Pakistan Economy - News & Updates

[alirulesall123]

hey there, can someone tell me WHAT IS CIVIL NUCLEAR TECHNOLOGY? Thanks

Civil Nuclear Techonology = Non-warfare nuclear techonology, such as nuclear generators used to generate electricity.

 

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Rs700 million pilferage discovered in Sui north​

By Kalbe Ali
Thursday, 04 Jun, 2009

ISLAMABAD: Rs700 million scam related to gas theft and oil smuggling has been unearthed by the Petroleum Ministry, but the government was unable to act against the culprits as there was no law to punish oil and gas stealing.
‘The ministry is going to move to the Law Ministry seeking amendment in Penal code and seek a 15 year imprisonment and a five of up to Rs2000 for gas theft.’ Advisor to Prime Minister on Petroleum and Natural Resources Dr Asim Hussain told media, here on Thursday.

Dr Hussain said that action has been initiated against the officials of Sui Northern Gas Pipeline Limited (SNGPL) who were involved in gas thefts involving losses of Rs694.55 million since January.

According to the report prepared by the SNGPL, the largest number of gas thefts cases occurred in the Lahore region where 4,279 consumers were involved in stealing Rs380 million worth of gas, followed by the Gujaranwala region where 247 consumers stole gas worth Rs100.97 million.

The other regions are Islamabad with thefts of gas worth Rs77.21 million, Peshawar Rs53.45 million, Faisalabad Rs41 million, Multan had gas thefts of Rs39.88 million and Abbotabad Rs1.71 million.

‘The proceeding on gas theft worth Rs450 million was also in progress,’ he added.

Dr Hussain said that many influential people were involved in gas theft and that the case cannot be registered against the consumers as there was no punishment in the PPC against gas thefts or tampering with oil and gas pipelines.

He said that the inquiry was initiated after Unaccounted For Gas (UFG) increased from six to eight per cent causing a blow to the profitability of SNGPL.

The advisor said that petroleum Ministry had given target to SNGPL to reduce UFG to one per cent within next months that would help to increase the profit of gas utility.

Managing Director (MD) SNGPL Rasheed Lon said that during the third quarter of the current financial year, the UFG had increased from six to 8.5 per cent. The current campaign against the gas theft would also continue in future.

The advisor also said that government had held 200 oil containers in Karachi involved in the smuggling of oil. One official of Hydrocarbon Development Institute of Pakistan (HDIP) involved in oil smuggling had been suspended, he said adding that the case has been sent to the custom intelligence for further investigation.

DAWN.COM | Business | Rs700 million pilferage discovered in Sui north

 

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National Economic Council approves massive PSDP ​

By Mubarak Zeb Khan
Friday, 05 Jun, 2009

ISLAMABAD: The National Economic Council approved an ambitious Rs621 billion Public Sector Development Programme and projected a GDP growth rate of 3.3 per cent in 2009-10.

The NEC meeting, presided over by Prime Minister Yousuf Raza Gilani, reviewed the economic performance during 2008-09, set targets and approved the Annual Development Plan for the next fiscal year.

An official told Dawn that the planning commission had proposed Rs395 billion as the federal PSDP, but the prime minister enhanced the amount to Rs421 billion to accommodate requests from various ministers.

An amount of Rs200 billion was approved for the provincial component of the development budget.

Besides the PSDP allocation, the NEC also approved Rs70 billion for the Benazir Income Support Programme, Rs50 billion for internally displaced persons and Rs40 billion for revival of industries. Agriculture is projected to grow by 3.8 per cent against 4.7 per cent in 2008-09, manufacturing sector by 1.8 per cent and services sector by 3.9 per cent.

Briefing newsmen after the meeting, Information Minister Qamar Zaman Kaira and Deputy Chairman of the Planning Commission Sardar Aseff Ahmad Ali said that Rs209 billion (49 per cent of the federal PSDP) had been allocated for infrastructure, Rs190 billion (46 per cent) for social sector and Rs22 billion (5 per cent) for productive sector.

‘The American support and other pledges would be used for the social sector, particularly in the NWFP and Balochistan,’ Mr Kaira said, adding that the overall amount was expected to edge up following the realisation of funds from other sources.

‘We don’t have any problem of resources. We have to make effective use of available resources,’ he said.

The minister said Balochistan would get Rs50 billion from the PSDP. He said that Rs21 billion of the current year’s lapsed amount would also be given to the province, besides an additional Rs9 billion for budgetary support.

During the next fiscal year, the National Highway Authority will get Rs45 billion, water sector Rs60 billion, health sector Rs26 billion and education and higher education Rs32 billion.

Sardar Aseff said the NEC approved the ADP and a five-year plan titled ‘Investing in People’. He said that the proposed plan had been sent to the provincial governments and it would also be presented in parliament for discussion, along with budget documents.

He said the meeting decided to establish 27 technical institutes of international standard in 27 districts at a cost of Rs7 billion and a Rs1 billion revolving fund for housing for the general public and government employees. The meeting also approved Rs4 billion for the Benazir tractor scheme, Rs27 billion for new grain storage facilities and the public-private partnership in the field of dairy products with government equity of Rs3.5 billion.

He said allocation had already been made for Bhasha dam and work on the dam would be taken up during the next fiscal year.

Sardar Aseff said various projects would be initiated to eliminate poverty, and not to alleviate it. He said a Pakistan Rapid Development Fund would be set up at the planning commission to give concept to governments for channelling money coming from outside, particularly the ‘Friends of Democratic Pakistan’.

Mr Kaira said the Balochistan government had expressed satisfaction over release of funds. He said special preference would be given to early release of funds for development projects in the province.

He said the NEC also approved the Thar coal project, which would also be used for generation of cheap electricity.

He said Sindh Chief Minister Syed Qaim Ali Shah had called for resumption of negotiations on the NFC award before or immediately after the budget.

Mr Kaira said Punjab Chief Minister Shahbaz Sharif was willing to show flexibility on the issue of the population factor, a major source for delay in the NFC award.

He said that Mr Sharif had also proposed indigenisation of resources, particularly enhancing the taxpayer base and prioritising development projects.

DAWN.COM | Business | National Economic Council approves massive PSDP

 

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Rs620bln development budget proposed ​

By Dawn Reporter

ISLAMABAD: The total development budget of the country for next fiscal year has been recommended Rs620 billion to the National Economic Council, which includes Rs190 billion to develop Chashma –III and Chashma –IV nuclear energy plants.

The recommendations have been forwarded by the Annual Plans Coordination committee (APCC) on Tuesday for the NEC, scheduled to be held in Islamabad on June 4, the NEC would be chaired by the prime minister.

The APCC has recommended Rs262 billion for federal ministries in the Public Sector Development Program (PSDP) for 2009-10, the recommendations includes Rs38 billion for special areas including AJK, FATA and northern areas, Rs35 billion have been recommended for special programs and Rs60 billion have been recommended for corporations.

The APCC has recommended Rs200 billion for the development budget of provinces, and Rs25 billion for the earthquake reconstruction.

The APCC papers for the NEC said that the broad sectoral distribution of federal PSDP includes Rs195 billion for infrastructure, Rs164 billion for social sector, Rs18 billion for agriculture, industries, minerals, Rs12 billion for science and technology and Rs6 billion for environment.

APCC has proposed that Rs190 billion for the development of nuclear plants C-3 and C-4 to generate 600 megawatt electricity by 2016.

