two thirds
of FDI inflows in the country.
Inflation: A stable inflation not only gives a
nurturing environment for economic growth but
also uplifts the poor and fixed income citizens who
are the most vulnerable in society. Over the last
decade, with a few exceptions, inflation around the
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world had been at a retreat. However, with buoyant
global growth, along with higher population
growth, rapid industrialization and urbanization in
emerging markets, and strong per capita income
growth, inflation has started veering its ugly head
in many parts of the world including Pakistan.
Inflation is uncomfortably high in almost every
corner of the world including Pakistan, creating
extraordinary difficulties for policy-makers. The
culprit everywhere is rising food and energy prices
underpinned by surging demand from the fast
growing developing countries.
There is a general consensus that the era of cheap
food is over. Soaring food prices over the last year
have helped propel inflation all around the world,
sparking protests and even riots in some countries.
The high price of food in the global arena as well
as short-sighted policy responses threatens to push
millions into poverty. Rising food prices have
pushed up overall inflation not only in Pakistan,
but across the region, particularly during 2007 and
mid-2008. This is worrisome given that food price
inflation is the most regressive of all taxes, hurting
the poor and fixed income groups the most.
Additionally, this explosion in international food
prices is a threat to macroeconomic stability
through inflation, the rising fiscal cost of food
subsidies, and the negative impact on the exchange
rate for net food/energy importing countries like
Pakistan.
The CPI-based inflation during July-April 2007-08
averaged 10.3 percent as against 7.9 percent in the
same period last year. The single largest
component of the CPI is the food group, which
makes up 40.34 percent of the CPI, and it showed
an increase of 15.0 percent. This was higher than
the 10.2 percent food inflation observed over the
corresponding period of last year. A further
breakdown of food inflation into perishable food
items and non-perishable food items reveals some
interesting facts. The rise in the price of perishable
food items stood at 8.7 percent whereas nonperishable food items stood at 13.6 percent. Based
on the current trend observed, the contribution of
food inflation to the overall CPI is estimated at 59
percent and non-food inflation at 40 percent as
against 52.4 percent and 47.2 percent, respectively
in the comparable period last year. On the other

hand, the non-food prices grew at a slower pace

compared to last year. Non-food inflation averaged
6.8 percent during July-April 2007-08 while it
stood at 6.2 percent in the corresponding period
last year. The non-food-non-energy inflation (core
inflation) was also higher at 7.5 percent in first ten
months of the fiscal year 2007-08 as against 6.0
percent in the same period last year, on account of
the rising house rent and Medicare sub-indices.
The current fiscal year inflation on a year-on-year
(y-o-y) basis exhibits a significant increase in price
pressures. This years inflation started with 6.4
percent in July 2007 but continued to accelerate,
reaching a peak of 17.2 percent in April 2008.
Food inflation was close to 8.5 percent at the
beginning of the year but accelerated sharply to
25.5 percent in April 2008, recording one of the
highest increases since 1974-75, when it peaked at
27.8 percent. The exceptionally high trend in food
inflation during the current fiscal year indicates
that prices of a few (18) essential food items
registered sharp increase particularly during the
second half of the fiscal year. The high food
inflation adversely affects the low and fixed
income groups as a majority of their total monthly
expenditure is on food items. Thus, sharp increases
in prices of some key food items puts a lot of
pressure on the poor segment of society. Other
significant contributors to this years upward
inflationary trend include house rent, which is the
index that measures the cost of construction in
Pakistan, racing to 11.4 percent by April 2008.
Transport and communication also contributed a
heavy chunk by peaking at 17.9 percent in April
2008, given the unprecedented hike in global oil
prices, translating to domestic oil and
transportation costs. Rounding up, fuel and lighting
stood at 8.6 percent whereas Medicare stood at 7.4
percent in April 2008 (y-o-y).
High global prices of food, fuel and other
commodities driven by a weaker Pakistani rupee,
high import prices and gradual removal of fuel,
food and power subsidies along with monetary
overhang on account of excessive borrowing from
the SBP to finance fiscal deficit have been mainly
responsible for sharp pick up in prices this year.
These factors will continue to exert upward
pressure on overall prices in the next two/ three

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Overview of the Economy

years. The longer the higher inflationary pressure
persists, the greater is the chance for wage-price
spiral to gain a firm hold. Pursuance of tight
monetary policy will be necessary to prevent the
wage-price spiral from gaining strength.
The government is fully aware of the
developments taken place on the inflationary
scene, both within and outside the country. The
government is also aware of its responsibilities to
maintain price stability, particularly with respect to
essential commodities. It is in this perspective that
the State Bank of Pakistan has further tightened the
monetary policy to curtail aggregate demand. On
the other hand the government is making efforts to
ensure adequate supplies of essential food items
through encouraging domestic production as well
as imports. It is in this perspective that the
government has increased the support price of
wheat from Rs.425 per 40 kg to Rs.625 per 40 kg
for the current wheat season with a view to
providing right price to Pakistani farmers so that
they can grow more wheat. Furthermore, a higher
support price of wheat will also help in
discouraging smuggling, therefore ensuring the
availability of the commodity in the country. The
government has also imported 1.7 million tons of
wheat last year and will also be importing 2.5
million tons this year to ease supply pressures. The
government has also allowed the private sector to
import wheat for which the custom duty was
reduced to zero. In order to stabilize the price of
rice in the country, the government negotiated an
agreement with the Rice Exporter Association of
Pakistan. The association will provide adequate
quantity of rice at a subsidized rate to the Utility
Stores Corporation as well as ensure an adequate
supply of rice in the country. The government has
also used the facilities of the Utility Stores
Corporation for providing relief to the people by
selling wheat flour, pulses, and edible oil at
reduced rates. The government is also working to
set up an Income Support Fund through which the
deserving segments of society will be protected
from the rising cost of food items.
Monetary Policy: Monetary policy stance of the
SBP has undergone considerable changes over the
last seven years, gradually switching from an easy
monetary policy to the current aggressive tight

monetary policy stance depending on the

inflationary situation in the country. During FY08,
the SBP continued with a tight monetary policy
stance, thrice raising the discount rate and
increased the Cash Reserve Requirement (CRR)
and Statutory Liquidity Requirement (SLR).
During the first half of FY08, the SBP raised the
policy rate by 50 bps to 10 percent effective from
August 1st, 2007. Furthermore, the SBP zero rated
the CRR for all deposits of one year and above
maturity
to
encourage
greater
resource
mobilization of longer tenor and 7 percent CRR for
other demand and time liabilities. In the second
half of FY08, the SBP further tightened monetary
policy by raising the discount rate by 50 bps to
10.5 percent. Furthermore, the CRR was raised for
deposits up to one year maturity by 100 bps to 8
percent while leaving term deposits of over a year
zero rated. The objective was to give incentives to
commercial banks to mobilize long-term deposits.
In the light of a continued inflationary buildup and
increasing pressures in the foreign exchange
market, the SBP announced a package of monetary
measures on May 21, 2008 that includes; (i) an
increase of 150 bps in discount rate to 12 percent;
(ii) an increase of 100 bps in CRR and SLR to 9
percent and 19 percent, respectively for banking
institutions (iii) introduction of a margin
requirement for the opening of letter of credit for
imports (excluding food and oil) of 35 percent, and
(iv) establishment of a floor of 5 percent on the
rate of return on profit and loss sharing and saving
accounts.
In order to improve the effectiveness of monetary
policy and avoid ambiguities in sending out policy
signals, the SBP has abolished the Annual Credit
Plan (ACP). This was a long awaited measure,
following the removal of credit ceilings which
made the Credit Plan redundant. For 2007-08, the
SBP had assumed that with real GDP growth target
of 7.2 percent and inflation target of 6.5 percent,
broad money (M2) supply growth should grow by
13.7 percent. The money supply growth during
July- May 10th 2007-08 (henceforth July-May) of
the current fiscal year slowed to 9 percent
compared to 14 percent during the corresponding
period of FY07. The FY 08 growth in M2 is
entirely attributable to a rise in the net domestic
assets (NDA) of the banking system due to high
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government borrowings for budgetary support, as
the NFA registered a contraction during the period,
mainly reflecting the weaknesses in countrys
external balance of payment. The monetary
tightening has been successful in moderating the
exceptional rise in private sector credit growth
seen in recent years to levels consistent with its
long term trends. However, the impact of this
desirable moderation in private sector growth on
M2 was more than offset by continued strong
budgetary borrowings of the government from the
banking system. The NDA of the banking system
registered an expansion of Rs.656 billion during
Jul-May FY08 compared with an expansion of
Rs.395 billion during the corresponding period of
last year.
In the current fiscal year, domestic and external
shocks of extra-ordinary proportions caused large
slippages on the fiscal side. The financing plan of
the fiscal deficit was also affected by these shocks.
The overall fiscal deficit of Rs.398 billion was to
be financed by external sources (Rs.193 billion),
and domestic sources (Rs131 billion).The
remaining Rs.75 billion was to come from
privatization proceeds. Within domestic sources,
Rs. 81 billion financing was to come from banking
sources while the remaining Rs. 50 billion was to
come from non-banking sources. The domestic and
external shocks not only increased the size of the
fiscal deficit but they also changed the composition
of financing. The borrowing requirements
increased from Rs. 324 billion (the net of
privatization proceeds) to Rs. 683.4 billion (with
no privatization proceeds) - an increase of 111
percent (based on information until May 23, 2008).
External resource inflows were adversely affected
by these shocks and against the budgeted level of
Rs.193 billion, only Rs.119.4 billion is likely to
materialize. Pakistan could not complete the
transaction of GDRs of the National Bank of
Pakistan and could not launch sovereign and
exchangeable bonds either. Furthermore, some of
the lending from the multilateral banks could not
be materialized. These developments had adversely
impacted the external resource inflows which
remained far below the budgeted level. Thus, the
brunt of adjustments on the financing side fell on
domestic sources. Against the budgeted financing
of Rs. 131 billion from domestic sources, it

increased to Rs. 564 billion. Within domestic

sources, the bulk (82.2 percent) of financing came
from banks while the remaining Rs. 100 billion or
17.8 percent came from non-bank sources. Most
importantly, the borrowings from the State Bank of
Pakistan reached an alarming level which is posing
serious complications for the conduct of monetary
policy. On cumulative basis, as on May 10 2008,
the government has borrowed Rs.551 billion from
SBP during the current fiscal year, which has
almost doubled the stock of MRTBs with SBP to
Rs.945.9 billion. To put this in perspective, the
July-May FY08 borrowings are twice the net
borrowings seen during the preceding three years.
The reliance on central bank borrowing is partly an
outcome of scheduled banks reduced interest in
government papers. In addition, the expectations
regarding changes in the discount rate in the
monetary policy statement for the second half of
FY08 also limited the scheduled banks
participation in the auctions of government
securities.
Credit to private sector grew by 14.9 percent
during July-May FY08 as against 12.2 percent in
the same period of last year. Credit to private
sector as percent of GDP is continuously rising
since 2001-02. The key factors contributing to this
years acceleration in private sector credit growth
include: (i) rise in working capital requirements
due to higher input costs; (ii) the need for bridge
financing to settle price differential claims of the
OMCs and IPPs; and (iii) the higher fixed
investment in the month of March 2008.
In order to develop the bond market, and to reduce
the cost of funds for financing the fiscal deficit in
the long run, Government has started PIB auctions
since December 2000. In FY07, the supply of long
term government paper started to pick up pace as
the government started to hold primary auctions of
PIBs in a more regular and predictable manner.
Regarding long-term interest rates, an important
development in FY07 was the extension of the
yield curve to 30 years. Interest rates of long term
government securities also registered an increase
due to the upward revision of the discount rate, and
the yield curve moved in an upward direction in
the range of approximately 81 to 110 basis points.
The SBP mopped up Rs.68 billion from the

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primary market of PIBs during the first nine
months of FY08 as compared to Rs.37 billion in
the same period of FY07. The market offered a
total amount of Rs.133 billion in the first nine
months of FY08 as compared to Rs.100 billion in
the same period of last year. In the first nine
months of FY08, heavy investment was in 10 year
PIBs which constituted 33.5 percent of the total
accepted amount.
The tight monetary policy for the year 2007-08 is
also reflected in the rise of the weighted average
lending rate. The weighted average lending rate
increased by 60 bps since June 2007 and until
March 2008. During the same period the weighted
average deposit rate increased by 20 bps. The
spread - a measure of banking sector
efficiency/inefficiency - increased from 6.3 percent
to 6.7 percent during the same period. It is in this
perspective that the State Bank of Pakistan in its
Interim Monetary Policy Measures announced on
May 21 2008, mandated the commercial banks to
pay a minimum interest rate of 5 percent on
savings deposit products with a view to not only
encouraging people to save more, but also to
bringing the spread down to a reasonable level.
Capital Markets: Pakistans stock market has
emerged as one of the fastest growing markets in
emerging economies in recent years. Local and
foreign investors confidence in the investment
environment of Pakistan has boosted the index to
peak highs. Pakistans benchmarked stock market
index - the Karachi Stock Exchange - KSE-100
index has increased from 1,521 points on June 30,
2000 to 12,130.5 points on May 30, 2008 a rise
of over 10,610 points or an increase of 698
percent.
Similarly,
Aggregate
Market
Capitalization (AMC) has increased from Rs. 392
billion ($ 7.6 billion) on June 30, 2000 to Rs. 3,746
billion ($ 56 billion) on May 30, 2008, showing a
rise of over Rs. 3,354 billion ($ 48.4 billion) or an
increase of 856 percent.

Notwithstanding the difficult domestic and

external environments, the fiscal year 2007-08
has witnessed large-scale merger and
acquisition activities. Several key takeovers
have taken place in Pakistans corporate sector
during the year. These include: (i) acquisition

of 65 percent strategic stake and management

control in Worldcall Telecom by OmanTel, (ii)
sell-off of 68 percent shares in Saudi-Pak
Commercial Bank to an international
consortium consisting of Bank Muscat, IFC
and Nomura European Investment Limited,
(iii) acquisition of 15 percent strategic stake in
Muslim Commercial Bank (MCB) by
Malaysias largest financial institution,
Maybank, with a right to increase its stake to
20 percent after one year, (iv) and acquisition
of 95 percent shares of ABN AMRO Bank
worldwide by the Royal Bank of Scotland
(RBS). These M&A activities, which have
taken place at very attractive valuations, have
provided support to the valuation in the stock
market. Peer group companies stock prices
have also reacted as a result of these
acquisitions. The Initial Public Offerings
(IPOs) of Habib Bank Limited (HBL) and
Arif Habib Bank Limited both came in 1.5x
and 5.8x oversubscribed, which is an
encouraging development.
The Karachi Stock Exchange (KSE) is the
biggest and most liquid exchange in Pakistan.
The premier equity market is benchmarked
through the KSE-100 index. The KSE-100
index closed at 12,130.5 points on May 30,
2008, a decrease of 1,642 points or about 11.9
percent in comparison to end June index
position of 13,772.5 points, after touching its
all-time high of 15,676 points on April 18,
2008. On the other hand, the Aggregate
Market Capitalization (AMC) settled to close
at Rs. 3,746 billion ($ 56 billion), about Rs.
273 billion ($ 10.4 billion) or 6.8 percent less
than the end-June 2007. A series of domestic
and external shocks impacted the performance
of Pakistans stock market in the fiscal year
2007-08. Political uncertainty, less than
satisfactory security environment, and a
disturbed law and order situation on the
domestic front, an international financial
market crisis and the downgrading of
Pakistans credit rating by Standard & Poors
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Pakistan Economic Survey 2007-08

and Moodys on the international front, have

played major roles in dampening the investors
sentiments.
Fiscal Policy: Fiscal year 2007-08 proved to be a
difficult year for Pakistan, with several political
and economic events transpiring unexpectedly.
These events include heightened political tensions,
soaring global oil prices, the international and
domestic food inflation phenomena, a slowdown in
global economic activity, and the troubled law and
order situation prevalent in the country. However,
the most important aspect was the non-responsive
stance on account of political expediency, that is,
not responding to the policy challenges emerging
on Pakistans economic scene during most part of
the fiscal year 2007-08. All these events have had
adverse consequences for fiscal discipline. Because
of the instability experienced at the onset of 200708, the fiscal deficit is expected to miss the target
of 4.0 percent of GDP this year by a wide margin.
The hard earned macroeconomic stability
underpinned by fiscal discipline is under threat.
A sound fiscal position is vital for achieving
macroeconomic stability, which is increasingly
recognized as being critical for sustained economic
growth and poverty reduction. The sooner Pakistan
improves its fiscal position by making sharp fiscal
adjustments, the lesser the price it is likely to pay
for its fiscal indiscipline. A sharp fiscal adjustment
can reduce large external current account
imbalances, restore the confidence of global
investors, ease financing constraints, support
growth and contain inflation.
The total revenue collected during FY 2007-08
stood at Rs. 1545.5 billion, higher than the targeted
level of Rs 1476 billion (based on information till
May 23, 2008). This increase of Rs 69.5 billion
from the budgeted revenues was mainly due to
higher-than-targeted non-tax collections. Tax
revenues however, exhibited a disappointing
performance. Political disturbances and a less than
satisfactory law and order situation seriously
hampered the revenue collection efforts of the
FBR. There are expectations that the FBR may fall
short of its targeted level, and the year is most
likely to end with tax collection amounting to Rs.
1.0 trillionRs. 25 billion less than the original

target. Notwithstanding the shortfall, the

government has made an extraordinary effort to
collect more resources from the non-tax revenue
side. There are expectations that the government
may collect an additional Rs. 103 billion in non-tax
revenues, reaching to Rs. 483 billion. Slippages in
provincial tax revenues amount to Rs. 8 billion.
The FBR was assigned an ambitious revenue target
of Rs. 1,025 billion for FY 2007-08, and to reach
this target a reasonably high growth of 21 percent
was required over the last year collection of Rs.
847 billion. However, revenue collection efforts
were seriously hampered due to political unrest in
the country during most of 2007-08. The incidents
of December 2007, accompanied with a severe
energy crisis and long hours of load shedding,
adversely
affected
industrial
production.
Resultantly, FBR also suffered a revenue loss of
Rs. 35 billion. At the end of April 2008, the net
collections had reached Rs. 763.6 billion, higher by
16.3 percent over the net collection of previous
fiscal year, but short of the assigned target of Rs.
787.7 billion. Thus, revenue collection has so far
achieved 97.0 percent of its target, which was
Rs.1025 billion at the beginning of the year.
A detailed analysis reveals that the gross and net
collection has increased by 12.3 percent and 16.3
percent, respectively. In absolute terms, the gross
and net collections have gone up by Rs. 89.9
billion and Rs. 107.1 billion, respectively. The
overall refund/rebate payments during the first ten
months of the current fiscal year amounted to Rs.
55.8 billion relative to Rs. 73.0 billion paid during
the corresponding period of the last fiscal year.
Among the four federal taxes, the highest growth
of 28.9 percent was recorded in the case of federal
excise receipts, followed by sales tax (19.5%),
direct taxes (12.5%) and customs (11.4%).

The total expenditure for 2007-08 was

budgeted at Rs. 1875 billion -- 11.9 percent
higher than last year. Current expenditure on
the other hand was budgeted at Rs. 1378
billion (almost equivalent to last years level),
of which, Rs. 862 billion was earmarked for
the federal government and the remaining Rs.
416 billion was allocated for provincial
governments. Development expenditure (after

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adjusting for net lending) was targeted at Rs.

496 billion 16.7 percent higher than last
year. On the basis of revenue and expenditure
projections, the overall fiscal deficit was
targeted at Rs. 398 billion or 4 percent of GDP
as against 4.3 percent last year.
Fiscal Year 2007-08 has been a tough year for
Pakistans economy. This year began in the
backdrop of challenges emanating from
domestic and external front. Surging oil, food
and commodity prices accompanied by the
turmoil in international financial markets and
the disturbed domestic political conditions had
an adverse impact on Pakistans budgetary
position. Furthermore, inaction on account of
political expediency for most part of the fiscal
year in addressing the challenges, accentuated
the budgetary imbalances.
Large slippages have occurred on the expenditure
side mainly on account of subsidies on oil, power,
fertilizer, wheat and other food items. In addition
to this, the interest payment significantly surpassed
their targeted level. Oil subsidy was budgeted at
Rs. 15 billion and the price of oil in the
international market was $50-55 per barrel (Arab
Gulf Mean) during the time of the preparation of
the budget 2007-08. It was also assumed that the
government would pass on the rise in international
price of oil to domestic consumers. Two factors
had a significant impact on the budgetary outlook
for the year. Firstly, oil prices continued to rise at a
greater pace, reaching as high as $ 115 per barrel
in May 2008--- an increase of over 116 percent
during the fiscal year. Secondly, the lack of action
on the part of the government aggravated the fiscal
situation as the high international price of oil was
not passed on to the domestic consumers.
Consequently, the oil subsidy is projected to rise to
Rs. 175 billion surpassing the targeted level by
Rs. 160 billion. Similarly, the higher cost of
furnace oil used in power generation was not
allowed to pass through to domestic consumers of
electricity. Therefore, against the budgeted subsidy
of Rs. 52.9 billion the projected power subsidy is
likely to be Rs. 113 billion --- an excess of Rs. 60
billion.

At the time of the preparation of the Federal

Budget 2007-08, the government never thought of
importing wheat as there was a bumper wheat crop
(23.3 million tons) in 2006-07. Hoarding,
smuggling and mismanagement of wheat
operations forced the government to import 1.7
million tons of wheat at all time high prices. Since
the government imported wheat at higher prices
and sold it in the domestic market at a cheaper
price, the difference of Rs. 40 billion had to be
picked up by the government. Similarly, the
government had to make extra payments on
research and development (R&D) in the textile
sector, subsidy on imported fertilizer etc. which
were not part of the 2007-08 federal budget.
Interest payments surpassed their targeted level by
a significant margin. A sum of Rs. 375 billion was
budgeted for interest payments in 2007-08. The
year is likely to end with interest payments of Rs.
503.2 billion surpassing the target by Rs. 128.2
billion, mainly due to two reasons. Firstly, there
was a slippage on account of the National Savings
Scheme (NSS) particularly with respect to Defence
Savings Certificates (DSCs), amounting to Rs. 54
billion. There was a massive maturity of DSCs
that were issued in 1997-98 which were due for
payment in 2007-08 (this is a ten year paper). The
NSS is still ill-equipped to determine how many of
these certificates were encashed prematurely and
how many were held till maturity. Secondly, there
was a slippage on account of floating debt and
permanent debt mainly due to the substantial rise
in the volume of borrowing as well as the rising
interest rates. Therefore, a combination of
underestimating the extent of maturity of the NSS
instruments as well as substantial rise in the
governments borrowing requirements (because
fiscal deficit was high: Rs. 683 billion vs Rs. 398
billion) and the consequential rise in interest rates
of various instruments were responsible for the
slippages in interest payments.
In order to counter massive gaps between budgeted
and estimated targets in current expenditure, the
government made efforts to mobilize more
resources on the one hand, and postpone
development spending on the other. An adjustment
of Rs. 100 billion was made in development
expenditure. All these efforts were made to bring
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the budget deficit at an acceptable level in the
wake of a difficult domestic and external
environment.
The above developments on the revenue and
expenditure sides resulted in massive slippages in
the overall fiscal deficit for the year 2007-08.
Against the target of Rs. 398 billion or 4 percent of
GDP the overall fiscal deficit is likely to be Rs.
683.4 billion or 6.5 percent of GDP--- the highest
in the last ten years.
Public debt is the outcome of the developments
taking place on the fiscal and current account
deficits. A larger gap in these two deficits would
cause the public debt to grow at a faster pace.
Exchange rate depreciation would also cause the
public debt to grow even if the government does
not borrow a single dollar. Low fiscal and current
account deficits, along with stability in the
exchange rate, are critical in keeping the public
debt at a sustainable level. Public debt as a
percentage of GDP (a critical indicator of the
countrys debt burden), which stood at 85 percent
in end-June 2000, has declined to 55.2 percent by
end-June 2007 a reduction of almost 30
percentage points of GDP in seven years. The
declining trend in public debt is likely to be
reversed in 2007-08, mainly on account of a
widening of the fiscal and current account deficits
and a sharp depreciation of the rupee vis--vis the
US dollar. By end-March 2008, the public debt as
percentage of full year GDP stood at 53.5 percent.
More damage has however, been done to public
debt in the last quarter (April-June) of the current
fiscal year, that is, a further widening of the fiscal
and current account deficits, increased borrowing
from domestic and external sources to finance the
deficits, and a sharper adjustment to the exchange
rate. The year 2007-08 is likely to end with public
debt at around 56 percent of GDP marking the
first time in a decade to see a reversal in trends.
Public debt in rupee terms has increased by 15.8
percent in the first nine months (July-March) of the
fiscal year 2007-08. Public debt is a charge on the
budget and therefore, it must be viewed in relation
to government revenues. Public debt stood at 589
percent of total revenues by end-June 2000 but
declined to 363 percent by end-March 2008 a
reduction of 226 percentage points of revenue.

Fiscal year 2007-08 has also witnessed violation of

various elements of the Fiscal Responsibility and
Debt Limitation Act 2005. Under the act, the
revenue deficit (total revenue minus current
expenditure) was to become zero by end-June
2008. As a consequence of large fiscal slippages,
the revenue deficit is likely to be Rs. 287 billion or
2.7 percent of GDP- a violation of the Act.
Similarly, the Act also requires that public debt as
percentage of GDP must decline by 2.5 percentage
points each year. Instead of declining, public debt
is likely to increase over the last year- once again a
clear violation of the Act.
Going forward, the key to the success of reducing
public debt burden includes: a reduction in fiscal
and current account deficits and maintaining
stability in the exchange rate. A declining public
debt would release government resources for
public sector investment, would enable private
sector to borrow more (crowding-in) for
investment, and thus promote growth.
External Sector: Both the domestic and external
environments play an important role in shaping the
countrys trade with rest of the world. The
outgoing fiscal year 2007-08 witnessed a series of
developments, both on the domestic and external
front, which adversely affected the countrys
overall balance of payments, including the trade
balance. Pakistans export performance has been
impressive in recent years (2002-03 to 2005-06)
registering an average growth of 16 percent per
annum. Pakistans export performance was dismal
in 2006-07 as it witnessed abrupt and sharp
deceleration to less than 4 percent. When viewed
in the back of last years performance, exports did
manage to recover somewhat this year but its
performance has remained far short of the average
growth of 16 percent achieved during 2002-03 to
2005-06.
Pakistans exports suffer from serious structural
issues which need to be addressed primarily by the
industry itself, with government playing its role of
a facilitator. Textile is the backbone of Pakistans
exports but bears various tribulations. These
include: (i) low value added and poor quality
products fetching low international prices; (ii) the
machinery installed in recent years has depreciated

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considerably relative to Pakistans competitors;
(iii) these machines are power-intensive, less
productive and carry high maintenance cost; (iv)
augmented wastage of inputs adding to the cost of
production; (v) little or no efforts on the part of
industry to improve their workers skills; (vi)
industry spending less money on research and
development; and (vii) export houses lacking
capacity to meet bulk orders as well as meeting
requirements of consumers in terms of fashion,
design and delivery schedule.
Pakistans imports grew at an average rate of 29
percent per annum during 2002-03 to 2005-06 on
the back of strong economic growth which
triggered a consequential growth in investment and
imports. However, import growth slowed to a
normal level in the fiscal year 2006-07 but
registered a sharp pick up once again in the current
fiscal year 2007-08 on account of an
unprecedented rise in oil import bills and some
one-off elements in the shape of imports of wheat
and fertilizer. As a result, Pakistans trade and
current account deficits have widened substantially
in this year contributing to serious macroeconomic
imbalances. Correction of imbalances through
shaving off aggregate demand by appropriate
policies should be the top most priority of the
government.
Exports: Overall exports recorded a growth of 10.2
percent during the first ten months (July- April) of
the current fiscal year against a growth of 3.6
percent in the same period last year. In absolute
terms, exports have increased from $ 13.8 billion
to $ 15.3 billion. Broad categories of exports
suggest that with the exception of textile
manufactures, all other categories of exports
registered stellar growth. For example, exports of
food group were up by 22.4 percent; petroleum
group exports registered an increase of 38 percent;
exports of other manufactures and other items
posted a handsome growth of 33.2 percent and
59.5 percent, respectively. Textile manufactures,
accounting for almost 57 percent of total exports,
performed poorly as it registered a decline of 2.5
percent. The government has provided financial
support to the textile sector through R & D during
the current fiscal year. Even this financial support
could not help improve the performance of textile

exports. It is therefore, clear that the problems are

structural in nature and cannot be resolved through
financial support of the government.
Exports of the food group, accounting for 13.2
percent in total exports, grew by 22.4 percent and
contributed 26.1 percent in overall exports growth.
Within food group, rice, accounting for 60 percent,
registered an impressive growth of 28.5 percent.
Pakistan clearly benefited from the unprecedented
rise in international price of rice and this is likely
to continue in coming years since Pakistan is a net
exporter of rice. This will also encourage farmers
in Pakistan to grow more rice and benefit from the
current hike in international prices. Export of
textile manufactures, accounting for 57 percent of
total exports, not only registered a negative growth
of 2.5 percent but also was a drag on the overall
performance of exports. With the exception of raw
cotton and other textile materials, all other major
components of textile manufactures registered
negative growth in the current fiscal year. It is
important to note that the unit value of all the
major components of textile manufactures were up
substantially but exports in quantum terms
registered a sharp decline across the board with the
exception of raw cotton. In other words, Pakistans
textile exports could not benefit from higher
international prices. The dismal performance of
textile exports can be attributed, beside their
structural issues, to rising cost of production owing
to increase in domestic cotton prices and stifling
power shortages; the deteriorating law and order
situation in the country resulting in reported
diversion of export orders to other countries; poor
quality of cotton on account of contaminated
cotton issue has also adversely affected the export
of the spinning industry. Furthermore, textile
exports appear to have also suffered from the slow
down in the US economy which has been the
largest destination for Pakistani exports during the
last few years. Export of the petroleum group,
accounting for 6 percent of total exports,
contributed 18.2 percent in the overall exports
growth for the year. Export of petroleum products
and Naphtha registered an impressive growth of 83
percent and 16 percent, respectively.
Unlike textile manufactures, exports of other
manufactures, accounting for 19 percent of total
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exports, posted a stellar growth of 33.2 percent in
the current fiscal year. Accordingly, it contributed
over 50 percent to this year overall exports growth.
The major performers under this category of
exports
include
leather
tanned;
leather
manufacturer; surgical goods; chemical and
pharmaceutical products. Performance of all broad
categories of exports is indeed encouraging when
viewed at the back of power and skilled labor
shortages and political disturbances in the country.
The performance of textile manufacturers has been
far from satisfactory during the fiscal year 200708. This points to the fact that a natural
diversification of exports is underway and Pakistan
appears to be moving away from conventional
textile products to new non-conventional items
such as other manufactures, petroleum products
and food group. However, the pace of
diversification is painfully slow. The current food
price hike at the global and national level provides
window of opportunity for Pakistani farmers to
grow more wheat and rice and thus emerge as a
major exporter of these agricultural produce.
Pakistan's exports are highly concentrated in a few
items namely, cotton, leather, rice, synthetic
textiles and sports goods. These five categories of
exports account for 72.4 percent of total exports
during the first nine months of 2007-08 with cotton
manufacturers alone contributing 54.7 percent,
followed by rice (7.1%), leather (6.1%), synthetic
textiles (2.9%) and sports goods (1.6%). The
degree of concentration has changed little from the
last fiscal year. Like the concentration of
Pakistans exports in a few items, the countrys
exports are also highly concentrated in only few
countries. USA, Germany, Japan, UK, Hong Kong,
Dubai and Saudi Arabia alone account for almost
one-half of Pakistans export. Continuing the past
trend, these seven markets remained the major
destinations for Pakistani export during the current
fiscal year. US remained by far the major
destination for Pakistans exports accounting for
26.4 percent.
Imports: Imports during the first ten months (JulyApril) of the current fiscal year (2007-08) grew by
28.3 percent to $32.1 billion on the back of an
extraordinary surge in the imports of petroleum

products as well as imports of food group and raw

material. Non-oil imports were up by 22.5 percent
and non-oil and non food imports surged by 18.8
percent during the same period. Imports of food
group were up by 48.6 percent in the current fiscal
year mainly on account of unanticipated imports of
wheat amounting to $ 819 million and an
extraordinary surge (70.4%) in the imports of
edible oil due to the sky-rocketing price of palm oil
in the international market. Imports of food group
accounted for 11 percent of total imports but
contributed 16.3 percent in the overall growth of
imports in the current fiscal year.
Imports of machinery posted a modest increase of
6.9 percent in the first ten months (July-April) of
current fiscal year reaching to $4.2 billion. Within
machinery group, imports of power generating
machines; construction and mining machines and
other machinery showed a substantial increase of
38.2 percent, 33.1 percent and 9.9 percent,
respectively. The rise in the import of these
different categories of machines is attributed to
ongoing work on various power and construction
projects in the country. Machinery group accounts
for 13.2 percent of total imports but contributed
only 3.8 percent in the overall import growth of
this year.
Imports of the petroleum group witnessed an
extraordinary surge at 47 percent, amounting to
$8.7 billion. Petroleum group accounts for 27
percent of total imports but contributed 39 percent
in the overall import growth for the year. The surge
in imports of petroleum group has been the result
of an extraordinary increase in the prices of POL
products.
Unlike in previous years, the imports of consumer
durables registered a decline of 1.6 percent in the
first ten months (July-April) of the current fiscal
year. The share of consumer durables in total
imports stood at 5.3 percent in 2007-08 while its
contribution to this years import growth has been
nil at best.
Imports of raw material, accounting for 16.6
percent of total imports, grew by 38.6 percent in
the first ten months (July-April) of the current
fiscal year. Fertilizers, plastic material, iron, steel

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and scrap, amounting for 45 percent of total raw
material imports, grew respectively by 193.1
percent, 12.3 percent and 74 percent. The
extraordinary increase in the import of fertilizer
was surprising at a time when the price of fertilizer
in the international market was up by almost 50
percent. As against 1 million tons last year,
Pakistan imported almost 2 million tons in the first
ten months of current fiscal year, registering a
growth of 97 percent. Why such large quantities of
fertilizer were imported when its off-take within
the country did not grow compared to last year, is
not clear. Nevertheless, the country had to pay an
additional $542 million in imports on account of
the extraordinary
increase in the import of
fertilizer which cannot be explained by looking at
the performance of this years agricultural crops.
Imports of raw material contributed 21 percent to
the overall growth of imports this year.
Unlike in the recent past, imports of telecom
remained more or less at last years level of $1.9
billion, suggesting that the expansion phase of
various cellular companies appears to have
saturated for the time being. Imports of telecom
accounts for 5.9 percent of total imports but
contributed only marginally (0.3%) to this years
overall imports growth.
It is important to note that the surge in imports
during 2003-06 was on the back of strong
economic growth which strengthened the domestic
demand and consequently a pick up in investment.
In contrast, the surge in this years import is not
because of any structural shift in demand but
because of rising international commodity prices
such as crude oil and palm oil and oneoff
increases in the import of wheat and fertilizer.
Imports of petroleum products and edible oil alone
contributed 47 percent to the rise of this years
import. Additional 18.7 percent contribution came
from import of wheat and fertilizer. Together these
four items accounted for two-thirds growth in this
years import.
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 75.5 percent of total imports during

the first nine months (July-March) of current fiscal
year. Pakistans imports are also highly
concentrated in few countries. USA, Japan,
Kuwait, Saudi Arabia, Germany, the UK and
Malaysia have been the major sources of
Pakistans imports since last ten years. Over 40
percent of Pakistans imports continue to originate
from these seven countries. During first nine
months (July-March) of the current fiscal year,
Saudi Arabia, followed by USA and Japan have
been the major supplier of our imports.
Trade Balance: During the first ten months of the
current fiscal year (July- April), the merchandise
trade deficit worsened sharply to $ 17 billion as
compared to $ 11 billion in the same period last
year. The surge in merchandize trade deficit owes
to an outsized increase of 28.3 percent in imports
that more than offset a modest export growth 10.2
percent. On the basis of existing trends, the trade
deficit is likely to touch $ 20.5 billion or 12.3
percent of GDP during 2007-08.
Current Account Balance: Pakistans current
account deficit further widened to US$ 11.6 billion
(including official transfers) during Jul-Apr FY08
against US$ 6.6 billion in the comparable period of
last year, showing an increase of 75.6 percent.
Even when compared to the size of the economy,
the current account deficit was substantially high at
6.9 percent of GDP during Jul-April FY08 as
against 4.6 percent for the same period last year.
Given the trend so far, the year is likely to end with
a current account deficit of over 8.0 percent of
GDP. The deterioration in the current account
deficit mainly emanated from the sharply rising
trade deficit along with increase in net outflows
from the services and income account. The strong
growth in current transfers on the back of
impressive growth in remittances almost entirely
offset the deficit in the services and income
account thereby leaving the trade deficit as the
fundamental source of expansion in current
account deficit. The current transfers witnessed an
impressive increase of 16.4 percent during JulApril FY08 on the back of strong growth in private
transfers.

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A month-wise trend in current account deficit can
be categorized into two distinct periods. In the
initial four month (Jul-Oct) of FY08, the current
account deficit averaged $737.5 million and
depicted almost 15 percent ($518 million)
improvement over the same period last year on the
back of a small recovery in exports (non-textile)
and slowdown in import growth. However, this
improvement could not be sustained in the
subsequent months with current account deficit
averaging $1439 million during Nov-Apr FY08almost doubled compared to the initial four
months. This deterioration in the current account
deficit can also be viewed from the fact that
Pakistan faced a high average price of crude oil,
rising from $69 per barrel in July to $75 per barrel
in the month of October 2007 but surged to $106
per barrel in April 2008. Such a massive surge in
oil prices caused the monthly oil import bill to rise
from $762 million in July 2007 to $1.3 billion in
April 2008. These developments, along with
imports of wheat and fertilizer, worsened the trade
deficit as well as current account deficit. Financing
of current account deficit witnessed some
compositional shift during Jul-Apr FY08 compared
to previous years. Specifically, unlike Jul-Apr
FY07, when current account deficit was
comfortably financed from surpluses in the
financial account, during Jul-Apr FY08 the deficit
was financed through a mix of surplus in the
financial account and a drawdown of foreign
exchange reserves.
Workers Remittances: Workers remittances
registered commendable growth during Jul-Apr
FY08, growing by 19.5 percent to $5.3 billion on
top of 22.7 percent growth in the corresponding
period of last year. Remittances routed through
exchange companies contributed 60.2 percent in
the overall remittances growth. As a result, foreign
exchange companies share in overall remittances
increased to 23.8 percent during Jul-April FY08
from 16.7 percent for same period last year.
Higher remittances have two favorable effects for
the economy. Firstly, these inflows enhance local
purchasing power, especially in rural areas and
provide an important hedge against higher levels of
domestic inflation. Secondly, they limit the
deterioration in the current account deficit due to
the worsening merchandise trade deficit caused by

the high international price of oil. A major share in

remittances growth came from United States,
Saudi Arabia, United Arab Emirates, and other
GCC countries. Together they accounted for over
78 percent of remittances, with the US taking the
lead with 27.5 percent. Pakistan has emerged as the
worlds 12th largest remittances recipient country
during 2007.
Foreign Exchange Reserves: Pakistans total
foreign exchange reserves stood at $ 12.3 billion as
of end-April 2008, significantly lower than end
June 2007 level of $15.6 billion. During the
current year, movement in foreign exchange
reserves can be divided into two distinct periods.
In the first period, reserves peaked to $ 16.4 billion
at end Oct-2007 while the second period showed
significant depletion of $ 4.1 billion during NovApr FY08. During Jul-Oct 2007, reserves
improved by 5.1 percent due to a relatively lower
current account deficit and substantial inflows in
the financial account. However, November
onwards, net outflows from portfolio investment,
and a steep rise in the current account deficit led to
a sharp decline in the foreign exchange reserves of
the country. Reserve adequacy in terms of weeks
of import, eroded during July-April FY08, to 19.4
weeks of imports down from 30.6 weeks in June
2007, mainly due to the combined impact of surge
in imports and drawdown of reserves.
Exchange Rate: Pak rupee, after remaining stable
for more than four years, lost significant value
against the US dollar, depreciating by 6.4 percent
during July-April 2007-08. The movements in the
rupee-dollar parity largely followed the same
pattern as witnessed in the case of reserves. During
the first four months of the current fiscal year, Pak
rupee remained more or less stable and
depreciation in the value of rupee against the US
dollar was only marginal. In contrast, Nov-April
FY08 period saw a steep decline in the value of the
rupee, mirroring pressures in the foreign exchange
market which arose after November, 2007
onwards. Beside the steep depreciation during
July- April FY08, the exchange rate also remained
much more volatile, particularly in mid-December
2007 onward, which prompted the SBP to
intervene in the market aggressively, helping
reduce the day-to-day volatility in the exchange

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rate. However, these interventions were not aimed
at arresting the fall in the value of Rupee against
the US dollar. The month of April, and especially
May, witnessed an even steeper decline while the
exchange rate remained under pressure, breaching
the Rs.64 per dollar mark in the month of April for
the first time in six years. Pak Rupee came under
intense pressure in the month of May 2008 on
account of speculative dollar buying in the market
which prompted the SBP to take severe actions
against the money changers to resist the sharp fall
in the value of the rupee. The rupee had reached to
an all-time low of Rs. 68 per dollar on May 9,
2008. To cool-off the foreign exchange market and
curb speculation, the State Bank took several
measures to stabilize the exchange market, details
of which are well documented in the relevant
chapter.

External Debt and Liabilities (EDL): High

and rising external debt burden constitutes a
serious constraint for development; a major
impediment to macroeconomic stability and
hence, to growth and poverty reduction; and a
discouragement to foreign investment because
it creates a high risk environment and
exchange rate depreciation. Borrowing from
within and outside the country is a normal part
of economic activity. Developing countries,
like Pakistan, would need to borrow to finance
their development; however, they need to
enhance their debt carrying capacity as well. In
other words, the borrower must continue to
service its external debt obligations in an
orderly and stable macroeconomic framework.
Furthermore, the borrowed resources must be
utilized effectively and productively so that it
generates economic activity. Prudent debt
management is therefore, essential for
preventing debt crisis.
Pakistans total stock of external debt and
foreign exchange liabilities (EDL) grew at an
average rate of 1.2 percent per annum during
2001-07, rising from $37.2 billion in end-June
2001 to $40.5 billion by end-June 2007.
However, in the first nine months (JulyMarch) of FY 2007-08, the stock of EDL rose

to $45.9 billion - an increase of $5.4 billion or

13.3 percent, the highest increase in almost
one decade. It is important to note that
Pakistans external debt is contracted in
various currencies but for accounting purpose,
it is reported in equivalent of US Dollar.
Therefore, any movement in exchange rates,
especially against US Dollar, would translate
into changes in the dollar value of the
outstanding stocks of EDL. During the first
nine months of this fiscal year, the total
increase in EDL amounts to $5.4 billion, of
which, $4.2 billion is the exchange rate
translation effect while net disbursement of
loan was just $1.2 billion. Pakistan has
benefited immensely from the exchange rate
translation effect in the past, particularly when
major currencies were depreciating against the
US Dollar. Unfortunately, Pakistan was on the
receiving end of the translation effect in the
current fiscal year because US Dollar
depreciated against Japanese Yen, Euro, and
SDR by 18.7 percent, 14.9 percent, and 8.2
percent, respectively. Notwithstanding, the rise
in EDL in absolute terms, the burden of the
debt, defined in various ways, has declined
over the years. From a policy perspective, it is
the incidence of the debt burden which is
important and meaningful. Furthermore, the
international financial institutions as well as
international rating agencies look at incidence
of debt burden rather than debt in absolute
number. The EDL as percentage of GDP
declined from 51.7 percent in end-June 2000
to 28.1 percent by end-June 2007 and further
to 26.9 percent by end-March 2008. Similarly,
EDL, as percentage of foreign exchange
earnings, declined from 297.2 percent in endJune 2000 to 121.6 percent in end-June 2006,
but exhibiting and increasing trend thereafter
reaching to 127.1 percent by end-March 2008.
Furthermore, EDL was 19.3 times of foreign
exchange reserves in end-June 2000 but
declined to 2.7 times by end-June 2005 and
exhibiting an increasing trend thereafter
reaching to 3.4 times by end-March 2008. The
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maturity profile of Pakistans EDL also

showed an improvement over the last eight
years as short-term debt was 3.2 percent of
EDL but declined to 1.3 percent by end-March
2008.
Performance of Sovereign Bonds: Fiscal
year 2007-08 has seen increased volatility in
international credit markets. The fallout from
the sub-prime crisis and the ensuing credit
crunch gripping the world has impacted
Emerging Market debt significantly. Spreads
have been increasing across the board and
access to financing has decreased. Pakistans
sovereign papers were doubly affected by
credit crunch in international capital market as
well as unsettling domestic political and
security environment. The downgrading of
ratings by Standard & Poors and Moodys
also impacted the performance of Pakistans
papers in secondary market trading at the
international level. As compared to the issue
spread of UST + 200bps, the 2017 bond is
trading currently at a spread of UST +629 bps.
The 2036 bond, as compared to the issue
spread of UST + 302bps, is trading currently at
a spread of UST + 507 bps, about 69 percent
higher. The 2036 bond was the longest ever
tenor achieved by Pakistan.
Poverty and Income Distribution: The
income-consumption module of the Pakistan
Social and Living Standard (PSLM) Survey
provides basic information for measuring the
incidence of poverty and distribution of
income. Until the first half of the fiscal year
2007-08, the latest estimates available to
gauge poverty situation in the country was
related to the fiscal year 2004-05. Based on
PSLM 2004-05 survey, poverty was estimated
at 23.9 percent as compared with 34.5 percent
in 2000-01- an improvement of 10.6
percentage points in four years. Only recently,
the Federal Bureau of Statistics (FBS) made
available the income-consumption module of
PSLM 2005-06 to the Center for Research on

Poverty and Income Distribution (CRPRID)

attached with the Planning Commission and
funded by the United Nations Development
Program (UNDP). It is important to note that
the estimates of poverty from PSLM 2005-06
would depict the socio-economic conditions
that prevailed during the fiscal year 2005-06.
These estimates have nothing to do with
current ground realities which have been
impacted by the surge in food and fuel prices,
poor agricultural performance and slower
economic growth.
It should be clearly noted that poverty
estimates are highly sensitive to a variety of
factors, like how a poverty line is estimated
and updated; which welfare measure is
adopted, household expenditure or income;
how the scale of household is controlled for,
per capita or per adult equivalent; and how
spatial price differences are controlled, etc.
Each methodology or choice has advantages
and limitations. Also, poverty estimates and
the trend vary substantially depending on what
methodology is selected. This very nature of
poverty estimation suggests that the validation
exercise needs to be designed carefully. For
example, it is not constructive to simply point
out the difference between the CRPRID/
Planning Commissions poverty estimates and
those based on a conceptually different
methodology.
The CRPRID/ Planning Commission estimated
the Headcount ratio based on PSLM 2005-06
survey with a view to updating the benchmark
of poverty estimates for Pakistan. The latest
estimate of inflation-adjusted poverty line is
Rs.944.47 per adult equivalent per month, up
from Rs.878.64 in 2004-05. Headcount ratio,
i.e., percentage of population below the
poverty line has fallen marginally from 23.94
percent in 2004-05 to 22.32 percent in 200506, an improvement of 1.62 percentage points.
Poverty in rural areas declined from 28.13
percent to 27.0 percent, showing an

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improvement of 1.13 percentage points

between 2004-05 and 2005-06. Poverty in
Urban areas also registered a decline from
14.94 percent to 13.1 percent during 2004-05
and 2005-06, thereby, depicting an
improvement of 1.84 percentage points in the
period. Poverty estimate in urban areas
became less than half the rural estimates in
2005-06 for the first time since 1998-99. It is
important to note that a decline of 1.6
percentage points in poverty Headcount
between 2004-05 and 2005-06 is found
statistically insignificant. In other words,
statistically speaking, taking into account the
margin of error in the estimates, the estimates
of the two years are not different from each
other. It is also important to note that a
technical exercise carried out by the World
Bank
supports
the
accuracy
of
CPRID/Planning
Commission
poverty
numbers for PIHS 2000-01, PSLM 2004-05,
and PSLM 2005-06 using the official
methodology and data cleaning protocol. The
World Bank also carried out various sensitivity
analyses to ensure the reliability of the
estimates, and found that the poverty estimate
at the national level declined slightly between
2004-05 and 2005-06, but the reduction was
not statistically significant.
Notwithstanding marginal and statistically
insignificant
improvement
in
poverty
Headcount during 2004-05 and 2005-06, the
consumption inequality during the period has
increased marginally to 0.3018 as measured by
the Gini coefficient. It may also be noted that
consumption inequality is continuously on the
rising trend since 2000-01, rising from 0.2752
to 0.3018.
The poverty estimates discussed above have
nothing to do with the current ground realities
which have been impacted by a high doubledigit inflation, particularly food inflation, poor
agricultural performance, particularly the
major crops, and slower economic growth.

These developments will likely be a major

contributor to eroding the gains of poverty
reduction. Whether these shocks will have any
bearing, and to what extent, on the poverty
profile of the country in 2007-08 will only be
known once the income-consumption module
of PSLM 2007-08 will be available sometime
in the last quarter of 2008-09.
The government is fully aware of the difficulties
faced by the low and fixed income groups on
account of rising inflation, especially food
inflation. The government is setting up an Income
Support Fund with a view to providing relief to the
deserving segments of the society. Such a measure
will help alleviate difficulties faced by the low
income group from rising food and fuel prices. In
this perspective, a comprehensive survey / census
will be conducted soon by the government to
identify the targeted households.

EXECUTIVE SUMMARY
01. GROWTH AND INVESTMENT
Pakistans economy has shown great resilience
against internal and external shocks of very high
intensity and grew robustly at 5.8 percent in 200708, as against 6.8 percent last year and this years
target of 7.2 percent. The Commodity Producing
Sector (CPS) registered a growth of 3.2 percent in
2007-08 as against 6.0 percent last year owing
mainly to the lackluster performance of agriculture
and manufacturing. While agriculture grew by 1.5
percent, the manufacturing sector posted a modest
growth of 5.4 percent in 2007-08. The large scale
manufacturing (LSM) sector witnessed a modest
growth of 4.8 percent, down from 8.6 percent last
year. The manufacturing sector has been hard hit
by political instability, frequent eruptions of
incidents detrimental to law and order and the
acute energy shortages. In unison with increasing
prices for fuel and energy, all these factors have
caused slower growth in LSM. Growth in the small
scale manufacturing sub-sector moderated to 7.5
percent in 2007-08 from 8.1 percent during 200607.

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The poor show of the agriculture sector was the
result of a sharp deceleration in the growth of the
major crops sub-sector which posted a negative
growth of 3.0 percent in 2007-08 as against a
healthy growth of 8.3 percent last year. Minor
crops registered a growth of 4.9 percent as against
the negative growth of 1.3 percent last year.
Fishing and forestry exhibited robust growth of 3.8
percent and 11.0 percent, respectively.
The services sector has surpassed the growth target
of 7.1 percent and grew by 8.2 percent in 2007-08
as against the actual achievement of 7.6 percent
last year. The finance and insurance sector
displayed a stellar growth performance of 17.0
percent during 2007-08 as against 15 percent last
year. Value added in the wholesale and retail
trade sector grew at 6.4 percent as compared to 5.4
percent last year and the target of 7.8 percent this
year. The Transport, Storage and Communication
sub-sector saw a deceleration in growth to 4.4
percent in 2007-08 as compared to 6.5 percent of
last year.
The contribution of CPS to GDP growth has
declined to 26.6 percent from 42.4 percent last
year. Agriculture sector contributed only 0.3
percentage points or 5.6 percent to GDP growth in
2007-08 as against 0.8 percentage points or 12
percent contribution last year. The manufacturing
sector contributed 1.0 percentage point or 17.7
percent to GDP growth as against 1.5 percentage
points or 22.2 percent last year. Industry
contributed 1.2 percentage points or 20.9 percent
to this years real GDP growth. The Services sector
contributed 4.2 percentage points or 73.4 percent
to overall growth this year. The contribution made
by wholesale and retail trade has been 18.7
percent or 1.1 percentage points to GDP growth in
2007-08. Finance and insurance has also
contributed 18.7 percent or 1.0 percentage point to
this years growth.
Per capita income has grown at an average rate of
above 13.0 percent per annum during the last five
years, rising from $ 586 in 2002-03 to $ 925 in
2006-07 and further to $ 1085 in 2007-08. Per
capita income in dollar terms rose from $ 925 last
year to $ 1085 in 2007-08, depicting an increase of
18.4 percent. Real per capita income in rupee

terms has also increased by 4.7 percent, on

average, for the last three years. The real per capita
income grew by 4.2 percent as compared to 4.9
percent last year. Real private consumption
expenditure grew by 8.5 percent in 2007-08 as
opposed to 4.1 percent last year.
Total investment declined to 21.6 percent of GDP
in 2007-08 from its peak level of 22.9 percent last
year. However, total investment has increased from
16.9 percent of GDP in 2002-03 to 21.6 percent of
GDP in 2007-08 showing an increase of 5.7
percent of GDP in five years. Fixed investment
grew by 3.4 percent in real terms and 12.5 percent
in nominal terms. Private investment grew by 16.3
percent per annum in real terms and 30.7 percent
per annum in nominal terms during the period
(2004-07). However, its growth declined
substantially to 0.9 percent in real terms and 9.7
percent in nominal terms. Major nominal growth
in private sector investment was witnessed in:
mining & quarrying (15.3%), electricity & gas
(11.0%), financial business (11.4%), and wholesale
and retail trade (18.4%).
National Savings stood at 13.9 percent of GDP in
2007-08 down from last years level of 17.8
percent. Domestic savings has declined to 11.7
percent of GDP from 16.0 percent of GDP in 200607. Public sector investment has also increased by
30.0 percent per annum during the last three years
and 20.2 percent during the current fiscal year in
nominal terms.
Overall foreign investment during the first ten
months (July-April) of the current fiscal year has
declined by 32.2 percent and stood at $ 3.6 billion
as against $5.3 billion in the comparable period of
last year, mainly because of the fact that the
political economy suffered many headwinds at
continuous intervals.
Foreign direct investment (private) has shown
more resilience and stood at $3481.6 million
during the first ten months (July-April) of the
current fiscal year as against $4180.8 million in the
same period last year thereby showing a decline of
16.7 percent. Private portfolio investment on the
other hand witnessed a massive decline of 91
percent by recording an inflow of $98.9 million as

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against $1097.3 million in the comparable period
of last year. Public foreign investment depicted a
modest inflow of only $20.5 million as against an
outflow of $66.6 million in the comparable period
of last year.
Almost 57 percent of FDI has come from three
countries, namely, the UAE, US, and UK. US
investors, with 33.4 percent investment,
contributed the most during the first ten months
(July-April) of 2007-08. Norway (4.4% or $154.8
million), Switzerland (4.1% or $141.3 million),
Hong Kong (3.5% or $121.3 million), Netherlands
(2.9% or $101.0 million) and Japan (2.9% or
$100.3 million) were the other contributors to FDI
inflows. Three groups, namely; communication,
financial business and oil & gas exploration,
accounted for almost 67 percent of FDI inflows in
the country.
02. AGRICULTURE
Notwithstanding its declining share in GDP,
agriculture is still the single largest sector of the
economy, contributing 21 percent to GDP and
employing 44 percent of the workforce. More than
two-thirds of Pakistans population lives in rural
areas and their livelihood continues to revolve
around agriculture and allied activities. Like in
other developing countries, poverty in Pakistan is
largely
a
rural
phenomenon;
therefore,
development of agriculture will be a principal
vehicle for alleviating rural poverty. The recent
global food crises, while creating difficulties for
net food importing countries, is equally providing
opportunities for developing countries like
Pakistan to get their acts together and benefit from
the current situation by giving more serious
attention to agriculture.
The sustained higher growth in emerging
economies has impacted the consumption patterns
of households, including dietary changes towards
higher quality food such as meat and dairy
products. As a result, the production of these items
is rising globally. In Pakistan, the livestock and
dairy sectors accounts for 52 percent of agriculture,
11 percent of GDP and affects the lives of 30-35
million people in rural areas. In order to achieve
higher sustained growth in agricultural value
added, it is absolutely necessary to give due

attention to the livestock and dairy sector to

achieve multiple objectives, such as, the objectives
of attaining food security and poverty reduction.
The growth performance of agriculture over the
last six years has fluctuated in the range of 1.5
percent to 6.5 percent. The volatility in agricultural
growth is mainly caused by the crop sector which
is associated with the vagaries of Mother-Nature,
pest attacks, ill effects of adulterated pesticides etc.
Such volatility is detrimental to income growth of
farmers and hampers government efforts to reduce
poverty.
Agriculture performed poorly in 2007-08, growing
at 1.5 percent against the target of 4.8 percent. This
poor performance is mainly because of equally
poor performance of major crops and forestry,
registering negative growths of 3.0 percent and 8.5
percent, respectively. Livestock, minor crops and
fishing have been the saving grace for agriculture
as these sectors performed reasonably well and
compensated for the performance of major crops
and forestry, which allowed the growth rate in
agriculture to arrive at 1.5 percent this year. Major
crops, accounting for 34 percent of agriculture and
7.1 percent of GDP, suffered on account of the
poor showing of wheat and cotton and less than
satisfactory performance of the rice crop.
Sugarcane and maize, being the other two major
crops, performed impressively in 2007-08.
The cotton crop suffered for a variety of reasons,
including heavy rainfall in May 2007 which caused
poor germination in Punjab, high temperatures
during August and September 2007, causing more
shedding of fruit parts and pest attacks, especially
the
dangerous
mealy
bug
infestation.
Consequently, cotton production declined to 11.7
million bales as against 12.9 million bales last year
registering a negative growth of 9.3 percent.
The wheat crop was adversely affected by the
shortage of irrigation water to the extent of 23.3
percent over normal supplies during Rabi and the
inordinate spike in prices of DAP fertilizer.
Accordingly, production of wheat declined to 21.7
million tons as against 23.3 million tons last year,
thereby showing a decline of 6.6 percent. In sheer
contrast, the two other major crops performed well
with sugarcane recording the highest ever
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production level of 63.9 million tons 16.8
percent higher than last year. The production of
rice witnessed a modest growth of 2.3 percent and
stood at 5.6 million tons.
Minor crops, accounting for 12 percent in
agriculture value added, posted a growth of 4.9
percent against the negative growth of 1.3 percent
last year. The performance of livestock, accounting
for 52.2 percent of agricultural value added, was
satisfactory at 3.8 percent. The performance of
fisheries has been impressive as it grew by 11
percent in 2007-08 because inland fish catch
increased by 11.1 percent while the output of
marine fishing grew by 11.5 percent during 200708. Forestry followed the traditional negative
growth pattern for the fifth year in a row. This
small sector, with only one percent stake in the
overall value - addition in agriculture, registered a
negative growth of 8.5 percent in 2007-08 as the
turnout of production of timber and firewood
during the year declined by 9.3 percent.
Pakistans agricultural output is closely linked with
the supply of irrigation water. 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 lower
in the range of 5.9 percent (2003-04) to 20.6
percent (2004-05). Relatively speaking, Rabi
season faced more shortage of water than Kharif
during 2007-08.
During the current fiscal year (2007-08), the
availability of water for Kharif 2007 (for the crops
such as rice, sugarcane and cotton) has been 5.5
percent more than the normal supplies and 12.2
percent more than last years Kharif. The water
availability during Rabi season (for major crop
such as wheat), as of end-March 2008 was,
however, estimated at 27.9 MAF, which was 23.4
percent less than the normal availability, and 10.5
percent less than last years Rabi, adversely
affecting the wheat crop, production of which has
decreased by 6.6 percent over the last year.
03. MANUFACTURING & MINING
Pakistans manufacturing sector recorded the
weakest growth in a decade during the outgoing
fiscal year 2007-08. Overall manufacturing posted

a growth of 5.4 percent during the first nine

months of the current fiscal year against the target
of 10.9 percent and 8.1 percent of last year. Largescale manufacturing, accounting for 70 percent of
overall manufacturing, registered a growth of 4.8
percent in the current fiscal year 2007-08 against
the target of 12.5 percent and last years
achievement of 8.6 percent. Heightened political
tension, deteriorating law and order situation,
growing power shortages, the cumulative impact of
monetary tightening and rising cost of doing
business are the reasons responsible for the poor
showing of manufacturing in 2007-08.
The main contributors to this growth of 4.8 percent
during July-March 2007-08 over last year, are
pharmaceuticals (30.7 percent), wood products
(21.9 percent), engineering products (19.5 percent
), food & beverages (11.1 percent), petroleum
products (6.0 percent) and chemicals (3.1 percent).
The individual items that displayed positive growth
include: cotton cloth (4.8 percent) and cotton yarn
(3.3 percent) in the textile group; cooking oil (1.1
percent), sugar (33.9 percent) and cigarettes (5.1
percent) in the food, beverages and tobacco group;
cement (17.9 percent) in the non-metallic mineral
products group; and buses (32.0 percent), LCVs
(16.4 percent) and motorcycles (28.1 percent) in
the automobile group. A few items that showed a
decline in production include: fertilizers (16.9
percent), electronics (4.6 percent), paper & paper
board (5.5 percent) and iron & steel products (7.6
percent). The individual items that exhibited
negative growth include; cars & jeeps (3.9
percent), phosphatic fertilizer (24.0 percent) and
billets (20.6 percent).
The mining and quarrying sector registered a
growth rate of 4.9 percent as against a target of 4.5
percent and 3.0 percent of last year. The higher
growth was propelled by magnetite (20.5%), lime
stone (17.8%) and Baryte (15.6%).
With effect from January 1991 to February 2007,
GoP has privatized around 166 units at Rs. 475
billion (approx US$ 8.9 billion). The transactions
carried out during the period of July 2007 to
February 2008 include: UBLs divestment of 25
percent shares through a GDR fetched $650
million and was the biggest book building ever in

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Pakistans banking history. Initially 21.74 percent
(175.95 million) shares were divested in June 2007
for total proceeds of $565.4 million. Another 3.2
percent (26.39 million) shares were divested in
July 2007 for total proceeds of $84.81 million. The
stock was priced at 5 times to book which is the
highest valuation compared to similar transactions
globally. The HBL-IPO was the largest offering
ever in Pakistan in terms of value and the number
of successful applicants. A total subscription of Rs.
18.9 billion was received against the base offer of
Rs. 8.1 billion resulting in an over subscription of
2.3 times. The IPO has generated gross proceeds
worth Rs. 12.2 billion against the divestment of
51.8 million shares (including a green shoe option
of 17.2 million).
A new SMEs Policy 2007 was launched in fiscal
year 2007-08, where an attempt has been made to
define uniformly, small and medium sectors in
manufacturing, trade and services sectors for all
the stake-holders and give a broad frame-work for
the promotion of SMEs by improving the
regulatory, fiscal and business environment. The
policy document gives a broad frame-work for
promoting and developing small and medium
sectors through institutionalization of the support
structure, and outlines a strategy for SME-led
private sector growth for poverty reduction and job
creation.
04. FISCAL DEVELOPMENTS
Fiscal year 2007-08 proved to be a difficult year
for Pakistan, with several political and economic
events transpiring unexpectedly. Domestic and
global headwinds have had adverse consequences
for fiscal discipline. Resultantly, the fiscal deficit
is likely to miss its target of 4.0 percent of GDP by
a wide margin. The hard earned macroeconomic
stability underpinned by fiscal discipline appears to
have been evaporated.
Total revenues collected during the current year
stood at Rs 1545.5 billion, higher than the targeted
level of Rs 1476 billion. This increase of Rs 69.5
billion from the budgeted revenues was mainly due
to higher than targeted non-tax revenues. There are
expectations that the FBR may fall short of its
targeted level with total tax collections of Rs 1.0
trillionRs. 25 billion less than the original target.

It is also anticipated that the government may

receive an additional Rs. 103 billion from non-tax
revenues, reaching to Rs. 483 billion. Slippages in
provincial tax revenues amounted to Rs. 8 billion.
Pakistans tax revenue-to-GDP ratio stood at only
9.5 percent of GDP during 2007/08 as compared to
an average of 18 percent for other developing
countries, indicating that substantial tax policy
reforms are still needed to broaden the tax base.
The indirect tax-to-GDP ratio stood at around 6
percent, while the direct tax-to-GDP ratio was
calculated to be 4 percent. The government
recognizes the need to broaden the tax base and
reduce marginal tax rates which would stimulate
investment and production. The overall services
sectors, including wholesale and retail trade, as
well as agriculture, are potential candidates for
broadening of the tax bases.
Gross and Net tax collection has increased by
12.3% and 16.3% respectively. In absolute terms,
these collections have gone up by Rs. 89.9 billion
and 107.1 billion, respectively. Among the four
federal taxes, the highest growth of 28.9% was
recorded in the case of federal excise receipts,
followed by sales tax (19.5%), direct taxes (12.5%)
and customs (11.4%). The collection of direct
taxes has suffered a substantial shortfall during
July-April FY 07-08.
The total expenditure for 2007-08 was budgeted at
Rs. 1875 billion 11.9 percent higher than last
year. Current expenditure on the other hand was
budgeted at Rs. 1378 billion which was at previous
years level. Development expenditure was
targeted at Rs 496 billion 16.7 percent higher
than last year. On the basis of revenue and
expenditure projections, the overall fiscal deficit
was targeted at Rs 398 billion or 4 percent of GDP
as against 4.3 percent last year. However, large
slippages have occurred on the expenditure side
mainly on account of subsidies on oil, power,
fertilizer, wheat and other foods.
Two factors had a significant impact on the
budgetary outlook. Firstly, oil prices continued to
rise at a greater pace, reaching as high as $ 115 per
barrel in May 2008--- an increase of over 116
percent during the fiscal year. Secondly, the lack of
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action on the part of the government aggravated
the fiscal situation as the high international price of
oil was not passed on to the domestic consumers.
Consequently, the oil subsidy is projected to rise to
Rs 175 billion over shooting the targeted level
by Rs 160 billion. Hoarding, smuggling and
mismanagement of wheat operations forced the
government to import 1.7 million tonnes of wheat
at all time high prices.
Interest payments surpassed their targeted level by
a significant margin. A sum of Rs. 375 billion was
budgeted for interest payments in 2007-08 whereas
they are estimated at Rs. 503.2 billion, thereby
surpassing the targeted level by staggering Rs
128.2 billion. The adverse developments on the
revenue and expenditure sides resulted in massive
slippages in the overall fiscal deficit for the year
2007-08. Against the target of Rs 398 billion or 4
percent of GDP the overall fiscal deficit is likely to
be Rs 683.4 billion or 6.5 percent of GDP the
highest in the last ten years. In order to counter
massive gaps between budgeted and estimated
targets in current expenditure, the government
made efforts to mobilize more resources on the one
hand, and postpone development spending on the
other. An adjustment of Rs 100 billion was made
in development expenditure.
Domestic and external shocks not only increased
the size of the fiscal deficit but they also changed
the composition of financing. The borrowing
requirements increased from Rs 324 billion to Rs
683.4 billionan increase of 111 percent. External
resource inflows were adversely affected by these
shocks and against the budgeted level of Rs 193
billion, only Rs 119.4 billion is likely to
materialize. In addition to this, Pakistan could not
complete the transaction of Global Depository
Receipts (GDRs) of the National Bank of Pakistan
and could not launch sovereign and exchangeable
bonds. Furthermore, some of the expected
disbursements of multilateral banks and
privatization proceeds were not materialized.
These developments had adversely impacted the
external resource inflows which remained below
the budgeted level. Thus, the brunt of adjustments
on the financing side fell on domestic sources.
Against the budgeted financing of Rs 131 billion
from domestic sources, it increased to Rs 564

billion. Within domestic sources, the bulk (82.2

percent) of financing came from banks while the
remaining Rs 100 billion or 17.8 percent came
from non-bank sources. Most importantly, the
borrowings from the State Bank of Pakistan (SBP)
reached an alarming level. Consequently, the
money supply growth for the year 2007-08 is
expected to breach the target of 13.7 percent.
Public debt as a percentage of GDP (a critical
indicator of the countrys debt burden), which
stood at 85 percent in end-June 2000, declined to
55.2 percent by end-June 2007 a reduction of
almost 30 percentage points of GDP in seven
years. The declining trend in public debt is likely
to be reversed in 2007-08, mainly on account of
yawning fiscal and current account deficits and a
sharp depreciation of the rupee vis--vis the US
dollar. By end-March 2008 the public debt as
percentage of full year GDP stood at 53.5 percent.
However, more damage has been done to public
debt in the last quarter (April-June) of the current
fiscal year which means a further widening of the
fiscal and current account deficits, increased
borrowing from domestic and external sources to
finance the deficits, and a sharper adjustment to the
exchange rate. The year 2007-08 is likely to end
with public debt at around 56 percent of GDP
marking the first time in a decade to see a reversal
in trends. Public debt in rupee terms has increased
by 15.8 percent in the first nine months (JulyMarch) of the fiscal year 2007-08.
By end-June 2007 total domestic debt stood at Rs.
2610.2 billion which was estimated at 30 percent
of GDP. The outstanding stock of domestic debt
rose by Rs 409.9 billion and stood at Rs. 3020.1
billion by end-March 2008 or 30.3 percent of GDP.
The domestic debt had increased by 15.7 percent
by end-March 2008 over end-June 2007. The
increase in domestic debt mainly emanates from
floating debt (27.1%) while the other two
components, unfunded and permanent, witnessed a
modest growth of 6.1 percent and 9.4 percent,
respectively.
05. MONEY & CREDIT
Pakistan has made significant progress in
improving the health and soundness of the banking
and financial sector over the last two decades.

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During this period of transformation, the financial
sector of Pakistan has evolved into a more
progressive and dynamic module of the economy,
both in response to the financial sector reforms and
to the growing financing needs of an expanding
economy. In response to the growing demands of
financial globalization, Pakistans financial system
is starting to integrate with international financial
markets.
The process of the tightening of monetary policy
began
in
FY05,
from
being
broadly
accommodative to one more aggressive. The
governments December 2004 decision to lift the
freeze on domestic POL prices raised inflationary
expectations, forcing a more aggressive tightening
of monetary policy. During FY08, the SBP
continued with a tight monetary policy stance,
thrice raising the discount rate while also
increasing the Cash Reserve Requirement (CRR)
and the Statutory Liquidity Requirement (SLR).
The impact of the tight monetary stance and
liquidity management began to translate into a rise
in other interest rates, with varied magnitude, at
different stages of the economy. For instance, the 6
months T-bills cutoff witnessed an increase of 97
basis points to 9.9 percent during Jul-Apr FY08.
Similarly, the 6 months and 12-months KIBOR
also increased by 77 basis points and 63 basis
points to 10.38 percent and 10.71 percent
respectively.
In order to improve the effectiveness of monetary
policy and avoid ambiguities in sending out policy
signals, the SBP has abolished the Annual Credit
Plan (ACP). For 2007-08, the SBP had assumed
that with real GDP growth target of 7.2 percent and
inflation target of 6.5 percent, the broad money
(M2) growth should have grown by 13.7 percent.
The money supply growth slowed to 9.0 percent
during July 2007-May 10, 2008 compared to 14
percent during the corresponding period of FY07.
The M2 growth is entirely attributable to a rise in
net domestic assets (NDA) of the banking system
driven by high government borrowings for
budgetary support. The NDA of the banking
system registered an expansion of Rs.656 billion
during July 2007-May 10, 2008 compared with an
expansion of Rs.395 billion during the same period
of last year. The net bank credit to the government

for financing commodity operations and budgetary

support amounted to Rs.423 billion against Rs.185
billion in the same period. Credit to government
for commodity operations expanded by Rs.60
billion compared to a contraction of Rs.26 billion,
while credit to government for budgetary support
increased to Rs.362 billion. The NFA of the
banking system registered a net contraction of
Rs.289 billion compared to an expansion of Rs.84
billion during this period. This contraction in NFA
is attributable to delays in the issuance of GDRs,
sovereign bonds, lower than expected receipts on
account of logistics support, decline in foreign
investment, lower inflows from multilateral
institutions, and SBPs decision to provide foreign
exchange to support a part of oil payments even
when the oil prices are at their historic high levels.
Credit to private sector grew by 14.9 percent
during July 2007-May 10, 2008 against 12.2
percent in the same period of last year. The key
factors contributing to the recent acceleration in
private sector credit growth were (i) rise in
working capital requirements due to higher input
costs; (ii) the need for bridge financing to settle
price differential claims of OMCs and IPPs; and
(iii) the higher fixed investment in the month of
March 2008.
The impressive performance of Pakistans banking
sector has attracted considerable FDI inflows in
recent years. The banking sector of Pakistan has
undergone a visible change as about eighty percent
of the banking assets are now controlled by the
private sector. Assets of all banks showed a net
expansion of Rs.203.1 billion in the first six
months of FY 08 and stood at Rs.5155 billion as
compared to Rs.4351 billion in the same period of
last year.
The Islamic Financial industry in Pakistan has
grown substantially in recent years. Total assets of
the Islamic banks reached Rs. 200.4 billion in FY
08 from Rs. 12.9 billion in FY03 and had
contributed 4.1 percent in banking assets till endFebruary 2008.
The importance of the SME sector cannot be
overemphasized in the overall industrial
development of a country. SMEs constitute nearly
90% of all the enterprises in Pakistan; they employ
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80% of the non-agriculture labor force; and their
share in the annual GDP is nearly 40%. During
FY08, credit to the SME sector decreased to Rs.18
billion from Rs.30 billion during FY07.
The nonbank financial sector has historically
played an important role in the mobilization and
channeling of savings in the financial system. The
NBFIs have, in recent years benefited from an
environment of low interest rates coupled with
high economic growth but have been unable to
create an impact as well-functioning, specialized
financial intermediaries. The success story among
NBFIs is that of mutual funds. The mutual fund
sector is rapidly growing in Pakistan and
accounted for the largest chunk in total assets of
non-bank financial sector. Between FY00 to FY
07, net assets of mutual funds have grown by more
than 12 times to reach Rs.313 billion from Rs.25
billion only in FY 00.
06. CAPITAL MARKETS
A strong economy requires a cutting-edge financial
system that instills confidence and efficiently
provides a wide range of financial services to
households and businesses alike; and capital
markets are an essential component of a strong
financial system. A diversified financial system is
conducive to both financial stability and to
efficient resource allocation in support of medium
term economic growth. Pakistan, with its large
consumer base, has enormous and attractive
investment opportunities, and like other developing
countries, needs both local and foreign investment
to support and sustain its economic growth.
Pakistans equity market has performed
comparatively better in comparison to its regional
counterparts during the outgoing fiscal year 200708, albeit with a volatile political scenario and
fragile economic outlook. A large number of
mergers and acquisitions were witnessed during
the outgoing fiscal year, which is a healthy sign for
a corporate assessment of the country. Two major
banks (HBL and Arif Habib Bank) went public on
the KSE via IPOs. The premier stock exchange
index (KSE-100) broke the psychological barrier
of 15,500 points to close at 15,676 points on April
18, 2008. This level has never been achieved in
Pakistan before, portraying an attractive valuation

of the domestic equity market. The unprecendted

events of November 3, December 27, February 18
and May 22 invited sharp corrections to the stock
market. Nevertheless, the stock market was able to
survive through these periods of tumult which
increased the confidence of the equity market
investors, despite the overall market return
remaining notably lower than those in the past
several years. LSE and ISE followed the foot prints
of the leading stock exchange in the country.
Moreover, the sectoral performance in the bourses
remained impressive with banks and financial
institutions outperforming the others.
Pakistans debt market has seen a consistent supply
of long term government securities amounting to
about Rs. 69 billion and the inflation-adjusted rise
in deposit rates of National Savings Schemes in
2007-08. Five new TFCs have been issued, mostly
by the financial sector in the same period, and a
sophisticated derivative market has taken off
recently. The Pakistani investor base has observed
phenomenal progress in terms of size, liquidity and
growth in recent years. Over time, the NonBanking Finance Companies sector has
demonstrated better performances. In particular,
the leasing and investment finance sectors have
shown impressive growth. The buoyant capital
market provided vigour to the growth and
development of mutual funds, which nearly
doubled their asset holdings during last
year. However, growth in the housing finance
sector has remained stagnant. It is also pertinent to
note that the development of discount houses and
venture capital companies remains at an initial
stage. Real Estate Investment Trusts, Private
Equity and Venture Capital Funds are welcome
additions this year. However, the credit rating
industry still lags behind with only two companies
currently involved in it. This has clearly hampered
the development of sub-grade investment bonds in
the country though the credit quality remains high.
Capital market reforms initiated by the SECP
promise far-reaching results in improving the
financial markets of Pakistan although some key
steps are still to be taken. However, the domestic
capital markets need more aggressive reform
actions and hence, a comprehensive set of
recommendations has been laid out at the end of

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the chapter. Strong dedication and commitment by
the government will lead to constant innovation
and a healthy development of the local capital
markets.
07. INFLATION
The inflation rate as measured by the Consumer
Price Index (CPI) averaged at 10.3% during (JulyApril ) 2007-08 as against 7.9% in the same period
last year. Food price inflation is estimated at 15.0%
compared to 10.2% in the same period of last year.
Non-food inflation increased to 6.8% versus 6.2%
in the comparable period of last year. The core
inflation (non-food, non-energy sector), increased
little over last year accelerating from 6.0 percent in
2006-07 to 7.5 percent in the first ten months of
current fiscal year. The larger contribution towards
the overall CPI inflation comes from food
inflation. Based on current trends, it is expected
that the average inflation rate during 2007-08 will
be over 10.5%.
Major factors contributing to the rise in
inflationary pressures in the economy during the
current year 2007-08 include the extremely high
food and energy prices, which is in fact a global
problem. Food inflation was predominantly driven
by unprecedented rise in the prices of few items
like wheat, rice and edible oil etc. owing to supply
short-fall of key consumer items as well as the
impact of the significant increase in their global
prices. The record high jump in oil prices lead to
an increase in the cost of Pakistani imports as well
as aggravating food shortages across the world
through the conversion of many crops from human
consumption to fuel which have also seriously
spurred the world-wide price level including those
in Pakistan.
Inflation is an important determinant of the
macroeconomic stability and thus attracted policy
measures to contain it at tolerable level. The
corrective measures include: pursuing tight
monetary policy by SBP to control money supply
and credit expansion, easing supply by allowing
imports of several essential items to augment
domestic supply, gearing reforms toward
additional agricultural output and effective
participation of the public sector distribution
network (USC & TCP).

