The following is the Economic Survey of Pakistan for the year 2004-2005 released by the Finance Division, Economic Adviser's Wing, Government of Pakistan: Pakistan's economic recovery has gained further traction during the fiscal year 2004-05, with the economy expanding at its fastest clip in two decades. The exceptionally strong growth was underpinned by accommodative macroeconomic policies, growing domestic demand, renewed confidence of private sector, fiscal discipline and competitive exchange rates.

The outgoing fiscal year has indeed been an eventful year for Pakistan's economy. The year has posted several multiyear "firsts". Pakistan's real GDP growth of 8.4 percent in 2004-05 is the fastest pace in two decades; the fifth time in the country's history that it exceeded 8 percent growth mark; Pakistan positioned itself as the second fastest growing economy after China in 2004-05; its per capita income crossed $700 mark; Pakistan achieved highest ever production of cotton (14.6 million bales) and wheat (21.1 million tons) in 2004-05; it has seen the largest ever expansion of private sector credit in 2004-05; exit from the IMF Programme marks an important milestone; Pakistan became the fourth sovereign to issue an Islamic Bond (Sukuk), following Malaysia, Qatar and Bahrain; the country's public and external debt burden declined to their lowest in decades; current account balance slipped into the red after posting surpluses for three consecutive years; and inflation at 9.3 percent is the highest in 8 years.

Pakistan is in the midst of an economic upturn. Since 2002-03, the economy has mounted a strong recovery with a sustained improvement in prospects. During the fiscal year 2004-05, many of its macroeconomic indicators show marked improvement over last year.

The most important achievements of the year include: the fastest pace in real GDP growth, powered by stellar growth in large-scale manufacturing, a sharp pick up in agriculture, a continuing robust performance in services, and an extra-ordinary strengthening of consumer demand; a double-digit growth in per capita income in dollar term, reaching $736; investment upturn gaining a stronger footing, particularly private sector investment which remained buoyant owing to a rare confluence of various positive developments; an unprecedented increase in credit to private sector for second year in a row; sharp increases in the consumption of oil, gas, electricity and coal reflecting rising level of economic activity; fiscal deficit remaining on target despite Rs 50 billion shortfall in revenue on account of lower collection of petroleum development levy (PDL); higher than targeted collection of taxes; a high double-digit growth in exports and imports; workers' remittances maintaining their momentum; a continued accumulation of foreign exchange reserves and stability in the exchange rate; a sharp decline in the public and external debt burden; privatisation programme continued to maintain its robust momentum; launching of first ever Islamic Bond (Sukuk) in international capital markets; and the performance of Eurobond remained in line with the markets with the spread over US Treasury undergoing further compression.

It is not uncommon to see pressures building up on prices, trade and current account balances when economic activity accelerates. Pakistan's economy is undergoing structural shifts that are fuelling rapid changes in consumer spending patterns.

Three years of strong economic growth complemented by record - low interest rates and the on-going structural shift of many households in Pakistan toward higher consumption have injected new life into domestic spending. The extra-ordinary surge in domestic demand in conjunction with unprecedented rise in oil prices fuelled import demand which more than offset the improved outcome for exports.

Accordingly, this year has witnessed widening of trade deficit more than what was envisaged at the beginning of the year. With trade gap widening, the current account balance slipped into the red after posting surpluses for three consecutive years.

This year has also seen inflation rising to 8 years high, hurting the poor and fixed income groups the most. In particular, food inflation at high double-digit has put extra-ordinary burden on poor segment of the society as they spend bulk of their income on food items. A surge in domestic demand on the one hand and supply side shocks emanating from rising commodity and oil prices on the other, have been responsible for the sharp pick up in inflation this year.

This year has seen improvements in many macroeconomic indicators along with improvements in social and living conditions indicators. Results from the recently concluded Pakistan Social and Living Standards Measurement (PSLM) Survey show a marked improvement in social and living conditions indicators.

Key indicators such as literacy rate, gross and net enrolment in primary, middle and matric levels; access to sanitation and safe drinking water; use of electricity and gas as source of lighting and cooking fuel, respectively; various health indicators such as child immunisation and treatment of Diarrhea, have all shown marked improvements over the last 4 - 7 years.

While socio-economic and macroeconomic polices pursued during the year have had a strong influence on across-the-board improvement, an increasingly broad and dynamic global recovery has aided Pakistan in this endeavor.

Global Economic Environment From the developing countries' perspective, the global economic environment this year has been relatively less benign than last year. In terms of economic recovery, the world economy enjoyed one of its strongest years of growth (5.1%) in 2004 and this momentum is expected to continue this year, albeit at a more moderate pace (4.3%), owing to higher and volatile oil prices and rising interest rates.

Although the global economy posted strong growth in 2004, the overall picture, however, hides growing divergence across regions. Growth in the United States was stronger than expected on the back of strong domestic demand but it was disappointing in Europe and Japan - the two major growth poles of the world economy, reflecting weak domestic demand and equally weaker export performance.

The story of emerging markets is altogether different. Real GDP growth in 2004 exceeded expectations in almost all regions.

In emerging Asia, China's growth momentum remained very strong while growth in India also remained robust. Pakistan's growth performance in emerging Asia has also been extra-ordinarily strong on the back of strengthening domestic demand and robust global economic expansion.

In ASEAN region, Indonesia, Malaysia, Thailand and Philippines posted growth in the range of 5-6 percent. While South Asia remained a strong performer on account of sharp pick up in growth in Pakistan and India, Sri Lanka and Bangladesh also experienced growth of over 5 percent.

Robust global growth of last two years has strengthened the external demand environment, which contributed to the sharp pick up in growth in developing countries via strong increases in exports. Pakistan also benefited from healthy external demand environment as its exports continued to grow at high double-digit during the last two years.

Notwithstanding strong global economic expansion supporting growth in developing countries, several other factors have impacted these countries adversely to varying degrees. These factors include: rising oil prices, sliding dollar, rising inflation and interest rates.

This year has seen unprecedented rise in oil prices on the back of rising demand and a series of supply disruption including capacity constraints in raising supply. Although the main consumers of oil continue to be the industrialised world (US, OECD Europe, and Japan together consume about half of annual oil output) they have at the same time prepared themselves to face oil price volatility.

Over the last 30 years, they have succeeded in reducing oil intensify or use of oil per unit of output by one-half. It is the oil-importing countries who are severely affected by the unprecedented rise in oil prices in several ways. Firstly, these countries are less oil efficient despite the fact that their oil intensity, on average, has declined by one-third; secondly, their foreign exchange reserves are relatively low and their balance of payments are fragile.

Even a temporary period of higher oil prices can force substantial adjustment in domestic consumption at a considerable cost to growth and poverty reduction. The fiscal impact can also be significant when domestic petroleum products prices are not adjusted accordingly.