Another important aspect of the proposals is that the allocations for health sector has been suggested to be raised by 82 per cent to Rs26 billion in the fiscal 2009-10.

Major programs in the federal health sector includes Rs6 billion for EPI, Rs3 billion for mother and child health, Rs7 billon for primary health care.

While the allocations for education and training has been increased by 60 per cent to Rs32 billion for the next fiscal year.

The paper said that water sector allocations has been proposed at Rs58 billion, that accounts to almost 14 per cent of the total federal program. It said that 32 small and medium dams, eight in each province are being financed in the next fiscal year.

Rs12 billion have been proposed to complete the Mangla dam raising project, as a result 2.88 million acre feet additional water could be stored in the dam in next monsoon season.

Rs139 billion have been proposed for energy sector including electricity generation and conservation projects.

Transportation and communication sector has been allocated Rs70 billion in the APCC proposals and Rs12 billion for improvement of railways.

To save the agriculture produce modern grain storage facilities are proposed at Rs27 billion and Rs3.5 billion has been proposed for public private partnership in the field of dairy development.

For the continuation of housing program for poor and government officials that was initiated in the current fiscal year, the APCC has proposed RS1 billion to continue the project.

The APCC in its proposals to the NEC has said that Thar coal infrastructure will be developed in the next fiscal and the World Bank has pledged grant assistance for preparation of the project.

‘The government of Sindh is allowed to negotiate loans with the world bank,’ the paper said.

The recommendations for the NEC said that to sharpen the skills of labour force ‘Hunarmand Pakistan Programme’ would be launched to improve skills of the labour which will create demand for Pakistani workforce abroad also.

Pakistan had requested the IMF to increase the fiscal deficit limit from 3.4 per cent to 4.6 per cent to accommodate the additional amount of around Rs160 billion in the development budget for the next fiscal.

Deputy chairman planning commission Sardar Aseff Ahmed Ali said that increased allocations for development budget would help the government fight poverty.

‘This would be a support the government to fight terrorism reducing joblessness,’ he said. The National Economic Council is expected to consider enhance the powers of Central Development Working Party (CDWP) for sanctioning development schemes.

The CDWP, currently, is authorised to sanction projects up to Rs 500 million for the federal government and projects exceeding this limit are submitted for approval to the Executive Committee of the National Economic Council (ECNEC).

DAWN.COM | Business | Rs620bln worth of development projects proposed for budget

 

[Neo]

Cut in development spending unsustainable, undesirable​

KARACHI (June 05 2009): The State Bank of Pakistan (SBP), terming reduction in development spendings as unsustainable and undesirable, has stressed the need to allocate more funds for socio-economic uplift of the masses to address the root-causes of militancy.

SBP FOR SPENDING MORE ON SOCIO-ECONOMIC UPLIFT TO CURB MILITANCY: In its "Third Quarterly Report on the State of Economy" issued on Thursday, the SBP also linked substantial decrease in current expenditures to a "significant reduction in the size of government machinery," without which it said the achievement of desired results was not possible.

The central bank also eyes the government's expenditure budget to be "stretched" by the ongoing war on terror, and an unavoidable need to support an estimated million plus internally displaced persons (IDPs) fleeing the troubled areas.

Sharp cut in development spending would have detrimental impacts on country's human and physical infrastructure, the SBP said, adding that "A substantial reduction in current expenditures is not possible without significant reduction in the size of government machinery, due to inflexible interest payments and expenses under defence and civil administration."

Therefore in the medium term, the only viable way to achieve sustainable improvements in fiscal accounts is to raise the tax-to-GDP ratio through increasing the tax net, the SBP added, warning however that an increase in tax rate may encourage evasions.

"It is crucial that the government increase its spending on health, education and strengthening social safety nets in the context of the socio-economic conditions that support the extremist militants," the SBP said.

The growth in tax collections has already slowed, and may decline further in Q4-FY09. Also, non-tax revenue receipts, which had hitherto supported overall revenue growth, are also expected to weaken in the same quarter, it added. The report pointed out that anticipated weaker performance of revenues, and increase in expenditures both point to the risk of slippage in the fiscal deficit target, and a contingent increase in financing requirements.

Similarly, resurgence in international commodity prices poses risks to the assessment of a continued sharp deceleration in inflation in the months ahead. In particular, a rise in international oil prices would have adverse consequences for domestic inflation as well as the external account balance, it added.

On the domestic front, poor law & order and security situation, and political noise have led to net outflows of portfolio investment. While, Pakistan's ability to access international financial market is constrained, any shortfall in external inflows would add to pressures on monetary policy.

The report pointed out that a practical solution is to enhance productivity in the medium term. However, it cannot be achieved without providing basic education and health facilities to masses, as well as efficient physical infrastructure including credible low cost energy, transportation and postal systems.

The country can achieve all these despite huge investment requirements. In fact, these areas indicate to implement second generation reforms to improve governance, strengthening institutions and reform legal as well as regulatory system, it added.

The report pointed out that sustainable improvement can be achieved only through increasing exports by product and market diversification with gains in productivity, adding that these are not easy tasks.

Increase in market diversification requires quality products with a good name of the country and congenial environment to buyers of Pakistani products to visit production venues and observe the processes. A large number of buyers are required to do this to satisfy their developed countries' clients about safety standards and environmental as well as social issues. Similarly, product diversification needs investment, expertise, spending in research and development.

 

[Neo]

Economic performance weak in fiscal year 2009​

KARACHI (June 05 2009): Pakistan's economy continued to show macroeconomic stability in the third quarter of the current 2008-09 fiscal year (FY09), however it became clear that economic performance of the country would remain weak in current fiscal year.

According to the Third Quarterly Report of the State Bank of Pakistan on the state of the economy, earlier months developments such as high inflation, deterioration in external account and declining industrial output have made it clear that lower growth target for the FY09 would be difficult to achieve and the country's GDP growth would be 2-3 percent.

However, the report noted with caution: "Despite the improvement in macroeconomic indicators is very encouraging, the economy is not out of the woods yet. Major macroeconomic indicators show underlying weaknesses which, if not addressed, could hamper economic recovery."

Macroeconomic stability, in third quarter, is largely attributed to the macroeconomic reforms initiated by the government and the economy benefited from a sharp decline in international commodity prices and other favourable developments. Inflation began to decline, the current account deficit narrowed substantially with a corresponding stability in the exchange rate, and fiscal discipline was maintained with the fiscal deficit being reported to be 3.1 percent of GDP for July-March FY09.

The report said that recent easing of inflationary pressures is indeed encouraging as the headline inflation - measured by consumer price index (CPI) - dropped to 17.2 percent on year-on-year (YoY) basis in April 2009 from its peak of 25.3 percent YoY in August 2008.

The report pointed out that major economic targets such as GDP growth, inflation, workers remittances and exports would not be achieved and inflation would be 20.5-21.5 percent in FY09 against the target of 11 percent.

While, the country's goods exports would be 18.5-19.5 billion dollars against the target of 22.9 billion dollars and workers remittances 7.5 billion dollars, it added. A slowdown in economic activities as well as poor law & order situation also impacted the performance of services sector during FY09.

In contrast with stellar growth in recent years, services sector is expected to record below target growth in FY09. The report said that trade deficit recorded a break from rising trend of the past six years, declining by 15.9 percent YoY during July-April FY09.