08. TRADE AND PAYMENTS

Pakistans exports were growing at 16 percent per
annum on the back of strong macroeconomic
policies pursued at home and the hospitable
international trading environment the period
(2002-03 to 2005-06). The impressive export
performance backtracked to dismal in 2006-07
when they were hardly managed to grow at less
than 4 percent. Overall exports recorded a growth
of 10.2 percent during the first ten months (JulyApril) of the current fiscal year against 3.6 percent
in the same period of last year. In absolute terms,
exports have increased from $ 13847.3 million to $
15255.5 million in the period. Although exports
growth has remained far short of the average
growth of 16 percent achieved during 2002-03 to
2005-06 but it was satisfactory when viewed in the
backdrop of poor show last year.
Imports during the first ten months (July-April) of
the current fiscal year (2007-08) grew by 28.3
percent compared with the same period of last
year, reaching to $ 32.06 billion. After growing at
an average rate of 29 percent per annum during
2003-04, Pakistans import growth slowed to a
moderate level of 6.9 percent in the last fiscal year
(2006-07). Imports growth exhibited a sharp pick
up in 2007-08 on the back of an extra-ordinary
surge in the imports of petroleum products, food
and raw material. Non-oil imports were up by 22.5
percent and non-oil and non food imports spiked
by 18.8 percent during the first ten months (JulyApril) of the current fiscal year.
Imports of the petroleum group registered
extraordinary growth of 47 percent and reached to
$8670 million. The petroleum group accounts for
27 percent of total imports but contributed 39
percent in the overall growth of imports for the
year. The rise in imports of the petroleum group
has been the fallout of extraordinary hike in the
crude oil prices in the international market as well
as the substantial increase in its quantity imported.
The imports of raw material contributed almost 21
percent to this years rise in import bill. This is
followed by imports of food group which
contributed 16 percent to the overall imports
growth. Imports of petroleum products and edible
oil contributed 47 percent to the additional import
bill in FY 08. Additional 18.7 percent contribution
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came from the import of wheat and fertilizer.
These four items accounted for two-thirds of
imports growth. Consumer durables contribution
was negative (0.4%) mainly on account of decline
in the import of road motor vehicles.
Pakistans current account deficit (CAD) widened
to US$ 11.6 billion during Jul-Apr FY08 against
US$ 6.6 billion in the comparable period of last
year, showing an increase of 75.7 percent. Even
when compared to the size of the economy, CAD
was substantially high at 6.8 percent of GDP
during Jul-April FY08 as against 4.6 percent for
the same period last year. The deterioration of the
current account deficit was mainly driven by sharp
rise in the trade deficit along with an increase in
net outflows from services and income account.
Services account deficit widened by 44.2 percent
during Jul-April FY08 to reach $ 5.6 billion. This
deterioration was contributed by relatively high
import growth and the decline in export of
services. However, the strong growth in current
transfers on the back of impressive growth in
remittances almost entirely offset the deficit in
services and income account thereby leaving the
trade deficit as the fundamental source of
expansion in the current account deficit. The
current transfers witnessed an impressive increase
of 16.4 percent during Jul-April FY08 on the back
of strong growth in both private and official
transfers.
The Pak rupee, after remaining stable for more
than four years, lost significant value against the
US dollar and depreciated by 6.4 percent during
July-April 2008. The fall in the value of the rupee
is mainly attributed to rising oil prices in the
international market, widening of current account
deficit and the uncertain political situation in the
country.
Workers remittances registered commendable
growth during Jul-Apr FY08 by growing by 19.5
percent on top of 22.7 percent growth in the
corresponding period of last year. Workers
remittance totaled $5.3 billion in the first ten
months of (Jul-April) of the fiscal year as against
$4.4 billion in the same period last year. Pakistans
total foreign exchange reserves stood at $ 12,344
million as on end-April 2008, significantly lower

than the end-June 2007 level of $15,646 million.

Reserves peaked to $ 16,443 million at end Oct2007 while they showed significant depletion of $
4.1 billion during Nov-Apr FY08. During Jul-Oct
2007, reserves improved by 5.1 percent due to the
relatively lower current account deficit and
substantial inflows in the financial account.
However, October onwards, net outflows from
portfolio investment, and a steep rise in the current
account deficit led to a sharp decline in the foreign
exchange reserves of the country.
09. EXTERNAL DEBT AND LIABILITIES
Owing to the prudent debt reduction strategy and
successive high growth rates, Pakistan has reduced
its public debt burden (including Rupees debt and
foreign currency debt) from 100.3 percent of GDP
in end-FY99 to 53.5 percent of GDP by end-March
FY08. The external debt component of public debt
(excluding private non-guaranteed debt and
liabilities) has decreased from 40.8 percent of GDP
end-FY02 to 24.7 percent of GDP at end-March
FY08.
External debt and liabilities (EDL) at the end of
March FY08 stood at US$ 45.9 billion. This
represents an increase of US$ 5.4 billion,
indicating a 13.3 percent increase over the stock at
the end of FY07. Borrowing from multilateral and
bilateral lenders accounts for 80 percent of
outstanding debt, and are mostly in the form of
medium and long term debt. The share of shortterm debt, on the other hand, is extremely low at
1.3 percent. Pakistan took advantage of an earlier
Paris Club rescheduling to re-profile its debt at a
more manageable level. The external debt and
liabilities (EDL) declined from 51.0 percent of
GDP at the end of FY02 to 26.9 percent of GDP by
end-March 2008. Similarly, the EDL were 236.8
percent of foreign exchange earnings but declined
to 127.1 percent in the same period. The EDL were
nearly 5.8 times foreign exchange reserves at the
end of FY02 but declined to 3.4 by end March
2008. Interest payments on external debt were 7.8
percent of current account receipts but declined to
2.5 percent during the same period. The maturity
profile also showed an improvement over the last
five years as short-term debt was 1.4 percent of
EDL but declined modestly to 1.3 percent of EDL
in the same period.

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International capital markets have suffered one of
the most turbulent years in recent history. With the
financial crisis instilling a sense of distrust amidst
the market, access to financing has been restricted,
with spreads widening for both developed and
emerging economies alike. Given the negative
sentiment surrounding capital markets, and a
domestic
economy
with
substantial
macroeconomic
imbalances
and
political
uncertainty, Pakistan has not issued any new
instruments in FY 08. However, the country is still
pursuing a comprehensive external borrowing
strategy consistent with borrowing constraints such
as the saving/investment gap, amortization
payments, keeping adequate reserves and most
importantly the governments medium-term
development priorities. The government plans to
continue to tap the global capital markets, when
conditions are more favorable, through regular
issuance of bonds (conventional and Islamic) to
ensure a steady supply of Pakistans sovereign
paper, establish a benchmark for Pakistan and to
keep Pakistan on the radar screen of global
investors. This will keep spreads on Pakistani
paper low, give more borrowing options to
Pakistani borrowers including the government and
ensure that Pakistan is covered by various
investment research products.
10. EDUCATION
Education is central to the socio-economic
development of a country. It plays a vital role in
building human capabilities and accelerates
economic growth through knowledge, skills and
creative strength of a society. The positive
outcomes of education include reduction in poverty
and inequality, improvement in health status and
good governance in implementation of socioeconomic policies. The multifaceted impact of
education makes it an essential element for policy
framework. Developing countries, where majority
of the worlds population resides, need to redesign
educational policies for promoting productivity in
different sectors of the economy by developing
highly skilled manpower and addressing their
development needs for rapid industrialization.
The government is making serious efforts to
improve the quantity and quality of education by
enhancing educational facilities within the

minimum possible time. National Textbook and

Learning Materials Policy (2007) has been
prepared to prop up the quality of education at all
levels through better quality textbooks at
affordable prices and other learning materials for
promoting Pakistan as a knowledge based society.
National Curriculum Council (NCC) has prepared
comprehensive review of school curriculum to
make it relevant to student needs.
Between two Population Census 1972 and 1981
literacy rate improved by 0.5% per annum.
However between 1981 and the 1998 Census
revealed a growth rate of 1.07% per annum in
literacy. The adult literacy rate (10 years and
above) rose from 26.2% to 43.9% in this period.
In the current decade, Literacy Rate has improved
at a moderate pace. According to PSLM Survey
data (2006-07), the overall literacy rate (10 years
& above) was 55% in 2006-07 compared to 45%in
PIHS (2001-02), indicating a 10 percentage points
increase over a period of only six years. Males
literacy rate increased from 58 percent in 2001 to
67 percent in 2006-07 while it increased from 32 to
42 percent for females during the same period,
highlighting the gender gaps that still persist in
access to education. Province wise literacy data
(2006-07) show Punjab stood at 58% followed by
Sindh (55%), NWFP (47%) and Balochistan at
42%.
According to PSLM Survey data (2006), the
overall school attendance (age 10 years and above)
is 57% (69% for male and 44% for female) in
2006-07 compared to 51% (66% for male and 36%
for female) in PIHS (2001-02). Province-wise,
school attendance data for 2006-07 as against
2001-02 shows Punjab to be on the top (60% Vs
54%) followed by Sindh (56% Vs 49%), NWFP
(50% Vs 45%), and Balochistan (39% Vs 37%) to
be at the lowest level.
According to the Ministry of Education (2006-07),
there are currently 231,289 educational institutions
in the country. The overall enrollment in these
institutions is recorded at 34.8 million with
teaching staff of 1.307 million. Out of total
institutions, there are 50% primary schools, 16%
middle, 10% high, 4.9% Deeni Madaris and 1.2%
Vocational Institutions. About three-fourth of the
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institutions are in rural areas. About 67% of the
educational institutions in the country are run
publicly relative to only 33% in the private sector.
The government has established the National
Vocational & Technical Education Commission
(NAVTEC) to facilitate, regulate, and provide
policy direction for technical education and
vocational training to meet national and
international demand for skilled manpower. In
view of spreading higher education to every area of
Pakistan, over the past three years, 17 new
universities have been granted Charters, with the
majority opened in areas where higher education
opportunities were previously unavailable. To
promote research and development (R&D)
activities, the Higher Education Commission
(HEC) has awarded 5,837 PhD scholarships (3,237
indigenous, 2,600 foreign) over the past three
years.

make the ratio of population per doctor as 1,225,

population per dentist as 19,121 and population per
nurse as 2,501. The new health facilities added to
overall health services include the construction of
56 new facilities (43 BHU and 13 RHCs),
upgrading of 1,015 existing facilities (65 RHCs
and 950 BHUs) and addition of 4,500 new doctors,
3,350 nurses and 400 dentists. The total outlay for
the health sector is budgeted at Rs. 60 billion
which shows an increase of 20% over the last year,
and turns out to be 0.6 % of GDP. To reduce the
incidence of disease and to alleviate peoples pains
and sufferings so as to improve their health status,
various health programs remained operative during
fiscal year 2007-08. These include the national
programs for the prevention and control of
tuberculosis, malaria, HIV/AIDS, hepatitis,
blindness and the program on maternal, neonatal
and child health etc. During the fiscal year 2007-08
the caloric availability per day is likely to increase
from 2,466 to 2,529.

11. HEALTH & NUTRITION

Good health, defined in terms of a state of
complete physical, mental and social well being, is
a prerequisite for a nation to be productive. The
intrinsic importance of health in social, economic
and human development of individuals implies that
poor health can directly influence an individuals
opportunities, his or her earning capacity,
participation in community activities, and so on.
The cohesive agenda of Millennium Development
Goals (MDGs) also reflects the important role of
health in the form of specific measurable targets.
Pakistan is also a signatory to the UN Millennium
Declaration and is fully committed to extend the
agenda of providing basic right of health to all of
its citizens. The Governments commitments
regarding the health sector are spelled out in the
form of MDGs, PRSP, and MTDF.
A considerable improvement in health sector
facilities over the past year is reflected in the
existing vast network of health care facilities
which consist of 4,755 dispensaries, 5,349 basic
health units/sub health centers (BHUs/SHCs), 562
rural health centers (RHCs), 945 hospitals, 903
maternal and child health centers (MCHs), and 290
TB centers (TBCs). Available Human resource for
fiscal year 2007-08 turns out to be 127,859
doctors, 8,795 dentists and 62,651 nurses which

12. POPULATION, LABOUR FORCE AND

EMPLOYMENT
Pakistan, with a population of 160.9 million in
mid-2008, is the 6th most populous country in the
world. In absolute numbers; almost 128 million
persons have been added to the population during
the last 58 years (1951-2008). Annual growth rates
have risen from 1 percent in the first three decades
of the country, to around 2 percent in the next three
decades after peaking over 3 percent in the 1960s
and 1970s and then below 3 percent in the 1990s.
The countrys population is estimated to double in
the year 2045 if it continues to grow at 1.8 percent.
The population density has increased to 203
persons per square kilometer today from 42.5
persons per square kilometer in 1951 which is
almost a four time increase. Movement of
population to urban areas, attributed to well known
pull and push factors continues and as a result,
the urban population has increased from 6 million
in 1951 to todays 57 million. This has put
enormous pressure on available infrastructure like
housing,
transportation,
electricity,
water,
sewerage, sanitation, health and educational
facilities.
The Crude Birth Rate (CBR) and Crude Death
Rate (CDR) are statistical values that can be

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utilized to measure the growth or decline of a
population. The CBR and CDR are both measured
by the rate of births or deaths respectively among a
population of 1,000. The Crude Birth Rate is called
"crude" because it does not take into account age
or sex differences among the population. CBR of
more than 30 and less than 18 per 1000 population
are respectively considered high and low. The
CBR in Pakistan is estimated at 26.1. It is worth
mentioning that health statistics in Pakistan are
gradually improving; mortality rate is declining
and was 7.1 (per thousand) in 2005-06; the decline
is attributed to the elimination of epidemic diseases
and the improvement in medical services. Despite
a considerable decline in the total mortality in
Pakistan, infant mortality remains high at 76.7 per
thousand live births in 2005-06. The major reasons
for the high mortality rate include diarrhea and
pneumonia. While maternal mortality ratio ranges
from 350-400 per hundred thousand births per
year, the contraceptive prevalence rate (CPR) is
estimated at 26 percent and total fertility rate
(TFR) has exhibited a decline from 4.5 percent in
2001-02 to 3.8 percent in 2005-06.
The labour force participation rate is an important
variable which indicates the supply of labour in the
economy and the composition of the countrys
human resource. Labour force analyses also helps
in policy formulation for employment, human
resource development, determination of training
needs, etc. In addition this indicator of labour force
is helpful in assessing the labour market behavior
for different segments of population, especially for
youth. The working age (10 years & above)
population is estimated to be 111.39 million. The
labour
force
participation
rate,
though
demonstrating an increasing trend in recent years,
is nevertheless lower than the global or regional
rates. The increasing trend in labour force
participation witnessed in the recent years can be
attributed to rising employment opportunities
owing to robust growth and lowering of sociocultural barriers for females to enter the job
market. Total provincial LFPR (both sex) has
however, witnessed a decline in all the four
provinces in the year 2006-07. The most
pronounced reduction has been noted for NWFP
(from 39.7% to 36.3%). A province-wise break up
of refined participation rates suggest that against

the national average of 45.2 percent, the

participation rate in Punjab is 48.5 percent
followed by Sindh (42.7%), Balochistan (43.6%)
and NWFP (36.3%).
Agriculture employs 43.61 percent work force in
Pakistan followed by trade (14.43%), services
sector (14.41%) and manufacturing (13.54%). In
other words, over 86 percent of work force is
employed in these four sectors. As against 2005-06
the shares of agriculture and services in employed
workforce marginally increased in 2006-07 while
those in manufacturing and trade registered a
marginal decline.
There has occurred a shift in employment in major
sectors of the economy; however, agriculture still
remains the dominant source of employment in
Pakistan. In 1999-00, the share of agriculture in
employment was 48.4 percent, while in 2006-07
this has reduced to 43.6 percent. Targeting of labor
intensive livestock and dairy sectors can be an
important strategy for employment augmentation
in rural areas. These are complemented by public
sector funded small area development schemes.
These strategies have successfully expanded rural
employment, particularly at the local level.
Agriculture is followed by wholesale and retail
trade, community and social services and
manufacturing sector. These sectors employ 14.4
percent, 14.4 percent and 13.5 percent workforce,
respectively. An increase in the share of
manufacturing sector (2.1%), over the last seven
years, is an indication that employment
opportunities are being created in both rural and
urban regions of the country. Trade (0.9%),
construction (0.8%) and transport (0.4%) are
supplementing employment generation as well.
The policy of deregulation, privatization and
liberalization helped in increasing the participation
of private sector in the economy. As a result, a
significant number of employment opportunities
are being generated in urban areas. The capital
intensity of the industrial sector, however, limits its
employment generating capacity.
13. POVERTY AND INCOME
DISTRIBUTION

The income-consumption module of the

Pakistan Social and Living Standard (PSLM)
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Survey provides basic information for

measuring the incidence of poverty and
distribution of income. Until the first half of
the fiscal year 2007-08, the latest estimates
available to gauge poverty situation in the
country was related to the fiscal year 2004-05.
Based on PSLM 2004-05 survey, poverty was
estimated at 23.9 percent as compared with
34.5 percent in 2000-01- an improvement of
10.6 percentage points in four years. Only
recently, the Federal Bureau of Statistics
(FBS) made available the income-consumption
module of PSLM 2005-06 to the Center for
Research on Poverty and Income Distribution
(CRPRID) attached with the Planning
Commission and funded by the United Nations
Development Program (UNDP). It is
important to note that the estimates of poverty
from PSLM 2005-06 would depict the socioeconomic conditions that prevailed during the
fiscal year 2005-06. These estimates have
nothing to do with current ground realities
which have been impacted by the surge in food
and fuel prices, poor agricultural performance
and slower economic growth.
The CRPRID/ Planning Commission estimated
the Headcount ratio based on PSLM 2005-06
survey with a view to updating the benchmark
of poverty estimates for Pakistan. The latest
estimate of inflation-adjusted poverty line is
Rs.944.47 per adult equivalent per month, up
from Rs.878.64 in 2004-05. Headcount ratio,
i.e., percentage of population below the
poverty line has fallen marginally from 23.94
percent in 2004-05 to 22.32 percent in 200506, an improvement of 1.62 percentage points.
Poverty in rural areas declined from 28.13
percent to 27.0 percent, showing an
improvement of 1.13 percentage points
between 2004-05 and 2005-06. Poverty in
Urban areas also registered a decline from
14.94 percent to 13.1 percent during 2004-05
and 2005-06, thereby, depicting an
improvement of 1.84 percentage points in the
period. Poverty estimate in urban areas

became less than half the rural estimates in

2005-06 for the first time since 1998-99. It is
important to note that a decline of 1.6
percentage points in poverty Headcount
between 2004-05 and 2005-06 is found
statistically insignificant. In other words,
statistically speaking, taking into account the
margin of error in the estimates, the estimates
of the two years are not different from each
other. It is also important to note that a
technical exercise carried out by the World
Bank
supports
the
accuracy
of
CPRID/Planning
Commission
poverty
numbers for PIHS 2000-01, PSLM 2004-05,
and PSLM 2005-06 using the official
methodology and data cleaning protocol. The
World Bank also carried out various sensitivity
analyses to ensure the reliability of the
estimates, and found that the poverty estimate
at the national level declined slightly between
2004-05 and 2005-06, but the reduction was
not statistically significant.
Notwithstanding marginal and statistically
insignificant
improvement
in
poverty
Headcount during 2004-05 and 2005-06, the
consumption inequality during the period has
increased marginally to 0.3018 as measured by
the Gini coefficient. It may also be noted that
consumption inequality is continuously on the
rising trend since 2000-01, rising from 0.2752
to 0.3018.
14. TRANSPORT AND COMMUNICATION
A well performing Transport and communication
structure is vital for a countrys development.
Investment in a countrys infrastructure directly
affects economic growth as producers find the best
markets for their goods, reducing transportation
time and cost, and generating employment
opportunities. The transport and communications
sector accounts for about 10.0 percent of the
countrys GDP, and 20.9 percent of Gross Fixed
Capital Formation in FY07/08. It provides over 2.3
million jobs in the country (6% of all employment)
and receives 12 to 15 percent of funds from the
annual Federal Public Sector Development

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Program (PSDP). Apart from being a significantly
large source of budgetary expenditure, the
transportation sector imposes huge demand on
Pakistans energy supply, absorbing approximately
35% of total energy annually.
Pakistan, with 161 million people, has a reasonably
developed transport infrastructure. The country
generates a total domestic transport load of around
239 billion passenger kilometers and 153 billion
tonne kilometers annually. Road transport is the
backbone of Pakistan's transport system. The 9,574
km long National Highway and Motorway network
- which is 3.65 percent of the total road network carries 80 percent of Pakistan's total traffic. Recent
initiatives and developments in sectors such as
shipping, railways, and aviation are a welcomed
step towards a more comprehensive, efficient, ad
multi-modal transportation system. The total road
network is about 260,000 km of which around 60%
is paved. Road density is 0.32 km/km2 which is
low and compares unfavorably with other South
Asian countries (Bangladesh-1.7 km/km2, Sri
Lanka-1.5 km/km2 and India-1.0 km/km2). The
Government intends to generate/ mobilize all
possible resources to double road density to 0.64
km/km2. Total roads, which were 229,595 KM in
1996-97, increased to 264,853 KM by 2007-08
an increase of 15.4 percent. During the out-going
fiscal year, the length of the high typed road
network increased by 3.2 percent but the length of
the low type road network declined by 2.8 percent
Port traffic in Pakistan has been growing at 8
percent annually in recent years. Two major ports,
Karachi Port and Port Qasim, handle 95 percent of
all international trade. Gwadar Port, which was
inaugurated in March 2007 and is being operated
by Singapore Port Authority, is aiming to develop
into a central energy port in the region. In addition,
14 dry ports cater to high value external trade.
During the first six months of FY 2007-08,
Karachi Port had handled a total of 20.5 million
tonnes of cargo. From July to March of the current
financial year, 2007-08, Port Qasim handled 19.76
million tonnes of cargo depicting a growth rate of
10% over the same period last year.
Pakistan Railways (PR) suffered heavy losses and
damage to property owing to violence and rioting

around the country this year. The network carried

59.74 million passengers and 5.2 million tons of
freight during July-March of the outgoing fiscal
year. Pakistan Railways earnings stood at Rs.
13,954 million during the first nine months of FY
2007-08.
PIA carried 5.415 million passengers in 2007 as
against 5.732 million in 2006 showing a decrease
of 5.5 percent. While having to deal with
challenges of rising fuel costs and imposition of a
ban placed by the European Union, the Airline
suffered losses of Rs. 13.4 billion in the outgoing
fiscal year. Along with PIA, there are three private
sector airlines operating in Pakistan.
Telecom sector continued to show a stellar growth
in last few years. Tele-density in the country has
jumped from a mere 6% to 57% (Mar- 08) in just a
few years. On average, more than 2 million
subscribers are being added on cellular mobile
networks per month which is an exemplary growth
in the region. Pakistan has become one of the
fastest growing mobile markets among the
emerging telecom markets. This year the sector
grew by 80% whereas average growth rate in last 4
years is more than 100%. Today total subscriber
base stands at 82.5 million (Mar 2008) whereas it
was 34.5 million in 2006. Pakistan's broadband
market has been slow despite the fact that services
have been available since almost five years.
Currently there are a total of almost 12,689
Broadband subscribers. According to estimates by
the Internet Service Providers Association of
Pakistan (ISPAK), currently there are about 3.5
million internet subscribers all across in Pakistan
where total users crossed 17 million marks.
Currently around 3,008 cities are connected to
internet cities.
15. ENERGY
Energy is essential for the maintenance and
development of the quality of human life as well as
for economic activities. The world is facing a
daunting task to meet the growing energy demand
that is likely to double in the next twenty years.
Pakistan is among those developing countries
where the need to tackle the challenge is greatest.
Ensuring availability of usable and affordable
energy is therefore, the bedrock of Pakistans
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Pakistan Economic Survey 2007-08

current and future developments. In recent years,
the energy demand has increased sharply in
Pakistan owing mainly to strong economic growth
and the attendant rise in per capita income. The
supply of energy, on the other hand, has remained
far too short to match growing demand because the
existing energy resources could not be sufficiently
explored and exploited. To address the issue of
demand-supply gap, the government is working on
many fronts, including the import of electricity and
gas from Iran, utilization of 185 billion reserves of
coal, development of small hydro projects,
promotion of efficient use of energy, and
acceleration of current programmes of alternative
energy development.
The consumption of petroleum products, gas,
electricity and coal during the first nine months
(July-March 2007-08) of the current fiscal year
increased by 10.1 percent, 2.8 percent, 5.7 percent
and 11.9 percent, respectively over the
corresponding period of last year. On the other
hand, supply of crude oil, gas, petroleum products,
coal, and electricity during the first nine months of
the outgoing fiscal year 2007-08 increased by 6.5
percent, 2.7 percent, 7.4 percent, 13 percent and
4.4 percent, respectively over the corresponding
period of last year
Production of crude oil per day has increased to
70,166 barrels per day during July-March 2007-08
from 66,485 barrels per day during the same period
last year, showing an increase of 5.54 percent. The
overall production of crude oil has increased to
19.3 million barrels during July-March 2007-08
from 18.2 million barrels during the corresponding
period last year, showing an increase of 5.9
percent. On average, the transport sector consumes
50.9 percent of the petroleum products, followed
by power sector (32.8 percent), industry (11.0
percent), household (1.9 percent), other
government (2.2 percent), and agriculture (1.2
percent) during last 10 years i.e. 1997-98 to 200607.
The average production of natural gas per day
stood at 3,965.9 million cubic feet during JulyMarch, 2007-08, as compared to 3,876.4 million
cubic feet over the same period last year, showing
an increase of 2.3 percent. The overall production

of gas has increased to 1,090,620 million cubic feet

during July-March 2007-08 as compared to
1,062,124 million cubic feet in the same period last
year, showing an increase of 2.7 percent. On
average, the power sector consumes 36.8 percent
of gas, followed by fertilizer (20.7 percent),
industrial sector (19.8 percent), household (17.4
percent), commercial sector (2.7 percent) and
cement (1.1 percent) during last 10 years i.e. 199798 to 2006-07.
The total installed generation capacity has
increased to 19,566 MW during July-March 200708 from 19,440 MW during the same period last
year, showing a marginal increase (0.65 percent).
Total installed capacity of WAPDA stood at
11,654 MW during July-March 2007-08 of which,
hydel accounts for 55.6 percent or 6,474 MW,
thermal accounts for 44.4 percent or 5,180 MW.
During first three quarters of current fiscal year
74,032 GWh electricity has been generated as
against 71,033 GWh were produced in the same
period last year, showing an increase of 4.2
percent. The number of villages electrified
increased to 126,296 by March 2008 from 113,605
upto 2006-07, showing an increase of 11.2 percent.
Presently, some 2,068 CNG stations are operating
in the country. By March 2008 about 1.70 million
vehicles were converted to CNG as compared to
1.35 million vehicles during the same period last
year, showing an increase of 26 percent. With
these developments Pakistan has become the
leading country in Asia and the third largest user of
CNG in the world.
16. ENVIRONMENT
Environmental degradation is fundamentally linked
to poverty in Pakistan. Approximately less than
one-fourth of the countrys population, like in most
developing countries, is poor and directly
dependent on natural resources for their
livelihoods. The current cost of environmental
degradation in Pakistan is considerably high.
According to a recent assessment made by the
World Bank (WB) 1 , the cost of environmental
neglect and degradation to the economy has
1

Pakistan: Strategic Country Environment Assessment by WB (Sep, 2007)

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Overview of the Economy

amounted to Rs. 365 billion during the current
year. The latest red-list of endangered species in
Pakistan, released by the World Conservation
Union (IUCN), includes the Blue Whale, Fin
Whale, Hotson's Mouse-like Hamster, Indus River
Dolphin Markhor, Urial, Snow Leopard, Woolly
Flying Squirrel, Brown Grizzly Bear, Western
tragopan, Hobara Bustard, Siberian White Crane,
Olive ridly turtle, Green turtle, Marmot, Blackbuck
and Sand Cat.
In order to address environmental concerns at the
national level a multifaceted programme namely
National Environment Action Plan (NEAP) was
launched by the government in 2001. It mainly
aimed to achieve environmental sustainability and
poverty reduction in the context of economic
growth. The key policies and programmes that
have stemmed from NEAP are; Air and Water
Quality Monitoring, Clean Drinking Water for All,
Pakistan
Wetlands
Programme,
National
Sanitation Policy, Sustainable Land Management
to
Combat
Desertification
in
Pakistan,
Environmental Rehabilitation and Poverty
Reduction through Participatory Watershed
Management in Tarbela Reservoir etc.
Pakistan is likely to achieve many of the MDG
2009-10 and MTDF 2015 targets, in advance. The
Forest Cover including state and private
forests/farmlands (%age of total land area) stood at
5.2% during the current fiscal year. The targeted
area was 5.2% for MTDF 2009-10 and 6% for
MDGs 2015 confirming that the country is doing
well in terms of achieving the signified target.
However, according to international organizations
such as IUCN and the World Wide Fund for
Nature (WWF) it is feared that Pakistan is
experiencing the worlds second highest rate of
deforestation. The protected area for conservation
of wildlife (%age of total area) was estimated at
11.3% while the targeted levels were 11.6% and
12.0% according to MTFD and MDG targets,
respectively.

Air pollution levels in Pakistan's most populated

cities are among the highest in the world and are
likely to climb further, causing serious health
issues. The levels of ambient particulates - smoke
particles and dust, which cause respiratory diseases
- are generally twice the world average and more
than five times as high as in industrial countries
and Latin America (Energy Information
Administration, 2004).
In 1951, per capita water availability in Pakistan
was calculated at 5300 cubic meters, which has
now decreased to 1090 cubic meter just touching
water scarcity level of 1000 cubic meter.
Currently, only 44 percent of the population of
Pakistan has access to safe sanitation and 65
percent to safe drinking water, whereas the MDG
targets for 2015 are 90 percent and 93 percent,
respectively. The National Sanitation Policy
resolves to meet the MDG targets whereby the
proportion of people without sustainable access to
improved sanitation will be reduced by half, by the
year 2015 and 100 percent population will be
served with improved sanitation by 2025.
Persistent Water logging, Salinization and Sodicity
is continuously reducing the productivity of fertile
soil in the country. It is estimated that about 38
percent of Pakistan's irrigated land is water logged,
14 percent is saline and the application of
agricultural chemicals has increased by a factor of
almost 10 since 1980.
The Government in collaboration with various
concerned organizations has recently initiated the
Technical Advisory Panel (TAP) on Climate
Change. The official launch of the TAP was held
on February 15, 2008, Funded by the Royal
Norwegian Embassy and the Department for
International Development, U.K., and TAP is a
joint initiative of the Ministry of Environment,
Government of Pakistan, and The World
Conservation Union (IUCN).

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Chapter 01

GROWTH AND INVESTMENT

I. INTRODUCTION
In the face of adverse internal and external
developments of an extraordinary nature,
Pakistans economy has shown great resilience
against shocks of very high intensity. Domestic
factors like heightened political tensions, an
unstable law and order situation, supply shocks,
coupled with external factors like a worsening of
international financial crisis, and an unprecedented
rise in global food and energy prices tested the
strength of economic fundamentals but Pakistans
economy grew robustly at 5.8 percent in 2007-08,
as against 6.8 percent last year and this years
target of 7.2 percent. When viewed in the backdrop
of major disruptions of extraordinary nature, the
economic growth in 2007-08 appears satisfactory.
The economy has grown at an average rate of 6.6
percent per annum for the last six years which
provides a source of optimism that regaining
macroeconomic stability as well as reinvigorating
the growth momentum through a combination of
adjustments and reforms is a very plausible option.
The commodity producing sector, with agriculture
(especially major crops) and manufacturing
posting dismal performance, has contributed to
less-than-targeted growth for the year 2007-08.
The service sector has proved to be the main force
driving economic growth in the country this year
and surpassing the target.
The poor show of the agricultural sector is because
of its heavy dependence on vagaries of mothernature. However, this sector is also vulnerable to
policy risks in the pricing of agri-products, lack of
regulations and standards with regards to quality of
inputs, and weak infrastructure facilities. A
substantial reduction in output from the major
crops sub-sector has influenced the below par

performance of the agriculture in the outgoing

fiscal year.
The other important component of CPS,
manufacturing, has been deeply affected by a
series of negative shocks. A price hike of
unprecedented nature in international resource
market, severe energy shortages at home, and
political unrest and social disruptions at regular
intervals have all played their part in hampering
the growth performance of the manufacturing
sector. The monetary tightening phase that started
from April 2005 in order to curb domestic inflation
has also played its role in dampening this years
manufacturing growth. Large-scale manufacturing
failed to meet its growth target for the year,
exhibiting not only signs of moderation but also
fell victim to domestic and external shocks. The
construction sector continued its high double-digit
growth for fourth year in a row while electricity
and gas distribution continued its dismal
performance in as many years.
The services sector has more than compensated for
the sluggish performance of the commodity
producing sector and provided much needed
support for sustaining a relatively higher growth
rate for the economy. Exceptional performance of
the financial sector has helped the economy to
remain closer to higher growth trajectory. The
wholesale retail & trade, and social services sectors
have also posted healthy growth, contributing to
exceptional growth performance of the services
sector.
Consumer spending remained strong with real
private consumption growing at a much higher rate
than last year. However, gross fixed capital
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formation could not maintain its strong momentum Table-1.1:Comparative Real GDP Growth Rates (%)
and real fixed investment grew at a moderate rate.
2004-05 2005-06 2006-07 2007-08
Region/Country
Pakistans real per capita income has risen at a
faster pace during the last six years (4.5 percent 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 year. Relatively
slower growth in consumption in 2005-06 and
2006-07 was mainly attributed to the tight
monetary policy pursued by the SBP but with
rising inflation real interest rate actually declined
and thus boosted private consumption in the
current year. The consumption boom during the
last six years points to the following facts. First,
the higher consumer spending feeding back into
economic activity has provided adequate support to
the on-going growth momentum. Second, it
suggests the emergence of a strong middle class
with more purchasing power which is a healthy
sign for business expansion and social
transformation. Third, extra-ordinary rise in
consumer spending over the last six years appears
to be one of the driving forces behind building
inflationary pressures in Pakistan.
The past few years of sustained economic growth
have made Pakistan an attractive investment
destination by an ever-wider set of investors and
leading companies of the world. The foreign direct
investment which had attained new heights at $ 6.5
billion last year has shown some signs of
moderation but still FDI inflow of $3.0 billion in
July-April 2007-08 as against $3.9 billion in the
comparable period of last year augur well for
investor confidence on Pakistans economy. More
importantly, almost the entire decline in FDI
during Jul-Apr 07-08 has resulted from decline in
cash investment, as reinvested earnings grew by
12.0 percent during the same period. Higher
reinvested earnings mainly reflect profitability of
these sectors and investors confidence in
Pakistans economy in the long run. Gross fixed
investment by the private sector grew by 9.7
percent in nominal terms and by marginal 0.9
percent in real terms.

World GDP
Euro Area
United States
Japan
Germany
Canada
Developing Countries
China
Hong Kong SAR
Korea
Singapore
Vietnam

5.3
2.0
3.9
2.7
1.2
3.3
7.7
10.1
8.6
4.7
8.8
7.8

4.9
5.4
4.9
1.4
2.6
2.6
3.2
3.3
2.2
1.9
2.2
2.1
0.9
2.7
2.5
2.9
2.7
2.7
7.5
7.9
7.9
10.4
10.7
11.4
7.5
6.8
6.3
4.2
5.0
5.0
6.6
7.9
7.7
8.4
8.2
8.5
ASEAN
Indonesia
5.0
5.7
5.5
6.3
Malaysia
7.2
5.2
5.9
6.3
Thailand
6.3
4.5
5.0
4.8
Philippines
6.2
5.0
5.4
7.3
South Asia
India
7.8
9.2
9.2
9.2
Bangladesh
6.1
6.3
6.7
5.6
Sri Lanka
5.4
6.0
7.5
6.3
Pakistan
9.0
5.8
6.8
5.8
Middle East
Saudi Arabia
5.3
6.6
4.6
4.1
Kuwait
10.5
10.0
5.0
4.6
Iran
5.1
4.4
5.3
5.8
Egypt
4.1
4.5
6.8
7.1
Africa
Algeria
5.2
5.3
2.7
4.6
Morocco
4.2
1.7
7.3
2.2
Tunisia
6.0
4.0
5.3
6.3
Nigeria
6.0
7.2
5.3
6.4
Kenya
4.5
5.8
6.0
7.0
South Africa
4.8
5.1
5.0
5.1
Source: World Economic Outlook (IMF), April 2007.

Pakistans strong economic growth of the last six

year has also benefited from the buoyant global
economic environment undeterred by the rising
and volatile energy prices. In the current year,
however, the global environment remained
inhospitable and had its adverse impact felt on
domestic macroeconomic environment. A brief
overview of the major developments that have
taken place on the global economic scene is
documented in the ensuing pages.
The year 2007-08 has been a turbulent year for the
world economy. A rollercoaster ride with record
growth in China and India punctuating the highs,
soaring energy prices, unprecedented hikes in food

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Growth and Investment

inflation and a financial markets crisis to match the
Great Depression accentuating the lows. The year
saw China and India account for more than half of
world growth, but for many, the most pressing
matter of the year has been the sub-prime
meltdown in the US and the ensuing financial
crisis and credit crunch around the world.
The collapse of the US sub-prime market, brought
about by a correction in the housing sector, has had
dire consequences not only for the worlds largest
economy but for the rest of the developed markets
as well. The fallout has spread through an
extensively interlinked global financial market and
resulted in a tightening of credit and general drying
up of liquidity as banks and other financial
institutions looked to limit their losses. The impact
of this crisis on developing and emerging
economies is visible, but the extent of the damage
caused is still not clear.
The general consensus is that the US Economy will
dip into a mild recession in 2008. Growth in output
for the year 2008 has been projected at 0.5percent,
while growth for this year was at 2.2 percent, a
significant reduction from the 2.9 percent posted in
2006. The United Kingdom became the next
casualty of subprime with the collapse of Northern
Rock and consumer confidence reaching its lowest
ebb. Economic growth slowed by almost half
during the first six months of 2008 by reaching at
1.6percent from 3.1 percent a year ago in 2007
[See Table 1.1].
The Euro Zone started to show strains towards the
end of 2007 with fourth quarter GDP growth
slowing down to 1.5 percent. Rising oil prices and
the financial crisis has taken its toll on real
disposable income, leading to a deterioration of
consumer and business sentiment. Appreciation of
the Euro in a sluggish export market also had a
negative impact on growth. The Euro Zone
economy grew by 2.6 percent for 2007, but is
expected to slowdown to 1.4 percent by the end of
2008 [See Table 1.1].
Growth in the emerging economies, although still
remaining strong, has decelerated from last years
high. For emerging economies as a group, the
performance has been encouraging as foreign

exchange inflows, international reserve growth,

and foreign direct investment remained strong
throughout the crisis. The loss of trade due to the
financial crisis has been limited. Even with these
strong fundamentals, emerging economies have
seen the spreads on sovereign and corporate debt
widening, and a retreat in equity prices as a result
of the global crunch.
Against this backdrop, developing and emerging
economies
have
outperformed
advanced
economies by growing at brisk pace of 7.9 percent
in 2007 and projected moderation at 6.7 percent in
2008 [See Table 1.1]. The effects of adverse
developments at global level have been felt
unevenly
and
countries
with
weaker
macroeconomic fundamentals taking a bigger hit.
The impact from the global slowdown might be
less than expected given the strong local demand
and macroeconomic fundamentals coupled with
diversified trade base. Pakistan has to diversify
trade and review trade structure to narrow trade
imbalance.
An international economic crisis of such a nature
has not been witnessed in the past. The fallout has
been complicated further by ever increasing
globalization and inter-weaving connectivity of
financial markets. Recent crisis reinforced the need
to have a global surveillance body to ensure
transparency in the financial markets. Policy
responses to the global slowdown become harder
to achieve amidst the recent trends in energy and
food prices. There might be no quick fix to the
current situation, but all efforts must be made
through monetary and fiscal responses with
reforms in the financial sectors. Although growing
at above average rates, developing countries need
to keep a close eye on inflation, while guarding
against any spill-over effects from the slowdown.
After analyzing the overall growth, investment and
consumption, and the international economic and
financial environment, it is imperative to look into
the growth performance of the various components
of Gross National Product for the year 2007-08.
The performance of the various components of
national income over the last two and a half
decades is summarized in Table 1.2.
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II. Commodity Producing Sector (CPS)
Commodity Producing Sector (CPS) is comprised
of production sectors such as agriculture and
industry. It accounts for 46.8 percent stake in the
GDP. Its less-than-satisfactory performance has
been responsible for a relatively slower economic
growth this year. The CPS registered a growth of
3.2 percent in 2007-08 as against 6.0 percent last
year owing mainly to the lackluster performance of
its critical components, namely agriculture and
manufacturing. While agriculture grew by 1.5
percent, the manufacturing sector posted a modest
growth of 5.4 percent in 2007-08 [See Table 1.2].
II.i. Agriculture
The share of agriculture in GDP has been falling
persistently. It accounted for 24.1 percent in 200102 but subsequently has declined to 20.9 percent in
2007-08. However, it still remains the single
largest sector of Pakistans economy and an
overwhelming majority of the population depends
directly or indirectly on income streams generated
by the agriculture sector. Apart from being a major
source of foreign exchange earnings, the
agriculture sector also provides employment to the
44 percent of the countrys labour force.
The agriculture sector consists of crops, livestock,
fishing and forestry sub-sectors. The crop subsector is further divided into major crops
(primarily wheat, cotton, rice, sugarcane, maize
and gram) and minor crops (such as pulses,
potatoes, onions, chillies and garlic). Historically,
the crops sub-sector has had the largest share of the
agriculture sector, but the lackluster performance
of this sub-sector over the years has reduced its
contribution to 45 percent in 2007-08. The crop
sector has enormous potential to influence not only
the performance of overall agriculture but can
serve as an anchor for food security of the country,
particularly after the emergence of a food crisis on
the global front. In order to do so, a shift in
emphasis from price to yield is absolutely vital.
Global integration and changing dietary patterns
across regions have caused structural shift. The
share of livestock in agriculture has increased from
27.2 percent in 1969-70 to 52.1 percent in the
outgoing fiscal year. The contributions of fishing
and forestry have historically been low and

insignificant; therefore it remained so with a

contribution of only 0.3 percent and 0.2 percent,
respectively.
Agriculture performed poorly this year, growing at
a meager 1.5 percent as compared to 3.7 percent
last year and against the target of 4.8 percent for
the year. Such a dismal performance can be
attributed to sharp deceleration in the growth of
major crops sub-sector. Having grown at a healthy
8.3 percent last year, this sub-sector has posted a
negative growth of 3.0 percent in 2007-08. Minor
crops registered a growth of 4.9 percent as against
the negative growth of 1.3 percent last year.
Fishing and forestry exhibited robust growth of 3.8
percent and 11.0 percent, respectively. A detailed
analysis of the performance of each of the subsectors of agriculture is given below:
II.i.a. Major crops accounting for 34 percent of
agricultural value added, witnessed a contraction
of 3.0 percent as against a positive growth of 8.3
percent last year and a target of 4.5 percent. Major
decreases over last years production have been
observed in wheat (from 23.3 to 21.7 million
tones), cotton (from 12.9 to 11.7 million bales)
while minor decline has been witnessed in the
production of gram, jowar and tobacco. Rice,
sugarcane and maize registered positive growth.
II.i.b. Minor crops, accounting for 11.4 percent of
value added in overall agriculture, grew by 4.9
percent, against the negative growth of 1.3 percent
last year and growth target of 2.3 percent.
Production of pulses such as masoor and mung
registered a sharp increase of 13.8 percent and
28.4percent, respectively. Vegetables such as
potatoes and onions exhibited mixed performance
as the later registered an increase of 13.8 percent
while the former posted a decline of 3.8 percent.
Chillies, being an important minor crop, registered
a sharp increase of 96.1 percent during the year
under review. Edible oils also witnessed decline in
production.
II.i.c. Livestock. With rising per captia income,
the dietary patterns of households are changing
globally, including in Pakistan, which, in turn,
increasing the demand for livestock and dairy
products across the globe. While livestock

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Growth and Investment

accounts for 52 percent of agriculture and 10.9
percent of GDP, its importance can be gauged by
the fact that the livelihoods of about 30-35 million
people in the rural areas depend directly or
indirectly on livestock and dairy sector. It is highly
labourintensive and a good source of job creation.
Its share in agriculture is more than combined
shares of major and minor crops and most
importantly its performance is not dependent on

mother nature. Accordingly, it has emerged as a

major alternative source of income, particularly for
the landless rural poor. Livestock includes: cattle,
buffalos, sheep, goats, camels, horses, asses and
mules. The livestock sector grew by 3.8 percent
during 2007-08 as against 2.8 percent last year.
The higher growth is mostly due to an increase in
livestock animals and the poultry sub sectors. [See
Table 1.2]

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 2006-07
6.5
4.6
4.2
9.3
9.5
5.1
6.0
Commodity Producing Sector
1. Agriculture
5.4
4.4
4.1
2.4
6.5
6.3
3.7
- Major Crops
3.4
3.5
6.8
1.7
17.7
-3.9
8.3
4.1
4.6
1.9
3.9
1.5
0.4
-1.3
- Minor Crops
5.3
6.4
2.6
2.9
2.3
15.8
2.8
- Livestock
- Fishing
7.3
3.6
3.4
2.0
0.6
20.8
0.4
- Forestry
6.4
-5.2
11.1
-3.2
-32.4
-1.1
-29.5
9.5
2.7
6.6
15.6
10.0
4.6
3.1
2. Mining & Quarrying
8.2
4.8
6.9
14.0
15.5
8.7
8.2
3. Manufacturing
- Large Scale
8.2
3.6
7.2
18.1
19.9
8.3
8.6
- Small Scale *
8.4
7.8
6.3
-20.0
7.5
8.7
8.1
4. Construction
4.7
2.6
4.0
-10.7
18.6
10.2
17.9
10.1
7.4
-11.7
56.8
-5.7
-26.6
2.5
5. Electricity & Gas Distribution
Services Sector
6.6
4.6
5.2
5.8
8.5
6.5
7.6
6. Transport, Storage and Comm.
6.2
5.1
4.3
3.5
3.4
4.0
6.5
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)

7.2
6.0
7.9
5.4
6.5
6.1
5.5

3.7
5.8
5.3
2.8
6.5
4.6
4.0

* Slaughtering is included in small scale

II.i.d. Fisheries: The fisheries sector account for

only 0.3 percent of GDP and witnessed a growth of
11 percent against 0.4 percent last year. The
growth figures posted for the fisheries sector are
much higher than the targeted rate of 4.2 percent
for 2007-08. Components of fisheries such as
marine fishing and inland fishing, contributed to an
overall increase in value addition in the fisheries
sub-sector. Marine fisheries registered a growth of
11.0 percent against negative growth of 7.0 percent
last year. Inland fish segment also registered a
growth of 11.1 percent as against 2.5 percent last
year.
II.i.e. Forestry: Forestry plays an important role in
Pakistans economy in spite of its meager share of
0.2 percent in the GDP. Forests are important for
the protection of land and water resources,

6.0
-1.3
3.3
7.7
6.2
4.7
7.5

8.3
9.0
3.5
3.2
5.4
7.5
6.4

12.0
30.8
3.5
0.6
6.6
9.0
8.7

-2.4
42.9
3.5
10.1
9.9
5.8
5.6

5.4
15.0
3.5
9.1
8.8
6.8
6.7

2007-08
3.2
1.5
-3.0
4.9
3.8
11.0
-8.5
4.9
5.4
4.8
7.5
15.2
-14.7
8.2
4.4
6.4
17.0
3.5
10.9
9.4
5.8
6.1

Source: FBS

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 percent of its total land area
under forest which is very low as compared to
other Asian countries. Of the 5 percent of total
landmass that has forest cover, 85 percent is under
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 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 a negative
growth of 8.5 percent as against massive decline of
29.5 percent last year and much lower than the
targeted level of 3.5 percent. The earthquake of
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Economic Survey 2007-08

October 8, 2005 is partly responsible for
destruction of considerable portion of forests
during the last couple of years. However, the
Forestry subsection has been posting negative
growth rates since 2003-04. Forests are a key
component of our environment, degradation of
which will pose severe socio-economic challenges
for the generations to come.
II.ii. Manufacturing
The manufacturing sector has witnessed healthy
growth since the turn of the decade, growing at an
average of 9.7 percent since 2002-03. The growth
performance in 2007-08 has remained subdued.
The process of deceleration in growth that started
last year continued this year as well. Output from
the manufacturing sector grew at a modest 5.4
percent as compared to 8.2 percent last year. The
estimated growth rate is less than half of the
targeted growth level of 10.9 percent. Both subsectors of manufacturing, i.e. large-scale and
small-scale exhibited deceleration in growth
momentum. The large scale manufacturing (LSM)
witnessed a modest growth of 4.8 percent down
from 8.6 percent last year. Growth in the small
scale manufacturing sub-sector moderated to 7.5
percent in 2007-08 from 8.1 percent in 2006-07.
The manufacturing sector has been hard hit by
domestic and international factors. Political
instability and frequent eruptions of incidents
detrimental to law and order have created uncertain
environment, resulting in loss of working hours.
Incidence of violence causing damage to property
and forcing industries to remain closed for many
days. This sector has also fallen victim to the acute
energy shortages. Continuous power breakdowns
are preventing industries from operating at their
capacity level. In unison with increasing prices for
fuel and energy, all these factors have caused
slower growth in LSM.
The main contributors to the 4.8 percent growth
during July-March 2007-08 were beverages
(30.5%), sugar (34.0%), tea blended (10.4%) ,
beverages (30.5%), cigarettes (5.1%) , cotton yarn
(3.3%) & cotton cloth (4.9%), upper leather
(13.5%), petroleum products (6.0%) , cement
(17.9%), pig iron (2.3%) , refrigerators (10.7%) ,

electric fans (18.3%), TV sets (19.3%), diesel

engines (46.0%), trucks (1.6%) & buses (32.1%),
motor cycles (28.1%), paints & varnishes (8.7%)
and LCVS (60.5%). The major receding items
include: vegetable ghee (2.8%), cotton ginned
(10.1%), sole leather (25%), paper & board (5.6%),
phosphatic fertilizer (24.0%), motor tyres (12.8%)
and tubes (7.6%), coke (13.9%), billets (17.1%),
wheat thrasher (13.1%), deep freezers (11.2%),
electric motors (16.0%), tractors (5.2%), vegetable
ghee (2.8%) and jeeps and cars (3.9%).
II.iii. Mining and Quarrying
Natural reserves of ores and minerals are a vital
asset to any economy. Extraction of these reserves
through efficient mining and quarrying provide
convenient and economical access to raw materials
and provides a competitive edge to developing
countries. 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 4.9 percent in 200708 as against 3.1 percent last year and target of 4.5
percent. However, the contribution of this sector
towards GDP has remained low at around 2.5
percent. Within the sector, the output of crude oil
and natural gas has increased by 8.5 percent and
2.4 percent, respectively. The production of coal
has declined sharply by 5.9 percent. The minerals
group exhibited mixed results, with an increase
seen in agriclay, barites, china clay, chromite,
dolomite, fluorite, fullers earth, gypsum, iron ore,
laterite, limestone, magnesite, phosphates, quartz,
lake salt, slate stone, and sulphur. Significant
reductions were seen in the production of agronite
marble, ball clay, bentonite, chalk, fire clay,
granite, and silica sand. Because much of the
countrys mining reserves exist in remote areas,
infrastructure improvements are necessary to
attract higher investment in this sector.

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Growth and Investment

II.iv. Services Sector
The services sector has emerged as the main driver
of economic growth around the world and it has
remained the economic powerhouse of Pakistan for
some time. The services sector has surpassed the
growth target of 7.1 percent and grew by 8.2
percent in 2007-08 as against actual achievement
of 7.6 percent last year. The services sector has
made a contribution of 74 percent to the GDP
growth. The services sector has been an important
contributor to Pakistans economic growth over the
past five years growing at an average of 7.3
percent annually since 2003-04. The continuing
buoyant trend, even while growth in the
Agriculture and Manufacturing Sectors has been
slowing, implies that the services sector in Pakistan
has remained relatively insulated from the
challenges faced by the rest of the economy and
has been better able to cope with them.
The sector consists of the following sub-sectors:
Transport, storage and communication; Wholesale
& Retail Trade; Finance and Insurance; Ownership
of Dwellings; Public Administration and Defence;
and Social Services. These sectors collectively
absorb approximately one-third of workforce in
Pakistan. Growth in the services sector is mainly
attributed to the robust performance of the finance
& insurance, wholesale and retail trade, public
administration and defence, and social services
sector. A brief analysis of each sub-sector is given
below:
Finance and insurance sector displayed a stellar
growth performance by posting a growth of 17.0
percent during 2007-08 which is higher than 15
percent growth of 2006-07 and target of 15.0
percent. The performance of this sector shows that
it is relatively insulated from the financial crisis
plaguing international markets and that Pakistan
has not suffered from first round effects of the subprime crisis in the US. Gross value added (GVA)
by the State Bank of Pakistan has increased by
61.1 percent in nominal terms; foreign commercial
banks saw an increase in GVA by 17.4 percent,
while cooperative banks, development finance
institutions, investment banks and leasing
companies saw a combined increase of 24.6
percent. A reduction in GVA was witnessed for
specialized domestic banks, discount and guarantee

houses, housing finance companies, and venture

capital.
The
Transport,
Storage
and
Communication sub-sector saw a deceleration in
growth to 4.4 percent in 2007-08 as compared to
6.5 percent of last year. Value added in this sector
is based primarily on the profits and losses of
Pakistan Railways, Pakistan International Airlines
and other airlines, Pakistan Posts & Courier
Services, Pak Telecom and motor vehicles of
different kinds on the road. Mechanized road
transport has depicted a growth of 7.0 percent,
communication sector by 7.8 percent while the
value added by Pakistan Railways declined
significantly by 51.5 percent. Other sectors that
showed a decline are; water transport (11.1%), air
transport (10.1%), and pipeline transport (7.8%).
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 2007-08, this sector
grew at 6.4 percent as compared to 5.4 percent in
last year and target for the year of 7.8 percent.
Public administration and defense posted a
growth of 10.9 percent as compared to 9.1 percent
in 2006-07. The estimates of this sector are based
on budgeted figures of expenditures incurred on
administration of federal, provincial, district and
local governments. The performance of this sector
far outstripped the target of 4.0 percent. This
increase was mainly due to a positive change in the
wage component of public sector employees, and
an increase in development and defense
expenditures. Growth in the Ownership of
Dwellings has remained constant at 3.5 percent for
the past 5 years. However, the growth of 3.5
percent this year was below the targeted level of
4.0 percent. Social Services Sector improved its
growth performance to 9.4 percent from 8.8
percent last year. Along with Finance and
Insurance, this sub-sector has remained a stalwart
of growth for the services sector, easily surpassing
the targeted level of 5.0 percent for the fiscal year.
III. Contribution to
(Production Approach)

Real

GDP

Growth

The contribution to economic growth is dominated

by the services sector with almost three-fourth
stake. Just over one-fourth contribution came from
Commodity Producing Sector (CPS) which
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Economic Survey 2007-08

accounts for 46.8 percent of the GDP. The
contribution of CPS to GDP growth has declined to
26.6 percent from 42.4 percent last year. The
decline in contribution was caused primarily by a
comparatively slower growth in manufacturing and
major crops-led-agriculture sectors [See table 1.3
and fig 2 for details] Agriculture sector contributed
only 0.3 percentage points or 5.6 percent to GDP
growth in 2007-08 as against 0.8 percentage points
or 12 percent contribution last year. The reliance
on the agriculture sector has declined with the
passage of time. The manufacturing sector
contributed 1.0 percentage point or 17.7 percent to
GDP growth as against 1.5 percentage points or
22.2 percent last year. Industry contributed 1.2
percentage points or 20.9 percent to this years real
GDP growth.
Commodity Producing Sectors has been
overshadowed by another year of exceptional
growth in the Services sector which contributed 4.2
percentage points or 73.4 percent to overall growth
this year. It is encouraging to note that the

Table-1.3: Sectoral Contribution to the GDP growth (% Points)

Sector
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
Agriculture
1.0
0.6
1.5
1.4
0.8
0.3
Industry
1.0
3.8
3.1
1.1
2.1
1.2
- Manufacturing
1.1
2.3
2.7
1.6
1.5
1.0
Services
2.7
3.1
4.4
3.3
3.9
4.2
Real GDP (Fc)
4.7
7.5
9.0
5.8
6.8
5.8
Source: Federal Bureau of Statistics.

contribution of wholesale and retail trade is

increasing. It has contributed 18.7 percent or 1.1
percentage points to GDP growth in 2007-08. This
sector is highly labour-intensive and higher growth
in the sector may have contributed to the rise in
employment and income level of the people
attached with the sector. Construction with many
forward and backward linkages is also making
impact on the economic growth by contributing 6.4
percent or 0.4 percentage points to this years real
GDP growth. Less labour intensive sector such as
finance and insurance has also contributed 18.7
percent or 1.0 percentage point to this years
growth.

Fig-1.2: Contribution to the Real GDP Growth

2007-08

2006-07

Agriculture
6%
Agriculture
12%

Other Industry
3%

- M anufacturing
18%
Other Industry
8%
Services
58%

- M anufacturing
22%

IV. Contribution to Economic

(Aggregate Demand Side Analysis)

Growth

Consumption, investment, export are figuratively

described as the 'three horses of Troika' that drives
economic growth. In all economies the expansion
of output is the sum of consumption (both private
and government) plus investment (public and
private) plus net exports of goods and services.
Consumption comprises a major chunk of

Services
73%

economic growth in almost all economies.

Pakistans economic growth is historically
characterized as consumption-led growth and this
is true for the year 2007-08. The consumption has
driven the growth and its contribution of 108
percent to the GDP growth is only neutralized by
negative contribution by net exports to the extent
of 21 percent. The contribution of net exports has
traditionally been negative for the most part of our
history, with the exception of a brief interval

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Growth and Investment

(2000-04) when net exports contributed positively.
During 2007-08, the contribution of investment has
declined substantially from as high as 47.6 percent
in 2005-06 to 11.7 percent in 2007-08. Massive
rise in the macroeconomic imbalances is
responsible for lower contributions from net
exports and investment. The balance between
investment and consumption which had improved
during 2004-05 and 2006-07, disturbed

significantly in 2007-08. Consumption has

accelerated in early phase of recovery starting from
2001-02 moderated in 2006-07 but bounced back
in 2007-08. Higher growth in consumption allowed
the firms to use their excess capacity in the first
phase but continued strong growth in consumption
encouraged firms to undertake new investment
over the last four years [See Table 1.4 and Fig.
1.3].

Table-1.4: Composition of GDP Growth

Point Contribution
Flows

2000-01

Private Consumption
Public Consumption

Total Consumption [C]

0.4
-0.5

2001-02

2002-03

1.0
1.2

0.3
0.6

2003-04

2004-05

2005-06

2006-07

2007-08

Average
2003-07

7.1
0.1

8.7
0.1

0.8
3.9

3.4
-1.1

6.0
0.5

5.2
0.7

-0.1

2.2

0.9

7.2

9.4

4.7

2.3

6.5

6.0

Gross Fixed Investment

Change in Stocks

0.7
0.0

-0.1
0.0

0.6
0.4

-1.0
0.1

1.8
0.1

2.9
0.1

2.6
0.1

0.6
0.1

1.4
0.1

Total Investment [I]

0.7

0.0

1.1

-0.9

2.0

2.9

2.7

0.7

1.5

1.6
0.3

1.5
0.4

4.5
1.6

-0.3
-1.3

1.7
5.4

1.8
3.2

0.4
-0.5

-1.6
-0.4

0.4
1.3

1.3

1.0

2.8

1.0

-3.7

-1.5

1.0

-1.2

-0.9

2.3
0.7

3.7
2.2

6.5
2.0

6.0
6.3

13.0
11.3

9.4
7.6

5.5
5.0

5.6
7.2

7.9
7.5

2.0

3.2

4.8

7.4

7.7

6.2

6.0

6.0

6.6

Exports (Goods & Serv.) [X]

Imports (Goods & Serv.) [M]

Net Exports [X-M]

Aggregate Demand (C+I+X)
Domestic Demand (C+I)

GDP MP

Source: Federal Bureau of Statistics.

Fig-1.3: Contribution to GDP Growth

16.0

% age points

12.0

Net Exports
Investment
Consumption
GDP Growth

8.0

4.0

0.0

-4.0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Economy has maintained a steady and rapid

growth for the last six years in a row. Given its
lions share in GDP, consumption mainly
supported the on-going growth momentum has
contributed in the range of 80 83 percent to
overall economic growth over the last 7 years. In
2007-08 consumption accounted for 108.8 percent

or 6.5 percentage points to economic growth and

while investment accounted for 11.7 percent or 0.7
percentage points to growth. Last year was unique
because of the fact that major contribution was
coming from investment, however, Net exports
appear to have been a drag on overall growth in
200607. The investment rate was rising since
2004-05, and reached at peak 22.9 percent of GDP
in 2006-07, however, amidst extraordinary
headwinds the investment-to-GDP ratio declined to
21.6 percent. This years economic growth is
largely consumption driven and support from
investment declined substantially. National savings
have shown their inadequacy for financing the new
emerging investment cycle. The national savings
rate has nose-dived to 13.9 percent of GDP in
2007-08 as against 17.8 percent of GDP.

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A faster growth in exports is needed to make total
demand less sensitive to rising domestic real

market, and relax the foreign exchange constraints

Table 1.5: Sectoral Share in Gross Domestic Product(GDP)

(At Constant Factor Cost) (In %)
1969-70 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
Commodity Producing Sector
61.6
47.9
47.6
48.4
48.7
48.3
47.9
46.8
1. Agriculture
38.9
24.1
24.0
22.9
22.4
22.5
21.8
20.9
- Major Crops
23.4
8.0
8.2
7.8
8.4
7.6
7.7
7.1
- Minor Crops
4.2
3.1
3.0
2.9
2.7
2.6
2.4
2.4
- Livestock
10.6
12.0
11.7
11.2
10.6
11.6
11.1
10.9
- Fishing
0.5
0.3
0.3
0.3
0.3
0.3
0.3
0.3
- Forestry
0.1
0.7
0.7
0.6
0.4
0.4
0.2
0.2
2. Mining & Quarrying
0.5
2.4
2.5
2.6
2.7
2.6
2.5
2.5
3. Manufacturing
16.0
15.9
16.3
17.3
18.3
18.8
19.0
18.9
- Large Scale
12.5
10.4
10.6
11.7
12.9
13.2
13.4
13.3
- Small Scale
3.5
5.6
5.6
4.2
4.1
4.3
4.3
4.4
4. Construction
4.2
2.4
2.4
2.0
2.1
2.2
2.5
2.7
5. Electricity & Gas Distribution
2.0
3.0
2.5
3.7
3.2
2.2
2.1
1.7
Services Sector
38.4
52.1
52.4
51.6
51.3
51.7
52.1
53.2
6. Transport, Storage and
6.3
11.4
11.4
10.9
10.4
10.2
10.2
10.0
7. Wholesale and Retail Trade
13.8
17.8
18.0
18.2
18.7
17.2
17.0
17.1
8. Finance and Insurance
1.8
3.5
3.3
3.4
4.0
5.5
5.9
6.5
9. Ownership of Dwellings
3.4
3.2
3.1
3.0
2.9
2.8
2.7
2.6
10. Public Admn. & Defence
6.4
6.4
6.6
6.3
5.9
6.1
6.2
6.5
11. Other Services
6.7
9.8
9.9
9.7
9.5
9.9
10.1
10.4
12.GDP (Constant Factor Cost)
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
P Provisional
Source: Economic Advisers Wing, Finance Division

interest rates and indebtedness, secure productivity

gains as a result of competition in the international

for imports.

V. Composition of the GDP

declined to 20.9 percent in 2007-08. The share of

agriculture in GDP has declined by 3.2 percentage
points in the last 7 years (from 24.1 in 2001-02 to
20.9 percent in 2007-08) alone and the share of the
manufacturing sector has increased by the same
percentage points during the period. It implies that
the space created by the agriculture sector is
occupied by the manufacturing sector which
signals a move away from an agriculture based
economy to an increasing reliance on industry and
manufacturing- a pre-requisite for the first phase of
structural transformation.

For all developing countries, accelerating

economic growth is accompanied by a process of
structural transformation. A growing economy
witnesses a shift in sectoral patterns, analysis of
which provides further insight into a countrys
growth dynamics. This process of transformation
has accelerated in Pakistan in recent years. The
structure of the GDP has undergone substantial
change during the last three and a half decades (see
Table 1.5 for details). There has been a marked
shift away from the commodity producing sector
(CPS) which accounted for almost 62 percent of
the GDP in 1969-70, its share has declined to 46.8
percent in 2007-08 a decline of 15.2 percentage
points. The decline in the share of CPS is fully
accounted for by the equal rise in the share of
services sector. A further breakdown of the CPS
shows that the share of the agriculture sector has
been falling with time. In 1969-70, agriculture
accounted for 38.9 percent of GDP, but steadily

Beside compulsions imposed by the theory of

economic development that with higher level of
economic development the share of agriculture has
to shrink, the other determining factor is the
exclusive preoccupation of the successive
governments in the past to four major crops,
namely, wheat, cotton, sugarcane and rice in policy
making and little or no efforts to increase yield per

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acre or no policy support to diversification of
agriculture sector. These four major crops only
account for one-third of agricultural value addition
while rest of the two-third has received very little
attention from all the governments. Most
importantly, livestock, which accounts for more
than one-half of the agricultural value added, has
been the major victim of the total neglect of the
governments all along until few years ago that this
sector started receiving some attention. A
continued emphasis on four major crops and
neglect to the other sub-sectors of agriculture and
stagnant yields, the contribution of agriculture to
overall GDP is bound to shrink further in the
coming years as rapid growth in industry and
services sector has outpaced the growth in
agriculture. During the last seven years, the major
impetus to growth has come from services and
manufacturing sectors. The service sector has
emerged as the main engine of the growth,
contributing a massive 4.2 percentage points and
helping maintain an overall growth rate of 5.8
percent despite a slowdown in agriculture and
manufacturing. The share of manufacturing in
GDP has remained stagnant at around 16 percent
for 33 years until 2002-03. Its contribution to GDP
has increased only during the last five years rising from 16.3 percent in 2002-03 to 18.9 percent
in 2007-08. Within the services sector, almost all
the components have raised their contribution over
the last three and half decades. Recently, the
finance and insurance sub-sector has been growing
at a rapid pace, increasing its share from 3.5
percent in 2001-02 to 6.5 percent in 2007-08. The
emergence of these sectors as growth engines
means that growth momentum can be sustained in
the economy even while the share and contribution
made by agriculture is falling.
VI. Per Capita Income
Per capita income is treated as one of the foremost
indicators of the depth of growth and general wellbeing of an economy. Despite the array of recent
and more sophisticated tools to measure growth,
development, and economic advancement, none
match the historical importance and the simplicity
of per capita income as a measure of the average
level of prosperity of an economy. Per capita
income, defined as Gross National Product at
market price in dollar term divided by the

countrys population, has grown at an average rate

of above 13.0 percent per annum during the last
five years rising from $ 586 in 2002-03 to $ 925 in
2006-07 and further to $ 1085 in 2007-08 [See Fig1.4]. The main factor responsible for the sharp rise
in per capita income include acceleration in real
GDP growth, and four fold increase in the inflows
of workers remittances. Per capita income in
dollar term rose from $ 925 last year to $ 1085 in
2007-08, depicting an increase of 18.4 percent.
Fig. 1.4 shows the improvement in per capita
income during the last seven years. Real per capita
income in rupee terms has also increased by 4.7
percent, on average, for the last three years. The
real per capita income grew by 4.2 percent as
compared to 4.9 percent last year.

Fig-1.4: Per Capita Income ($)

1,120

1,085

1,040
960

926

880

836

800

733

720

669

640
560

586
526

507

509

480
400

VII. Investment and Savings

After reaching at record level of 22.9 percent of
GDP in 2006-07, the total investment moderated to
21.6 percent of GDP in 2007-08. Fixed investment
has decreased to 20.0 percent of GDP from 21.3
percent last year. Investment is a key determinant
of growth. Total investment has increased from
16.9 percent of GDP in 2002-03 to 22.9 percent of
GDP in 2006-07 showing an increase of 6.0
percent of GDP in five years. However, it has
declined by 1.3 percentages points in 2007-08.
Fixed investment grew, on average, by 13.2
percent in real terms and 25.9 percent in nominal
terms per annum during the last four years (200408). Private investment grew by 12.5 percent per
annum in real terms and 25.4 percent per annum in
nominal terms during the same period. In the fiscal
year 2007-08, gross fixed capital formation or
domestic fixed investment grew by 12.5 percent in
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Economic Survey 2007-08

nominal terms as against 18.6 percent last year. In
real terms it grew by 3.4 percent as against 16.0
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 9.7 percent this year as
against 13.3 percent last year in nominal terms.
Public sector investment has also increased by 15.7
percent per annum during the last four years and
9.7 percent during the current fiscal year in real
terms. Public sector investment has created

spillovers effects for private sector investment

through massive increase in development spending
particularly on infrastructure [See Table-1.6]. The
other interesting development that has taken place
on investment scene is that the share of private
sector investment in domestic fixed investment has
increased from less than two-third (64.2percent) to
more than three-fourth (76.0percent) in the last
seven years clearly reflecting the growing
confidence of private sector in the current and
future prospects of the economy.

Table 1.6: Structure of Savings and Investment (As Percent of GDP)

Description
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P
Total Investment
17.2
16.8
16.9
16.6
19.1
22.1
22.9
21.6
Changes in Stock
1.4
1.3
1.7
1.6
1.6
1.6
1.6
1.6
Gross Fixed Investment
15.8
15.5
15.3
15.0
17.5
20.5
21.3
20.0
- Public Investment
5.7
4.2
4.0
4.0
4.3
4.8
5.7
5.7
- Private Investment
10.2
11.3
11.3
10.9
13.1
15.7
15.6
14.2
Foreign Savings
0.7
-1.9
-3.8
-1.3
1.6
3.9
5.1
7.6
National Savings
16.5
18.6
20.8
17.9
17.5
18.2
17.8
13.9
Domestic Savings
17.8
18.1
17.6
15.7
15.4
16.3
16.0
11.7
P: Provisional
Source: EA Wing Calculations

Private sector investment was broad-based. The

energy sector has played key role in attracting
private sector investment. The overall fixed
investment destined to energy sub-sectors, namely,
mining & quarrying, and electricity & gas
distribution witnessed highest increase by growing
at 41.0 percent and 22.1 percent, respectively. The
investment in mining & quarrying sector grew by
29.4 percent in real terms while in electricity & gas
distribution it grew by 12.0 percent. Other major
contributors to private sector investment growth
are manufacturing (8.1%), transport and
communication (8.6%), and wholesale and retail
trade (18.4%). The construction sector is the only
sector which registered negative investment
growth of 11.0 percent. The public sector and
general government investment collectively grew
by 20.2 percent while the public sector investment
grew by 27.9 percent. Barring transport &
communication and agriculture, investment in all
other sectors rose sharply by high double digits,
thus enabling overall public sector investment to
grow by 27.9 percent.