During the current fiscal year, Pakistan had to face serious difficulties in managing the cost of unprecedented rise in oil prices. In order to shield its domestic consumers and industries from higher oil prices, it absorbed a fiscal cost of Rs 50 billion in fiscal year 2004-05. Furthermore, it had to pay additional $700 - 800 million in oil import bills.

The sliding dollar as a result of widening US current account deficit, raised the debt burden of developing countries on account of valuation effect. During the first nine months of the current fiscal year, Pakistan's external debt increased by $628 million due to valuation effect alone.

However, given the present outlook of exchange rate movements, particularly weakening of Euro after France's rejection of the European Union constitution, a further decline in valuation effect is expected in the fourth quarter of the current fiscal year.

In fact, after the French rejection, Euro was trading at a 7-month low of $1.23; and Japanese Yen at 108.4. These are good signs for Pakistan as its external debt would decline further during the fourth quarter of the year if the decline in non-US dollar currencies continues.

The surge in international oil prices coupled with an unprecedented rise in world price of commodities combined to spark inflationary pressure not just in Pakistan, but in the global economy. Rising interest rate, reflecting a gradual tightening of monetary cycle to counter inflationary expectations, raised the cost of borrowing for developing countries.

This cost is likely to adversely affect the balance of payments of developing countries, their fiscal position as well as prospects for growth.

GDP GROWTH: Real GDP grew by 8.4 percent in 2004-05 as against 6.4 percent last year and surpassed the target (6.6%) by a wide margin. This is the third year in a row when Pakistan overshort its growth target by a wide margin. The sharp pick up in growth this year is aided by a stellar performance in large-scale manufacturing, impressive recovery in agriculture and a strong growth in services sector.

This year's growth is truly broad-based as each sub-sector has recorded strong growth. Large-scale manufacturing grew by 15.4 percent against the target of 12.2 percent and last year's achievement of 18.2 percent. Growth in large-scale manufacturing is also broad-based as many sub-sectors registered a high double-digit growth.

Agriculture posted a growth of 7.5 percent against the target of 4.0 percent and last year's achievement of 2.2 percent. The services sectors registered an equally strong growth of 7.9 percent, aided by remarkable growth in finance and banking sector (21.8%), wholesale and retail trade (12.0%); and a modest growth in transport and communication (5.6%). With 8.4 percent growth, Pakistan has joined Singapore to emerge as the second fastest growing economy of Asia after China in 2004-05 - an achievement for which every Pakistani should feel elated.

This does not mean that Pakistan has joined the East Asian league, including China, in terms of prosperity and living standards. To join the league, it would require a rapid growth over a prolonged period for which, much more efforts would be required. This year's growth is however, underpinned by supportive macroeconomic polices and benign financial market conditions.

AGRICULTURE: After four years of weak and fragile growth, this year has seen agriculture staging a smart recovery by posting a growth of 7.5 percent on the back of an unprecedented rise in the production of cotton (14.6 million bales) and wheat (21.1 million tons) crops. These two crops account for over 24 percent of the value added in agriculture. Stellar performance of these two crops helped agriculture staging an impressive recovery in 2004-05. A 7.8 percent rise in area under the crop, higher ball bearing, use of improved quality of pesticide resulting in low pest pressures, and favourable weather condition for growth and development of the crop are responsible for the unprecedented rise in cotton production.

The rise in support price, adequate and timely supply of inputs including fertiliser, availability of certified seed and above all, the widespread and timely winter rains have helped in achieving higher than targeted wheat production. Sugarcane production was down by 15.2 percent on the back of severe water shortage during Kharif season. Rice, another water intensive crop, grew by 2.9 percent over last year.

Major crops, accounting for 37.1 percent of agricultural value added, registered highest growth (17.3%) in decades as against 1.8 percent last year. Minor crops, contributing 12.2 percent to overall agriculture, grew by 3.1 percent as against 2.6 percent last year. The performance of livestock - the single largest contributor to overall agriculture (46.8%) - has remained lacklustre at best on account of total neglect by every government all along.

Water situation improved considerably with the passage of time during the current fiscal year. The water availability for Kharif season (for crops such as rice, sugarcane and cotton) has been 12 percent less than the normal supplies.

The water availability for Rabi season (for crops such as wheat) as of end March 2005 was 36.5 percent less than the normal availability. Water situation, however, improved after the widespread winter rain of January - March 2005. A higher than expected snowfall on the mountains during the same period is going to help fill the reservoirs during the summer time. This will further improve the water situation for Rabi and Kharif 2005-06.

MANUFACTURING: Manufacturing sector in general and large scale manufacturing in particular, continued to maintain their impressive performance for the second year in a row. Overall manufacturing, accounting for 18.3 percent of GDP, registered an impressive growth of 12.5 percent against the target of 10.2 percent and last year's achievement of 14.1 percent. Large-scale manufacturing, accounting for 69.5 percent of overall manufacturing and 12.7 percent of GDP, registered a sharp pick up of 15.4 percent as against the target of 12.2 percent and last year's achievement of 18.2 percent.

A 15.4 percent growth in large-scale manufacturing over a very high base of last year, is one of the important developments of fiscal year 2004-05. Various factors including accommodative monetary policy, financial discipline, consistency and continuity in policies, strengthening domestic demand, continuously improving macroeconomic environment, a stable exchange rate, continued global economic expansion fuelling exports growth and a general "feel good" environment have been responsible for sustained high growth in large-scale manufacturing. Growth in this sector has been broad-based as many sub-sectors registered a high double-digit growth.

CONSTRUCTION: Construction sector has been one of the star performers of the fiscal year 2004-05. As against a sharp down turn of 6.9 percent last year, this sector has recorded equally sharp upturn of 6.2 percent this year. Last year's decline was mainly caused by a massive global increase in the prices of iron and steel because of the 'China factor'.

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

During the last two years, the government has taken various budgetary and non-budgetary measures which are now yielding positive results. Construction activity in Pakistan has gathered momentum; the demand for construction-related materials has surged. Many national and international real estate developers have launched or are launching construction projects in Pakistan.

PER CAPITA INCOME: Per capita income is one of the main indicators of development. It simply indicates the average level of prosperity in the country or average standard of living of the people in a country. Per capita income defined as Gross National Product at market price in dollar term divided by the country's population, grew by an average rate of 13.5 percent per annum during the last three years - rising from $579 in 2002-03 to $736 in 2004-05.

Per capita income in dollar term > from page 16 registered an increase of 12 percent over last year - rising from $657 to $736. The main factor responsible for the sharp rise in per capita income include: a sharp pick up in real GDP growth, stable exchange rate, and rise in inflow of workers' remittances.