This was principally led by a 9.8 percent YoY fall in imports that more than offset a small 3.0 percent YoY fall in exports during this period. A larger share of the improvement in trade deficit was observed during January-April FY09; due to a sharp 35.1 percent YoY fall in imports that outpaced a yet large 19.2 percent YoY fall in exports in this period, it added.

The report said that in order to support industry and particularly the export-oriented sectors, which were pressured by the impact of the global recession, the SBP introduced measures such as easing access to concessional financing schemes, and lengthening maturities.

The central bank also injected appropriate liquidity to meet banking system's increased demands for commodity operations and settlement of circular debt. However, by April 2009, broad money (M2) growth was still quite weak, at 1.9 percent year-to-date, down sharply from 8.4 percent in the corresponding period last year, reflecting continued deceleration in domestic demand.

"As a result of this, the SBP projections suggest that deceleration in inflation will be much sharper in the next few months. This is also evident from the successive fall in the core inflation during March and April 2009," it added. It said this has encouraged the SBP to gradually shift its policy bias towards supporting growth in the economy.

Thus, as other macroeconomic indicators improved further, this allowed the central bank a 100 bps reduction in the policy rate, bringing it to 14 percent effective April 21, 2009. The report said that the record wheat and rice harvests together with the likelihood of good production in minor crops and of fodder increase expectations that growth in the crops sub-sector of agriculture will exceed the FY09 annual target.

"A reasonable performance from the livestock sector, supporting all this, will help take the overall agri-sector growth close to, or over, the annual target," it added. However, it noted with concern that growth in large scale manufacturing (LSM) has been negative for the 10th consecutive month in March 2009, the longest period in which production continued to shrink.

LSM growth dropped by 7.6 percent during July-March FY09 compared with a 5.0 percent rise in the corresponding period of FY08. This is the major drag on the prospects of improving real GDP growth, it added. In addition, the report said the international inflows under financial and capital accounts are relatively lower compared with the preceding years, causing a rise in overall external account deficit.

A fall in financial inflows is the result of combined impact of both external and domestic factors, the report said. "While, Pakistan's ability to access international financial market is constrained, any shortfall in external inflows would add to pressures on monetary policy," the report added.

"In short, the limited gains in key macroeconomic indicators should not lead to complacency as the quality of these improvement and challenges to economy are some factors of disquiet," it pointed out. The report also stressed upon increasing exports by product and market diversification with gains in productivity. It underscored the need to implement second generation reforms to improve governance, strengthening institutions and reforming legal as well as regulatory system.

 

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Private sector credit growth falls to six-year low​

KARACHI (June 05 2009): Private sector credit growth has declined to a six-year low of 3 percent by the end of April 09 due to low demand for working capital ahead of slow economic activities and high interest rate, said SBP Third Quarterly Report. The report pointed out that slowdown in private sector credit which started in October 2008, due to temporary liquidity crunch with banks, persisted in the following months of FY09 as well.

Resultantly, the YoY growth in private sector credit reached six-year low of 3.0 percent by the end of April 2009. "In absolute terms, the increase in private sector credit was only Rs 48.6 billion in July-April FY09 compared with remarkable surge of Rs 371.3 billion in the corresponding period of last year," it added. The deceleration in credit growth slightly increased as a few Independent Power Projects (IPPs) settled some of their loan obligations with banks.

Nonetheless, even after adjusting for this one-off impact for bank finance, the credit off-take for July-March FY09 period remained significantly low at Rs 105.8 billion compared with Rs 332.0 billion in the same period of last year, the report said. The slowdown in private sector credit was mainly explained by exceptionally low demand for working capital.

This reflects a number of developments, such as slowdown in domestic economic activities on account of acute power shortages, a sharp fall in raw material prices in the international and domestic markets, rising interest cost and contraction in trade volume partly due to the global recession etc.

The report said that demand for fixed investment loans in contrast remained quite resilient. Adding, "growth in long-term loans was because a few industries such as power, fertiliser and construction, utilised their credit lines committed with banks in the last two years".

This reliance is likely to persist as the commencement of new private sector projects particularly in cement, fertiliser, power and sugar industries would continue to sustain the demand for long-term loans in the coming months.

"The major deceleration has registered in textile sector, as excluding this, the growth in manufacturing sector increased to 12.6 percent in July-March FY09, though still lower than the same period of the previous year," the report said. Besides textile, refinery, basic metal and domestic appliance also dragged down the demand for bank loans in the manufacturing sector, it added.

The slowdown in textile sub-sector was visible in both working capital loans and fixed investment loans, only advances extended under Export Finance Scheme (EFS) registered a significant growth. However, the strong impact of EFS was more than diluted by a sharp drop in import finance and other than EFS loans to textile sector.

Within textile sector, most of the slowdown in running finance requirements emanates from the spinning sector. Monthly trend reveals that the credit-off take in this sector was strong in the initial few months of FY09 partly a reflection of commodity financing for cotton availed by the private sector. However, in the following months of FY09, the loans to the spinning industry could not maintain the growth momentum and dropped drastically.

Though a part of the fall in textile loans was anticipated, in view of continued global slowdown and the resulting drop in exports, the huge stock of inventories on account of delays in export order settlement further aggravated the situation. Furthermore, a few spinning industries have closed down their production operations in the recent months on account of acute power shortages, structural impediments in the industry and rising inability to service bank obligations.

 

[Neo]

LSM growth negative for 10 months in a row​

KARACHI (June 05 2009): Weakness in domestic demand, power shortages and deterioration in law & order situation have shrunk Large Scale Manufacturing (LSM) growth, said SBP's Third Quarterly Report. The report pointed out that growth in LSM has been negative for the 10th consecutive month in March 2009, the longest period in which production continued to shrink.

LSM growth has dropped by 7.6 percent during July-March FY09 compared with a 5.0 percent rise in the corresponding period of FY08. "Decline in external demand and sharply lower fund flows amid global recession probably contributed to slowdown in domestic manufacturing activities, while on the domestic side Weakness in domestic demand, worsening power shortages, structural problems and poor law & order situation are some important factors responsible for the decline in LSM production," the report said.

Consumer durables industry witnessed drastic decline in production during July-March FY09. In particular, jeeps & cars sub-sector is the worst hit by the sluggish demand due to continued increase in prices, rise in cost of financing and lower availability of institutional financing given the risk averse behaviour of banks amid increasing NPLs under consumer financing and liquidity problems.

The report pointed out that production decline in cooking oil & ghee industry is due to the combined impact of weaker domestic demand as well as uncertain international prices of key inputs. Similarly, textile industry suffered due to domestic as well as external shocks. Power outages, increase in utility charges and higher financial cost were some domestic factors responsible for a drag in textile sector, weak external demand amid global recession hurt production in this export driven sector.

 

[Neo]

Country to miss CPI inflation target​

KARACHI (June 05 2009): State Bank of Pakistan (SBP) has said that resurgence in international commodity prices poses risks to the assessment of a continued sharp decline in inflation in the months ahead and average CPI inflation would be over the target by the end of FY09.

According to SBP third quarterly report, the relative ease in inflationary pressures that began in Q2-FY09 continued into Q3-FY09 with all price indices exhibiting a declining trend, however the country would miss its CPI inflation target.