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
needed to finance the saving-investment gap
simply reflects the current account deficit in the
balance of payments. National Savings at 13.9
percent of GDP is the lowest ever level since 19992000 and has financed 64.5 percent of fixed
investment in 2007-08 as against 77.7 percent last
year. National savings as percentage of GDP stood
at 13.9 percent in 2007-08 which is far below than
last years level of 17.8 percent. Domestic savings
has also declined substantially from 16.0 percent of
GDP to 11.7 percent of GDP.
VII. Foreign Investment
With rising macroeconomic imbalances and rising
investment needs to grow at a faster pace in the
developing countries, foreign investment has
played crucial role in providing much needed
macroeconomic
stability.
Foreign
direct
investment (FDI) has emerged as a major source of
private external flows for Pakistan as well amidst
widening savings-investment gap. Since current

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Growth and Investment

account deficits has generated need for financing,
the FDI inflows has provided important source of
non-debt creating inflows. During the last two
decades countries have liberalized their FDI
regimes and pursued investment- friendly
economic policies to attract investment to
maximize the benefits of foreign presence in the
host economy. In many developing countries, FDI
has triggered technology spillovers, assisted human
capital formation, contributed to international trade
integration, helped in creating a more competitive
business environment and promoted enterprise
development. These developments contributed

positively to higher economic growth in many

developing countries, which is the most potent tool
for alleviating poverty. Another contribution of
FDI in recent years to developing countries has
been its crucial role of preventing economies from
ill-effects of exploding debt accumulation to
finance their development needs and thus enabled
exchange rate stability. Inflow of foreign
investment has remained subdued in emerging
markets in FY 08, however, the case of Pakistan
was more acute because the political economy
many headwinds at continuous intervals.

Table 1.7: Inflow of Net Foreign Private Investment (FPI)

(Million US $)

July-April
Country
USA
UK
UAE
Germany
Kuwait
Hong Kong
Norway
Japan
Saudi Arabia
Canada
Netherlands
Mauritius
Singapore
China
Australia
Switzerland
Others
Total

2006-07
Direct Portfolio
913.3
853.4
860.0
960.1
662.2
14.9
78.9
7.0
65.9
17.0
32.6
-72.6
25.1
0.0
64.4
3.9
104.9
0.1
10.7
0.1
771.8
6.2
77.6
13.0
20.9
118.2
712.1
0.0
72.0
-6.4
175.0
-127.4
492.2
32.7
5139.6
1820.4

Total
1766.8
1820.1
677.0
85.9
82.9
-40.0
25.1
68.4
105.0
10.9
778.0
90.6
139.1
712.1
65.6
47.6
524.9
6959.9

2006-07
Direct Portfolio
682.3
669.8
718.8
382.2
368.0
19.7
30.0
6.9
46.4
18.3
30.2
-93.8
25.1
0.0
51.7
0.2
91.6
0.1
10.5
0.1
753.4
5.7
65.2
9.7
15.3
118.3
708.9
0.0
60.5
-5.9
157.8
-85.7
365.1
51.7
4180.8
1097.3

Total
1352.1
1101.0
387.7
36.9
64.7
-63.6
25.1
51.9
91.8
10.6
759.1
74.9
133.6
708.9
54.6
72.1
416.8
5278.1

2007-08
Direct Portfolio
1161.7
520.6
303.1
-137.6
535.4
17.8
61.7
-0.5
31.7
27.9
121.3
-227.4
154.8
0.0
100.3
10.9
37.0
-1.6
13.0
0.3
101.0
39.7
81.7
5.3
23.5
-19.5
13.2
0.0
56.9
-64.8
141.3
-79.3
543.8
7.1
3481.6
98.9

Total
1682.3
165.4
553.2
61.2
59.6
-106.1
154.8
111.2
35.4
13.3
140.7
87.0
4.0
13.2
-7.9
62.1
551.0
3580.5

Source: State Bank of Pakistan

Higher foreign direct investment levels in recent

times has relaxed the foreign exchange constraint
for imports to a greater extent, and supported the
increase in the investment-to-GDP ratio, necessary
to deliver the higher growth rates. Pakistan has
become an attractive destination for foreign
investors and even during the crisis ridden current

fiscal year Pakistan managed to get $3.6 billion

worth of foreign investment. The overall foreign
investment during the first ten months (July-April)
of the current fiscal year has declined by 32.2
percent and stood at $ 3.6 billion as against $5.3
billion in the comparable period of last year.

13
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Economic Survey 2007-08

The overall foreign investment has two
components foreign direct investment (FDI) and
portfolio investment i.e., investment in the equity
market. Foreign direct investment (private) shown
more resilience and stood at $3481.6 million
during the first ten months (July-April) of the
current fiscal year as against $4180.8 million in
the same period last year thereby showing a

decline of 16.7 percent (See Table 1.8). Private

portfolio investment on the other hand witnessed
massive decline of 91 percent by recording inflow
of $98.9 million as against $1097.3 million during
the comparable period of last year. Public foreign
investment depicted modest inflow of only $20.5
million as against outflow of $66.6 million in the
comparable period of last year [See Table 1.8].

Table-1.8: Net Inflow of Foreign Investment

Million US$

2006-07

July-Apr
2006-07 2007-08

%
Change

6960.0
5278.1
3580.5
Foreign Private Investment
5139.6
4180.8
3481.6
Foreign Direct Investment
266.4
133.2
133.2
of which Privatisation Proceeds
1820.4
1097.3
98.9
Portfolio Investment
1570.4
847.3
98.9
Equity Securities
250.0
250.0
0.0
Debt Securities
1468.3
671.4
20.5
Foreign Public Investment
1468.3
671.4
20.5
Portfolio Investment
738.0
738.0
0.0
Equity Securities
730.3
-66.6
20.5
Debt Securities *
Total
8,428.3
5,949.5
3,601.0
Encashment of Special US$ bonds, FEBC, DBC and Receipts of Eurobonds
*

-32.2
-16.7
0.0

-91.0
-88.3
-96.9
-96.9
-130.8
-39.5

Table-1.9: Net Inflow of Foreign Direct Investment (Group-Wise)

Million US$

S.N ECONOMIC GROUP

1 Food, Beverages & Tobbaco
2 Textiles
3 Sugar, Paper & Pulp
4 Leather & Rubber Products
5 Chemicals & Petro Chemicals
6 Petroleum Refining
7 Minning & Quarrying
8 Oil & Gas Explorations
9 Pharmaceuticals & OTC Products
10 Cement
11 Electronics & Other Machinery
12 Transport Equipment(Automobiles)
13 Power
14 Construction
15 Trade
16 Communications
1) Telecommunications
17 Financial Business
18 Social & Other Services
19 Others
TOTAL

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

-5.1
7.0
4.6
22.8
61.9
515.8
18.4
26.1
35.5
39.3
47.0
59.4
0.9
2.3
2.1
4.3
5.1
17.4
0.8
1.2
3.5
6.5
8.2
7.3
12.9
86.9
16.8
52.1
72.4
52.5
2.8
2.2
70.9
23.7
31.2
155.2
6.6
1.4
1.1
0.5
7.1
23.7
268.2
186.8
202.4
193.8
312.7
545.1
7.2
6.2
13.2
38.0
34.5
38.4
0.4
-0.4
1.9
13.1
39.0
33.7
26.4
17.6
17.0
16.5
21.0
22.0
1.1
0.6
3.3
33.1
33.1
50.4
36.4
32.8
-14.2
73.3
320.6
204.6
12.8
17.6
32.0
42.7
89.5
157.1
34.2
39.1
35.6
52.1
118.0
173.4
12.7
24.3
221.9
517.6 1937.7 1898.7
6.0
13.5
207.1
494.4 1905.1 1824.3
3.5
207.6
242.1
269.4
329.2
930.1
10.2
19.7
16.4
24.7
64.7
88.4
12.7
28.8
33.1
78.9
65.5
166.1
484.7
798.0
949.4 1,524.0 3,521.0 5,139.6

July-March
2006-07 2007-08
489.8
33.3
46.8
22.3
15.8
9.6
6.2
4.6
31.8
85.3
98.7
61.7
20.5
22.0
421.9
465.5
25.7
38.6
13.4
89.5
15.7
36.5
36.7
73.3
125.1
39.8
114.4
69.7
130.9
148.4
1411.6
923.0
1350.0
811.6
696.0
685.6
72.3
86.1
85.7
144.1
3,859.1 3,038.8
Source: SBP

Almost 57 percent of FDI has come from three

countries, namely, the UAE, US, and UK. US

investors with 33.4 percent investment are on the

top during the first ten months (July-April) of

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Growth and Investment

2007-08. Norway (4.4% or $154.8 million),
Switzerland (4.1% or $141.3 million), Hong Kong
(3.5% or $121.3 million), Netherlands (2.9% or
$101.0 million) and Japan (2.9% or $100.3
million) were other contributors to FDI inflows
[See Table 1.7].
The communication sector (including Telecom)
spearheaded the FDI inflows by accounting for
30.4 percent stake during July-April 2007-08
followed by financial business (22.6 percent),
energy including oil & gas and power (16.6
percent), and trade (4.9 percent). Three groups
namely; communication, financial business and oil
& gas exploration accounted for almost 67 percent
of FDI inflows in the country [See Table-1.9]. The
pace of both FDI and portfolio investment clearly
indicators that foreign investors are still upbeat on
Pakistans current and future economic prospects.
The current wave of slowdown in economic
activity could be short-lived if consistency and
continuity in economic policies is ensured. A better
macroeconomic management could yield dividends
which can enhance prospects of the economy.
There is need to maintain macroeconomic stability
by introducing corrective measures and continue to
pursue structural reforms in different sectors of the
economy.
Notwithstanding the decline in the FDI inflow, the
re-invested earnings have increased by 12.0

percent in July-March 2007-08 by moving to $751

million as against $ 671 million in the comparable
period of last year [See Table-1.10].
Table-1.10: Sector wise Reinvested Earnings in FDI
(Million US dollar)
July-March
FY 07
FY 08
% Change
Chemical
36.8
33.3
-9.5
Petroleum Refining
84.8
50.6
-40.3
Oil & Gas Exploration
95.8
159.3
66.3
Cement
16.1
31.6
96.3
Trade
15.2
36.2
138.2
Cars
28.3
48.1
70.0
Power
77.9
4.5
-94.2
Telecommunication
51.7
65.8
27.3
Financial Busienss
171.5
241.9
41.0
Other
92.9
80.0
-13.9
Total
671.0
751.2
12.0
Source: SBP

It may be indicative of growing confidence of

existing foreign investors in long-term prospects of
Pakistan economy that the amount of reinvested
earning has been on the increase over the last four
years in most of the sectors. Major sectors which
registered increase in reinvested earning during JulMar 2007-08 include: financial business, oil & gas
exploration, cement and trade. Higher reinvested
earnings mainly reflect profitability of these sectors
and investors confidence in Pakistan economy in the
long run.

15
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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

(Rs million)
% Change
2006-07/
2007-08/
2005-06
2006-07

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07
R

2007-08
P

212,661
146,912
2,921

228,419
163,175
658

172,499
105,388
3,703

172,221
91,476
1,224

170,518
72,762
75

180,066
75,153
125

205,084
81,810
983

273,594
95,156
1,022

300,145
110,502
948

33.4
16.3
4.0

9.7
16.1
-7.2

5,113
21,187
2,744
52,185

19,805
13,044
2,015
50,785

20,545
1,265
3,058
20,173

25,149
1,245
2,735
27,118

3,902
2,397
2,745
14,890

7,853
1,282
3,252
15,379

8,106
3,385
5,091
17,188

12,718
2,406
7,080
18,830

21,404
3,813
7,445
22,418

56.9
-28.9
39.1
9.6

68.3
58.5
5.2
19.1

56,213
369
27,438
28,406

70,433
2,387
30,148
37,898

51,212
5,016
24,671
21,525

28,173
2,804
5,992
19,377

43,933
2,376
4,154
37,403

42,522
2,048
6,408
34,066

41,215
2,446
7,837
30,932

45,783
1,836
6,322
37,625

46,205
1,792
4,347
40,066

11.1
-24.9
-19.3
21.6

0.9
-2.4
-31.2
6.5

3,680
2,869
65,749
24,980
31,763
9,006

2,211
4,224
65,244
23,404
30,555
11,285

2,033
3,399
67,111
28,277
16,904
21,930

2,247
3,585
80,745
29,217
24,691
26,837

1,061
3,759
97,756
32,357
39,216
26,183

733
4,007
104,913
26,694
49,062
29,157

1,424
4,418
123,274
32,017
67,902
23,355

2,012
5,305
178,438
45,976
91,098
41,364

2,235
41.3
11.1
6,034
20.1
13.7
189,643
44.7
6.3
57,021
43.6
24.0
79,535
34.2
-12.7
53,087
77.1
28.3
Source: Federal Bureau of Statistics.

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Chapter 02

AGRICULTURE
Notwithstanding its declining share in GDP,
agriculture is still the single largest sector,
contributing 21 percent to GDP and employing 44
percent of the workforce. More than two-thirds of
Pakistans population lives in rural areas and their
livelihood continues to revolve around agriculture
and allied activities. Like in other developing
countries, poverty in Pakistan is largely a rural
phenomenon;
therefore,
development
of
agriculture will be a principal vehicle for
alleviating rural poverty. Empirical evidence
suggests that higher growth in agriculture on a
sustained basis had a lasting impact on poverty
1
reduction in Asia in the 1970s and the 1980s . In
later decades the impact of agriculture on poverty
reduction became weaker as the Asian countries in
general, and South Asia in particular, began to
witness productivity gains stagnanting on account
of structural issues, including limited investment in
research and extension services. The recent global
food crises, while creating difficulties for net food
importing countries, is equally providing
opportunities for developing countries like
Pakistan to get their acts together and benefit from
the current situation by giving more serious
attention to agriculture.
For Pakistan, the notion of food security should
move beyond a relatively static focus on food
availability.
Higher
agricultural
growth,
particularly emanating from the crop sector, will
provide food security by increasing supply,
stabilizing prices, and raising incomes of poorfarm households. To benefit from the current
global food crises, Pakistan needs to change its
policy-orientation from the current practice of
1 See Economic and Social Survey of Asia and the Pacific 2008, UNESCAP,
February 2008; pp.122

focusing exclusively on price and move towards

yield enhancement and address, structural issues
such as poor crop management skills of farmers;
use of cheaper seeds; lack of agricultural
infrastructure and higher post-harvest losses;
limited research as well as the gap between
available research and practical applications; and
inadequate funding for research and development.
Agriculture will continue to acquire the highest
priority from the government for its role in poverty
reduction as well as from a food security point of
view.
The emerging economies have become more
affluent as they have sustained higher economic
growth in recent years. Such affluence is impacting
the consumption patterns of households including a
dietary change towards higher quality food such as
meat and dairy products. As a result, the
production of these items is rising globally. In
Pakistan however, the livestock and dairy sectors
have received little or no attention by the
successive governments in the past despite the fact
that it accounts for 52 percent of agriculture, 11
percent of GDP and affects the lives of 30-35
million people in rural areas. In order to achieve
higher sustained growth in agricultural value
added, it is absolutely necessary to give due
attention to the livestock and dairy sector to
achieve multiple objectives, such as, the objectives
of attaining food security and poverty reduction.
The growth performance of agriculture over the
last six years has been of a volatile nature - ranging
from 1.5 percent to 6.5 percent (see Table 2.1).
The volatility in agricultural growth is mainly
caused by crop sector which is associated with the
vagaries of mother nature, pest attacks, adulterated
pesticides etc. Such volatility is detrimental to
income growth of farmers and hamper government
efforts to reduce poverty.
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Pakistan Economic Survey 2007-08

Table 2.1: Agriculture Growth (Percent)
Year
Agriculture
Major
Minor
Crops
Crops
2002-03
4.1
6.8
1.9
2003-04
2.4
1.7
3.9
2004-05
6.5
17.7
1.5
2005-06
6.3
-3.9
0.4
2006-07
3.7
8.3
- 1.3
2007-08 (P)
1.5
- 3.0
4.9
Average
4.1
4.6
1.9
P= Provisional Source: Federal Bureau of Statistics

supplies during Rabi and inordinate spike in prices

of DAP fertilizer. Accordingly, production of
wheat declined to 21.7 million tons - from 23.3
million tons last year, thus registering a decline of
6.6 percent. In sheer contrast, the two other major
crops performed better with sugarcane recording
highest ever production level of 63.9 million tons
16.8 percent higher than last year. The
production of rice witnessed a modest growth of
2.3 percent and stood at 5.6 million tons.

Agriculture performed poorly in 2007-08, growing

at 1.5 percent against the target of 4.8 percent. The
poor performance of agriculture can be attributed
to an equally poor performance of major crops and
forestry, registering negative growth of 3.0 percent
and 8.5 percent, respectively. Livestock, minor
crops and fishing have been the saving grace as
these sectors have performed reasonably well to
compensate the performance of major crops and
forestry to arrive at 1.5 percent growth in
agriculture this year. Major crops, accounting for
34 percent of agriculture and 7.1 percent of GDP,
suffered on account of poor showing of wheat and
cotton and less than satisfactory performance of
rice crop. Sugarcane and maize being other two
major crops, performed impressively in 2007-08.

Minor crops accounting for 12 percent in

agriculture value added posted a growth of 4.9
percent against the negative growth of 1.3 percent
last year. The performance of livestock accounting
for 52.2 percent of agricultural value added, was
satisfactory at 3.8 percent. The performance of
fisheries has been impressive as it grew by 11
percent in 2007-08 because inland fish catch has
increased by 11.1 percent while the output of
marine fishing grew by 11.5 percent during 200708. Forestry followed the traditional negative
growth pattern for the fifth year in a row. This
small sector with only one percent stake in the
overall value - addition in agriculture, registered
negative growth of 8.5 percent in 2007-08 as the
turnout of production of timber and firewood
during the year declined by 9.3 percent.

The cotton crop suffered for a variety of reasons

including heavy rainfall in May 2007 causing poor
germination in Punjab, high temperature during
August and September 2007 causing more
shedding of fruit parts and pest attack, especially
dangerous mealy bug infestation. Consequently,
cotton production declined to 11.7 million bales
this year from 12.9 million bales last year - thus
registering a negative growth of 9.3 percent. The
wheat crop was adversely affected by the shortage
of irrigation water by 23.3 percent over normal

Pakistans agricultural output is closely linked with

the supply of irrigation water. 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 20.6 percent (2004-05).
However, it remained less by 2.5 percent in 200506 against the normal availability. Relatively
speaking, Rabi season faced more shortage of
water than Kharif during 2007-08.

Table 2.2: Actual Surface Water Availability

Period
Kharif

Rabi

Total

Average system usage

2002-03
2003-04
2004-05
2005-06
2006-07
2007-08

36.4
25.0
31.5
23.1
30.1
31.2
27.9

103.5
87.8
97.4
82.2
100.9
94.3
98.7

67.1
62.8
65.9
59.1
70.8
63.1
70.8

(Million Acre Feet)

%age incr/decr.
Over the Avg.
- 15.2
- 5.9
- 20.6
- 2.5
- 8.9
- 4.6
Source: IRSA

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Agriculture
During the current fiscal year (2007-08), the
availability of water for Kharif 2007 (for the crops
such as rice, sugarcane and cotton) has been 5.5
percent more than the normal supplies and 12.2
percent more than last years Kharif (see Table
2.2). The water availability during Rabi season (for
major crop such as wheat), as on end-March 2008
was, however, estimated at 27.9 MAF, which was
23.4 percent less than the normal availability, and
10.5 percent less than last years Rabi, adversely
affecting the wheat crop, production of which has
decreased by 6.6 percent over the last year.
I. Crop Situation
There are two principal crop seasons in Pakistan,
namely the "Kharif", the sowing season of which
begins in April-June and harvesting during
Table 2.3: Production of Major Crops (000 Tons)
Year
Cotton
Sugarcane
(000 bales)
2003-04
10048
53419
(-1.6)
(2.6)
2004-05
14265
47244
(42.0)
(-11.6)
2005-06
13019
44666
(-8.7)
(-5.5)
2006-07
12856
54742
(-1.2)
(22.6)
2007-08 (P)
11655
63920
(-9.3)
(16.8)

a) Major Crops:
i) Cotton:
Pakistans economy is mainly dependent on cotton
and textile sector. It is, however, realized that
under the WTO post - quota scenario a larger crop
would pay the real dividends only when its quality
matches the spinners demand at home and abroad.
All the stakeholders are, therefore, being motivated
to play their due role in transforming the cotton
pricing and marketing system from subjective
assessment to objective valuation of seed cotton
and lint through adoption of cotton standardization
and grading mechanism already developed and
introduced by the government.
World cotton production is estimated at 118.8
million bales in 2007-08 - 3 percent lower than last

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 88.9 percent of
the value added in the major crops. The value
added in major crops accounts for 33.9 percent of
the value added in overall agriculture. Thus, the
four major crops (wheat, rice, cotton, and
sugarcane), on average, contribute 30.2 percent to
the value added in overall agriculture and 6.3
percent to GDP. The minor crops account for 11.4
percent of the value added in overall agriculture.
Livestock contributes 52.2 percent to agricultural
value added much more than the combined
contribution of major and minor crops (45.3%).
Rice

Maize

Wheat

4848
1897
19500
(8.3)
(9.2)
(1.6)
5025
2797
21612
(3.6)
(47.4)
(10.8)
5547
3110
21277
(10.4)
(11.2)
(-1.6)
5438
3088
23295
(-2.0)
(-0.7)
(9.5)
5563
3313
21749
(2.3)
(7.3)
(-6.6)
Source: Ministry of Food, agriculture & Livestock

year because of the decline in world area by 1.2

million hectares to 33.6 million hectares. In 200708, production is estimated to decline in the USA
(12%), China (3%), Pakistan (9.3) and Turkey
(12%). Production in 2007-08 is estimated to
increase in India by 11.1 percent and in Brazil by 5
percent. According to the cotlook the price of
cotton averaged 69 cents per pound during the first
half of 2007-08, 11 cents higher than the same
period last year.
World cotton area is projected to remain, by and
large, stable in 2008-09 at 33.9 million hectares.
World cotton yield is expected to show a rising
trend in 2008-09 and is projected to be 794
kilograms per hectare. As a result, world cotton
production in 2008-9 is expected to increase by 5.0
million bales to 123.8 million bales. However,
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Pakistan Economic Survey 2007-08

Area, production and yield of cotton for the last

five years are given in Table 2.4 and Fig. 2.1.

Fig-2.1: Cotton production (000 bale s)

150 0 0
14 0 0 0
13 0 0 0
12 0 0 0
110 0 0
10 0 0 0
9000

'07-08 P

'06-07

'05-06

'04-05

'03-04

02-03

01-02

00-01

8000
99-00

Cotton is the important non-food cash crop and a

significant source of foreign exchange earnings.
Cotton accounts for 7.5 percent of the value added
in agriculture and about 1.6 percent to GDP. The
crop was sown on the area of 3054 thousand
hectares, 0.6 percent less than last year (3072
thousand hectares). The production is estimated at
11.7 million bales for 2007-08, less by 9.3 percent
over the last years production of 12.9 million
bales. Several factors are responsible for the lower
production of cotton this year. Firstly, the cotton
area sown in the Punjab Province in this season
was less by 2.5 percent compared with last year,
mainly due to shifting of area to sugarcane. At the
same time, the plant population per acre was 15
percent short, whereas average weight of boll was
also less by about 2 percent. Secondly, the cotton
area sown in Sindh was 6 percent higher than the
last year. The average plant population and the
weight of boll was however comparatively better
than the Punjab. Thirdly, heavy rainfall in Punjab
in May 2007 caused poor germination. Fourthly,
high temperature during August and September
2007 caused more shedding of fruiting parts /bolls.
Fifthly, the Mealy Bug infestation was heavy and
widespread. Repeated sprayings by the growers for
the control of Mealy Bug depressed the plant
activity resulting in lower boll weight. Sixthly,
Cotton Leave Curl Virus infestation was also
comparatively more than last year. Finally, it is
also apprehended that the unapproved and
generation old cottonseeds purchased by the
growers from private sources in the name of Bt.
cotton had adversely affected the production of this
crop.

98-99

Review of Domestic Cotton Situation

Cotton prices this season in the country remained

significantly higher than last year. The seed cotton
prices during the season so far has averaged at Rs
1,422 per 40 Kgs, as against last year s average
price of Rs 1,171/-. In other words farmers
received, on average, 21.4 percent higher prices
this year. Similar trend was noticed in lint cotton
prices. Cotton prices in the world market have also
remained significantly higher than last year. It is
important to note that the government had
previously been fixing the seed cotton intervention
price and entering the market through the Trading
Corporation of Pakistan only when the seed cotton
market price fell below the intervention price. Such
a necessity was felt in 2004-05 when the
government had to purchase 1.6 million bales. The
growers had availed better prices in 2005-06 and
2006-07 seasons. For the current season (2007-08)
the government did not fix any intervention price
for seed cotton, but the market prices remained
firm this year.

97-98

Three Asian countries (China, India and Pakistan)

are expected to produce more than half (59%) of
the global cotton production in 2008-09. Similarly
these three countries are also likely to account for
about 68 percent of the world cotton consumption.

Cotton Prices

96-97

world mill use is projected to increase further to

124.6 million bales thereby exceeding the
production. Accordingly, the end stock is expected
to decline.

The proposed actions to be undertaken by various

stakeholders for a collaborative approach to
achieve the cotton area and production target of 3.2
million hectares and 14 million bales, respectively
for next season (2008-09) are summarized as
follows:

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Agriculture
Table 2.4: Area, Production and Yield of Cotton
Year
Area
(000 Hectare)
% Change
2003-04
2989
7.0
2004-05
3193
6.8
2005-06
3103
-3.0
2006-07
3075
-0.9
2007-08 (P)
3054
- 0.6
P=Provisional (July-March)

i)

Production
(000 Bales)
% Change
10048
-1.6
14265
42.0
13019
-8.7
12856
-1.2
11655
- 9.4

(Kgs/Hec)
572
760
714
711
649

Yield
% Change
-8.0
32.9
-10.3
-0.4
-8.7

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

Arrangement to be made for availability of

63,000 metric tons of certified seeds of
approved cotton varieties.

ii) Late sowing to be discouraged.

iii) Plant population to be increased to 18,000
20,000 plants per acre through higher seed rate
and timely re-sowing, if so needed.
iv) Subsidy on phosphate and potash fertilizers
may continue for encouraging the balanced use
of fertilizers.
v) Growers to be encouraged to also add micronutrients to the soil for retention of larger
number of flowers and bolls.
vi) Availability of adequate and insect specific
pesticides to be ensured through out the crop
growth and development period, particularly
for mealy bug and white fly.
vii) Special campaign to be launched by the
Provincial Agriculture Departments through
print and electronic media to forewarn and
guide the growers on mealy bug infestation
and control measures.

like sugar, chipboard, and paper. Its share in value

added of agriculture and GDP are 4.5 percent and
0.9 percent, respectively. For 2007-08, the area
under sugarcane crop was targeted at 1039
thousand hectares as against 1029 thousand
hectares of last year. However, sugarcane has been
sown in the area of 1241 thousand hectares, 20.6
percent higher than last year. Sugarcane production
for the year 2007-08 is estimated at 63.9 million
tons -the highest ever in the countrys history
against 54.7 million tons last year. This indicates
significant improvement of 16.8 percent over the
production of last year.
The main reasons of higher sugarcane production
are high prices of sugarcane received by the
grower last year, encouraging them to increase area
under production, judicious application of
fertilizer, improvement in cultural practice and
non-significant attack of pests and diseases. The
area, production and yield per hectare for the last
five years are given in Table 2.5 (see also Fig. 2.2)

Fig-2.2: Sugarcane Production (000 Tons)

65000
60000
55000
50000

ii) Sugarcane:
45000

'07-08 P

'06-07

'05-06

'04-05

'03-04

01-02

'02-03

00-01

99-00

98-99

97-98

40000
96-97

Sugarcane is an important cash crop of Pakistan. It

is mainly grown for sugar and sugar - related
production. It is an important source of income and
employment for the farming community of the
country. It also forms essential item for industries

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Pakistan Economic Survey 2007-08

Table 2.5: Area, Production and Yield of Sugarcane
Year
Area
Production
Yield
(000 Hectare
% Change
(000 Tons)
% Change
(Kgs/Hec.)
% Change
2003-04
1074
-2.4
53419
2.6
49738
5.1
2004-05
966
-11.8
47244
-11.6
48906
-3.8
2005-06
907
-6.1
44666
-5.5
49246
0.7
2006-07
1029
13.5
54742
22.6
53199
8.0
2007-08 (P)
1241
20.6
63920
16.8
51507
-3.2
P: Provisional. (July-March)
Source: Ministry of Food, Agriculture and Livestock, Federal Bureau of Statistics.

Fig- 2.3: Rice production (000 Tons)

6000
5500
5000
4500
4000

'07-08 P

'06-07

'05-06

'04-05

'03-04

02-03

01-02

00-01

99-00

98-99

3500
97-98

Rice is the third largest crop after wheat and

cotton. Rice is highly valued cash crop and is also
major export item. It accounts for 5.5 percent of
value added in agriculture and 1.1 percent in GDP.
Pakistan grows enough high quality rice to meet
both domestic demand and for exports. Area and
production target of rice for the year 2007-08 were
set at 2594 thousand hectares and 5720 thousand
tons, respectively. Area sown for rice is estimated
at 2515 thousand hectares, 3 percent less than the
target and 2.5 percent lower than last year. The
size of the crop is estimated at 5563 thousand tons
2.3 percent higher than last year but 2.7 percent
lower than the target. Increase in rice production
by 2.3 percent during 2007-08 mainly resulted
from improvement in yield. The area under rice
crop this year was less by 2.5 percent, but the yield
has improved by 4.9 percent at national level while
it has increased by 7.2 percent in Punjab and by 3.9

percent in Sindh due to favourable weather

condition and no attack of pest and diseases. Area,
production and yield of rice for the last five years
are given in Table 2.6 and Fig 2.3.

96-97

iii) Rice:

Table 2.6: Area, Production and Yield of Rice

Year
Area
Production
Yield
(000 Hectare
% Change
(000 Tons)
% Change
(Kgs/Hec.)
% Change
2003-04
2461
10.6
4848
8.3
1970
-2.1
2004-05
2519
2.3
5025
3.6
1995
1.2
2005-06
2621
4.0
5547
10.4
2116
6.1
2006-07
2581
-1.5
5438
-2.0
2107
-0.4
2007-08 (P)
2515
- 2.5
5563
2.3
2211
4.9
P: Provisional. (July-March)
Source: Ministry of Food, Agriculture and Livestock, Federal Bureau of Statistics.

iv) Wheat:
Wheat is a stable food item of Pakistani people,
therefore, it is grown in almost every part of the
country. It contributes 12.7 percent to the value
added in agriculture and 2.6 percent to GDP. Area
and production target of wheat for the year 200708 were set at 8578 thousand hectares and 24
22

million tons, respectively. Wheat was cultivated on

an area of 8414 thousand hectares, showing 1.9
percent decrease over last years area of 8578
thousand hectares. The size of the wheat crop is
provisionally estimated at 21.75 million tons, 6.6
percent less than last year and 9.4 percent less than
the target for this year. There are several reasons
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Agriculture

The outgoing fiscal year also witnessed the worst

ever wheat crisis in the countrys history. Pakistan
produced a bumper wheat crop of 23.3 million
tons. The news about the bumper wheat crop
started pouring, in April 2007, resulting in a
decline in wheat prices. To prevent the wheat price
falling before the harvesting of crop, the
government allowed exports of 0.5 million ton of
wheat in April 2007. Wheat prices started moving
upward sharply in the international market
sometime during June 2007, touching all time high
at over $500 per ton. Prices of wheat in
neighbouring countries were also very high
compared with the price prevailing in the domestic
market. Consequently, the price differential
encouraged unscrupulous elements to enter into
hoarding and smuggling, causing domestic price to
surge at unprecedented level. The government, in
its attempt to stabilize wheat prices, took various
measures including: banning of export of wheat,

Per capita availability (Kg)

Fig-2.5: Per capita availability

Average (124 Kg)

140
135
130
125
120
115
2007-08

Wheat situation 2007-08

2006-07

07-08 P

06-07

05-06

04-05

03-04

02-03

01-02

00-01

99-00

98-99

97-98

96-97

16000

2005-06

17000

2004-05

18000

2003-04

19000

2002-03

20000

2001-02

21000

2000-01

22000

1999-00

23000

1998-99

24000

The wheat produced in 2007-08 will be consumed

in 2008-09. To achieve procurement target of 5.0
million tons, the government increased the
minimum guaranteed price further from Rs 510 to
625 per 40 kg on March 29, 2008. The higher
prices offered to farmers this year would
encourage them to grow more wheat in coming
years. This can only be achieved if government
changes its emphasis from price to yield
enhancement. Although the production of wheat is
rising over the years, however, when viewed in
relation to per capita availability, its performance
has been dismal at best (see Figs 2.4 and 2.5). In
other words, wheat production has been rising, on
average, in relation to the size of population, but
exhibited a fluctuating trend along the per capita
availability of 124 kg. During the last 12 years,
per capita availability of wheat was less than 124
kg in 8 years and only 4 years that it remained
above the required level.

1997-98

Fig-2.4 : Wheat Production (000 tons)

imposition of 35 percent regulatory duty on export

of wheat to Afghanistan; early release (September
2007) of wheat to flour mills; monitoring and
controlling flour prices through Magistrates;
beefing up of anti- smuggling measures through
the establishment of Federal Food Committee, sale
of wheat flour at subsidized rates through the
outlets of the Utility Stores Corporation (USC), the
State Bank of Pakistan sending instructions to the
Commercial Banks for not rolling over the
financing facility of wheat given to private sector
beyond January 31, 2008, and import of 1.7
million tons of wheat to augment supplies.

1996-97

for the decline in wheat production this year.

Firstly, as a result of delayed start of sugar
crushing season and late cotton picking by the
growers, the area sown under wheat crop declined
by 2 percent. Secondly, the higher prices of DAP
(Rs 850 to Rs 3000 per 40 Kgs) discouraged
farmers to use more phasphatic fertilizer, thus
affecting yield of the crop. Thirdly, shortage of
irrigation water by 23.3 percent over normal
supplies during Rabi season affected wheat crop.
Finally, the incidence of severe frost on early sown
crop caused damage in some areas of Punjab and
NWFP.

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Table 2.7: Area, Production and Yield of Wheat
Year
Area
Production
Yield
(000 hectares)
% Change
(000 tons)
% Change
(Kgs/Hec.)
% Changes
2003-04
8216
2.3
19500
1.6
2375
-0.5
2004-05
8358
1.7
21612
10.8
2568
8.1
2005-06
8448
1.1
21277
-1.6
2519
-1.9
2006-07
8578
1.0
23295
9.5
2716
7.8
2007-08 (P)
8414
-1.9
21749
-6.6
2585
-4.8
P= Provisional. (July-March
Source: Ministry of Food, Agriculture & Livestock, Federal Bureau of Statistics

v) Other Major Crops

The production of bajra, rapeseed & mustard,
maize and barley have increased by 28.1 percent,
27.8 percent, 7.3 percent and 5.4 percent,

respectively. The production of tobacco, jawar and

gram decreased by 7.8 percent, 5.6 percent and 1.8
percent respectively as the area of these crops
decreased by 11.8, 3.8 and 0.6 percent. The details
are given in Table 2.8.

Table 2.8: Area and Production of Other Major Kharif and Rabi Crops
Crops
2006-07
2077-08(P)
Area
Production
Area
Production
(000 hectares)
(000 tons)
(000 hectares)
(000 tons)
KHARIF
Maize
1017
3088
1015
3313
Bajra
504
238
531
305
Jawar
292
180
281
170
RABI
Gram
1052
838
1046
823
Barley
94
93
92
98
Rapeseed & Mustard
256
212
228
271
Tobacco
51
103
45
95
P=Provisional (July-March),

% Change In
production

7.3
28.1
-5.6
-1.8
5.4
27.8
-7.8

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. These
crops are grouped in two categories viz.
conventional and non-conventional oilseed crops.
Rapeseed-mustard, groundnut and sesame are
conventional crops and are being grown in the
country for a long period. Sunflower, soybean and
safflower are non-conventional crops. There are
also some oilseed crops, which are mainly used for
industrial purposes, such as linseed and castor. The
main source of local edible oil production is
cottonseed and sunflower.

The total availability of edible oils in 2006-07 was

2.796 million tons. Local production stood at 0.857
million tons which accounts for 28 percent of total
availability. The remaining 72 percent was made
available through imports. During 2007-08, local
production of edible oil is provisionally estimated
at 0.833 million tons. During July March, 1.385
million tons of edible oil was imported and 0.163
million tons edible oil is estimated to have been
recovered from imported oilseeds. The total
availability of edible oil from all sources amounted
to 2.381 million tons during July March, 200708. The production of oilseed crops during 200607 and 2007-08 is given in Table 2.9.

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Agriculture
Table 2.9: Area and Production of Major Oilseed Crops
2006-07
Area
Production
Crops
(000 Acres)
Seed
Oil
(000 Tons)
(000 Tons)
Cottonseed
7599
3980
478
Rapeseed/
628
188
63
Mustard
Sunflower
945
662
251
Canola
359
180
65
Total Oil
857
P: Provisional

Due to the surge in the prices of palm oil in

international markets, local prices of ghee and
edible oil have also witnessed unprecedented rise.
In this regard, All Pakistan Solvent Extractors
Association (APSEA) increased procurement price
of sunflower and canola from Rs 830 to Rs 1600
and from Rs 750 to Rs 1225 per 40/Kg,
respectively. Therefore, the area under sunflower
and canola crops in 2007-08 has increased from
1304 thousand acres last year to 1526 thousand
acres showing an increase of 17 percent. The price
increase has provided an opportunity to the farmers
to bring more area under oilseed crops to raise
their income and make agriculture commercially

Area
(000 Acres)
7547
576

2007-08 (P)
Production
Seed
Oil
(000 Tons)
(000 Tons)
3568
428
172
58

1124
402

696
218

264
83
833
Source: Pakistan Oilseed Development Board

viable.
ii) Other Minor Crops:
The production of all the crops increased except
potato which declined by 3.8 percent. The
production of all the pulses i.e. mung, masoor and
mash increased by 28.4 percent, 13.8 percent and
8.8 percent, respectively. The production of
chillies and onion increased by 96.1 percent and
13.8 percent, respectively. The foremost reason for
this increase of chillies crop this year is due to
decrease in production by 43.4 percent and in area
by 32.4 percent last year. Area and production of
minor crops are given in Table 2.10.

Table-2.10 : Area and Production of Minor Crops

2006-07
2007-08(P)
%Change In
Production
Crops
Area
Production
Area
Production
(000 hectares)
(000 tons)
(000 hectares)
(000 tons)
Masoor
38.3
21.0
35.0
23.9
13.8
Mung
216.9
138.4
247.4
177.7
28.4
Mash
33.0
15.9
34.6
17.3
8.8
Potato
131.9
2581.5
248.6
2483.7
-3.8
Onion
124.1
1816.4
152.1
2067.6
13.8
Chillies
43.7
69.9
44.6
137.1
96.1
P=Provisional (July-March)
Source: Ministry of Food, Agriculture and Livestock.
Federal Bureau of Statistics

II. Farm Inputs

i) Fertilizer:
Fertilizer is one of the key inputs to agricultural
production. Balanced usage of fertilizer helps in
increasing crop yield from 30 to 60 percent in
different regions of the country. Almost the entire
available soil in the country is nutrient deficient.
To overcome the problem of nutrient deficiency,
use of nutrient fertilizer has become vital for

achieving the higher agricultural production.

However, the main impediment in exploring the
full potential of the soil has remained below par
due to imbalances in fertilizer usage especially, in
terms of over application of nitrogenous fertilizer
compared to phosphatic fertilizer. Realizing the
importance of balanced nutrition, the prices of 50
Kg bag of these fertilizers were reduced by Rs 250
for encouraging a more balanced use of key
fertilizers (nitrogenious, phosphatic, potassic
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Pakistan Economic Survey 2007-08

fertilizers) in 2006. Following the steep increases
in international prices of phosphatic and potassic
fertilizers, the Government in July 2007, further
increased the relief in price from Rs 400 to Rs 470
per bag.
The domestic production of fertilizers during the
first nine months (July 2007 to March 2008) of the
current fiscal year was less by 2.2 percent. On the
other hand, the import of fertilizer in nutrient tons
increased by 27.4 percent, hence, the total

availability of fertilizer increased by 3.9 percent

during July 2007 to March 2008. Total off-take of
fertilizer remained flat (0.5 percent) mainly
because offtake pattern of nutrients also changed
as nitrogen offtake increased by 11.4 percent while
that of phosphate and potash decreased by 25.3 and
33.3 percent, respectively during July 2007 to
March 2008. Increased international prices of
phosphatic and potash fertilizers overshadowed the
subsidy effect and eventually offtake could not
increase and remained at almost last years level.

Table 2.11: Production and Off-take of Fertilizer

Year
Domestic
%
Import
Production Change
2003-04
2539
9.7
764
2004-05
2718
7.1
785
2005-06
2832
4.2
1268
2006-07
2747
-3.0
796
2006-07(Jul-March)
2135
555
2007-08 (Jul-March) P
2087
-2.2
707
P : Provisional

Improved Seed:
It is generally accepted that high quality seed is the
most effective input for improving productivity.
Seed is an important component in agriculture
productivity system. Seed has the unique position
among various agricultural inputs because the
effectiveness of all other inputs mainly depends on
the potential of seeds. Seed is a high technology
product and is an innovation most readily adapted.
Improving access to good quality seed is a critical
requirement for sustainable agricultural growth and
food security. Effective use of improved seed can
result in higher agricultural production and
increase net incomes of farming families, which
has a positive impact on rural poverty Hence,
availability of quality seed of improved varieties is
essential to yield the targets specified by the
government for a particular year
The Federal Seed Certification and Registration
Department (FSC&RD) is an attached department
of Ministry of Food, Agriculture & Livestock
(MINFAL) and is engaged in providing seed
certification coverage to public and private sector
seed companies of Pakistan alongwith seed quality
control services through its 30 seed testing

(000 N/tons)
%
Total
%
Off%
Change
Change
take
Change
-0.3
3303
7.2
3222
6.7
2.7
3503
6.1
3694
14.6
61.5
4100
17.0
3804
3.0
-37.2
3543
-13.6
3672
-3.5
2690
2826
27.4
2794
3.9
2839
0.5
Source: National Fertilizer Development Centre

laboratories and monitoring of seed quality in the

market as well.
In addition to field crops, certification scheme has
been initiated in fruit plants and NWFP Province
has a lead in establishing germplasm units of
temperate, tropical and sub-topical fruits. Similar
scheme will be replicated in Punjab and Sindh for
citrus and mango etc. Seed Industry of Pakistan is
comprised of both formal and informal sectors.
There are four public sector organizations and
more than 600 national seed companies and about
four multinational companies. The public and
national seed companies deal with the seeds of
varieties from public sector research institutes
where as multinationals deals with hybrids of
maize, sunflower, canola, fodders and forages and
vegetables.
During July-March 2007-08, about 231.67
thousand tones of improved seed of various
kharif/rabi/spring/winter season crops was
distributed. The procurement and distribution of
seeds of various Kharif crops (cotton, paddy,
maize, mungbean etc) is under progress.

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Agriculture
iii) Mechanization:

comprehensive strategic planning for the future.

Mechanization as a tool for modernization of

agriculture
has
been
well
recognized.
Mechanization generates greater cropping intensity
and as such improves productivity. 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

The demand for tractors has increased

significantly. In order to meet tractors demand,
Federal Government allowed import of new and
used tractors in CBU at zero tariffs. Other
interventions including use of laser land levelers,
ridge and broad bed farming are being encouraged
in the country through provision of incentives to
the farmers. On the average, an increase of about 9
percent in the prices of locally manufactured
tractors compared to last year has been recorded
(See Table 2.12).

Table 2.12: Price of Locally Manufactured Tractors

Tractor Model
2006-07
MF-240 (50-H.P)
339,000
MF-260 (60 H.P)
429,000
MF-375S (78 H.P)
539,000
MF-385 (85 H.P)
639,000
MF-385 (4wd)-85 HP
995,000
NH-FIAT-480 (55-H.P)
320,000
NH-FAIT-GHAZI(65 HP)
349,000
NH-FIAT-640 (75-H.P)
459,000
NH-FAIT-640-S (85)
469,000
NH 55-56 (55-HP)
410,000
NH 60-56 (65-HP)
439,000
UNIVERSALU-640(65 HP)
436,800
UNIVERSAL U-530 (53-HP)
320,000

(In Rs.)
2007-08
% Change
370,000
9
462,000
8
564,000
5
704,000
10
1,020,000
3
367,000
15
399,000
14
510,000
11
550,000
17
430,000
5
460,000
5
439,000
1
359,000
12
Source: Ministry of Food, Agriculture and Livestock.

iv) Plant Protection

v) Irrigation:

Plant protection is an important factor amongst the

agricultural inputs In this regard, the Department
of Plant Protection (DPP) provides facilities, such
as, Locust Survey and Control, Aerial Pest Control
and Pesticide Registration and Testing.

Efficient irrigation system is a pre-requisite for

higher agricultural production since it helps
increase the crop intensity. Despite the existence of
good irrigation canal network in the Pakistan, it
still suffers from wastage of a large amount of
water in the irrigation process.

Pakistan remained free from gregarious desert

locust activity. However, nature solitary adult
locust population ranging from 1-3/h was observed
in four localities in uthal area of Balochistan. The
Department carried out regular field crop surveys
and aerial spray operation on date palms against
Dubas bug in Panjgur on an area of 12,400 acres
during the said period. Federal Pesticides Testing
and Reference Laboratory analysed 571 samples of
the pesticides during July-March (2007-08).

Table 2.13: Rainfall Recorded During 2007-08

(In Millimeter)
Monsoon
Rainfall
(Jul-Sep)
2007

Winter
Rainfall
(Jan-Mar)
2008

Normal
137.5
70.5
Actual
125.0
49.3
Shortage (-)/excess (+)
-12.5
-21.2
% Shortage (-)/excess (+)
-9.1
-30.0
Source: Pakistan Meteorological Department

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Pakistan Economic Survey 2007-08

During the monsoon season (July-September,
2007) the normal rainfall is 137.5 mm while the
actual rainfall received stood at 125.00 mm,
indicating a decrease of 9.1 percent. Likewise,
during the winter (January to March 2008), the
actual rainfall received was 49.3 mm while the
normal rainfall during this period has been 70.5
mm, indicating a decrease of 30 percent over the
normal rainfall. The details are in Table 2.13.

The canal head withdrawals in Kharif 2007 (AprilSeptember) have increased by 12.0 percent and
stood at 70.78 Million Acre Feet (MAF), as
compared to 63.10 MAF during the same period
last year. During the Rabi season 2007-08
(October-March), the canal head withdrawals
decreased by 10.5 percent, as it remained at 27.93
MAF compared to 31.18 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)

Provinces
Punjab
Sindh
Baluchistan
NWFP (CRBC)
Total

Kharif
(Apr-Sep)
2006

Kharif
(Apr -Sep)
2007

34.92
25.10
2.03
1.06
63.10

37.66
30.29
1.75
1.08
70.78

Million Acre Feet (MAF)

% Change in
Kharif 2007
over 2006

8.0
21.0
-14.0
2.0
12.0

Rabi
(Oct-Mar)
2006-07

Rabi
(Oct Mar)
2007-08

16.28
13.76
0.73
0.42
31.18

15.25
11.21
0.78
0.70
27.93

% Change in
Rabi 2007-08
Over 2006-07

-6.0
-19.0
7.0
68.0
-10.5

Source: Indus River System Authority.

In order to alleviate water scarcity, the government

has given top priority to the development of water
resources in order to uplift the agro-economy.
About 71.00 billion development budget is being
expended in water sector to achieve the objectives
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. Water
conservation
is
being
ensured
through
rehabilitation remodeling of irrigation system and
lining of canals. Integrated programme approach is
being adopted like National Program for
Watercourses Improvement in Pakistan and Flood
Protection Programme. Following major objective
were achieved or planned to be achieved by
adopting the above-mentioned strategies in water
sector during the year 2007-08.

Fast track implementation of 3 mega canals

projects namely; Kachhi Canal in Balochistan,
Rainee Canal in Sindh and Greater Thal Canal
in Punjab for irrigating 2.864 million acres.
Substantial completion of Mangla Dam
Raising Project for additional storage of 2.9
MAF and additional power of 120 MW.

On time completion of Mirani Dam Project in

Balochistan to provide water for 33,200 acres.

Completion of Sabakzai Dam in Balochistan to

irrigate 6,875 acres.

Substantial completion of Satpara Dam in

Northern Areas for irrigation of 15,536 acres
and 15.8 MW power generation.

Continued work on Gomal Zam Dam Project

in Tribal/NWFP area despite the law & order
situation.

Launching of Kurram Tangi Dam Project in

NWFP.

Detailed design of Diamer Basha Dam near

completion.

Fast track implementation of National Program

for Improvement of Water Courses in Pakistan
for 86000 watercourses to save about 8 MAF
water.

Launching of Water Conservation project

through High Efficiency Irrigation System
(drip and sprinkler) in Pakistan to upgrade
irrigation in 291,000 acres.

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Agriculture

4.90 million acres of irrigated land.

In drainage sector fast track implementation of

RBOD-I, II & III Project to protect and reclaim

Table 2.15: Water Sector Projects under Implementation

Cost
Total
Projects
Location
(US$m)
App.cost
(Rs. M)
Gomal Zam Dam
NWFP
211
12,829
Greater Thal Canal *
Punjab
501
30,467

Live
Storage
(MAF)
1.14
-

Area Under
Irrigation
(Acres)
163,086
1534,000

Rainee Canal *

Sindh

229

18,862

412,000

Kachhi Canal *

Balochistan

538

31,204

713,000

Sabakzai Dam
Raising of Mangla Dam
(30 ft)
Satpara Dam Multipurpose
Diamer Basha Dam
Project

Balochistan
AJ&K

26
1030

1,577
62,553

0.02
2.90

Skardu

35

2,090

0.05

6,680
Through out
Pakistan
15,536

N.A &
NWFP

6,500

Cost not
Yet final

6.40

Feasibility in
progress

NWFP

283

17,205

0.83

362,380

Kurram Tangi Dam

Completion
Date
Oct., 2010
Dec. 2008,
Phase-I
March 2009
Phase-I
Dec., 2008
Phase-I
Dec., 2008
June, 2008
Dec., , 2008
Feasibility in
progress

2010-11
Works on
main dam not
yet started
Source: Water Resources Section, Planning & Development Division
* Date of completion for all three canals is for Phase-I, whereas cost is reflected for total project

vi) Agricultural Credit:

Agricultural credit provides financial resources to
the farming community particularly for purchase of
primary inputs like fertilizer, seed, pesticides,
machinery, equipments etc. Government considers
it as 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 year. In order
to cope with the increasing demand for agricultural
credit, institutional credit to farmers is being
provided through Zarai Taraqiati Bank Limited
(ZTBL), Commercial Banks, Punjab Provincial
Cooperative Bank Ltd (PPCBL) and Domestic
Private Banks. The Government has allocated Rs
200 billion for agriculture credit disbursements for
the year 2007-08 which is 25 percent higher than
the allocation of the preceding year i.e. Rs 160
billion. Out of the total credit target of Rs 200
billion, Rs 96.5 billion were allocated to
commercial banks, Rs 60 billion to ZTBL, Rs 8

billion to Punjab Provincial Cooperative Bank

Ltd., and Rs 35.5 billion to Domestic Private
Commercial Banks. The agricultural loans
extended to the farming community during JulyMarch, 2007-08 are discussed below:
a) Production and Development Loans
Agricultural loans amounting to Rs. 138.6 billion
were disbursed during (July-March, 2007-08) as
against Rs.111.2 billion during the corresponding
period last year, thereby registering an increase of
24.6 percent. The share of ZTBL in supply of total
agricultural credit by institutions decreased and
was 28.6 percent during (JulyMarch, 2007-08)
However, the share of Commercial Banks has
surpassed the share of ZTBL; it was 47 percent of
the total agricultural credit disbursed during July
March 2007-08. While the share of PPCBL has
also decreased as it stood at 2.8 percent in supply
of total agricultural credit by institutions. The share
of domestic private bank has increased; as it was
21.6 percent of the total agricultural credit
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Pakistan Economic Survey 2007-08

disbursed during July-March, 2007-08. Supply of
agricultural credit by various institutions since

2003-04 to 200708 (July-March) is given in Table

2.16.

Table 2.16: Supply of Agricultural Credit by Institutions

Year
ZTBL
Commercial
PPCBL
Banks
2003-04
2004-05
2005-06
2006-07
2006-07(July-March)
2007-08(July-March)

29933.07
37408.84
47594.14
56473.05
40881.42
39561.17

33247.45
51309.78
67967.40
80393.19
48962.19
65124.83

7563.54
7607.47
5889.49
7988.06
5269.57
3935.16

(Rs. in million)
Total
Rs.
%Change
Million
2701.80
73445.86
24.6
12406.82
108732.91
48.0
16023.38
137474.40
26.4
23976.16
168830.46
22.8
16081.99
111195.17
29975.57
138596.72
24.6
Source: State Bank of Pakistan.

Domestic
Private Banks

b) Zarkhaiz Scheme (one Window Operation)

d) Crop Maximization Project:

ZTBL continued its expeditious delivery of credit

to farmers with special reference to subsistence
and small farmers through One Window
Operations. This programme has established its
importance by witnessing tremendous strength in
timely channeling of production loans to small
farmers, which contributed significantly towards
increasing farm production. The programme is
conducted by the Bank in coordination with the
officials of Provincial Revenue Department and
Pakistan Post Office once a week on Monday for
Rabi crops during the period from October to
January and for Kharif crops from April to
September each year. Under One Window
Operation loans are processed on the spot and
sanctioned in the branches within 3 days.

Ministry of Food, Agriculture & livestock

(MINFAL) launched an integrated development
programme entitled Crop Maximization Project
(CMP) in 15 districts of the country. The project
aimed at providing inputs for crops through
Revolving Fund for the financial assistance of the
farmers in the project area. Under an agreement,
the MINFAL will provide funds to the tune of Rs
299.893 million to ZTBL for onward lending to the
project farmers to meet the input requirements for
various crops and ZTBL will revolve these funds
up till 30th June 2014.

c) Sada Bahar Scheme/Revolving Finance

Scheme:
For providing timely input loans for crops and
working capital for dairy, poultry and fisheries, the
Bank has launched Sada Bahar Scheme (SBS).
Assessment for inputs requirements for the whole
year is made at the time of first application. The
amount so assessed is treated as Revolving Limit.
For repeat loan, fresh investigation/appraisal is not
necessary. The Managers are authorized to
sanction such loan within their loan sanctioning
powers and renew the same even if previously it
was sanctioned by the higher authority. During
(July 2007 March 2008), an amount of Rs
33473.514 million was disbursed inclusive of Rs
8187.698 million disbursed under One Window
Operations.

New Schemes/Initiatives
a) White Revolution
Under the White Revolution Scheme, two Strategic
Partnership Agreements have been executed
between ZTBL and M/S Nestle Pakistan Limited
and M/s Pakistan Dairy Development Company.
Under this participatory approach, dairy sector
would be modernized with a view to increase milk
supply, mitigate poverty and improve the living
standard of the rural population. The Bank has
earmarked funds to the tune of Rs. 5,000 million
for financing of 50,000 animals (buffaloes and
imported cows) during the five years period (20072011).
M/s. Nestle Pakistan would help to select and
identify good clients for the Bank to improve
quality breed of foreign and local dairy animals.
Technical guidance would be provided to the
farmers through Nestle Veterinary Doctors. The
Company would purchase milk through its network

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Agriculture
and make weekly payment of milk sale to the Bank
for the adjustment of loan. M/s Pakistan Dairy
Development Company will also help the Bank in
the selection of clients and processing of loan
cases. Initially the scheme will be for
modernization of 5000 farms during 5 years period
involving Rs 700 million. Under the scheme 1000
farms would be covered on yearly basis. There
would be maximum loan limit of Rs 1 million per
borrower/party.
b) Sairab Pakistan Scheme
Water plays vital role in improving per acre yield.
Increase in water supply being a key input is
required to raise cropping intensity and enhance
the income of the farmers. Since inception, ZTBL
has financed over 144,478 tube wells by disbursing
over Rs 14,713 million. For raising irrigated area
to accelerate the economic growth and to facilitate
the farmers, ZTBL will also provide loans to
farmers for installation of tubewells/turbines.
c) Red Meat Financing Scheme
In line with the policy of Government for
accelerated development of livestock sector, the
bank has announced a Red Meat Financing
Scheme for fattening/rearing of sheep/goat. This
scheme will address the credit need of livestock
farmers especially the small farmers. Initially the
scheme is implemented in Multan, Faisalabad,
Dera Ghazi Khan, Dera Ismail Khan, Bhakkar,
Nawabshah, Dadu, Sukkur, Peshawar, Lasbella,
Loralai and Khuzdar Districts branches having
good potential and repayment culture. The loans
are advanced @ Rs 5000/- per Sheep/Goat, RS
3500/- for Teddy Goat and Rs 1200/- per Kid
(Sheep/Goat). Rearing expenses are borne by the
borrowers from their own resources.
III. Forestry
Forests are an essential part of our economy
through their significant role in land conservation,
regulation of flow of water for irrigation and power
generation, reduction of sedimentation in water
channels and reservoirs and maintenance of
ecological balance. Forestry is also essential for
maintaining a sustained supply of wood and wood

products. Pakistan is a land of great diversity,

which has yielded a variety of vegetation,
however, only 5.01 percent of total land area is
under forest ranking it under Low Forest Cover
Countries. Of this total forest area, commercial
forest is just one-third (32.8%) and the rest
(67.2%) is under protection forests performing soil
conservation, watershed protection and climatic
functions. Forests include State-owned forests,
communal forests and privately owned forests.
Major forest types existing in Pakistan are
temperate and subtropical conifer forests, scrub
forests, riverine forests irrigated plantation, liner
plantations (roadside, canal-side), and mangrove
forests. Besides, a significant proportion of private
farmlands are under tree cover. Existing forest
resources are under pressure to meet the fuelwood
and timber needs of rising population and woodbased industries including housing, sports,
matches, boat making and furniture industries.
Priority of Forestry Sector is reflected in MTDF
(2005-10) wherein Government of Pakistan has
allocated ample financial resources. The target is to
increase forest cover from 5.01 to 6.0 percent by
2015. Recently mega forestry projects amounting
Rs 12 billion have been approved by ECNEC that
shall be implemented by all the Provincial
Governments including Azad Jammu Kashmir and
Northern Areas. The Provincial Governments are
implementing these projects with the involvement
of all stakeholders including farmers, local
communities, forest owners, civil society
organizations and private sector companies
During the year 2007-08 forests have contributed
74 thousand cubic meters of timber and 206
thousand cubic meters of firewood as compared to
100 thousand cubic meters timber and 225
thousand cubic meters firewood in 2006-07. In
order to enhance tree cover in the country, tree
planting campaigns are held each year. During the
tree planting campaign, all the Government
Departments, Private Organizations, Defence
Organizations and NGOs are involved in planting
activities. During spring and monsoon season year
2007, 95.14 million saplings (spring 61.48 million
and monsoon 33.66 million) were planted.
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IV. Livestock and Poultry
a) Livestock
As a result of strong economic growth achieved in
recent year, the per capita income of the people
have also increased. As people become more
affluent, they have not only been consuming more
food but shifting their diet towards higher quality
food product such as meat and dairy products.
Accordingly the demand for high quality food such
as meat and dairy products are rising and putting
pressure on the prices of these commodities. In a
changed environment, there is an ample scope to
provide boost to the livestock and dairy sector.
Unfortunately, these sectors have received little or
no attention by the successive governments in the
past. It is important to note that livestock accounts
for 52.2 percent of agricultural value added,
contributes 11 percent to GDP and affects the lives
of 30 35 million people in rural areas. It is highly
labour intensive and if proper attention is given to
this sector, it will not only absorb more rural
workforce but also help alleviate rural poverty in
Pakistan. In order to achieve higher sustained
growth in agriculture, it is absolutely necessary for
the government to give more attention to livestock
and dairy sector because it is not immune to the
mother nature.
Realizing its importance to rural poverty reduction,
the government has started giving some attention
only during the last two years. It is in this
perspective that livestock development policy and
poultry development policy have been put in place.
Both policies are aimed at developing livestock
and dairy sector by the private sector, the job of the
Table No 2.18: Milk and Meat Production
Species
Units
Milk (Gross Production)
000 tons
Cow

Buffalo

Sheep#

Goat

Camel#

000 tons
Milk (Human Consumption)@
Cow

Buffalo

Sheep

Goat

Camel
000 tons
Meat &

government is to provide enabling environment.

Accordingly, a full autonomous private sector led
Livestock and Dairy Development Board and
Pakistan Dairy Development Company have been
established. These companies are serving as a
platform for investment in this sector. Apart from
provincial Government programs, the federal
government has substantially increased public
sector investment in livestock sector and has
initiated projects to the tune of Rs 7.1 billion for
strengthening livestock services for improving
disease control; milk and meat production; breed
animal husbandry and management practices; in
the county. The livestock population for the last
three years is given below:
Table 2.17: Livestock Production (Million No)
Species
2005-06*
2006-07#
2007-08#
Cattle
29.6
30.7
31.8
Buffaloes
27.3
28.2
29.0
Sheep
26.5
26.8
27.1
Goat
53.8
55.2
56.7
Camels
0.9
0.9
1.0
Horses
0.3
0.3
0.3
Asses
4.3
4.3
4.4
Mules
0.2
0.2
0.2
Source: MINFAL (Livestock Wing
Notes:
* Actual Figures of Livestock Census 2006
# Estimated Figure based on inter census growth
rate of Livestock Census 1996 & 2006

The major products of livestock is milk and meat,

the production of which for last three years is
given below:

2005-06*
39,596
13,407
24,723
34
664
767
31,970
10,726
19,779
34
664
767
2,515

2006-07**
40,872
13,913
25,465
35
682
77
32,996
11,130
20,372
35
682
777
2,618

2007-08**
42,199
14,437
26,239
35
700
787
34,064
11,550
20,991
35
700
787
2,727

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Table No 2.18: Milk and Meat Production
Species
Units
Beef

Mutton

Poultry meat

2005-06*
1,449
554
512

2006-07**
2007-08**
1,498
1,549
566
578
554
601
Source: MINFAL (Livestock Wing)

Note:
*
The figures for milk and meat production for the year 2005-06 were calculated using the livestock population reported in livestock census
2006 and then by applying production parameters.
** The figures for milk and meat production for the year 2006-07 and 2007-08 were calculated by applying production parameters to the
projected population of 2006-07 and 2007-08 based on the inter census growth rate of livestock census 1996-2006
#
The figures for the milk production for the year 2005-06, 2006-07 and 2007-08 were calculated after adding the production of milk from
camel and sheep to the figures reported in the livestock census 2006.
@ Milk for human consumption is derived by subtracting 20% (15% wastage in transportation and 5% in calving) on the gross milk production
of cows and Buffalo.
& The figures for meat production are of red meat and do not include the edible offals

The production of other livestock products for the last three years is given below:
Table No. 2.18: Livestock Products Production
Species
Units
Million Nos
Eggs
000 Nos
Hides
Cattle

Buffalo

Camels

000 Nos
Skins

Sheep skin

Goat skin

Fancy skin
Lamb skin

Kid skin

000 tons
Wood

Hair
Edible Offals

Blood

Guts
000 Nos
Casings

Horns & Hooves

000 tons
Bones

Fats

Dung

Urine

Head & Trotters

Ducks, Drakes & Ducklings

2005-06*
9,712
11,418
5,602
5,723
94
43,353
10,016
20,722
12,616
2,975
9,641
40.10
20.31
300
51.45
43,795
12,160
42.81
633.48
203.28
894
277
186.49
0.70

2006-07**
2007-08**
10,197
10,712
11,803
12,202
5,813
6,032
5,895
6,074
95
96
44,325
45,325
10,131
10,251
21,283
21,860
12,910
13,215
3,009
3,045
9,901
10,170
40.57
41.05
20.85
21.41
308
317
52.74
54.07
44,777
45,788
12,568
12,992
44.06
45.36
652.51
672.24
209.18
215.30
921
949
285
293
191.66
197.02
0.67
0.67
Source: MINFAL (Livestock Wing)

Note:
*
The figures for livestock products for the year 2005-06 were calculated using the livestock population reported in livestock census 2006 and
by applying production parameters.
** The figures for livestock product for the years 2006-07 and 2007-08 were calculated by applying production parameters to the projected
population of 2006-07 and 2007-08

B) Poultry
Poultry sector is one of the most vibrant segments
of agriculture sector of Pakistan. This sector

generates employment (direct/indirect) and income

for about 1.5 million people. Poultry meat
contributes 19 percent of the total meat production
in the country. The current investment in Poultry
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Pakistan Economic Survey 2007-08

Industry is about Rs 200 billion. Poultry sector has
shown a growth of 8-10 percent annually.
This sector has faced a tough challenge on account
of Avian Influenza (AI) outbreak in the country.
The re-occurrence of Avian Influenza was reported
on 3rd February 2007 in backyard poultry/zoo and
commercial poultry in Rawalpindi/Islamabad,
Peshawar, Abbottabad, Mansehra, Kamalia,
Summundari and Karachi areas. There have been
72 (27 commercials flocks and 45 backyard
poultry and game birds) recorded cases of H5NI
till March 2008, involving approximately 176.1
thousand commercial poultry (broiler/layer) apart
from game birds and backyard poultry. Zero
tolerance policy was adopted and flocks were
destroyed under the supervision of state
veterinarians and district administration. Apart
from projects already under implementation
regarding Avian Influenza, Ministry, Food,
Agriculture & Livestock has intimated a project

titled National Programs for the Control and

Preservation of Avian Influenza at a total cost of
Rs 1180.142 million. The project is of three years
duration and will be implemented through out
Pakistan including AJK, FATA and FANA. The
proposed project objectives include improving and
scaling up avian influenza surveillance, reporting
and diagnostic at federal and provincial district
levels. Strengthening disease control, outbreak
containment and eradication of highly pathogenic
avian influenza (HPAI), compensation to farmers,
increase awareness among the farmers, consumers,
veterinarians and other stake holders regarding AI,
vaccine development, improving veterinary
services to enforce national animal disease control
measures.
The production of domestic/rural & commercial
and rural poultry and products for last three years
is given below:

Table No. 2.19: Domestic/Rural & Commercial Poultry

Type
Domestic Poultry
Cocks
Hens
Chicken
Eggs
Meat
Duck, Drake & Ducking
Eggs
Meat
Commercial Poultry
Layers
Broilers
Breeding Stock
Day old chicks
Eggs
Meat
Total Poultry
Day old chicks
Poultry Birds
Eggs
Poultry Meat

Units
Million Nos

000 Tons
Million Nos

000 Tons

2005-06*
72.95
8.61
34.23
30.12
3423
94.67
0.70
31.14
0.95

2006-07**
74.02
8.84
34.84
30.34
3484
96.54
0.67
29.85
0.91

2007-08**
75.11
9.08
35.47
30.57
3547
98.45
0.67
29.85
0.91

Million Nos

000 Tons

23.20
337.00
6.90
352.00
6258
416.55

24.82
370.70
7.25
387.20
6682
456.95

26.56
407.77
7.61
425.92
7136
501.30

Million Nos

000 Tons

352.00
441
9712
512

387.20
477
10197
554

425.92
518
10712
601

Source: MINFAL (Livestock Wing)

Notes:
*
The figures for the year 2005-06 are the actual livestock census 2006 figure except for the Layers (Farming) and Breeding Stock (Farming)
which were calculated using the census and provincial figures to reflect the most upto date information.
** The figure for the year 2006-07 and 2007-08 were statistically calculated using the figures of 2005-06

34
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Agriculture
C.

Incentives to Promote Livestock

Government has provided following incentives to increase livestock and poultry production in the country:
Regulatory measures include allowing import of high yielding animals, semen and embryos for crossbreeding,
expansion/improvement and modernization of laboratory facilities to diagnose and treat livestock diseases;
introduction of mobile animal health service to provide diagnostic services at the door steps of farmers, duty
free import of veterinary dairy and livestock machinery/equipment, not manufactured in the country.
Government has allowed import of Incubators, Brooders, Evaporation cooling pads, cooling system, Grain
storage silos for poultry, poultry equipments, milk and meat processing machinery/equipment (not
manufactured locally), at zero percent custom duty. Private sector has imported milk and meat processing
machinery/equipment worth of Rs 285 million during July-March, 2007-08.
In order to reduce input costs in poultry production, poultry vaccines, feed additives, coccidiostats, Growth
promoters premixes, Vitamin premixes, Fish feed, Zinc sulphate, Copper sulphate used in poultry feed has been
zero-rated. Sales tax exemption has been allowed to un-cooked poultry meat; processed milk, yogurt, cheese
flavored milk, and butter cream. In addition, poultry, vaccines, feed additives and coccidiostats used in poultry
feed manufacturing have been allowed at zero percent custom duty.
Following new development projects have been launched in the country during 2005-06 to 2007-08.
Livestock Production and Development project is of five years duration (2005 2010) and has total allocation
of Rs 1520 million. It is assisting in the establishment of 2590 fattening farms (1040 beef and 1550 mutton), 08
Slaughterhouses and 20 butcheries in private sector.
Milk Collection Processing and Dairy Production and Development Program Project is of five years duration
(2005 2010) with a total cost of Rs 1588 million. More than 10,000 rural subsistence dairy farmers are likely
to enter into the milk marketing chain due to project interventions, 15000 to 20000 additional breeding animals
of better genetic potential for milk production will become available in the project area.
Livestock Project is of 05 years duration (2005-2010) and initiated at a total cost of Rs 1992 million. It is aimed
at enhancing the livestock productivity through the provision of livestock production and extension services at
farmers doorsteps, targeting 13 million rural poor in 1963 union councils in 80 districts of the country.
Improving reproductive efficiency of cattle and buffaloes in stallholders production system Project is of five
years duration (2007-2012) and has total cost Rs 495.15 million. The project aimed at establishment of Embryo
Transfer Technology Centre, Semen Production and Processing center, Strengthening of Provincial Semen
Production Units and Support of semen Production in private sector. The center will produce 5000 embryo per
year for farm use and supply to others.
Construction of Animal Quarantine Facilities at various places including Northern Area, Wahga Border, Lahore
and Khokrapar project has total coat of Rs 300 million. It is of five years duration (2006-2011). The project is
aimed at improving quarantine facilities and establishing new entry exit points to facilitate trade of animal and
animal products.

V. Fisheries
The share of fisheries in GDP, though small, but it
does contribute to the foreign exchange earnings
through export besides providing proteins to the
populace. The nutritional value of fish is very high,
with a protein content, low cholesterol content and
many useful dietary supplements. Government of
Pakistan is taking a number of steps to improve
fisheries sector. A number of initiatives are being
taken by federal and provincial fisheries
departments which include inter alia strengthening
of extension services, introduction of new fishing

methodologies, development of value added

products, enhancement of per capita consumption
of fish, upgradaion of socio-economic conditions
of the fishermens community.
Marine Fisheries Department
following development projects
i)

is

executing

Reduction in Seafood Post Harvest Losses by

Improvement of Fish Holds of Local Fishing
Boats which is aimed at to start a programme
of post harvest losses through modification of
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Pakistan Economic Survey 2007-08

the fish holds of the local fishing boats to
enhance the export earnings. Due to
improvement in the fish holds, post harvest
losses will be reduced substantially making
available additional quality raw material for
the processing plants.
ii) The project Stock Assessment survey
programme through chartering of research
vessel for Marine Fisheries Department is
aimed at chartering a suitable vessel for
conducting stock assessment resource surveys
in the coastal and offshore waters of Pakistan
to strengthen Marine Fisheries Department by
capacity building to conduct resource survey,
stock assessment on regular basis and to
develop management strategy for the fish
exploitation and utilization.
iii) Two other projects i.e. Accreditation of
quality control laboratories of Marine Fisheries
Department and Establishment of an
Integrated National Animal and Plant Health

Inspection Service (NAPHIS) are also being

implemented to provide improved quality
control services to the seafood export industry.
These two projects are aimed to get the
laboratories of the Marine Fisheries
Department accredited with international
bodies and meet the requirements of ISO
During the period July-March 2007-08, the total
marine and inland fish production was estimated to
be 640,000 M. tons. Out of which share of marine
fish is 390,000 M. tons and inland contributed is
250,000 M. tons. The production for the year
2006-07 was estimated to be 578,000 M. tons in
which 353,000 M. tons was from marine and the
remaining was 225,000 M. tons was produced by
inland fishery sector. Main buyers of fish and fish
preparations are Japan, USA Middle East, Sri
Lanka, and China etc. Pakistan earned US$ 188.5
million during July-March (2007-08) and over
100,000 M. tons of fish and fishery products were
exported.

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TABLE 2.15
LIVESTOCK PRODUCTS
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 *
2006-07 @
2007-08 @

Milk #

Beef

15,481
16,280
17,120
18,006
18,986
22,970
23,580
24,215
24,876
25,566
26,284
27,031
27,811
28,624
29,438
31,970
32,996
34,064

765
803
844
887
931
898
919
940
963
986
1,010
1,034
1,060
1,087
1,115
1,449
1,498
1,549

Mutton Poultry
Meat
665
151
713
169
763
265
817
296
875
308
587
355
602
387
617
284
633
310
649
322
666
339
683
355
702
370
720
378
739
384
554
512
566
554
554
601

Wool
48.1
49.3
50.5
51.7
53.1
38.1
38.3
38.5
38.7
38.9
39.2
39.4
39.7
39.9
40.0
40.1
40.6
41.0

Hair
7.9
8.3
8.1
9.0
9.4
15.6
16.2
16.7
17.3
17.9
18.6
19.3
19.9
20.7
20.7
20.3
20.8
21.4

Bones
259.0
265.0
271.0
277.0
283.0
295.7
302.3
309.2
316.3
324.0
331.4
339.4
347.6
356.2
365.1
633.5
652.5
672.2

Fat
101.8
104.5
107.2
110.0
113.0
110.1
112.6
115.2
117.8
120.6
123.5
126.5
129.7
132.9
136.3
203.3
209.2
215.3

Blood
40.1
42.5
45.1
47.3
50.7
32.0
32.8
33.6
34.4
40.9
41.8
42.9
44.0
45.2
45.2
51.4
52.7
54.1

Eggs

(000 tonnes)
Hides
Skins

(Mln.Nos.)