Pakistan's economy is undergoing structural shifts that are fuelling rapid changes in consumer spending patterns. In particular, the middle classes are becoming an increasingly dominant force. Pakistan's per capita real GDP has risen at a faster pace during the last two years (4.4% in 2003-04 and 6.5% in 2004-05), leading to a rise in average income of the people. Such increases in real per capita income have led to a sharp increase in consumer spending during the last two years.

As opposed to an average annual increase of 1.4 percent during 2000-2003, real private consumption expenditure grew by 8.2 percent in 2003-04 and further by 16.8 percent in 2004-05. The extra-ordinary strengthening of domestic demand during the last two years points to the following facts. First, the higher consumer spending feeding back into economic activity is likely to support the on-going growth momentum. Second, it suggests the emergence of a strong middle class with buying powers - good for business expansion.

Third, extra-ordinary rise in consumer spending over the last two years appears to have contributed, in part to building inflationary expectations in Pakistan.

INVESTMENT: Investment is a key determinant of growth. During the fiscal year 2004-05, gross fixed capital formation or domestic fixed investment grew by 15.6 percent as against a sharp rise of 17.4 percent last year. Although the growth in domestic investment was marginally slower than last year, the composition of investment between private and public has changed considerably.

Private sector investment grew by 19.3 percent this year as against a growth of 9.6 percent last year. Public sector investment on the other hand registered marginal decline of 0.4 percent as against a hefty 36.8 percent increase last year. In other words, the growth in domestic investment was largely a public sector phenomenon last year but this year, it was entirely private sector driven.

As percentage of GDP, total investment is provisionally estimated at 16.9 percent - slightly lower than last year (17.3%). Fixed investment is estimated at 15.3 percent of GDP this year versus 15.6 percent last year. A marginal decline in the rate of fixed investment on the one hand and a sharp pick up in economic growth on the other, simply indicates the rise in efficiency of capital. In other words, it simply suggests an increase in capacity utilisation or gains in productivity.

INFLATION: Inflation, as measured by the changes in the Consumer Price Index (CPI), averaged 9.3 percent during the first ten months (July - April) of the current fiscal year as against 3.9 percent in the same period last year. At 9.3 percent, inflation is at 8 year high in 2004-05. Food inflation recorded at 12.8 percent compared with 4.9 percent for the same period last year.

Non-food inflation rose to 6.9 percent as against 3.3 percent in the same period last year. Core inflation, arrived at by excluding food and energy inflation, also indicated a rising trend for the period under review, increasing from 3.3 percent to 7.4 percent.

The sharp upturn in inflationary trend is caused by demand pressures on the one hand and supply shocks on the other. Three years of strong economic growth in succession have given rise to the income levels of various segments of society. The rising levels of income have strengthened domestic demand which contributed to the rise in inflationary pressure.

Supply side pressures emanated from a combination of factors. Successive increases in the support price of wheat in the last two years (Rs 100 per 40 kg), shortage of wheat owing to less than the targeted production (in 2003/04); and the mismanagement of wheat operation by two provinces, resulted in sharp increases in the prices of wheat and wheat-flour. The price of other food items registered sharp increases owing to 'sympathy effect' on the one hand and demand pressure on the other.

The pass-through impact on CPI-based inflation of an increase in wheat support price is both significant as well as empirically well established. In addition, a surge in international oil prices coupled with an unprecedented rise in world prices of commodities have combined to spark inflationary pressure.

House rent index also played an important role in building inflationary pressure this year. With second largest weight in the CPI (23.4%) after food (40.3%), the persistent rise in this index has contributed substantially to the increase in CPI - inflation. From a level of 3.8 percent last year, the index recorded an increase of 11.1 percent.

Cognisant of the impact of inflation on the economy, most importantly its adverse and disproportionate effect on the poor and vulnerable segments of society as well as its deleterious effect on purchasing power of the fixed-income group, the government responded in a multi-pronged manner to the rise in the price level.

A strategy of regular monitoring of domestic stocks of key commodities and their prices was adopted, by which the government was able to respond in a timely manner to shortages by importing substantial quantities of wheat and other essential commodities to augment supplies.

To ease off the demand pressures generated by the rising level of economic activity, the State Bank of Pakistan began to tighten monetary cycle rather aggressively of late.

The easing of demand pressure through monetary policy and improving the supply situation of food items, either through raising their production (for example, wheat this year) or through imports, are likely to put downward pressure on general price level in coming months.

MONETARY POLICY: A gradual shift in monetary policy stance has been observed for the last 15 -16 months as inflationary pressure kept on mounting. The State Bank of Pakistan changed its monetary policy stance from easy to 'measured' tightening and of late, it moved rather aggressively to tame inflation. Notwithstanding gradual tightening of monetary cycle, monetary policy has been largely supportive to growth momentum.

The State Bank of Pakistan avoided a 'sledgehammer' policy to ensure that the current economic upturn is not derailed. As a result, the interest rate environment remained relatively investment-friendly for most part of the year under review as weighted average lending rate remained negative in real terms and private sector credit rose to a record Rs 370 billion during the period under review.

The benchmark 6-months T-bill rate was hiked by 500 basis points since June 2004 to 7.08 percent by April 2005. Of late, the State Bank of Pakistan raised the discount rate by 150 basis points (bps) to 9.0 percent in April 2005 from 7.5 percent in November 2002, strongly signaling the increase in the lending rates.

It was not surprising to see credit plan undergoing revision on the back of exceptionally strong growth this year. Broad money (M2) was originally targeted to grow by 11.3 percent on the basis of a 6.6 percent growth and 5 percent inflation for the year. Private sector credit was targeted to rise by Rs 200 billion.

The monetary developments during the first half of the fiscal year as well as upward revision of both the real GDP growth and inflation targets, suggested higher monetary expansion. The Credit Plan was, therefore, revised with broad money growing by 14.5 percent (Rs 306 billion) during the fiscal year 2004-05. The target for private sector credit expansion was raised to Rs 350 billion and government borrowing for budgetary support was fixed at Rs 60 billion.

During the first nine months (July - March) of the fiscal year, broad money has registered a growth of 13.1 percent as against the full-year target of 14.5 percent and last year's growth of 12.3 percent in the same period. The growth of broad money is largely driven (84%) by expansion in net domestic assets (NDA) which was itself triggered by unprecedented rise in the credit to private sector (Rs 370 billion). The net foreign assets (NFA) contributed only 16 percent to monetary expansion.

The extremely buoyant attitude of the private sector can be viewed by the fact that the cumulative borrowing of this sector during the last three years amounted to Rs 863 billion as against the cumulative borrowing of Rs 580 billion in the previous ten years (1992-2002). More importantly, credit to private sector as percentage of GDP surged from almost 20 percent in 1999-2000 to over 25 percent in 2004-05 - almost 5 percentage point's increase in the last six years.