The report said that a rise in international oil prices would have adverse consequences for domestic inflation as well as the external account balance and projected that in FY09 average CPI inflation is expected to stay between 20.5 percent and 21.5 percent as against the target of 11 percent.

The report said that recent easing of inflationary pressures is indeed encouraging as the headline inflation - measured by consumer price index (CPI) - dropped to 17.2 percent on year-on-year (YoY) basis in April 2009 from its peak of 25.3 percent YoY in August 2008.

In particular, a sharp downtrend in food inflation is a welcome development as this component of CPI affects low income groups the most. CPI food inflation fell from its peak of 34.1 percent YoY during August 2008 to 17.0 percent in April 2009.

The recent downtrend in CPI inflation (YoY) was mainly attributed to declining domestic food inflation, principally a reflection of fall in international prices and smooth domestic supply of key staples. Signs of easing of inflationary pressures are also reflected by a decline in persistent component of inflation, which is measured by core inflation, the report said.

The non-food non-energy (NFNE) trimmed 20 percent meaning both the core inflation measures have shown signs of relative ease during April 2009. It said the downtrend in inflation owes to both, favourable international and domestic developments, as well as a deceleration in domestic demand.

The latter, in particular, reflects the monetary tightening by the State Bank, as well as the complementary improvement in fiscal discipline, especially after November 2008. It is worth noting that the acceleration in the fall of inflation is becoming visible only after the magnetisation of the fiscal deficit was halted, the report added.

Going forward CPI non-food inflation is also expected to ease as a result of lagged impact of tight monetary stance, declining international commodity prices, subdued inflationary expectations amid weaker domestic demand and absence of second-round effects due to a relative slowdown in food inflation.

In line with CPI inflation (YoY) other price indices including WPI and SPI also witnessed a downtrend during Q3-FY09. While, inflation is still high it is expected that the downtrend in inflation will gather pace in the next few months. Weak inflation expectations together with evident decline in domestic demand resulted in an ease of the monetary policy in April 2009, the report said.

 

[Neo]

Fiscal year 2009 agriculture growth would be reasonably good​

KARACHI (June 05 2009): The agriculture growth would be reasonably better during the FY09 due to the record wheat and rice harvests together with the likelihood of good production in minor crops, said the SBP's Third Quarterly Report. The report pointed out that reasonable performance from the livestock sector, supporting all this, will help take the overall agri-sector growth close to, or over, the annual target.

"Robust growth by major crops, despite lower water availability and decline in fertiliser off-take, is principally a reflection of anticipated higher prices, and good luck in terms of favourable weather," the report said. The good performance by major crops appears to be more impressive given a substantial decline in sugarcane harvest during FY09.

Similarly, growth in production of some pulses, oilseeds and horticulture crops indicates a better performance by minor crops during FY09. More importantly, growth in livestock benefited from higher supply of fodder, following the extended monsoon and winter rains as well as absence of any major incident of diseases during FY09.

All these developments suggest that FY09 agriculture growth would be reasonably good and that could have been even better if sufficient inputs - irrigation water, fertilisers and certified seeds - could have been used. Farmers' ability to increase investment in quality inputs may be reflected partially by slower than anticipated growth in agri credit.

The trends so far suggest that the annual target of Rs 250 billion would be missed, for the first time since FY05. This would be due to both demand and supply factors. However, for the next season, credit disbursement is expected to improve. For example, relatively stable fertiliser prices would help restore demand for agri credit for inputs. Similarly, an ease in monetary policy and the SBP measures to address liquidity shortages in the banking system would help improve supply of agri credit in the months ahead.

 

[Neo]

PM Gilani urges US to write-off debt​

ISLAMABAD (June 05, 2009): Prime Minister Syed Yousuf Raza Gilani urged the United States on Friday to write-off the country's debt, saying the war against militants and the displacement of tens of thousands of people had compounded economic woes.

Pakistan owed the United States $1.55 billion as of March 31, 2008, government figures show.

Prime Minister Gilani told US special envoy Richard Holbrooke that the US administration should expedite supply of military hardware to Pakistan and work with Congress to substantially increase economic assistance.

"(Gilani) has called upon the US to write off its debt to help the government of Pakistan overcome the present economic difficulties accentuated by the war on terror, growing crisis of IDPs and the negative impact of the global recession," according to a statement issued by Gilani's office.

Holbrooke had earlier announced that the United States aimed to give Pakistan $200 million, in addition to $110 million already pledged, to help it deal with the problems of the internally displaced persons (IDPs).

He said the United States would look into Pakistan's request for the debt write-off and measures were being taken to accelerate the pace of military supplies to Pakistan, the statement said.

Gilani acknowledged US help for dislocated people and hoped that the European and Muslim countries would also come forward with assistance.

Pakistan is vital for US efforts to defeat al Qaeda and Taliban in neighbouring Afghanistan.

 

[Neo]

Government seeks help to revive closed 135 megawatts Sepcol​

ISLAMABAD (June 05 2009): Ministry of Finance (MoF) is reportedly using its influence to revive the closed 135 MW Southern Electric Power Company Limited (Sepcol), which was shut down due to financial crisis and dispute with Wapda, official sources told Business Recorder.

Arshad Lodhi, Assistant Economic Advisor, Ministry of Finance in a self-contained note to Rashid Mirza, Head of Private Energy Division Corporate & Investment Banking Group, National Bank of Pakistan, Karachi, has recommended the revival of the Sepcol in wake of the current severe power shortage being faced by the country.

GoP exposure in Sepcol project is to the tune of $52.458 million comprising: (i) Long Term Credit Fund (LTCF) subordinated facility - principal outstanding $38.211million interest outstanding $5.513 million and monitoring fee outstanding $0.038 million; and (ii) Coface Facility of $8.706 million rescheduled/ restructured under Paris Club arrangements.

Giving the background, sources maintained that Sepcol was incorporated in Pakistan on December 20, 1994. The complex consisted five medium speed diesel engine generators each having 23.4 MW gross rating of 117 MW with net capacity of 112.5 MW. Subsequently, to improve the plant output and efficiency, the company installed 6th diesel engine with a capacity of 18 MW in 2007 that led the gross capacity to 135 MW with net capacity of 119.5 MW.

The operational performance of the company has been below expectations and the cash flows of the company have therefore, been significantly affected. Despite the financial disputes with Wapda, the company managed to remain current on its LTCF debt till April 25, 2006. However, it defaulted on LTCF debt obligations in October 25, 2006. Subsequently, Sepcol initialled LTCF debt restructuring negotiations with NBP.

The main reasons for the default were: (i) High level of Liquidated Damages (LDs) during the period 2005 - 2006 mainly due to engine breakdowns which resulted in non-availability of the plant inline with the PPA; (ii) Crash Maintenance programme (CMP) on the recommendations of engine manufacturer for major overhauling of all the five engines at a cost of $3.0 million; (iii) fuel losses incurred on gross generation due to increased auxiliary generation and increasing fuel prices; (iv) payment delays by Wapda against Capacity Purchase Price (CPP) invoices; and (v) inability of the company to arrange additional working capital lines of approximately $4 million.

The sources said rescheduling of the three LTCF instalments falling due on October 25, 2006, April 25, 2007 and October 25, 2007 had to be undertaken along with the interest thereon. The total amounts restructured worked out to be $10.614 million. The restructuring was approved by the World Bank, energy committee and NBP Board.