(Mln.Nos.) (Mln.Nos.)

4,490
5.9
32.7
33.9
4,914
6.0
36.0
5,164
6.1
37.8
5,740
6.2
39.3
5,927
6.3
32.7
5,757
7.0
34.5
6,015
7.1
35.3
5,737
7.3
36.3
8,261
7.5
37.2
7,321
7.6
38.2
7,505
7.8
39.2
7,679
7.9
40.3
7,860
8.2
42.4
8,102
8.4
42.6
8,529
8.4
9,712
11.4
43.3
10,197
11.8
44.3
10,712
12.2
45.3
Source: Livestock Division

* : Population figures are actual figures of Livestock Census 2006.

#: Human Consumption
@ : Estimated figures based on Inter census grwoth rate of livestock census 1996 & 2006

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Chapter 03

MANUFACTURING AND MINING

3.1 Introduction
Pakistans manufacturing sector recorded the
weakest growth in a decade during the outgoing
fiscal year 2007-08. Overall manufacturing posted
a growth of 5.4 percent during the first nine
months of the current fiscal year against the target
of 10.9 percent and 8.1 percent of last year. Largescale manufacturing, accounting for 69.5 percent
of overall manufacturing registered a growth of 4.8
percent in the current fiscal year 2007-08 against
the target of 12.5 percent and last years
achievement of 8.6 percent. Heightened political
tension, deteriorating law and order situation,
growing power shortages, cumulative impact of
monetary tightening and rising cost of doing
business are responsible for poor showing of
manufacturing in 2007-08. Taking a longer term
view, the manufacturing growth exhibits a
moderating trend (see Fig-3.1).
Fig- 3.1:Large-Scale Manufacturing Gorwth
(%) 1999-00 till 2007-08
18.1

20.0%
15.0%

11.0

10.0%
5.0%

3.5

1.5

19.9

8.7

7.2

8.6
4.8

0.0%
2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

The manufacturing sector in the country still

revolves around the traditional low value added
industries, whose share in world trade is
continuously declining. The investment in
upgrading technology is low and diversifying into
emerging markets, products and processes is either

slow or nearly constant. An efficient international

quality supply chain, which is so essential for local
industry to flourish, is missing, partly due to
insufficient scale of economies and partly due to
bundling of raw material, parts and modules by the
multinationals in their assembly oriented
companies, which discourage a local vendor
industry to flourish. Major constraints in achieving
and sustaining the goal of rapid industrialization,
are low productivity level without the development
of a widely embedded skills base, competence and
productivity, global trading challenges cannot be
achieved as well as skills shortage, and skills gap
in key modern technologies which reduces
optimum operation of both plant and machinery.1
Diversifying the manufacturing sector, developing
SMEs and enhancing productivity are the major
objectives to be achieved in the manufacturing
sector. Pakistan has to make important strategic
choices to ensure sustainable growth in the
manufacturing sector in a rapidly changing and
challenging international competitive environment.
This requires massive structural changes, shift in
the production paradigm to technology and
knowledge based industrialization, with a focus on
the quantitative and the qualitative growth of an
integrated and competitive industry in the private
sector. The inefficiencies of import substitution
must give way to an export led strategy. The share
of knowledge and technology intensive
engineering, electronics, pharmaceutical, chemical
and non-metallic mineral products, should be
strengthened and enabled through fiscal and tariff
means as well as building of alliances with
international partners. Sectors and products with
comparative advantage such as textiles, food and
agro-processing should similarly be fostered.
1

Annual Plan 2007-08, Planning Commission

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Pakistan Economic Survey 2007-08

Pakistans economy was characterized by a diverse
albeit stagnant manufacturing sector during most
period of the 1990s. It was in the later years that
prudent, far-reaching and innovative government
policies took hold and the manufacturing sector,
for the first time in the history of the country,
became the star of the economy. From 2000-01,
the large-scale manufacturing sector as a result of a
fast expanding economy, moved from one peak to
another and reached its zenith at 19.9 percent in
2004-05. During the last three years the large-scale
manufacturing sector is showing signs of
moderating along with a subsequent slowing down
of the economy and has registered a growth of 4.8
percent during the current fiscal year (see Fig-3.1).
The main contributors to this growth of 4.8 percent
in July-March 2007-08 over last year are
pharmaceuticals (30.7 percent), wood products
(21.9 percent), engineering products (19.5
percent), food & beverages (11.1 percent),
petroleum products (6.03 percent) and chemicals
(3.1 percent). Individual items displaying positive
growth are: cotton cloth (4.8 percent) and cotton
yarn (3.3 percent) in the textile group; cooking oil
(1.1 percent), sugar (33.9 percent) and cigarettes

(5.1 percent) in the food, beverages and tobacco

group; cement (17.9 percent) in the non-metallic
mineral products group and buses (32.0 percent),
LCVs (16.4 percent) and motorcycles (28.06
percent) in the automobile group. A few groups
showing decline in production are: fertilizers
(16.89 percent), electronics (4.6 percent), paper &
paper board (5.5 percent) and iron & steel products
(7.6 percent). The individual items exhibiting
negative growth include; cars & jeeps (3.9
percent), phosphatic fertilizer (24.0 percent) and
billets (20.6 percent).
According to statistics T.V sets has shown a
marked increase by posting a growth of 19.3
percent during the year under review. Similarly,
the production of buses in the country has
increased from 21.2 percent during the last fiscal
year to a healthy 32.0 percent in FY08. Production
in 42 reporting units comprising of printing,
writing packing, paper board and chip board units
declined by 5.6 percent during July -March 200708. The shortage of raw material such as wheat,
straw etc. is the basic reason of this lull in
production (see Table 3.1).

Table-3.1: 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
Bicycles
Paper & Paper Board
T.V Sets
Motor Tyres
Billets
Refrigerators
Caustic Soda

Units

2005-06

2006-07

000 tonnes
Mln.Sq. Mtr
000 tons
000 N. tons
000 N. tons
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

2546.5
903.8
2960.0
2411.4
414.5
241.6
1151.7
254.1
18564
64.1
163114
49439
29581
751667
589.6
476.7
935.1
5942
230.6
874.2
219.3

2845.2
977.8
3525.9
2362.4
372.8
246.5
1174.0
271.7
22739
66.0
179314
54610
24489
839224
486.3
464.7
609.2
7027
341.8
937.6
242.2

July-March
%
Change
2006-07
2007-08
2132.6
2203.5
3.32
727.9
763.4
4.88
3247.6
4351.2
33.9
1805.5
1825.3
1.1
317.9
241.6
-24.0
185.1
172.2
-6.97
881.8
856.8
-2.84
200.8
203.0
1.10
16448
19401
17.95
47.5
49.9
5.05
128145
123107
-3.93
39569
37514
-5.19
13436
15652
16.49
609528
780591
28.06
375.6
382.0
1.70
348.3
328.8
-5.60
440.5
525.5
19.30
4953
5165
4.28
258.2
204.8
-20.68
622.6
689.3
10.71
178.5
181.1
1.46
Source: Federal Bureau of Statistics

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Manufacturing and Mining

During the period July-March 2007-08 automobile
industry recorded some what subdued growth in
assembling/manufacturing
business.
The
production of LCVs increased by 16.4 percent,
buses 32.0 percent, trucks 1.5 percent and
motorcycles 28.0 percent. On the other hand,
during the same period, negative growth rate was
recorded for cars & jeeps (3.9 percent) and tractors
(5.1 percent). On the other hand, production of
bicycles increased by 1.7 percent as against a
negative growth of 16.5 percent last year
3.2 Textile Related Industries
Pakistans textile industry ranks amongst the top in

the world. Pakistan is worlds fourth largest

producer of cotton and the third largest consumer
of the same. Cotton based textiles contribute over
60 percent to the total exports, accounts for 46
percent of the total manufacturing and provides
employment to 39 percent manufacturing labour
force (see Table 3.2), the availability of cheap
labour and basic raw cotton as raw material for
textile industry has played the principal role in the
growth of the Cotton Textile Industry in Pakistan.
With the advent of the quota free global imperative
for a rapidly developing country like Pakistan to
further explore potential new markets both in its
neighboring territories as well as distant ones.

Table 3.2: Importance of Textile Industry in Pakistans Economy

2006-07
Share in Total Exports
61.1%
Share in Manufacturing
46%
Share in Employment
38%
Share in GDP
8.5%
Textile Exports
$6.6 billion
Investment in Textile
$6.4 billion

3.2.1 Textile Industry in Pakistan

During the year 2006-07 the Textile Industry was
confronted with problems both at local and global
level. The input cost impacted almost all sub
sectors. In spite of that the performance of Industry
during the last five years has been satisfactory. The
market was responsive, the Governments policy
was supportive and inputs were viable. The
industry made profits and re-invested in new
machinery for balancing, modernizing and
restructuring (BMR) and expansion. The industry
made an investment of approx. $6.4 billion during
the period 1999-2007. The major investment has
been made in spinning, weaving, textile processing
and making up sectors (see Fig-3.2). Approx.
454,000 new direct jobs have been created and
industry has been able to make incremental
production and exports. Import of textile
machinery, which is the single largest item in the
machinery group, picked up to $928.6 millions in
2004-05, $771.5 million in 2005-06, $503.0
million in 2006-07 and $281.7 million up to JulyFeb. 2007-08 (see Table 3.3). This shows that
investment for modernization of textile industry,
which started four years ago, still continues. The

2007-08 (July-Feb)
53.8%
46%
39%
8.5%
$6.3 billion
$7.0 billion
Source: Textile Commissioners Organization

industry, however, needs to be facilitated to exploit

its full potentials.
Fig-3.2 : Sectoral Shares in Total Investment in
the Sector ($ 7.0 billion), 1999-2008
Made Ups,
Knitw ear &
Garments,
7.02%

4.71%
Sy nthetic
Tex tiles,
5.76%

Tex tile
Processing,
17.08%
Weav ing,

Spining,
50.20%

15.23%

The Textile Industry in Pakistan has not been able

to reap all benefits of quota phase out as compared
to its regional competitors. China, India and
Bangladesh are posing tough competition by virtue
of their competitiveness in term of price and
quality. Some sub-sectors of Textile Industry have
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Pakistan Economic Survey 2007-08

been impacted from the new trade development,
vis--vis cotton yarn and cloth, bed ware, garment
and knitwear sector remained under pressure and
declined.
Table-3.3 : Import of Textile Machinery
Year
Million $
% Change
1999-2000
210.9
28.6
2000-01
370.2
75.5
2001-02
406.2
9.9
2002-03
531.9
30.7
2003-04
597.9
12.4
2004-05
928.6
55.3
2005-06
771.5
-17.0
2006-07
503.0
-36.7
2007-08 (Jul-Mar)
318.2
Total
4638.3
Source: Federal Bureau of Statistics

Reforms in the Textile Sector

With the broad focus on knowledge, technology
and value addition improvements, the Ministry of
Textile Industries (MINTEX) is striving hard to
achieve the objectives of contamination-free cotton
to cater to the demand for quality raw material for
the finished products; technological up-gradation
at the ginning, weaving, processing and garment
production level; product diversification and valueaddition through better materials, accessories and
design inputs; up gradation of the weaving sector
with air jet and water jet looms along with zero
rated duties; encouragement of integrated as well
as horizontal garment industries on the basis of
R&D and technological support for the garments
sector; introduction of cotton hedge trading to
promote marketing of cotton; testing facilities for
increasing compliance and conformity assessment;
and augmenting the institutional capacity in the
field of research by setting up of R&D Cell within
the Ministry.
The industrys market competitiveness is
dependent to a considerable degree on the
operating environment in Pakistan as shaped by
factor costs, gas, power, human resource
development (academic/vocational); marketing
support; taxation and investment policies and
infrastructure development. At the moment, a
relatively small number of companies match
international levels for quality however, most
companies are aiming to improve their
40

competitiveness via cost and quality control in the

changing market environment of today.
In order to accelerate the growth of textile sector
and to resolve issues of supply chain management
and value addition, the MINTEX has taken a
number of proactive measures since its inception.
These include: Federal Textile Board (FTB),
Textile Skill Development Board, Textile Training
Institute Management Board (TTIB) etc. A brief
discussion on these is as follows.
Federal Textile Board (FTB): In order to prepare
the Textile Industry for post quota scenario the
Government in September, 2000 set up FTB. FTB
has been tasked with Clean Cotton Program,
Labor,
Social
and
Environment
Laws,
Modernization of Ginners, Rationalization of
Tariff, Facilitation in Sales Tax Issues and to
develop packages to promote garment sector by
improving their competitiveness in the global
market.
Textile Skill Development Board: As announced in
the Trade Policy for the Year 2005-06 Government
established a Textile Skill Development Board, to
provide support to the Textile Garments Sector,
and initiated skill development and training of
stitching workers. The objective of the board was
to train a critical mass of 10,000 to 12,000
stitching machine operators in one year, both for
woven and knitted garments, by imparting training
at the factory/unit. The scheme has been launched
and 34 garments units have joined the Stitching
Machine Operators Training (SMOT) Scheme, of
which 15 units are in Karachi, 11 units in Lahore, 7
units in Faisalabad and one unit in Rawalpindi.
About 3800 trainees have been trained of which
2700 are females and 1100 males.
Textile Training Institute Management Board
(TTIB): Pakistans human resource development
profile needs major reforms since there is an acute
shortage of skilled manpower in the country thus
TTIB was created to address this critical issue. The
elimination of quotas has exposed the
manufacturing sector to intense competition from
China and India. The entire textile value chain
needs to be upgraded in terms of production
management, dyeing, printing and wet processing,
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quality stitching, line supervision, machinery
maintenance, factory floor performance, better
technology, and research and innovation. TTIMB
has been constituted in 2008 with representatives
from academia and Textile Industry. TTIB has so

far undertaken a planned program of strengthening

of faculty, equipment and support for the
scholarships in order to train youth work force
according to the needs of the textile industry.

Box Item -13.1: Recent Initiative Taken to Support Textile Industry

Government of Pakistan has taken various initiatives to boost the textile sector and to make it compatible with other
global competitors in the quota free regime, these are:

Establishment of separate Ministry of Textile to focus on textile issues.

Amendments in labour laws and factories act to make them ILO and W.T.O compliant.

A Campaign for the production of contamination free cotton was launched with amendment in Cotton Control
Act, 1966. As a result the foreign matter in cotton has been reduced from 60gm per bale to 5 gm per bale.

Gradual reduction of import duty on textile machinery to 5%.

Sales Tax on the import and local supply of major inputs/raw materials utilized in the manufacturing regime of
textile industry, has been zero rated.

Import duty on raw material, sub-components and components used in the local manufacturing of textile plants
and machinery for export sector has been reduced to zero%.

Import duty on ginning presses has been reduced to 5%.

Turn over tax has been reduced to 1% on retailers of specified textile fabrics and articles of apparel including
readymade garments or fashion wear. The 15% Sales Tax levied earlier on retailer has been reduced to 2%.
Both these taxes will be final tax liability.

Custom Duty, Sales Tax and withholding tax on raw materials for the manufacture of textile has been zero rated
at the import stage to do away with the duty drawback/refund claims under the revised and simplified DTRE
Scheme.

R&D support has been given to Garment Exports at 6%, Dyed/Printed & White, Home Textile at 3% &
dyed/printed home textile at 5% of the FOB value.

MINTEX has launched studies by International consultants M/s. Gherzi to conduct a study based on assessment
of the cost of production in competing countries and the subsidies being provided by their respective
Governments in order to enable us to develop a strategy to enhance competitiveness of the Industry in Pakistan.

In order to meet the shortage of raw cotton, import of raw cotton was allowed from Wagah Border.
Source: Textile Commissioners Organization

3.2.2 Ancillary Textile Industry

i)

Cotton Ginning Sector

Textile production is comprised of cotton ginning,

cotton yarn, cotton fabric, fabric processing (greydyed-printed), home textiles, towels, hosiery &
knitwear and readymade garments. These
components are being produced both in the largescale organized sector as well as in unorganized
cottage/small and medium units. The performance
of these various ancillary textile industries is
evaluated below:-

Cotton is a natural fiber used primarily as a

raw material for textiles. 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 percent to 39 percent in the
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total world fiber consumption. 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.
ii) Cotton Spinning Sector
Spinning is the process of converting fibers
into yarn. The Spinning Sector is the most
important segment in the hierarchy of textile
production. Pakistan has the third largest
spinning capacity in Asia with a spinning
capacity of 5percent of the total world and 7.6
percent of the capacity in Asia. Pakistans
growth rate in this sector has been 6.2 percent
per annum and is second only to Iran amongst
the major players. At present, it is comprised
of 521 textile units (50 composite units and
471 spinning units) with 10.1 million spindles
and 114 thousand rotors in operation with
capacity utilization of 89 percent and 60
percent respectively, during July March,
2007-08.
Table 3.4: Installed and Used Capacity in Weaving
Sector
(Nos.)
Effective/
Installed
Category
Capacity
Capacity
Worked
a) Integrated Textile Mills
7599
3471
b) Independent Weaving
Units
27500
27000
c) Power Loom Sector
295442
285442
Total
330541
315913
Source: Textile Commissioner Organization.

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 (see Table 3.4). The Power
Loom Sector has modernized and registered a
phenomenal growth over the last two decades.
The growth in power loom sector is to a larger
extent a result of the government policies
pursued so far as well as increased demand for
the product. This sector is producing
comparatively low value added grey cloth of
mostly inferior quality. The problems of the
Power Loom Sector revolve round access to
credit facilities to modernize their equipment
as well as purchase of yarn especially when the
prices of yarn increase and the prices of cloth
increase with a time lag. There is a need for
training facilities and guidance to diversify
their products, especially to cater to the needs
of the garment industry. However the
performance of cloth sector remained far better
than last year and charted a growth of 12.6
percent during July-March 2007-08.
iv) Cotton Cloth
While the production of cloth in mill sector is
reported, the same is not true with production
of non-mill sector. Output of the non-mill
sector is estimated although its output is seven
times more than the mills sector. The
production of cloth, both from mills and nonmills sector have registered a growth of 2.7
percent during July-March 2007-08 (see Table
3.5). This sector showed growth and thus
served as the main strength for down stream
sectors like bed wear made-up & garments.
However, it recorded somewhat negative
export growth for July-March 2007-08 (11.0%) as compared to 2006-07. This decline
in exports can largely be attributed to
increasing cost of production due to shortage
of cotton in the local market, increased wages
of unskilled workers, massive power cuts,
rising international competition and poor
infrastructure
have
made
the
local
manufacturers and exporters non-competitive
in the international market. Meanwhile,
Pakistans
competitors
e.g.,
China,
Bangladesh, India and Sri Lanka are
aggressively marketing their products and are
more competitive in the international market
than Pakistan.

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Table 3.5: Production of Cloth (M. Sq. Mtrs)
2006-07
2007-08
%
Category
(Jul-Mar) (Jul-Mar) Change
Mill Sector
759.68
773.44
1.81
Non-Mill Sector
5762.05
5925.03
2.83
Total
6521.74
6698.47
2.71
Source: Textile Commissioner Organization.

(7.3%) as compare to last year. Currency

differentials between India (Pakistans
traditional rival in this sector) and Pakistan
as well as increased stress on quality
control, played favorable for the country
and diverted more orders towards
Pakistani garment exporters.

v. Textile Down-Stream Industry

c. Towel Industry

This is the most dynamic segment of textile

industry. The major product groups are
Towels, Tents & Canvas, Cotton Bags, BedWear, Hosiery & Knitwear and Readymade
Garments including Fashion Apparels.

There are about 7500 Towel Looms in the

country in both organized and unorganized
sector. This Industry is dominantly export
based and its growth depends heavily on
export outlets. Towel Industry showed a
negative growth of 3.9 percent in FY08
against FY07. Over 300 percent increase
in export of towels in the past indicate that
tremendous possibilities exist for further
expansion provided the existing towels
manufacturing factories are up-graded to
produce better quality towels so that they
have a fair chance in the international
market.

a. Hosiery Industry
There are about 12,000 knitting machines
spread all over the country. The capacity
utilization is approx 70 percent. 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. However,
the sub-sector remained under pressure
from its competitors during the year under
review and recorded a decline of 8.0
percent in exports as against last year amid
tough competition emerging from the
newly-inducted members to the European
Union (EU) belonging to the former East
European bloc.
b. Readymade Garment Industry
The Garment Industry provides highest
value addition in Textile Sector. This
industry is distributed in small, medium
and large scale units most of them having
50 machines and below; however, large
units are now coming up in the organized
sector of the industry. The industry enjoys
the facilities of duty free import of
machinery and income tax exemption.
During the year under review the sector
recorded a healthy growth in exports

d. Canvas
Canvas exports can be subdivided into five
categories i.e. tarpaulins, awnings & sun
blinds, tents, sails, pneumatic mattresses
and camping goods. Although all of the
different types of canvas are being
manufactured in Pakistan but it 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. Around 60
percent of its production is exported while
40 percent is consumed locally by Armed
Forces Food Department. During (JulyMarch) 2007-08 canvas exports showed a
decline of 3.1 percent. Intense competition
from its competitors in the international
market, country-wide incidents of violence
and chaos following the assassination of
former Prime Minister Benazir Bhutto as
well as prolonged Eid holidays in
December, 2007 were the main reason for
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Pakistan Economic Survey 2007-08

the falling export of textile products.
Assassination of Ms Bhutto in December
brought to halt not only the industrial
activities but huge number of export
shipments could not make their way to the
sea ports because of strikes and
unavailability
of
cargo
transport
compelling importers of Pakistani products
to divert their orders to other destinations.
e. Synthetic
Sector

Fiber

Manufacturing

This sector has made tremendous progress

in line with demand of the Textile Industry
and have registered vigorous export
growth of 41.0 percent during July-March
2007-08. Presently there are seven
Polyester Fiber Units with production
capacity of 640,000 tons per annum, two
acrylic fiber units of which one unit (M/s.
Dewan Salman) has started its commercial
production in December 1999 with
capacity of 25,000 tons per annum. Two
units of Viscose Fiber with a capacity of
10,000 tons and 72,000 tons per annum
respectively have also gone into
production.
vi. 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.
Table 3.6: Capacity of Synthetic Filament Yarn
Type of yarn
No of
Production
Units
of Capacity
(Metric. Tons)
Acetate Rayon Yarn
1 Units
3000
Nylon Filament Yarn
2 Units
2000
Polyester Filament Yarn
21 Units
95000
Source: Textile Commissioners Organization

imports from China has compelled local industry

to close down and only about 6 units with
operational capacity of 55,000 tons is supplying
polyester filament yarn. The local production
filament fabrics is not picking up as their export
sales are not feasible and local market is heavily
flooded with smuggled goods. However,
Government in the last year reduced duty on
filament yarn in order to boost the polyester yarn
industry which should have a positive impact on
polyester yarn production in times to come.
vii. Art Silk
Industry

and

Synthetic

Weaving

Art Silk and Synthetic Weaving Industry has

developed over 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
looms on filament yarn. Besides these there
are some mobile looms which also become
operational on market demand. The major
concentration is in Karachi, Faisalabad,
Gujranwala, Jalalpur Jattan as well as in the
un-settled areas (Bara, Sawat, Khyber Agency
and Waziristan) of the country. This ancillary
textile sub-sector showed a healthy export
growth of 40.9 percent during July-March
2007-08 and earned $396.1 million for the
national exchequer on the back of increase in
export orders from Pakistans various trading
partners.
3.3 Other Industries
Although Pakistan is a large exporter of cotton and
textile related products in the world market, still
this does not mean that this is the only part of
manufacturing in the country which is growing.
During the last couple of years Pakistan has made
huge strides in other industries as well. Some of
these are documented below:

The polyester filament yarn manufacturing activity

has slowed down recently and currently large scale
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3.3.1 Engineering Sector
Engineering sector accounts for around 63 percent
share in world trade. Achieving any significant
share of this market will require concerted efforts
by Pakistan in gearing up our universities, polytechniques and factories for the kind of
manufacturing prowess and design capabilities
required by the world market. In this context an
important step has been taken by the restructuring
of the Engineering Development Board (EDB).
Engineering Development Board has been
assigned the task of strengthening the engineering
sector and integrating it with the world market to
make it the driving force for economic growth. As
part of EDBs engineering goods export promotion
strategy to integrate ambitious and capable
engineering companies with the global supply
chain, EDB has so far facilitated 100 Pakistani
engineering companies to participate in worlds
leading technology fairs either as exhibitors or as
members of business delegations. EBD has also
embarked upon a detailed sector development
program of various engineering sub-sectors with
the objective to become part of international
supply chain and to determine the indigenous

capabilities/capacities and assess export potential

of these sectors in the international market.
a. Automobile Sector
Pakistans automobile sector has been showing an
upward trend over the past few years, except 200607, and, presently, it is contributing 3.6 billion
dollars annually in GDP besides providing direct
employment opportunities to about 192,000
people. Currently, there are 39 assemblers,
manufacturing cars, including light vehicles, buses,
trucks and tractors, in the country. In the world of
today, changing models, improving fuel efficiency,
cutting costs and enhancing user comfort without
compromising on quality are the most important
challenges of the auto industry in a fast globalizing
world. Despite increase in the production of cars in
the country, the demand of cars in market is
increasing day by day.
The growth of the auto sector, over the years, has
resulted in the increase of the manufacturing units,
giving a healthy impetus to the industrial output.
Vehicles manufacturing has been among the few
industries which have continued to attract local and
foreign investment even when the investment
climate in the country was not very favorable
Fig-3.3 (b): Investment 2004 (Rs. in Billion)

Fig-3.3 (a): Investment 2005 (Rs. in Billion)

Indus
Motors, 3.5

Nissan,
1.15

Indus
Motors, 2.8
Nissan, 0.7

Suzuki, 5.2

Suzuki, 7.5

Honda, 1.7
Honda, 2.28

Dewan, 2.5

Dewan, 2.5

Source: PAMA

The production of cars/jeeps in the country during

the period July-March 2008 decreased by 3.9
percent to 123,107 units from 128,145 in the first
nine months of the current financial year. Even the
reduction in withholding tax seems unable to have

become an effective tool to raise sales.

Furthermore, a subsequent increase in interest rates
on different leasing schemes has also contributed
to this less than expected boost in sales/production
due to a reduction in tax. Light commercial
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vehicles (LCVs) continued to register a positive
trend and showed a growth of 16.5 percent. About
15,652 units were produced during July-March
2008 against 13,436 units last year. Production of
buses grew substantially from 627 units to 828
units a healthy growth of 32.0 percent.
Production of trucks, as well, increased by 1.5
percent. While the farm tractors barely sustained
their growth (-5.1 percent) with 37,514 units. 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

considered as one of the cheapest means of

transport especially in rural areas for its price tag
as well as its durability and affordable petrol
consumption. The production of motorcycles
remained more or less stable during the late
nineties but has sky rocketed since 2000-01 and
further projections show it to be increasing even at
a faster rate. Motorcycles registered a phenomenal
growth of 28.06 percent and are expected to grow
further with the annual installed capacity
increasing to 1.9 million units (see Table 13.7).

Table 3.7: Installed and Operational Capacity of Automobile Industry (Numbers)

Inst. Capacity
2006-07
July-March
Item
(Single Shift )
2006-07
2007-08
Cars/Jeeps
275,000
179,314
128,145
123,107
Trucks
28,500
4,410
3,266
3,317
Buses
5,000
993
627
828
LCVs
40,000
24,489
13,436
15,652
Tractors
65,000
54,610
39,569
37,514
Motorcycles
1,700,000
839,224
609528
780591

% Change
-3.9
1.56
32.06
16.49
-5.19
28.06
Source: FBS

Local tractor manufacturers produced 54,610 units

during the year 2006-07 which remains by no
means a mean achievement. However, during JulyMarch 2007-08 the growth rate of tractor
production dwindled to -5.1 percent. The flip side
of the coin is that the tractor industry has already
got the maximum local content and both M/s
Millat Tractors and Al/Ghazi Tractors continue on
the path of further localization of components. The
high volume production of tractors has bridged the
demand supply gap to some extent and has been
able to standout in the total duty tax free import
regime for CBUs. The tractor industry by virtue of
its highly competitive production which is duly
supported by the local vendors and conductive
government policies is expected to grow more in
future to become a part of global supply and thus
rectify its growth figures as well. The government
has declared trucking an industry in the National

Trade Corridor Program. This will give added

impetus to the production of trucks and prime
movers through incentives to new and bigger
vehicles and restrictions on old and unfit ones. The
bus manufacturers as well have enormous potential
of growth only if the urban transport scheme long
in the making is declared enforced within a given
time frame.
The expansion in the installed capacity of the
car/LCVs, heavy commercial vehicles (HCVs),
two/three wheelers and farm tractors plants now
exceeds the demand particularly for HCVs and
two/three wheelers. Increase in investment (see Fig
13.3 a, b & Fig 13.4 a, b) from the present Rs. 25
billion to Rs. 53 billion planned for the next five
years will double it calling for appropriate
incentives to the industry and by banning import of
new or second-hand vehicles and adopting strict
measures against their smuggling into the country.

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Fig 3.4 (a): Revenue to GDP, 2012
(Rs. in Billion)
Indus
Motors, 27

Fig 3.4 (b): Projected Investment 2012

(Rs. in Billion)
Suzuki, 32

Indus
Motors, 14
Suzuki, 27

Dewan, 5.1
Nissan,
16.6

Nissan, 2
Honda, 4

Honda,
17.8

Dewan, 7
Source: PAMA

Auto Industry Development Plan (AIDP)

Engineering Development Board (EDB), has
developed an Auto Industry Development Plan
(AIDP) to facilitate and encourage investment,
domestic competition, enhance competitiveness
and stimulate innovation through technology
acquisition, human resource development, capacity
expansion, auto cluster development, etc. AIDP
provides the targets and goals for a clear road map
for the next five years. The Plan also envisages the
establishment of an Auto Industry Skills
Development
Company
(AISDC).
Besides
providing incentives against the newly installed
productive assets to stimulate investments in the
production capacities of auto part manufacturing,
AIDP provides for the establishment of two auto
clusters, one each at Lahore and Karachi, land for
which has already been acquired. AIDP also
provides for Auto Industry Investment Policy
(AIIP) framework to facilitate investors toward
manufacturing of vehicles in the country.
3.3.2. Fertilizer Industry
There are about six urea manufacturers in the
country of which four are listed at the local stock
exchanges. These include Fauji Fertilizer Company
Limited, Engro Chemicals, Fauji Fertilizers Bin
Qasim (FFBL) and Dawood Hercules Company
Limited. Fauji Fertilizer is the largest player in the
fertilizer sector with a 59 percent market share,
while Engro, as the second largest urea
manufacturer has about 20 percent market share.
Only one fertilizer manufacturer, FFBL, produces
DAP in the country, with 71 percent of the DAP
usage imported.

The fertilizer industry is still facing a urea supply

shortfall problem, though its severity has declined.
Over the last 5 years, the average urea off take
growth was 2.1 percent. Urea manufacturers are
running at 100 percent plus capacity utilization
levels and FFBL and Fatima Fertilizer Company
are also in the process to expansion. The share of
domestic urea production in private sector was 100
percent during 2006-07. This was because of the
sale of Pak Arab plant to Fatima Fertilizer
Company and Pak American Fertilizer Limited
(PAFL), the last manufacturing plant of urea, to
Azgard 9. For the purpose of balanced use of
fertilizer, the GoP initially announced subsidy of
Rs. 250/ per bag on DAP in October 2006, which
was increased to Rs. 400 in April 2007 and from
July 2007, the GoP is providing subsidy of Rs. 470
per bag on DAP. This move is likely to improve
DAP off take in the country. The average growth
in DAP off take over the last 5 years has been 4.3
percent.
The Government provides an indirect subsidy to
fertilizer manufacturers by selling feedstock gas
(80% of the raw material cost) at approximately 50
percent lower rates compared to the price for
commercial users. The price of urea has grown at
an average rate of 6.7 percent in the last 5 years
and currently a 50kg bag of urea costs about Rs.
610 to the farmer. On the flip side, imported urea
costs GoP at least Rs. 1200/bag. The heavy burden
of imported ureas cost is being borne by the GoP,
while its distribution is local manufacturers
responsibility on a zero profit margin.

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Domestic fertilizer industry witnessed a negative
trend in production during the year under review.
The production in nutrient terms decreased from
2,832 thousand tons during 2005-06 to 2,747
thousand tons during 2006-07 showing a decrease
of 3.0 percent. Nitrogen production was 2,427
thousand tons during 2006-07 and recorded a
decrease of 2.0 percent (88.4 percent share in total
nutrient production), phosphate 308 thousand tons
(11.2 percent share in total nutrient production),
which decreased by 9.8 percent. This was due to
close of Fauji Jordan Fertilizer DAP plant for
maintenance. Potash blends production was about
12 thousand tons (0.4 percent share in total nutrient
production).
A reasonable volume of new investment in
fertilizer industry for enhancing its production
capacity is under way. A new project of Fatima
Fertilizer Company with a capacity of 400
thousand tons of urea, 450 thousand tons of CAN,
400 thousand tons of NP and 300 thousand tons of
NPK is under construction. It is expected that this
project will start production by 2010.
Expansion/BMR of Fauji Fertilizer Bin Qasim
Limited (FFBL) for 220 thousand tons of DAP and
100 thousand tons of urea is expected by 2008. A
new project of 1300 thousand tons of urea of
Engro Chemical is also expected by 2010. The Pak
American Fertilizer Company has planned to
install a plant of 200 thousand tons per annum of
DAP fertilizer by 2010. Suraj Fertilizer Industries
are setting up a new plant of SSP at Harappa
(Sahiwal) with a production capacity of 150
thousand tons annually. It is hoped that this plant
will start production in 2008. Along with this, there
are a few companies, which have started SSP
production at small scale. SSP plant at Haripur is
in the process of privatization, while the plant at
Jaranwala (Faisalabad) has already been sold to
Al-Hamd Chemicals (Pvt.) Limited, Lahore.
Fertilizer sector is the second largest consumer of
gas after power sector. Natural gas is used as
feedstock as well as fuel in the manufacturing of
nitrogenous fertilizers. Three companies namely
Sui Notherns Gas Pipeline Limited, Sui Southern
Gas Company Limited and Mari Gas Company
Limited are providing gas to fertilizer sector. The
consumption of gas during 2006-07 was 249,649

mmcft. Out of this 81.2 percent was used as feed

stock and 18.8 per cent as fuel. For
enhancement/expansion in production capacity of
fertilizer industry, the process of allocation of gas
to Pak American Company and Suraj Fertilizer
Industries is under way.
3.3.3. 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 kg in the developed world and 15
kg per capita for the world. The demand for paints
and varnishes is rising due to the resurgence of
housing and construction sector. During JulyMarch, 2007-08, the production of paints and
varnishes both solid and liquid grew by 9.9 percent
and 8.2 percent, respectively.
3.3.4. Cement Industry
The country at present has 29 cement plants with
an installed capacity of producing around 37
million tones of cement mainly Portland cement.
Cements demand side of the equation is pretty
strong on the back of higher Public Sector
Development Program, an increasing number of
real-estate development projects for commercial
and residential use, developing of an export market
especially in Afghanistan, Sri Lanks, Bangladesh
and Vietnam, lower competition in the
international cement market from Iran and
expected construction of mega dams, Gwadar Port,
power plants, Islamabad new city etc.
Cement production is expected to rise in the
remaining months of fiscal year 2008 (FY08) with
rising exports and stable local dispatches. With the
advent of the peak local cement demand season in
the country and soaring regional prices, demand
for cement is set to rise further. Already, in the first
nine months (Jul-March) of FY08, production has
demonstrated a healthy increase of 18.0 percent.
Considering the production increase of 18.0

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Manufacturing and Mining

percent in the first nine months of the current fiscal
year, the total dispatches are likely to reach 29.6
million tons in FY08. The peak demand season
starts in March with the end of winter and advent
of suitable weather for construction work. Some of
the infrastructure development projects including
building of 250,000 houses in five years, new
canals, highways, buildings and new dams (like
Diamir-Basha Dam), announced in the budget
2007-08 have already been undertaken which
would help further raise local cement demand.
Cement exports are expected to soar as well by a
massive 107 percent due to the primary source of
overall cement growth in FY08, the high exports
owing to the cement supply shortage in India and
Middle East which lead to rocketing cement prices
in the region. Pakistani cement companies, due to
their excess capacity, are exporting to Middle East,
Africa, Afghanistan and India where they are
getting a price premium. In the first nine months of
FY08, exports increased by 114 percent to 5.1
million tons while at the end of the year FY08 the
expected total exports would be around 6.6 million
tons.
Currently there are 21 listed companies in this
sector with a total market capitalization of Rs.
115.4 billion ($1.9 billion). However, Lucky
Cement, capitalizing on its size, location and early
expansion, is the largest and has therefore reaped
the most benefit of growing cement sales. Lucky
Cement with its 2 new lines of 1.26 million tons
capacity each and Fauji Cement with its 2.1
million tons new line are expected to come online.
With these additions and other expansions, the
total industry installed capacity is expected to
reach 49.1 million tons per annum by FY10.
3.4 Mining and Quarrying
Pakistan has a widely varied geological frame
work, ranging from pre-Cambrian to the Present
that includes a number of zones hosting several
metallic minerals, industrial minerals, precious and
semi-precious stones. Although many efforts have
been made in developing geological products,
institutional, academic and R&D infrastructure,
much remains to be done to enable this sector to
take full advantage of its endowment. As a result
of various efforts devoted for the development of

mineral sector, resources of several minerals have

been discovered over the last many decades,
including world class resources of lignite coal
deposits at Thar; Sindh; porphyry copper-gold
deposits in Chagai; Balochistan; Iron ore deposits
at Dilband; Balochistan; Lead-Zinc deposits at
Duddar; Balochistan; Gypsum; Rock Salt;
limestone; dolomite; china clays etc. in the Indus
Basin, ornamental and construction stones in the
various parts of the country; and about 30 different
gems and precious stone deposits in northern
Pakistan. These and many other mineral projects
are in various stages of implementation from grass
root through exploration and evaluation to
development stages.
However, mineral industry in Pakistan shows that
over the last few decades this sector has been
allocated a very small amount, 0.45 percent to 2.46
percent of the total public sector expenditure since
first five year plan reflecting its contribution to
Gross National Product (GNP) of just around 0.5
percent. The mineral resources of a country are
valuable means and measures of its economic and
industrial growth. These are still more important
for Pakistan because of its favorable geological
environment and a large number of mineral
resources in the country. Considering that
substantial scope exists for the development
uncertainties, it requires Government support and
recognition of mineral sector.
The Government is fully committed to making the
mineral sector in Pakistan one of the most prolific
for the country. During the current fiscal year the
mining and quarrying sector has registered a
growth rate of 4.9 percent as against a target of 4.5
percent and growth figures of 3.0 percent of last
year. The increased growth was propelled by
strong growths recorded in magnetite (20.5%),
lime stone (17.8%) and Baryte (15.6%). To make
this sector thrive more in the upcoming year the
Government has already started various initiatives
which is evident from the discovery and
development of world class copper-gold deposits
in Chagai; Balochistan by Australian Firms that
would fetch $500 million to $600 million per year
during the lives of these mines. Successful
upgradation studies being carried out by German
Consultants on Dilband Iron Ores Balochistan
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Pakistan Economic Survey 2007-08

would, to large extent, minimize importation of
Iron Ores 1.7 million tons iron ores costing about
Rs. 3.2 billion per year. Development of Thar coal
field, one of the largest good quality lignite (brown
coal) deposits in the world, on completion, would
provide additional source of energy.

in Pakistan. Energy Minerals (coal), Agriculture

Minerals (rock phosphate, gypsum), Metallic
Minerals (iron ores, copper, gold, zinc-lead,
chromite,
antimony),
Refractory
Minerals
(refractory clays, magnesite, chromite, silica sand,
dolomite) and Glass & Ceramic Minerals (kaolinchina clay, nephyeline syenite, silica sand).

The minerals described below are under various

phases of exploration, development and utilization
Table-3.8 : Extraction of Principal Minerals
Units of the
Minerals
2005-06
quantity
Coal
Million tonnes
3.9
Natural Gas
000 MMCFT
39.6
Crude Oil
Mln. Barrels
23.9
Chromites
000 tonnes
52.5
Dolomite
000 tonnes
184.0
Gypsum
000 tonnes
601.0
Limestone
Mln. tonnes
18.4
Magnesite
000 tonnes
2.4
Rock Salt
000 tonnes
1859.0
Sulphur
000 tonnes
24.7
Baryte
000 tonnes
52.1

Other than oil, gas and nuclear minerals all other

minerals are a provincial subject under the
constitution. Thus, Provincial Government is
responsible for the development and exploitation
of minerals. Both Federal and Provincial
Governments have jointly set out National
Minerals Policy which provides appropriate
institutional arrangements, a modern regulatory
frame work, an equitable and internationally
competitive fiscal regime and program to expand
geological database. The provision of National
Mineral Policy distinctly conveys the message that
focus of all activities and decision making is at the
Provincial level while the Federal Government
would provide requisite support and advice to the
province to take up the challenges of achieving
sustainable benefit from the development of
identified mineral resources.
Sindh and Balochistan are primarily the two
provinces of the country where most of the
countrys mineral deposits are located. In order to
step up the mineral extraction and development

2006-07
3.7
40.0
24.6
104.0
342.4
624.0
25.5
3.4
1873.0
27.7
47.0

July-March
%
2006-07
2007-08
2.7
2.6
-3.7
30.1
31.1
3.3
18.2
19.5
7.1
67.0
68.0
1.5
274.3
279.8
2.0
413.0
440.0
6.5
18.5
21.8
17.8
3.4
4.1
20.5
1380.0
1385.0
0.3
20.5
22.1
7.8
32.0
37.0
15.6
Source: Federal Bureau of Statistics

process in the above specified provinces, Mines

and Minerals Development Departments have been
constituted in both Sindh and Balochistan.
Mines & Mineral Development Department
(Balochistan)
Balochistan, area wise is the largest province of the
country, constituting about 42 percent of the total
national land mass and has been endowed by
nature with blessings of substantial mineral wealth
which needs to be explored and developed.
Government of Balochistan (GoB) with the help of
Mines & Mineral Development Department has
successfully implemented the National Mineral
Policy in the province. The Government of
Balochistan is currently launching major policy
initiative to expand mineral sector activity mainly
through private investment and to enhance the
contribution made by this economic activity to
GDP and also to generate additional employment
opportunities for the locals.

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The Mineral Development Program of the Mines
and Mineral Department is centered on the
promotion of private investment in the mining
sector as well as enhancement of the economical
impact of mining on poverty reduction through the
sustainable exploitation of its mineral resources
and empowerment of the communities for the local

management of the mineral wealth of the province.

Moreover, World Bank, on the request of
Government of Pakistan, has agreed to develop the
Mineral Sector and to extend Techno-economic
Assistance for Mining and Technical Assistance
Project (MTAP) at the estimated cost of $ 52
million.

Table 3.9: Federal PSDP Projects (MTDF) (Rs. Million)

Name of Scheme
Cost Estimates
Black Topping of Marble deposits road from AZad
240.0
Station to Julli Mines Area Distt: Changi (60km).
Black Topping of Match Abegum Coal Field Road
100.0
District Bolan (25 km).
Black Topping of Mines Road from Nal city to Cartoon
120.0
District Khuzdar District Bolan (30km)
Black Topping of Mines road from Duki to new Quetta
60.0
Coal Co, District Loralai (15km)
Black Topping of Mines road from Sharigh to PMDC
60.0
Coal Mines District Sibi (15km).
Contruction of Black Top road from Dewana Shah
260.0
Cross to Saroona Marbel Filed Tehsil & District
Khuzdar (70km).
Construction of Black Top road from Dureji to Lodi
300.0
Marble field (90km), District Lasbella.
Black Topping of Chromites Mines road from Muslim
150.0
Bagh to Jung Tor Field District Killa Saifullah (50km).
Contruction of Black Top road from Jodah to Dilband
100.0
Iron Ore deposit (40km).
Contruction of Black Top Road Khost, Sharigh, Harnai
150.0
(50km).
Total
1,540
Source: Mines & Minerals Development Department, Balochistan

Performance evaluation of various mineral projects

ongoing in the Province is reported below.

Chamalong Coal Field

A long outstanding dispute between Marri and

Lunti tribes has been successfully settled by the
Government. Production has commenced since
April 2007. The mining activity in the area has
given thirty thousand (30,000) jobs to the people
which will boost up the socio-economic conditions
of the remote residents of the area.

Saindak Metals (Ptv)

Projects District Chagai

Limited/Copper

Saindak Metals Limited (SML), formally Resource

Development Corporation (RDC) was established

in 1974. Saindak ore yields average annual

production of 15810 tones of blister copper, 1.47
tones gold and 2.76 tones silver. On 2nd October
2002 Saindak Project assets were transferred to
MCC/MRDL 9 (Chinese Company) for a period of
ten years. The plant has started production of
blister Copper since 2003. Copper Gold project
owned by the Federal Government is being
operated by MCC China as well. During the last
fiscal year a sum of Rs. 199.85 million has been
collected on account of rent and royalty.

BDA-BHP Chagai Hills Exploration Joint

Venture Agreement for Gold and
Associated Minerals

An agreement was signed by BHP and BDA in

July 1993. Capital structure of the joint venture is
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Pakistan Economic Survey 2007-08

BHP 75 percent, GoB and BDA 25percent each. In
2000, BHP brought in an Australian company
(TCC) to replace BHP in the joint venture. In
2006, Auto-fagasta of Chile and Barrick Gold
Company of Canada has jointly and equally
purchased the shares of TCC. Since the grant of
Licenses, the company has invested $36.585
million. The resources identified by the company
in the Rekodik are 2400 million tones having 0.51
percent copper and 0.27 percent Gold g/t.

Lead Zinc Project At Duddar

A mining area of 1500 acres was granted to M/S

Pakistan Minerals Development Corporation at
Duddar in District Lasbella to M/S MCC Resource
Development Company (Pvt) limited till 2003.
This project is at an advanced stage of
development.

Table 3.10: Revenue Receipts

(Rs. Million)
Period
Revenue Receipts
2004-05
208.7
2005-06
252.7
2006-07
380.9
2007-08 (Jul-Jan)
301.4

Major projects envisioned for the future include:

establishment of geo-data centre and strengthening
of Exploration Promotion Division and sustaining
the promotion of private investment in mining
sector; completion of geological & geophysical
survey of mineral bearing areas; promoting social
responsiveness of the mining operators and the
sustainable management of mineral resources
through improved environmental and safety
conditions with in small-scale mining operation
and improving the infrastructure facilities;
establishment of mineral based industry, Export
Processing Zone (EPZ) within province etc.
3.5 Public Sector in Industry

Enhancement of the mineral activity has not only

provided socio- economic uplift of the remote
areas of Balochistan province, creating job
opportunities for the local as well as increase in the
revenue to Government exchequer. The total
collected revenues on account of rent & royalty for
Balochistan are as under.

Performance review of operating units is carried

out for corporations namely: NFC, PACO, SEC
and Pakistan Steel. Key performance indicators
present the following picture for July-June 20072008 based on 9 months actual figures and three
months projections. In case of Pakistan Steel
performance is based on 8 months actual and 4
months projections.

Table 13.11: Performance Of Public Sector Industries (Excluding Pak Steel) (July June) (Rs. In Million)
2006-2007
2007-2008 (Expected )
Increase/ Decrease%
Production Value *
1,645
1,514
-7.96
Net Sales
3,268
3,427
4.87
Pre-tax profit
135
350
159.26
Taxes and duties
311
316
1.61
No. of employees **
3,413
3,329
-2.46
*Production Value of PACO is at current prices. NFC & SEC are at constant prices of 1999-2000 and 1992-93
respectively.
**Including daily wagers.
***Excluding holding corporations.

Production value of all operating units under three

corporations excluding Pakistan Steel decreased by
7.9 percent as against the same period last year.
PACO showed an increase of 47.5 percent, while
NFC and SEC showed a decline of 5.3 percent and
12.8 percent respectively. Net sales (excluding

Pakistan Steel) increased to an estimated amount

of Rs 3,427 million for July-June, 2007-2008
compared to Rs 3,268 million during the previous
year showing an increase of 4.8 percent. NFC and
PACO have shown an increasing trend in net sales.
The increasing trend is 64.0 percent and 147.0

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Manufacturing and Mining

percent respectively, while SEC has shown a
decline of 5.2 percent. During July-June 20072008
the
three
corporations
(including
operational/non-operational units) incurred an
aggregate profit of Rs. 350 million compared to
aggregate profit of Rs 135 million during last year.
PACO showed decrease in loss by 36 million.
Profit at NFC and SEC increased by Rs. 138
million (1971.4%) and 41 million (17.4%)
respectively. During 2007-08, taxes & duties paid
by all operating units under the public sector
corporations excluding Pak Steel increased to Rs
316 million as compare to Rs. 311 million paid
during last year, showing an increase of 1.6 percent
mainly due to increase in taxes and duties at NFC
& PACO. Total number of employees with all
operational/non-operational units (including daily
wagers and holding corporations) excluding Pak
Steel, as on 30th June, 2008 stands at 3,329 against
3,413 last year.

3.5.1 Performance of Pakistan Steel

Pakistan Steel is a major contributor to the national
exchequer. It has paid an amount of Rs.76.7 billion
towards duties and taxes to the Government since
1984-85 to February, 2008. The project has thus
repaid more than Rs.24.70 billion which was spent
on creating it. The duties and taxes to be paid
during 2007-08 are expected to be Rs.6.31 billion.
It is to be added here that an amount of Rs. 1
billion dividend was paid to the GoP during
September, 2007. Pakistan Steel is expected to
earn Rs.2.936 billion pre-tax profit during the year
2007-08. 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 JulyJune 2006-07 & 2007-08) are summarized in the
table given below:

Table 13.12: Performance of Pak Steel, (July-June) (Rs. In Million)

2007-2008
Particulars
2006-2007
(Expected/Actual)
Production Value*
12624
12777
Net Sales
30111
38936
Pre-Tax profit
4576
2936
Taxes and duties
6326
6310
No of employees**
16483
16625
*At constant prices of 1999-2000
** Including daily wages / contract

3.5.2 The Privatization Program

The privatization of state owned enterprises
(SOEs) has been a recurrent theme on the
international arena since the early 1980s. In
Pakistan it was in the policy agenda of every
government after 1977, but it was actually initiated
with effect from 1990s. The aim of the
Privatization Program is to achieve enhanced
quantity and quality of goods and services,
strengthen public finances, broaden and deepen
capital markets, reduce opportunities for corruption
as well as to avoid mismanagement.
Over the last few decades, there has been a
widespread change of opinion regarding the role of

Increase/Decrease%
1.21
29.30
-35.84
-0.25
0.86

state and private enterprises in promoting

economic growth. An opinion has emerged that the
achievement of more dynamic economic growth
requires a greater role for the private sector with
the belief that resources will be used more
productively if they are transferred to the private
sector. Therefore, a key element of this market
orthodoxy has been the privatization of SOEs.
In Pakistan, the concept of privatization for the
policy makers is not new; it may be traced as back
as in 50s, when Pakistan Industrial Development
Corporation (PIDC) was established to boost up
the industrial development in the country. This
premier Corporation established over 50 industrial
undertakings in the length and breadth of the
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Pakistan Economic Survey 2007-08

country and after their successful operation and
management; these units were transferred from
public to private sector. The tide of nationalization,
which swept the whole economy in the first half of
70s, was reversed in 1977. The privatization of
SOEs thus again became an important instrument
of economic policy of the government in late 80s.
However, it was in 1991 that the privatization
process in Pakistan gained sufficient momentum.
Table 3.13: Assets Privatized during 2007-08
(Rs. Billion)
Assets
Value
UBL 3.2% through GDR
(26,392,660 shares)
5.157
HBL 7.5% through IPO
(51,750,000 shares)
12.161
8.084
PTCL 3rd Installment
Other Privatization Receipts
1.6
Total
27.002
Source: Privatization Commission

With effect from January 1991 to February 2007,

GoP has privatized around 166 units at Rs. 475.08
billion (approx US$ 8.9 billion) (see Table 3.14).

The transactions carried out during the period July

2007 to February 2008 include: UBLs divestment
of 25 percent shares through a GDR which fetched
$650 million was the biggest book building ever in
Pakistani banking history. Initially 21.74 percent
(175.95 million) shares were divested in June 2007
for total proceeds of $565.43 million. Another 3.2
percent (26.39 million) shares were divested in
July 2007 for total proceeds of $84.81 million.
The stock was priced at 5 times to book which is
the highest valuation compared to similar
transactions globally. HBL-IPO was the largest
offering ever in Pakistan in terms of value and
number of successful applicants. Total subscription
of Rs. 18.94 billion was received against the base
offer of Rs. 8.11 billion resulting in an over
subscription of 2.33 times. The IPO has generated
gross proceeds of Rs. 12.161 billion against the
divestment of 51.75 million shares (including
green shoe option of 17.25 million).
Sector wise summary of 163 transactions
completed from January 1991 to February 2007 is
as follows:

Table 3.14: Number of Privatized Transactions (Rupees in Million)

From
From
From
1991 to Jun 06
Jul 06 to Jun 07 Jul 07 to Feb. 08
Sector
No.
Amount
No.
Amount
No.
Amount
Banking
Capital Market Transaction
Energy
Telecom
Automobile
Cement
Chemical / Fertilizer
Engineering
Ghee Mills
Rice/Roti Plants
Textile
Newspapers
Tourism
Others
Total

7
18
14
4
7
16
20
7
24
23
3
5
4
6
158

41,023
32,190
51,756
187,360
1,102
11,862
24,353
183
843
324
215
271
1,805
159
353,446

83,614

1
2

4,316
16,229

156

104,315

Privatization, liberalization and deregulation are

pillars of Governments economic policy,
privatization being the most critical among them. It
is now widely believed that sustainable economic

Total

Number of
Amount
Transaction
7
41,023
17,320
22
133,124
14
51,756
4
187,360
7
1,102
17
16,178
22
40,582
7
183
24
843
23
324
4
371
5
271
4
1,805
6
159
17,320
166
475,081
Source: Privatization Commission

growth can be made through private sector led

development and that the Governments role
should be limited to providing a level playing field
and providing a favorable business climate. The

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Manufaccturing and Mining

M
Governmeent is, thereffore, systemaatically comiing
out of thhe business of running businesses and
a
industry through
t
privaatization of puublic enterprisses
(PEs) andd confining itts role to makking policy and
a
providingg good govern
nance; providing a sound and
a
effective regulatory framework; ensure soccial
equity annd economic justice; provviding enabliing
environment, includin
ng physical and technical
infrastructture and sociaal services
The Goveernment starteed disinvestm
ment of its shaares
to the genneral public through
t
the stock
s
exchangges
in 1994 by
b offering 2 percent of PTCL
P
shares for
general puublic. This treend has continnued to this day
d
and the goovernment haas offered its shares in bannks
and a few
w other entitiees like PIA, OGDCL,
O
SSG
GC,

Fig - 3.5: Sources off Proceeds

Energy, 11%

Bankiing &
Cappital
Markett, 37%

Teleccom,
39%
%

Source: Privvatization Commissiion

KAPCO
O etc. for puublic offeringss. The governnment
has reecently starteed offerings shares of Public
P
Enterprrises (PEs) through Global
G
Depository
Receippts (GDRs) att the Londonn Stock Exchhange.
GDRs of UBL annd OGDCL have been quite
successsful which fettched $ 1.38 billion.
b

Table-3.155: Expected Privatization Proceeds

P
Durin
ng 2008-09 (R
Rs. Million)
Traansactions
1.
PT
TCL 26% B claass shares Insstallments
2.
Koot Addu Powerr Company (155% shares)
3.
Naational Bank off Pakistan (20%
% shares)
4.
Sm
mall Medium Enterprise
E
Bankk
5.
Divestment of OG
GDCL (10% shares)
mshoro Power Co. (51% sharres)
6.
Jam
7.
Faaisalabad Electrric Supply Co. Ltd. (56% shaares)
8.
Naational Power Construction
C
C
Co
9.
Paakistan Steel Mills
M Corp (10%
% shares)
10.
Priinting Corporaation of Pakistaan (assets)
11.
Services Internattional Hotel
m Developmentt Corp ?(Motells)
12.
Paakistan Tourism
13.
Paakistan Machine Tool Factoryy (90% shares)
14.
Moorafco Industriies Ltd. (Assetss)
15.
Sinnd Engineering
g Ltd. (Assets)
16.
Laakhana Coal Mining Project
17.
Khhewra Salt Min
nes
Tootal

The currrent Privatization Prograam targets the

t
power secctor, oil and gas
g sector, enggineering secctor
and remaiining interestts in bankingg and insurannce.
Most of these entities are up forr strategic saale.
These incclude OGDC
CL, PSO, FES
SCO, Jamshooro
Power Coompany, SM
ME Bank etc.. However, the
t
Governmeent is also opting
o
for GDRs
G
for som
me
entities e..g. PPL, KAP
PCO, HBL, etc.
e In the lonngof
term, thee Program aiims at the privatization
p
financial, insurance, an
nd utilities secctors.

Industrial &
Other, 13%
%

Proceeds
P
1
18,117
6
6,800
3
38,148
3
3,400
5
51,000
3
3,851
4
4,354
4
438
2
2,500
3
3,500
1
1,000
8
800
2
2,000
2
250
2
200
1
1,500
1
1,500
1
139,361
Source: Privatization Comm
mission

Privatee sector has emerged as a major playyer in

most of
o the econom
mic sectors as a result of
o the
privatizzation progrram. The Government has
alreadyy divested itss major stakes in the baanking
sector where 80 peercent depositts are currenntly in
the privvate banks ass compared too 20 percent before
b
privatizzation. The Governmentt has successfully
compleeted privatizaation of all units
u
of chem
mical,
textile, cement, ricce, roti and light engineeering
while 98
9 percent auutomobile industry, 96 peercent
ghee mills
m
83 perceent units of phosphate
p
ferttilizer
55
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Pakistan Economic Survey 2007-08

and all units of nitrogen fertilizer have been
privatized. Since a substantial part of the utilities
have been privatized, the Government is obliged to
strengthen the regulatory regime for protection of
consumer interests as well as investor confidence.
The State Bank of Pakistan (SBP) and the
Securities and Exchange Commission (SECP) have
been made autonomous. The Competition
Commission has been established and independent
regulatory authorities have been established for
various sectors like telecommunication, electricity,
electronic media, oil and gas etc. This regime is
gradually replacing the Governments dual role of
provider and regulator.
3.6 Small and Medium Enterprises (SMEs)
A broad-based thriving Small and Medium
Enterprise (SME) sector is considered to be the
hallmark of a prosperous and growing economy.
The existence of a sound SME sector is spelled out
loudly in Economic Survey of Pakistan, wherein
according to official figures, there are 3.2 million
economic establishments operating in Pakistan, out
of which over 93 percent of the entities fall in the
category of SMEs. Moreover, SMEs have a
pervasive presence across the economy with
varying density, i.e., wholesale, and retail trade,
restaurants & hotel business (53%) has the lions
share followed by other services (27%) and
manufacturing sector (20%). The SMEs census
shows that it also contribute over 30 percent to the
GDP and 25 percent to the countrys total export
earnings. Their share in the manufacturing value
addition is estimated to be around 35 percent.
A new SMEs Policy 2007 was launched in the
fiscal year 2007-08 where an attempt has been
made to define uniformly, small and medium
sectors in manufacturing, trade and services sectors
for all the stake-holders and give a broad frame
work for promotion of the SMEs by improving
regulatory, fiscal and business environment. The
policy document gives a broad frame work for
promoting and developing small and medium
sector through institutionalization of the support
structure and outlines a strategy for SME-led
private sector growth for poverty reduction and job
creation.

Small and Medium Enterprise Development

Authority (SMEDA) being the premier SME
development agency in the country conducts and
supervises all SME related activities. SMEDA is
also carrying out two surveys, to facilitate
conducive investment climate for SMEs in
Pakistan. Baseline Survey, the first SME focused
survey of Pakistan, is an exercise to derive
recommendations
to
improve
business
environment for SMEs based on on-ground
problems spelt out by SMEs themselves. Another,
Investment Climate Assessment II (ICA-II) is being
carried out jointly, by SMEDA and the World
Bank. The recommendations of ICA II will assist
GoP to initiate the necessary interventions helping
to boost the investment in the country. Aligning
with the priorities of MTDF the operational
strategy of SMEDA has been suitably adjusted to
adequately address issues related to sector
development at sub-national level. Sector
Development Companies have already been set up
for Gems & Jewelry, Marble & Granite, Furniture,
Dairy and Hunting and Sporting Arms Sectors.
These Companies work on the Public Private
Partnership basis with private sector having a
leading role in decision making.
Conclusions
Achieving
accelerated
and
sustainable
industrialization is the foremost goal of the
Government which can be met through capitalizing
upon a nations strengths and mitigation of its
weaknesses. The challenge for Pakistan is not to
rediscover industrial policy, but to re-deploy it in a
more effective manner in the national, regional,
and global context. The provision of facilities for
public testing laboratories, public R&D, vocational
and technical training, infrastructure and
communications, are all necessary inputs which are
regarded as being imperative for the manufacturing
sector. Value additions in products and processes
also have to be strengthened through backward and
forward linkages. Keeping the economy on the
upright path while maintaining macro-economic
stability is the key for any developing economy.
This balancing act requires a holistic approach and
prudent policies to reverse the current slower
economic growth.

56
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Manufacturing and Mining

Keeping the current global economic scenario in
mind it is easily predicted that tough time is ahead
for all developing economies including Pakistan.
The new government will face multidimensional
short (inflation, price hike, increase in utility bills,
oil and gas prices, employment generation) and
long term problems (widening current and trade

deficits, budgetary borrowing, weakening of

exports volumes, high prices of oil, poverty
reduction and the last but not the least
sustainability of macro-economic growth).
However, implementation and continuity of
sensible and integrated policies seem to be the light
at the end of the tunnel for Pakistan.

57
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TABLE 3.6
PERCENT GROWTH OF SELECTED INDUSTRIAL ITEMS

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
2006-07
2007-08 *
*
Note:

Cotton
Cotton
Jute
Veg.Ghee
Yarn
Cloth
Goods
14.22
(0.65)
1.15
(3.93)
12.44
5.12
4.13
(2.59)
4.13
5.68
(3.37)
13.46
7.43
(3.23)
(21.64)
(7.45)
4.59
2.19
(10.34)
5.96
9.16
1.62
3.07
3.09
1.72
1.99
(2.69)
(2.59)
0.76
2.04
38.86
0.70
0.52
13.02
(10.38)
7.95
8.41
13.73
(1.87)
(9.65)
3.06
12.12
4.56
19.59
5.09
20.09
(8.61)
7.24
6.18
1.66
14.03
(6.75)
0.73
17.39
8.87
15.10
18.22
28.89
0.80
3.19
11.66
(2.26)
(0.27)
9.86
11.73
8.18
12.97
1.94
3.32
4.89
8.46
(2.83)
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
4.98
2.87
5.11

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
5.03
(7.75)
(16.89)

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
13.52
22.49
17.95

Soda Ash

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)
7.19
6.11
(5.01)
3.74
10.45
19.13
13.51
1.44
33.98
Source: Federal Bureau of Statistics

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Chapter 04

FISCAL DEVELOPMENT
I. Introduction
Fiscal year 2007-08 proved to be a difficult year
for Pakistan, with several political and economic
events transpiring unexpectedly. These events
include heightened political tensions, soaring
global oil prices, the international and domestic
food inflation phenomena, a slowdown in global
economic activity, and the troubled law and order
situation prevalent in the country. However, the
most important aspect was the non-responsive
stance on account of political expediency, that is,
not responding to the policy challenges emerging
on Pakistans economic scene during most part of
the fiscal year 2007-08. All these events have had
adverse consequences for fiscal discipline. Because
of the instability experienced at the onset of 200708, the fiscal deficit is expected to miss the target
of 4.0 percent of GDP this year by a wide margin.
The hard earned macroeconomic stability
underpinned by fiscal discipline appears to have
been evaporated. In other words, financial
indiscipline during the outgoing fiscal year has
already caused severe macroeconomic imbalances,
for which, Pakistan is likely to pay a heavy price in
terms of deceleration in growth and investment,
and the associated rise in the levels of poverty;
widening of current account deficit and the
attendant rise in public and external debt; a loss of
foreign exchange reserves and the associated
pressure on the exchange rate; and most
importantly, higher inflation and the associated rise
in interest rates.
A sound fiscal position is vital for achieving
macroeconomic stability, which is increasingly
recognized as being critical for sustained economic
growth and poverty reduction. The sooner Pakistan
improves its fiscal position by making sharp fiscal
adjustments, the lesser the price it is likely to pay
for its fiscal indiscipline. A sharp fiscal adjustment
can reduce large external current account

imbalances, restore the confidence of global

investors, ease financing constraints, support
growth and contain inflation. With a new
government coming to power late in the fiscal year
2007-08, the need to adjust policies and counter
the burden on the fiscal position has become a
challenging task.
II. Fiscal Policy Developments
Pakistans fiscal policy position remained focused
on sustained economic growth in unison with
declining debt services, alleviating poverty and
investing in physical and human infrastructure.
The last seven years (2001-07) saw Pakistan
improve its fiscal position considerably, given that
the overall fiscal deficit, that averaged nearly 7.0
percent of GDP in the 1990s, had declined to an
average of 3.8 percent (including earthquake
spending). The underlying fiscal deficit targeted at
4.0 percent of GDP for 2007-08 is most likely to
be surpassed owing to a variety of factors stated
earlier.
A study of Table 4.1 discloses a change in pattern
of both government revenues as well as
expenditures over the last 17 years. Under
revenues, tax-to-GDP and hence revenue-to-GDP
ratios have shown a declining trend, owing mainly
to structural deficiencies in the tax collection
system. The expenditures of the government
follow a similar pattern, with total expenditures
showing an overall decline since the beginning of
the 1990s. It should be pointed out that despite an
overall decrease in total expenditures, it is
heartening to see that development expenditure has
shown a steady increase in recent years.
Fiscal deficit as percent of GDP has steadily
declined during the same period, picking up
slightly in the last two fiscal years, mainly on
account of earthquake spending. The declining
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pattern of the fiscal deficit was more to do with

falling expenditures than rising revenues. Since
1999-2000, the fiscal deficit has been contained
primarily due to an improvement in total revenues
and also partly due to the rationalization of
expenditure. The shifting of expenditure from
current to development while leaving total
expenditures stagnant at around 18 percent of GDP
has helped improve the fiscal position while
maintaining the focus of the governments
developmental needs for the country.

Moving forward, an additional reduction in fiscal

deficit in the future should be largely driven from
improvements in total revenue, more specifically,
through the taxation system. The improvement in
the tax collection effort should not just be the
responsibility of the Federal Government but also
the Provincial Governments, who must contribute
their share by enhancing their provincial tax-toGDP ratio from the current stagnant level of 0.5
percent to at least 1.0 percent of GDP in the
medium-term.

Table 4.1: Fiscal Indicators as Percent of GDP

Year
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08 B

Real GDP
Growth
5.4
7.6
2.1
4.4
5.1
6.6
1.7
3.5
4.2
3.9
1.8
3.1
4.7
7.5
9.0
5.8
6.8
7.2

Overall Fiscal
Deficit
8.8
7.5
8.1
5.9
5.6
6.5
6.4
7.7
6.1
5.4
4.3
4.3
3.7
2.4
3.3
4.2*
4.3*
4.0

Total
25.7
26.7
26.2
23.4
22.9
24.4
22.3
23.7
22.0
18.7
17.2
18.8
18.6
16.7
18.4
18.7
20.2
18.8

Expenditure
Current Development
19.3
6.4
19.1
7.6
20.5
5.7
18.8
4.6
18.5
4.4
20.0
4.4
18.8
3.5
19.8
3.9
18.6
3.4
16.5
2.2
15.5
1.7
15.9
2.9
16.3
2.3
13.5
3.2
14.5
3.9
14.4
4.3
15.8
4.4
13.8
5.0

Total Rev.
16.9
19.2
18.1
17.5
17.3
17.9
15.8
16.0
15.9
13.5
13.3
14.2
14.9
14.3
13.8
14.2
14.9
14.8

Revenue
Tax
12.7
13.7
13.4
13.4
13.8
14.4
13.4
13.2
13.3
10.7
10.6
10.9
11.5
11.0
10.1
10.4
11.0
11.0

Non-Tax
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
3.9
3.8

Note 1: 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.

Statistical discrepancy (both positive and negative) has been adjusted in arriving at overall fiscal deficit numbers.
* Include earthquake related expenditure worth 0.8 and 0.5 percent of GDP for 2005-06 and 2006-07 respectively.

III. Reforms in Tax Policy and Tax

Administration
An adequate level of revenue generation is a sine
quo non for public policy to meet expenditure
obligations. Conversely, inadequacy of revenue
generation directly affects the governments
resource position and the availability of socially
desirable public goods. In Pakistans economic
history, the mismatch between revenue collections
and budgetary requirements was a norm rather than
an exception. The reform efforts remained
ineffective due to the inherent weaknesses in the
tax system and an ineffective tax administration.

Pakistans tax structure is characterized by a

number of structural weaknesses. First, due to a
number of wide-ranging exemptions and
concessions as well as rampant tax evasion, the tax
base is narrow and punctured. Second, tax rates
have been pitched at high levels, which created a
vicious cycle of tax-base erosion and higher tax
rates. Third, there is the issue of multiplicity of
taxes, with an individual firm facing numerous
types of taxes. Fourth, there is over dependence on
indirect taxes, which until recently, accounted for
nearly 60 percent share in revenues. This has
increased the regressivity of the tax system and
imposed a higher burden of taxation. Fifth, the tax
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system is complex and tedious which, along with

high rates, has bred corruption and encouraged
evasion.
The combined result of such characteristics is the
low and stagnant tax-to-GDP ratio on one hand,
and low tax elasticity on the other. The tax-GDPratio, which represents the countrys fiscal effort,
has remained stagnant in the neighborhood of 12 to
14 percent over the last three decades. Successive
governments have introduced a number of wideranging reforms since the 1990s. The government
specifically planned to make the tax policy more
equitable; bring more taxpayers into the net;
reduce the tax rate; streamline the tax laws so as to
make them taxpayer friendly; improve tax
enforcement and put in place a tax administration
system that is efficient and responsive.
III.I. Major Reforms in Direct Taxes:
Major reforms introduced in the Direct Tax
structure include the promulgation of the Income
Tax Ordinance, 2001, which came into effect
from 13th September 2001. The objective was to
simplify the language of the Ordinance by
removing ambiguities for ensuring uniformity in
treatment of various categories of taxpayers,
reduce the dependency on withholding taxes,
encourage voluntary compliance backed by strong
audit, and minimum tax exemption.
The introduction of Universal Self Assessment
Scheme (USAS) for all categories of taxpayers,
without any conditionality, has been a major
breakthrough. The basic threshold of income tax is
continuously being raised and the removal of a
large number of income tax exemptions have been
put in place. A two-tier agricultural income tax
was initiated during the same period. A selfassessment scheme for filing of corporate tax was
introduced. Some revenue reducing measures,
principally cuts in corporate income tax rates have
been put in place in recent years. This also ensured
parity between the rates applicable to private,
public and banking companies. Wealth tax was
also abolished.

III.II. Major Reforms in Indirect Taxes:

a) The enactment of the Sales Tax Act, 1990
introduced its value added version renamed as
General Sales Tax (GST). 1 This was levied on
goods only (with many exemptions) and that too at
the manufacturing and import stages. A major leap
forward was taken in 1995-96 when GST was
converted into a full-fledged VAT mode tax with
all its basic features; self-assessment, functional
distribution, input tax credit facility and audit
based procedures. To further increase its base, its
coverage was extended to importers in 1997 and to
wholesalers and retailers in 1998. With the
expansion of service sector in 1990s, the anomaly
that goods are being taxed but not the services was
removed and the scope of GST was extended in
2000.
b) The major policy change introduced in the
2005 budget regarding Federal Excise was the
system of self-assessment by withdrawal of
federal excise staff from the manufacturing
units. The idea was to improve the confidence of
the taxpayers which should promote voluntary
compliance. Similarly, the Federal Excise Act was
transformed in conformity with the Sales Tax Act
and the registration procedure was changed. The
sales tax registration number will also be sufficient
for the federal excise taxpayers. The mode of
payment was rationalized to provide relief to the
taxpayers. On some services and goods FED is
payable in VAT mode i.e. in the same manner as
provided in the Sales Tax Act of 1990.
c) Pakistan has made significant efforts in
liberalizing its trade regime during the last two
decades. The maximum tariff rate had declined
from 225 percent in 1990-91 to 45 percent by
1996-97. It was further reduced to a maximum
tariff rate of 25 percent (barring automobile sector)
during fiscal year 2007-08. The average tariff rate
stood at just 6 percent in fiscal year 2007-08 as
compared to 65 percent in 1990-91. The number of
tariff slabs was reduced from 13 to 4 during the
same period. Quantitative import restrictions have
already been eliminated except those relating to
security, health, religious and cultural concerns.
1
The terms VAT, GST or Sales Tax have been used interchangeably in this
paper implying same meaning.

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The number of statutory orders that exempted

certain industries from import duties was phased
out by June 2004 and import duties on 4,000 items
were reduced. Import liberalization measures were
adopted for agricultural and petroleum products.
Restrictions on agriculture exports were also
removed.

major efforts have been made to improve tax

administration.
Some of the milestones already achieved under tax
administration reform are summarized below:

Establishment of Large and Medium

Taxpayer Units: LTU was established on July
1, 2002 in Karachi, encompassing the three
domestic taxes i.e. sales tax, central excise
duty, and income tax. Medium Taxpayer
Unit had started working in Lahore w.e.f.
October, 1, 2002 to facilitate taxpayers. Before
the FBR administrative reforms, Direct Taxes
were
being
collected
through
the
administrative set up of regional and zonal
Commissionerates. This has now been
converted into 13 RTOs in all the major cities
and 3 LTUs Karachi, Lahore and Islamabad.
The concept is to provide maximum
facilitation
to
the
taxpayers
while
consolidating the taxpayers data by colocating the Direct Taxes, Sales Tax and the
Federal Excise Duty

Universal Self Assessment System: USAS is

the corner-stone of the reform strategy of FBR.
While sales tax is already on a self assessment
basis, income tax has also been brought under
the USAS through the Income Tax Ordinance
2001.

