IFIs paint rosy picture of Pak economy
By Khalid Mustafa
ISLAMABAD: Three international financial institutions (IFIs) including JP Morgan, Citigroup and Merrill Lynch have painted a rosy picture of Pakistanââ¬â¢s economy, saying the GDP growth is higher, poverty rates are down, FDI is up and fiscal deficits are down.
However, in their analysis and reports about Pakistanââ¬â¢s economy, the three IFIs mentioned that the current account balance had shown deficit, although overall external balances are healthy.
According to Update Pakistanââ¬â¢s Economy, the first week of the month of February 2007 has been highly encouraging for Pakistanââ¬â¢s economy as three international financial institutions released their reports and economic analysis on the countryââ¬â¢s current and future economic outlook.
JP Morgan market primer entitled ââ¬ÅPakistan: Just Push Playââ¬Â gave a comprehensive outlook of Pakistanââ¬â¢s economy in the new year. This was followed by another document by Citigroup entitled ââ¬ÅAsia Sovereign Monthly-Finding Value in a Frothy Marketââ¬Â. In this update, Citigroup reviewed the performance of Pakistanââ¬â¢s economy and future prospects.
Finally, Merrill Lynchââ¬â¢s economic analysis on Pakistan entitled ââ¬Å2007 to be a Challenging Year for Pakistanââ¬Â was also unveiled. This report reviewed the economic environment in Pakistan.
All the three reports and economic analysis have many good things to say on Pakistanââ¬â¢s economy and its future prospects. According to JP Morgan, Pakistanââ¬â¢s economic performance in the past five years has been commendable. GDP growth is higher, poverty rates are down, inflation is lower, FDI is up and fiscal deficits are down. However, the current account balance has turned towards deficit, although overall external balances are healthy.
Driving all of these improvements has been an environment of relative political stability under the pro-reform administration of President Musharraf and Prime Minister Shaukat Aziz.
Pakistanââ¬â¢s economy grew 6.6 per cent during 2005-06 - the third consecutive year of GDP growth exceeding 6 per cent compared to the rest of emerging Asia. Recent track record puts Pakistanââ¬â¢s GDP growth rate solidly in the top half of the regionââ¬â¢s fast growing economies.
Pakistanââ¬â¢s government is targeting a 6-7 per cent range for real GDP growth over the medium term. Though this target may seem aggressive against a 10-year historical average of close to 5 per cent, recent structural reforms and privatisations have improved the overall business and investment climate substantially.
The industrial sector has performed well in recent years, growing at close to double-digit pace. The start of 2006-07 has been good with July-Sept manufacturing growth around 11.2 per cent.
JP Morgan believes that manufacturing will continue to post double-digit growth in the medium term, as new capacity comes on line in key sectors.
Rivaling the strong growth in industry is the recent track record in services. This is particularly true of growth in telecom and financial sectors.
Pakistanââ¬â¢s financial sector has seen tremendous growth in the past few years and has been the driving force behind sustained above average services sector growth. Banking sector profitability has broken its own record year after year.
The boom in mobile phone subscribers and the number of motor vehicles on the road have provided the impetus for value addition in transport, storage and communications sub-sectors.
Driven by these two sectors, overall services are likely to continue to increase its weight in GDP in the medium term.
Inflation in Pakistan has stayed persistently high, with the most recent reading in December 2006 jumping to 8.9 per cent. Surging exports, an expansionary fiscal stance and abundant liquidity have underwritten rapid output growth over the last three years. These factors, together with the rapid rise in energy cost, have fueled the high inflation rate.
Monetary policy, which had been very accommodative since 2001-02, gradually began to tighten in mid-2004. While headline CPI remains elevated, core inflation has fallen to 5.5 per cent in Dec 2006 from 7.4 per cent a year earlier. The higher level of CPI stems from higher food prices still prevalent in the economy.
Pakistanââ¬â¢s external account has seen significant swings, first into large surplus and now deficits of a similar magnitude. On the other side of the balance of payments, the surge in capital inflows has been more than sufficient to cover the current account deficit, allowing foreign exchange reserves to be stable-to-higher.
Over the medium term, financing the current account deficit will require sustained inflow of non-debt creating capital. This means that the recent success of the privatisation programme must continue, as must Pakistanââ¬â¢s increased attractiveness to foreign investors.
In addition, Pakistan has shown the ability to access international capital markets at attractive spreads over low US treasury yields. The IMF, in its recent assessment, has stated that it believes that Pakistanââ¬â¢s external financing prospects can remain favourable for several years.
According to the Citigroup report, macroeconomic trends are supportive of an improving credit story in Pakistan, which is already increasingly reflected by the recent outperformance of its dollar bonds (particularly the Pakistan 2036).
In addition, Pakistan has succeeded in bringing down public debt from more than 90pc of GDP in 2000-01 to an estimated 56pc in 2005-06, which is estimated to further fall to about 53pc in 2006-07.
Pakistan this year again has been dogged by persistently high inflation of 8.9pc, which is hence accompanied by a tight monetary policy by the SBP.
According to Merrill Lynch, the strength of Pakistanââ¬â¢s economy in the face of various exogenous shocks in 2005-06 and the countryââ¬â¢s future prospects in 2006-07 appear to be on track. In their opinion, the continuation of positive structural trends of economy is due to the governmentââ¬â¢s far-reaching macroeconomic and structural reforms initiated over the last several years, which subsequently have propelled the economy to annual expansion of about 7 per cent over the last five years.
A new dynamism has taken hold in economic activity and social indicators have improved, which together augur well for continued rapid development, said the analysis.
Merrill Lynch estimates that Pakistanââ¬â¢s economy is likely to grow by 7-7.5 per cent in 2006-07, backed by robust domestic consumption. They also see great progress in reducing inflation from 9.3pc in 2005-06 to 7.75pc in 2006-07.
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