The situation continued to deteriorate and by mid 2007, the Working Capital Line (WCL) of Rs 1265 million was almost fully utilised and with substantive increase in fuel prices, the company became dependent upon advance from Wapda for purchase of its fuel requirements.

Wapda supported the project by allowing advance payment of Energy Purchase Price (EPP) to Sepcol since 2006 without an obligation under the Power Purchase Agreement (PPA).

The advance payment continued to be adjusted from the monthly EPP invoice of Sepcol at the end of each month. This arrangement continued till January 31, 2008. Wapda discontinued the advance payment for fuel on February 2008. With the hike in fuel price, Sepcol let with no cash available to finance its fuel requirements, which resulted in the complete shutdown of the complex on February 15, 2008. Subsequently, Wapda served a default notice to the company for failure to operate the plant.

Due to non availability of the plant, Wapda imposed LDs, which were contended by the company. The company filed suit against Wapda and also issued notice for arbitration. During the dispute with Wapda, the company approached various local banks for additional working capital lines in order to meet its fuel purchase requirement.

However, the banks have yet to entertain the request as the plant is closed and disputes with Wapda are continuing. The sources said the company also defaulted on its payment obligation due to LTCF on April 25, 2008, October 25, 2008 and April 25, 2009 amounting to about $15 million. In October 2008, after the lapse of eight months, Wapda started making advance payments to the company for the purchase of fuel required to run the plant and the court/arbitration proceeding were put in abeyance. However, the plant was shutdown once again in November 2008 as the sponsors/ management remained unable to (i) resolve the disputes with Wapda and (ii) raise funds from other sources to make the plant operative as a going concern.

When the plant shutdown in February 2008, the company had operated the plant every 18th day to maintain its entitlement for the CPP payment as per the terms of the PPA. However, Wapda has released no payments since November 2008 and the company has reached at a point where it may no longer be possible for it to operate the plant on every 18th day.

According to the Assistant Economic Advisor, financial crunch at this point of time is so severe that the plant preservation is at stake. Further, the company does not have funds to renew plant insurances and have requested the lenders to make payment of the insurance premium on its behalf. In case the insurance premium payment is not made before June 9, 2009 the plant would become uninsured, thus putting a national asset in jeopardy.

 

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Services sector may record below target growth​

KARACHI (June 05 2009): Slowdown in economic activities as well as poor law & order situation has affected the performance of services sector, which is expected to record below target growth in FY09.

State Bank of Pakistan's third quarterly report released Thursday says that overall domestic economic slowdown was witnessed in FY09, depicted decline in large scale manufacturing, decrease in domestic demand and decline in exports as well as imports are factors impeding growth prospects in services, it added. While, finance & insurance sub-sectors also presents a mixed performance.

Outlook for trading activities is on the down side as the two major components of value addition in trading ie manufacturing and imports exhibit slowdown in FY09. The report said that profits of commercial banks have dropped substantially during the first three quarters of FY09. In contrast, SBP profits witnessed a substantial increase during this period.

Moreover, other financial institutions; including, mutual funds, modarba companies and foreign exchange companies, whose earnings contain higher risk premia and are prone to fluctuation in rupee parity, were negatively impacted by capital market instability in H1-FY09 as well as high National Savings Schemes returns, the report said. Transportation and communication are expected to benefit from relatively lower international oil prices and consolidation of revenues, in addition storage activities exhibit sharp increase in FY09.

 

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Salman predicts a deficit budget for 2009-10​

LAHORE (June 05 2009): Former Federal finance minister and leading economist Dr Salman Shah has predicted a deficit budget for 2009-10 due to failure in achieving revenue targets set for the 2008-09 fiscal year. Addressing a pre-budget seminar, organised by the Pakistan Muslim League-Q, here on Thursday, Dr Salman Shah maintained that five percent deficit budget for the 2009-10 fiscal year would be presented.

Currently, the growth rate of the national economy was only 2.5 percent as compared to five percent last year, he said. He said that the main reason of this decline was surge in interest rate on foreign loans, besides nine percent cut in production because of following policies of the International Monetary Fund (IMF).

He further said the government was engaged in borrowing from banks and the government would have to pay Rs 650 billion in 2009-10 fiscal year on payments of internal and external loans. If the government did not receive foreign aid ahead of the budget, he also feared increase in ratio of unemployment and price hike.

He said the development sector would badly suffer, if foreign aid were not received. Dr Salman Shah further said expenditures on internal security matters were increasing. He called for reviewing the small and medium enterprise (SMEs) sector to help stabilise the economy.

He said during the current year, there was 25 percent price spiral, while difficult time was ahead for the people, as the government would have to further increase power tariff. He also said the Punjab government also failed in achieving the targets set for revenue growth for the current fiscal.

"If the oil prices would increase in the international market in time ahead, there might by economic crisis in the country, as it would result in energy crisis," he added. Nevertheless, increase in oil prices in the international market would enhance production cost of thermal power generation, he opined.

The former advisor to prime minister on economic affairs also stressed the need for construction of Kalabagh Dam to overcome power crisis. The construction of this vital project must be initiated immediately after developing consensus of all the provinces on this project, he added. He said the previous governments also made efforts to develop consensus on Kalabagh Dam. Now when all the parties were in the government, attention should be paid to achieve consensus for Kalabagh Dam, which could be completed in just five years.

He said the government would have to focus on construction of more and more dams, as it would put an end to dependence on oil apart from ensuring food security. He said the government should focus on hydel power generation, as cheap electricity would not only help stabilise the economy, but also create job opportunities.

He further said that private power companies were working below their production capacity due to failure in meeting their running expenditures. Currently, he said there was capability in the country to produce 20,000 MW of electricity. Speaking next, opposition leader in the Punjab Assembly Chaudhry Zaheeruddin said that Kalabagh Dam was a national project, which would ensure progress and prosperity in the country.

 

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Economic Outlook: Alongside is the Overview of the State Bank of Pakistan's Third Quarterly Report for Fiscal Year 2009​

TEXT (June 05 2009): 1.1 Overview: As the year progressed, it became clearer that economic performance of the country would remain weak in FY09. A moderation in economic growth was expected and embedded in a lower growth target for FY09, but developments during the first four months of the fiscal year made it obvious that even this lower growth target would be difficult to achieve.

These developments included stubbornly high inflation, massive deterioration in external accounts, and declining industrial output. Nonetheless, by the end of Q2-FY09 some semblance of macroeconomic stability was beginning to emerge, as the government focused on restoring macroeconomic stability, and entered into a Stand By Arrangement (SBA) with the IMF in support of its reform program.

This improvement continued in the third quarter of FY09, as these reforms took hold and the economy benefited from a sharp decline in international commodity prices and other favourable developments. Inflation began to decline, the current account deficit narrowed substantially with a corresponding stability in the exchange rate, and fiscal discipline was maintained with the fiscal deficit being reported to be 3.1 percent of GDP for July-March FY09.

While this improvement in macroeconomic indicators is very encouraging, the economy is not out of the woods yet. Major macroeconomic indicators show underlying weaknesses which, if not addressed, could hamper economic recovery. The record wheat and rice harvests together with the likelihood of good production in minor crops and of fodder backs expectations that growth in the crops sub-sector of agriculture will exceed the FY09 annual target.