Customs Administration Reform (CARE):

The CARE project was established in April
2005.
This
project
has
introduced
computerized
Processing
of
Customs
documents (PACCS) under which Goods
Declaration (GD) can be filed by an importer
on-line without physical interaction with
customs
officials.
Model
Customs
Collectorates (MCCs) have been built around
the functioning of PACCS as per reformed
administrative structure that has evolved under
the CARE initiative. The effectiveness and
efficiency of the CARE program has
encouraged the FBR to roll it out at 11 MCCs
during FY06-07 and FY07-08, including four
regional hubs.

Sales Tax Automated Refund Repository

(STARR) Project: The re-engineering and
automation of the sales tax refund system was

III.III. Tax Administration Reforms:

The tax administration reform strategy stresses
upon Policy, Administrative and Organizational
reforms.
Policy reforms: This includes the simplification of
laws, introduction of universal self-assessment,
elimination of exemptions, reducing dependence
on withholding taxes, and an effective dispute
resolution mechanism.
Administrative reforms: This includes the
transformation of the income tax organization on
more functional lines, the re-engineering of manual
processes of all taxes, increasing the effectiveness
of FBR, and improving skills and integrity of the
workforce.
Organizational reforms: This includes reorganization of FBR headquarters, reductions in
the number of tiers, and the reduction in workforce
from existing levels with enhanced financial
packages. Simultaneously, the Government has
constituted a Cabinet Committee for Federal
Revenue (CCFR) to provide functional autonomy
to the FBR.
The aim of these reforms is to have a fully
integrated tax management system. There is a
strong realization in the FBR that, apart from
customs, other tax wings i.e. Sales Tax and Income
Tax should be developed on similar standards so
that at the end, FBR has one comprehensive
integrated system. The change in name of the
revenue board from CBR to FBR signifies a
complete paradigm shift from an adversarial
relationship between the taxpayers and collectors,
to taxpayers facilitation and education to mobilize
resources. The government has also approved a
medium-term program for reforming tax
administration in November 2001. Since then,

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identified as an essential component of the

reform in sales tax. The implementation of the
first phase had been completed and the system
was evaluated and reviewed for the
development and implementation of the second
phase of the project. The second phase was
implemented in July 2003 and on its
completion the sales tax refund system will be
transformed into a simpler, fully automated,
risk-based system, enabling quick refunds and
identifying high risk cases for scrutiny and
audit. The STARR system has been upgraded
and now refund claims are processed through
Risk-based Refund Analysis System (RRAS).
Existing sales tax offices located in Karachi
have been consolidated in a single unit called
the Model Sales Tax House, Karachi.

Taxpayers Facilitation Centers (TFCs):

With a view to promote voluntary compliance
in a self assessment system of tax
administration, taxpayer education and
facilitation was given a priority.

Income Tax Organization Structure: A new

income tax organizational structure containing
functions of taxpayer services, information
processing, audit, enforcement, collection,
legal, information technology, HRM and
internal control was developed.

Tax Administration Reform Program

(TARP): The objectives of TARP include: (i)
the implementation of universal selfassessment, (ii) creation of a functional
organization, (iii) building of a taxpayer
service function, (iv) use of modern work
layout for conducting tax administration, (v)
creation of database for management reporting,
(vi) audit selection, (vii) statistical analysis,
and (viii) automation in FBR and its field
formations. An amount of US$ 24 million was
utilized for establishment of the following
projects under TARP: a) Establishment of 13
RTOs at Karachi, Hyderabad, Sukkur, Quetta,
Lahore, Faisalabad, Multan, Gujranwala,
Sialkot, Rawalpindi, Peshawar, Sahiwal, and

Abbotabad. b) Establishment of third LTU at

Islamabad. c) Establishment of 12 MCCs d)
Establishment of 65 TFCs throughout the
country
e)
Construction
of
transit
accommodation with RTOs.
To enhance the operations of the revenue board
and increase tax collection many modern and
innovative techniques have been adopted such as:

E-Filling: The facility to file tax returns

online.

IC3: The Integrated Cargo/Container Control

Program, which involves inspecting US-bound
cargo at Pakistans seaports through a
screening and imaging process.

Improving Direct Tax Collection: The FBR is

using a National Taxpayer Number for all
taxpayers. However, it was recommended that
the FBR uses the Computerized National
Identification Card (CNIC) number for
individuals while continuing the use of NTN
for businesses.

Case
Tracking
System
for
collection/enforcement: This system will track
a case and provide its status (received, closed
and inventoried, etc.) as it proceeds through
the system.

Computerized audit selection system: This

system will select cases for audit based on an
audit selection criteria established by member
audit.

IV. Outcomes of Reforms

The structure of taxation in Pakistan has changed
considerably following a number of tax and tariff
reforms that started in the 1990s and were
intensified during the recent decade. With a
gradual reduction on the dependence on foreign
trade taxes (collected through customs) and a
concurrent increase in GST and direct tax
collections, the composition of tax collections has
been successfully modernized (see, Table 4.2 and
Fig-4.1).

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Fig-4.1: Structure of Taxes

2007-08 (B.E)

1990-91
Excise
22.5%

Sales
14.4%

Excise
8.8%

Direct Taxes
18.0%

Direct Taxes
39.6%

Sales
36.3%
Customs
14.9%

Customs
45.0%

Excise duties accounted for about a fifth of FBRs

collection until 1998/99, targeting levies on utility
services, bank advances, and other goods and
services at the point of production. Since then,
gradual cuts in excise duties, as well as removal of
selected items from the excise net, have led to a
sharp decline in collection, with excises
comprising of only 8.8% of total FBR revenues or
0.8 percent of GDP in FY07-08.
Pakistans tax revenue-to-GDP ratio stood at only
10 percent of GDP during 2007/08 compared to an
average of 18 percent for other developing
countries indicating that substantial tax policy
measures are still needed to broaden the tax base.
The buoyancy and elasticity of the taxation system
does not exhibit the desired improvements and
needs to be focused upon. The countrys tax
regime resembles the one generally practiced
throughout Latin American countries, where
indirect tax, in particular sales tax, occupies a
relatively high share within the overall tax
revenues. The indirect tax-to-GDP ratio stood at
around 6 percent, and direct tax-to-GDP ratio was
calculated to be 4 percent and less than 2 percent if
withholding taxes are excluded. The government
recognizes the need to broaden the tax base and
reduce marginal tax rates which would stimulate
investment and production. This would also
promote voluntary tax compliance. Broadening of
the 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 of the tax
bases.

During the decade ending in 1999-2000, the

average growth of FBR tax collections stood at 12
percent. This growth rate was calculated at 14.5
percent during the period between 2000-2008. The
slight increase from 12 to 14.5 percent confirms
the positive impact of reforms but also reveals that
more defined efforts are required to enhance
overall collections. It is however encouraging to
know that during the last few years the growth in
revenue collection has been impressive at close to
20 percent.
The share of Direct Taxes in federal tax receipts
has increased from around 18 percent in the early
1990s to 32 percent in 2000-01. It further increased
to 39.6 percent in 2007-08. One of the implications
of this change is that direct taxes have now
emerged as the leading revenue contributors to
federal taxation receipts a transition that has
always been desired on equity and efficiency
grounds. Consequently, the direct-tax-to-GDP ratio
continues to increase from 3.8% in FY06-07 to
4.1% in FY07-08. It is distressing however, that
direct taxation in Pakistan accounts for only 4% of
GDP whereas in other competing developing
countries this ratio is as high as 7%.2
Indirect taxes currently account for 62 percent of
the total revenues. The largest among these is the
GST, which accounts for 39 percent of the total tax
collections and its share in indirect taxes stood at
60.3 percent for FY07-08. VAT or GST in
For instance, the income and corporate tax to GDP ratio in Indonesia is
6.8%, Philippines 5.7%, Malaysia 7%, Thailand 6.3%, and India 3.7%. In
the case of Bangladesh it is only 1.7% [Source: Information down loaded
2

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Pakistan is a recent phenomenon. Nonetheless, its

growth has been faster than any other tax. It has
increased sharply both at domestic and import
stage, from Rs. 16.0 billion in FY90-91 to Rs. 375
billion in FY07-08.
Induced largely by trade liberalization, the customs
collection declined sharply over the past decade,
but rose sharply from FY02-03 because of higher
imports. As a share of GDP, customs collections
Table 4.2: Structure of Federal Tax Revenue
Year
Total
Tax Rev as
(FBR)
% of GDP
1990-91
111.0
11.0
1996-97

282.0

12.0

1997-98

293.7

11.0

1998-99

308.5

10.0

1999-00

346.6

9.1

2000-01

392.3

9.4

2001-02

403.9

9.2

2002-03

460.6

9.6

2003-04

518.8

9.2

2004-05

588.4

8.9

2005-06

713.4

9.4

2006-07

847.2

9.7

2007-08 (B.E)

1025.0

10.3

declined from 3.4 percent in FY94 to 1.1 percent in

FY02. During the last few years, imports were
growing in excess of 30 percent due to an
unprecedented surge in domestic demand.
Consequently, the current fiscal year witnessed an
increase in gross and net collection from Rs. 132.2
billion in FY06-07 to 154 billion in FY07-08.
Custom duties accounted for 24.7 percent of the
total indirect taxes for the current year as compared
to 25.5 percent last year.
(Rs. Billion)

Direct
Taxes
20.0
[18.0]*
85.0
[30.1]
103.3
[35.0]
110.4
[35.8]
112.6
[32.5]
124.6
[31.8]
142.5
[35.3]
148.5
[32.2]
165.3
[31.9]
176.9
[30.1]
224.6
[31.5]
333.7
[39.4]
408.2
[39.6]

*as % of total taxes

^ as % of indirect taxes

V. Trends in Expenditure
The Governments plan of better fiscal
transparency
and
improving
expenditure
management is still at the forefront of policy
despite the impediments faced by the country
during this fiscal year. The total expenditure of the
government has remained more or less stable in a
narrow band of 17 to 18 percent of GDP during the
last nine years. There has been a substantial

Customs
50
(54.9)^
86
(43.7)
74.5
(39.1)
65.0
(33.0)
61.6
(26.4)
65.0
(24.3)
47.8
(18.3)
59.0
(18.9)
89.9
(25.4)
117
(28.5)
138
(28.3)
132.3
(25.8)
154
(24.7)

Indirect Taxes
Sales
Excise
16.0
25.0
(17.6)^
(27.5)^
56.0
55.0
(28.4)
(27.9)
53.9
62.0
(28.3)
(32.6)
72.0
60.8
(36.3)
(30.7)
116.7
55.6
(49.9)
(23.7)
153.6
49.1
(57.4)
(18.3)
166.6
47.2
(63.7)
(18.0)
205.7
47.5
(65.9)
(15.2)
219.1
44.6
(62.0)
(12.6)
235.5
58.7
(57.2)
(14.3)
294.6
55.0
(60.4)
(11.3)
309.4
71.8
(60.3)
(13.9)
375
91.0
(60.3)
(14.6)

Total
91.0
[82.0]*
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]
487.9
[68.5]
513.5
[60.6]
622.3
[60.4]

Source: Federal Board of Revenue

decline in interest payments, from as high as 6.9

percent of GDP or Rs 262 billion in 1999-00 to 4.2
percent of GDP or Rs 369 billion in 2006-07.
Interest payment are budgeted at 3.8 percent of
GDP or Rs. 375 billion for FY07-08. This has
provided fiscal relief, which has allowed
expenditures to restructure in favour of
development expenditure. Consequently, the share
of current expenditure in total expenditure has
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declined from 89 percent in 1999-00 to 82.3

percent in 2006-07. Current expenditures are
budgeted at 73.4 percent for FY07-08. In absolute
terms, the current expenditure stood at Rs 1375.3
billion during the last fiscal year and budgeted at
Rs. 1378 billion for this fiscal year. Additionally,
the share of development expenditure rose from
13.5 percent to 23.4 percent during the same
period. Development expenditure bore the burden
of structural adjustments during the 1990s as 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 eight years, development
expenditure improved from 2.2 percent of GDP or
Rs 89.8 billion in 2000-01 to 4.5 percent of GDP
or Rs 394 billion in 2006-07. Development

expenditure is budgeted at 5.6 percent of GDP or

Rs. 561 billion for FY07-08. The second largest
component of current expenditure, namely,
defence spending remained stagnant at around 3
percent of GDP during the last five years, and
stood at Rs 275.0 billion in 2007-08. This shows
that the Government is focused on removing
infrastructural bottlenecks and building physical
assets. The Government is also committed to
achieving the goal of fiscal stabilization without
compromising its spending on the social sector.
Non-defence-non-interest
expenditure
has
improved from 7.7 percent of GDP or Rs 95.6
billion in 1999-2000 to 12.3 percent of GDP or Rs
1225.1 billion in 2007-08. The historical trends
observed in various components of expenditure are
documented in Tables-4.3 (a+b).

Table 4.3 a): Trends in Components of Expenditure (As % of GDP)

Primary
Revenue
Interest
Development Non Interest
Current
Total
Fiscal
Defence
deficit
Deficit/Surplus
Expenditure Non-Defence
Year
Expenditure Expenditure Payments
Deficit
(D)
Exp (A-C-D)
(TR-Total CE) (TR-NI Exp)
(C)
(E)
(B)
(A)
22.9
13.6
2.1
5.5
9.3
15.3
-6.0
3.3
-3.9
1980-81
24.7
17.7
3.5
6.7
7.0
14.5
-8.3
-1.3
-4.8
1984-85
26.1
19.9
5.0
6.6
6.3
14.5
-8.1
-1.8
-3.1
1988-89
25.9
19.3
5.5
6.9
6.5
13.6
-7.3
-0.8
-1.9
1989-90
25.6
19.2
4.9
6.3
6.4
14.3
-9.5
-3.1
-4.6
1990-91
26.5
19.0
5.2
6.3
7.5
15.1
-8.7
-1.1
-3.5
1991-92
20.9
18.6
7.5
4.9
3.3
8.6
-5.0
-2.7
2.5
1998-99
18.5
16.4
6.9
3.9
2.5
7.7
-5.1
-3.0
1.7
1999-2000
18.8
16.9
6.5
3.4
2.3
8.8
-4.3
-2.4
2.2
2000-01
18.6
15.7
6.2
3.4
2.8
9.1
-4.5
-1.7
1.6
2001-02
18.4
16.0
4.1
3.3
2.6
11.0
-3.6
-1.3
0.5
2002-03
16.4
13.8
3.5
3.2
2.9
9.7
-2.3
0.3
1.2
2003-04
17.2
14.5
3.2
3.3
3.5
10.7
-3.3
-0.7
-0.1
2004-05
18.5
14.8
3.1
3.2
4.3
12.2
-4.3
-0.6
-1.2
2005-06
19.2
15.8
4.2
2.9
4.5
12.1
-4.3
-0.9
-0.1
2006-07
18.8
13.8
3.8
2.8
5.6
12.3
-4.0
1.0
-0.2
2007-08 B
B Budgeted
Source: E A Wing Finance Division
Note: The GDP was rebased w.e.f 1999-2000, so figures thereafter may not be comparable with earlier years

The two tables highlight the major developments

on the expenditure side over the last three decades.
Firstly, the rising trend in current expenditure has
been arrested, mainly on account of declining
interest payments and defencethe two major
components of current expenditure. Interest
payments have declined from a peak level of 7.5
percent of GDP in 1998-99 to almost 4.0 percent
during the current year. Similarly, defence
spending was at a significantly high level in 198990 at 6.9 percent of GDP but has declined
gradually to below 3 percent today. These
developments have provided more fiscal space to

the government for directing expenditures towards

the development side, particularly towards physical
and human infrastructure. These two tables reflect
that both development and non-interest-nondefense spending have gone up substantially,
particularly over the last five years. The message
from these two tables is clear; going forward, the
government must keep budget deficit at a lower
level which would release resources from interest
payment. In other words, a fiscal space would be
available for investment in physical infrastructure
and human development which are critical for
sustaining growth and poverty reduction.

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Table 4.3 b): Trends in Components of Expenditure

Total
Current
Interest
Year
Expenditure Expenditure Payments
(A)
(B)
(C)
63.6
37.8
5.9
1980-81
116.8
83.7
16.5
1984-85
201.2
153.1
38.1
1988-89
221.6
165.6
46.7
1989-90
260.9
195.7
50.0
1990-91
321.5
230.1
62.4
1991-92
615.0
547.3
220.1
1998-99
709.1
626.4
262.2
1999-2000
717.9
645.7
249.3
2000-01
826.3
700.2
273.9
2001-02
898.1
781.9
199.8
2002-03
923.6
778.4
196.3
2003-04
1117
943.1
210.2
2004-05
1401.8
1121
237.1
2005-06
1675.5
1375.3
368.8
2006-07
1874.7
1378.2
374.6
2007-08 B
B Budgeted

Development Non Interest

Defence
Expenditure Non-Defence
(D)
(E)
Exp (A-C-D)
15.3
25.8
42.4
31.8
33.1
68.4
51.1
48.1
112.0
58.7
56.1
116.2
64.6
65.3
146.3
75.7
91.3
183.3
143.5
98.3
251.5
150.4
95.6
296.5
131.2
89.8
337.4
149.3
126.2
403.1
159.7
129.2
538.6
180.4
160.9
546.9
211.7
228
695.1
242
326.7
922.7
249.9
394
1056.8
275
561
1225.1

V.I. Trends in Real Expenditure

Expenditure in real terms (adjusted for inflation) is
much more interesting than the nominal monetary
value of expenditure, which is a direct charge on
the budget. Therefore, it is worth scrutinizing the
real growth patterns in expenditure and the
interesting facts that it will reveal. Total real
expenditure grew at a modest 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 a
modest 2.7 percent on average in real terms but
interest payments grew by 18.1 percent, reflecting
a tremendous pace of accumulation of public debt.
Interestingly, real defence spending followed a
higher growth path and grew by 8.9 percent on
average. Such a level of fiscal indiscipline in the
past forced Pakistan to undergo a painful period of
structural adjustments in the 1990s. The rate of
growth of real expenditure slowed in the first half

(Rs Billion)
Revenue
Primary
Fiscal
Deficit/Surplus
deficit
Deficit
(TR-Total CE) (TR-NI Exp)
-16.6
9.2
-10.7
-39.4
-6.4
-22.9
-62.1
-14.0
-23.9
-62.8
-6.8
-16.1
-97.1
-31.8
-47.1
-104.9
-13.6
-42.5
-146.4
-78.7
73.7
-196.6
-113.9
65.6
-164.9
-92.7
84.4
-202.2
-76.1
71.7
-177.4
-61.2
22.4
-129.5
15.7
66.8
-216.8
-42.9
-6.6
-325.2
-44.4
-88.1
-377.5
-77.3
-8.7
-398.7
97.8
-24.1
Source: E A Wing, Finance Division

of the 1990s but at the expense of development

expenditures which witnessed a contraction of 1.7
percent, on average, to contribute 2.4 percent
growth in real expenditure in the period. Current
expenditure, however, grew by 3.9 percent thanks
to only 0.7 percent growth in defence spending and
a relatively slower growth of 4.2 percent witnessed
in interest payments. Non-defence-non-interest
expenditure also grew by a modest 3.0 percent in
real terms. Even the sharp fall in real development
expenditure which contracted 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 a massive 13.7
percent average growth in interest payments.
Resultantly, total expenditure grew by 3.1 percent
per annum in the period; however, non-interest
non-defence expenditure registered a negative
growth of 1.2 percent per annum. The second
major item, defence spending, inched up
marginally by 0.1 percent per annum.

Table 4.4: Trends in Real Expenditure(1999-2000=100) (%Growth)

Period

Total
Expenditure

1980's
7.7
1990's
2.8
1990-I
2.4
1990-II
3.1
2000-04
1.4
2004-08*
10.9
* Budget estimate for 2007-08

Current
Expenditure

Development
Expenditure

10.5
4.5
3.9
5.0
0.14
7.4

2.7
-2.6
-1.7
-3.5
9.4
27.2

Non-Defense
Non-Interest
Expenditure
18.1
8.9
4.9
8.9
0.4
0.9
4.2
0.7
3
13.7
0.1
-1.2
-10.9
-0.2
11.0
10.7
3.3
13.8
Source: EA Wing, Finance Division

Interest
payment

Defense

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Total expenditure grew by 1.4 percent in the first

four years (2000-04) of the current decade but
accelerated to 10.9 percent during the last four
years (2004-08). The main contribution came from
development expenditure which grew by 9.4
percent per annum during the first four years
(2000-04) and by 27.2 percent in the recent four
years (2004-08). Current expenditure grew by 0.14
percent on average in the first four years (2000-04)
of the decade, mainly on account of a sharper
decline in interest payments and a marginal
contraction in defense spending. During the last
four year (2004-08) current expenditure in real
term grew by 7.4 percent mainly on account of a
sharper increase in interest payments and a
moderate growth in defense expenditure.
V.II. Comparison of Defence, Development
(PSDP) and Social Sector & Poverty-Related
Expenditures
Defense expenditure at current prices showed a
constantly increasing trend in the last decade.

During the current fiscal year 2007-08, defense

expenditure went up by 10% from Rs 250 billion
in 2006-07 to Rs 275 billion in 2007-08. The
average growth of Defense expenditure at constant
prices has been relatively sluggish at 4.5% owing
to the governments consistent efforts to minimize
it and increase development and social sector
expenditures.
A comparison of defence, development, social
sector and poverty related expenditures in real term
is well documented in Table 4.5. Contrary to the
general perception, defence spending in real terms
has grown at an average rate of 4.5 percent per
annum as opposed to 15.2 percent for social sector
and poverty related expenditures and 20.8 percent
for development spending. In other words,
development spending has grown at a much faster
pace than social sector and poverty- related
expenditures, its pace has over thrice the speed of
growth in defence spending.

Table 4.5: Comparison of Defence, Development (PSDP) and Social Sector & Poverty-Related Expenditures
Defence
Social Sector and Poverty
Development Expenditure (PSDP)
Related-Expenditure
Current
%
Constant
%
Current
%
Constant
%
Current
%
Constant
%
Prices
Change
Price
Change Prices Change
Price
Change Prices Change
Price
Change
Rs. Bn
Rs. Bn
Rs. Bn
Rs. Bn
Rs. Bn
Rs. Bn
150.4
95.6
1999-2000
131.2
-12.8
122.9
122.3
114.6
89.8
-6.1
84.1
2000-01
149.3
13.8
136.5
11.0
167.3
36.8
153.0
33.5
126.2
40.5
115.4
37.2
2001-02
160.0
7.2
140.0
2.6
209.0
24.9
182.9
19.6
130.0
3.0
113.8
-1.4
2002-03
180.0
12.5
144.5
3.2
254.0
21.5
203.9
11.5
161.0
23.8
129.3
13.6
2003-04
212.0
17.8
159.0
10.0
316.0
24.4
237.1
16.2
228.0
41.6
171.0
32.3
2004-05
242.0
14.2
166.2
4.5
435.0
37.7
298.8
26.0
327.0
43.4
224.6
31.3
2005-06
250.0
3.3
159.3
-4.2
394.5
-9.3
251.3
-15.9
394.0
20.5
251.0
11.8
2006-07
275.0
10.0
520.0
31.8
508.0
28.9
2007-08
Average
4.5
Average
15.2
Average
20.8
Source: Budget Wing, Finance Division

VI. Fiscal Performance: 2007-08

The total revenue collected during the current year
stood at Rs 1545.5 billion, higher than the targeted
level of Rs 1476 billion. This increase of Rs 69.5
billion from the budgeted revenues was mainly due
to higher than targeted non-tax collections. Tax
revenues however, exhibited a disappointing
performance. Political disturbances and a less than
satisfactory law and order situation seriously
hampered the revenue collection efforts of the
FBR. There are expectations that the FBR may fall
short of its targeted level, and the year is most
likely to end with tax collection amounting to Rs

1.0 trillionRs. 25 billion less than the original

target. Notwithstanding the shortfall, the
government has made an extraordinary effort to
collect more resources from the non-tax revenue
side. There are expectations that the government
may collect an additional Rs. 103 billion in non-tax
revenues, reaching to Rs. 483 billion. Slippages in
provincial tax revenues amount to Rs. 8 billion
[see Table 4.11].
The FBR was assigned an ambitious revenue target
of Rs 1,025 billion for FY 2007-08, and to reach
this target a reasonably high growth of 21% was
required over the last year collection of Rs 847
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billion. With a booming economy, the possibility

of achieving this target was quite bright. However,
revenue collection efforts were seriously hampered
due to political unrest in the country during most
of 2007-08. The chaotic incidents of December
2007, accompanied with a severe energy crisis and
long hours of load shedding, adversely affected
industrial production. Resultantly, FBR also
suffered a revenue loss of Rs 35 billion. At the end
of April 2008, the net collections had reached Rs
763.6 billion, higher by 16.3% over the net
collection of PFY, but short of the assigned target
of Rs 787.7 billion. Thus, revenue collection has so
far achieved 97.0 percent of its target, which was
Rs.1025 billion at the beginning of the year.
Table 4.6: Gross and Net Revenue Receipts
FY 07-08
Months
Gross
July
55.9
August
63.0
September
100.7
October
69.8
November
73.4
December
106.6
January
85.2
February
75.9
March
100.0
April
89.0
July-April
819.4

A detailed analysis reveals that the gross and net

collection has increased by 12.3% and 16.3%
respectively (see, Table 4.6). In absolute terms, the
gross and net collections have gone up by Rs. 89.9
billion and 107.1 billion respectively. The overall
refund/rebate payments during the first ten months
of the current fiscal year (CFY) amounted to Rs.
55.8 billion relative to Rs. 73.0 billion paid back
during the corresponding period of the past fiscal
year (PFY). Among the four federal taxes, the
highest growth of 28.9% was recorded in the case
of federal excise receipts, followed by sales tax
(19.5%), direct taxes (12.5%) and customs
(11.4%).

FY 06-07
Net
50.9
60.1
94.1
66.4
68.5
95.0
77.5
72.8
94.5
83.7
763.6

VI.I. Detailed Analysis of Individual Taxes

Direct Taxes: The collection of direct taxes has
suffered a substantial shortfall during July-March
Table 4.7: Direct Taxes: Gross and Net Revenue Receipts
FY 07-08
Months
Gross
Net
July
15.2
14.1
August
15.4
15.0
September
51.1
48.4
October
17.6
17.2
November
20.2
18.7
December
58.5
51.2
January
31.1
27.1
February
25.6
25.0
March
43.1
41.0
April
28.3
26.9
July-April
306.1
284.6

The refund payments have declined by 24.1%. The

major reasons for less than expected growth in
collection has been a substantial reduction in

Gross
54.5
54.0
101.0
60.4
67.1
123.9
55.6
56.8
89.3
66.4
729.5

Net
46.2
46.3
91.4
53.3
59.0
114.2
52.2
52.4
81.9
59.5
656.5

Growth%
Gross
Net
2.6
10.3
16.7
29.8
-0.9
2.9
15.6
24.5
9.4
16.1
-13.9
-16.8
53.3
48.7
33.5
38.8
11.9
15.4
34.0
40.7
12.3
16.3
Source: Federal Board of Revenue

FY 07-08 (see, Table 4.7). The gross and net

collections have registered a growth of only 8.8%
and 12.5%, respectively during the first ten months
of the CFY.
FY 06-07
Gross
11.6
12.9
52.0
17.9
17.4
80.4
13.5
14.8
42.8
17.8
281.3

Net
10.1
11.1
45.3
16.1
13.9
76.2
12.5
13.8
38.9
15.1
252.9

Growth%
Gross
Net
30.8
39.9
19.0
35.1
-1.8
6.9
-1.8
6.8
16.0
34.4
-27.3
-32.9
130.0
117.3
73.2
81.6
0.8
5.4
58.6
78.5
8.8
12.5
Source: Federal Board of Revenue

payments with returns and a modest growth in

advance tax payments partly because of procedural
change in the tax regime largely due to a reduction
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in taxable income of leading corporate entities.

However, this shortfall has been recouped through
extra tax effort. In fact, an amount of Rs 29.8
billion has been realized through demand creation
during the period under review as against Rs 6.5

billion during the comparable period of PFY.

Similarly, WHT has grown by 23.1%, whereas
contracts and dividends have registered 36.8% and
37.5% growth in collection, respectively.

Table 4.8: Sales Taxes: Gross and Net Revenue Receipts

FY 07-08
Months
Gross
Net
July
29.2
26.2
August
30.5
28.8
September
30.7
27.7
October
33.4
31.5
November
32.2
29.7
December
28.3
25.3
January
32.0
29.9
February
30.3
28.8
March
32.8
30.6
April
37.3
35.0
July-April
316.8
293.7

Sales Tax: The gross and net sales tax collections

amounted to Rs. 316.8 billion and Rs. 293.6
billion, showing a growth of 13.6% and 19.5%,
respectively over the corresponding period of PFY
(see, Table 4.8). The refund payment has declined
by 30% during the same period. Most of the
refunds have been paid to the textile, electrical
energy and petroleum sectors. Of net collections,
46.2% was contributed by sales tax on domestic
production and sales, while the rest was generated
from imports. Within net domestic sales tax
collections, major contribution has come from
telecom services, POL products, electrical energy,
natural gas (sugar, Iron & Steel) and cigarettes.
Similarly, POL products, plastic & plastic

FY 06-07
Growth%
Gross
Net
Gross
Net
28.7
24.0
1.7
9.2
25.2
20.9
21.0
37.9
32.9
30.6
-6.8
-9.7
26.0
22.0
28.4
43.4
31.8
28.1
1.5
5.7
24.7
20.5
14.8
23.2
26.4
24.8
21.1
20.7
26.2
23.7
15.7
21.6
26.7
24.1
23.1
26.9
30.3
30.0
23.0
29.9
278.9
248.8
13.6
19.5
Source: Federal Board of Revenue

products, edible oil, vehicles, iron and steel and

chemicals have major contribution in the import
stage collection of sales tax.
Customs Duties: Collection under Customs duties
has registered a positive growth of 10.0% and
11.4% in gross and net terms, respectively. The net
and gross collection has increased from 114.4
billion and 103.1 billion in 06-07 to Rs 125.9
billion and Rs 114.8 billion during CFY (see,
Table 4.9). The refund payments have declined by
2.6%. Major revenue sources have been the
Automobiles, POL, machinery, edible oil, iron and
steel etc. This sector has contributed around 62%
of the net collection from Customs duties.

Table 4.9: Custom Duties: Gross and Net Revenue Receipts

FY 07-08
FY 06-07
Growth%
Months
Gross
Net
Gross
Net
Gross
Net
July
9.6
8.7
10.2
8.1
-5.2
8.2
August
10.5
9.7
11.2
9.7
-5.8
0.2
September
11.4
10.5
11.2
10.1
1.7
4
October
11.2
10.2
10.9
9.8
2.3
3.8
November
12.6
11.8
12.3
11.5
2.6
2.8
December
12
10.7
12.9
11.6
-6.7
-7.6
January
15.3
13.8
10.3
9.6
48.2
43.6
February
12.2
11.2
10.2
9.3
19.3
19.9
March
16.2
15.3
13.9
13
16.9
17.5
April
14.7
12.9
11.3
10.4
30.4
24.2
July-April
125.9
114.8
114.4
103.1
10.0
11.4
Source: Federal Board of Revenue

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Federal Excise Duty: A significant growth of

28.9% has been recorded in the net collection of
FED due to extension of its base and levying of
special excise duty @ 1% on domestic production
and imports. The inclusion of a broad range of
non-fund financial services and air travel into FED
net has extended the scope of the tax by about
10%. The net collection during July-April 2008

has been Rs. 70.6 billion as against Rs 54.7 billion,

amounting to an increase of Rs. 15.9 billion or 28.9
percent over previous year. The five major
commodity groups namely cigarettes, cement,
natural gas, beverages and POL products have
contributed around 68% of FED receipts. The
month-wise comparison of gross and net collection
is reflected in Table 4.10.

Table 4.10: Federal Excise: Gross and Net Revenue Receipts

FY 07-08
FY 06-07
Growth%
Months
Gross
Net
Gross
Net
Gross
Net
July
1.9
1.9
4.0
4.0
-53.6
-53.4
August
6.6
6.6
4.6
4.6
41.4
42.6
September
7.5
7.5
5.4
5.4
38.3
38.3
October
7.5
7.5
5.5
5.5
37.9
38
November
8.3
8.3
5.6
5.5
49.4
50.5
December
7.8
7.8
5.9
5.9
33.2
33.1
January
6.8
6.8
5.3
5.3
27.5
27.5
February
7.7
7.7
5.6
5.6
38.0
38.0
March
7.8
7.8
6.0
6.0
30.1
30.2
April
8.8
8.8
7.0
7.0
24.9
25.0
July-April
70.6
70.6
54.9
54.7
28.7
28.9
Source: Federal Board of Revenue

VI-II. Review of Public Expenditure: 2007-08

The total expenditure for 2007-08 was budgeted at
Rs. 1875 billion -- 11.9 percent higher than last
year. Current expenditure on the other hand was
budgeted at Rs. 1378 billion (almost equivalent to
last years level) of which, Rs 862 billion was
earmarked for the Federal government and the
remaining Rs 416 billion was allocated for
provincial governments. Development expenditure
(after adjusting for net lending) was targeted at Rs
496 billion 16.7 percent higher than last year. On
the basis of revenue and expenditure projections,
the overall fiscal deficit was targeted at Rs 398
billion or 4 percent of GDP as against 4.3 percent
last year.
Fiscal Year 2007-08 has been a tough year for
Pakistans economy. This year began in the
backdrop of challenges emanating from domestic
and external front. Surging oil, food and
commodity prices accompanied by the turmoil in
international financial markets and the disturbed
domestic political conditions had an adverse
impact on Pakistans budgetary position.
Furthermore, over a year of inaction by the

previous government, on account of political

expediency for addressing the challenges,
accentuated the budgetary imbalances.
Large slippages have occurred on the expenditure
side mainly on account of subsidies on oil, power,
fertilizer, wheat and other foods. In addition to
this, the interest payment significantly surpassed
their targeted level. Oil subsidy was budgeted at Rs
15 billion and the price of oil in the international
market was $50-55 per barrel (Arab Gulf Mean)
during the time of the preparation of the budget
2007-08. It was also assumed that the government
would pass on the rise in international price of oil
to domestic consumers. Two factors had a
significant impact on the budgetary outlook. Firstly
oil prices continued to rise at a greater pace,
reaching as high as $ 115 per barrel in May 2008--an increase of over 116 percent during the fiscal
year. Secondly, the lack of action on the part of the
government aggravated the fiscal situation as the
high international price of oil was not passed on to
the domestic consumers. Consequently, the oil
subsidy is projected to rise to Rs 175 billion
missing the targeted level by Rs 160 billion.
Similarly, the higher cost of furnace oil used in
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power generation, was not allowed to pass through

to domestic consumers of electricity. Therefore,
against the budgeted subsidy of Rs. 52.9 billion the
projected power subsidy is likely to be Rs. 113
billion --- a slippage of Rs. 60 billion. At the time
of the preparation of the Federal Budget 2007-08,
the government never thought of importing wheat
as there was a bumper wheat crop (23.3 million
tones) in 2006-07. Hoarding, smuggling and
mismanagement of wheat operations forced the
government to import 1.7 million tonnes of wheat

at all time high prices. Since the government

imported wheat at inflated prices and sold it in the
domestic market at a cheaper price, the difference
of Rs 40 billion had to be picked up by the
government. Similarly, the government had to
make extra payments on research and development
in the textile sector, subsidy on imported fertilizer
etc which were not a part of the 2007-08 budget.
Altogether, there was a slippage of Rs. 324 billion
under the item othersin current expenditures.

Table 4.11: Consolidated Revenue & Expenditure of the Government

(Rs. Billion)
Prov. Actual
Prov. Actual
Budget
Revised
July-June
July-June
Estimate
Projections
2005-06
2006-07
2007-08
2007-08*
A. Total Revenue
1077
1298
1476
1545.5
a) Tax Revenue
804
890
1096
1062.5
FBR Revenue
713.4
847.2
1025
1000
Provincial Tax Revenue
37
37
65
57
Others
54
7
6
0
b) Non-Tax Revenue
273
408
380
483
B. Total Expenditure
1402
1675
1875
2228.9
a) Current Expenditure
1121
1375
1378
1832.5
i) Federal
788
973
962
1416.5
- Interest
237
369
375
503.2
- Defense
242
250
275
277.3
- Others
309
354
312
636
ii) Provincial
333
402
416
416
b) Development Expenditure & Net Lending
367
425
496
396.4
PSDP
365
434
520
520
Net Lending
2
-9
3
-15.3
Operational Shortfall
0
0
-50
-125
Other Development expenditure
23.3
16.7
c) Unidentified Expenditure
-86
-125
0
1
C. Overall Fiscal Deficit
325
377
398
683.4
As % of GDP
4.2
4.3
4.0
6.50%
Financing of Fiscal Deficit
325
377
399
683.4
i) External Sources
149
147
193
119.4
ii) Domestic
79
159
131
564
- Bank
71
102
81
464
- Non-Bank
8
57
50
100
- Privatization Proceeds
97
71
75
0
GDP at Market Prices
7623
8723
9970
10478
*As revised on May 23rd , 2008
Source: Budget Wing, Ministry of Finance

Interest payments surpassed their targeted level by

a significant margin. A sum of Rs. 375 billion was
budgeted for interest payments in 2007-08. The
year is likely to end with interest payments of Rs.
503.2 billion--- surpassing the targeted level by Rs
128.2 billion mainly due to two reasons. Firstly

there was a slippage on account of the National

Savings Scheme (NSS) particularly with respect to
Defence Savings Certificates (DSCs), amounting
to Rs 54 billion. There was a massive maturity of
DSCs that were issued in 1997-98 which were due
for payment in 2007-08 (this is a ten year paper).
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The NSS is still ill-equipped to determine how

many of these certificates were encashed
prematurely and how many were held till maturity.
Secondly there was a slippage on account of
floating debt and permanent debt mainly due to the
substantial rise in the volume of borrowing as well
as the rising interest rates. Therefore, a
combination of underestimating the extent of
maturity of the NSS instruments as well as
substantial rise in the governments borrowing
requirements (because fiscal deficit was high: Rs
683 billion vs Rs 398 billion) and the
consequential rise in interest rates of various
instruments were responsible for the slippages in
interest payments.
In order to counter massive gaps between budgeted
and estimated targets in current expenditure, the
government made efforts to mobilize more
resources on the one hand, and postpone
development spending on the other. An adjustment
of Rs 100 billion was made in development
expenditure. All these efforts were made to bring
the budget deficit at an acceptable level in the
wake of a difficult domestic and external
environment.
The above developments on the revenue and
expenditure sides resulted in massive slippages in
the overall fiscal deficit for the year 2007-08.
Against the target of Rs 398 billion or 4 percent of
GDP the overall fiscal deficit is likely to be Rs
683.4 billion or 6.5 percent of GDP--- the highest
in the last ten years (see, Table 4.11)
While domestic and external shocks of extraordinary proportions caused large slippages on the
fiscal account, the financing plan of the fiscal
deficit was also affected by these shocks. The
overall fiscal deficit of Rs 398 billion was to be
financed by external sources (Rs. 193 billion), and
domestic sources (Rs 131 billion). The remaining
Rs 75 billion was to come from privatization
proceeds. Within domestic sources, Rs 81 billion
financing was to come from banking sources while
the remaining Rs 50 billion was to come from non-

bank sources. The domestic and external shocks

not only increased the size of the fiscal deficit but
they also changed the composition of financing.
The borrowing requirements increased from Rs
324 billion (the net of privatization proceeds) to Rs
683.4 billion (with no privatization proceeds)an
increase of 111 percent.
External resource inflows were adversely affected
by these shocks and against the budgeted level of
Rs 193 billion, only Rs 119.4 billion is likely to
materialize. Pakistan could not complete the
transaction of Global Depository Receipts (GDRs)
of the National Bank of Pakistan and could not
launch sovereign and exchangeable bonds.
Furthermore, some of the lending from the
multilateral banks could not be materialized. These
developments had adversely impacted the external
resource inflows which remained below the
budgeted level. Thus, the brunt of adjustments on
the financing side fell on domestic sources.
Against the budgeted financing of Rs 131 billion
from domestic sources, it increased to Rs 564
billion. Within domestic sources the bulk (82.2
percent) of financing came from banks while the
remaining Rs 100 billion or 17.8 percent came
from non-bank sources. Most importantly, the
borrowings from the State Bank of Pakistan (SBP)
reached an alarming level. Such an elevated level
of borrowing from the SBP is highly inflationary
as well as posing serious complications for the
conduct of effective monetary policy. Due to the
excessive borrowing from the SBP, the money
supply growth for the year 2007-08 is expected to
breach the target of 13.7 percent.
VII. Provincial Budgets
The total outlay of the four provincial budgets for
2007-08 stood at Rs.521.7 billion, which is 19.0
percent higher than the outlay for last year
(Rs.438.3 billion). NWFP witnessed the highest
increase of 18.6 percent in budgetary outlay
followed by the Punjab (16.3%). Sindh posted an
increase of 9.9% while Baluchistan witnessed a
decline of 8.8% in its expenditures mainly due to
correction in the higher expenditures of the last
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year. The overall provincial revenue receipts for

2007-08 are estimated at Rs. 645.9 billion, which
is 21.5% higher than last year. Tax revenue,
accounting for 80.8 percent of overall revenue
receipts, amounted to Rs. 460.5 billion which is
19.2 percent higher than last year and non-tax
revenue is estimated at Rs.78.8 billion which is
49.2 percent higher than last year. The total budget
outlay of Rs. 755.2 billion is shared in the ratio of
Table 4.12: Overview of Provincial Budgets
Punjab
Items
2006-07 2007-08
(R.E)
(B.E)
A. Total Tax Revenue
217.7
270.4
Provincial Taxes
31.5
37.3
Share in Federal Taxes
186.3
233.1
B. Non-Tax Revenue
35.2
59.8
C. All Others
6.1
8.6
Total Revenues (A+B+C)
259
338.8
a) Current Expenditure
201.1
243.5
b) Development Expenditure
137.1
150
i) Rev. Account
68.8
78.1
ii) Cap. Acount
68.3
71.9
Total Exp (a+b)
338.2
393.5

67.8 percent and 32.2 percent between current and

development expenditures, respectively. The
allocations for development expenditure are 2.7
percent higher than last year and for current
expenditure, they are higher by 17.9 percent. The
main components of the Provincial budgets 200708 in comparison with revised estimates of last
year are presented in Table-4.12.

Sindh
2006-07 2007-08
(R.E)
(B.E)
144.4
161.7
16.3
18.8
128.1
142.8
6.9
7.8
9.2
11.3
160.6
180.8
144.2
166.7
43.9
40
7
5.8
36.9
34.2
188.1
206.7

VIII. 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 for Finance of the
Federal Government, the Minister of Finance of
each of the 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

(Rs Billion)
NWFP
Baluchistan
Total
2006-07 2007-08 2006-07 2007-08 2006-07 2007-08
(R.E)
(B.E)
(R.E)
(B.E)
(R.E)
(B.E)
47.3
59.1
28.9
30.6
438.3
521.7
3.1
3.9
1.1
1.2
52
61.2
44.2
55.2
27.8
29.4
386.3
460.5
8.7
9.2
2
2
52.8
78.8
10.6
11.3
14.4
14.2
40.3
45.4
66.6
79.5
45.3
46.8
531.5
645.9
55.2
61
34
41.1
434.5
512.3
29.5
39.5
25.9
13.5
236.4
242.9
5.6
6.3
0
0
81.4
90.2
23.9
33.2
25.9
13.5
155
152.8
84.7
100.5
59.9
54.6
670.9
755.2
Source: Provincial Finance Wing, Ministry of Finance

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 Federal Government in the divisible pool was
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. An account of transfer to provinces
is given in Table-4.13.
IX. Public Debt
Public debt is the outcome of the developments
taking place on the fiscal and current account
deficits. A larger gap in these two deficits would
cause the public debt to grow at a faster pace.
Exchange rate depreciation would also cause the
public debt to grow even if the government does
not borrow a single dollar. Low fiscal and current
account deficits, along with stability in the
exchange rate, are critical in keeping the public
debt at a sustainable level. Large fiscal and current
account deficits lead to an accumulation of
domestic and external debt which increases the
countrys vulnerability to external shocks while

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reducing

investments

and

the

consequent

Table 4.13: TRANSFERS TO PROVINCES (NET)

2002-03
2003-04
Divisible Pool
158.5
176.4
Straight Transfer
34.3
38.5
Special Grants/ Subventions
26.3
32.8
Project Aid
12.9
12.9
Agriculture Sector Loan-II
12
12
Japanese Grant
0.1
0.1
Total Transfer to Province
244.3
264.7
Interest Payment
28
26.9
Loan Repayment
18.8
11.8
Transfer to Province(Net)
226
226

slowdown in economic growth.

2004-05
204.8
40.5
35.3
15.5
1.4
0.1
297.6
24.3
28.7
244.6

(Rs. Billion)
2005-06
2006-07
2007-08 (B)
244.6
320.6
403.1
56.8
70.3
62.8
63.5
29.3
31.3
17.5
16.8
26.1
2.8
2.6
1.1
0.1
0.1
0.1
385.2
439.7
524.5
21.6
18.0
18.2
14.7
40.2
14.6
348.9
381.5
491.8
Source: Budget in Brief,2007-08

Table-4.14: Public Debt, FY00-FY08 (July-Mar)

FY00

FY01

Domestic Currency Debt

Foreign Currency Debt
Total Public Debt

1576
1442
3018

1728
1761
3489

Rupees Debt
Foreign Currency Debt
Total Public Debt

41.2
37.7
78.9

41.5
42.3
83.8

Rupees Debt
Foreign Currency Debt
Total Public Debt

308
281
589

312
318
631

Rupees Debt
Foreign Currency Debt

52.2
47.8

Memo:
Foreign Currency Debt ($ Billion)
Exchange Rate (Rs./U.S.$, E.O.P)
GDP (in Rs. Billion)
Total Revenue (in Rs. Billion)

27.5
52.5
3826
513

FY02

FY06

FY07 FY08 (Mar)

2322
2041
4363

2601
2213
4814

3012
2593
5604

30.5
26.8
57.2

29.8
25.4
55.2

28.7
24.7
53.5

212
186
398

200
170
371

195
168
363

49.5
50.5

FY03
FY04
FY05
(In billions of Rs.)
1715
1852
1979
2152
1795
1766
1810
1913
3510
3618
3789
4064
(In percent of GDP)
39.0
38.4
35.1
33.1
40.8
36.6
32.1
29.4
79.8
75.0
67.2
62.5
(In percent of Revenue)
275
257
246
239
288
245
225
212
562
502
470
452
(In percent of Total Debt)
48.9
51.2
52.2
52.9
51.1
48.8
47.8
47.1

53.2
46.8

54.0
46.0

53.7
46.3

27.8
63.4
4163
553

29.9
60.1
4402
624

33.9
60.2
7623
1095

36.5
60.6
8723
1298

41.3
62.8
10478
1546

30.6
57.7
4823
721

31.3
57.9
5641
806

32.1
59.7
6500
900

Source: Various Economic Survey, EAD, Budget Wing (MoF) and calculations by DPCO staff.

350
2007

35
2008 Mar

400

2006

45

2005

450

2004

55

2003

500

2002

65

2001

550

2000

75

1995

600

1990

85

1980

(As % of GDP)

95

Revenue
650

(% of Revenue)

GDP

Fig-4.2:Trends in Public Debt

A debt reduction strategy was formulated in the

early part of the decade, the salient features of
which include: (i) a reduction in the fiscal and

current account deficits, (ii) lowering the cost of

borrowing,(iii) raising revenue and foreign
exchange earnings, and (iv) debt re-profiling from
the Paris Club. To provide a legal cover to this
initiative, the Fiscal Responsibility and Debt
Limitation Act 2005 (FRDL) was promulgated in
June 2005. To fulfill the legal requirements of the
FRDL Act 2005, the Debt Policy Coordination
Office (DPCO) was established in the Ministry of
Finance. This office prepares and submits two
reports annually, the Fiscal Policy Statement and
Debt Policy Statement before the Parliament every
January. It also submits a Medium-Term
Budgetary Framework along with other budget
documents at the time of the presentation of the
Fiscal Budget.

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percent of GDP marking the first time in a

decade to see a reversal in trends. Public debt in
rupee terms has increased by 15.8 percent in the
first nine months (July-March) of the fiscal year
2007-08.

The strategy followed so far has paid handsome

dividends. Public debt as a percentage of GDP (a
critical indicator of the countrys debt burden),
which stood at 85 percent in end-June 2000, has
declined to 55.2 percent by end-June 2007 a
reduction of almost 30 percentage points of GDP
in seven years. The declining trend in public debt
is likely to be reversed in 2007-08, mainly on
account of a widening of the fiscal and current
account deficits and a sharp depreciation of the
rupee vis--vis the US dollar. By end-March 2008
the public debt as percentage of full year GDP
stood at 53.5 percent. More damage has however,
been done to public debt in the last quarter (AprilJune) of the current fiscal year, that is, a further
widening of the fiscal and current account deficits,
increased borrowing from domestic and external
sources to finance the deficits, and a sharper
adjustment to the exchange rate. The year 2007-08
is likely to end with public debt at around 56

Public debt is a charge on the budget and therefore,

it must be viewed in relation to government
revenues. Public debt stood at 589 percent of total
revenues by end-June 2000 but declined to 363
percent by end-March 2008 a reduction of 226
percentage points of revenue. Going forward, the
key to the success of reducing public debt burden
includes: a reduction in fiscal and current account
deficits and maintaining stability in the exchange
rate. A declining public debt would release
government resources for public sector investment,
would enable private sector to borrow more
(crowding-in) for investment and thus promoting
growth.

Fig-4.3: Debt Servicing (Consolidated)

Current Expenditure

The rising stock of public debt has serious

implications for debt service obligations. The debt
servicing liabilities have declined sharply from
65.0 percent of total revenue in 1999-2000 to 28.5
percent of revenue in 2007-08 and from 53.5
percent of current expenditure to 31.7 percent of

2007-08 (BE)

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

99-2000

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

1990-91

1989-90

1988-89

1987-88

1986-87

1985-86

1984-85

1983-84

1982-83

1981-82

1980-81

(as % of)

Total Revenue
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0

current expenditure during the same period (see

Figure-4.3). 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
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in 2000-01 to a target level of Rs. 628.69 billion or

6.0% of GDP for 2007-08.
IX.I. Dynamics of the Public Debt Burden
A look at some of the main factors behind the
surge in public debt over the last two decades
reveals some important structural follies. The rise
appears to be largely contributed by the high real
cost of borrowing and stagnant government
revenue. Total public debt consists of debt payable
in rupees and debt payable in foreign exchange.
The real cost of borrowing for these two
components of public debt is measured differently.
As shown in Table-4.15, the real cost of Pakistans
domestic debt has varied substantially over time.
During the 1980s, the real cost of borrowing for
domestic public debt was only 1.0 percent. The
interest rates on domestic debt rose sharply in early
the 1990s due to financial sector liberalization but
the impact of higher nominal interest rates to a
large extent was wiped out by the sharp
acceleration in inflation. The average real cost of
borrowing for the domestic component of the
public debt was 3.2 percent in the 1990s because
of double-digit inflation. Further dis-aggregation of
the 1990s suggests that the real cost of domestic
borrowing was negative (1.9 percent) in the first
half of the 1990s but rose sharply (5.7 percent) in
the second half, mainly on account of a decline in
the inflation rate. During the first four years of the
decade (2000-04), the real cost of borrowing for
domestic debt was 5.8 percent owing to lower
inflation but in the last four years (2004-08) the
real cost of borrowing declined to 1.0 percent
partly due to rising inflationary pressures in the
economy as well as the declining nominal cost of
borrowing.
The average real cost of foreign borrowing was 2.7
percent per-annum in the 1990s [See Table-4.15].
Further dis-aggregation reveals that the real cost of
borrowing was much higher (5.9%) in the second
half of the 1990s mainly on account of a sharp
depreciation of the rupee vis--vis the US dollar
and falling domestic inflation. During the first four
years of the current decade (2000-04), the real cost
of borrowing for foreign exchange denominated
loan declined to 1.3 percent and further turned into

negative 4.4 percent in the last four years (200408). During 2004-08, the depreciation of rupee
along-with higher inflation contributed to negative
incidence of real cost of borrowing. The low
implied cost of external borrowing has contributed
to overall declining trend in real cost of borrowing
during the last eight years.
Table 4.15: Real Cost of Borrowing
(Percent)
External
Debt
Domestic Debt Public Debt
3.4
1980s
1.0
2.3
2.7
1990s
3.2
2.9
-3.0
1990-I
-1.9
-2.4
-5.5
1990-II
5.7
5.6
1.3
2000-04
5.8
3.6
-4.4
2004-08*
1.0
-1.5
Source: EA Wing and DPCO calculations.
* Jul. 2004 - end Mar. 2008.

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 well-documented in
Table-4.16. The growth in the public debt burden
averaged 2.0 percent per annum during the 1990s.
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 had been responsible for the rise in the
public debt burden in the second half of the 1990s.
As shown in Table 4.16, the primary fiscal balance
turned negative, standing at -0.9 percent of GDP
during 2004-08 while the real growth of debt
registered an increase of 0.5 percent and at the
same time revenue grew at a healthy average rate
of 6.1 percent per annum. The combined effect of
growth in revenue and sharp reduction in debt

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growth resulted in a sharp decline in the countrys

debt burden during the last seven years. In order to
assess the cost of borrowing, an implied interest
rate is calculated as interest payments in FY08
divided by the stock at the end of previous
financial year. The higher expenditure on debt
servicing is mainly because of the maturities of
DSCs sold in FY 1997-98. This shows that the
governments additional expenditure on domestic
debt servicing was due to past financing
commitments and not excessive spending in fiscal
Table-4.16: Dynamics of Public Debt Burden
Real Cost of
Primary Fiscal Balance
Borrowing
% of GDP
1980s
-3.7
2.3
1990s
-0.3
2.9
1990-I
-1.8
-2.4
1990-II
1.1
5.6
2000-04
1.7
3.6
2004-08*
-0.9
-1.5
* July 2004 - end March 08

X. Domestic Debt
Most developing countries have a relatively small
banking sector which limits the availability of
loanable funds. Borrowing from domestic financial
sources has several advantages including:
avoidance of exchange rate risk, lower liquidity
risk and ability to deflate debt through higher
inflation. However, excessive borrowing by the
public sector could lead to crowding out of the
private sector as well as high interest rates and
inflation. With the expansion of the financial sector
in Pakistan, the government has relied more on
borrowings from the domestic sector in recent
years, reflecting in an increase in the share of
domestic debt in total debt, standing in at 53.8
percent up to March 2008.
By end-June 2007 total domestic debt stood at Rs.
2610.2 billion which was estimated at 30 percent
of GDP. The outstanding stock of domestic debt
rose by Rs 409.9 billion and stood at Rs. 3020.1
billion by end-March 2008 or 30.3 percent of GDP.
The domestic debt has increased by 15.7 percent

year 2007-08. 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.
Real Growth Real Growth of
Real Growth of
of Debt
Revenues
Debt Burden
% Per Annum
10.6
7.6
3.0
4.9
2.9
2.0
3.6
3.2
0.4
6.2
2.5
3.7
0.3
6.1
-5.8
0.5
6.1
-5.6
Source: EA Wing & DPCO Calculations

by end-March 2008 over end-June 2007 (see,

Table 4.18). This growth in domestic debt when
viewed at the back of an average growth of 8.1
percent of the last five years suggest that though
the economys debt carrying capacity has
improved in recent years, the current rise in debt
burden was witnessed mainly due to the excessive
borrowing of the government from the central bank
as well as from non-bank sources to finance a large
budget deficit. The increase in domestic debt
mainly emanates from floating debt (27.1%) while
the other two components, unfunded and
permanent, witnessed a modest growth of 6.1
percent and 9.4 percent, respectively.
X.I. Composition of Domestic Debt
Pakistans domestic debt has undergone
considerable change in its composition in recent
years. The share of floating debt (a short-term
instrument) in total domestic debt increased from
36 percent in end-June 2005 to 46.6 percent in endMarch 2008 more than a 10 percentage points in
the last four years. The shape of long-term debt
instruments (unfunded debt) decline from almost
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40 percent to 33 percent in the same period. More

reliance on short-term instruments to finance the
fiscal deficit involves risks as more resources will
be required in quick succession. Going forward,
attempts should be made to rely as little as possible
on short-term instruments, particularly borrowing
from the SBP to finance the fiscal deficit.
X.I.i Unfunded Debt
The stock of unfunded debt has witnessed an
increase for a third year running. Having fallen

from a stock of 909.5 billion in 2002-03 to Rs 854

billion in 2004-05, unfunded debt has risen to Rs
997.2 billion by the end of March 2008, an
increase of 6 percent from last year or Rs 57.2
billion. This type of debt includes the various
instruments that fall under the National Saving
Schemes (NSS). In response to various reforms in
the NSS, the unfunded debt saw a substantial
increase starting in the first nine months of FY
2006-07 and the trend has continued into the
current fiscal year.

Table-4.17: Outstanding Domestic Debt (Rs. Billion)

2002
424.8
557.8
792.1
1774.7
40.3

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

2003
468.8
516.3
909.5
1894.5
39.3

End June
2004
2005
570.0
526.2
542.9
778.2
899.2
854.0
2012.2
2158.4
35.7
32.8

2006
514.9
940.2
859.2
2314.3
30.0

2007
562.5
1107.7
940.0
2610.2
30.0

End March
2008
615.7
1407.2
997.2
3020.1
30.3

* 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.

X.I.ii Floating Debt and Permanent Debt

The share of floating debt, which was undergoing a
substantial decline since the 1990s, increased by 27
percent or Rs 299.5 billion amounting to Rs 1407.2
billion by end-March 2008 (see, Table 4.17).
Figure-4.4: S tructure of Domestic Debt, FY00-FY08
(In percent of total domestic debt)
50
Unfunded Debt

(In percent)

40

30

Floating Debt

20

Permanent Debt

10
FY08(Mar)

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

Financal Year

The stock of permanent debt also exhibited a

moderate increase of Rs 53.2 billion or 9.4 percent
and stood at Rs 615.7 billion by end March 2008.
The increase in permanent debt is associated with
efforts made by the Government to access funds

from auctions of the PIBs to satiate appetite for

long-term paper and to promote the idea of
secondary market development. The administration
has made an effort to balance between long-term
and short-term securities. The trade-off between
short-run and longer run maturity is intricately
designed to keep debt servicing cost lower.
The major reason for the weak performance of
these long term instruments can be attributed to
firstly increased market depth, providing
diversified investment opportunities and secondly
the rigidities in profit payment structure of these
instruments that penalizes investors by denying
them profit on the broken period. During July-Mar
FY08 period, debt servicing cost of the domestic
debt increased by 52.1 percent, and stood at Rs 328
billion mainly due to increase in unfunded debt
servicing cost.
X.II. Domestic Debt Burden
In recent years, the burden of interest payments on
the domestic debt has declined sharply, thereby,

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releasing resources for development and social

sector programs.
A cursory look at the Table-4.18 is sufficient to see
that the interest payments as a percentage of total
revenue have been reduced to one-half (from 41
percent to 21.6 percent) over the last eight years.
Similarly, share of interest payments in total
expenditure declined from 29.6 percent to 17
percent during the same period. Most importantly
Table 4.18: Domestic Debt & Its Interest Payments
Domestic
Interest
Fiscal
Debt
Payments
Tax
Year
(Rs. Bln)
(Rs. Bln)
Revenue
448.2
35.7
27.5
1990-91
531.5
50.3
30.6
1991-92
615.3
62.7
35.2
1992-93
711.0
77.5
37.2
1993-94
807.7
77.9
30.2
1994-95
920.3
104.5
34.2
1995-96
1056.1
126.5
39.0
1996-97
1199.7
167.5
47.2
1997-98
1452.9
175.3
44.9
1998-99
1644.8
210.2
51.8
1999-00
1799.0
188.5
42.7
2000-01
1774.7
189.5
39.6
2001-02
1894.5
166.9
30.0
2002-03
2027.5
161.5
26.1
2003-04
2177.6
176.3
26.7
2004-05
2336.8
202.5
25.2
2005-06
2610.2
287.5
32.3
2006-07
3140.7
318.2
29.0
2007-08*
*Budget Estimate

XI. Concluding Remarks

Fiscal Year 2007-08 has been one of the most
difficult years for Pakistans economy, as several
political and economic events transpired
unexpectedly, adversely affecting the countrys
fiscal position. As a result, the overall fiscal deficit
is likely to be 6.5 percent of GDP against the
budgeted number of 4 percent. Such a large
slippage on the fiscal side has already caused
severe macroeconomic imbalances. The hardearned macro economic stability underpinned by
fiscal discipline appears to have been lost and
Pakistan is likely to pay a heavy price in terms of
deceleration in growth and investment, reversal in
poverty trends, widening of current account deficit,

interest payments declined from 5.5 percent to 3.0

percent of GDP, in the last eight years. Interest
payments stood at 21.6 as a percentage of total
revenue as compared to 22.1, percent last year. A
declining trend was also observed in interest
payments as a percentage of GDP and total
expenditure which has fallen from 3.3 percent to
3.0 percent and from 17.2 percent to 17.0 percent
respectively during the current fiscal year.

Interest Payments as % of
Total
Total
Current
GDP
Revenue
Expenditure
Expenditure
(mp)
20.8
13.7
18.2
3.5
21.7
15.6
21.9
4.2
26.0
18.0
23.0
4.7
28.4
21.3
26.4
5.0
24.1
18.2
22.5
4.2
27.5
20.2
24.7
4.9
32.9
23.4
27.3
5.2
39.0
26.4
31.6
6.3
37.4
27.1
32.0
6.0
41.0
29.6
33.5
5.5
34.1
26.3
29.2
4.5
30.4
22.9
27.1
4.3
23.2
18.6
21.1
3.4
20.0
17.2
21.2
2.9
19.6
15.8
20.4
2.7
18.8
14.4
19.6
2.7
22.1
17.2
23.0
3.3
21.6
17.0
23.1
3.0
Source: Budget Wing, Ministry of Finance

rise in public and external debt, depletion of

foreign exchange reserves and mounting pressures
on the exchange rate.
A sound fiscal position is crucial for achieving
macroeconomic stability, which is widely accepted
as being imperative for sustained economic growth
and poverty reduction. The sooner Pakistan
improves its fiscal position by making decisive
fiscal adjustments, the lesser the price it is likely to
pay for its fiscal indiscipline. A sharp fiscal
adjustment can reduce large external current
account imbalances, restore the confidence of
global investors, ease financing constraints,
support growth and contain inflation.

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TABLE 4.2
SUMMARY OF PUBLIC FINANCE (CONSOLIDATED FEDERAL AND PROVINCIAL GOVERNMENTS)

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
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 Proce
Memorandum Item
GDP (mp) in Rs. Billion
Total Revenue
Tax Revenue
Non-Tax Revenue
Expenditure
Current
Development
Overall Deficit Incl. E.quak
Q.E: Quick Estimates
R.E: Revised Estimates

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

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
-

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
-

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
-

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
-

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

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

794,000
900,014 1,076,600
741,000
842,900
992,200
84,400
53,000
57,114
611,000
659,410
803,700
583,000
624,700
766,900
28,000
34,710
36,800
183,000
240,604
272,900
158,000
218,200
225,300
47,600
25,000
22,404
956,000 1,116,981 1,401,900
775,000
864,500 1,034,700
557,000
664,200
789,100
218,000
200,300
245,600
161,000
227,718
365,100
20,000
24,763
2,100
-32,000
0
-86,307
-130,000
-216,967
-325,300
130,000
216,988
325,200
-5,900
120,432
148,900
135,900
96,556
176,300
61,000
8,050
8,100
63,690
60,179
70,900
11,210
28,327
97,300

2,678

2,938

3,826

4,210

16.0
13.2
2.8
23.7
19.8
3.9
7.7

15.9
13.3
2.7
22.0
18.6
3.3
6.1

13.4
10.6
2.8
18.8
16.4
2.5
5.4

13.1
10.5
2.6
17.4
15.3
2.1
4.3

4,453
4,876
5,641
(As Percent of GDP at Market Price)
14.0
14.8
14.1
10.7
11.4
10.8
3.3
3.4
3.2
18.3
18.5
16.9
15.7
16.2
13.7
2.8
2.2
3.2
4.3
3.7
2.3

6,500
13.8
10.1
3.7
17.2
13.3
3.9
3.3

2005-06

7,623

2006-07
R.E.
1,297,957
1,215,730
82,227
889,685
852,866
36,819
408,272
362,864
45,408
1,799,968
1,375,345
973,130
402,215
433,658
-9,035
-124,510
-377,501
377,501
147,150
230,351
56,905
101,982
71,464

8,723

(Rs Million)
% Change
2007-08 2007-08/
(Q.E) 2006-07
1,545,500
19.1
1,408,500
15.9
137,000
66.6
1,062,500
19.4
1,005,500
17.9
57,000
54.8
483,000
18.3
403,000
11.1
80,000
76.2
2,228,900
23.8
1,832,500
33.2
1,416,500
45.6
416,000
3.4
411,700
-5.1
-15,300
0
-683,400
683,400
119,400
564,000
100,000
464,000
0
-

10,478

20.1

14.1
14.9
14.7
10.5
10.2
10.1
3.6
4.7
4.6
18.4
20.6
21.3
13.6
15.8
17.5
4.8
4.9
3.8
4.3
4.3
6.5
Source: Budget Wing, Finance Division, Islamabad

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.

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Chapter 05

MONEY AND CREDIT

The role of the financial system is to intermediate
between lenders and borrowers, providing a menu
of saving vehicles with differing risk and return
characteristics. Financial intermediaries help the
investors find the financing they need, taking into
account the returns and risks on the project they
wish to undertake. In carrying out their functions,
financial intermediaries reduce transaction costs
for savers and investors and help reduce problems
of asymmetric information that are inherent in the
relationships between investors and entrepreneurs.
For a given level of saving, more efficient
intermediation increases the productivity of
investment. It seems obvious that the more
efficient the financial system is, the stronger would
be the economic growth.
The global economy for some time has enjoyed
good economic growth and increasing depth in
financial markets, accompanied by the significant
financial innovation. This growth co-existed with a
combination of favorable economic indicators,
with relatively benign inflation levels, low risk
premia, and an easy access to finance even in the
midst of continuing global imbalances. Until
recently, the risk associated with such development
seemed to be contained; however gains from the
benign macroeconomic environment of the last few
years have been dealt with a severe blow in the
form of liquidity crunch triggered by the US subprime mortgage crisis. These events have brought
to the forefront some global economic and
financial vulnerabilities whose prolonged impact
could pose certain risks given that the world is
more integrated today than ever before.
Pakistan has made a significant progress in
improving the health and soundness of the banking
and financial sector over the last two decades.
During this period of transformation, the financial
sector of Pakistan has evolved into a more

progressive and dynamic module of the economy,

both in response to the financial sector reforms and
to the growing financing needs of an expanding
economy. In response to the growing demands of
financial globalization, Pakistans financial system
is starting to integrate with international financial
markets. Financial integration was particularly
expedited in FY07 in which record high foreign
portfolio investment was received in stock market
as well as through the issuance of GDRs.
Additionally, with the rising strength of the
corporate sector and vigorous expansion plans, the
central bank is in the process of initiating External
Commercial Borrowing (ECB), which at the
moment is approved on a transactional basis. This
liberalization measure will provide an opportunity
to the corporate sector to raise external loans for
project finance, bond floatation, structured finance
and Islamic products.
In Pakistan, the composition of financial sector
gives credence that the overall dependence on the
banking sector has increased in the last few years.
Given the scope and requirements of the private
sector, growth in the banking sector is essential.
Encouragingly, the outreach of the banking sector
continues to improve, with diversified pattern in
ownership, both foreign and local, and with the
expanding network of commercial banks,
microfinance institutions and Islamic banks in all
parts of the country. Alongside these
developments, ongoing financial sector reforms are
paving the way for a more diversified financial
sector, equipped to facilitate the economic growth
process. Financial sector assets have recorded a
remarkable growth in recent years. Strong growth
of mutual fund---being managed by professional
and reputable asset management firmsis largely
attributed to the improved performance of the
domestic financial markets, and points to the
gradual but steadfast process of diversification of
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Pakistan Economic Survey 2007-08

the financial sector. These developments augur
well for financial stability as well as meeting the
goal of enhancing financial services penetration.
Monetary Policy Stance
The process of tightening of monetary policy
began in FY05 from a broadly accommodative one
to more aggressive. The moderate interest rates,
together with broad-based private sector credit
demand helped in raising industrial production.
This has resulted in acceleration in monetary
expansion. Therefore, heightened activity also fed
a gradual rise in core inflation. The governments
mid December 2004 decision to lift the freeze on
domestic POL prices raised inflationary
expectations, forcing a more aggressive tightening
of monetary policy. It was in April 2005 that the
SBP raised its discount rate by 150 basis points
(bps) to 9 percent, and further to 9.5 percent in
July06 with the same objective of controlling
inflation. Demand pressures were still high, as
reflected by high growth in credit to private sector,
rising imports resulting in the widening of the
current account deficit and an expansionary fiscal
policy envisaged in the Federal Budget 2006-07.In
FY07, inflation target of 6.5 percent was surpassed
by 1.3 percentage points, primarily because of
demand pressures as reflected by widening fiscal
and current account deficits and double-digit food
inflation. During FY08, the SBP continued with
tight monetary policy stance, thrice raising the
discount rate and increased the Cash Reserve
Requirement (CRR) and Statutory Liquidity
Requirement (SLR). During H1-FY08, the SBP
raised the policy rate by 50bps to 10 percent
effective from August 1st, 2007. Furthermore, the
SBP zero rated the CRR for all deposits of one
year and above maturity to encourage greater
resource mobilization of longer tenor and 7 percent
CRR for other demand and time liabilities. In H2FY08 the SBP further tightened Monetary Policy
by raising discount rate by 50bps to 10.5 percent.
Furthermore, the CRR was raised for deposits upto
one year maturity by 100bps to 8 percent while
leaving term deposits of over a year zero rated. The
objective was to give incentives to commercial
banks to mobilize long term deposits. In the light
of continued inflationary buildup and increasing
pressures in the foreign exchange market, the SBP
announced a package of monetary measures on
82

May 21, 2008 that includes;(i) an increase of 150

bps in discount rate to 12 percent; (ii) an increase
of 100 bps in CRR and SLR to 9 percent and 19
percent, respectively for banking institutions (iii)
introduction of a margin requirement for the
opening of letter of credit for imports (excluding
food and oil) of 35 percent, and (iv) establishment
of a floor of 5 percent on the rate of return on
profit and loss sharing and saving accounts.
Monetary and Credit Development
In order to improve the effectiveness of monetary
policy and avoid ambiguities in sending out policy
signals, the SBP has abolished the Annual Credit
Plan (ACP). This was a long awaited measure,
following the removal of credit ceilings which
made the Credit Plan redundant. Since broad
money (M2) was the only intermediate target in the
monetary policy framework, SBP continued to
prescribe targets of NFA, NDA, government
borrowings and private sector credit .It is expected
that the abolishment of ACP will help remove the
uncertainties emanating from multiple targets of
monetary aggregates.
A sharp jump in monetary aggregates during the
last month of FY07 pushed the aggregate M2
growth for the year to 19.3 percent. This strikingly
higher growth in M2 was caused entirely by a
phenomenal rise in NFA in FY07.For 2007-08,the
SBP had assumed that with real GDP growth target
of 7.2 percent and inflation target of 6.5 percent,
broad money(M2) supply growth should grow by
13.7 percent. The money supply growth during
July- May1 of the current fiscal year slowed to 9
percent compared to 14 percent during the
corresponding period of FY07 (Table-5.1). The FY
08 growth in M2 is entirely attributable to a rise in
net domestic assets (NDA) of the banking system
due to high government borrowings for budgetary
support, as the NFA registered a contraction during
the period, mainly reflecting the weaknesses in
countrys external balance of payment. The
monetary tightening has been successful in
moderating the exceptional rise in private sector
credit growth seen in recent years to levels
consistent with its long term trends. However, the
impact of this desirable moderation in private
1

Pertains to 10 May for FY08 and 12 May for FY07

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Money and Credit

sector growth on M2 was more than offset by
continued strong budgetary borrowings of the
government from the banking system. The NDA of
the banking system registered an expansion of

Rs.656 billion during Jul-May FY08 compared

with an expansion of Rs.395 billion during the
corresponding period of last year.
(Rs. billion)
Jul-May*
2007-08
423.02
362.06
60.86
0.09
414.39
369.85
44.33
-0.03
0.24
-180.69
656.72
21.32%
-289.84
366.89
9.03%
Source:SBP

Table-5.1 Profile of Monetary Indicators

Jul-May*
2006-07
185.84
212.36
-26.42
-0.09
273.98
263.43
10.40
-0.23
0.38
-64.29
395.54
14.67%
84.59
480.12
14.09%

1.Net government sector Borrowing(a+b+c)

a .Borrowing for budgetary support
b.Commodity operations
c.Others
2.Credit to Non-government Sector (d+e+f+g)
d.Credit to Private Sector
e.Credit to Public Sector Enterprises (PSEs)
f. PSEs Special Account-Debt repayment with SBP
g.Other Financial Institutions(SBP credit to NBFIs)
3.Other Items(net)
4.Net Domestic assets (NDA)
Growth
5.Net Foreign Assets (NFA)
6.Monetary Assets(M2)
Growth
*pertains to 10th May for F08 and 12th May for FY07

Analysis of Monetary Indicators

Bank Credit to Government
The net bank credit to the government for
financing commodity operations and budgetary
support amounted to Rs. 423 billion during JulyMay FY08 against Rs.185 billion during the same

period last year.

Credit to government for
commodity operations expanded by Rs. 60 billion
during July-May FY08 as compared to contraction
of Rs.26 billion during the same period last year,
while credit to government for budgetary support
increased to Rs. 362 billion.