The distribution of credit to private sector was highly broad-based as almost all sectors of the economy availed substantial credit. Of course, manufacturing sector claimed 41 percent in the net credit expansion to private sector. Within manufacturing, textile sector received the lion share (62.8%).

The commerce sector was another important sector which availed Rs 38.6 billion or 11.5 percent of the total private sector. Consumer loans consisting of auto finance (Rs 32.6 billion), personal loans (Rs 27.4 billion), housing finance (Rs 14 billion) and credit cards (Rs 3.2 billion), amounted to Rs 77.2 billion or 23 percent to total private sector credit expansion.

The gradual tightening of monetary policy is also reflected in the rise of the weighted average (WA) lending rate. The WA lending rate was 4.63 percent at the beginning of the current fiscal year and by end-March 2005, it moved to 6.57 percent - 194 basis points increase in the lending rate.

The WA deposit rate, however, increased only by 23 basis points during the same period. This simply suggests that the spread has gone up from 3.43 percent to 5.14 percent. The rise in spread indicates an increase in the profit of the banking system but at the same time, it is an indicator of inefficiency. The yield on 6-month treasury bills moved upward rather sharply - increasing from 2.52 percent in July 2004 to 7.08 percent in April 2005 - an increase of 456 basis points in 10 months.

The export refinance rate which is linked with 6-month treasury bills rate, was adjusted upward by 150bps to 6.5 percent in May 2005. The State Bank of Pakistan will continue to monitor very closely the inflationary trend and its monetary policy stance will be influenced by the development on inflationary front.

STOCK MARKET: Stock market in Pakistan has witnessed extra-ordinary volatility during the year. The Karachi Stock Exchange (KSE) witnessed an accelerated rise during the year until March 15, 2005. The KSE-100 index rose from 5210 in July 2004 to peak at 10,303 on March 15, 2005 - an increase of 5093 points or 98 percent. More importantly, market moved in a normal way until December 2004.

The accelerated rise was witnessed since January 2005 and until March 15, 2005 when index rose by 65 percent in a short period of 2.5 months. Most of these increases were contributed by OGDC, PTCL, PSO, POL and NBP, of which three are on privatisation list (OGDC, PTCL and PSO) and their share prices jumped upward mainly on report of good buying interest from foreign strategic buyers. There has been a buying interest in NBP on account of good profitability.

The stock market turned bearish since March 16, 2005 as the KSE 100 index dropped to as low as 6939 on April 12, 2005 from its peak of 10303 - showing a decline of 3364 points or 32.7 percent. Such a sharp rise in index and a subsequent steep decline represented abnormal and unhealthy movements in the equity market.

While the five scrips listed above caused unprecedented boom, the same scrips largely became the cause for the sharp down turn. There are divergent views of the market players and outsiders on what caused abnormal behaviour of the equity market.

The reasons that need to be fully investigated include: (i) delay in the privatisation of government owned companies; (ii) withdrawal of funds by financiers; (iii) excessive buy positions by several brokers in the future market who were not able to get an exit opportunity due to the continuous decline in the market; (iv) sellers in the March future contract were carrying hedged position from ready market; (v) seller decided not to square up their positions in the March futures contract; and (vi) downward circuit breakers blocked the opportunity of exit from the market.

FISCAL POLICY: A sound fiscal management is essential for a stable macroeconomic environment. Weak fiscal balance has been the major source of macroeconomic difficulties in the 1990s. After six years of extensive efforts through the reform of the tax system and tax administration, Pakistan has succeeded in attaining fiscal stability.

The overall fiscal deficit that averaged nearly 7.0 percent of the GDP in the 1990s has been reduced to 2.3 percent in 2003-04 but increased to 3.2 percent on account of substantial loss in revenue under Petroleum Development Levy (PDL). The revenue deficit (total revenue minus current expenditure) has been narrowed from 3.0 percent of GDP in the late 1990s to 0.2 percent or Rs 13.9 billion in 2004-05.

The primary balance (total revenue minus total non-interest expenditure) has remained in surplus for the last many years. Public debt burden has also registered a sharp decline in recent years and is fast moving towards a sustainable level.

Pakistan continued to make gains on fiscal front during 2004-05. The overall fiscal deficit remained on the target (3.2 % of GDP) despite Rs 50 billion loss in Petroleum Development Levy (PDL) for not passing fully the rising cost of petroleum products to the domestic consumers.

The Central Board of Revenue (CBR) is targeted to collect Rs 580 billion but it is most likely to collect Rs 590 billion - Rs 10 billion more than the target and 13.7 percent more than last year. Total revenue is targeted to increase by 7.6 percent while total expenditure is projected to grow by 9.9 percent, but most of the increase is coming from the Public Sector Development Programme (PSDP) - up by 17.1 percent.

Current expenditure is targeted to increase by 11.8 percent, of which, interest payment and defence - the two largest components of it, is projected to grow by 8.5 percent and 7.5 percent respectively. As a result of prudent fiscal management, the share of interest payment in total outlay has declined from almost 30 percent in 2001-02 to 20.2 percent in 2004-05 - almost 10 percentage points decline in just four years.

While the share of defence stagnated at around 18 percent during the last four years, the share of PSDP increased from 15.3 percent to 19.2 percent during the same period. Thus, the saving from interest payments has been diverted towards the PSDP.

Another important development on the fiscal side has been the near elimination of the revenue deficit in the last two years. Revenue deficit stood at Rs 71 billion or 1.5 percent of GDP in 2002-03 but declined sharply to Rs 14.6 billion or 0.2 percent of GDP in 2004-05.

The Fiscal Responsibility and Debt Limitation Law require this deficit to be eliminated by 2007-08. Pakistan has almost reached there to achieve the target much in advance. Most importantly, Pakistan continues to maintain a primary surplus for the last several years - so vital for the reduction of public debt burden.

Public debt burden continues to decline rather sharply over the last five years with significant improvement in fiscal situation. The public debt to GDP ratio, which stood at 85 percent in 1999-2000, has declined sharply to 59.4 percent in 2004-05 - almost 26 percentage points reduction in debt burden in just five years is one of the significant achievements of the government.

During the year, public debt as percentage of GDP declined from 67.7 percent to 59.4 percent - an 8.3 percentage decline in one year is other stellar occurrences of the current year. Since public debt is a charge on the budget, its burden must be viewed in relation to government revenue. Public debt was 473.4 percent of total revenue last year but declined to 457 percent this year - a decline of 16 percentage points is not a mean achievement.

EXTERNAL SECTOR: Pakistan's external sector is being affected both by structural and cyclical factors. Three years of strong economic growth, complemented by record low interest rate and the ongoing structural shift of many household in Pakistan towards higher consumption have injected new life into domestic spending.