A reasonable performance from the livestock sector, supporting all this, will help take the overall agri-sector growth close to, or over, the annual target. Also, notwithstanding a slowdown in the trade, and the transportation & communication sub-sectors, the services sector is also expected to perform well. However, the substantial negative growth in large scale manufacturing (LSM) (see Table 1.1), remains a major drag on prospects of improving real GDP growth.

While the decline in LSM growth is a reflection of weaker domestic and external demand, other domestic factors have a significant contribution as well. These include infrastructural bottlenecks (eg power and gas shortages), increasing risk averseness of banks (this has lowered access, and increased cost of credit, for both businesses and consumers), as well as persistent inflationary pressures. In this context, the recent easing of inflationary pressures is indeed encouraging.

The headline inflation - measured by consumer price index (CPI) - dropped to 17.2 percent on year-on-year (YoY) basis in April 2009 from its peak of 25.3 percent YoY in August 2008. In particular, a sharp downtrend in food inflation is a welcome development as this component of CPI affects low income groups the most.

CPI food inflation fell from its peak of 34.1 percent YoY during August 2008 to 17.0 percent in April 2009. The downtrend in inflation owes to both, favourable international and domestic developments, as well as a deceleration in domestic demand. The latter, in particular, reflects the monetary tightening by the central bank, as well as the complementary improvement in fiscal discipline, especially post November 2008.

It is worth noting that the acceleration in the fall of inflation is becoming visible only after the magnetisation of the fiscal deficit was halted. The weakness in demand pressures amid fiscal prudence, lagged impact of relatively lower international commodity prices, bumper wheat and rice harvests as well as better supply management of key staples have augmented the gains of tight monetary policy.

While domestic demand had been visibly easing since November 2008, the pace of the improvement was initially unclear, and there were lingering risks on the external accounts as well as in the relative resilience in core inflation. These risks precluded an immediate easing of monetary policy, and accordingly the January 2009 monetary policy statement kept the policy rate unchanged.

Notwithstanding this, the measures introduced in the wake of the liquidity shock in October 2008 meant that KIBOR eased, particularly due to non-enforcement of the implicit interest rate corridor by SBP, which effectively diluted the impact of the policy stance on the already-stressed domestic economy.

To support industry and particularly the export-oriented sectors, that were pressured by the impact of the global recession, measures were introduced such as; easing access to concessional financing schemes, and lengthening maturities. The central bank also injected appropriate liquidity to meet banking system's increased demands for commodity operations and settlement of circular debt.

However, by April 2009, broad money (M2) growth was still quite weak, at 1.9 percent year-to-date, down sharply from 8.4 percent in the corresponding period last year, reflecting continued deceleration in domestic demand. As a result of this, SBP projections suggest that deceleration in inflation will be much sharper in the next few months. This is also evident from the successive fall in the core inflation during March and April 2009.

The projected improvement encouraged SBP to gradually shift its policy bias towards supporting growth in the economy. Thus, as other macroeconomic indicators improved further, this allowed the central bank a 100 bps reduction in the policy rate, bringing it to 14 percent effective from April 21, 2009.

It has been argued that the substantial improvement in macroeconomic indicators, should have allowed for a sharper reduction in the policy rate; particularly when the growth indicators show a substantial slowdown in the economy, and inflation is projected to fall sharply.

Indeed, the market had already envisaged the possible cut in the policy rate, ahead of the April reduction, observing low inflationary pressures in the economy, the expectation is evident from the downtrend in the market rates since January 2009. Such a measure would have been possible, were it not for the risks attached to the current macroeconomic situation.

These risks include anticipated shortfalls in fiscal receipts, the uncertain international environment which adds uncertainty to Pakistan's ability to finance even a narrower current account deficit, as well as the fact that the accelerated decline in inflation is, so far, more an expectation than a fact.

The fiscal deficit for July-March FY09 is reported at 3.1 percent of GDP, which is consistent with the annual target, but there are significant issues with both, the sustainability of this trend over the full year, and the quality of this reduction in the deficit.

(1) The growth in tax collections has already slowed, and may decline further in Q4-FY09. Also, non-tax revenue receipts, which had hitherto supported overall revenue growth, are also expected to weaken in the same quarter (eg rising international prices are expected to squeeze receipts of petroleum development levy).

(2) The government's expenditure budget will also be stretched by the ongoing war on terror, the need to support an estimated more than a million internally displaced persons (IDPs) fleeing the conflict areas.

(3) It is important to stress the "improvement" in the fiscal picture as a result of the sharp cut on development spending is neither sustainable nor desirable. Particularly in the context of the socio-economic conditions that support the extremist militants, it is crucial that the government increase its spending on health, education, and strengthening social safety nets.

The anticipated weaker performance of revenues, and increase in expenditures both point to the risk of slippage in the fiscal deficit target, and a contingent increase in financing requirements. The pertinent point here is that the lower demand for private sector credit and increased risk averseness of banks during the year so far, allowed the government to increase borrowings from commercial banks without putting upward pressure on interest rates.

However, recent developments suggest that this room is fast eroding, and significant additional government demand would increase the risk of crowding out the private sector. Similarly, resurgence in international commodity prices poses risks to the assessment of a continued sharp deceleration in inflation in the months ahead.

In particular, a rise in international oil prices would have adverse consequences for domestic inflation as well as the external account balance. In recent months, current account deficit witnessed improvement relative to the corresponding period, for the first time in five years.

This is mainly attributed to a substantial fall in import growth, and sustained strong growth in remittances that continued during December-April FY09. However, flows under financial and capital accounts are relatively lower compared with the preceding years, causing a rise in overall external account deficit.

A fall in financial inflows is the result of combined impact of both external and domestic factors. Financial flows towards emerging economies have generally significantly shrank amid financial turmoil and recession. On the domestic front, poor law & order and security situation, and political noise have led to net outflows of portfolio investment.

While, Pakistan's ability to access international financial market is constrained, any shortfall in external inflows would add to pressures on monetary policy. In short, the limited gains in key macroeconomic indicators should not lead to complacency as the quality of these improvement and challenges to economy are some factors of disquiet.

For example, a decline in fiscal deficit would have been a welcome development to the extent achieved through lower growth in current spending (see Table 1.2). The reduction in development expenditure is not desirable, as it would have detrimental impacts on country's human and physical infrastructure. In the medium term, the only viable way to achieve sustainable improvements in fiscal accounts is to raise the tax-to-GDP ratio through increasing the tax net.

This is because a substantial reduction in current expenditures is not possible without significant reduction in the size of government machinery, due to inflexible interest payments and expenses under defence and civil administration. Similarly, an increase in tax rate may probably encourage tax evasion.

Another area of concern is the gradual improvement in current account deficit, which is principally driven by a decline in import growth. It should be kept in mind that there exists quite uncertainty over the pace of growth in workers' remittances. In addition, country would also have higher debt servicing in coming years.

These two factors reinforce the common view that sustainable improvement can be achieved only through increasing exports by product and market diversification with gains in productivity. These are not easy tasks. Increase in market diversification requires quality products with a good name of the country and congenial environment to buyers of Pakistani products to visit production venues and observe the processes. A large number of buyers required to do this to satisfy their developed countries clients about safety standards and environmental as well as social issues.