Table-5.2 Monetary Indicators(Growth Rates)

Indicators
Net Bank Credit to Government Sector
Bank Credit to Private Sector
Net Domestic Assets(NDA)
Net Foreign Assets (NFA)
Money Supply(M2)
*pertains to 10th May for F08 and 12th May for FY07

FY 05

FY 06

FY 07

13.9
34.36
22.15
9.22
19.12

11.63
23.47
16.05
11.52
15.07

11.14
17.3
14.23
38.65
19.32

In the current fiscal year, domestic and external

shocks of extra-ordinary proportions caused large
slippages on the fiscal side. The financing plan of
the fiscal deficit also affected by these shocks. The
overall fiscal deficit of Rs.398 billion was to be
financed by external sources(Rs.193 billion), and
domestic sources (Rs 131 billion).The remaining
Rs. 75 billion was to come from privatization
proceeds. Within domestic sources, Rs 81 billion
financing was to come from banking sources while

Jul-May*
2006-07
22.29
12.23
14.67
11.9
14.09

(Percent)
Jul-May*
2007-08
45.66
14.91
21.32
-29.43
9.03
Source: SBP

the remaining Rs 50 billion was to come from nonbanking sources. The domestic and external shocks
not only increased the size of the fiscal deficit but
they also changed the composition of financing.
The borrowing requirements increased from Rs.
324 billion (the net of privatization proceeds) to
Rs. 683.4 billion (with no privatization proceeds)an increase of 111 percent. External resource
inflows were adversely affected by these shocks
and against the budgeted level of Rs.193 billion,
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Pakistan Economic Survey 2007-08

during the current fiscal year, which has almost
doubled the stock of MRTBs with SBP to Rs.945.9
billion. To put this in perspective, the July-May
FY08 borrowings are twice the net borrowings
seen during the preceding three years (Fig 5.1).
The reliance on central bank borrowing is partly an
outcome of scheduled banks reduced interest in
government papers .It may be pointed out that the
government had borrowed substantially from the
scheduled banks during Q1-FY08. This trend
however changed completely in subsequent
quarters when scheduled banks showed little
interest in the T-bill auctions. This probably
reflects strong seasonal demand for private sector
credit as well as attractive returns on such loans
and tight liquidity conditions in the inter-bank
market. In addition, the expectations regarding
changes in discount rate in the monetary policy
statement for H2-FY08 also limited the scheduled
banks participation in the auctions of the
government securities. (Fig 5.2)

only Rs.119.4 billion is likely to materialize.

Pakistan could not complete the transaction of
GDRs of the National bank of Pakistan and could
not launch sovereign and exchangeable bonds.
Furthermore; some of the lending from the
multilateral banks could not be materialized. These
developments had adversely impacted the external
resource inflows which remained below the
budgeted level. Thus, the brunt of adjustments on
the financing side fell on domestic sources.
Against the budgeted financing of Rs 131 billion
from domestic sources, it increased to Rs 564
billion. Within domestic sources, the bulk (82.2
percent) of financing came from banks while the
remaining Rs 100 billion or 17.8 percent came
from non-bank sources. Most importantly, the
borrowings from the State Bank of Pakistan
reached at an alarming level which is posing
serious complications for the conduct of monetary
policy. On cumulative basis, as on May 10, 2008
government has borrowed Rs.551 billion from SBP
Fig 5.1Government Budgetary Borrowings

Total borrowings
From Scheduled banks

400
Rs.billion

551

From SBP

600
212

200

99

98

178
35

191

161

102

362

170
22

-59

-189

-1

-200
-400
Q1 FY 08

Jul

Aug

Sep

Nov

Dec

Jan

Feb

Mar

2008

2007

Accepted

2008

2007

2008

2007

2008

2007

2008

Oct

Offered

2007

Target

2007

2008

2007

2008

2007

2008

2007

Rs. billion

Fig 5.2 T-bill Auctions Results

180
160
140
120
100
80
60
40
20
0

Jul-10May 08

2007

FY 07

2008

Jul-12May 07

2008

Jul-1Dec 07

Apr

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Money and Credit

Due to phenomenal rise in government sector
borrowings from the banking system, net domestic
assets of the banking system registered a strong
growth (21.32 percent) during July-May FY08
compared to the growth (14.67 percent) recorded
during corresponding period of last year. The SBP
has contributed the most to the overall NDA
expansion mainly due to the strong growth in the
government borrowings from the Central Bank.
Credit to public sector enterprises which registered
an expansion of Rs.44 billion in contrast to Rs.10
billion during the corresponding period last year
also contributed to the current rise in NDA. This
growth in the credit to PSEs is attributable to
delays in settlement of oil price differential claims
of one public sector oil marketing company
(OMC), and the credit extension to the electricity
distribution companies.

issuance of GDRs, sovereign bonds, receipts of

lower-than-expected logistics support, decline in
foreign investment, lower inflows from multilateral
development banks, and SBPs decision to provide
foreign exchange to support a part of oil payments
even when the oil prices are at their historic high
levels.
Fig 5.3 Net Foreign Assets
100

84.59

92.8

50
0

Rs.billion

Net Domestic Assets

-50
-100

-71.4

-99.9

-150
-200
-250
-300

-289.8
Jul-Dec FY07

Jul-May FY07

Jul-Jun FY07

Jul-Dec FY08 Jul-May FY 08

Net Foreign Assets (NFA)

NFA of the banking system registered a net
contraction of Rs.289 billion during July-May
FY08 compared to an expansion of Rs.84billion
during the corresponding period last year. This
contraction in NFA is attributable to delays in

Credit to Private Sector

Credit to private sector grew by 14.9 percent
during July-May FY08 as against 12.2 percent in
the same period of last year. Credit to private
sector as percent of GDP is continuously rising
since 2001-02 (Fig-5.5).
Fig 5.5 Credit to Private Sector/GDP(mp)

40
35
30
25
20
15
10
5
0

34.3

34.4
23.5
17.3

12.8

FY 03

FY 04

FY 05

FY 06

FY 07

14.9

FY 08

Net credit to private sector stood at Rs.369 billion

during July-May FY08 compared with Rs. 263
billion in the same period last year. Private sector
credit was growing at a slower pace till January
2008 compared to previous year, gathered
momentum thereafter. The key factors contributing

31
29
27
25
23
21
19
17
15
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
2006-07

Percent

Fig 5.4 Growth of Private sector

to recent acceleration in private sector credit

growth include: (i) rise in working capital
requirements due to higher input costs; (ii)the need
for bridge financing to settle price differential
claims of the OMCs and IPPs; and (iii) the higher
fixed investment in the month of March 2008.
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Table-5.3 Private sector credit (Flows)
Sectors
Overall Credit (I to V)
I.Loans to Private Sector business
A.Agriculture
B.Mining And Quarrying
C.Manufacturing
Textiles
D.Electricity,gas and water
E.Construction
F.Commerce and Trade
G.Transport,storage and communications
H.Services
I.Other Private Business
II.Trust funds and NPOs
III.Personal
IV.Others
V.Investment in Securities and Shares

A look on advances to private sector (Table 5.3)

suggests that, while the increase in raw material
prices did cause acceleration in credit demand in a
few industries, the increase in interest rates had put
significant downward pressures on credit demand
especially in industries that are capable of
generating cash flows internally, sufficient to meet
working capital requirements. It must also be kept
in mind that the credit by the banking sector is also
being supplemented by other sources of financing.
The private sector is using non-bank finances, thus
shifting part of the credit demand away from the
banking sources. In particular, besides banks, nonbank financial institutions are meeting the
financing demand of the private sector through
their investment in debt instruments (TFCs and
Sukuk).It may be pertinent to note that most of the
private sector TFCs and Sukuks have been used
to refinance bank credit. Availability of foreign
investment and loans has also played an important
role in softening the demand for bank credit
particularly in telecommunication sector. It appears
that demand for fixed investment loans has
moderated in a number of industries. However, this
does not necessarily suggests a slowdown in
economic activity as (a) the moderation in fixed
investment demand in cement, construction and
textile is more of a reflection of the fact that these
industries had already expanded their capacities in
recent years; and (b) some of the industries are

(Rs.billion)
Jul-Mar
FY07
267.5
203.2
10.5
0.3
119.0
21.6
12.3
10.3
15.9
13.9
18.4
2.9
0.6
38.8
4.1
20.8

FY08
368.0
304.7
12.1
4.7
193.1
94.2
37.3
15.0
28.5
4.0
10.0
-1.2
0.5
21.2
-0.6
42.2
Source:SBP

financing their expansion projects through other

sources, such as foreign currency loans (e.g.,
telecom), foreign investments (telecom, chemical)
and floatation of debt instruments (e.g., chemical,
cement, real estate and ship yard) in the domestic
market. Further, the demand for fixed investment
is expected to grow substantially in the power and
refinery sector.
The commencement of financing private sector
power projects will provide a boost to private
sector credit growth. It is also likely that
companies which met their demand from external
borrowings in earlier periods would revert to
domestic markets given the expected widening of
spread overseas.Although the SBP kept the
liquidity conditions tight in inter-bank market
throughout FY08, the impact on commercial
banks ability to lend was weaker by a number of
factors such as increase in banks paid up capital,
more than required capital adequacy of banks,
increase in non-performing loans, particularly in
consumer financing, SME, corporate and internal
cash generation through increased profitability, the
continued process of mergers and acquisitions, upgradation of the risk management systems in a few
banks and a slight deterioration in credit quality
have prevented a few banks from aggressive
lending.

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Sectoral Analysis:
Manufacturing, power, and commerce made major
contributions in the growth of net advances. In
contrast, contribution from services, construction,
personal and others was significantly lower during
Jul-Mar FY08 compared to the corresponding
period of FY07.
Agriculture Sector: The gross disbursement to
agri-sector grew by 24.8 percent to Rs 138.6
billion) during Jul-Mar FY08 compared with 21.9
percent in the same period of last year (Table5.4).Production loans rose by 28.5 percent to
Rs.125.4 billion from Rs.97.6 billion last year;
while the development loans declined to Rs.13.1
billion from Rs.13.6 billion during the same

period. Commercial banks gross disbursement

during Jul-Mar FY07grew to Rs.95.1 billion. An
encouraging factor regarding disbursement of
agricultural credit was the increasing role of
private domestic banks vis--vis traditional lender,
ZTBL. The share of private domestic banks in total
disbursement increased from 14.5 percent (Rs 16
billion) during Jul-Mar FY07 to 21.6 percent
(Rs.29.9 billion) during Jul-Mar FY08.On the
other hand, share of ZTBL declined from 36.8
percent(Rs.40.8 billion) during Jul-Mar FY07 to
28.5 percent (Rs.39.5 billion) during Jul-Mar
FY08.Among the major commercial banks,
National Bank of Pakistan continued its
dominance, followed by Habib Bank Limited,
MCB Bank, Allied Bank of Pakistan Limited, and
United Bank Limited.

Table-5.4 Targets and Actual Disbursement of Agriculture Loans

Actual Disbursement (July-March)
FY 07
FY 08
Name Of Banks
Pro
Dev
Pro
Dev
Total
Loans
Loans
Loans
Loans
I. Total Commercial Banks (A+B)
57.2
7.9
65
88.6
6.5
A.Major Commercial Banks
42.8
6.1
49
61.6
3.5
1.Allied Bank of Pakistan Limited
4.5
0.1
4.5
8.8
0.1
2.Habib Bank Limited
9.3
4
13.3
14.1
0.8
3.Muslim Commercial Bank Limited
5.2
0.1
5.4
13.4
0.5
4.National Bank of Pakistan
17.5
1.5
19
19.4
1.2
5.United Bank Limited
6.3
0.4
6.7
6
0.8
B Private Domestic Banks
14.3
1.7
16.1
27
3
II.Total Specialized Banks(1+2)
40.4
5.7
46.2
36.8
6.6
1.Zarai Taraqiati Bank Limited
36.9
4
40.9
33.6
6
2.P.P.C.B
3.6
1.7
5.3
3.3
0.7
Grand Total (I+II)
97.6
13.6
111
125.4
13.1

Power Sector: The demand for advances was

significantly higher in power sector during Jul-Mar
FY08. Indeed, the rise in working capital loans
incorporated the impact of delays in payment from
WAPDA to IPPs, whereas growth in fixed
investment loans reflects the impact of capacity
expansion in private sector power projects.
Manufacturing: Credit to manufacturing sector
rose to Rs.193 billion during Jul-Mar FY08
compared to Rs.119 billion in Jul-Mar FY07.This
higher growth was mainly driven by higher
advances to the textile sector (Rs.94.2 billion in the
FY08as compared to Rs.21.6 billion in the same

(Rs.billion)

Total
95.1
65.1
8.8
14.9
13.9
20.6
6.9
30
43.5
39.6
3.9
138.6
Source:SBP

period last year); excluding the textile industry, the

growth in advances to manufacturing sector has
decelerated.
Construction: Advances to construction sector
rose to Rs.15 billion during Jul-Mar FY08 Rs.10.3
billion in the corresponding period last year. The
issuance of privately placed Sukuks for financing
new projects probably explains lower demand for
fixed investment loans from this sector. Besides
rising housing demand, the increase in domestic
raw material prices for construction mainly
explains the higher demand for working capital
requirement in this sector during Jul-Mar FY08.
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Consumer Loans: Advances to consumer loans
slowed and reached to only Rs.16.6 billion during
Jul-Mar FY08 from Rs.35.2 billion in the
preceding year (Table 5.5). The decline in
consumer loans is evident in all categories (except
mortgage finance). In particular, deceleration in the
growth of auto finance was attributed to (1) lower
demand for automobiles due to increase in prices
of locally produced cars, and (2)risk aversions of
banks following recovery issues(e.g., one of the
banks has even suspended auto finance scheme).
Monetary Assets
The Components of monetary assets (M2) include:
Currency in Circulation, Demand Deposit, Time
Deposit, Other Deposits (Excluding IMF A/C,
counterpart) and Residents Foreign Currency

Deposits (RFCDs). The developments in these

components during the July-May FY08 of the
current fiscal year are presented below (Table-5.6)
Table 5.5 Consumer Financing
Consumer Financing
1.House Building
2.Transport i.e purchase of cars etc
3.Credit cards
4.Consumer Durables
5.Personal Loans
6.Others
Total

Table-5.6 Monetary Aggregates

Items

End June
2006
2007
740,390
840,181

(Rs.billion)
Change During
Jul-Mar
FY 07 FY 08
9
10.2
7.6
3.4
7
1.8
-0.4
0.7
11.9
0.4
-0.1
0.1
35.2
16.6
Source:SBP

(Rs million)
July-May*
2006-07
2007-08
874,171
1,026,284

A. Currency in Circulation
Deposit of which:
B. Other Deposits with SBP
4,931
7,012
6,113
4,341
C.Total Demand &Time Deposits incl.RFCDs
2,661,584
3,217,962
3,006,745
3,411,470
of which RFCDs
195,501
207,312
199,955
234,882
Monetary Assets Stock (M2) A+B+C
3,406,905
4,065,155
3,887,029
4,432,041
Memorandum Items
Currency/Money Ratio
21.7
20.7
22.5
23.2
Other Deposits/Money ratio
0.1
0.2
0.2
0.1
Total Deposits/Money ratio
78.1
79.2
77.4
77.0
RFCD/Money ratio
5.7
5.1
5.1
5.3
Income Velocity of Money
2.1
2
*pertains to 10th May for F08 and 12th May for FY07
Source:SBP
Note: Compilation of M1 based on weekly data has been discontinued. Now M1 is being compiled on the basis of
monthly returns and is given in Table 2.1 which would be published in the monthly Statistical Bulletin of SBP from
April 2008 in Table 2.1.
i. Excluding IMF A/c No 1 & 2 SAF Loans A/c, deposits money banks, counterpart funds, deposits of foreign
central bans, foreign governments.
ii. Excluding inter-bank deposits of federal and provincial governments and foreign constituents and international
organizations etc.
iii. Income Velocity of money is defined by the State Bank as GDP at current factor cost/quarterly average of
Monetary Assets (M2)

Currency in Circulation
As shown in the Table 6.6, currency in circulation
during July-May FY 08 increased to Rs.186 billion
from Rs.133 billion during the same period of last
year. The currency in circulation constituted 23.2

percent of the money supply (M2) as against 22.5

percent in the same period last year.
Deposits
During July-May FY08, demand and time deposits
has declined to Rs.165 billion as compared to

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Rs.340 billion in the same period of last year. On
the other hand, RFCDs has registered an increase
and reached to Rs. 27 billion as compared to Rs.4
billion in the same period last year.
The M2/GDP ratio, which is an indicator of
financial development continued to exhibit a rising
trend since 1990-00 from 36.9 percent to 46.6
percent in 2006-07.In March 2008, however, M2/
GDP ratio was 42 percent as compared to 43.4
percent in the corresponding period of last year
(see Table 5.7).
Table-5.7 Key Indicators of Pakistan's
Financial Development
Years
M2/GDP
DD+TD/M2
1999-00
36.9
74.6
2000-01
36.7
75.4
2001-02
40.0
75.4
2002-03
43.1
76.2
2003-04
44.9
76.8
2004-05
45.1
77.6
2005-06
45.0
72.5
2006-07
46.6
74.1
July-March
2006-07
43.4
72.3
2007-08
42.0
72.5
Source:SBP

Monetary Management
The Money market in Pakistan has developed
substantially since the process of liberalization of
the financial system began in the early 1990s.A
vibrant inter-bank money market not only helps to
transmit monetary policy signals but also provides
stability to financial institutions through meeting
short-term liquidity requirement with relative ease
and at competitive rates. The focus of SBPs
monetary management in FY08 was to improve the
transmission of policy rates to the retail rates by
draining the excess liquidity from the money
market and keeping the overnight rates close to the
discount rate. The tight monetary stance adopted
since April 2005, did help in containing
inflationary
pressures
in
the
economy.
Nevertheless, high monetary growth towards the
end of FY07 and substantial increase in

government borrowing from SBP during current

fiscal year along with shortage in food supply,
started to dilute the impact of a tight monetary
policy stance. To contain the rising inflationary
pressures in the economy, SBP therefore continued
with a tight monetary stance during the current
fiscal year, as the risk of inflation was outweighing
the risk of economic growth. The SBP raised its
policy rate by 250 basis points in the monetary
policy statements and revised CRR for demand and
time liabilities and SLR in the upward direction.
Complement to the tight monetary policy stance,
the SBP continued recourse to Open Market
Operation (OMOs) more frequently to manage
liquidity at the desired levels in the inter-bank
market. (The SBP moped up Rs.766 billion during
July-Mar FY07 against the injection of Rs.118
billion as compared to Rs.700billion against the
injection of Rs.72 billion in corresponding period
of last year.)
Table-5.8 Summary of OMOs
(Rs.billion)
Injection
Absorption
FY 07
FY 08
FY 07
FY 08
Jul
133.5
141.8
Aug
21.2
105.7
228.3
Sep
87
71.3
Oct
40.9
81.3
Nov
61.9
124.7
Dec
25.8
117.2
69
Jan
27.5
60.2
52.3
Feb
11.7
70.9
Mar
25
49.55
42.1
8.1
Total
72
118
700.5
766.4
Source:SBP

The impact of tight monetary stance and liquidity

management began to translate into a rise in other
interest rates, with varied magnitude, at different
stages of the economy. For instance, 6 months
T-bills cutoff witnessed an increase of 97 basis
points
to
9.9
percent
during
Jul-Apr
FY08.Similarly, 6 months and 12-months KIBOR
also increased by 77 basis points and 63 basis
points to 10.38 percent and 10.71 percent
respectively at end April 2007 in the same way,
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6-months repo rates depicted an increase of 133

basis points to 9.98 percent during Jul-Apr FY08.

Fig 5.6 Weighted Average Interest Rates

Fig 5.7 Contribution of T-bills

100

10.5
6-Months

10

12-Months

9.5

FY 07

71.3

79.5

FY 08
60

Percent

Percent

80

8.5
8

40
20

19.1
9.1

3-Months

Table-5.9 Market treasury bills Auctions

Jul-Jun
FY 2006-07
Offered

3-Months
6-Months
12-Months
Total

Accepted

*W.A Rate

186,652
136,102
8.5
125,483
90,433
8.7
787,636
661,786
9.0
1,099,771
888,321
* Average of maximum and minimum rates

9.6

11.4

Feb-08

Oct-07

Jun-07

Feb-07

Oct-06

Jun-06

Feb-06

Oct-05

Jun-05

7.5

6-Months

12-Months

(Rs million)
Offered

FY 07
182,802
99,320
561,683
843,805

The SBP accepted Rs.495 billion from the primary

market of T-Bills during the first nine months of
FY08 as compared to Rs.696 billion in FY07
(Table-5.9). Market offered a total amount of Rs.
682 billion in first nine months of FY 08 as
compared to Rs.843 billion in the same period of
last year. In the first nine months of FY07 heavy
investment was in 12 months T-bills which
constituted almost 80 percent of the total accepted
amount due to the fact that 12-months T-bills
provided the highest interest earnings with zero
risk in the short run (Fig-5.7).
In order to develop the bond market, and to reduce
the cost of funds for financing the fiscal deficit in
the long run, Government has started PIBs auctions
since December 2000. In FY07, the supply of long
term government paper started to pick up pace as
the government started to hold primary auctions of

FY 08
49,625
64,325
568,790
682,740

Jul-Mar
Accepted

FY 07
133,152
66,920
496,433
696,505

*W.A Rate

FY 08
45,225
56,395
393,605
495,225

FY 07 FY 08
8.5
9.1
8.6
9.4
8.9
9.6
Source:SBP

PIBs in a more regular and predictable manner.

Regarding long-term interest rates, an important
development in FY07 was the extension of yield
curve to 30 years. Interest rates of long term
government securities also registered increase due
upward revision of discount rate, and yield curve
moved in the upward direction in the range of 81 to
110 basis points approximately. The SBP mopped
up Rs. Rs.68 billion from the primary market of
PIBs during the first nine months of FY08 as
compared to Rs.37 billion in the same period of
FY07 (Table-5.10). Market offered a total amount
of Rs.133 billion in first nine months of FY08 as
compared to Rs.100 billion in the same period of
last year. In the first nine months of FY07 heavy
investment was in 10 years PIBs which constituted
almost 33 percent of the total accepted amount.
(Fig 5.9).

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Fig 5.9 Contribution of PIBs

Fig 5.8 Weighted Average Interest rate of 10 Years PIB

FY 07

14

Table-5.10 Pakistan Investment Bonds Auctions

Jul-Jun
PIBs
FY 2006-07
Offered Accepted *W.A Rate
3 Years
36,982
10,882
9.54
5 Years
39,799
10,174
9.77
10 Years
65,986
30,211
10.31
15 Years
12,750
9,250
10.95
20 Years
20,200
11,250
11.28
30 Years
23,300
16,100
11.61
Total
199,017
87,867
* Average of maximum and minimum rates

3 Yrs

Aug-07

Aug-06

Aug-05

Aug-04

Aug-03

Aug-02

30 Yrs

20 Yrs

15 Yrs

10 Yrs

Percent

Percent

10

FY 08

40
35
30
25
20
15
10
5
0
5 Yrs

12

(Rs.million)
Offered
FY 07
FY 08
21,770
11,044
17,407
21,177
26,030
58,805
9,850
14,876
13,150
9,550
12,000
17,600
100,207 133,052

Table-5.11 Lending & Deposit Rates (W.A)

LR
DR
Spread
Jun-06
9.9
2.9
7.0
Jul-06
10.2
3.1
7.2
Aug-06
10.6
3.1
7.5
Sep-06
11.0
3.2
7.8
Oct-06
11.1
3.4
7.7
Nov-06
11.0
3.6
7.4
Dec-06
11.2
3.7
7.5
Jan-07
10.7
3.7
6.9
Feb-07
10.5
3.8
6.7
Mar-07
10.6
3.9
6.6
Apr-07
10.6
3.9
6.7
May-07
10.6
4.0
6.5
Jun-07
10.3
4.0
6.3
Jul-07
10.4
4.0
6.4
Aug-07
10.5
4.1
6.4
Sep-07
10.5
4.1
6.3
Oct-07
11.0
4.1
6.8
Nov-07
10.7
4.1
6.6
Dec-07
11.0
4.1
6.8
Jan-08
10.8
4.2
6.6
Feb-08
10.8
4.2
6.6
Mar-08
10.9
4.2
6.7
Source:SBP

Jul-Mar
Accepted
FY 07
FY 08
3,982
4,953
4,523
10,777
12,170
23,038
4,300
7,801
4,000
7,850
8,000
14,400
36,975
68,819

*W.A Rate
FY 07 FY 08
9.53
10.11
9.82
10.30
10.18
10.81
11.01
11.49
11.39
11.69
11.68
11.91
Source:SBP

At the second stage of monetary transmission,

changes in SBP policy rate translated into an
increase in financial institutions lending and
deposit rates (Table 5.11). The spread between the
lending and deposit rates has also decreased from 7
percent in June 2006 to 6.7 percent in March
2007.However, W.A. lending rate has declined by
10 basis points during December 2007 to March
2008.In the Interim Monetary Policy Measures
announced by the State Bank, all banks are
required to pay a minimum interest rate of 5
percent on saving deposit products; aimed at
encouraging people to save more.
Pakistans Financial Sector Performance
Financial stability in Pakistan has benefited from
structural transformation of the banking sector and
wide-ranging policy initiatives of the State Bank.
The countrys prudential regulatory regime has
been crafted to promote and preserve financial
sector stability. The regulatory framework
encourages
(i)
financial
sector
growth,
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diversification and innovation, (ii) healthy
competition and risk taking to ensure a sustainable
and aggressive income stream, (iii) opportunities
for enhancing the franchise value of banks,
(iv)prudent
behavior
and
effective
risk
management and loan provisioning requirement
are stringent enough to discourage infection of
loan portfolio, and (v) safeguarding social
obligations and consumer interests. Financial
sector stability has been further fostered by
strengthening of banks system wide capital base.
Financial stability will further benefit from State
Bank efforts to operationalize a Real-time Gross
Settlement System (RTGS) named as PRISM
(Pakistan Real Time Inter-bank settlement

Mechanism) in June 2008 that will allow shift from

traditional paper-based, end-of-the-day settlement
system to electronic payment system for large
value, low volume inter-bank funds transfers and
settlements. Financial sector is now predominantly
owned by the private sector which presents some
new challenges. The State Bank of Pakistan is now
working to develop an adequate policy framework
for consumer protection, development of Financial
Safety Nets such as Deposit Insurance ,and a welllaid out Lender of last resort procedure. The
framework would strike a balance between
enhancing consumer protection and minimizing
moral hazard concerns.

Table 5.12 Asset Composition of the Financial Sector

FY 00
FY01
FY02
Investment Banks
40,989
30,862
27,001
Modaraba
15,278
15,561
17,456
Leasing
48,384
46,948
41,141
Discount Houses
1,805
1,395
1,527
Venture Capital Companies
1,027
346
272
Mutual Funds
25,347
24,175
29,094
Total Assets
125,587 120,723 122,298
CY 00
CY 01
CY 02
DFIs
91,496
61,145
68,729
Housing Finance
22,264
23,599
22,434
Insurance
n.a.
112,558 129,066
Total Assets
113,760 197,302 220,229

FY03
37,936
15,973
46,842
1,987
854
57,180
160,772
CY 03
78,803
21,562
150,330
250,695

FY04
35,568
18,026
44,806
1,341
1,005
103,080
203,826
CY 04
94,752
19,493
172,992
287,237

FY05
51,041
21,572
53,635
1,504
3,200
136,245
267,197
CY 05
107,811
18,657
201,665
328,133

FY06
54,527
23,927
63,999
1,834
4,131
177,234
325,652
CY 06
116,939
19,702
244,657
381,298

(Rs.million)
FY07
41,458
25,186
63,956
1,417
4,061
313,661
449,739
CY 07
n.a.
n.a.
n.a.
Source:SBP

Commercial Banks
The impressive performance of Pakistans banking
sector has attracted considerable FDI into the
industry in recent years. Commercial banks in
Pakistan operate on a sound capital base with a
commendable record of financial performance,
particularly in the last 3 years.
In Jul-Dec 2007-08, total number of branches of
banks was 8233 as compared to 7890 in 2006-07;
there has been an increase of 343 branches in the
first six months of FY07.Assets of all banks
showed a net expansion of Rs.203.1 billion in the
first six months of FY08 and stood at Rs.5155
billion as compared to Rs.4351 billion in the same
period of last year. An acceleration in private
sector credit contributed to increase in scheduled
banks assets. The total deposits of all banks
registered an increase of Rs.168 billion in the first
92

six months of FY08 and reached at the level of

Rs.3852 billion as compared to Rs. 3255 billion
recorded in the same period of last year.Net
investment of the banks showed an increase of
Rs.95 billion in Jul-Dec FY08 mainly contributed
by the private banks amounting to Rs.934 billion
as compared to Rs.601 billion for the six months of
last year. (Table 5.13)
The banking sector of Pakistan in recent years has
undergone a visible change as about 80 percent of
the banking assets are now controlled by the
private sector. While this has yielded significant
benefits in the form of increased competition,
product innovation, technological up-gradation and
diversification of business activities, a host of new
risks have also surfaced. This has necessitated the
adoption of international best practices by the
banks/DFIs in classification and provisioning
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Money and Credit

against their loans and advances portfolio to
further strengthen the soundness and stability of

banking system.

Table-5.13 Performance of Scheduled Banks

30-Jun-07
1.No.of Branches
Nationalized Commercial Banks
Private Banks
Specialized Banks
Foreign Banks
2.Assets (Rs.Billion)
Nationalized Commercial Banks
Private Banks
Specialized Banks
Foreign Banks
3.Net Advances (Rs.Billion)
Nationalized Commercial Banks
Private Banks
Specialized Banks
Foreign Banks
4.Deposits (Rs.Billion)
Nationalized Commercial Banks
Private Banks
Specialized Banks
Foreign Banks
5.Net Investments (Rs.Billion)
Nationalized Commercial Banks
Private Banks
Specialized Banks
Foreign Banks

The NPLs are the most important indicator of

determining the asset quality of any bank because
the gross NPLs to gross advances and net NPLs to
net advances are considered as key indicators of
quality of lending. As on 30th September 2007, the
gross NPLs of the banking system recorded at
Rs.163 billion and gross NPLs to gross advances
were at 6.5%.For the financial results of 2008,
commercial banks were needed to provide Rs 24
billion excess provisioning as per SBPs directive
regarding Forced Sales Value (FSV) of collateral.
On the basis of the provision provided by the
commercial banks against non-performing loans,
the net NPLs to net advances ratio rose to 2.4% .In
December 2007, the State Bank of Pakistan
withdrew the benefit of FSV against all non
performing loans (NPLs) for calculating
provisioning requirement which directly hampered
the profits of entire banking sector. Hence, the

7890
1696
5625
534
35
4952
964
3611
123
253.8
2498.9
464.7
1838.4
71.5
124.2
3683.7
756
2745.2
13.6
168.9
1180.3
243.9
879.7
14.9
41.8

Jul-Dec
2006-07
7852
1690
5597
534
31
4351.9
836.2
3173
119
223.8
2427.7
429.7
1807.2
70.6
120.2
3255
665.6
2425.8
13.5
150.1
836.7
179.9
601.7
16.6
38.5

2007-08
8233
1715
5935
534
49
5155.1
1017.2
3845.2
119.9
172.9
2694
488.7
2044.4
72.2
88.7
3852
813.1
2907.8
13.5
117.6
1275.5
298.7
934.5
15.8
26.5
Source:SBP

banks have to go for 100 percent provisioning

against the NPLs. However, liquid assets are being
subtracted to calculate provisioning against NPLs.
Therefore, the banks will show fewer profits due to
higher provisioning against their NPLs. Earlier,
there was an option for the banks to shelter the
actual required provisioning by showing collateral
process higher than the actual value. Due to FSV,
major impact would result in high recovery of
NPLs. The SBP further elaborated that the
classified loans and advances that have been
guaranteed by the government would not require
provisioning. According to an analysis; private
commercial banks will face biggest impact for SBP
provisioning policy while foreign banks would
face the least impact. The SBPs timely decision to
eliminate the benefit of FSV of collateral will help
the banks to improve their loan quality and
recovery rate going forward. The measure taken by
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SBP to streamline the financial sector is seen as a
positive step and will help the banks to strengthen
their balance sheets.

considerations, by giving them the opportunity to

choose between the two parallel modes of
financing and investment.

Islamic banks

The Islamic Financial industry in Pakistan has

grown substantially since the launch of SBPs
focused strategy to promote a parallel Islamic
Banking system in 2001.This performance is
commendable for such a short period, given that
other countries have achieved similar levels of
growth in their respective Islamic banking
industries after several years of existence. Besides
banks, IFIs in Pakistan include Islamic Mutual
Funds, Shariah-compliant housing finance
services, takaful companies and modarabas. Sukuk
issuances have also attracted considerable attention
in recent years.

Initially conceived in response to a faith-based

logic of conforming to the principles of Shariah in
all spheres of life, the astounding growth of the
Islamic Financial Industry also drew on the wealth
accumulation in oil-rich countries in the ensuing
years, and reflects its potential of financially viable
and lucrative segment of the global financial
system. Islamic Financial Institution (IFIs) have
been successful in tapping the previously excluded
market on faith-based considerations, as well as the
already included segment on preference-based
Table 5.14 Islamic Banks

Assets of the Islamic banks

Deposits of the Islamic Banks
Share in Banks Assets
Share in Bank Deposits

FY03

FY04

FY05

FY06

FY07

12,915
8,397
0.50%
0.40%

44,143
30,185
1.40%
1.25

71,493
49,932
2.10%
1.90%

119,294
83,740
2.90%
2.80%

205,212
146,945
4.20%
4.10%

The overall deposits of IBIs at the end of February

2008 stood at Rs.141,933 million and reflected a
share of 3.9 percent in banks assets as compared to
0.4 percent only in FY03, the downward trend in
FY 08 as compared to last year was inline with the
decreasing trend in deposits of all banks that began
in January 2008. Total assets of the Islamic banks
reached at Rs.200,415 million from Rs.12,915
million in FY03 and contributed 4.1 percent in
banking assets till end of February 2008 (Table
5.14). The industry has over the years managed to

offer a wide array of products encompassing

almost the entire range of modes of Islamic
financing that are able to cater to the needs of
majority of the sectors of the economy. The
segments covered by the industry include
Corporate / Commercial, Agriculture, Consumer,
Commodity financing, SME Sector, Treasury and
Financial institutions and manufacturing and
Services concerns through various Shariah
complaint modes.

Table 5.14 (a) Financing Products by Islamic banks (%age)

Mode of Financing
FY03
FY04
FY05
Murabaha
79.4
57.4
44.4
Ijara
16.5
24.8
29.7
Musharaka
1
0.8
Mudaraba
Diminishing Muskaraka
1.2
5.9
14.8
Salam
1.6
0.7
1.9
Istisna
0.4
1.4
Qarz/Qarz-e-hasna
Others
1.3
9.8
3

The highest share in financing products of Islamic

banks is contributed by Murabaha, Ijara, and
Diminishing Musharaka in FY08 (March).As the

(Rs.million)
FY08
(March)
200,415
141,933
4.10%
3.90%

FY06
48.4
29.7
0.8
14.8
1.9
1.4
3

FY07
38.9
25.4
0.9
0.3
25.1
1.4
0.9
7.1

FY08(March)
38.7
24.2
1.3
0.2
24.8
1.6
2.4
6.7

industry develops, SBP continues to provides an

enabling environment for Islamic Banks. Work is
underway on the development of Bait-ul-Maal

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Money and Credit

certificates to provide a sovereign instrument for
liquidity management, and risk management
guidelines have been issued.
Microfinance Institutions
The operations of MFIs, including Microfinance
Banks (MFBs), Non-Government Organizations
(NGOs), Rural Support programs (RSPs) and
Commercial Financial Institutions (CFIs) have
witnessed significant improvements, which are
reflected in almost all aspects of the microfinance
industry. Number of new MFBs branches has
grown, total assets have increased, products are
being gradually diversified, outreach is being
extended, branch network is being expanded and
growth has been achieved in the total number of
borrowers and advances.
With a focus on expanding microfinance reach to 3
million borrowers by 2010, a strategy for
Expanding Microfinance Outreach (EMO) has
been developed by the SBP which was approved
by the Government in February 2007.The EMO
strategy stresses on the fact that commercialization
of the sector is key to financial and social
sustainability.
Table 5.15 Disbursement of Loans by Microfinance
Banks
(Rs.million)
July-March
Institution
2006-07
2006-07 2007-08
Khushali Banks
3610900 2355041 2590058
Microfinance
Banks ( Others)
2500968 1875405 2298604
Total
6111868 4230446 4888662

During Jul-Mar 2008, Khushali Bank, which leads

the microfinance sector in Pakistan disbursed loans
amounting Rs.2.6 billion as compared to Rs.2.3
billion in the same period last year. While the share
of all other microfinance banks in loan
disbursement increased to Rs. 2.3 billion in
Jul-Mar FY08 from Rs. 1.8 billion in the Jul-Mar
FY07.
Small and Medium Enterprises
The importance of the SME sector cannot be
overemphasized in the overall industrial
development of a country. SMEs constitute nearly

90% of all the enterprises in Pakistan; they employ

80% of the non-agriculture labor force; and their
share in the annual GDP is nearly 40%.During
FY08, credit to SME sector has decreased to Rs.18
billion from Rs.30 billion during FY07. Mining,
Electricity, Commerce and other private business
sector registered in crease while Manufacturing,
Services, Communication, Construction sectors
recorded a substantial decrease.
Table-5.16 Credit to SME
(Rs .million)
Stocks
Flows
Sector
Jun-06 Jun-07 FY 07 FY 08
Mining and
Quarrying
822
790
172
303
153147 160791 15628 5856
Manufacturing
Ship Breaking
959
539
-526
-284
Electricity and Gas 1872
2681
860
1534
Commerce and
123723 126457 1599 5447
Trade
23163 30831 4973 -1892
Services
Transport and
Communications
9711
11956
553
72
Construction
12976 16370 1802 -335
Other Private
Business
32318 34809 5032 7360
Total
358692 385223 30091 18059
Source:SBP

Non-Bank Financial institutions (NBFIs)

The major objective of the introduction of the
concept of NBFCs i.e. Non-Banking Finance
Companies in 2002, was to enable the existing
(mainly) single-product institutions serving
specific market niches, to offer a whole variety and
range of financial products though a one window
operation akin to universal banking, subject to
compliance with the prescribed progressivelytiered regulatory requirements. It was expected that
consolidation of different financial services under
one umbrella would lead to the emergence of
stronger, well-capitalized entities, which will
provide a fillip for the future development of the
non-bank financial sector.
The key market players in the non-bank financial
sector of Pakistan are non-banking Finance
Companies (NBFCs), mutual funds, modarabas
and Development Finance Institutions (DFIs).The
non bank financial sector has historically played
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Pakistan Economic Survey 2007-08

an important role in the mobilization and
channeling of savings in the financial system. The
NBFIs have, in recent years benefited from an
environment of low interest rates coupled with
high economic growth but have been unable to
create an impact as well-functioning, specialized
financial intermediaries.
The success story among NBFIs is that of mutual
funds. The mutual fund sector is rapidly growing
in Pakistan and accounted for the largest chunk in
total assets of non-bank financial sector. Between
FY00 to FY 07, net assets of mutual funds have
grown by more than 12 times to reach Rs.313
billion from Rs.25 billion only in FY 00.

sector entities. However, with two-thirds of the

population living in the rural areas and low per
capita income, the insurance sector faces various
hurdles in its growth.
The growth in insurance sector is reflected in the
increase in premiums and profitability, as well as
assets for both life and non-life insurance. Private
sector companies have launched innovative
products in the recent past, such as livestock and
crop insurance, which will help promote the
quality of banks lending to agriculture sector.
Fig 5.11 Assets of Insurance Sector
300

Fig 5.10 Assets of Mutual Funds

313.7

300
Rs.billion

250
177.2

200
103.1

100
50

25.3

24.2

29.1

136.2

57.2

Rs.billion

350

150

244.7

250

201.7

200
150

112.6

129.1

150.3

173.0

100
50
0
CY 01

CY 02

CY 03

CY 04

CY 05

CY 06

0
FY 00 FY01 FY02 FY03 FY04 FY05 FY06 FY07

Insurance Sector
The role of the insurance sector is significant in
promoting the stability, not just of the financial
sector, but also of the overall macroeconomic
environment as it provides protection against
uncertainty to economic agents by an equitable
transfer of risk. Life insurance companies in
particular, due to the long term nature of their
premiums, are also among the large institutional
investors for capital and money market
instruments.
The insurance sector in Pakistan consisting of life,
non-life and the sole reinsurance company
(PRCL), has seen considerable improvements since
2001 on account of rise in the demand for
insurance by corporate, households and public

The low insurance penetration highlights the need

for concerted efforts to bring about reforms that
would increase the competitiveness and outreach
of Pakistans insurance industry. As a step in this
direction, Insurance Ordinance 2000 has laid out
targets that will help the expansion of the industry
in the coming years, for instance, the recent
increase in capital requirements will result in the
emergence of stronger players in the industry.
Appointment of the Insurance Ombudsman is
another measure which would also go a long way
in boosting the confidence of the public by setting
complaints expeditiously. Other insurance sector
reforms envision the privatization of State Life
Insurance Corporation (SLIC), the largest state
owned operator in the life insurance sector.
Moreover, Postal Life Insurance is planned to be
brought under the ambit of the Insurance
Ordinance 2000.Foreign investment rules in the
insurance sector have also been amended in order
to attract FDI in the sector.

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TABLE 5.4
INCOME VELOCITY OF MONEY

End June Stock

Naroow Money
M1

Monetary Assets (M2)

(Rs million)

Growth
Percentage

(Rs billion)
Income Velocity of Monetary
Assets (M2)

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

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

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
703.40
824.73
938.68
1,053.23
1,206.32
1,280.55
1,400.63

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

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

2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
End March
2006-07
2007-08
P:Provisonal
Explanatory Note:

1275.6
1494.14
1797.36
2174.74
2512.21
2720.68
3155.63

1,526.04
1,751.88
2,078.48
2,485.49
2,960.64
3,406.91
4,065.16

9.0
14.8
18.6
19.6
19.1
15.1
19.3

2.6
2.5
2.3
2.3
2.4
2.1
2.0

3,788.70
4,408.09

11.2
8.4
Source: State Bank of Pakistan

a: It may be noted that data series of M1 from 2000-01 is not comparable as compilation of M1 based on weekly data has been
discontinued by the SBP. Now M1 is being compiled on the basis of monthly returns and will be reported in the monthly statistical
Bulletin of the SBP beginning from April 2008 in its table 2.1
b: The stock data of M2 has been revised since June 2002 due to treatment of privatization commission deposits with NBP as
government deposits. These deposits were previously uncluded in private sector deposits which have now being included in
government deposits.

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Chapter 06

CAPITAL MARKETS
Introduction
Capital markets are key elements of a modern,
market-based economic system as they serve as the
channel for flow of long term financial resources
from the savers of capital to the borrowers of
capital. Efficient capital markets are hence
essential for economic growth and prosperity. With
growing globalization of economies, the
international capital markets are also becoming
increasingly integrated. While such integration is
positive for global economic growth, the downside
risk is the contagion effect of financial crisis,
especially if its origin lies in the bigger markets.
The US sub-prime mortgage crisis, which started
in 2007 and continues to persist in 2008, is an
example of such contagion which has impacted
capital markets all across the globe. With subprime mortgage related losses already running into
several hundreds of billions of dollars, investors
risk aversion has increased sharply which has
adversely impacted the global financial markets.
Pakistans stock market has shown considerable
immunity to the recent global turbulence and has
been classified as one of the fastest growing
markets in emerging economies. Local and foreign
investors confidence in the investment
environment of Pakistan has boosted the index to
peak highs in recent years. The Pakistans
benchmarked stock market index-the Karachi
Stock Exchange- KSE-100 index has increased
from 1,521 points on June 30, 2000 to 12,130.5
points on May 30, 2008 a rise of over 10,610
points or an increase of 697.6 percent. Similarly
Aggregate Market Capitalization (AMC) has
increased from Rs 392 billion ($ 7.6 billion) on
June 30, 2000 to Rs 3,746 billion ($ 56 billion) on
May 30, 2008, showing a rise of over Rs 3,354
billion ($ 48.4 billion) or an increase of 855.6
percent. The listed capital at KSE has increased

from Rs 236.4 billion in 2000 to Rs 690.1 billion in

2008 (as on March 31, 2008). Furthermore,
Pakistans debt market has improved in terms of
depth, breadth and liquidity significantly as
evidenced by regular Pakistan Investment Bond
(PIB) auctions in the outgoing fiscal year, increase
in the corporate debt issuance, continued focus on
floating Sukuks and commitment on the part of the
government in further reforming the capital
markets, are some of the key steps to mention
among many others.
There were several contributing factors leading to
booming conditions in the market. These included
improvement in the country's economic
fundamentals, stability in exchange rate, reduction
in interest rates by banks, recovery of
outstanding/over due loans, rescheduling of foreign
debts and prepayment of the expensive foreign
loans, regionally cheap valuation of the scrips,
large scale mergers and acquisitions, improving
relationship with the neighboring countries,
successful GDR offerings and increase in
Pakistan's coverage by large international
brokerage firms and investment banks. The
policies on privatization, liberalization and
deregulation had encouraged private investments
which also had a profound effect on the activity of
the stock market. The biggest push to the market
was caused by the interest shown by foreign
investors with huge liquidity at their command.
Corporate earnings, particularly in the banking and
financial sectors, have been excellent, prompting
foreign investors to extend their activities
particularly in this sector.
Equity Capital Market
Pakistans stock market showed considerable
resilience at the back of robust economic growth.
However, key macroeconomic indicators exhibited
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Pakistan Economic Survey 2007-08

less than satisfactory performance as a result of
rapid changes in the political landscape. A buoyant
stock market can be attributed to the continuity of
the macroeconomic policies of the government and
capital market reforms implemented by the apex
regulator,
the
Securities
and
Exchange
Commission of Pakistan (SECP).
Difficult global and domestic conditions adversely
impacted foreign portfolio investment into the
local equity market. Foreign portfolio investment
showed a net outflow of US$45 million during first
nine months of the fiscal year 2007-08.
Fig-6.1: Foreign Inflow/Outflow of
Equity Investment, FY08
400

USD Mn

300
200
100

Mar-08

Feb-08

Jan-08

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-07

0
-100

with a right to increase its stake to 20 percent after

one year, (viii) acquisition of 95 percent shares of
ABN AMRO Bank worldwide by the Royal Bank
of Scotland (RBS), (ix) Implementation Agreement
between Pakistan and Abu Dhabis International
Petroleum Investment Company for setting up a $
5 billion Khalifa Coastal Refinery at Gwadar
which would double the refining capacity of the
country. The Bank of Punjab (BoP) is currently in
a process of doing due diligence of Punjab
Provincial Cooperative Bank (PPCB) and expects
to complete the process by June 2008. This
acquisition will add 159 branches to the existing
network of 271 branches. This M&A activity,
which has taken place at very attractive valuations
has provided support to valuation in the stock
market. Peer group companies stock prices have
also reacted as a result of these acquisitions. The
Initial Public Offerings (IPOs) of Habib Bank
Limited (HBL) and Arif Habib Bank Limited both
came in 1.5x and 5.8x oversubscribed, which is an
encouraging development.

-200
-300
-400

The outgoing fiscal year 2007-2008 has witnessed

large-scale merger and acquisition activity. Several
key takeovers have taken place in Pakistans
corporate sector during the outgoing fiscal year.
These include: (i) acquisition of 30 percent stake in
Warid Telecom by SingTel, (ii) acquisition of 65
percent strategic stake and management control in
Worldcall Telecom by OmanTel, (iii) 18 percent
strategic stake in Uch Power by Creative Energy
Resources Corporation, a Saudi company, (iv) selloff of 68 percent shares in Saudi Pak Commercial
Banks to an international consortium, consisting of
Bank Muscat, IFC and Nomura European
Investment Limited, for $ 163 million, (v)
acquisition of 43 percent equity stake in
Shakarganj Food Products Limited by KASB
Capital Limited, (vi) acquisition of JS Finance Ltd
& Sigma Leasing by BankIslami (BIPL), (vii)
acquisition of an immediate 15 percent strategic
stake in Muslim Commercial Bank (MCB) by
Malaysias largest financial institution, Maybank,

Although no large privatization has taken place in

the fiscal year 2007-08, a privately held cement
company, Lucky Cement, has raised US$ 109.3
million through selling its 15 million GDR to
finance its expansion of 2.5mn tons per annum in
the companys southern plant.
Global Stock Markets:
During the fiscal year 2007-08, the leading stock
markets of the world observed low growth ranging
from 0.4 percent (Singapore) to a negative 17
percent (Philippines). The global liquidity crunch
coupled with rising commodity prices can be seen
as the prime reasons for this bearish performance.
The Karachi stock market showed modest
performance as its index increased by a meager 3.7
percent in terms of local currency despite
deterioration
in
domestic
macroeconomic
conditions and political upheaval, but slumped to
7.1 percent in terms of USD compared to 23.5
percent rise in the same period last year. Chief
stock indices including US S&P 500, UK FTSE
100 and Japanese Nikkei 224 also recorded
declines of 6.6 percent, 8 percent and 10 percent
respectively during FY08. Emerging equities of

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Capital Markets
Hong Kong witnessed a healthy 15.4 percent return
followed by India with 11.1 percent. Table 6.1
provides a quick snapshot of the returns in terms of

both domestic currency and USD for these

markets.

Table 6.1: Global Stock Indices during June 30, 2007 to May 12, 2008
Index
Currency
Sr.
(Local
Currency)
Country
Stock Name
#
30 Jun07 12 May08 Exchange 30 Jun07 12 May08
Rate

Market Return
Local
Currency

USD

1 Pakistan

KSE 100

13,772.46 14,286.61 PKR/USD

60.46

67.51

3.7%

-7.1%

2 India

Sensex 30

14,650.51 16,860.90 INR/USD

40.59

42.04

15.1%

11.1%

3 Indonesia

Jakarta Composite

2,139.28

2,378.00

11.2%

8.8%

4 Taiwan

Taiwan Weighted

8,883.21

8,830.05 TWD/USD

30.81

-0.6%

5.6%

5 South Korea Seoul Composite

1,743.60

1,842.80 KRW/USD 923.89

1,044.64

5.7%

-6.5%

6 Hong Kong

Hang Seng

21,772.73 25,063.17 HKD/USD

7.82

7.80

15.1%

15.4%

7 Malaysia

KLSE Composite

1,354.38

3.45

3.21

-4.5%

2.5%

8 Japan

Nikkei 224

18,138.36 13,743.36 JPY/USD

123.39

103.84

-24.2%

-10.0%

9 Singapore

STRAIT TIMES

3,548.20

3,180.16

SGD/USD

1.53

1.37

-10.4%

0.4%

10 Sri Lanka

All Shares

2,572.20

2,631.73

LKR/USD 111.35

107.60

2.3%

5.9%

11 China

Shanghai Composite 3,820.70

3,626.98 CNY/USD

7.61

6.99

-5.1%

3.4%

12 Philippines

PSE Composite

3,665.23

2,803.49

PHP/USD

46.24

42.63

-23.5%

-17.0%

13 Australia

All Ordinaries

6,310.60

5,894.10 AUD/USD

1.18

1.06

-6.6%

4.1%

14 US

S & P 500

1,502.97

1,403.58

PKR/USD

1.00

1.00

-6.6%

-6.6%

15 UK

FTSE 100

6,607.90

6,220.60

GBP/USD

0.50

0.51

-5.9%

-8.0%

4,234.29

3,637.83

NZD/USD

1.29

1.30

-14.1%

-14.3%

16 New Zealand NZSE 50

IDR/USD 9,011.90 9,210.10

1,293.09 MYR/USD

32.74

Source: Invisor Securities

Karachi Stock Exchange:

The Karachi Stock Exchange (KSE) is the biggest
and most liquid exchange in Pakistan. The premier
equity market is benchmarked through the KSE100 index. The Karachi stock exchange broke a
series of records to become the sixth best
performer among the emerging markets in the
calendar year 2007. As of March 31, 2008, 652
companies were listed having paid-up capital of
Rs. 690.1 billion.
The KSE-100 index closed at 12,130.5 points on
May 30, 2008, a decrease of 1,642 points or about
11.9 percent in comparison to end June index
position of 13,772.5 points, after touching its alltime high of 15,676 points on April 18, 2008. On

the other hand, the Aggregate Market

Capitalization (AMC) settled to close at Rs. 3,746
billion ($ 56 billion), about Rs. 273 billion (a
decline of $ 10.4 billion in terms of US$ due to
currency depreciation) or 6.8 percent below the
June month-end figure of Rs. 4,019 billion ($66.4
billion).
Figure 6.2 truly depicts the sharp volatility
exhibited by the KSE-100 index during July-May
2007-2008 and identifies major political and
economic events that have played an important
role in setting the sentiments of investors-both
positive and negative-in the local bourses. See
Figure 6.3 for assessing the trendy behavior of
AMC during the period under review.
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Pakistan Economic Survey 2007-08

The outgoing fiscal year 2007-08 began with the
Red Mosque incident in the early part of July,
followed by the restoration of Chief Justice of
Pakistan and confusion about imposition of
emergency rule in the country. The stock market
showed positive sentiments to the announcement

of presidential elections and then re-election of

President Musharraf on October 6. However, the
market reacted against the incident of bomb blasts
in the welcome procession of Ms. Benazir Bhutto
on October 18.

Table 6.2: Leading Stock Market Indicators on KSE (KSE-100 Index: November 1991=1000)
2006-07
2007-08(July-April)
Months
KSE
Market
Turnover
KSE
Market
Turnover
Index
Capitalization
of Shares
Index
Capitalization (Rs
of Shares
(end
(Rs billion)
(billion)
(end
billion)
(billion)
month)
(end month)
month)
(end month)
July
August
September
October
November
December
January
February
March
April
May
June

10,497.6
10,064.1
10,512.5
11,327.7
10,618.8
10,040.5
11,272.3
11,180.0
11,271.6
12,369.7
12,961.3
13,772.5

2,905.1
2,786.9
2,874.7
3,074.3
2,919.7
2,738.4
3,043.3
3,052.0
3,065.8
3,603.0
3,781.2
4,019.4

4.4
4.0
3.0
3.2
3.8
2.6
3.3
5.6
3.6
6.0
6.5
8.1

13,738.9
12,214.3
13,351.8
14,319.4
13,998.5
14,075.8
14,017.0
14,934.3
15,125.3
15,122.5
12,130.5

4,028.1
3,555.2
4,050.0
4,364.3
4,328.9
4,329.9
4,297.5
4,618.9
4,622.9
4,634.8
3,746.2

7.7
4.5
4.2
6.6
5.2
4.7
5.6
5.1
5.0
6.4

Source: KSE

The session on November 5 recorded a single day

biggest slump of 636 points due to the imposition
of emergency rule in the country. The suspension
of Pakistan from the Commonwealth, Moodys
downgrading of Pakistans outlook from stable to
negative and the uncertain political environment,
led to a sharp fall in index in mid-November.
Nevertheless, bulls took control of the Karachi
stock market as emergency was lifted on
December 16. The Karachi stock market, mourning
Benazir Bhuttos assassination, saw its all-time
biggest crash. Poor law and order situation together
with massive rioting raised the fears of foreign
capital flight. Bullish tendency once again returned
on the back of improving law and order situation in
the country due to announcement of polls date.
Meanwhile, the recovery in the international
markets against emergency steps taken by FED of
reducing interest rates was a significant factor that

affected the stock exchange in a constructive way.

Further, positive reports of foreign brokerage
houses including Credit Suisse, JP Morgan and
Merrill Lynch on Pakistans capital markets gave
an impetus to the market.
Countrys stock market joined the jubilations of
the winning political parties on their victory in
general elections held on February 18, 2008 when
it surged heavily on the back of expectations that a
stable democratic dispensation will be in place
with smooth transfer of power to the elected
government. The index registered the heaviest
single day gain of 443 points, which was attributed
to the holding of free, fair and transparent polls
sans major incident of violence and disturbance.
Major reason of forward march of the market to
post-election rally was witnessed on support of an
unabated cycle of buying elation in the wake of
strong result announcement session.

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Capital Markets
Daily Index Points

15,900
15,700
15,500
15,300
15,100
14,900
14,700
14,500
14,300
14,100
13,900
13,700
13,500
13,300
13,100
12,900
12,700
12,500
12,300
12,100
11,900
11,700
l
Ju

ov

ec

n
Ja

V: Lifting of
emergency &
expectations of
good corporate
earnings

VI: M s. Bhutto's
assassination, poor law
& order situation &
political uncertainity

b
Fe

ar
M

VII: Announcement
of new polls date &
improving law &
order situation

pr

Ye ar High:
15,676.3

ay
M

X: Judges' reinstatement issue,

downgraded credit rating, prebudget fears, SBP's steps for
supporting rupee value & hike
in discount rate by 150 bps

VIII: Holding of transparent

& peaceful elections,
announcement of good
corporate results & postive
reports by foreign brokerage
houses about Pakistan's
capital markets

IX:Oil & gas discoveries, improving

political setup, rising commodity
prices & quarterly result
announcement

Fig-6.2: Trends in KSE-100 Index for Jul'07-May'08

ct
O

Year Low:
11,955.3

II:Rumours of imposition
of emergency

p
Se

III: Re-election of
President M usharraf &
rise in oil prices

IV: Imposition of emergency, Pakistan's

suspension from Commonwealth, M oody's
and S&P changed rating outlook to negative
& Karachi bomb blast on M s. Benazir
Bhutto's return

ug

I: Red M osque
incident

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101

Pakistan Economic Survey 2007-08

Fig-6.3: Trends in Aggregate Martet Capitalization for Jul'07-May'08
5,000
4,800
4,600

Rs. (billions)

4,400
4,200
4,000
3,800
3,600
3,400

The news of increase in stake by Pak Oilfields in

TAL block and report about oil discovery by
OGDCL at Moolan north well no 1 played role of
catalysts in trading. International media
acknowledged this excellent bullish run as Wall
Street Journal reported about Pakistan becoming a
cash magnet for investors. This award indicated
great reputation earned by the leading stock
exchange of the country among the international
community. Healthy expectations about the
earnings of different companies during quarterly
result announcement season contributed a great
deal support.
The KSE took a technical breather after
undergoing a phase of uninterrupted record-

M
ay

A
pr

M
ar

Fe
b

Ja
n

D
ec

N
ov

O
ct

Se
p

A
ug

Ju
l

3,200

breaking figures on April 21. Uncertainty about the

outcome of judges reinstatement issue and prebudget reservations were held responsible for this
lethargic performance. Additionally, the ending up
of result season invited correction. Panic selling
was witnessed by investors following the unveiling
of SBPs decision to place curb on the flow of
capital flight to support sagging rupee value.
Moreover, the downgrading of credit rating of
Pakistan by S&Ps and Moodys dampened
investor sentiments. KSE-100 index plunged by
615 points on May 23, the second highest singleday decline in the stock exchange history. Equities
fell primarily due to an interest rate hike of 150 bps
by SBP as well as a stipulation of minimum return
on PLS accounts to 5 percent.

Table 6.3: Profile of Karachi Stock Exchange

Number of Listed Companies

New Companies Listed
Fund Mobilized (Rs billion)
Listed Capital (Rs billion)
Turnover of Shares (billion)
Average Daily Turnover of Shares (million)
Aggregate Market Capitalization (Rs billion)

2004-05

2005-06

2006-07

659
15
54.0
438.5
88.3
351.9
2068.2

658
14
41.4
496.0
104.7
319.6
2801.2

658
12
49.7
631.1
68.8
211
4019.4

2007-08
(Jul-Mar)
652
5
49.2
690.1
56.9
265.7
4622.9
Source: KSE

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Capital Markets
Sector-wise Performance:
Extraordinary performance in the stock markets
during the outgoing fiscal year was driven by some
major sectors of the economy including fuel &
energy, banks and other financial institutions,
chemicals and pharmaceuticals and engineering.
Performances of some of the major trading groups
are discussed below:
Banks & Other Financial Institutions In 2007, a
total of 168 companies were listed with the KSE,
67.86 percent (114 companies) of which showed
reasonable profits amounting to Rs. 157 billion.
There are six sub groups in this group namely:
commercial banks, investment companies, leasing
companies, modarabas, mutual funds and
insurance. During the year, this group experienced
modest growth. Its market capitalization increased
by 26.5 percent but share index declined by 10.6
percent. The aggregate market capitalization stood
at Rs. 1965 billion at the end of April 2008. A
decline in the credit cycle, higher interest rates, and
cautious lending stance given the experience with
loan defaults in some sectors are primary reasons
for the slowdown. However, even though nonperforming loans may have increased, the credit
quality is still much better than other regional
countries with lower NPL ratio. Also, SBPs
regulation relating to withdrawal of forced sales
value and decreasing the time period for
classifying personal loans and consumer loans as
Loss is likely to compel banks to be careful about

loan extensions in the future and is going to help

improve credit quality.
Fuel & Energy A total of 27 companies were
listed with the KSE. It is one of the most dominant
groups in the stock market due to rising demand
from improved economic activity and increasing
production due to higher exploration and
development activity. Accordingly, its share index
grew by 38.6 percent and its market capitalization
increased by 15.6 percent or by Rs. 169.2 billion
over the period of end June07-end April08. Its
earnings are led largely due to inventory gains
resulting from high international oil prices and
hence, the sector registered strong rebounds. Fuel
and energy sector continued to be one of the major
market players along with engineering, chemicals
and pharmaceuticals.
Transport & Communication At the end of 2007,
there were 14 companies in this group listed with
the KSE. Its share index and market capitalization
decreased by 2 percent and 15 percent respectively
during July-April 2007-08. Telecom remains a
strong contender for investment in 2008. Sector
deregulation and liberal policies have been
successful in stimulating much foreign interest in
telecom in the past four years and this trend is
expected to continue moving forward. On the FDI
side, telecom represented 35.6% share in FY07, the
largest by far. However, negative sentiments
prevailed in the sector primarily due to a large one
off expense from a retirement scheme currently
being pursued by PTCL.

Table 6.4: Sectoral Performance on Karachi Stock Exchange

Sr.
No.

General Index (%)

Sector

1
Cotton and other Textiles
2
Chemicals & Pharmaceuticals
3
Engineering
4
Auto & Allied
5
Cables and Electrical Goods
6
Sugar & Allied
7
Paper & Board
8
Cement
9
Fuel & Energy
10
Transport & Communication
11
Banks & Financial Institutions
12
Miscellaneous
Change
*End April

2006-07

-3.2
18.9
49.8
29.7
18.2
3.0
27.7
11.0
9.2
44.0
40.9
7.5
28.2

Jul-Apr
2006-07
2007-08

-17.4
5.9
16.3
13.3
-2.7
-6.8
2.7
-4.1
0.1
7.9
22.3
-7.5
8.5

11.6
27.0
48.4
-8.1
3.3
-11.4
14.9
-17.8
38.6
-2.0
-10.6
22.1
2.6

Market Capitalization (%)

2006-07

38.0
23.4
65.9
45.2
35.9
12.3
48.3
24.4
1.4
35.8
117.3
62.7
43.9

Jul-Apr
2006-07
2007-08

4.7
8.8
32.6
30.4
7.2
-1.4
10.3
-2.4
1.5
16.9
87.7
44.2
29.0

13.0
35.1
52.1
-2.0
4.7
6.2
19.5
-0.2
15.6
-14.9
26.5
5.3
17.0

AMC
(Rs billion)
2007*

2008*

103.3
153.9
241.4
369.9
15.0
28.6
92.0
100.5
20.0
26.5
17.1
20.6
24.0
38.6
129.9
156.6
1098.2 1267.4
244.9
241.9
1341.8 1965.1
241.3
286.5
----Source: SBP

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Cotton & Other Textiles In this group there are
three sub-groups: (a) textile spinning, (b) textile
weaving & composite, and (c) other textiles. There
were 209 companies listed with the KSE under this
group in December 2007. The share index of
cotton and other textiles was up by 11.6 percent
and its market capitalization by 13 percent during
July-April 2007-08. The profit before taxes of this
sector was also reduced to Rs. 8.2 billion in 2007
when compared to Rs. 9.3 billion in 2006.
Chemicals & Pharmaceuticals A total of 36
companies were listed with the KSE under this
group at the end of December 2007. During JulyApril 2007-08 its share index has increased by 27
percent. Its market capitalization improved by Rs
128.5 billion during July-April 2007-08 and stood
at Rs 370 billion on April 29, 2008. Its net income
before taxes in 2007 has increased by almost half
of the amount in 2006 due to tight-demand supply
situation and rising fertilizer prices, boosting up
margins.
Auto & Allied A total of 24 companies were listed
with the KSE under this group at the end of
December 2007. Its share index decreased by 8.1
percent, while its market capitalization decreased
by 2 percent during the first ten months of the
fiscal year 2007-08. Rising per capita income and
easy financing facilities resulted in a boom in auto
demand. However, recent sales statistics shows
that the demand is gradually tapering off. Increase

in the price of cars, rising interest rates and

stringent credit policies adopted by banks in the
wake of growing non-performing loans in this
segment have all contributed to this slow down.
However, the demand for cars has not tapered
permanently since some of the slack has been
picked up by higher sales of imported and used
cars. However, this current slowdown is largely
attributable to higher lending rates and a delay in
investment decisions over FY08 due to an
uncertain political climate.
Sugar & Allied A total of 37 companies of sugar
and allied were listed with the KSE. During JulyApril 2007-08 share index of sugar and allied
declined by 11.4 percent. Its market capitalization,
however, showed a positive 6.2 percent during the
period under review.
Cement At the end of 2007, there were 21 cement
companies listed with the KSE. During the period
under review, the performance of cement sector
remained lackluster. Share index of cement
declined by 17.8 percent during July-April 200708. Its market capitalization also declined by 0.2
percent in the outgoing fiscal year. 2007 was a year
of cement industry expansions. As a result, supply
has been enhanced, but depreciation and financial
charges have increased. A high interest rate
scenario has made the situation challenging for this
highly leveraged sector.

Table 6.5: Companies Listed on KSE and their Before Tax Profits
No. of
Profit Before
Companies
Taxation
Sr. #
Sector
(Rs billion)
2006
2007
2006 2007
1 Cotton & other Textiles
212
209
9.3
8.2
2 Chemical & Pharmaceuticals
35
36
27.3
38.7
3 Engineering
13
14
1.6
2.3
4 Auto & Allied
25
24
17.2
13.7
5 Cables & Electric Goods
09
09
2.3
4.6
6 Sugar & Allied
37
37
1.6
-0.5
7 Paper & Board
10
10
7.2
5.4
8 Cement
21
21
17.1
4.6
9 Fuel & Energy
28
27
133.0 116.0
10 Transport & Comm.
14
14
21.5
13.2
11 Bank & Financial Institutions
162
168
122.5 156.9
12 Miscellaneous
85
84
15.9
19.6
Total
651
655
376.7 382.7

Dividend Paying Profit Making

Companies
Companies
2006
60
22
09
16
04
17
05
12
16
05
91
37
294

2007
51
24
09
10
04
08
06
06
16
05
91
37
267

2006
114
26
10
20
06
25
08
16
19
08
111
44
407

2007
90
28
09
17
06
11
08
12
16
07
114
45
363

Loss Making
Companies
2006 2007
59
81
07
05
00
01
02
04
01
01
11
25
01
01
05
09
08
10
03
05
28
29
25
23
150
194
Source: KSE

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Capital Markets
In December 2007, a total of 655 companies were
listed on the Karachi Stock Exchange, including
209 companies in cotton and other textile, 168 in
banks and financial institutions and 84 in
miscellaneous group. As per the annual report of
the KSE 2007, a total of 78 companies were delisted and 83 companies were merged in the period
of 2002-07. In the calendar year 2007, the number
of dividend paying companies was 267 compared
to 294 companies in 2006. In 2007, 363 companies
were making profit and 194 companies were
shown as loss making. The numbers were 407 and
150 respectively in 2006. All trading groups except
banking, pharmaceuticals, engineering, cables and
electrical goods showed a downward trend during
the period under review. The total before taxation
profit of the 12 trading groups, listed with the
KSE, amounted to Rs 376.7 billion in 2006, which
increased to Rs 382.7 billion in 2007, showing a
modest gain of 1.6 percent. In the year 2007, the
12 trading groups were shown as profit making
except sugar and allied industries ranging from Rs
2.3 billion (engineering) to Rs 157.0 billion, (banks
& financial institutions). Banks and other financial

institutions, fuel & energy, and chemicals &

pharmaceutical group were among the most
important players in the stock market. However,
the results were not as healthy as compared to the
previous year announcements. Fuel and energy
earned a pre-taxation profit of Rs 116.0 billion in
2007 as compared to Rs 133.0 billion earned in
2006. Banks and other financial institutions with a
pre-taxation profit of Rs 157 billion was the second
largest profit-earning group in 2007 as compared
to Rs 122.5 billion earned in 2006. The group-wise
number of companies and their performance is
given in Table 6.5.
Performance of Selected Blue Chips:
During the first three quarters of the fiscal year
2007-08, the combined paid-up capital of ten big
companies (Oil & Gas Development Company
Limited, Arif Habib Securities Ltd, Fauji Fertilizer
Bin Qasim, National Bank of Pakistan, DG Khan
Cement, Pakistan Petroleum Ltd, Bank of Punjab,
Lucky Cement, Bosicor Pakistan Ltd and Bank
Alfalah Ltd) was Rs. 91 billion, which constituted
13.17 percent of the total listed capital at KSE.

Table 6.6: Price Earning Ratio, July 2007 March 2008

Paid-up Capital
Profit after Tax
Company
(Rs billion)
(Rs billion)
OGDCL
43.01
45.63
Arif Habib Securities Ltd
3.00
3.68
Fauji Fertilizer Ltd.
9.34
2.54
NBP
8.15
19.03
DG Khan Cement Co Ltd
2.54
1.62
PPL
7.54
16.77
Bank of Punjab Ltd.
4.23
4.45
Lucky Cement
2.63
2.55
Bosicor Pakistan Limited
3.92
(0.68)
Bank Alfalah Limited
6.50
3.13
Total/Average
90.86
98.72

These ten companies earned a profit after taxation

of Rs. 98.7 billion in the fiscal year up to March
2008. Out of total profit after tax, the share of
OGDCL and NBP was Rs. 64.66 billion
representing 65.5 percent of the ten big companies.
For the period ending March 31, 2008, PPLs aftertax profit was Rs. 16.77 billion. Earnings per share

EPS
10.61
12.27
2.72
23.34
6.40
22.23
10.51
9.67
(1.74)
4.82
10.08

Price
(Rs)
133.90
176.45
45.35
233.00
113.00
261.05
66.35
139.75
18.15
54.05
124.11

P/E Ratio
12.62
14.38
16.68
9.98
17.66
11.74
6.31
14.45
11.22
Source: KSE

of the top rated companies ranged from a negative

1.74 in the case of Bosicor to 23.34 in respect of
NBP. This indicates that the business environment
in the fiscal year 2007-08 has improved
appreciably for the blue chip companies. (See
Table 6.6)

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Fig-6.4 Trends in LSE-25 Index for Jul'07-May'08

ay
M

ar

pr
A

Fe
b

ec

Ja
n

ov

ct

Se
p

ug

Ju
l

5,200
5,100
5,000
4,900
4,800
4,700
4,600
4,500
4,400
4,300
4,200
4,100
4,000
3,900
3,800

The leading market indicators witnessed mixed

trends in Lahore Stock Exchange. The turnover of
shares on the exchange during July-March 2007-08
was 5.4 billion. Total paid up capital with the LSE
increased from Rs 491.4 billion in June 2007 to Rs.
645 billion in March 2008. The LSE index, which
was 4,249.3 points in June 2007, increased to
4,695.8 points in March 2008. The market
capitalization of the LSE has increased from Rs.
2,948.2 billion in June 2007 to Rs 4,129.8 billion
in March 2008. Two new companies and nine
open-ended funds were listed with the LSE during
July-March 2007-08, as compared to eight
companies in the fiscal year 2006-07. A profile of

LSE is given in Table 6.7. Also see Figure 6.4 for

a graphical representation of the index
performance.

Daily Index Points

Lahore Stock Exchange:

Table 6.7: Profile of Lahore Stock Exchange

Number of Listed Companies

New Companies Listed
Fund Mobilized (Rs billion)
Listed Capital (Rs billion)
Turnover of Shares (billion)
LSE Index*
Aggregate Market Capitalization (Rs billion)

2004-05

2005-06

2006-07

524
5
42.1
403.0
17.5
3762.3
1995.3

518
6
24.5
469.5
15.0
4379.3
2693.3

520
8
38.8
491.4
8.3
4249.3
2948.2

*LSE launched the new LSE-25 index in December 2002

Islamabad Stock Exchange:

The Islamabad Stock Exchange also witnessed
mixed trend during the first nine months of 2007-

2007-08
(Jul-Mar)
514
2
28.1
644.6
5.4
4695.8
4129.8
Source: LSE

08. The ISE 10 index started at 2,568.8 points and

ended at 3172.1 points depicting a healthy increase
of 23.49 percent.

Table 6.8: Profile of Islamabad Stock Exchange

Number of Listed Companies

New Companies Listed
Fund Mobilized (Rs billion)
Listed Capital (Rs billion)
Turnover of Shares (billion)
ISE Index
Aggregate Market Capitalization (Rs billion)

The highest level of index was recorded at 3,344.8

as on April 17, 2008 compared to the lowest level
of 2,693.2 as on August 23, 2007. The total
turnover during this period was 0.9 billion shares.

2004-05

2005-06

2006-07

232
5
27.6
337.3
0.7
2432.6
1558.4

240
2
5.2
374.5
0.4
2522.6
2101.6

246
7
30.7
389.7
0.3
2568.8
2247.6

2007-08
(Jul-Mar)
247
3
28.1
526.3
0.9
3172.1
3536.8
Source: ISE

A profile of the ISE is given in Table 6.8. Also see

Figure 6.5 for analyzing the trend exhibited by the
index during the period under review.

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Capital Markets
Government Securities:

Fig-6.5: Trends in ISE-10 Inde x for Jul'07-May'08

3,400
3,300

Daily Index Points

3,200
3,100
3,000
2,900
2,800
2,700

ay

ar

pr

Fe
b

ec

Ja
n

ct

ov

Se
p

ug
A

Ju
l

2,600

The total funds mobilized during July-March 200708 in the three stock exchanges (KSE, LSE & ISE)
amounted to Rs 105.4 billion, as compared to Rs
119.2 billion in the last fiscal year. The total
turnover of shares in the three stock exchanges
during the same period was 63.2 billion, compared
to 77.4 billion shares in the last fiscal year.
National Commodity Exchange Limited:
National Commodity Exchange Limited (NCEL) is
the Pakistans first electronic commodities futures
exchange which commenced its operations in
2007. NCEL is a technology driven demutualized
on-line commodity futures exchange which
employs modern risk management techniques
based on Value-at-Risk. NCEL plans to provide
platform for market participants to trade
commodity futures and in the first phase has
started trades for three month gold future contracts.
In addition to this, NCEL has formally started rice
trading based on three-month future contracts. The
Commission has also asked it to broaden its
shareholder base by 46.82 percent as part of the
Demutualization process being conducted by
SECP.
Debt Capital Market
As compared to other emerging markets in Asia,
Pakistans debt market remains at infancy, in both
relative and absolute terms. The slow growth of the
domestic debt market can partially be attributed to
its late start. The government established an
auction-based market for T-bills in 1991, and longterm securities did not appear until 1992. The
corporate debt market followed a few years later in
1995.