The strengthening of domestic demand triggering a pick up in investment spending after a multi-year lull has fuelled Pakistan's import growth. Higher global oil prices further added to a massive surge in imports which more than offset the improved outcome from exports and accordingly emerged as a key factor in widening the trade gap this year. With trade gap widening, the current account balance slipped into the red after posting surpluses for three consecutive years.

EXPORTS: Exports were targeted to grow by 11.3 percent in 2004-05 - rising from $12.3 billion last year to $13.7 billion this year. During the first nine months of the current fiscal year exports were up by 14.6 percent, rising to $10.2 billion from $8.9 billion in the same period last year, thereby registering an increase of $1.3 billion in absolute terms.

One-half of the net increase in exports amounting to $651 million has come from the non-traditional exports items, followed by 27 percent from other manufactures and 13.4 percent from primary commodities; exports. The textile manufactures contributed 9.4 percent towards additional export earnings.

Sustaining a high double-digit growth in exports for three consecutive years is one of the major achievements of the outgoing fiscal year. Given the performance of the first nine months, exports are likely to touch $14 billion mark by the end of this fiscal year.

Unlike last year when exports growth was largely on account of higher unit values, this year's exports are driven mainly by substantial rise in volume. In other words, quantity effect has dominated the price effect for the surge in exports this year. With firming up of prices in the international market, exports are likely to rise further.

The surge in exports is underpinned by a strong growth in primary commodities and other manufactures and a stellar growth in non-traditional items. Textile manufacturers, accounting for 58.5 percent of total exports registered a modest growth of 2.1 percent. However, within textile manufactures, knitwear, towels and made-up articles have registered an impressive growth of over 20 percent each.

Their exports in quantity term also registered a sharp increase, ranging between 10 - 32 percent. Although bases were low, exports of engineering goods, petroleum products and chemicals and pharmaceutical products have exhibited impressive performance.

Notwithstanding impressive export performance, Pakistan's exports are still highly concentrated in few items. Five categories of exports namely, cotton, leather, rice, synthetic textiles and sports goods account for over 79 percent of total exports.

Such a high degree of concentration of exports in a few items can serve as a major cause for instability in export earnings. Similarly Pakistan's exports are highly concentrated in few countries. About one-half of Pakistan's exports went to seven countries only. Such concentration in few markets can also become a source for instability in export earnings.

IMPORTS: Imports were targeted to grow by 7.1 percent in the current fiscal year - rising from $15.6 billion to $16.7 billion. Pakistan's imports are up by 37.8 percent in the first nine months of the current fiscal year - rising from $10.5 billion to $14.5 billion, showing an increase of almost $4.0 billion this year. Major contributions to this year's additional import bill have come from machinery, chemical and petroleum groups. Over one-half of the increases have come from machinery and chemicals and over 16 percent has come from petroleum group.

The extra-ordinary increase in imports owes mainly to strengthening domestic demand and higher prices of crude and petroleum products. The surge in domestic demand has fuelled an exceptional 41.5 percent increase in non-food non-oil imports. In particular, import of machinery, chemicals and metal groups are up by 55 percent, 33 percent and 80 percent, respectively as domestic investment has come back to life owing to stronger domestic and external demand.

These three groups combined accounted for over one-half of total imports, clearly reflecting the growing level of domestic investment. Rising prices of international oil are a major negative for Pakistan.

The unprecedented rise in oil prices has struck the economy at a time when domestic demand is showing signs of acceleration as imports of both crude and petroleum products are up by 18.8 percent and 8.4 percent, respectively in quantity terms pushing total oil import bill up 31 percent.

Both quantity and prices are responsible for the surge in imports this year as quantity accounted for 69 percent and the remaining 31 percent to the rise in prices of major import items.

Like exports, Pakistan's imports are also highly concentrated in few items. Machinery, petroleum and petroleum products, chemicals, transport equipment's, edible oil, iron and steel, fertiliser and tea account for over 70 percent of Pakistan's total imports. Within these few items, machinery, chemicals and metal group account for 68 percent of total imports.

Considerable structural changes have taken place in the composition of imports during the last 6 years in general and last three years in particular. The share of machinery, chemicals and metal group has increased from 36 percent in 1999-2000 to 39 percent in 2002-03.

Thereafter, the composition of imports has undergone sharp changes, mirroring the rising level of investment and economic activity in the country. The share of these three items jumped from 39 percent to 68 percent in a short period of three years.

TRADE BALANCE: Pakistan's trade deficit has widened beyond target for the current fiscal year owing to a much faster increase in imports compared with exports. Given the stronger-than-anticipated surge in domestic economic activity, the widening of trade gap in the short-run is quite normal.

The widening of trade gap is not worrisome as long as it is caused by rising import which is enhancing the production base of the economy. It should be a matter of concern if it is caused by rising imports of consumer durables and faltering exports. In the case of Pakistan, the trade gap has widened because of the extra-ordinary surge in investment driven imports, which is enhancing the production base of the economy.

WORKERS REMITTANCES: Workers remittances, the second largest source of foreign exchange inflow after exports, continue to maintain a rising trend. Against the full year target of $3.8 billion, workers remittances totalled $3.45 billion during the first ten months (July - April) of the current fiscal year, as against $3.2 billion in the same period last year, showing an increase of 7.5 percent.

The United States continues to be the single largest source of cash workers remittances accounting for 31 percent, followed by UAE (16.9%), Saudi Arabia (14.7%), UK (9.0%) and Kuwait (5.2%). Given the trend so far, it is likely that workers remittances may touch $4.2 billion in 2004-05. Remittances have so far proved remarkably resilient and have hovered around $4.0 billion since 2002-03.

ACCORDING TO THE RECENT WORLD ECONOMIC OUTLOOK: published by the IMF, remittances can help improve the country's development prospects, maintain macroeconomic stability, mitigate the impact of adverse shock and reduce poverty.

The Outlook further states that remittances allow families to maintain or increase expenditure on basic consumption, housing, education, and small-businesses formation. To the extent, the poorer section of the society depend on remittances for their basic consumption needs, increase remittances could be associated with reduction in poverty and possibly inequality.

The Outlook also finds strong empirical evidence that suggest that construction activity is highly correlated with remittances inflow. Pakistan has been receiving, on average, $4.0 billion or 4.0 percent of GDP per annum during the last three years. Such a massive inflow of remittances has helped Pakistan building its foreign exchange reserves which, in turn, has provided stability in exchange rate.

For the families, the massive flow of remittances helped increase their consumption spending, helped improve the housing facility and improve their overall hiring conditions.

CURRENT ACCOUNT BALANCE: Pakistan's current account balance has slipped into red in 2004-05 after posting surpluses for three consecutive years. The deterioration in the current account is driven by substantially wider trade deficit owing to higher oil import bill and hefty rise in non-oil non-food imports, fuelled by strong domestic demand.