TABLE 1.1: SELECTED ECONOMIC INDICATORS
================================================================== FY07 FY08 FY09 ================================================================== Growth rate (percent) ------------------------------------------------------------------ LSM Jul-Mar 9.1 5.0 -7.7 Exports (fob) Jul-Apr 2.9 9.9 -3.0 Imports (cif) Jul-Apr 8.9 28.3 -9.8 Tax revenue (FBR) Jul-Apr 20.0 16.3 17.7 CPI (12 month MA) Apr 7.8 9.8 22.0 Private sector credit Jul-Apr 13.0 15.0 1.7 Money supply (M2) Jul-Apr 11.8 8.4 1.9 ------------------------------------------------------------------ billion US dollars ------------------------------------------------------------------ Total liquid reserves1 end-April 13.7 12.4 11.2 Home remittances Jul-Apr 4.5 5.3 6.4 Net foreign investment Jul-Aprr 5.9 3.9 2.2 ------------------------------------------------------------------ percent of GDP2 ------------------------------------------------------------------ Fiscal deficit Jul-Mar 3.1 4.7 3.1 Trade deficit Jul-Mar 5.3 6.6 5.7 Current a/c deficit Jul-Mar 4.3 5.7 4.6 ==================================================================

NOTE:

1 With SBP & commercial banks.

2 Based on full-year GDP in the denominator. For FY09 estimated full-year GDP.

TABLE 1.2: PROJECTIONS OF MAJOR ECONOMIC INDICATORS
==================================================================== FY08 FY09 ==================================================================== Annual plan targets Projections ==================================================================== growth rates in percent -------------------------------------------------------------------- GDP 5.8 5.5 2.0 - 3.0 Average CPI Inflation 12 11 20.5 - 21.5 Monetary assets (M2) 15.3 14 8.0 - 10.0 -------------------------------------------------------------------- billion US dollars -------------------------------------------------------------------- Workers' remittances 6.5 7.7 7.5 Exports (fob-BoP data) 20.1 22.9 18.5 - 19.5 Imports (fob-BoP data) 35.4 37.2 30.5 - 31.5 -------------------------------------------------------------------- percent of GDP -------------------------------------------------------------------- Fiscal deficit 7.4 4.7 4.0 - 4.5 Current account deficit 8.4 7.2 5.0 - 5.5 ====================================================================
NOTE: Targets of fiscal and current account deficit to GDP ratios are based on nominal GDP in the Budget document for FY09, while their projections are based on projected (higher) nominal GDP for the year.

Similarly, product diversification needs investment, expertise, spending in research and development. Finally, a practical solution is to enhance productivity in the medium term. However, it cannot be achieved without providing basic education and health facilities to masses, as well as efficient physical infrastructure including credible low cost energy, transportation and postal systems.

The country can achieve all these despite huge investment requirements. In fact, these areas indicate to implement second generation reforms to improve governance, strengthening institutions and reform legal as well as regulatory system.

1.2 EXECUTIVE SUMMARY


1.2.1 AGRICULTURE SECTOR Robust growth by major crops, despite lower water availability and decline in fertiliser off-take, is principally a reflection of anticipated higher prices, and good luck in terms of favourable weather. The good performance by major crops appears to be more impressive given a substantial decline in sugarcane harvest during FY09.

Similarly, growth in production of some pulses, oilseeds and horticulture crops indicates a better performance by minor crops during FY09. More importantly, growth in livestock benefited from higher supply of fodder, following the extended monsoon and winter rains as well as absence of any major incident of diseases during FY09.

All these developments suggest that FY09 agriculture growth would be reasonably good and that could have been even better if sufficient inputs - irrigation water, fertilisers and certified seeds - could have been used. Farmers' ability to increase investment in quality inputs may be reflected partially by slower than anticipated growth in agri-credit.

The trends so far suggest that the annual target of Rs 250 billion would be missed, for the first time since FY05. This would be due to both demand and supply factors. However, for the next season, credit disbursement is expected to improve. For example, relatively stable fertiliser prices would help restore demand for agri-credit for inputs. Similarly, an ease in monetary policy and SBP measures to address liquidity shortages in the banking system would help improve supply of agri-credit in the months ahead.

1.2.2 LARGE-SCALE MANUFACTURING Growth in large scale manufacturing (LSM) has been negative for the tenth consecutive month in March 2009, the longest period in which production continued to shrink. LSM growth dropped by 7.6 percent during July-March FY09 compared with a 5.0 percent rise in the corresponding period of FY08.

Weakness in domestic demand, worsening power shortages, structural problems and deterioration in law & order situation are some important factors responsible for the decline in LSM production. Similarly, decline in external demand and sharply lower fund flows amid global recession probably contributed to slowdown in domestic manufacturing activities.

Consumer durables industry witnessed drastic decline in production during July-March FY09. Domestic consumer durable industry largely produces for the local market and is relatively less competitive than the regional competitors. In particular, jeeps & cars sub-sector is the worst hit by the sluggish demand due to (1) continued increase in prices; (2) rise in cost of financing; as well as (3) lower availability of institutional financing given the risk averse behaviour of banks amid increasing NPLs under consumer financing and liquidity problems.

Production decline in cooking oil & ghee industry is due to the combined impact of weaker domestic demand as well as uncertain international prices of key inputs. Similarly, textile industry suffered due to domestic as well as external shocks.

Power outages, increase in utility charges and higher financial cost were some domestic factors responsible for a drag in textile sector, weak external demand amid global recession hurt production in this export driven sector. In contrast, drop in sugar production is entirely attributed to domestic factor ie, lower sugarcane harvest during FY09.

1.2.3 SERVICES A slowdown in economic activities as well as poor law & order situation also impacted the performance of services sector during FY09. In contrast with stellar growth in recent years, services sector is expected to record below target growth in FY09. In relation to domestic economic slowdown, foreign inflows of funds in services have eased up in FY09.

Overall domestic economic slowdown witnessed in FY09, depicted by decline in large scale manufacturing, decrease in domestic demand and decline in exports as well as imports are factors impeding growth prospects in services. Outlook for trading activities is on the down side as the two major components of value addition in trading ie manufacturing and imports exhibit slowdown in FY09.

On the other hand, finance & insurance sub-sector also presents a mixed performance.The profits of commercial banks dropped substantially during the first three quarters of FY09. In contrast, SBP profits witnessed a substantial increase during this period.

Moreover, other financial institutions; including, mutual funds, modarba companies and foreign exchange companies - whose earnings contain higher risk premia and are prone to fluctuation in rupee parity - were negatively impacted by capital market instability in H1-FY09 as well as high NSS returns. Transportation and communication are expected to benefit from relatively lower international oil prices and consolidation of revenues; in addition storage activities exhibit sharp increase in FY09.

1.2.4 PRICES The relative ease in inflationary pressures that began in Q2-FY09 continued into Q3-FY09 with all price indices exhibiting a declining trend. After reaching a record high in August 2008, CPI inflation (YoY) declined to 17.2 percent in April 2009.

The recent downtrend in CPI inflation (YoY) was mainly attributed to declining domestic food inflation, principally a reflection of fall in international prices and smooth domestic supply of key staples. Signs of easing of inflationary pressures are also reflected by a decline in persistent component of inflation, which is measured by core inflation. The non-food non-energy (NFNE) and 20 percent trimmed mean, both the core inflation measures have shown signs of relative ease during April 2009.

Going forward CPI non-food inflation is also expected to ease as a result of lagged impact of tight monetary stance, declining international commodity prices, subdued inflationary expectations amid weaker domestic demand and absence of second-round effects due to a relative slowdown in food inflation. In line with CPI inflation (YoY) other price indices including WPI and SPI also witnessed a downtrend during Q3-FY09.