Pakistan Investment Bonds (PIBs) are fixed rate

government securities and provide a benchmark for
debt capital market. The government is committed
to provide sufficient supply of long term papers in
the market to develop the longer end of the
government debt yield curve. In this regard Debt
Policy Coordination Office (Ministry of Finance)
has put its efforts to educate the investor base
especially the institutional investors to manage
their balance sheets in a more innovative way by
diverting resources from working capital needs
towards investment.
In order to catalyze a vibrant market and develop
secondary markets, the government conducted five
PIBs auctions in FY07 and issued long term
securities amounting to Rs.87 billion (including
short-selling and non-competitive bids) while
Rs.39 billion was matured, therefore a surplus
issuance of Rs.48 billion. The government had also
launched 30 years maturity PIB in December06,
the total outstanding stock till end of June07 stood
at Rs.16.10 billion.
For the fiscal year 2007-08, the government opted
to remain close to its pre-set volumes and
consistent supply of government securities was
considered as an investment needed to develop the
government bond market. This in turn, provided
the benchmark yield curve that will form the
foundation of the corporate bond market. The
government has conducted six PIB auctions till
March08 and raised more than Rs.68.8 billion
(including short-selling and non-competitive bids).
Bids amounting to Rs.128 billion were received
from the major market players. Table 6.9 shows
the acceptance against offers in FY 08.
A cursory look at Table 6.9 depicts that first three
auctions of the fiscal year 2007-08 were volume
driven and market participated with huge amounts,
showing the availability of ample liquidity in the
financial system and investors preferred
government avenues for risk free investment.
However, the auction of November07 was
scrapped due to the higher rates demanded by the
market and participation was also low due to cash
flow management at year-end by banks. In
addition, the 29th January08 and 29th March08
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Pakistan Economic Survey 2007-08

auctions were not close to the targets. Government
is continuously conducting PIB auctions to ensure
its commitment of developing capital market by
providing supply of long term securities but banks
are showing little interest in government securities
since the second quarter of FY08. This probably
reflected the expectations of further monetary
tightening and consequent interest rate hike, strong
seasonal demand from private sector credit (as well
as attractive returns on private sector loans) and
lower growth of non-government deposits.

In the first quarter, only one auction was conducted

in the month of August in which Rs.15 billion was
raised against the target of Rs.15 billion. While in
the second quarter, three auctions were held in
which Rs.32 billion was mopped up from market
against the target of Rs.45 billion. In the third
quarter, only Rs.16.31 billion was raised in two
auctions (held in the months of January and
March) for a target of Rs.40 billion (See Fig 6.6).

Table 6.9: PIB Auction Results, July-March 2007-08

Month
21st Aug'07

Total
9th Oct'07

Total
30th Oct'07

Total
29th Nov'07

Total
29th Jan'08

Total
29th Mar'08

Total
Grand total

(1)
Tenor
3-Years
5-Years
10-Years
15-Years
20-Years
30- Years
3-Years
5-Years
10-Years
15-Years
20-Years
30- Years
3-Years
5-Years
10-Years
15-Years
20-Years
30- Years
3-Years
5-Years
10-Years
15-Years
20-Years
30- Years
3 Years
5 Years
10 Years
15 Years
20 Years
30 Years
3 Years
5 Years
10 Years
15 Years
20 Years
30 Years

(2)
Target
3.00
4.00
3.50
1.50
1.50
1.50
15.00
3.00
3.00
3.00
2.00
2.00
2.00
15.00
1.50
1.50
4.00
4.00
2.00
2.00
15.00
1.50
1.50
4.00
4.00
2.00
2.00
15.00
2.50
2.50
5.00
5.00
2.50
2.50
20.00
2.50
2.50
5.00
5.00
2.50
2.50
20.00
100.00

(Rs. billion)
(3)
(4)
Offered
Accepted
Amount
Amount
2.75
1.05
5.84
4.19
10.15
3.80
0.90
0.50
3.00
1.80
4.80
4.20
27.44
15.54
3.18
0.86
7.48
3.03
18.10
5.68
2.52
2.02
2.00
2.00
4.00
2.00
37.28
15.58
2.43
1.83
3.20
1.60
11.52
7.22
3.63
2.93
0.55
0.50
1.00
1.00
22.32
15.07
0.78
Scrapped
1.32
Scrapped
5.70
Scrapped
1.28
Scrapped
No Bids
Scrapped
2.00
2.00
11.07
2.00
0.20
0.05
0.81
0.45
5.40
4.05
2.45
1.70
3.00
2.60
4.80
2.60
16.66
11.45
0.50
0.05
1.00
0.05
6.10
0.55
1.14
0.46
1.00
0.95
3.00
2.80
12.74
4.86
127.51
64.50

(percent)
Variance
4-2

Cut-off
Yields

W. Avg
Yields

9.6881
9.8916
10.3509
11.1494
11.4016
11.6802

9.6725
9.8571
10.3371
11.1080
11.3730
11.6184

9.6211
9.8024
10.1897
11.1494
11.4103
11.6142

9.6185
9.7958
10.1791
11.1026
11.3753
11.5880

9.6495
9.8221
10.2195
11.1597
11.4132
11.6151

9.6344
9.8140
10.1961
11.1428
11.4057
11.6132

11.6198

11.6176

10.0499
10.2486
10.8503
11.7452
11.9493
12.1105

10.0499
10.2346
10.7763
11.6115
11.8355
12.05

10.6044
10.7995
11.4494
11.9893
12.1296
12.4938

10.6044
10.7995
11.4339
11.8681
11.9983
12.2392

0.54

0.58

0.07

-13.00

-8.55

-15.14
-35.50

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Capital Markets
Fig-6.6: Q uarter-wise PIB Auction O verview
T arget

Offered

80

Acceptance

70.67

70
Rs.b illio n

60
45

50
40
30
20

27.44
15

40
32.65

29.40
16.31

15.54

10
0
Q uarter 1

discount rate by 50 bps in the H1-Monetary Policy

Statement 2007-08. As a result of this hike, cut off
rates of government securities increased in the
range of 9 to 37 bps in the first quarter while in the
second quarter, there was a mixed trend of increase
and decrease in the rates of different government
securities.

Q uarter 2

Q uarter 3

A cursory look at the maturity profile of PIBs

depicts that approximately Rs.14.5 billion is owed
to be paid in the fiscal year 2007-08.The major
portion of this amount had matured in first quarter
while Rs. 3 billion would be matured in the last
quarter of FY 08. It is worth mentioning here that
the government had started the issuance of PIBs in
December 2000 that is why only 3 & 5 years PIBs
are seen on the repayment schedule. Table 6.10
provides the break-up of maturities in each quarter.
The discount rate increase is a regulatory move and
is a signal to the market that the economy is in an
interest rate hike cycle. The SBP had raised the

Table 6.10: Maturity Profile of PIBs 2007-08 (Rs million)

3-Years
5-Years
Total
July
3,894.20
August
50.00
September
4,279.60
Quarter 1 Total
50.00
8,173.80
8,223.80
October
November
December
1,977.00
Quarter 2 Total
1,977.00
1,977.00
January
February
March
50.00
1,100.00
Quarter 3 Total
50.00
1,100.00
1,150.00
April
May
June
3,118.50
Quarter 4 Total
3,118.50
3,118.50
Grand Total
100.00
14,369.30 14,469.30
Source: SBP

Table 6.11: Interest Rate Structure, FY 2007-08

1st Jul'07 30th Sep'07 Variance 31st Dec'07 Variance 31st Mar'08 Variance
(%)
(%)
(Sep-Jul)
(%)
(Dec-Sep)
(%)
(Mar-Dec)
bps
bps
bps
3-Years
9.32
9.69
9.65
10.60
37
-4
95
5-Years
9.55
9.89
9.82
10.80
34
-7
98
10-Years
10.12
10.35
10.22
11.45
23
-13
123
15-Years
10.99
11.15
11.16
11.99
16
1
83
20-Years
11.20
11.40
11.41
12.13
20
1
72
30-Years
11.59
11.68
11.62
12.49
9
-6
87

Rates of 3,5,10 and 30 years papers had decreased

in the range of 1 to 13 bps while 15 and 20 years
papers recorded an increasing trend in rates by 1
bps. In the third quarter, SBP raised the discount
rate by another 50 bps increase, and this hike
shifted the yield curve in upward direction by 72 to
123 bps in various maturities. The last column of
Table 6.11 clearly indicates the perception of
shorter-end interest rate volatility as the yields on

Variance
(Mar-Jul)
bps
128
125
133
100
93
90

3, 5 & 10 years PIBs have shown a jump in the

range of 125-133 bps when compared to July
yields of same tenors. On the other hand, the range
oscillated between 90-100 bps for the rest of the
maturities.
Distribution of government securities takes place
through a network of nine Primary Dealers (PDs),
including eight commercial banks and an
investment company, who enjoy exclusive access
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to auctions of government securities. PD has to be
a PRICE MAKER, quoting two-way price
reflective of market sentiment and keeping trading
window open throughout the day with active
trading in all marketable government securities.
However, the PD system is largely skewed towards
the banking sector, thus hindering the development
of longer-term benchmark yield curve. This, in
turn, results in recognizing the need to add more
PDs by including the non-bank market.
National Savings Schemes:
The National Savings Schemes (NSS) is run by the
Central Directorate of National Savings (CDNS),
an attached department of the Finance Division,
which is responsible for the sale of NSS products
to the public through a network of 368 branches
across the country. The instruments that fall under
the general umbrella of the NSS are long-term
government papers, which benefit from both high

yields and an implicit put option, whereby the

investor is able to resell before maturity without
incurring penalties. As of March 31, 2008, the total
outstanding balance of NSS instruments was Rs.
1139 billion, equivalent to 37 percent of total
domestic debt, a number that exhibited a rising
trend, attributable to the governments decision to
re-allow institutional investors to invest in these
instruments, from which they had been barred in
the year 2000. During the fiscal year 2006-07, net
deposits with NSS increased by Rs 67.6 billion as
compared to a minute net increase of Rs 8.8 billion
in 2005-06. In 2006-07 modest retirements were
made in the case of Regular Income Certificates
(Rs 17 billion) and Defence Savings Certificates
(Rs 5.8 billion). Net accruals on the other hand
increased in respect of Bahbood Savings
Certificates (Rs 47.2 billion), Pensioners Benefit
Accounts (Rs 11.5 billion), Savings Accounts (Rs
9.2 billion) and National Prize Bonds (Rs 9
billion). (See Table 6.12)

Table 6.12: Net Accruals by National Savings Schemes (Rs billion)

1.
2.
3.
4.
5.
6.
7.
8.
9.

2003-04

2004-05

2005-06

2006-07

Defence Savings Certificates

Special Savings Certificates (Registered)
Savings Accounts
Special Savings Accounts
Regular Income Certificates
Pensioners Benefit Accounts
Bahbood Savings Certificates
National Prize Bonds
Postal Life Insurance

3.2
-13.2
-0.7
2.9
-49.1
13.2
22.7
22.8
8.7

-8.7
-83.3
-2.9
-1.9
-40.7
17.7
60.7
9.4
10.3

-7.6
-57.7
0.2
-0.7
-15.6
16.4
59.6
3.3
10.8

-5.8
7.0
9.2
6.5
-17.0
11.5
47.2
9.0
-

Grand Total

10.6

-39.4

8.8

67.6

July-March
2006-07 2007-08
-4.5
0.4
3.7
12.1
1.8
-4.2
3.2
3.5
-12.4
-0.9
9.4
15.0
38.8
32.8
4.6
8.7
44.6

67.4

Source: CDNS

Retail investors are showing a bulk of interest in

the three schemes currently pursued by the
Directorate namely Special Savings Certificates,
Pensioners Benefit Account and Bahbood Savings
Certificates mainly due to the bi-annual nature of
coupon payments on these instruments, hence
making them a short term facility as well. Net
accruals of Special Savings Certificates increased
substantially by Rs 12.1 billion during July-March

2007-08 as against a minute rise of Rs 3.7 billion

in the same period last year. Similarly, Pensioners
Benefit Accounts and Bahbood Savings
Certificates attracted Rs. 15 billion and Rs. 32.8
billion respectively on net accrual basis during the
same period. These three instruments attracted
almost Rs. 60 billion during July-March 2007-08,
constituting about 89 percent of the total
investment of Rs. 67.4 billion.

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Table 6.13: Nominal and Real Deposit Rates on Savings Schemes during 2004-2008 (percent)
Scheme (Maturity)

2004-05
Nominal
Real
Rate
Rate
(p.a.)

2005-06
Nominal
Real
Rate
Rate
(p.a.)

2006-07
Nominal
Real
Rate
Rate
(p.a.)

2007-08
Nominal
Real
Rate
Rate
(p.a.)

1. Defence Savings Certificates

8.15

-1.15

9.46

1.56

10.03

2.23

10.15

0.65

2. Special Savings Certificate (R)

6.95

-2.35

8.6

0.7

9.34

1.54

9.25

-0.25

3. Regular Income Certificates

6.84

-2.46

8.88

0.98

9.24

1.44

9.54

0.04

4. Mahana Amdani Accounts

10.41

1.11

10.41

2.51

10.41

2.61

10.41

0.91

-5.3

-2.9

-1.8

6.5

-3

6. Pensioners Benefit Accounts

10.08

0.78

11.04

3.14

11.52

3.72

11.64

2.14

7. Bahbood Savings Certificates

10.08

0.78

11.04

3.14

11.52

3.72

11.64

2.14

-4.3

-2.9

6.5

-1.3

6.5

-3

7.29

-2.01

8.69

0.79

9.55

1.75

9.71

0.21

5. Savings Accounts

8. National Prize Bonds

Weighted Average

Source: CDNS
*Average inflation was 9.3% during 2004-05; 7.9% during 2005-06 and 7.8% during 2006-07, 9.5% during Jul-Mar 2007-08

Keeping in view the trend of rising interest rates,

the Government of Pakistan has raised the nominal
rates of return on most of the savings schemes
during the outgoing fiscal year. In case of Special
Savings Certificates, it has been decreased from
9.34 percent last year to 9.25 percent this year.
Nominal rate on Defence Savings Certificates has
been increased from 10.03 percent last year to
10.15 percent this year while nominal returns on
Bahbood Savings Certificates and Pensioners
Benefit Accounts are raised from 11.52 percent to
11.64 percent. As a result of these increases, real
deposit rates became positive for all schemes
except Special Savings Certificates, Savings
Accounts and Prize Bonds (See Table 6.13).
During 2006-07 and 2007-08 weighted average
real deposit rate remained positive indicating that
investors in the NSS are getting modest returns on
their investment. The presence of NSS instruments,
while useful for accessing retail sources of
funding, goes to the detriment of government debt
management, as it provides an on tap source of
financing over which the government has no
effective control.
Corporate Bonds:
The size of the corporate debt market in a country
can signify the extent of debt market development.

In addition to being indicative of the general debt

market development of a country, corporate debt
markets are vital for a strong financial system of an
economy as they strengthen and diversify the
funding channels for economic growth. This
market could act as a buffer in the face of sudden
interruptions in bank credit or international capital
flows. Accordingly, the meager size of Pakistans
corporate
debt
issues
reflects
the
underdevelopment of the countrys corporate bond
markets.
The key obstacle to the development of the
corporate debt market was the competition for long
term funds from the governments NSS
instruments. TFC issuance was further discouraged
by the relatively high issuance and taxation costs.
Not surprisingly therefore, the interest in the
corporate debt market revived only in the wake of
reforms aimed at removing these anomalies.
Specifically, the yields on NSS instruments were
first reduced, and then pegged (loosely) to the
yields on the governments market-based long term
bonds. Moreover, from March 2000, institutional
investors were barred from incremental investment
in NSS. Similarly, the TFC issuance and listing
costs were reduced through efforts of SECP and
KSE, as well as a reduction in withholding tax
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rates and stamp duties on these instruments. These
developments provided an enabling environment

for the accelerated growth of domestic debt market

in subsequent years.

Table 6.14: Overall Composition of Listed TFCs, FY01-FY08

FY01
FY02
FY03
FY04
Total Issued
11
17
21
6
Fixed
7
4
0
0
Floating
4
13
21
6
Anchored to Disc. rate
3
8
13
3
Anchored to PIBs
1
5
8
2
Anchored to KIBOR
0
0
0
0
Anchored to Profits
0
0
0
1

The growth of corporate debt market is clearly

evident in FY01 and onwards, especially during
FY01-FY03, when 49 new issues were launched in
the market. As a result, the outstanding listed TFCs
reached to Rs 29.6 billion by the end of FY03, up
from only Rs 3.8 billion in FY00. In FY04, only 6
TFCs of total worth Rs 3.3 billion were issued.
This is due to the availability of easier and cheaper
finance from commercial banks, increasing the
opportunity cost of fund raised through corporate
debt securities. While the corporate debt market
saw a small revival in FY05, this was principally
caused by the SBPs regulation that enabled
commercial banks to enhance their paid-up capital
by issuing TFCs as well as rising expectation of a
monetary tightening. Indeed, of the twelve new
listings in FY05, seven were launched by
commercial banks. During FY06, while eight new
issuances were made, commercial banks issued
another three TFCs. The corporate debt market has
also seen new floatation in FY07 amounting to Rs
14.2 billion. Both, the number of issues and the
amount mobilized during FY07 were higher
compared to the preceding year. Further, most of
the floatations during FY07 were related to the
financial sector. By far, five TFCs of Orix Leasing,
Engro Chemical, Faysal Bank, Pakarab Fertilizers
and NIB Bank have been listed on KSE in 200708.
In order to make issues more flexible and
affordable for the investors, issuers are adding
different features from shelf registration to the
green shoe option to TFC structure. A very
interesting development is the gradual evolution in
the pricing structure of the TFCs. Starting from the
plain vanilla structure with fixed coupon rates,

FY05
10
3
7
0
0
7
0

FY06
8
0
8
0
0
8
0

FY07
FY08
9
5
0
0
9
5
0
0
0
0
9
5
0
0
Source: SBP & KSE

market has witnessed an increasing number of

bonds with floating structures.
Table 6.15: Sukuk Issuances in Pakistan (Rs billion)
Issue
Name of Issuer
WAPDA Sukuk - I
8
WAPDA Sukuk - II
8
Sitara Chemical Industry
1.7
Sui Southern Gas Company
1
Karachi Shipyard & Eng, Works
3.5
Source: Islamic Banking Department, SBP

In line with the Islamic financial practices,

corporates have shown considerable interest in
issuing Sukuks as a tool to diversify their balance
sheets and to tap the huge potential lying within
the Islamic financial institutions. WAPDA issued
its Sukuk bond on November 28, 2005, the first in
the corporate sector. The WAPDA bonds were
issued for a tenor of 7 years and were allowed to
trade in the secondary markets. The six month
KIBOR with a positive spread of 35 basis points
has been used as the reference rate to compute the
return. By far, Sukuks amounting to Rs. 22.2
billion have been issued in the market.
Nevertheless, the TFC market is growing at a
steady pace with yet more corporate issues to
emerge preferably by banks & financial
institutions. However, a strong need is still felt on
the part of non-bank issuers to join the corporate
debt market.
Derivative Market:
Derivative products help corporates hedge against
future interest rate moves, and allow for the
opportunistic issuance and rebalancing of debt

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requirement. Derivative market, which is an
important pillar for effective risk management,
though still in its immaturity, has taken off. At
present, interest rate swaps and forward rate
agreements are allowed in Pak rupee and other
currencies after SBPs approval. Currently five
banks have been given the status of authorized
derivative dealers by SBP. These new products
will add sophistication to the markets and attract
new investors in addition to providing hedging
tools for existing investors.
Investor Base:
One of the major risks to financial stability is the
overall lack of financial sector diversification in
the country. Of the total financial sector assets,
insurance companies and mutual funds account for
three percent and are largely sponsored by banks,
while other non-bank financial companies
accounted for two percent of the system.
Non-Banking Finance Companies, an integral part
of the financial markets, serve as an important
source of resource mobilization in Pakistans
economy through their intermediary role which
provides stability to the financial system. SECP
has enhanced the capital requirement for NBFCs
and categorized the sector into two clusters where
the first group would cover Asset Management
Companies (Mutual Funds), and second Leasing,
Investment Banking and Housing Finance Units.
Mutual Funds recorded the highest growth in
terms of assets and numbers. The total number of
mutual funds was 82 as of March 31, 2008 and net
assets of mutual funds have increased from Rs. 295
billion to Rs. 389 billion during nine months,
depicting a growth of 31.86%. Major growth was
observed in the category of income fund and equity
fund. Moreover, SBP now allows mutual funds to
invest 30 percent of their assets abroad or US$ 15
million (whichever is lower). This initiative allows
fund managers to diversify their portfolios,
ultimately mitigating risk and enhancing investor
confidence in mutual funds. SECPs stringent
standards in terms of mandatory rating, weekly
reporting of assets and liabilities, and independent
safeguard for investors in the form of a trustee
structure, are proved to be an added advantage.
Flexibility available to asset managers to establish

their trusts or companies as well as to float equity,

debt or hybrid funds and continuous strong growth
in the countrys stock markets is likely to help
mutual funds industry further grow and it is
expected to see the industry growing by upto 200
percent in the next four to five years.
Insurance sector is reaping the benefits of a
growing economy coupled with sectoral reforms,
soaring trade activities, improving per capita
income and competition among insurance sector
companies, which are driving the current growth in
the insurance sector. Moreover, higher interest
rates and tax exemption on capital gains also
supported the investment income of the companies,
which provided further impetus to the insurance
bottom-line.
Leasing As of March 31, 2008, there were 15
active licensed leasing companies. The leasing
industry contributed significantly in the economy
over the years despite several impeding factors
such as increasing oil prices, growing competition
from commercial banks and shrinking profit
margins. This sector played a significant role in the
development of small and medium enterprises
(SMEs).
Investment Banks At the end of March 2008,
there were 11 active licensed investment banks.
Major financial indicators of leasing and
investment banks are summarized in Table 6.16.
Table 6.16: Key Financials of NBFCs,
31 March 2008
(Rs. billion)
Leasing
Inv. Banks
Total Assets
65.86
59.67
Total Liabilities
57.73
46.61
Total Equity
7.20
13.11
Total Deposits
11.47
14.10
Source: SECP

Modaraba sector constitutes of 27 Modarabas

having total assets of Rs. 28.4 billion, while the
total equity amounts to Rs. 12.2 billion. With a
view to assisting the Modaraba sector in resource
mobilization, they are allowed to issue Musharaka
based TFCs on the basis of profit and loss sharing
principles. It is expected that this will open a useful
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avenue of resource mobilization for the sector and
will also add to the growth of the corporate debt
market under Islamic financial principles. In
addition, SECP has approved the launching of 12
different forms of Shariah-Compliant modes of
Modaraba financing approved by the religious
board of Modarabas. This would provide the sector
a level playing field with other financial
institutions in addition to providing new products
for the Islamic financial markets.
Real Estate Investment Trusts (REITs) are
transparent, tax efficient, income producing,
professionally managed collective investment
schemes that invest money in real estate ventures.
It is for the first time that an emerging market has
launched a modern product in a sector which so far
was the undiluted domain of the developed
countries. REITs structure would help in regulating
the existing fragmented property development
mechanism and bring forth efficiency in price
discovery mechanism of real estate. It will also
yield improved market valuation of property
prices, besides enhancing the liquidity of the real
estate market.
Private Equity and Venture Capital Fund
(PE&VCF) is an unlisted closed-end unit-trust
fund open only to high net-worth individuals and
institutions, due to its intrinsic nature of being a
high-risk asset class. The fund will provide equity
for seed/start-up capital, expansion and buyout as
well as turn around primarily to private &
sick/badly managed companies and would also
help in attracting foreign direct investment.
Voluntary Pension System (VPS) Six pension
funds have been launched under the VPS that
managed to attract a total amount to the tune of Rs.
20 million.
While lack of suitable assets has clearly hampered
the development of institutional investors, the
relative underdevelopment of contractual savings
in turn, inhibits the development of capital
markets. Instead of competing with the commercial
banks, NBFCs should enhance their own specific
areas of business and co-exit with the commercial

banks so that a comprehensive and healthy

financial sector could further evolve.
Credit Rating Agencies:
Credit rating agencies are an essential element of
an efficient debt market infrastructure and play a
crucial role in providing investors with the tools to
make informed investment decisions and also
achieve price discovery. There are two credit rating
agencies in Pakistan: Pakistan Credit Rating
Company (PACRA) and JCR-VIS Credit Rating
Co. Ltd (JCR-VIS). PACRA has completed well
over a hundred ratings, including major industrial
corporates, financial institutions and debt
instruments. In addition to local ratings, PACRA
has also successfully completed two international
rating assignments in collaboration with Fitch.
Settlement System:
The absence of a Real Time Gross Settlement
System (RTGS) is a significant hindrance to the
efficiency of debt capital market. However its
planned implementation as PRISM (Pakistan Real
Time Inter-bank Settlement Mechanism) in June
2008 is a welcome development. This step will
allow shift from traditional paper-based, end-ofthe-day settlement system to electronic payment
system for large value, low volume inter-bank
funds transfers and settlements.
Capital Market Reforms
Capital market reforms are aimed at a balanced
development of the Pakistans capital markets and
financial sector. These reforms assist in reducing
systemic vulnerabilities in a bank-dominated
financial system. Special emphasis is devoted to
strengthen pension funds and other institutional
investors, such as insurance, mutual funds, and non
banking finance companies, given the strong
causal relationship between the level of
development of institutional investors and the
deepening of capital markets. One of the major
thrusts of reforms during the period remained on
strengthening the governance of securities markets
and market intermediaries to increase investors
protection and confidence. New checks and
balances have been introduced and systems have
been put in place to control un-necessary

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speculation and systemic risk. These reforms have
yielded dividends in the form of improvement in
key financial performance and soundness
indicators.

system from a local IT solution provider to

strengthen its stock market monitoring capacity.
The system enables alerting on real time basis and
facilitates detection of market manipulative
activities.

Various capital market reform initiatives

introduced by the SECP during the period under
review are documented below:

Corporate Debt Market Reforms:

Regulatory Reforms:
The reforms on the regulatory side include
regulations governing Cash-Settled Futures (CSF)
contracts, amendments in stock exchange listing,
streamlining of the arbitration procedure and
avoiding of any possible conflict of interest during
the proceedings. New Risk Management
Regulations for ISE have been approved. These
regulations encompass VAR based margining
system, new netting regime, imposition of position
limits, mark-to-market loss collection regime,
imposition of special margins and valuation of
securities (haircuts regime).
Developmental Activities:
CFS Mk II, launched in April 2008, allow direct
provision of finance in the equity market by
institutions in the capacity of authorized financiers
by committing a minimum amount for a period of
at least 90 days. The Commission actively
developed a Financial Institutions Margining
System, which is a mechanism enabling collection
of margins directly with National Clearing
Company of Pakistan Limited (NCCPL) from nonmember institutions dealing through a member of
the exchange. A shorter T+2 settlement cycle for
trades on stock exchange, introduced in August
2007, facilitated to reduce the overall settlement
risk in the market and brought the domestic
markets at par with various international
jurisdictions.
To enhance transparency and
effective monitoring of capital markets, the
Commission initiated measures for compulsory
reporting of all off-market transactions at the stock
exchanges and automated the process of handling
corporate actions in CFS transactions. The
Commission has taken steps to enhance NCCPLs
paid-up capital to Rs. 300 million and reduce stock
exchanges share holding to 30% of the overall
paid-up capital. SECP has acquired a surveillance

The maximum initial listing fee for debt

instruments has been reduced by KSE from Rs.
500,000 to Rs. 100,000 and the stamp duty on
debentures and commercial papers has been
reduced by Government of Punjab. The later is
also under consideration of provincial governments
and administration of Islamabad Capital Territory.
Work-in-Progress:
(i) Demutualization of Stock Exchanges, (ii)
Futures Trading Act, (iii) Introduction of Islamic
Index, (iv) New Derivative Products Development,
and (v) Setting up of Pakistan Institute of Capital
Markets.
Key Recommended Reforms
The Government of Pakistan is eager to continue
its reform path, on all aspects of capital market
development. Towards this end, some action plans
have been put forward that aim at enhancing the
financial markets of the country as a whole, among
which are the followings:

Strengthen the government securities market

development by improving the efficiency and
transparency of primary market, gradually
increasing the marketable government
securities and reducing the issuance of nonmarketable securities and strengthening the
liquidity of secondary market.
Consider shifting to a price discovery
mechanism from the current policy of volume
based PIB auctions, once the spillover effects
of the ensuing international financial crisis are
over or reduced to a minimum. This will, in
turn, facilitate the development of credible
sovereign benchmark as well as interest rate
markets over the long run.
Publish a quarterly PIBs issuance calendar,
subject to a tight compliance with the timings
stipulated in the calendar.
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Promote corporate bond market development

by streamlining the issuance procedure and
increasing the supply of instruments by
tapping potential new issuers.
Adopt high standards of transparency, public
disclosure of financial information and
corporate governance on the part of
corporations to strengthen their credit ratings
and facilitate market access.
Set up a corporate bond database, with details
of issuances, convergence in rating and
transactions undertaken, to facilitate investors
having complete information.
Set up trading platforms for undertaking bond
transactions.
Encourage corporations to publicly issue debt
rather than resorting to private placements by
easing regulatory interface.
Eliminate restrictions on investment in
domestic bonds by foreign investors.
Encourage secondary bond market activities.
Permit issuance of unsecured bonds and
develop a market for sub-investment-grade
debt.
Broaden the investor base by promoting
pension reform and strengthening the
insurance
and
mutual
fund
sectors
development.
Modify the investment guidelines for NBFCs.
Reform the NSS to align their returns to those
available in the market and target small savers

by transforming NSS into a modern retail

program.
Promote the relevant market infrastructure
development and create an enabling
environment for bond market development by
upgrading clearing & settlement arrangement,
strengthening
government
cash/debt
management capacity, facilitating money
market development and strengthening the
credit rating industry.
Improve the effectiveness of monetary policy
implementation.
Clarify oversight responsibilities among
various regulatory agencies including MoF,
SECP and SBP.
In all, with competitive pressures facing Pakistans
financial players, and with the widely
acknowledged need to consolidate and build upon
the impressive achievements of the past, the path
towards a progressive growth of domestic capital
markets is appealing. Strong dedication by the
government in enhancing its role in the financial
system of the country is worth mentioning, since
reform is a process that demands a strong and
sustained commitment to yield substantial and
durable results. Regulatory authorities are acting
like a watch-dog, overseeing the performance of
the market and immediately rectifying hiccups, if
any. This behavior is expected to persist in order to
make Pakistans capital markets the best yielding
markets of the region.

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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
c. If Certificate of Rs 1000 encashed after 2 year investor will get Rs 1310
Sale under this scheme has
d. If Certificate of Rs 1000 encashed after 3 year investor will get Rs 1520
already been discontinued, from
e. If Certificate of Rs 1000 encashed after 4 year investor will get Rs 1740
December 1999 however, on
f. If Certificate of Rs 1000 encashed after 5 year investor will get Rs 1990
outstanding balance till maturity,
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

Scheme has already been discontinued w.e.f. February 1999. Only

repayment is made

3. Special US$ Bonds

a) 3 year maturity
b) 5 year maturity
c) 7 year maturity

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

4. Pakistan Investment Bonds

Tenor
3-Year Maturity
5-Year Maturity
10-Year Maturity
15-Year Maturity
20-Year Maturity
30-Year Maturity

Rate of Profit
9.10% p.a
9.30% p.a
9.60% p.a
10.00% p.a
10.50% p.a
11.00 % p.a

These coupon rates will effective from March 31, 2008 for
PIBs of 3, 5 & 10 years maturity while for PIBs of 15 and 20
years maturity launched on Jan 20,2004 the respective
coupon rates will effective since then. PIBs of 30 years
maturity were launched on Dec 12, 2006.

5. Unfunded Debt
Defence Saving Certificates

10.00% p.a (m)

10 Years

13.00% p.a.

7 Years
3 Years

National Deposits Schemes

Special Saving Certificates (R)
for each of 1st five profit
for the last one porfit
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

9.00% p.a.
10.50% p.a.
12.36% p.a.(m)
9.54% p.a
13.42% p.a.
10.41% p.a.(m)
6.50% p.a.
11.64% p.a.
11.64% p.a.
6.50% p.a.

The rates are effective form Sept. 1999. If bonds are encashed before
one year no profit will be paid. Profit is payable @ LIBOR + 2 on bonds
reinvested for 3 years on Special US$ Bonds redeemed against 3 and
7 years maturity. However, the facility of reinvestment has been
discontinued since October 2002.

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

3 Years
5 Years
3 Years
7 Years
Running Account

Taxable and discontinued

Taxable
Taxable and discontinued
Taxable and discontinued
Taxable for deposits exceeding Rs 150,000

10 Years
Source: SBP and Directorate of National Savings

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Chapter 07

INFLATION
7.1 Introduction
Inflation is a key indicator of a country and
provides important insight on the state of the
economy and the sound macroeconomic policies
that govern it. A stable inflation not only gives a
nurturing environment for economic growth, but
also uplifts the poor and fixed income citizens who
are the most vulnerable in society. Over the last
decade, with a few exceptions, inflation around the
world had been at a retreat. However, with buoyant
global growth, along with higher population
growth, rapid industrialization and urbanization in
emerging markets, and strong per capita income
growth, inflation has started veering its ugly head
in many parts of the world, including Pakistan. In
the midst of soaring demand for essential
commodities, food inflation has emerged as the
main contributor to recent global inflationary
pressures.
There is a general consensus that the era of cheap
food is over. Soaring food prices over the last year
have helped propel inflation all around the world,
sparking protests and even riots in some countries.
The high price of food in the global arena as well
as short-sighted policy responses threatens to push
millions into poverty. Rising food prices have
pushed up overall inflation not only in Pakistan,
but across the region, particularly during 2007 and
mid-2008. This is worrisome given that food price
inflation is the most regressive of all taxes, hurting
the poor and fixed income groups the most.
Additionally, this explosion in international food
prices is a threat to macroeconomic stability
through inflation, the rising fiscal cost of food
subsidies, and the negative impact on the exchange
rate for net food/energy importing countries like
Pakistan.
For a developing country like Pakistan, inflation
needs to be stabilized in order to ensure sustainable

growth as well as macroeconomic stability. Both

empirical and theoretical studies demonstrate that
there is a strong link between inflation and output
(unemployment). Very high levels of inflation as
well as very low levels of inflation are equally
damaging for an economy. Both extremes arrest
growth prospects, impose economic suffering on
the population, cause inefficient allocation of
resources, inexplicably hurt the poor and fixed
income groups, create uncertainty throughout the
economy and undermine macroeconomic policies.
High inflation always burdens the poor and fixedincome groups more than the rich since they are
not able to protect themselves against the costs
attached to inflation, nor able to hedge against the
risks that inflation brings with it. In contrast, low
or falling inflation can also have a negative impact
on growth through several different factors. For
instance, falling asset prices can constrain
collateralized lending; the negative wealth effect
can slow down demand; and borrowers are worse
off since the real rates have turned against them.
The Government needs to be cautious about
inflation and thus has taken various steps to release
demand pressures on the one hand and enhance
supplies of essential commodities on the other. To
ease demand pressures, the State Bank of Pakistan
(SBP) has continuously tightened the monetary
policy over the last three years and more so in the
current fiscal year, while to enhance supplies, the
Government has relaxed its import regime and
allowed imports of several essential items so that
there is a continuous flow in the supply of those
important commodities. In addition, the
Government increased the imports of items like
wheat, pulses and sugar to complement the efforts
of the private sector. In order to provide relief to
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the common man, the government also increased
the scale of operations of the Utility Stores
Corporation (USC) which supplies essential
commodities such as wheat flour, sugar, pulses and
cooking oil/ ghee at less than the market prices.
The Government stance remains steadfast, in that
its policy objective is to ensure high growth while
keeping inflation in check. Growth, on one hand,
creates more jobs and increases incomes, directly
contributing in reducing poverty. On the other
hand, the associated higher inflation tends to
worsen income distribution by hitting the low
income groups the hardest, thus further reducing
their purchasing power and perpetuating poverty.
The trade off between the two has to be dealt with
the utmost care, which the Government is fully
aware of and has taken several initiatives that seek
to achieve a high rate of economic growth, lower
unemployment and reduce the rate of inflation.
Table 7.1: Inflation Rate
Item

2005-06

2006-07

2006-07

2007-08

(July-April)
CPI (General)
7.9
7.8
7.9
10.3
Food Group
6.9
10.4
10.3
15.0
Non-Food Group 8.6
6.0
6.2
6.8
Core Inflation
7.5
5.9
6.1
7.5
Source: Federal Bureau of Statistics (FBS)

The overall CPI-base inflation during the first ten

months of the current fiscal year 2007-08 (July
April) averaged at 10.3 percent. This is much
higher than that of the last fiscal year where 200607 (JulyApril) inflation stood at 7.9 percent. The
higher inflation is largely driven by food and
energy prices, which have been a global problem
over the past year, with the crisis hitting hard
particularly in developing countries like Pakistan.
Food inflation in turn, was predominantly based on
an increase in prices of a few essential items such
as wheat, rice, edible oil, meat, pulses, tea, milk
and fresh vegetables. A more detailed analysis in
later sections will show that within the food group,
a smaller group of items had a much higher
contribution to a sharp pick up in prices. Based on
current trends, it is expected that the average

inflation for the year (2007-08) as measured by the

CPI will be over 10.5 percent. These developments
in the CPI are also reflected in other measures of
inflation used in Pakistan, namely the Wholesale
Price Index (WPI) as well as the Sensitive Price
Index (SPI).
7.2 Historical Perspective of Inflation
7.2.1 Price Indices
Pakistan publishes four different price indices over
the course of fiscal year, namely: the Consumer
Price Index (CPI), the Wholesale Price Index
(WPI), the Sensitive Price Index (SPI) and the
GDP deflator. The CPI is the main measure of
price changes at the retail level. It indicates the
cost of purchasing a representative fixed basket of
goods and services consumed by private
households. In Pakistan, the CPI covers the retail
prices of 374 items in 35 major cities and reflects
roughly the changes in the cost of living of urban
areas. The WPI is designed for those items which
are mostly consumable in daily life on the primary
and secondary level; these prices are collected
from wholesale markets as well as from mills at
organized wholesale market level. The WPI covers
the wholesale price of 106 commodities prevailing
in 18 major cities of Pakistan. The SPI shows the
weekly change of price of 53 selected items of
daily use consumed by those households whose
monthly income in the base year 2000-01 ranged
from Rs.3000 to above Rs.12000 per month. The
SPI also informs about the actual position of
supply: whether the commodity is available in
market or not. If the commodity is not available,
the reason for that is also recorded. The SPI is
based on the prices prevailing in 17 major cities
and is computed for the basket of commodities
being consumed by the households belonging to all
income groups combined as in CPI. 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 also placed on the CPI as a measure of
inflation as it is more representative with a wider
coverage of 374 items in 71 markets of 35 cities
around the country. The details are presented in
Table-7.2.

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Inflation
Table 7.2: Price Indices in Pakistan
Features
Cities covered
Markets covered
Items covered
Commodities Covered
Number of Commodity Groups
Number of Quotations
Income Groups
Occupational Groups
Reporting Frequency

Base Year 2000-01=100

CPI
SPI
35
17
71
53
374
53
92
10
106,216
11,236
Four
Rs.3000/Month
All Categories combined
3 (Urban)
Monthly
Weekly

WPI
18
18
425
106
5
1550
Monthly

Source: Federal Bureau of Statistics

7.2.2 Trends in Inflation

Inflation in Pakistan over the last 18 years had an
erratic trend, ranging as high as 13.0 percent and as
low as 3.1 percent mainly because of: (i)
decelerating economic growth; (ii) loose monetary
policies; (iii) output set-backs; (iv) higher duties
and taxes; (v) a depreciating Pak Rupee; (vi)
frequent adjustments in the administered prices of
gas, electricity, POL (Petroleum, Oil and
Lubricants) products as well as the support price of
wheat, and (vii) political instability. The pressure
on prices intensified in 1994-95 when inflation
went up to 13 percent, mainly due to extremely
high food inflation of 16.5 percent. Both the food
and non-food inflation contributed to the
persistence of double-digit inflation during the
period from 1990-1997, averaging 12.2 and 10.7
percent, respectively against the overall CPI
inflation of 11.4. (See Table 7.3 & Figure 7.1)

inflation, as domestic supply was plentiful as were

international stockpiles. Inflation began to pick up
after the first quarter of 2003-04, reaching as high
as 9.3 percent in June 2005 (i.e. at the end of fiscal
year 2004-05) for a variety of reasons including a
rise in the support price of wheat, shortages of
wheat, and a rise in international prices including
the oil prices. The inflation rate had come down to
7.8 percent at the end 2006-07 but has since
steadily risen to 10.3 percent over the period JulyApril 2007-08. Inflation had been contained during
the period of 2000-07 despite tremendous growth
through a combination of tight monetary policy
and the resolving of several supply bottlenecks.
Despite these measures taken by the government
over the last couple of years, inflation has steadily
increased this past fiscal year due to soaring
international food and energy prices.
Figure 7.1: Inflation Trend (1990-2008)*
20
18

CPI
FOOD
NON-FOOD

16
14
12
10
8
6
4

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

2007-08
Jul-Arp

2
1990-91

Percent

Nevertheless, the price pressure started to

moderate from 1997-98 onwards as an improved
supply position, strict budgetary measures and
depressed international market prices kept
domestic prices in check. The inflation rate, which
was at 5.7 percent in 1998-99, was further reduced
to 3.1 percent by 2002-03 (the lowest in the last
three decades). This low level of inflation was
supported by strict fiscal discipline, the lower
monetization of the budget deficit, an output
recovery, a reduction in duties and taxes, and
appreciation of exchange rate. During this time
period, the country had very low levels of food

Period

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Table 7.3: Historical Inflationary Trends*
Overall CPI
Year

Food
Non-Food
Core
WPI
(Annual percentage change, period average)
12.9
12.4
12.6
11.7
10.6
10.5
7.5
9.8
11.9
7.8
7.5
7.4
11.3
11.2
10.9
16.4
16.5
10.2
10.7
16.0
10.1
11.3
10.9
11.1
11.9
11.7
11.4
13.0
7.7
8.0
7.5
6.6
5.9
5.6
4.5
6.4
2.2
4.7
3.5
1.8
3.6
5.1
4.2
6.2
2.5
4.3
2.0
2.1
2.9
3.2
2.1
5.9
6.0
3.6
3.0
7.9
12.5
7.1
7.2
6.8
6.9
8.6
7.5
10.1
10.3
6.0
5.9
6.9
15.0
6.8
7.5
13.7
10.1
9.3
8.9
10.0
12.2
10.7
10.7
12.2
5.3
6.1
5.2
4.9
7.5
5.6
4.9
7.5

12.7
1990-91
10.6
1991-92
9.8
1992-93
11.3
1993-94
13.0
1994-95
10.8
1995-96
11.8
1996-97
7.8
1997-98
5.7
1998-99
3.6
1999-00
4.4
2000-01
3.5
2001-02
3.1
2002-03
4.6
2003-04
9.3
2004-05
7.9
2005-06
7.8
2006-07
10.3
2007-08 (July-April)
9.7
Average of 1990s
11.4
Average of 1990-97
5.7
Average of 1998-2000
6.4
Average of 2000-2008
* Base year = 2000-01
CPI: Consumer Price Index, WPI: Wholesale Price Index and SPI: Sensitive Prices Index

7.3 Inflation in the FY 2007-08

The CPI-based inflation during July-April 2007-08
averaged 10.3 percent as against 7.9 percent in the
same period last year. The single largest
component of the CPI is the food group, which
makes up 40.34 percent of the CPI, and it showed
an increase of 15.0 percent. This was higher than
the 10.2 percent food inflation observed over the
corresponding period of last year. A further
breakdown of food inflation into perishable food
items and non-perishable food items reveals some
interesting facts. The rise in the price of perishable
food items stood at 8.7 percent whereas nonperishable food items stood at 13.6 percent. Based
on the current trend observed, the contribution of
food inflation to the overall CPI is estimated at 59
percent and non-food inflation at 40 percent as
against 52.4 percent and 47.2 percent respectively
in the comparable period last year. On the other
hand, the non-food prices grew at a slower pace
compared to last year. Non-food inflation averaged

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
7.0
10.8
14.1
9.9
12.0
5.2
7.8
Source: FBS

6.8 percent during July -April 2007-08 while it

stood at 6.2 percent in the corresponding period
last year.
The non-food-non-energy inflation (core inflation)
was also higher at 7.5 percent in first ten months of
the fiscal year 2007-08 as against 6.0 percent in the
same period last year, on account of the rising
house rent and Medicare sub-indices.
Several domestic and international factors have
contributed to the extraordinary surge in the
domestic price levels in Pakistan. The high price of
food and energy in the international markets can be
primarily blamed on a confluence of factors that
are not only structural and cyclical in nature but
also involve demand and supply dynamics.
Structural factors have dominated in recent times
and a closer look at them will reveal important
insights on the cause of inflation that is currently
gripping the world.

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Inflation
Correlation between the USD-Euro Exchange Rate &
International Oil Prices

April 2007 - May 2008

135
130
125
120
115
110
105
100
95
90
85
80
75
70
65
60

US $ per barrel

1.62
1.60
1.58
1.56
1.54
1.52
1.50
1.48
1.46
1.44
1.42
1.40
1.38
1.36
1.34
1.32

Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08

Euro/USD Exchange Rate

USD-Euro Exchange Rate

Crude Oil Prices

Source: DPCO Staff

Firstly, despite an overall slowdown in world

economic growth, crude oil prices have continued
to accelerate to new highs, breaking pricing
records along the way. Oil prices have surged this
fiscal year from lows of around $55 per barrel in
January of 2007 to over $130 per barrel in May
2008. This is a jump of more than 145 percent. A
depreciating dollar, the standard currency for
international trade, has also plunged against major
currencies over the course of the year in tandem
with rising oil prices, as illustrated in the graph.
This correlation between oil prices and the dollar
has risen notably over the last year or so, leaving
energy-importing countries like Pakistan facing
huge import bills. As producers pass on the
increased costs to consumers, this leads to an
increase in cost of Pakistani imports which drives
up inflation. It is also likely that the response of the
general domestic prices to oil prices is asymmetric
i.e. general domestic prices rise with an oil price
increase due to the sympathy effect but when the
oil prices fall general domestic prices are not
reduced.
Secondly, another important structural demand
factor is the competing use of food grain to
produce ethanol as a substitute for oil. The jump in
oil prices is driving up the use of various
agricultural crops as the demand for alternative
biofuels is increasing, exacerbating food inflation
and aggravating shortages across the world. Bio-

fuel production is seriously affecting food markets

as its demand is leading to the diversion of grain,
soybeans, sugar and vegetable oil from use for
human consumption as well as livestock feed, thus
creating supply shortages. Consequently, this
substitution effect is having dire consequences for
the poorest residents of society, as developing
countries struggle to meet the demand
requirements of their citizens. The United States
and the European Union have set ambitious targets
about biofuel, implying that diverting crops
towards biofuel production will continue at least
another five years. The 2007 energy bill in the
United States nearly quintuples the biofuels target
to 35 billion gallons by 2022, whereas the
European Union has decreed that 10 percent of
transportation fuels must use biofuels by 2020.
This means that upward pressure on prices of some
major food crops will continue for some time.
Thirdly, falling global inventories of major crops
are indicative of the fact that production growth
has fallen below consumption growth. Not only
does this show a higher demand for these crops,
but also reflects the attempt to rebuild stocks,
adding even greater upward pressure on demand
relative to supply. Among these demand-side
factors are growing world population and strong
income growth in emerging economies. The latter
factor especially, reflects a dietary change towards
higher quality food such as meat and dairy
products, which in turn requires large amounts of
grain in the form of livestock feed. Also,
urbanization and industrialization has led to
competing demand for land for commercial use as
opposed to agricultural purposes.
On the supply side, cyclical factors, such as
adverse weather conditions and crop infestation,
have harmed production in some major crop
exporting countries, further alleviating the
problem. The recent financial market crisis has
also exerted cyclical effects as investors hedge
against the turmoil by turning to the commodity
markets to get a better return. Thus food inflation
has emerged as a major source of concern for
policy-makers around the world, including
Pakistan, which is part of the global community
and therefore cannot be immune to such external
dynamics.
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In Pakistan, sustained level of high economic
growth over the last few years has increased the
level of income which has resulted in a surge in
domestic demand. The link between growth and
inflation is well-documented phenomenon in
economic statistics around the world. The
aggregate demand may also be driven by a

perceived wealth effect. As prices have risen

throughout the economy there has also been a
sharp increase in asset values particularly in real
estate. Although borrowing against increased
equity on real estate is limited in Pakistan, the high
net wealth is likely to reduce incentives to save.

Box Item: Major Developments in International Food Commodity Markets

Following are the major developments that have led to a surge in food commodity prices in the international
markets:
Wheat

Rapid growth in emerging economies, importantly China and India, has resulted in increased demand for
wheat, thus pushing its prices up.
The number of wheat farmers switching to other crops such as maize and corn is growing due to increase in
the preference for bio-fuel.
Two years of drought in Australia has cut the global wheat stock to a level not seen since the 1970s.
Continued larger exports of wheat from the United States led to a depletion of wheat stocks to a 60 years
low, creating panic.

Rice

A ban from major exporters like Vietnam, India, Egypt and Cambodia to ensure domestic availability
aggravated supply concerns.
Increase in rice demand as its consumption in Asia, Middle East and West Africa is rising due to higher per
capita income.
Short supplies due to reduction in acreage, rising cost of fuel and poor crop due to water shortages, has
resulted in current global rice stocks to be at their lowest levels since 1976.

Edible Oil

Expected lower rapeseed production in China because of bad weather and lowering of input tariff by the
Indian government has put pressure on vegetable oil prices in the global market.
US, EU and Russia have been showing high consumption of soybean oil for industrial use, pushing up its
rice in the international market.
Increasing palm oil prices are also being supported by protectionist policies in major exporting countries
like Indonesia and Malaysia, where palm oil is politically sensitive as it is a staple product.
Source: State Bank of Pakistan

The resultant increase in consumption will also

drive up aggregate demand and thus prices. In
addition, the unprecedented levels of remittances
also provide an impetus to aggregate demand.
There has been an increase in the prices of other
commodities which are important for domestic
consumption in Pakistan. For example, the
international price of soybean oil has increased by
nearly 61 percent since July 2007. Since these are
essential inputs for the edible oil industry, an
122

increase in their prices is largely responsible for

the drastic increase in edible oil prices. The rise in
international oil prices is also critical in analyzing
domestic food inflation as fertilizer prices, which
are highly dependent on petroleum and natural gas
prices, move in tandem with energy prices and thus
add to production costs. Other commodity metals
such as iron ore have been experiencing price
increases due to high demand from countries like
China and India.
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Inflation
Table 7.4 Annual Inflation by Commodity Groups
Point Contribution #
(July-April)
Commodity Group
2006-07
2007-08
2006-07
2007-08
Weight
Percent
Percent
100
7.9
10.3
7.9
10.3
CPI
Food
40.3
10.2
15.0
52.4
59.0
i) Perishable
5.14
11.4
8.7
7.4
4.4
ii) Non perishable
35.2
12.4
13.6
55.5
46.6
Non-Food
59.7
6.2
6.8
47.2
39.6
52.4
6.0
7.5
39.1
38.6
Core*
Apparel, Textile
6.1
4.8
7.9
3.7
4.7
House Rent
23.4
6.7
8.7
20.0
19.9
Energy*
7.3
7.3
3.4
7.9
2.9
Household
3.3
6.8
6.6
2.8
2.1
Transport*
7.3
3.7
0.6
2.4
0.3
Recreation
0.8
4.4
-3.6
0.5
-0.3
Education
3.5
4.9
6.9
2.1
2.3
Cleaning
5.9
4.3
9.8
3.2
5.6
Medicare
2.1
9.1
8.4
2.4
1.7
Source: Federal Bureau of Statistics
# Calculated as group specific inflation times its share divided by total inflation.
* Updated till April 2008.
(July-April)

The continuous upward adjustment in administered

prices, such as the support prices of wheat, has
added to domestic inflation. The price of wheat
serves as a trigger mechanism for other food
prices as the latter moves in sympathy with the
former. A shortfall in the production of essential
perishable (vegetable and fruits) and nonperishable (pulses, sugar, chilies etc) commodities
within the country in relation to their demand has
also driven up prices. Significantly, there are nine
essential food items (Wheat and flour; rice; pulses;
meat; milk; ghee/cooking oil; and vegetables) that
account for almost 50 percent of the total weight in
the Sensitive Price Index (SPI) food group. It is
from these critical items that there has been a sharp
pick up in food inflation in Pakistan over the last
fiscal year. The 45 percent increase in the world
market prices of palm oil, 93 percent in prices of
wheat and a staggering 197 percent in the prices of
rice since July 2007 to April 2008, have caused the
domestic prices of these items to also substantially
increase. Among these few items, a substantial
increase of 59 percent has seen in prices of rice,
followed by chicken farm, ghee/edible oil, wheat
and wheat flour etc. However, prices of certain
other food items like sugar, onions, potatoes and
moong pulse have shown a decline.

Another major contributor to domestic inflation is

the excessive borrowing of the government from
the banking system. Government borrowing,
particularly from the State Bank of Pakistan (SBP),
has reached alarming levels during the current
fiscal year. According to the latest provisional
data, governments budgetary borrowing from the
banking system up until May 7th 2008 had
increased to Rs. 389 billion. Of the total, Rs. 539
billion (139%) has been borrowed from the SBP
which is highly inflationary in nature while the
Government has retired its debt owing to
scheduled banks, amounting to Rs. 150 billion. The
stock of Market Related Treasury Bills (MRTBs)
through which the Ministry of Finance borrows on
tap from SBP has increased sharply by 105 percent
and has touched a record level of Rs. 928.1 billion.
The domestic debt plan for fiscal year 2007-08
recommended that the government would raise Rs.
200 billion from the market and retire government
borrowing from the SBP by Rs. 62.3 billion.
However, the actual outcome shows that the
government continued to finance its deficit by
borrowing from the SBP, adding to the inflationary
pressures on the economy. Such excessive
government borrowing from the banking system
puts stress on the effectiveness of monetary policy,
as can be seen by the money supply growth during
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Pakistan Economic Survey 2007-08

the current fiscal year, which is set to breach the
target of 13.7 percent. The need to find alternative

sources to finance the government deficit should

be a priority in order to contain domestic inflation.

Figure 7.2: Inflation Rate By Groups

Jul-Apr 06-07

7.5

Jul-Apr 07-08

6.8

6.0

Core

15.0

6.2

Non-Food Group

10.3

10.2

Food Group

7.9

CPI (General)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Percentage

Based on the current trend observed, the

contribution of food inflation to the overall CPI is
estimated at 59 percent and non-food inflation at
40 percent as against 52.4 percent and 47.2 percent
respectively in the comparable period last year.
Considering the other CPI groups, the highest
inflation was in the medicine group and cleaning
groups with reported 10 month inflation of 8.4
percent and 9.8 percent respectively during JulyApril 2007-08. But since their weights are small in
the CPI basket (2.1 percent and 5.9 percent), their
contribution to inflation was small. On the other
hand, house rent and textile groups which have a
23.4 percent and 6.1 percent weight respectively in
the CPI have shown a higher pick in inflation from
6.7 percent to 8.7 percent and from 4.8 percent to
7.9 percent (See Table 7.4 and Fig-7.2).
7.3.1 Inflation on a Monthly Basis
The current fiscal year inflation on a year-on-year
(y-o-y) basis exhibits a significant increase in price
pressures. This years inflation started with 6.4
percent in July 2007 but continued to accelerate,
reaching a peak of 17.2 percent in April 2008.
Food inflation was close to 8.5 percent at the
124

beginning of the year but accelerated sharply to

25.5 percent in April 2008, recording one of the
highest increases since 1974-75, when it peaked at
27.8 percent. The exceptionally high trend in food
inflation during the current fiscal year indicates
that prices of a few (18) essential food items
registered sharp increase particularly during the
second half of the fiscal year. The high food
inflation adversely affects the low and fixed
income groups as a majority of their total monthly
expenditure is on food items. Thus, sharp increases
in prices of some key food items puts a lot of
pressure on the poor segment of society. Other
significant contributors to this years upward
inflationary trend include house rent, which is the
index that measures the cost of construction in
Pakistan, racing to 11.35 percent by April 2008.
Transport and communication also contributed a
heavy chunk by peaking at 17.92 percent in April
2008, given the unprecedented hike in global oil
prices, translating to domestic oil and
transportation costs. Rounding up, fuel and lighting
stood at 8.55 percent whereas Medicare stood at
7.44 percent in April 2008 (y-o-y). (See Fig.7.3,
Fig.7.4 and Table-7.5).
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Inflation
Table 7.5: Monthly Inflation Rate
2005-06
Period
CPI
Food
Non-food
9.0
9.7
8.5
Jul
8.4
7.8
8.8
Aug
8.5
7.5
9.2
Sep
8.3
6.4
9.6
Oct
7.9
5.8
9.4
Nov
8.5
8.1
8.8
Dec
8.8
8.2
9.2
Jan
8.1
7.5
8.4
Feb
6.9
5.4
8.0
Mar
6.2
3.6
8.0
Apr
7.1
5.6
8.2
May
7.7
7.8
7.5
Jun

CPI
Food
N-Food

28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
-2

2006-07
2007-08
Food
Non-food CPI
Food
Non-food
7.4
7.8
6.4
8.5
4.9
11.1
7.4
6.5
8.6
4.9
11.3
7.0
8.4
13.0
5.0
10.5
6.4
9.3
14.7
5.4
10.6
6.3
8.7
12.5
5.9
12.7
6.2
8.8
12.2
6.3
8.7
5.2
11.9
18.3
7.3
10.0
5.6
11.3
16.1
7.8
10.7
5.5
14.1
20.6
9.4
9.4
5.2
17.2
25.5
11.2
11.3
4.7
9.7
5.1
Source: Federal Bureau of Statistics
House Rent

Figure 7.4: Recent Trend in Components of

Non-food Inflation

Energy
Transport

24.00
20.00

Percent

16.00
12.00
8.00
4.00
0.00

Month

7.3.2 Inflation by Income Group

The analysis of inflation by income group provides
an explanation of the impact of inflation over
different income classes. The inflation rate of 12
percent estimated for the people of lower income
groups in the range of Rs 3000--5000 per month is
relatively higher over the other groups, which
shows that the high rate of inflation in term of
incidence has penalized the poor more than the rich
because of their inability to protect themselves
against high prices. The menace of inflation affects
all categories of people but the most heavily
impacted victims are the low income groups.
Given that the major share of their consumption
expenditure is incurred on food necessities, the
prices of which have increased drastically during
the current year 2007-08, the implications of

Apr-08

Dec-07

Apr-07

Aug-07

Dec-06

Apr-06

Aug-06

Dec-05

Apr-05

Aug-05

Dec-04

Apr-04

Aug-04

Dec-03

Aug-03

-4.00
July 02
Oct 02
Jan 03
Apr 03
July 03
Oct 03
Jan 04
Apr 04
July 04
Oct 04
Jan 05
Apr 05
July 05
Oct 05
Jan 06
Apr 06
July 06
Oct 06
Jan 07
Apr 07
July 07
Oct 07
Jan 08
Apr 08

Percent

Figure 7.3: Monthly CPI Inflation

CPI
7.6
8.9
8.7
8.1
8.1
8.9
6.6
7.4
7.7
6.9
7.4
7.0

Month

inflation on the poor segment of society has been

unfavorable in many respects. The price hike of
essential items are highly disturbing for the poor as
people with fixed incomes, especially the labor
class across the country, are adding pressure on
policy makers to curb inflation (See Table 7.6).
The effect of food inflation will differ among
households, where different tastes and expenditure
patterns are prevalent, thus some households will
benefit from higher prices whereas some will be
adversely affected. Therefore, it is worth
examining the impact of food price increases on
poverty in Pakistan. Inflation eats into real incomes
and expenditures which undermines the gains from
poverty reduction policies and human development
that an emerging country targets. To get a sense of
the varying impact of increases in food prices on
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Pakistan Economic Survey 2007-08

different clusters of society, food expenditure
shares by income quintile are given in Table 7.7.
The average share of food in total expenditure is
given as inversely proportionate to income across
the quintile groups. It is obvious from studying the
table that the poorer segments (quintile 1 and 2) of
society spend a larger share of their total
expenditure on food than the richer ones (quintile 4
Table 7.6: Inflation Rate by Income Groups
Overall
Up to Rs.
CPI
3,000
Period
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08(Jul-April)

10.8
11.8
7.8
5.7
3.6
4.4
3.5
3.1
4.6
9.3
7.9
7.8
10.3

10.6
11.7
7.9
5.6
3.2
4.5
3.0
2.9
5.3
10.2
7.7
8.3
11.9

and 5). Consequently the poorest 20 percent of the

population spend nearly two-thirds on food
expenditure whereas the richest 20 percent spend
only one-third. The implications of this are
staggering, given that a sharp rise in essential food
items will have a greater impact and risk associated
with a relatively low-income country like Pakistan.

Between Rs. 3,001

Between Rs.
Above Rs.
- Rs. 5,000
5,001-Rs. 12,000
12,000
(percentage change, period average)
10.7
10.8
11.3
11.9
11.8
11.0
7.8
7.9
8.0
5.6
5.9
6.2
3.4
3.8
4.5
4.3
4.5
4.7
4.9
3.4
3.6
1.8
3.1
3.1
5.1
4.7
4.3
9.8
9.4
8.9
7.5
7.6
8.3
8.3
8.0
7.4
12.2
11.1
9.2
Source: Federal Bureau of Statistics

TABLE 7.7: QUINTILES

Share of Food Expenditures to Total
Expenditures (%)
Top 17 major food items contribution
in Food Expenditure (%)
Contribution of Wheat in Total Food
Expenditure (%)
Contribution of Rice in Total Food
Expenditure (%)
Contribution of Vegetable Ghee in Total
Food Expenditure (%)
Contribution of Milk in Total Food
Expenditure (%)
Contribution of Pulses in Total Food
Expenditure (%)
Contribution of Beef in Total Food
Expenditure (%)
Contribution of Vegetables in Total Food
Expenditure (%)
Contribution of Sugar in Total Food
Expenditure (%)

1st

2nd

3rd

4th

5th

55.61%

52.63%

50.91%

46.29%

33.14%

48.79%

45.98%

43.33%

38.51%

25.41%

23.8%

20.7%

17.9%

15.0%

9.8%

4.4%

3.8%

3.7%

3.4%

3.0%

8.7%

8.0%

7.1%

6.3%

3.8%

15.7%

17.7%

19.0%

20.1%

20.2%

2.7%

2.6%

2.5%

2.4%

2.0%

2.4%

3.2%

3.4%

3.5%

3.6%

10.3%

9.7%

9.1%

8.7%

7.3%

8.1%
7.8%
7.5%
6.8%
5.1%
Source: Household Integrated Economic Survey, PSLM 2005-06
Note: The quintiles are based on households' total expenditure expressed in per capita terms. Quintiles one
represents the 20% of the population with the lowest per capita expenditure and so on.

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Further analysis of Table 7.7 reveals that the
poorest quintile spends nearly 24 percent of their
food expenditure on wheat alone while the richest
quintile only about 10 percent. The record high
wheat prices witnessed over the past year have had
serious consequences for the lowest two quintiles
because of the high share they dedicate to wheat
and wheat-flour. Similarly, other essential food
items for an average Pakistani household such as
pulses, rice, vegetables, milk, beef and sugar show
a similar trend. Prices of these crucial commodities
fluctuated throughout the year. For instance, wheat
prices in July 2007 were Rs. 12.43 per kg and by
May 2008, they had risen to Rs. 19.08 per kg, an
increase of 53.5 percent. Rice (Irri-6) prices also
had a big jump, from Rs. 22.42 per kg at the
beginning of the fiscal year to Rs. 46.41 per kg by
May 2008, a massive 107 percent increase. The

price of vegetable ghee, another staple item for the

poorer segment of society, showed a 43.8 percent
increase, jumping from Rs. 259.41 per 2.5 kg to
Rs. 373 per 2.5 kg. The poor spend more on
vegetables and staples whereas the rich can afford
more meat and dairy products. There is a pressing
need for the government to focus on the
underprivileged of society and ensure that they do
not fall deeper into poverty. Higher food prices
will lead to more unequal distributions of income
and expenditures because, as seen above, food
takes a greater share in total expenditure for poorer
individuals, particularly the poorest quintile.
Therefore, action must be taken to safeguard the
poor by mitigating the harmful impact of rising
food prices, since they feel the pinch of rising food
prices the most.

Wheat Prices

Prices of Pulses

Average Monthly Palm/Cooking Oil Prices

1,400

Masur

1,200

US $ per metric ton

Moong

70.00

Mash Pulse

60.00

Gram Pulse

50.00
40.00
30.00
20.00

1,000

400
International Palm Oil
Domestic Cooking Oil

300

800
250

600

200

400

7.3.3 Wholesale Price Index (WPI)

WPI on an annual average basis registered an
increase of 13.7 percent during the period July
April 2007-08 as against 6.9 percent in the

150
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08

Apr-08

Jan-08

Oct-07

Apr-07

July-07

Jan-07

Oct-06

Apr-06

July-06

Jan-06

Jul-05

Oct-05

Apr-05

Jan-05

Oct-04

July-04

200

Month

350

Pak Rs. per 2.5 ltr

80.00

(International)

Apr-08

Month

90.00

(Rs/Kg)

Jan-08

Month

Jul-07

200.0
Oct-07

18.00
Apr-07

300.0

Jan-07

23.00

Jul-06

400.0

Oct-06

28.00

Apr-08

Jan-08

Jul-07

Oct-07

Apr-07

Jan-07

Jul-06

Oct-06

Apr-06

Jan-06

Jul-05

Oct-05

Apr-05

Jan-05

150.00

500.0

Apr-06

250.00

600.0

33.00

Jan-06

350.00

38.00

Jul-05

450.00

700.0

Rice International ($/Ton)

Oct-05

550.00

43.00

Apr-05

Wheat (Rs/Kg)

800.0

Rice Basmati Broken (Rs/Kg)

Jan-05

Wheat Canada($/Ton)

650.00

Rice Prices

48.00

(Domesticl)

750.00

20.00
19.00
18.00
17.00
16.00
15.00
14.00
13.00
12.00
11.00
10.00

(Domestic)

(International)

850.00

July 2002 - April 2008

corresponding period last year. The major factors

contributing to this double digit increase in WPI
were the sharp increase in the indices of building
material prices and the raw materials price group.
However, the impact of the food group, both in
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Pakistan Economic Survey 2007-08

term of percent change and its contribution to the
over all WPI increase, was the largest contributor
and it appears to be emanating mainly from an
increase in the wholesale prices of key consumer
items in the country such as wheat (32%), rice
(18.2%), edible oils (40 %), masoor pulse (57%),
vegetables (44%) chicken farm (32%) following
the impact of supply shortages in local markets and
the global market price-trends of these items. An
increase of 11.6 percent in the raw materials price
group was a reflection of a substantial increase in
prices of cotton, pig Iron and cotton-seed. The
exceptionally high increases in global oil prices

have induced an increase in local prices by pushing

up the index of this group to 16.0 percent in the
first ten months of this fiscal year (2007-08) as
against 6.0 percent last year. The building
materials group registered an increase of 12.8
percent over the corresponding period because of
higher prices of iron bars, bricks, glass-sheets and
other construction related items. Prices of these
items continue to remain high during the current
year owing to rising demand from construction
activities in the country. (See Table-7.8 for
details).

Table 7.8: Components of WPI (% change)

Commodity Groups
WPI
Food
Non-Food
Raw Material
Fuel & Lubricants
Manufacturers
Building Materials

Weight
100
42.12
57.88
7.99
19.29
25.87
4.73

7.3.4 Sensitive Price Indicator (SPI)

The SPI shows the weekly changes in prices of 53
essential items of daily use. During the current
fiscal year (JulyApril) 2007-08, the increase in
SPI is estimated at 14.1 percent over corresponding
increase of 11.1 percent from last year. An analysis
of 53 essential items can be further de-composed
into food, non-food, utility and transport groups
revealing that the highest increase of 14.95 percent
was in food items. The contribution of the food
items group in the overall SPI works out to be 82
percent. The observed increase appears to reflect
the phenomenal increase in food staples owing
largely to the demand-supply gap in the
international as well as local markets. An itemwise review of food stuff indicates that the
observed increase has been taken over as a result
of an extremely high increase in prices of 9 items.
These few items account for 50 percent of the
weight in SPI and have contributed an imposing 75
percent to the overall increase in SPI. Where the

% Point contribution
July-April
2007-08
2006-07
2007-08
13.7
6.9
13.7
16.7
51.8
51.4
11.5
48.5
48.7
11.6
15.9
6.8
16.0
16.7
22.6
6.0
11.8
11.4
12.8
3.5
4.4
Source: Federal Bureau of Statistics

July-April
2006-07
6.9
8.5
5.8
13.8
6.0
3.2
5.1

contribution of wheat-flour is estimated at 22

percent, Milk fresh at 14.6 percent, vegetable ghee
(Loose) 11.7 percent, vegetable ghee (2.5 Kg tin)
7.7 percent, chicken farm 1.8 percent, beef 1.1
percent and red chillies 2.9 percent. The current
increase in the prices of wheat and wheat flour
represents the global price trend of these
commodities as well as the inappropriate handling
of the wheat situation including speculative
hoarding by the private sector. The increase in
ghee prices in the local market is due to a price
hike of palm oil, a basic input in the ghee/cooking
oil industry. Palm oil prices in the international
market increased from $811 per ton in July 2007 to
$1,174 per ton in April 2008 or an increase of 45
percent. When the price of basic inputs increase,
the overall price is bound to show an increase too.
The price of rice has increased at an unprecedented
level in the international market. Pakistan, being
part of the global economy, cannot remain immune
to such global developments on price front, and
hence this is reflected in the local markets.

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Table 7.9: Prices of Essential Commodities
Items
Wheat
Wheat Flour
Rice Basmati Broken
Rice Irri-6
Masur Pulse
Mash Pulse
Gram Pulse
Beef
Mutton
Eggs (Farm)
Chicken (Farm)
Bred Plain
Milk Fresh
Milk Powder
Vegetable Ghee
Veg. Ghee (Loose)
Mustered Oil
Cooking Oil
Tomato
Red Chilies

Unit

2005-06

2006-07

% Change
Jul-Dec
2007

Kg
Kg
Kg
Kg
Kg
Kg
Kg
Kg
Kg
Dozen
Kg
Each
Ltr
400 Gm
2.5 Kg
Kg
Ltr
2.5Ltr
Kg
Kg

11.55
13.07
20.15
16.03
45.07
52.96
31.17
106.8
202.07
34.74
65.54
14.23
23.89
108.46
203.63
58.93
66.7
204.4
18.86
70.75

11.94
13.61
22.96
17.5
44.22
70.23
41.05
117.81
223.94
38.72
73.28
15.34
26.72
121.37
223.16
70.54
76.71
223.59
28.52
94.67

37.5
25.7
8.5
9.2
20.3
-1.9
-1.5
0.7
0.9
28.2
14.5
15.6
2.1
7.7
11.3
16.2
31.3
11.3
19.5
12

% Change
Jul-Apr
(on average basis)
2007-08
31.65
26.39
59.23
51.43
46.78
1.73
0.43
4.03
5.33
26.45
10.91
17.03
13.13
21.4
37.6
53.28
54.12
38.47
13.76
52.67

Percent Point
Contribution
1.4
22.28
5.46
0.81
1.78
0.06
0.03
1.14
1.06
1.95
1.85
1.54
14.65
0.14
7.74
11.75
0.45
5.19
1.03
2.97

Source :Federal Bureau Statistics

7.3.5 Regional Price Developments

The analysis given in Table 7.10 shows the prices
of 19 consumer items prevailing on 2nd May 2008
in the cities of Islamabad, New Delhi, Dhaka,
Colombo, Tehran and Kabul. Comparative analysis
of these 19 selected food items indicates that the
prices of wheat, wheat flour, sugar, and moong
pulse were found to be lower in Pakistan than
those in India, Bangladesh and Sri Lanka. The
variations in prices of these items in the given
cities are also subject to their consumption pattern.
Despite the relatively close proximities of the
reported cities, it is interesting to see some stark
variations in prices of some commodities. These
differences encourage hoarding and smuggling, as
profiteers seek to sell their commodities for the
highest available price in the region. The
government needs to try and downplay this by

sealing off borders while at the same time making

domestic prices at par with regional ones.
7.4 Step-taken to control inflation
The prices of essential items have increased for a
variety of reasons. These include (i) over 100
percent increase in international oil prices
beginning April 1st 2007 till today, (ii) over 200
percent increase in global palm oil prices, and (iii)
a 150 percent increase in wheat prices. These
developments have created serious difficulties for
all the developing countries including Pakistan.
The government is fully aware of these events and
has taken various measures to stabilize the prices
of essential commodities in the country and bring
relief to the citizens.