The current account deficit, excluding official transfers, stood at $1358 million (1.2% of GDP) during July - March, 2004-05 as against a surplus of $1505 million in the same period last year. Besides widening trade gap underpinned by a surge in investment-driven imports, higher freight charges by international shipping lines as a result of sharp increase in global trade and higher fuel cost and growth in personal travel due to the rising level of income of middle and high income groups, have also contributed in taking current account balance in deficit for the first time in three years.

A deficit of this magnitude (1.2 - 1.5 % of GDP) is quite consistent with the growth target that Pakistan has set for itself in the next five years. If Pakistan succeeds in attracting foreign direct investment in the range of 1.2 - 1.5% of GDP, it can finance the gap in current account without adding to the country's debt burden, as FDI is a non-debt creating inflow.

FOREIGN DIRECT INVESTMENT: Pakistan has succeeded in attracting $891.5 million in FDI during July - April, 2004-05 as against $760 million in the same period last year, showing an increase of 17.2 percent. By the end of the current fiscal year, FDI is expected to cross $1.0 billion mark. Over 70 percent of FDI has come into power sector; telecom sector; chemicals, pharmaceutical and fertiliser; oil and gas; and banking and finance.

Almost 70 percent of FDI has come from USA, UK, Switzerland, Japan, UAE and Netherlands. Significant improvement in the country's overall macroeconomic environment, performance of Euro and Islamic bond (Sukuk) and up-gradation of Pakistan's credit rating have helped attract relatively large inflows of foreign direct investment.

FOREIGN EXCHANGE RESERVES: Pakistan's total liquid foreign exchange reserves, with some fluctuations, maintained an upward trend during the current fiscal year. By end April 2005, reserves touched all time high at $13.0 billion - up from $12.5 billion in the same period last year. Of which, reserves held by the State Bank of Pakistan amounted to $10.23 billion and by bank stood at $2.8 billion. Many factors contributed toward this comfortable position of reserves.

The most important among those are private transfers that include remittances, higher export proceeds, floatation of Islamic bond (Sukuk) and higher FDI flows. With this build up in reserves Pakistan is in a position to meet any abnormal shock on external front.

The continued build up in foreign exchange reserves has provided strength to the Pakistani rupee vis-à-vis US dollar. The interbank exchange rate per US dollar averaged rupees 59.4 per US dollar on end - April 2005 as against Rs 57.5 averaging on the same period last year, reflecting a depreciation of 3.2 percent. In general, Pakistan's exchange rate vis-à-vis US dollar has remained stable during the period under review.

PRIVATIZATION: The privatisation program has progressed at a much faster pace this year. Since 1990 and until mid-April 2005, Pakistan has completed or approved 146 transactions with gross proceeds of Rs 148.4 billion. Of this, a sum of Rs 13.6 billion was received during the first nine and a half months (July - mid April) of the current fiscal year.

In addition, bidding for Karachi Electric Supply Corporation was held on February 4, 2005 the proceeds of which amounted to Rs 20.24 billion are still awaited. A new feature of the privatisation program has been the offering of the shares to the general public through the stock market, which was well received.

EXTERNAL DEBT: Until a few years ago, Pakistan was facing serious difficulties in meeting its external debt obligations. Not only was the stock of external debt and foreign exchange liabilities growing at a breakneck pace, but the debt carrying capacity remained stagnant. Consequently, the debt burden (external debt and foreign exchange liabilities as percentage of foreign exchange earnings) reached an unsustainable level of 335 percent by 1998-99.

FOLLOWING A CREDIBLE STRATEGY OF DEBT REDUCTION: Pakistan has succeeded in reducing the rising trend in external debt and foreign exchange liabilities. Pakistan's external debt and liabilities have declined by $1.24 billion - down from $37.9 billion at the end of the 1990s to $36.62 billion by end-March, 2005.

The surplus in current account coupled with continued build up in foreign exchange reserves and the higher foreign exchange earnings, pre-payment of expensive debt and debt write-off are the major factors responsible for the reduction in the total stock of debt.

The country's debt burden has also declined at a much faster pace than anticipated. The country's debt burden defined as a ratio of external debt and liabilities to GDP stood at around 52 percent in end-June 2000, declined to 36.7 percent in end-June 2004 and further to 33.1 percent by end-March 2005.

Similarly, the country's debt burden defined in a different way, that is, external debt and liabilities as percentage of foreign exchange earnings was 297 percent in 1999-2000, declined to 164.6 percent in 2003-04 and further to 145.9 percent by end-March 2005.

It may also be pointed out that Pakistan's external debt and liabilities were 22 times of its foreign exchange reserves in 1998-99 but declined sharply to 2.8 times in just six years. These statistics suggest that Pakistan's external debt burden has declined at a much faster pace than anticipated and that it is now on a solid downward footing.

EURO BOND: On February 12, 2004 Pakistan made a successful return to the international capital market for the first time in more than five years. Pakistan issued $500 million five years Regulation-S Euro bond due 2009, lead managed by J.P.Morgan, Deutsche Bank and ABN Amro Bank.

This transaction attracted strong demand from high quality and diversified international investors resulting in four times over subscription and consequent tightest possible pricing of the bond in comparison to similar or better rated sovereign offering for five years new issues.

The success of this transaction reflected a vote of confidence by the international investor's community on Pakistan's economic policies and reform agenda. Pakistan's Euro bond was priced at 370bps above US Treasury (3.046%) to yield 6.75 percent which looked very tight when compared with emerging market peers.

Since the issue of Pakistan's Eurobond, due 2009, it has performed in line with the market with the spread over US Treasury under going compression by about 100 basis points as on May 19, 2005. As compared to the issue a spread of UST + 370bps, the bond is currently trading at a spread of UST + 279bps.

SWAP DEAL FOR EURO BOND: As part of a dynamic debt management process, Pakistan transacted an interest rate swap to lower the interest cost of its Euro bond. The deal was done with Standard Chartered Bank at a rate of 3.2275 percent over 6 - month LIBOR with protection against a sharp unexpected rise in interest rate.

This transaction has yielded a positive carry of about $8 million so far. In other words, Pakistan saved debt service payments to that extent. For the first time in the country's history, the government has undertaken such an exercise to reduce the country's debt burden and as such is building an in-house capacity to monitor global markets.

ISLAMIC BOND (SUKUK)On January 18, 2005, Pakistan successfully closed its debt Sukuk transaction in the international capital markets. Following on from its highly successful US $500 million Eurobond issue in February 2004, Pakistan issued a five-year floating rate note Sukuk Al-Ijara. The issue conformed to Regulation S Eurobond standards and was lead managed by Citigroup and HSBC.