While, inflation is still high it is expected that the downtrend in inflation will gather pace in the next few months. Weak inflation expectations together with evident decline in domestic demand resulted in an ease in monetary policy in April 2009.

1.2.5 MONEY AND BANKING SBP reduced the policy discount rate through a 100 bps to 14 percent effective from April 21, 2009. Though the demand pressures have been showing a downtrend since November 2008, the lowering of risks to external account position and a visible downtrend in stubbornly high core inflation allowed SBP to lower the policy rate.

While inflation has been quite stubborn over the last 6 months, this appears to be changing, as evident in the declining trend in the year-on-year figures for CPI inflation as well as both core inflation measures. Similarly, a sharp slowdown in country's import bill during Q3-FY09 helped substantially in narrowing the current account deficit to US $396 million in the same period.

This together with financial flows from International Financial Institutions (IFIs) led to a significant increase in SBP's foreign exchange position to US $7.8 billion at end-April 2009 from its low level of US $3.5 billion by end-October 2008. Moreover, the private sector credit growth continued to show deceleration as it recorded net retirement of Rs 127.1 billion in January-March FY09 compared with net lending of Rs 203.1 billion in H1-FY09.

While the credit demand is slowing down, banks were also reluctant to lend to private sector due to rising credit quality concerns. On the fiscal side, the demand stimulus has continued to ease as fiscal discipline improved, and government reliance on central bank borrowing has further declined by end- March 2009.

The domestic liquidity condition, as a result of slowdown in domestic credit requirements by the government and private sector and sharp fall in pace of depletion of NFA of the banking system have continued, so far, remained relatively easy. The impact of improvement in demand pressures on rupee liquidity is quite visible from the softening of market interest rates since January 2009.

The YoY growth in broad money (M2) decelerated sharply to 8.4 percent as on April 25, FY09 compared to 15.3 percent in the corresponding period last year. This was despite a considerable fall in pace of depletion of Net Foreign Assets (NFA) of the banking system. The sharp deceleration in M2 growth came from reduced credit requirement by the government and private sector.

Resultantly, as on April 25, 2009, the YoY growth in Net Domestic Assets (NDA) of the banking system dropped to 16.9 percent from 22.6 percent a year earlier. The overall deposits mobilisation by banks remained weak during July-March FY09 as overall deposits of the banking system witnessed a contraction of 0.6 percent on cumulative basis.

This was despite a considerable ease in external current account pressures which was a significant source of erosion in deposit-base. Indeed, deceleration in private sector credit growth, higher competition from National Saving Scheme (NSS), and lower liquidity injections from SBP into banks following a lesser budgetary borrowings from the central bank limited the deposit growth in the period of analysis.

1.2.6 FISCAL DEVELOPMENTS Recent update on fiscal developments by Ministry of Finance indicates that the budget deficit for July-March FY09, as a percentage of the estimated FY09 GDP, is likely to remain at 3.1 percent compared with 4.7 percent in the corresponding period of FY08. Though broadly consistent with the annual fiscal deficit target for FY09, the quality of this fiscal improvement can only be judged once consolidated fiscal accounts are released.

Indicators of tax performance suggest a likely shortfall in tax collection (budget) target for FY09. During July-April FY09, FBR tax receipts amounted to Rs 898.6 billion compared with Rs 763.6 billion in the same period last year, reflecting a YoY increase of 17.7 percent.

Although the YoY growth in tax receipts during July-April FY09 is moderately higher than the 16.3 percent rise experienced in the corresponding period of FY08, monthly trend projects a deceleration in FBR tax revenues for the entire fiscal year 2008-09.

Even if FBR is able to arrest the downtrend in the growth of tax collection during the remaining months of FY09, the current pace of increase in tax receipts falls short of the 24.1 percent YoY growth required to attain the Rs 1250 annual budget target for FY09.

As a percent of annual target, total tax collection stands at 71.9 percent by end April 2009. Importantly, 74.5 percent and 78.6 percent of the annual budget target were achieved in the same period of FY08 and FY07 respectively. It merits mentioning here that the FBR tax collections fell short by Rs 17.8 billion in FY08.

To achieve FY09 target of Rs 1250 billion would require FBR to amass almost 28 percent of the target amount in the remaining two months; indicating that the revenue target for FY09 will be hard to achieve keeping in view the prevailing economic conditions in the country.

The aggregate government borrowing from domestic sources stood at Rs 353.0 billion during July-March FY09, which is significantly lower than the domestic budgetary requirements in the corresponding period of FY08. With apparent shortfall in external borrowing for budgetary support, the decline in budgetary borrowing from domestic sources in July-March FY09 reflects improvement in fiscal balance.

1.2.7 BALANCE OF PAYMENTS The improvement in Pakistan's overall external account, which emerged in November FY09, continued in the subsequent months as well. A large part of this improvement during July-April FY09 is on account of 23.5 percent contraction in current account deficit. This contraction mainly owed to fall in imports, on the back of weakening aggregate demand pressures and falling import prices, and strong remittances growth.

Unlike the improvement in current account, capital & financial account deteriorated sharply during July-April FY09. This deterioration was contributed by a fall in both investment and loan inflows. While loan inflows revived to large extent after IMF support for macroeconomic stabilisation program, foreign investment inflows continued their declining trend in the wake of worsening global financial crises.

While loan inflows could further strengthen if pledges (worth US $5.28 billion) made in Friends of Democratic Pakistan (FODP) conference materialise, substantial recovery in foreign investment inflows is subject to the normalisation of international financial market conditions and improvement of Pakistan's macroeconomic indicators.

The relative improvement in Pakistan's external accounts was reflected in foreign exchange reserves, which recorded sustained improvement November 2008 onwards. Consequently by April 30 2009, foreign exchange reserves had climbed back to almost the end-June level of US $11.4 billion after hitting a low of US $6.8 billion in October 2008. This also alleviated pressures on the exchange rate, helping it to stabilise in the range of 78.8 and 80.8.

1.2.8 TRADE ACCOUNT Trade deficit recorded a break from rising trend of the past six years, declining by 15.9 percent YoY during July-April FY09. This was principally led by a 9.8 percent YoY fall in imports that more than offset a small 3.0 percent YoY fall in exports during this period.

A larger share of the improvement in trade deficit was observed during January-April FY09; due to a sharp 35.1 percent YoY fall in imports that outpaced a yet large 19.2 percent YoY fall in exports in this period. The fall in imports, in turn, was contributed by a shrinking import demand which was complemented by a large YoY decline in import unit values from the beginning of January FY09.

Unfortunately exports, after recording a decent performance during July-October FY09, recorded an accelerated deterioration November 08 onwards. This deterioration in export performance was the result of multifarious issues faced by exports. For instance structural obstacles, domestic energy crisis, and worsening law and order situation were some of the major issues that constrained export performance.

The impact of these domestic impediments was complimented by deepening international recession from Q4-CY08, which further squeezed external demand for country's major exports leading to a YoY fall in exports for July-April FY09. Nevertheless, given the expectation that the decline in imports will be much larger than the fall in exports, the trade deficit is expected to continue to decline in the remaining months of FY09. Thus overall, the trade deficit for FY09 is likely to be much lower than that in FY08.