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The following measures have been taken/being
taken to stabilize the commodity prices and

supplies:

Table 7.10: Comparative Prices in Region

Items

Unit

Islamabad
2/5/2008
19.00
20.88
53.13
95.31
58.38
76.88
60.75
141.25
273.13
96.00
54.00
27.31
130.00
153.20
20.25
20.00
34.00
240.00
68.75

(Value in Pakistani Rupees)

Dhaka
New Delhi
Colombo
Tehran
Kabul
2/4/2008
1/5/2008
30/04/08
23/01/08 24/04/08
34.92
20.00
82.11
*
57.20
44.12
22.40
46.92
*
59.80
68.02
48.00
117.30
117.97
104.00
70.77
83.20
129.03
98.31
65.00
66.18
86.40
129.03
78.65
65.00
59.74
89.60
129.03
104.00
64.34
54.20
129.03
85.20
65.00
238.99
96.00
199.41
524.31
221.00
238.99
288.00
351.90
589.85
286.00
78.13
144.00
240.46
121.25
91.00
44.12
35.20
63.24
131.08
52.00
38.60
28.80
36.36
45.88
29.90
70.77
80.00
234.60
122.20
98.35
108.80
290.31
104.86
124.80
13.78
11.20
43.69
32.77
16.90
14.70
12.80
35.19
32.77
16.90
14.70
24.00
41.05
52.43
32.50
110.30
208.00
108.50
78.65
156.00
32.17
160.00
39.88
131.08
52.00
Source: Ministry of Commerce

Kg
Wheat
Kg
Wheat Flour
Kg
Rice Basmati
Kg
Masoor Pulse
Kg
Moong Pulse
Kg
Mash Pulse
Kg
Gram Pulse
Kg
Beef
Kg
Mutton
Kg
Chick Farm
Dozn
Eggs
Kg
Sugar
Kg
Veg. Ghee (loose)
Ltr
Edible Oil (Dalda) loose
Kg
Potato
Kg
Onion
Kg
Tomato
Kg
Red Chilies
Kg
Garlic
Value in Pak Rupees
- Not available
* As per policy of Government of Iran, wheat and wheat flour are not sold in the open market

a) The support price for wheat has been increased

from Rs. 425/ 40Kg to Rs.625/40Kg for the
current wheat season with a view of providing
the right price to Pakistani farmers,
encouraging them to grow more wheat.
Furthermore, a higher support price of wheat
will also help in discouraging smuggling and
will ensure adequate supplies of this
commodity in the country. In addition to this, a
payment of Rs. 25 per 100 kg bag as
transportation charges will be allowed to the
farmers. The government has taken special
measures to ensure Pakistan's borders are
sealed so that there is no inclination of
hoarding. The import of 2.5 million tons of
wheat was also approved to ease supply
pressures. In May 2008, the government
allowed the private sector to import wheat for
which the customs duty was reduced to zero.
Also, the Trading Corporation of Pakistan
(TCP) would ensure the import of one million
tones of wheat before August 31st 2008. The
government will also maintain strategic
130

reserves of wheat/ wheat flour in order to

stabilize their prices in the domestic market.
Encouragingly, all these efforts have eased the
price of wheat at the procurement stage.
b) The Government has set up the Secretaries
Committee to monitor prices of essential
commodities under the chairmanship of the
Finance Minister. This Committee meets
frequently to monitor the prices and takes
necessary action. The Prime Minister has
authorized the Committee to take all necessary
decisions in anticipation of ECCs approval.
c) In order to stabilize the prices of rice in the
country, the Committee negotiated an
agreement with the Rice Export Association of
Pakistan (REAP). Under this agreement REAP
will provide 200,000 tons of rice to Utility
Store Corporation (USC) at the mutually
agreed price which will be fixed for the next
six months. REAP will also hold 300,000 tons
of rice to ensure its availability in the country

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Inflation
and sell it through fair price shops/ USCs
outlets if the prices start rising again.
d) The government also provides sugar at reduced
rates to the consumer. TCP imported sugar is
being sold at subsidized rates to USC which
then sells it at the governments fixed rate to
the consumer. The government then picks up
the price differential between the cost and sale
price of sugar. In this manner, a huge amount
of subsidy is being paid to both TCP and USC.
e) The Government provided relief on the sale of
Atta, pulses and edible oil at reduced rate
through Utility Stores Corporation (USC). The
USC also provides selected food items at
subsidized rates during the month of Ramadan
every year. The government provided a
subsidy for the market price differential on the
basis of sales turn-over under these packages
to USC.
f) Imports have been liberalized to improve the
supply situation of essential commodities. The
government has also allowed duty free imports
of wheat and other essential consumer items
with a view to augment their supplies and
reduce their prices.
g) The Government is providing all pulses and
other essential edibles at Utility Stores
Corporation at cheaper rates than those found
on the open market.
h) To ensure competition and fair play in the
market, the Monopoly Control Authority
(MCA) has been converted into Competition
Commission of Pakistan (CCP) by granting it
valuable powers to prevent non-competitive
behaviour in the market.
7.5 Future outlook of Inflation
The government is likely to miss the inflation
target for 2007-08 of 6.5% and end the year with
average inflation rate of over 11.0%. The
government has taken several measures this fiscal
year to contain the rapid rise in inflation for next
year. Monetary tightening by the SBP will likely
continue into next year as the central bank will try

and contain the money supply and credit to private

sector. A number of measures are being taken to
contain the price hike in the country including
easing of imports for commodities that are facing
supply shortages and some reforms that are geared
towards increasing agricultural output. The
increase in supply should also lead to a further
deceleration in inflation in the coming months.
Keeping these considerations in mind, it is
expected that the next years inflation may average
11.0percent. The challenge for the government is
to attain a proper balance between immediate
responses to protect the vulnerable groups, and
short term efforts to ensure that inputs and credit
are available to support a supply response over the
coming crop cycles. Medium-to-long term efforts
should be to increase supply by making
agricultural land and labor more productive, thus
having enough quantities of essential items to feed
the country as well as for export purposes.
Henceforth, inflation needs to be nipped in the bud
to limit its impact on long-term growth. Economic
growth may suffer in the short run but its the price
the economy must pay in order to return to its long
term high growth path. In the interim, the
government can undertake targeted subsidy
programs to alleviate the impact of rising inflation
on the poor segments of society.
Both food and energy prices have become a cause
for concern for policy-makers around the world,
therefore it is essential that these issues be raised at
an international level by the political leadership so
as to raise awareness and seek solutions to this
crisis. Reduction in poverty targets that were set by
the UN will have to be revised as the current crisis
has deteriorated poverty-reduction efforts over the
last decade. Even though global growth forecasts
have been scaled back, prices have been
accelerating, indicating that it would be unwise to
be complacent, and that higher prices are not
merely a short-term phenomenon that markets will
automatically correct. This has strong implications
for macroeconomic stability, poverty reduction and
income inequality and therefore requires corrective
measures at state and global levels.

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TABLE 7.3 (B)

ANNUAL CHANGES IN PRICE INDICES AND GDP DEFLATOR
Consumer
Wholesale
Sensitive
Fiscal
Price
Price
Price
Annual
Year
Index*
Index*
Indicator*
GDP Deflator@
1990-91
12.66
11.73
12.59
1991-92
10.58
9.84
10.54
10.07
1992-93
9.83
7.36
10.71
8.89
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
1997-98
7.81
6.58
7.35
6.55
1998-99
5.74
6.35
6.44
5.85
1999-00
3.58
1.77
1.83
2.78
2000-01
4.41
6.21
4.84
6.72
2001-02
3.54
2.08
3.37
2.49
2002-03
3.10
5.57
3.58
4.42
2003-04
4.57
7.91
6.83
7.74
2004-05
9.28
6.75
11.55
7.02
2005-06
7.92
10.10
7.02
10.49
2006-07
7.77
6.94
10.82
7.98
Jul-Apr
2006-07
7.89
6.92
11.13
7.98
2007-08
10.30
13.70
14.10
13.41
P : Provisional
Source: Federal Bureau of Statistics
* : WPI, CPI & SPI Base Year = 1990-91 series have been converted into Base Year 2000-01.
@ : GDP Deflator Base Year 1980-81=100 has been changed with 1999-2000 = 100 as new base year.

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Chapter 08

TRADE AND PAYMENTS

Introduction
Domestic and external environment play an
important role in shaping the countrys trade with
rest of the world. The outgoing fiscal year 2007-08
witnessed a series of developments, both on
domestic and external front, which adversely
affected the countrys overall balance of payments,
including the trade balance. Unsettling political
landscape on domestic side and unprecedented
surge in oil and commodity prices, along with
slower growth in world economy in general and
the US economy in particular on external front
played an important role in shaping the outcomes
of Pakistans trade sector in 2007-08.
Pakistans export performance has been impressive
in recent years (2002-03 to 2005-06) with exports
registering an average growth of 16 percent per
annum on the back of strong macroeconomic
policies pursued at home and international trading
environment remaining hospitable. Pakistans
export performance was dismal in 2006-07 as it
witnessed abrupt and sharp deceleration to less
than 4 percent. As will be discussed later, exports,
when viewed in the back of last years
performance, did manage to recover somewhat this
year but its performance has remained far short of
the average growth of 16 percent achieved during
2002-03 to 2005-06.
Pakistans exports suffer from serious structural
issues which need to be addressed primarily by the
industry itself, with government playing its role of
a facilitator. Textile is the backbone of Pakistans
exports but bears various tribulations. These
include: (i) low value added and poor quality
products fetching low international prices; (ii) the
machinery installed in recent years has depreciated
considerably relative to Pakistans competitors;
(iii) these machines are power-intensive, less
productive and carry high maintenance cost; (iv)

augmented wastage of inputs adding to the cost of

production; (v) little or no efforts on the part of
industry to improve their workers skills; (vi)
industry spending less money on research and
development; and (vii) export houses lacking
capacity to meet bulk orders as well as meeting
requirements of consumers in terms of fashion,
design and delivery schedule.
Pakistans import grew at an average rate of 29
percent per annum during 2002-03 to 2005-06 on
the back of strong economic growth which
triggered a consequential growth in investment.
The surge in investment led to a substantial
increase in imports. However, import growth
slowed to a normal level in the fiscal year 2006-07
but registered a sharp pick up once again in the
current fiscal year 2007-08 on account of
unprecedented rise in oil import bills and some one
off elements in the shape of imports of wheat and
fertilizer. As a result, Pakistans trade and current
account deficits have widened substantially in this
year contributing to serious macro economic
imbalances. Correction of imbalances through
shaving off aggregate demand by appropriate
policies should be the top most priority of the
government.
1

EXPORTS :
Overall exports recorded a growth of 10.2 percent
during the first ten months (July- April) of the
current fiscal year against a growth of 3.6 percent
in the same period last year. In absolute terms,
exports have increased from $ 13847.3 million to $
15255.5 million. (See Table 8.1)
However,
1

The analysis of exports and imports and trade balance is based on trade
data released by Federal Bureau of Statistics (FBS) on custom basis. The
State Bank of Pakistan (SBP) prepares balance of payments for the country
and uses exports, imports and trade gap numbers on actual payment basis.
Therefore, the trade numbers will differ with each other.

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Pakistan Economic Survey 2007-08

exports of $15255.5 million in ten months imply
that the target of $19 billion exports is likely to be
achieved. Broad categories of exports suggest that
with the exception of textile manufactures, all
other categories of exports registered stellar
growth. For example, exports of food group were
up by 22.4 percent; petroleum group exports
registered an increase of 38 percent; exports of
other manufactures and other items posted
handsome growth of 33.2 percent and 59.5 percent,
respectively. Textile manufactures, accounted for
almost 57 percent of total exports, performed
poorly as it registered a decline of 2.5 percent.
Textile exports are suffering from structural issues
which need to be addressed by the industry itself.
The government has provided financial support to
textile sector through R & D during the current
fiscal year. Even this financial support could not
help improve the performance of textile exports. It
is therefore, clear that the problems are structural
in nature and cannot be resolved through financial
support of the government.
Exports of food group accounting for 13.2 percent
in total exports grew by 22.4 percent and
contributed 26.1 percent in overall exports growth.
Within food group, rice accounting for 60 percent,
registered an impressive growth of 28.5 percent.
Pakistan clearly benefited from the unprecedented
rise in international price of rice. Since Pakistan is
a net exporter of rice, it is likely to benefit from the
elevated international price of rice in coming years.
This will also encourage farmers in Pakistan to
grow more rice and benefit from the current hike in
international price of rice. The other important
component of food group which registered
impressive growth includes fruits; oil seeds, nuts
and kernels; meat and meat preparations; fish and
fish preparations. (see Table 8.1).
Export of textile manufactures, accounting for 57
percent of total exports not only registered a
negative growth of 2.5 percent but also was a drag
on the overall performance of exports. With the
exception of raw cotton and other textile materials,
all other major components of textile manufactures
registered negative growth in the current fiscal
year. It is important to note that the unit value of

all the major components of textile manufactures

were up substantially but exports in quantum term
registered a sharp decline across the board with
exception of raw cotton. In other words Pakistans
textile exports could not benefit from higher
international prices and as such the exports
performance of this sector has been dismal in
2007-08 (see Table 8.1). The dismal performance
of textile exports can be attributed, beside their
structural issues, to rising cost of production owing
to increase in domestic cotton prices and stifling
power shortages. In addition, the deteriorating law
and order situation in the country also resulted in
reported diversion of export orders to other
countries. Poor quality of cotton on account of
contaminated cotton issue has also adversely
affected the export of spinning industry.
Furthermore, textile exports appear to have also
suffered from the slow down in the US economy
which has been the largest destination for Pakistani
exports during the last few years. In addition,
Pakistan also faced tough competition from China,
India, Bangladesh and Turkey in the EU market for
textile apparel. In the case of bed wear exports, its
exports to EU market are rising after the reduction
of anti-dumping duty on this category from the
previous level of 13.1 percent to 5.8 percent.
However, in the US market, this category of export
faces tough competition in terms of prices,
especially from China.
Export of petroleum group accounting for 6
percent of total exports contributed 18.2 percent in
the overall exports growth for the year. Export of
petroleum product and Naphtha
registered an
impressive growth of 83 percent and 16 percent
respectively. (see Table 8.1).
Unlike textile manufactures, exports of other
manufactures accounting for 19 percent of total
exports posted a stellar growth of 33.2 percent in
the current fiscal year. Accordingly, it contributed
over 50 percent to this year overall exports growth.
The major performers under this category of
exports
include
leather
tanned;
leather
manufacturer; surgical goods; chemical and
pharmaceutical products. The performance of
carpets & rugs and engineering goods has been
lackluster as they registered negative growth. All
other manufactures under this category of exports

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Trade and Payments

registered impressive growth of over 100 percent
during the current fiscal year (see Table 8.1).
Performance of this category of exports is indeed
encouraging when viewed at back of power and
skilled labor shortages and political disturbances in
the country.

Export of all other items accounting for over 5

percent of total exports grew by almost 60 percent
and accordingly, contributed 20.6 percent to this
years overall exports growth. (see Table 8.1).

Table 8.1: Structure of Exports

July-April
Particulars
A. Food Group
Rice
Fish & Fish Preparation
Fruits
Spices
Oil Seeds, Nuts & Kernels
Meat & Meat Preparation
All other Food Items
B. Textile Manufactures
Raw Cotton
Cotton Yarn
Cotton Cloth
Knitwear
Bed Wear
Towels
Readymade Garments
Made-up Articles
Other Textile Materials
C. Petroleum Group
Petroleum Crude
Petroleum Products
Petroleum Top Naptha
Solid Fuel (Coal)
D. Other Manufactures
Carpets. Rugs & mats
Sports Goods
Leather Tanned
Leather Manufactures
Surgical G. & Med.Inst.
Chemicals & Pharma. Pro.
Engineering Goods
All other manufactures
E. All Other Items
Total
* Provisional

2007-08*

2006-07

2007.3
1210.9
165.9
127.3
21.5
35.3
41.2
405.3
8649.6
58.1
1070.6
1572.5
1504.3
1565.0
497.6
1200.2
428.6
752.7
930.9
0.0
407.7
523.2
0.1
2890.7
182.3
244.5
338.6
570.7
202.6
498.4
163.7
690
777.0
15255.5

1640.3
942.0
158.2
95.2
20.2
13.8
33.7
377.2
8875.0
45.3
1176.5
1717.5
1479.9
1634.7
506.0
1250.8
419.4
645.0
674.1
0.0
222.8
450.9
0.4
2170.8
193.3
234.0
279.8
461.2
152.1
315.9
191.7
342.8
487.1
13847.3

As shown in Figure 8.1, the contribution of textile

manufactures in overall exports has been
fluctuating, at best ,over the last five years. The
performance of textile manufacturers has been far
from satisfactory during the fiscal year 2007-08.
This points to the fact that a natural diversification
of exports is underway and Pakistan appears to be

% Change
22.4
28.5
4.9
33.7
6.6
155.1
22.3
7.4
-2.5
28.5
-9.0
-8.4
1.7
-4.3
-1.7
-4.0
2.2
16.7
38.1
0.0
83.0
16.0
-84.9
33.2
-5.7
4.5
21.0
23.7
33.2
57.8
-14.6
101.3
59.5
10.2

Absolute
Increase/
Decrease
367.0

($ Millions)
Percentage
Contribution to
Increase in Exports
26.1

-225.5

-16.0

256.9

18.2

719.9

51.1

289.9
20.6
1408.2
100.0
Source: Federal Bureau of Statistics

moving away from conventional textile products to

new non-conventional items such as other
manufactures, petroleum product and food group
(see figure 8.1). However, the pace of
diversification is painfully slow. The current food
price hike at the global and national level provides
window of opportunity for Pakistani farmers to
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Pakistan Economic Survey 2007-08

bring more area under cultivation for rice and
wheat crop as they have been receiving higher
prices for their crops. Pakistan can emerge as one

of the major exporters of rice and wheat, therefore,

contributing substantially to overall export growth.

Fig-8.1: Major Contributors to Additional Export Earnings

150
120

90
60
30
0
-30
-60
FY 04
Food Group

FY 05

T extile Group

FY 06

Petroleum

Trends in Monthly Exports

The monthly exports for the period July-April,
2007-08 remained above the corresponding months
of the last year, averaging $ 1495 million per
month as against an average of $ 1419 million last
year. (See Table 8.2)
Concentration of Exports
Pakistan's exports are highly concentrated in a few
items namely, cotton, leather, rice, synthetic
textiles and sports goods. These five categories of
exports account for 72.4 percent of total exports
during the first nine months of 2007-08 with cotton
manufacturers alone contributing 54.7 percent,
followed by rice (7.1%), leather (6.1%), synthetic
textiles (2.9%) and sports goods (1.6%). The
degree of concentration has changed little from the
last fiscal year. The annual percentage shares of
Table 8.3:Pakistans Major Exports
Commodity
98-99
99-00
Cotton
Manufacturers
59.1
61.0
Leather
6.9
6.3
Rice
6.9
6.3
Synthetic Textiles
5.1
5.3
Sports Goods
3.3
3.3
Sub-Total
81.3
82.2
Others
18.7
17.8
Total
100.0
100.0
*July-March (Provisional)

FY 07

Other Manufactures Group

FY08
All Other Items

the major export commodities are given in Table

8.3 as well as in Figs-8.2 & 8.3.
Table 8.2: Monthly Exports
Month
($ Million)
2006-07
2007-08
July
1342.0
1471.6
August
1498.5
1464.6
September
1412.8
1484.5
October
1262.6
1378.2
November
1374.9
1539.2
December
1516.6
1320.2
January
1175.6
1476.5
February
1271.9
1554.9
March *
1523.1
1786.4
April
1808.5
1469.3
Monthly Average
1418.7
1494.5
Source: Federal Bureau of Statistics.

00-01

01-02

02-03

03-04

58.9
7.5
5.7
5.9
2.9
80.9
19.1
100.0

59.4
6.8
4.9
4.5
3.3
78.9
21.1
100.0

63.3
6.2
5.0
5.1
3.0
82.6
17.4
100.0

62.3
5.4
5.2
3.8
2.6
79.3
20.7
100.0

04-05

(Percentage Share)
05-06
06-07 07-08*

57.4
59.4
59.7
54.7
5.8
6.9
5.2
6.1
6.5
7.0
6.6
7.1
2.1
1.2
2.5
2.9
2.1
2.1
1.7
1.6
73.9
76.6
75.7
72.4
26.1
23.4
24.3
27.6
100.0
100.0
100.0
100.0
Source: Ministry of Commerce & FBS.

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Trade and Payments

Fig- 8.2: Pakistan's Major Exports 1998-99 [%S hare]

Fig-8.3: Pakistan's Major Exports Jul-Mar 2007-08 [% share]

Others
18%
Sports Goods
3%

Synthetic
T extiles
5%

Others
28%

Cotton
Manufacturer
60%
Rice
7%

Sports Goods
2%
Synthetic
T extiles
3%

Leather
7%

Pakistans exports were slowly moving toward

higher value added in textile as shares of bedwear,
towels, and knitwear have increased over the last
seven years. But the performance during the
current fiscal year shows a decline in the share of
these high value added exports. Beside this, the
Table 8.4: Export of Textile Manufactures
Item
2000-01 2001-02
Cotton Yarn
18.7
16.1
Cotton Cloth
17.9
19.6
Knitwear
15.8
14.6
Bed wear
12.9
15.9
Towels
4.2
4.6
Tents, Canvas &
0.9
0.9
Tarpaulin
Readymade Garments
14.4
15.1
Synthetic Textiles
9.5
7.1
Made up Articles
5.7
6.1
Others
100.0
100.0
*July-March (Provisional)

Cotton
Manufacturers
54%

Rice
7%

Leather
6%

share of cotton yarn and cotton cloth has also

witnessed a decline. However, the shares of other
categories of textile exports such as ready made
garments, synthetic textile and made up articles
have shown a marginal increase during the first
nine months of current fiscal year. (See Table 8. 4)

2002-03
12.9
18.6
15.9
18.4
5.2
1.0

2003-04
14.0
21.3
18.1
17.2
5.0
0.9

2004-05
12.7
23.3
18.9
16.4
5.9
0.8

15.1
7.9
5.0
100.0

12.4
5.9
5.2
100.0

12.9
3.5
5.5
0.1
100.0

Composition of Exports
Pakistans export composition has changed
significantly since early 1990s as it moved from
primary and semi manufactured exports to
manufactured exports (See Table 8.5). However,
during the last three years the export composition
has observed no change with both primary and
semi manufactured exports contributing 11
percent, while a major bulk of contribution
coming from manufactured goods, that is, 78
percent. The composition of Pakistans export
reflects that it doesnt rely heavily on primary
commodities for foreign exchange earnings. What

2005-06
13.7
21.6
17.6
20.8
5.8
0.3

2006-07
13.6
19.3
18.7
19.0
5.7
0.7

(Share)
2007-08*
12.4
17.7
17.3
18.1
5.6
0.7

13.8
13.2
14.1
2.0
4.0
5.1
4.3
4.5
5.0
0.1
1.3
4.0
100.0
100.0
100.0
Source: FBS & Finance Division.

Pakistans economy lacks is the export of high

technological products and software
Direction of Exports
Like the concentration of Pakistans export in few
items, the countrys exports are also highly
concentrated in only few countries. USA,
Germany, Japan, UK, Hong Kong, Dubai and
Saudi Arabia alone account for almost one-half of
Pakistans export. Continuing the past trend, these
seven markets remained the major destinations for
Pakistani export during the current fiscal year with
a marginal diversification. US remained by far the
major destination for Pakistans exports accounting
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Pakistan Economic Survey 2007-08

for 26.4 percent, followed by U.K, Germany and
Table 8.5: Composition of Exports
Year
Primary Commodities
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
2005-06
11
2006-07
11
July-March
2006-07
11
2007-08 *
11
* Provisional

Semi-Manufactures
21
25
21
18
15
15
14
11
12
10
11
11
11
11

Since Pakistans exports are highly concentrated in

few items and few countries, a more diversified
export mix both in terms of commodities and
markets is necessary. Heavy concentration of
exports in few commodities and few markets can
lead to export instability. Besides the issue of
export diversification, other broad-based measures
need to be undertaken to address the constraints
faced by the export sector. In this regard, private
sector should increase its competitiveness by
employing state of the art machinery, better
management, and cost effectiveness. Other major
problems such as low value addition and poor
quality; obsolete use of machinery and technology;
Table 8.6: Major Exports Markets
Country
98-99
99-00
00-01
USA
21.8
24.8
24.4
Germany
6.6
6.0
5.3
Japan
3.5
3.1
2.1
UK
6.6
6.8
6.3
Hong Kong
7.1
6.1
5.5
Dubai
5.4
5.7
5.3
Saudi Arabia
2.4
2.5
2.9
Sub-Total
53.4
55.0
51.8
Other
46.6
45.0
48.2
Countries
Total
100.0
100.0
100.0
*July - November

Saudi Arabia.(See Table 8.6)

Manufactured Goods
64
64
68
70
73
72
75
78
78
79
78
78

(% Share)
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

78
100.0
78
100.0
Source: Federal Bureau of Statistics

higher wastage of inputs adding to the cost of

production; low labor productivity; little spending
on research and development; export houses
lacking capacity to meet bulk orders; inability to
meet requirements of consumers in terms of
fashion and design; non-adherence to contracted
quality and delivery schedule, lack of marketing
techniques also needs to be addressed.
Government should play its role as a facilitator in
achieving the objective of raising exports by
providing a strong macro economic environment
with a stable exchange rate, low cost of capital and
strong infrastructure.

01-02
24.7
4.9
1.8
7.2
4.8
7.9
3.6
54.9
45.1

02-03
23.5
5.2
1.3
7.1
4.6
9.0
4.3
55.0
45.0

03-04
23.9
4.9
1.1
7.6
4.7
7.3
2.8
52.3
47.7

04-05
23.9
4.8
1.1
6.2
3.9
3.3
2.5
45.7
54.3

100.0

100.0

100.0

100.0

05-06
25.5
4..2
0.8
5.4
4.1
5.6
2.0
47.6
52.4

(Percentage Share)
06-07
07-08*
24.6
26.4
4.1
4.3
0.7
0.8
5.6
5.6
3.9
4.0
7.5
1.6
1.7
1.7
48.1
44.4
51.9
55.6

100.0
100.0
100.0
Source: Ministry of Commerce.

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Trade and Payments

Imports
Imports during the first ten months (July-April) of
the current fiscal year (2007-08) grew by 28.3
percent compared with the same period of last
year, reaching to $ 32.06 billion (See Table 8.7).
After growing at an average rate of 29 percent per
annum during 2003-04, Pakistans import growth
slowed to a moderate level of 6.9 percent in the
last fiscal year (2006-07). Imports growth
exhibited a sharp pick up in 2007-08 in the back of
extra ordinary surge in the imports of petroleum
products as well as imports of food group and raw
material. Non-oil imports were up by 22.5 percent
and non-oil and non food imports surged by 18.8
percent during the first ten months (July-April) of
the current fiscal year (See Table 8.7).
Imports of food group were up by 48.6 percent in
the current fiscal year mainly on account of
unanticipated imports of wheat amounting $ 819
million and extra ordinary surge (70.4%) on the
imports of edible oil due to sky-rocketing price of
palm oil in international market. Within food
group, more than 67 percent increase is attributed
to imports of wheat alone, followed by 47 percent
from edible oil imports. Despite having a bumper
wheat crop of 23.3 million tons, Pakistan had to
import 1.7 million tons of wheat at a time when the
prices in international market were all time high.
The prices of palm oil in international market
surged mainly on account of convergence of palm
oil from consumption to bio-diesel, there by
creating shortages in international market.
In other words, more than the entire increase in the
import of food group can be attributed to these two
items-wheat and edible oil. Sugar, pulses, tea and
milk and milk food registered a combined decline
of $330 million leaving the absolute increase of
$1152 million in the imports of food group.
Imports of food group accounted for 11 percent of
total imports but contributed 16.3 percent in the
overall growth of imports in the current fiscal year
(See Table 8.7 & 8.8).
Imports of machinery posted a modest increase of
6.9 percent in the first ten months (July-April) of
current fiscal year reaching to $4224.5 million.
Within machinery group, imports of power
generating machines; construction and mining

machines and other machinery showed a

substantial increase of 38.2 percent, 33.1 percent
and 9.9 percent, respectively. The rise in the
import of these different categories of machines is
attributed to ongoing work on various power and
construction projects in the country. A large part of
the growth in power generating machinery imports
was on account of needs of IPPs that achieved
financial closure during the first seven months
(July-Jan) of current fiscal year. The absolute
increase in imports of these three categories of
machines amounted to $432 million, 59 percent
more than the total import of the machinery group.
Within the machinery group, the combined decline
in the imports of textile machinery, office
machines, air crafts, ships and boats, and
agriculture machinery amounted to $161 million,
thus arriving at an absolute increase of $271
million in the imports of machinery group.
Machinery group accounts for 13.2 percent of total
imports but contributed only 3.8 percent in the
overall imports of this year. (See Tables 8.7 &
8.8).
Imports of petroleum group witnessed an extra
ordinary surge at 47 percent, amounting to $8670
million. Within petroleum group, both product and
crude posted an increase of 53.6 percent and 40.1
percent, respectively in first ten months (JulyApril) of current fiscal year. Petroleum group
accounts for 27 percent of total imports but
contributed 39 percent in the overall import growth
for the year. (See Table 8.7 & 8.8) The surge in
imports of petroleum group has been the result of
an extra ordinary increase in the prices of POL
products as well as substantial increase in its
quantity. The oil prices in international market are
currently hovering around $130 per barrel. If the
prices stayed at this level during the remaining
months of the current fiscal year, oil import bill
will likely to touch $11 billion. Apart from price
factor, the quantity of oil imports has also
contributed in the extra-ordinary surge in imports.
The rise in the quantity of petroleum products was
on account of higher demand of furnace oil for
power generation as the supply of gas to power
sector has been relatively less this fiscal year.
Unlike in the previous years, the imports of
consumer durable registered a decline of 1.6
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Pakistan Economic Survey 2007-08

percent in the first ten months (July-April) of the
current fiscal year. Within consumer durables,
imports of electrical machinery and appliances
grew by 14.3 percent while imports of road motor
vehicles registered a decline of 8.6 percent. The
share of consumer durables in total imports stood
at 5.3 percent in 2007-08 while its contribution to
this years import growth has been nil at best. (See
Tables 8.7 & 8.8)

Imports of raw material contributed 21 percent to

the overall growth of imports this year. Imports of
iron and steel and scrap grew by 74 percent on
account of elevated level of construction activity in
the country. (see Tables 8.7 & 8.8). Local
production from Pakistan Steel Mills and other
industries could not meet the growing demand for
these products in construction sector, hence import
were up.

Imports of raw material, accounting for 16.6

percent of total imports, grew by 38.6 percent in
the first ten months (July-April) of current fiscal
year. With exception of insecticides, which grew
only by 1 percent, all other categories of raw
material
registered
substantial
increases.
Fertilizers, plastic material and iron and steel and
scrap, amounting for 45 percent of total raw
material imports, grew respectively by 193.1
percent, 12.3 percent and 74 percent. The extraordinary increase in the import of fertilizer was
surprising at a time when the price of fertilizer in
the international market was up by almost 50
percent. As against 1 million tons of last year,
Pakistan imported almost 2 million tons in the first
ten months of current fiscal year, registering a
growth of 97 percent. Why such a large quantity of
fertilizer were imported when its off-take within
the country did not grow compared to last year is
not clear? Nevertheless, the country had to pay
additional $542 million in import on account of
extra-ordinary increase in the import of fertilizer
which cannot be explained by looking at the
performance of this years agricultural crops.

Unlike in the recent past, imports of telecom

remained more or less at last years level of $1.9
billion, suggesting that the expansion phase of
various cellular companies appears to have
saturated for the time being. Imports of telecom
accounts for 5.9 percent of total imports but
contributed only marginally (0.3%) to this years
overall imports growth (See Tables 8.7 & 8.8)
It is important to note that the surge in imports
during 2003-06 was on the back of strong
economic growth which strengthened the domestic
demand and consequently a pick up in investment.
In contrast, the surge in this years import is not
because of any structural shift in demand but
because of the rising international commodity
prices such as oil and palm oil and oneoff
increase in the import of wheat and fertilizer.
Imports of petroleum products and edible oil alone
contributed 47 percent to the rise of this years
import. Additional 18.7 percent contribution came
from one of the element that is import of wheat and
fertilizer. Together these four items accounted for
two third growth in this years import (see Table
8.8).

Table 8.7: Structure of Imports

July-April
Particulars
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

2007-08*

2006-07

Absolute
Increase

% Change

3523.7
63.6
818.6
67.6
167.4
63.7
1309.2
13.3
151.8
4224.5
851.8

2371.8
66.1
41.6
56.6
184.3
45.2
768.4
256.1
218.5
3953.6
616.5

1151.9
-2.5
777.0
10.9
-16.9
18.5
540.8
-242.8
-66.7
270.9
235.4

48.6
-3.8
1869.7
19.3
-9.1
40.9
70.4
-94.8
-30.5
6.9
38.2

($ Million)
Contribution
to import
growth (%)
16.3
0.0
11.0
0.2
-0.2
0.3
7.7
-3.4
-0.9
3.8
3.3

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Trade and Payments

Table 8.7: Structure of Imports
July-April
Particulars
Office Machines
Textile Machinery
Const. & Mining Mach.
Aircraft Ships and Boats
Agri. Machinery
Other Machinery
C. Petroleum Group
Petroleum Products
Petroleum Crude
D. Consumer Durables
Elect. Mach. & App.
Road Motor Veh.
E. Raw Materials
Synthetic fibre
Silk yarn (Synth & Arti)
Fertilizer
Insecticides
Plastic material
Iron & steel and Scrap
Other Chemical Products
F. Telecom
G. Others
Total
Excluding Petroleum Group
Excluding Petroleum & Food Groups
* Provisional

2007-08*

2006-07

248.3
359.8
206.1
823.7
122.7
1612.1
8670.4
4650.8
4019.6
1703.9
607.7
1096.3
5325.8
240.3
240.0
823.3
80.3
1068.3
511.6
2362.0
1890.1
6722.6
32061.1
23390.7
19867

268.0
428.4
154.9
876.1
143.2
1466.5
5896.6
3027.7
2868.9
1731.3
531.6
1199.7
3841.5
193.6
193.7
280.9
79.5
951.2
294.0
1848.5
1868.6
5329.6
24993.0
19096.4
16724.6

($ Million)
Contribution
Absolute
% Change
to import
Increase
growth (%)
-19.7
-7.4
-0.3
-68.6
-16.0
-1.0
51.2
33.1
0.7
-52.4
-6.0
-0.7
-20.6
-14.4
-0.3
145.6
9.9
2.1
2773.8
47.0
39.2
1623.0
53.6
23.0
1150.8
40.1
16.3
-27.3
-1.6
-0.4
76.1
14.3
1.1
-103.4
-8.6
-1.5
1484.3
38.6
21.0
46.7
24.1
0.7
46.3
23.9
0.7
542.4
193.1
7.7
0.8
1.0
0.0
117.0
12.3
1.7
217.7
74.0
3.1
513.5
27.8
7.3
21.5
1.2
0.3
1393.0
26.1
19.7
7068.1
28.3
100.0
4294.3
22.5
60.8
3142.4
18.8
55.5
Source: Federal Bureau of Statistics.

Table 8.8: Major Contributors to Increase Imports July-April 2007-08

($ Million)
July-April
Absolute
%
Percentage
Increase
Change
Contribution
2006-07
2007-08
Total Imports
24993.0
32061.1
7068.1
28.3
100.0
A. Food Group
2371.8
3523.7
1151.9
48.6
16.3
B. Machinery Group
3953.6
4224.5
270.9
6.9
3.8
C. Petroleum Group
5896.6
8670.4
2773.8
47.0
39.2
D. Consumer Durables
1731.3
1703.9
-27.3
-1.6
-0.4
Elect. Mach. & App.
531.6
607.7
76.1
14.3
-1.1
Road Motor Vehicles
1199.7
1096.3
-103.4
-8.6
-1.5
E. Raw Materials
3841.5
5325.8
1484.3
38.6
21.0
F. Telecom
1868.6
1890.1
21.5
1.2
0.3
G. Others
5329.6
6722.6
1393.0
26.1
19.7
Source: Federal Bureau of statistics.

The surge in international commodity and oil

prices is reflected in Pakistans import bill.
Pakistan import was inflated by $ 4099 million in
the first ten (July-April) months of the current
fiscal year mainly on account of higher
international prices of commodities, including oil.

Pakistans trade balance would not have worsened

so much if the unit value of few items listed in
Table 8.9 remained at last years level. Pakistans
import would have been lowered by $ 4099 million
and import growth would have been 12 percent and
not 28.3 percent as reported in Table 8.9
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Pakistan Economic Survey 2007-08

Table 8.9: Additional Import Bill as a Result of the Rise in Import Prices (July- April 2007-08*) ($ Million)
Actual
Imports at Last
Additional Bill
Commodity
Imports
Years Prices
(Gains/Losses)
Soya bean Oil
92.1
32.2
59.9
Palm Oil
1217.0
736.2
480.8
Petroleum Products
4650.8
3027.7
1623.1
Petroleum Crude
4019.6
2868.9
1150.7
Fertilizer
823.3
280.9
542.4
Plastic Material
1068.3
951.2
117.1
Medicinal Products
427.7
351.7
76.0
Iron & Steel
1039.6
990.1
49.5
Total
13338.4
9238.9
4099.5
*Provisional
Source: FBS & E.A. Wing, Finance Division.

Trends in Monthly Imports

Trend in the monthly import shows that except for
the month of December and April, the imports
during July-April, 2007-08 remained consistently
higher compared to the same months of last year.
Imports averaged $ 3.1 billion per month during
this period as against $ 2.7 billion for the
comparable period last year. Trends in monthly
imports are documented in Table 8.10.
Concentration of 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 75.5 percent of total imports during
the first nine months (July-March) of current fiscal
year. Among these categories machinery,
petroleum & petroleum products and chemicals

accounted for 57.3 percent of total imports. The

annual percentage share of major imports is given
in Table 8.11 which further strengthens the fact
that concentration of imports has remained, by and
large, unchanged over the last one decade.
Table 8.10 Monthly Imports
($ Million)
2006-07
2007-08
July
2459.9
2573.8
August
2523.6
2747.4
September
2442.3
2734.9
October
2131.1
3384.7
November
2773.6
3161.2
December
2564.2
2348.8
January
2329.9
3529.5
February
2572.3
3659.2
March *
2622.6
3823.3
April
4100.0
2573.5
Monthly Average
2652.0
3053.6
*Provisional Source: Federal Bureau of Statistics.
Month

Table 8.11: Pakistans Major Imports

Commodities
96-97 98-99 99-00 00-01 01-02 02-03
Machinery * *
23.1
17.9
13.9
19.3
17.1
18.5
Petroleum &
Products
19.0
15.5
27.2
31.3
27.1
25.1
Chemicals @
13.4
16.6
17.5
20.0
15.9
15.1
Transport
Equipments
4.7
5.7
5.5
4.0
4.8
5.6
Edible Oil
5.1
8.7
4.0
3.1
3.8
4.8
Iron & Steel
3.9
3.1
3.0
2.6
3.3
3.3
Fertilizer
3.2
2.8
1.9
1.6
1.7
2.1
Tea
1.1
2.4
2.0
1.9
1.5
1.4
Sub-Total
73.5
72.7
75.0
83.8
75.2
75.9
Others
26.5
27.3
25.0
16.2
24.8
24.1
Total
100.0 100.0 100.0 100.0 100.0 100.0
* July-March (Provisional
** Excluding Transport Equipments, @ Excluding Fertilizer

03-04
17.8

04-05
22.5

(Percentage Share)
05-06 06-07 07-08*
18.0
21.9
18.4

20.3
16.1

19.4
15.5

22.3
13.4

24.0
13.0

26.5
12.4

5.6
6.2
7.7
7.6
5.7
4.2
3.7
2.7
3.1
4.2
3.3
4.3
5.1
4.9
3.3
1.8
2.0
2.4
1.5
2.7
1.2
1.1
0.9
0.7
0.5
70.3
74.7
72.5
76.7
73.7
29.7
25.3
27.5
23.3
26.3
100.0 100.0 100.0 100.0 100.0
Source: Ministry of Commerce & FBS

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Trade and Payments

Composition of Imports
The composition of Pakistans import shows that
they had not witnessed any significant change over
the last ten fifteen years. The share of raw
material for consumer goods had been on a rise
while that for capital goods had almost remained
stagnant. The upward movement observed by the
share of capital goods owes to higher level of
investment in the country. However, the declining
share of consumer goods is on account of higher
domestic production. Composition of imports

during the first nine months of the current fiscal

year (July-March, 2007-08) shows that share of
consumer goods stood at 10 percent and capital
goods declined to 31 percent from 37 percent,
while that of raw material for consumer goods
increased by five percentage point from 46 to 51,
due to higher domestic production. The share of
raw material for capital goods also increased by 1
percentage point during this period owing to higher
level of investment. The details are given in Table
8.12.

Table 8.12: Composition of Imports

Year

Capital Goods

1990-91
1992-93
1994-95
1996-97
1998-99
99-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
July-March
2006-07
2007-08 *
* Provisional

33
42
35
37
31
26
25
28
31
35
36
37
36

(% Share)
Raw Material for
Capital Goods
Consumer Goods
7
45
6
38
5
46
5
44
6
47
6
54
6
55
6
55
6
53
6
49
8
46
7
45
7
47

37
31

7
8

46
51

Direction of Imports
Like exports, Pakistans imports are also highly
concentrated in few countries. USA, Japan,
Kuwait, Saudi Arabia, Germany, the UK and
Malaysia have been the major sources of
Pakistans imports since last ten years. Over 40
Table 8.13: Major Sources of Imports
Country
98-99 99-00 00-01
U.S.A.
7.7
6.3
5.3
Japan
8.3
6.3
5.3
Kuwait
5.9
12.0
8.9
Saudi Arabia
6.8
9.0
11.7
Germany
4.1
4.1
3.5
U.K.
4.3
3.4
3.2
Malaysia
6.7
4.3
3.9
Sub-Total
43.8
45.4
41.8
Other Countries
56.2
54.6
58.2
Total
100.0 100.0 100.0
*July-March

01-02
6.7
5.0
7.1
11.6
4.3
3.4
4.4
42.5
57.5
100.0

Consumer Goods

Total

16
14
14
15
16
14
14
11
10
9
10
11
10

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.00

10
100.0
10
100.0
Source: Federal Bureau of Statistics

percent of Pakistans imports continue to originate

from these seven countries. During first nine
months (July-March) of the current fiscal year,
Saudi Arabia, followed by USA and Japan had
been the major supplier of our imports. [See Table
8.13].
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

04-05
7.6
7.0
4.6
12.0
4.4
2.6
2.6
40.8
59.2
100.0

(Percentage Share)
05-06
06-07
07-08*
5.8
7.5
7.2
5.4
5.7
4.6
6.2
5.7
6.6
11.2
11.4
11.7
4.7
3.9
3.2
2.8
2.3
2.0
3.0
3.1
3.9
39.3
39.6
38.5
60.7
60.4
61.5
100.0
100.0
100.0
Source: Ministry of Commerce

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The international surge in oil and commodity
prices have led to an increase in the import bill of
petroleum and some essential food items, thus
causing deterioration in terms of trade. The terms
of trade with base year 1990-91 (equal to 100)
aggregated to 58.35 during 2007-08 as compared
to 64.1 of 2006-07, showing a deterioration of 9

percent. The deterioration in the terms of trade has

also contributed to deterioration of the current
account deficit. The reason for deterioration of
terms of trade index is the unit value index of
imports is rising at a faster pace than unit value of
exports. This sharp decline in terms of trade is also
depicted in fig 8.4.

Table 8.14: Unit Value Indices and Terms of Trade (Base year 1990-91 = 100)
Unit Value Indices
Year
Terms of Trade
Exports
Imports
1995-96
185.4
185.5
99.9
1997-98
245.6
198.9
123.5
1998-99
258.4
223.3
115.7
99-2000
253.8
259.0
98.0
2000-01
271.5
298.4
91.0
2001-02
271.2
298.6
90.8
2002-03
254.0
309.5
82.1
2003-04
279.6
355.4
78.7
2004-05
288.8
392.5
73.6
2005-06
299.3
460.4
65.0
2006-07
310.03
495.33
62.59
July-March
2006-07
308.62
481.47
64.10
2007-08 *
334.83
573.82
58.35
* Provisional.
Source: Federal Bureau of Statistics
Fig-8.4: Terms of Trade (1990-91=100)
130
120
110
100
90
80
70
60
FY08*

FY07

FY06

FY05

FY04

FY03

FY02

FY01

Pakistans merchandise trade deficit has been in

the range of $ 2 billion during 2000-2003 but
started deteriorating thereafter at the back of
surging oil import bill; continued strength in
domestic demand, triggering consequential pick up
in investment; continuous occurring of one-off

FY00

Trade Balance:

FY99

FY98

FY97

FY96

FY95

FY94

FY93

FY92

FY91
*Jul-Apr

imports (sugar, wheat, oil rigs, commercial aircraft

etc.) and abrupt and sharp deceleration in export
growth, particularly in 2006-07(see Fig 8.5).
Merchandised trade deficit jumped from $ 2 billion
in 2002-03 to $12 billion by 2005-06 several fold
increase in just three years. The recent
deterioration in merchandise trade deficit over the
last two years owes mainly to the continued robust

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domestic demand in the back of strong economic
growth and an extraordinary rise in the

international oil and food prices causing import

bills to surge at new highs.

Fig- 8.5: Pakistan: Trade Balance (US $ Billion)

4
2
0
-2
-4
-6
-8
-10

Overall Balance
Oil
Non-Oil

-12
-14
-16
19992000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

During the first ten months of the current fiscal

year (July- April), the merchandise trade deficit
worsened sharply to $ 17 billion as compared to $
11 billion in the same period last year. The surge in
merchandize trade deficit owes to an outsized
increase of 28.3 percent in imports that more than
offset a modest export growth 10.2 percent. On the
basis of existing trend, the trade deficit is likely to
touch $ 20.5 billion or 12.3 percent of GDP during
2007-08.
Current Account Balance
Pakistans current account deficit (CAD) further
widened to US$ 11.6 billion during Jul-Apr FY08
against US$ 6.6 billion in the comparable period of
last year, showing an increase of 75.6 percent.
Even when compared to the size of the economy,
CAD was substantially high at 6.9 percent of GDP
during Jul-April FY08 as against 4.6 percent for
the same period last year [See Table 8.15]. The
deterioration in current account deficit mainly
emanated from the sharply rising trade deficit
along with increase in net outflows from services
and income account. Services account deficit
widened by 44.2 percent during Jul-April FY08 to
reach $ 5.6 billion. This deterioration was
contributed by relatively high import growth and
decline in export of services. However, the strong
growth in current transfers on the back of
impressive growth in remittances almost entirely

offset the deficit in services and income account

thereby leaving trade deficit as the fundamental
source of expansion in current account deficit. The
current transfers witnessed an impressive increase
of 16.4 percent during Jul- April FY08 on the back
of strong growth in both private and official
transfers. [See Table 8.15]
Month-wise trend in current account deficit can be
categorized into two distinguished periods. In the
initial four month (Jul-Oct) of FY08, the current
account deficit depicted some improvement on the
back of small recovery in exports (non-textile) and
slowdown in import growth. However, this
improvement could not be sustained in the
subsequent months. As a result, during Nov-Apr
FY08, the trade deficit widened sharply, resulting
in higher current account deficit.
Financing of current account deficit witnessed
some compositional shift during Jul-Apr FY08
compared to previous years. Specifically, unlike
Jul-Apr FY07, when current account deficit was
comfortably financed from surplus in the financial
account, during Jul-Apr FY08 the deficit was
financed through a mix of surplus in financial
account and drawdown of foreign exchange
reserves. Surplus in financial account declined
sizeably during Jul-April FY08 as compared to last
two years. A large part of this decline was a result
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Pakistan Economic Survey 2007-08

of lower inflows in both foreign portfolio
investment and foreign direct investment, resulting
in overall decline of 39.2 percent in net foreign
investment during Jul-April FY08 (as compared to
substantial inflows in the same period last year).
Other investment however, recorded considerable
Table 8.15: Balance of Payments
Components
Trade balance
Exports (fob)
Imports (fob)
Services (net)
Private transfers (net)
Workers remittances
Current account balance
Excluding official transfers
Current account balance
Including official transfers
Long term capital (net)
Changes in reserves (- ve = Increase)
P: Provisional

2005-06

2006-07

-8236
16388
24624
-7302
9914
4600

-9495
17119
26614
-7968
10102
5494

-5624

-7361

-4990
4642
-675

-6878
9856
-4183

Workers Remittances
As in the previous year, workers remittances
registered commendable growth during Jul-Apr
FY08, growing by 19.5 percent on top of 22.7
percent growth in the corresponding period of last
year. Remittances routed through exchange
companies contributed 60.2 percent in the overall
remittances growth. As a result, foreign exchange
companies share in overall remittances increased to
23.8 percent during Jul-April FY08 from 16.7
percent for same period last year [See Table 8.16].
Part of strong growth in remittances is probably a
consequence of rising costs of living at home
which is eroding purchasing power of remittances.
Table-8.16: Workers Remittances
Monthly Cash Inflow *
July
August
September
October
November
December
January
February
March
April
July-April
Monthly average
* Including FEBCs and FCBCs

inflows during Jul-April FY08 which mainly

reflects higher inflows in earthquake loans
(US$516 million) and receipt of short term loans
(net US $ 561 million from Islamic Development
Bank (IDB)).

2006-07
377
434.8
421.7
410.6
448.6
475.2
391.3
457.2
520.2
513.4
4450.1
445.0

($ Million)
July-April
2006-07
2007-08(P)
-8117
-12595
13903
15991
22020
28586
-6957
-8777
8222
9299
4450
5319
-6852

-12073

-6628
-11586
7056
5325
-764
6225
Source: State Bank of Pakistan

A greater share in remittances growth was that of

oil rich gulf-region Kuwait, Bahrain, Qatar, Oman,
Saudi Arabia and United Arab Emirates and from
the United State of America.(See Table 8.17).
Increase in remittance to Pakistan in recent years is
in line with the international trends. The world top
fifteen remittances recipient countries have
experienced increase in remittances in the last two
years. Pakistan registered third highest growth
(19.6 percent) in remittances during 2006 and
highest growth (19.1 percent) in 2007 among the
top fifteen countries. As a result, Pakistan has
become worlds 12th largest remittances recipient
country during 2007 from 17th in 2005.
2007-08*
495.4
489.4
516.1
580.2
505.3
479.1
557.1
502.8
602.2
590.7
5318.2
531.8

($ Million)
% Change
31.4
12.5
22.4
41.3
12.6
0.8
42.4
10
15.8
15.1
19.5
19.5
Source: State Bank of Pakistan

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Table-8.17: Country/Region Wise Cash Workers Remittances
July-April
July-April*
Country / Region
2006-07
2007-08
USA
1176.1
1463.7
UK
354.6
379.0
Saudi Arabia
827.6
1001.7
UAE
673.5
907.5
Other GCC Countries
609.9
795.2
EU Countries
123.1
147.7
Others Countries
683.1
622.1
Total
4447.9
5316.9
* Provisional

($ Million)
% Change

% Share

24.5
27.5
6.9
7.1
21.0
18.8
34.7
17.1
30.4
15.0
20.0
2.8
-8.9
11.7
19.5
100.00
Source: State Bank of Pakistan

current account deficit and substantial inflows in

the financial account. However, October onwards,
net outflows from portfolio investment, and steep
rise in the current account deficit led to a sharp
decline in the foreign exchange reserves of the
country.

Foreign Exchange Reserves

Pakistans total foreign exchange reserves stood at
$ 12,344 million as of end April 2008, significantly
lower than end June 2007 level of $15,646 million
(see Figure 8.6).
During the current year,
movement in foreign exchange reserves can be
divided into two distinct periods. In the first
period, reserves peaked to $ 16,443 million at end
Oct-2007 while the second period showed
significant depletion of $ 4.1 billion during NovApr FY08. During Jul-Oct 2007, reserves
improved by 5.1 percent due to relatively lower

Reserve adequacy in terms of weeks of import

eroded during Jul-Apr FY08, to 19.4 weeks of
imports down from 30.6 weeks in June 2007,
mainly due to combined impact of surge in imports
and drawdown of reserves.

Fig-8.6 Foreign Exchange Reserves (End Period)

17
16

billion US $

15
14
13
12
11

Effective from May 19, 1999 the exchange rate in

Pakistan has been unified with the introduction of
market-based floating exchange rate system, under
which the exchange rate is determined by the
demand and supply position in the foreign
exchange market. The current exchange rate is

15-May

March

Jan, 08

November

September

July

May

March

Jan, 07

November

September

May

Exchange Rate

July

March

Jan, 06

November

September

July

May

March

Jan, 05

10

working under this floating exchange rate regime;

however, the SBP do intervenes in market to
smooth out volatility in exchange rate at times if it
is required. Pak rupee after remaining stable for
more than four years, lost significant value against
the US dollar ,depreciating by 6.4 percent during
July-April 2008.
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Pakistan Economic Survey 2007-08

Other than sharp depreciation, rupee dollar
exchange rate also remained quite volatile during
the last five months (Dec-April), with monthly
standard deviation of exchange rate reaching 36.2
percent in February 2008 and touching as high as
64.5 percent in April 2008. Particularly during the
month of February, the gap between minimum and
maximum rupee exchange rate was very high,
reflecting uncertainty in the market followed by
optimism in pre- and post-election periods. During
a very short period of 5 days before and after the
elections, US $/ rupee exchange rate went as high
as Rs.63.1/US $ and fell immediately after
elections to Rs. 61.88 /US $.

The movements in the rupee/US$ exchange rate

largely followed the same pattern as witnessed in
case of reserves. During the first four months of
the current fiscal year Pak rupee remained more or
less stable and depreciation in the value of rupee
against the US dollar was only marginal. In sheer
contrast, Nov-April FY08 period saw steep decline
in the value of rupee, mirroring pressures in the
foreign exchange market which arose after
October, 2007 onwards. Beside the steep
depreciation during July- April FY08, the
exchange rate also remained much more volatile,
particularly in mid-December 2007 onward. (See
Fig 8.7) This prompted SBP to intervene in the
market aggressively, helping reduce the day-to-day
volatility in the exchange rate. However, these
interventions were not aimed at arresting the fall in
the value of Rupee against the US dollar. While
deteriorating economic and political environment
may have been responsible in large part for the
steep fall in the value of rupee, a portion of the
decline seems be driven by speculative activity in
the forex market. This is evident from the rising
FC deposits and export bills outstanding in the
second quarter of FY08.

Further more, strengthening of Pak- Rupee

following peaceful elections lends credence to the
argument that speculators were attacking the
currency to make quick gains .In fact, the SBP had
to intervene in the market to arrest steep
appreciation immediately following the election on
19 February 2008. Apparently strong reserves
coupled with SBPs prompt actions to maintain
calm in the forex market has been successful in
arresting even steeper fall in the value of rupee.

Fig-8.7: Open Vs Composite/ Inter-Bank Exchange Rate (Rs/US $)

69.0
67.0
65.0
63.0
61.0
59.0
57.0
55.0
53.0
51.0
49.0

15 Aug 01

9 M ay 08
30 Oct 04

15 Oct 00

15 Nov 07

30 M ar 99

5/30/08

11/30/07

5/30/07

11/30/06

5/30/06

11/30/05

5/30/05

11/30/04

5/30/04

The month of April and especially May has

witnessed even a steeper decline and exchange rate
remains more or less volatile. Pakistani rupee is
continuously losing ground viz US and European
currencies in the local currency market due to
rising oil prices in the international market,
widening of current account deficit and uncertain
political situation in the country. These factors
148

11/30/03

5/30/03

11/30/02

5/30/02

11/30/01

5/30/01

11/30/00

5/30/00

11/30/99

5/30/99

11/30/98

Composite

Open Market

coupled with the rising demand for dollar by the

importers to cover their payment needs has led the
rupee to breach Rs. 64 mark in the month of April,
for the first time during last six years. With the
rupee crossing $ 64 Mark in the month of April ,
the cumulative depreciation of Rupee against
Dollar during the first ten months(July- April) of
current fiscal year turn out to be 6.4 percent. In
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Trade and Payments

addition to this, the speculative dollar buying is
also responsible for the rupee to reach historic
lows. (See Fig 8.7)
Rupees Sharp Plunge and SBP Crackdown
A further deceleration of rupee value in month of
May prompted SBP to take severe actions against
the money exchangers to resist the sharp fall in the
value of rupee. The rupee had reached to an all
time low of Rs. 68 to one dollar on May 9, 2008
(See Fig 8.7). The recent sharp slide in the value of
rupee against US dollar was driven by slow
inflows and higher demand (organic and
speculative) for dollar. To cool-off the foreign
exchange market and curb speculations, the SBP
has issued a circular to foreign exchange
companies to remain vigilant. The SBP has taken
following measures to stabilize exchange market
i)

Export companies are required to bring 25% of

foreign currency exports by them in FCY
accounts and maintained with Pakistani banks.
It has been decided that a minimum of 15 %
instead of 10 % of inward remittances must be
sold in inter-bank market.

ii) Advance payment against import is reduced

from 100 % to 50 % of FOB and CFR.
iii) All permissible inflows/outflows of exchange
companies are to be routed only through FCY
accounts maintained in Pakistan. All exchange
companies are therefore required to close their
existing Nostro Accounts abroad.

iv) Beside the existing facility of accepting US $ ,

the SBP will henceforth accept cash in Pound
sterling, Euro, Dirham from the authorized
dealers against credit in their Nostro accounts.
It is important to note that the SBPs recent move
is against the speculators and not against investors
and this should not be viewed as capital control.
The SBP has halted the exports of non-dollar cash
exports through exchange companies. This is a
positive move as it would reduce the capital flight
and restrict non-dollar outward remittances. But
investors are free to send and receive profits and
investment through the official channel (Special
Convertible Rupee Account). Still Pakistan
remains the best choice for investors as it allows
100% foreign ownership and does not discriminate
foreign investors from domestic investors. The
recent $ 680 million Maybank strategic investment
in MCB and Barclays bank investment of $100
million reflect continued investors confidence.
Rupee exchange rate against Euro also rose
significantly during Jul-Apr 2008, from Rs. 81.775
per Euro at end June FY07 to Rs. 100.47 per Euro
registering a depreciation of 18.6 percent. This
steep depreciation in rupee value vis--vis Euro is
a reflection of weakness of US dollar against Euro,
coupled with rupee depreciation against US dollar.
The movement of the Pak rupee exchange rate
versus US dollar and Euro is given Fig.8.8

Table 8.18: Average Exchange Rates and Premium

Inter Bank Rate (Rs / $)
Open Market Rate (Rs/$)
January, 2006
59.857
59.805
July, 2006
60.352
60.825
January, 2007
60.737
60.895
July, 2007
60.39
60.97
August
60.61
60.92
September
60.70
60.72
October
60.72
60.74
November
61.24
61.33
December
62.00
61.60
January, 2008
62.64
62.65
February
62.45
62.55
March
62.75
63.20
April
64.60
65.80

Premium (%)
Rs/ Euro
-0.09
72.42
0.78
77.02
0.26
78.71
0.96
82.86
0.51
82.92
0.03
86.60
0.03
87.65
0.15
90.17
-0.65
91.05
0.02
92.99
0.16
94.86
0.72
99.05
1.86
100.47
Source: State Bank of Pakistan

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by 10.76 percent rise in relative prices index, partly
offset the depreciation in real terms to a large
extent.[See Fig 8.9]

Fig-8.8 Rupee exchange rate agianst other currrencies

105

65
Rs/$

Rs/Euro(RHS)

100

64

Table 8.19: Real Effective Exchange Rate

(Rupee Price of a Basket of 15 Currencies)
(2000=100)
End Month Position
Jul-05
95.377
Jan-06
96.460
Jul-06
96.088
Jan-07
95.746
Jul-07
95.673
Aug-07
96.824
Sep-07
97.484
Oct-07
96.991
Nov-07
94.739
Dec-07
95.57
Jan-08
94.56
Feb-08
93.67
Mar-08
92.47
Apr-08
93.44

95

63

90
62
85
61

80

Apr-08

Mar-08

Jan-08

Feb-08

Dec-07

Oct-07

Nov-07

Sep-07

Jul-07

Aug-07

70
Jul-06

59
Jan-07

75
Jan-06

60

Real Effective Exchange Rate

During July-Apr FY08, real effective exchange
rate of Pak rupee vis--vis a basket of currencies
depreciated by 2.23 percent. In nominal terms, Pak
rupee depreciated considerably (11.73 percent)
against the trading partners currencies. However,
inflationary pressures in the economy, as depicted

Fig-8.9: Real Effective Exchange Rate (REER)

86
REER Index (2000=100)

88
90

T rend Line

92
94
96
98
100
Apr-08

Jan-08

Oct-07

July-07

April-07

Jan-07

Oct-06

Jul-06

Policies toward foreign trade are among the most

important factors promoting economic growth and
convergence in developing countries. More open
and outward oriented economies consistently
outperform countries with restrictive trade and

Apr-06

Jan-06

Oct-05

Jul-05

Apr-05

Jan-05

Oct-04

Jul-04

SALIENT FEATURES OF TRADE POLICY

2007-08

foreign investment regimes. The government of

Pakistan is also fully aware of the importance of
trade policies in economic growth of its nation.
The government has a firm stance on the view that
in the current era of globalization, free trade and
intense competition, there are no short cuts to
achieve export growth and economic development
without perusing sound trade policies which should

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promote export led growth and increase our share
in intentional market. Since 1999, Pakistan has
embarked on an export-led growth strategy which
is being managed through successive trade
policies. The trade policy 2007-08 is a continuation
of the trade related initiatives which emphasize on
export led growth strategy based on

Zero rating of sales tax for entire textile

chain, leather products, surgical goods,
carpets and sports goods.

Zero rating of certain duty on priority

export machinery sector such a
Agriculture, Horticulture, Marble/granite,
and Gem & Jewellery etc.

Improved market access

Strengthening of trade promotion

infrastructure

Import of PSF under Duty Tax Remission

for
Export
scheme
(DTRE)
for
manufacture-cum-re-export.

Improving skill development and productivity

Provision of state of the art physical

infrastructure

2. Skill Development and Capacity Building

Beside that, liberalization of import regime, to

facilitate stakeholders (businessman and exporter)
so that cost of doing business for them is reduced
and they should create exportable surplus also
reflect consistency and continuity in policies. The
trade policy for FY 2007-08 encompasses certain
export and import initiatives, the salient feature of
which are explained as:
EXPORT INTIATIVES

Establishment
of
Export
Skills
Development Council and Conversion of
existing
training
institutes
into
Technological & Skill Development
Resource Centres.

Assistance
for
registration
of
pharmaceutical products in foreign
countries.

Enterprise
capacity
manufacturing units.

Strengthening of industrial clusters in

collaboration with UNIDO.

building

of

1. Financial and Commercial Support

-

Long term, Fixed Rate, Export Oriented

Projects Financing Scheme- to enhance
production capacity.

3. Marketing and Promotional Activities.

-

Financial
Support
for
compliance
certifications for international quality,
environment and social standards.

Permission to import semi-finished carpets

on temporary basis for processing for
exports given.

Research and Development Support for the

textile sector, leather garments &
footwear, and to motorcycle industry on
export of their products.

The EPB has been replaced with the Trade

Development Authority of Pakistan
(TDAP), which will now focus on export
marketing.

Assistance for opening exporters offices

abroad.

Participation in international trade fairs

and exhibitions.

Holding
annual
Expo
Pakistan
International Exhibition at Karachi Expo
Centre from 2005.

Sending out trade delegations to foreign

countries.

Support for
products.

marketing

of

branded

To encourage investment and facilities

exports, scheme of export-oriented units
has been introduced.

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state elements, it has been decided that such
material may be allowed for import only on the
recommendation of Ministry of Interior.

IMPORTS MEASURES
-

To enable the construction, mining and

petroleum sector companies to meet their
requirements of machinery and equipment,
commercial importers have been allowed to
import
machinery/equipments/specialized
machinery.
To ensure that only genuine construction
companies can avail the above facility, only
those construction companies, which are
registered with Pakistan Engineering Council,
will be allowed to import secondhand plant
machinery and equipment.

The import of used heavy duty prime movers

i.e. 380 HP and above, not more than four
years old which are EURO-III complaint has
been allowed.

Pakistan based Associations and individual

companies have also been allowed to import
products for display and exhibitions subject to
endorsement by TDAP.

Mountaineering expeditions have also been

allowed to import their requirements on
import-cum-export basis without recourse to
Ministry of Commerce.

In respect of goods sent by overseas Pakistani,

the authority to grant exemption from sales tax
registration has been delegated to the Collector
of Customs concerned instead of FBR.

In order to prevent misuse of imported narcotic

drugs
and
psychotropic
substances,
pharmaceutical units having valid drugs
manufacturing licenses will be allowed to
import these substances on the authorization of
Ministry of Health. Import of formaldehyde
has been allowed only to industrial consumers
who have valid licences issued by the
environmental agency/deptt. Concerned under
Pakistan Environmental Protection Act, 1979.

To prevent the import of raw materials used in

the manufacture of bullet proof jackets by anti-

To discourage import stolen and chassis

tampered vehicles under the Personal Baggage,
Gift and Transfer of Residence schemes, it has
been decided that in addition to confiscation of
the said vehicles, the importers will also be
liable to such penalty as may be imposed by
any other law for the time being in force. Reexport facility will also not be available for
such vehicles.

The input of waste, parings and scrap of

polyethylene (PE) and polypropylene (PP) has
been allowed with mandatory certification by
the Government of the exporting country or
certification by a pre-shipment inspection
company in the exporting country specialized
in this field.

Bilateral and Regional Trade Agreements

Bilateral and Regional Trade Agreements
commonly referred to as FTAs, PTAs or RTAs
have emerged as salient feature of the
contemporary trading scene. Such agreements
contribute to the development of global trade and
take members of PTAs/FTAs one step nearer to the
multilateral trading regime. In addition, member
countries to a FTA/PTA gain from economies of
scale, competition and increased FDI. The Ministry
of Commerce has initiated market access
negotiations with various trading partners for two
fundamental reasons (i) Seeking maximum market
share for Pakistani export in foreign markets (ii)
Ensuring level playing fields for Pakistani
exporters vis--vis other competing exporters who
have bilateral or regional arrangements of free
trade or preferential trade rights in these markets.
The detail about Free Trade Agreements (FTAs) or
Preferential
Trade
Agreement
(PTAs)
concluded/operational from various dates is given
in box-item 1.

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Box-Item 8.1 : Pakistans FTAs/PTAs with trading Partners

Pakistan has signed a Free Trade Agreement (FTA) with Sri Lanka and it has been operationalized since 12th
June, 2005.
Pakistan has entered into a Preferential Trade Agreement (PTA) with Iran, which is operational since September
1, 2006.
Pakistan is also a signatory of the South Asian Free Trade Agreement (SAFTA), which has become operational
from July 1, 2006.
Pakistan and China also initiated and concluded an Early Harvest Programme (EHP), which is in operation
since January 1, 2007.
The Pakistan Malaysia Agreement on the Early Harvest Programme was signed in October 1, 2005, which is
operational from January 1, 2006.
Pakistan and China has signed FTA with Malaysia including bilateral trade, investment and economic
cooperation. This agreement has become operational on January 1, 2008.
Pakistan has also signed a Preferential Trade Agree (PTA) with Mauritius on July 30, 2007.
Pakistan is a signatory of the Preferential Trade Agreement among the OIC Member Countries (PRETAS)
which was signed a February 17, 2007.
Pakistan has also signed a Trade and Investment Framework Agreement with USA on June 25, 2003.
In order to expand and promote trade relations, Pakistan started Free Trade Negotiations with the MERCOSUR
countries, which concluded on a Framework Agreement on Trade, which was signed on July 21, 2006.
Pakistan and Indonesia has also signed a comprehensive Economic Partnership Agreement in November 2005
to promote trade ties between the two countries.
Five out of ten Member State signed the ECO Trade Agreement (ECOTA) in July 2003. The signatory members
are Pakistan, Iran, Turkey, Afghanistan and Tajikistan.
A Frame Agreement on Preferential Trade Agreement between Pakistan and Turkey was signed during the
President of Pakistans visit to Turkey in January 2004.
Pakistan signed Preferential Trade Agreement among OIC Member Countries (PRETAS) on 17.02.2007.
Pakistan-Mauritius Preferential Trade Agreement signed on 30.07.2007.
Pakistan-Mauritius Preferential Trade Agreement signed on 30.7.2007.

EFFORTS FOR MARKET ACCESS IN THE

EU
The following initiatives have been taken for
increased market access in the European Union,
which is Pakistans single largest export market.
i)

PAK-EU FTA

The European Community (EC) is embarking on

initiating Free Trade Agreements (FTAs) with a
few Asian economies including ASEAN, South
Korea, China and India as WTO plus
arrangements. The key economic criteria for new
FTA partners are market potential (economy size
and growth) and the level of protection against EU
exports. The scope of upcoming EU FTAs will
cover both goods and services. The upcoming
FTAs will also cover both traditional and nontraditional trade barriers. Pakistan has approached
the EU to persuade them to enter into FTA
negotiations with Pakistan as well. A strategy has
been launched with the approval of the Prime

Minister to convince EC that given the size of its

market and huge market potential, Pakistan can be
a credible FTA partner of EU.
ii) MARKET ACCESS INITIATIVE IN NONEU COUNTRIES
Within Europe, Non-EU member countries are also
targeted to sign preferential trade agreements
(PTAs) leading to free trade agreements (FTAs).
The countries targeted in this regard are
Switzerland, Norway, Serbia, Montenegro, Bosnia,
Croatia, Belarus, Ukraine EFTA (Europe Free
Trade Agreement) as both Switzerland and
Norway are the members of EFTA. Serbia and
Bosnia have agreed to initiate negotiations with
Pakistan for a PTA leading to FTA.
iii) Russia:
A draft text of PTA was sent to Russian for their
consideration on May 12, 2006. Later on, their
queries on the draft were clarified and their
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Pakistan Economic Survey 2007-08

response is now awaited. Lately, the issue has been
discussed between the Prime Ministers of the two
countries during the visit of the Russian Prime
Minister on 12-13 April 2007.
WTO RELATED ISSUES
Pakistan is a member of the World Trade
Organization (WTO) since is inception in 1995.
Currently there are 150 member countries of the
WTO. Pakistan is actively participating in all
current round of negotiation call Doha
Development Agenda (DDA) negotiations, but its
key interests lie in seeking market access and
important in the Rules areas. Its foremost objective
in these negotiations is to ensure removal of tariff
peaks and high tariffs on products of export
interest of Pakistan.
Pakistan believes that development concerns are
spread all over the DDA. If an ambitious result is
achieved in the DDA through removal of trade

distorting agricultural subsidies and reduction of

tariff peaks in Agriculture and NAMA,
liberalization of Services in modes and sectors of
interest to developing countries and formulation of
more transparent Rules on anti-dumping and trade
facilitation, an overall development package will
emerge.
Pakistans Third Trade Policy review was held
January, 2008 at the WTO Secretariat Geneva. It
was noted during the review that Pakistans
economic growth had been impressive since its
previous Trade Policy Review in 2002, mainly as a
result of its relatively open trade and investment
regimes. Generally accommodative macroeconomic policies and structural reforms.
Moreover, Pakistans ranking on the UN human
development index had risen from low to
medium. Poverty had fallen in line with the
Governments 2003 poverty reduction strategy,
although income inequality had widened slightly
and rural poverty remained high.

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TABLE 8.10
EXCHANGE RATE POSITION (Pakistan Rupees in Terms of One Unit of
Foreign Currency)
2000-01

2001-02

(Average during the Year)

2002-03
2003-04
2004-05

2005-06

2006-07

Average(Jul-Apr)
2006-07
2007-08

Country

Currency

Australia
Austria
Bangladesh
Belgium
Canada
China

Dollar
Schilling
Taka
Franc
Dollar
Yuan
Krone

31.3747
3.7942
1.0794
1.2934
38.4434
7.0601
6.9916

32.1607
3.9960
1.0826
1.3633
39.1719
7.4149
7.3987

34.2101
na
1.0108
na
38.8234
7.0613
8.2524

41.0626
na
0.9842
na
42.8526
6.9497
9.2250

44.7141
54.8940
0.9774
na
47.5567
7.1676
10.1527

44.7564
na
0.9121
na
51.4986
7.4161
9.7699

47.6760
na
0.8723
na
53.5778
7.7526

47.0955
na
160.8376
na
53.0591
7.7191

54.6118
na
163.4790
na
60.9804
8.3910

France
Germany
Holland
Hong Kong
India
Iran
Italy

Franc
Mark
Guilder
Dollar
Rupee
Rial
Lira

7.9536
26.6543
23.6655
7.4906
1.2529
0.0332
0.0269

8.3867
28.1084
24.9556
7.8720
1.2787
0.0307
0.0284

na
na
na
7.4990
1.2219
0.0073
na

na
na
na
7.3970
1.2682
0.0069
na

na
na
na
7.6176
1.3253
0.0067
na

na
na
na
7.7127
1.3389
0.0066
na

na
na
na
7.7772
1.3746
0.0066
na

na
na
na
7.7807
1.3521
0.0066
na

na
na
na
7.9030
1.5318
0.0066
na

Japan
Kuwait
Malaysia
Nepal
Norway
Singapore
Sri Lanka

Yen
Dinar
Ringgit
Rupee
Krone
Dollar
Rupee

0.5109
190.4592
15.3871
0.7893
6.4483
33.1605
0.7026

0.4884
200.7861
16.1621
0.8033
7.0288
33.9503
0.6624

0.4888
194.5677
15.3944
0.7515
8.1021
33.3406
0.6057

0.5203
194.3681
15.1532
0.7802
8.2191
33.5098
0.5920

0.5558
202.3816
15.6244
0.8169
9.1841
35.6797
0.5813

0.5216
205.3258
16.0515
0.8296
9.2141
36.4149
0.5872

0.5122
209.8118
17.0649
0.8575
9.7161
39.1651
0.5649

0.5149
209.7138
16.9348
0.8434
9.6385
39.0598
0.5684

0.5573
223.2147
18.5148
0.9525
11.3209
42.5475
0.5558

Sweden
Switzerland
S.Arabia
Thailand
UAE
UK
USA

Krona
Franc
Riyal
Baht
Dirham
Pound
Dollar

5.9379
34.1098
15.5868
1.3438
15.9133
84.7395
58.4378

5.9117
37.1824
16.3792
1.4000
16.7231
88.5691
61.4258

6.6910
41.4643
15.5961
1.3742
15.9261
92.7433
58.4995

7.5195
44.2489
15.3488
15.6727
100.1672
57.5745

8.2949
49.0657
15.8027
1.4763
16.1586
110.2891
59.3576

7.7867
46.8551
15.9608
1.5005
16.2972
106.4344
59.8566

8.6143
49.2385
16.1656
1.6789
16.5107
117.1852
60.6342

8.5722
49.1958
16.1648
1.6642
16.5089
116.5412
60.6313

9.6193
55.0251
16.4389
1.8400
16.7725
123.8515
61.5700

EMU
IMF

Euro
SDR

74.7760

54.9991
78.0627

61.3083
79.3198

68.6226
83.2470

75.5359
88.5631

72.8661
86.9594

79.1763
78.6722
89.6170
90.7726
90.5531
96.4585
Source: State Bank of Pakistan

na : Common currency Euro is in use of these countries

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