The order book was twice oversubscribed and in the light of such strong demand, Pakistan increased the issue size from US $500 million to US $600 million. The deal was also particularly successful from a pricing perspective; the transaction was priced at 220bps over 6 months US dollar LIBOR, which was at the tightest end of the revised price guidance, on the back of the continuing strengthening of the underlying economic fundamentals.

The development of the local Islamic banking market was also another strategic imperative for Pakistan. Last year, the State Bank of Pakistan commenced the issuing of new Islamic banking licenses, which paved the way for the establishment of several new Islamic banks as well as permitting conventional banks to open full-fledged Islamic branches.

The Sukuk issue would provide the spur for the creation of both the domestic Islamic capital and money markets. It was for this reason that Meezan Bank Limited was brought in as the local structuring advisor for the Sukuk issue.

The unique transaction appealed to both conventional as well as Islamic institutions, and attracted demand from both pools of liquidity in a wide geographic base.

Pakistan was extremely encouraged by the quality of the order book. Central bank / Government Agencies accounted for 25 percent of the transaction, Asset managers 23 percent, Islamic Institutions 20 percent, banks 18 percent, Private Banks/ Retail intermediaries 11 percent and Insurance Companies/ Corporates approximately 2 percent.

In the secondary market, the Sukuk has performed extremely well, underpinned by the strong demand and the robust performance of the Pakistan economy, consequently the yield has tightened by over 30bps and is currently trading at the LIBOR + 185bps range.

SOCIAL SECTOR AND LIVING CONDITIONS: The discussion so far points to the fact that Pakistan's economy has gained more strength during the outgoing fiscal year. All its macroeconomic indicators with a few exceptions show marked improvements over last year. The macroeconomic-policies and reform programmes pursued over the last six years have not only transformed Pakistan into a stable and resurgent economy, but have set the stage for the economy to grow more vigorously in the next five years.

Have such policies and programmes improved the social indicators and living conditions of the people? These are valid and frequently asked questions. The government believes that the efforts to strengthen the economy will not be completed unless macroeconomic gains trickle-down to masses in terms of improved living conditions.

The Federal Bureau of Statistics has recently completed the Pakistan Social and Living Standards Measurement (PSLM) Survey, designed to provide social and economic (poverty) indicators in the alternate year at provincial and district level for the assessment of development programme initiated by the government under Poverty Reduction Strategy Paper (PRSP).

The first district level Survey, following the Core Welfare Indicators Questionnaire (CWIQ) approach, with a sample size of 76520 households (27144 urban and 49376 rural) from 5348 sample area, covering both urban and rural areas, has been conducted during the year 2004-05.

The Survey was started in September 2004 and the entire field operations were completed in March 2005. The first report of the Survey covering national/provincial level indicators has been finalised and will be released shortly by the FBS.

The remaining reports covering district level information will also be released soon by the FBS. The provincial level Survey of the PSLM, focusing on household consumption and expenditure will be completed by June 2005 and its report will be available in December 2005. The estimate of poverty for 2004-05 would be available to all of us.

This year's Economic Survey has reported result pertaining to some of the key indicators representing living conditions and social sector, obtained from the PSLM Survey. The detailed results will be released by the FBS. Social indicators and the indicators representing the living conditions of the people have exhibited marked improvement over 2000-01 as well as over 1998 census results.

For example, the number of household living in one room homes decline from 38.1 percent according to 1998 census to 24.2 percent in 2004-05. Similarly, percentage of households living in 2 - 4 rooms homes increased from 55 percent to 68.7 percent during the same period.

Number of household living in 5 and more rooms also show improvement from 6.9 percent to 7.1 percent. This trend simply reflects the improvement in the living conditions of the people. Another important finding is the percentage of households using electricity as a source of lighting and gas as cooking fuel has also registered sharp improvement. Several other indicators such as major source of drinking water and type of toilets used by household also show significant improvement in the last four years.

The percentage of household using Tap water as major source of drinking water increased from 25 percent to 39 percent in the last four years. Gross enrolment at primary level, after stagnating at around 71 - 72 percent during 1998-99 and 2000-01, increased substantially to 86 percent in 2004-05. Net enrolment at primary level increased by 10 percentage points (from 42% to 52%) in four years.

This simply suggests that the drop out rate has declined and cost effectiveness of educational expenditure has improved somewhat. Gross and net enrolment in middle and matric level also shows improvement during the last four years as against a total stagnation during 1998-99 and 2000-01.

Most importantly literacy rate has increased from 45 percent to 53 percent during the last four years with male literacy rate rising from 58 to 65 percent in female literacy rate rising from 32 to 40 percent. Adult literacy rate has also increased from 43 to 50 percent - seven percentage points increases across urban and rural areas in four years.

Health conditions of the population have also improved significantly during the last four years. The proportion of children immunised in the 12 - 23 months bracket at national level has risen from 53 to 77 percent while in rural areas it has shown an even faster increase from 46 to 72 percent.

The practice and source of treatment of diarrhea in children under five year shows improvement. The percentage of cases where practitioners were consulted went up from 81 to 90 percent, while the percentage of cases where ORS was administered went up from 52 to 78 percent in rural areas.

The wide spread use of ORS both in urban and rural areas suggest that media campaign by the relevant ministries are paying healthy returns in the form of increased awareness and timely action at the household level. This will directly contribute in reducing the under-five mortality rate in the country.

Notwithstanding significant improvements in the social and living indicators, much more effort will be required to improve the country's overall social indicators. Improvements thus so far show that the direction is right but pace of improvement needs to be accelerated.

CONCLUDING REMARKS: This is no time for complacency. Pakistan is in the midst of an economic upturn. To sustain the momentum is indeed a major challenge for the policy-makers. Linked with this are the challenges of job creation, poverty alleviation, improving social indicators and most importantly, strengthening the country physical infrastructure to support 7 - 8 percent growth in the medium-term.

Against the backdrop of the improved economic outlook, the focus of policy efforts should be on medium-term measures that would underpin the sustainability of the recovery while rebuilding room for maneuver to respond to possible future shocks.

An impressive recovery from an economic downturn is a good time to start implementing second generation reforms. Many economic problems are due to shortcomings in the markets, rather than to resource shortages or an excess or deficiency of overall demand.

There is a broad consensus that where there are such problems, structural reforms - policy measures that change the institutional and regulatory frameworks governing market behaviour - can lead to greater efficiency in the allocation of resources.

Structural reforms can also boost growth in the short-run by increasing returns to investment and by providing scope for macroeconomic policies to allow the economy to run at higher levels of capacity utilisation without inflationary pressures.

While the outcomes of the outgoing fiscal year have given sources of optimism some lessons from this year should form the guiding principles for going forward. First and foremost is that we should rely least on the support price mechanism and rely more on the non-price mechanism to enhance agricultural output.

Second, livestock sector accounts for almost one-half of the agricultural value added - much more than major crops - therefore, proportionate attention must be given to this sector which has remained neglected for many decades.

The policy of concentrating on four major crops is a self-defeating policy as far as overall agriculture is concerned. Livestock, minor crops, fishing and forestry need equal attention - they together account for 70 percent of agriculture.

Third, credit booms are difficult to foresee, therefore, we need to remain vigilant, especially in situations where rapid credit growth is accompanied by current account deficit and higher inflation.

Containment of credit booms usually requires strengthened surveillance of the banking system and close scrutiny of corporate borrowing during periods of rapid economic growth.

Pakistan's economy is no longer fragile and its balance of payments is no more vulnerable to external shocks. Wide-ranging structural reforms, prudent macroeconomic policies, financial discipline, and consistency and continuity in policies have transformed Pakistan into a stable and resurgent economy. Going forward, sound macroeconomic policies, financial discipline, continuity of policies, political and regional stability will be the key, to sustain growth momentum.

http://www.brecorder.com/index.php?id=2710...&term=&supDate=

Fastest pace of growth in 20 years, rise in per capita income to $736
RECORDER REPORT
ISLAMABAD (June 05 2005): Pakistan's per capita income in dollar terms rose by 12 percent to $736 from $657 in FY-05. The 'Economic Survey FY 2004-05,' released in Islamabad on Saturday, said that improvement in the average standard of living of the people was helped by the fastest pace of growth in 20 years: 8.4 percent rise in GDP, a stable exchange rate and a rise in the inflow of workers' remittances ($3.45 billion, against $3.2 billion in 10 months of last year). Social indicators, representing the living conditions of the people, registered a marked improvement, according to the Pakistan social and living standards measurement survey.

For example, the number of households living in one-room houses declined from 38.1 percent (2000-01) to 24.2 percent (in 2004-05). Similarly, percentage of households occupying two to four-room houses increased from 55 to 68.7 percent during the same period. The number of households in five or more rooms also showed improvement from 6.9 to 7.1 percent.

Use of tap water was up from 25 to 39 percent. Percentage of households using electricity, as a source of lighting, and gas, as cooking fuel, was sharply up. Gross enrolment at primary level, after stagnating at around 71 to 72 percent during 1998 to 2000, increased substantially to 86 percent in 2004-05. Net enrolment at primary level increased by 10 percentage points (from 42 to 52 percent) in four years.

INVESTMENT: Private sector investment in 2004-05 grew by 19.3 percent as against 9.6 percent of last year, while public sector investment was down marginally by 0.4 percent as against a hefty 36.8 percent increase last year. In other words, the growth in domestic investment was entirely private sector-driven, says the survey.

As a percentage of GDP, total investment was slightly lower at 16.9 percent as against 17.3 percent last year. Fixed investment was 15.3 percent of GDP this year versus 15.6 percent last year. "A marginal decline in the rate of fixed investment and a sharp pickup in economic growth showed rise in efficiency of capital and increase in capacity utilisation or gains in productivity.


Copyright Business Recorder, 2005

Tax-to-GDP ratio falls to 9pc




By Our Reporter

ISLAMABAD, June 4: The tax-to-GDP ratio has declined to 9 per cent in 2004-05 from the 9.4 per cent of last year, says the Economic Survey released on Saturday. The survey says that the tax revenue in relation to GDP has remained stagnant at 9 to 10 per cent during the last five years.

The government had recently projected to raise the tax-to-GDP ratio to 10.5 per cent by the year 2009-10. The decline in the ratio calls for a greater deal of effort to widen the tax base by mobilizing additional resources to bring this ratio at par with other countries, which were more or less at the same levels of economic development stage.

Pakistan’s GDP was re-based at 1999-2000 from a two decades old base of 1980-81.

According to the report, during the last five years, tax collection has increased by more than 70 per cent to Rs590 billion expected to be collected in 2004-05 against Rs346.6 billion in 1999-2000.

The revenue deficit — the difference between total revenue and total current expenditure — has been narrowed from 3 per cent of the GDP to 0.2 per cent, which will increase national savings and thus reduce the country’s dependence on foreign savings to finance domestic investment.

The share of direct taxes in total taxes decreased to 31.4 per cent in 2004-05 from 32.5 per cent in 1999-2000. However, the share of indirect taxes increased to 68.6 per cent in 2004-05 from 65.5 per cent in 1999-2000.

According to the report, the pace of change in the tax structure, particularly in indirect taxes has gained considerable momentum over the last five years. The share of customs collection declined to 26.1 per cent in 2004-05 from 33 per cent in 1999-2000, while share of central excise declined to 11.5 per cent in 2004-05 from 31 per cent in 1999-2000.

The share of sales tax during the period increased dramatically from 36.3 per cent to 62.5 per cent of indirect taxes in 2004-05.

The survey expressed the hope that an improved tax structure would reduce the deadweight loss associated with raising a given amount of revenue and a reduction in the relative share of trade taxes and increase in the relative shares of taxes on income and consumption could be taken as evidence of an improvement in tax system.

http://www.dawn.com/2005/06/05/ebr2.htm

Inflation at 9.3pc: survey




By Ihtasham ul Haque

ISLAMABAD, June 4: An eight-year high inflation rate of 9.3 per cent has impacted the poor disproportionately during the first 10 months of the outgoing financial year, the government conceded on Saturday.

According to the Economic Survey 2004-05, released here at a news conference the inflation, as measured by changes in the Consumer Price Index (CPI), averaged 9.3 per cent during 2004-05 (July-April period) against 3.9 per cent of the corresponding period of the 2003-04 financial year.

“This 9.3 per cent inflation is due to various internal and external factors but hopefully it will be brought down at a reasonable level during the next financial year,” said Adviser to prime minister on Finance Dr Salman Shah.

“Let me assure you that this increased rate of inflation will be kept in control,” he said, adding that it was a short-term phenomenon and would come down gradually.

He said that the international oil prices were likely to get stabled in the future and would help reduce inflation. “At 9.3 per cent, inflation is at an eight-year high in 2004-05. Food inflation recorded at 12.8 per cent compared with 4.9 per cent for the corresponding period of the previous fiscal year,” said the survey report. Non-food inflation rose to 6.9 per cent as against 3.3 per cent in the last year.

“Core inflation, arrived at by excluding food and energy inflation, also indicated a rising trend for the period under review, increasing from 3.3 per cent to 7.4 percent,” the survey admitted.

The sharp upturn in inflationary trend is caused by demand pressures on the one hand and supply shocks on the other. However, the survey claimed that the strong economic growth gave rise to the income levels of various segments of society, which strengthened the domestic demand and contributed to the rise in inflationary pressure.

http://www.dawn.com/2005/06/05/top2.htm