Pakistan Economy Achieves Record Fastest Growth of 7 per cent in FY2006-07

Pakistan’s economy recorded one of the fastest growth rates in Asia during fiscal year 2006-07, which was surpassed only by China and India. Real Gross Domestic Product (GDP) grew by 7 per cent during fiscal year 2006-07 as compared with 6.6 per cent in FY06, but despite a visible slowdown in non-food inflation, inflationary pressures remained strong throughout the year, said State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar at a press conference here on Monday at the launch of the SBP Annual Report for fiscal 2006-07. The SBP governor said the GDP growth target of 7.2 per cent for FY2007-8 was achievable. She warned about persisting inflationary risks to the economy and said inflationary pressure might be further aggravated if international food commodity prices remained high or if fiscal compulsions drove the government to pass through a rise in fuel pries the face of rising international oil price.

Strength of food price inflation drove the annual average Consumer Price Index (CPI) inflation for fiscal year 2007 to 7.8 per cent resulting in slippage of 1.3 per cent relevant to the annual target of 6.5 per cent.

Moreover, the food inflation remained in the double digits for most of the months of FY07 mainly due to rising food prices in the international market coupled with domestic supply shortage of some important minor crops and higher demand on the back of increasing income. Contrary to this, the average non-food CPI inflation declined to 6 per cent during FY07 which remained lower than that of the average non-food inflation of 8.6 per cent for FY06.The major contributory factor for slowdown in non-food inflation was transport, communication, house rent, fuel and lighting sub-groups. The SBP annual report said this was the fourth successive year of sustained high growth in the economy, with the average annual growth accelerating to 7 per cent during FY03-07 period. The continued strong performance of the services sector made major contribution to the FY07 outcome, while growth in agriculture and industry also witnessed improvement over the previous year. The services sector witnessed growth to 8 per cent against the target of 7.1 per cent, while in FY07 the agriculture sector grew by 5 per cent against the target of 7.1 per cent. The SBP report said sharp rise in value addition by crops in turns centered essentially around three major crops, ie, wheat, sugarcane, and gram recorded exceptional growth during FY07 and offset the disappointing growth in two other cash crops (cotton and rice). It further said the growth in livestock sector in FY07 was strongest in a decade (exceeded only by exceptional FY06 growth). Moreover, consequent to the robust demand of the sub-sector was attracting investment in the production, processing, transportation, and storage of dairy products. Similarly, the industrial sector witnessed moderate recovery with a 6.8 per cent growth during FY-07 compared with 5 per cent in FY06; however it was the second consecutive fiscal year when growth targets for the industrial sector remained unachieved. The highest growth was observed in the construction sub-sector with a growth of 17.2 per cent in FY07 compared with 5.7 per cent in FY06.

The large-scale manufacturing sector grew by 8.8 per cent down from 10.7 per cent growth in the preceding year. The LSM growth target was fixed at 13 per cent for FY 07.

During FY07, national savings rose sharply by 19.8 per cent in FY 07, raising its share in GDP to 18 per cent, the highest in the last four years.Shamshad Akhtar said the SBP continued with a tight monetary policy to strike a balance between reducing inflation and supporting sustainable strong economic growth. The headline CPI inflation while lower than FY06 remained high mainly due to continued strength of food inflation.

Fiscal deficit remained 4.3 per cent of GDP in FY07 same as of last year, and this was because the impact of an exceptional 18.6 per cent year-on-year growth in CBR tax collection and strong non-tax receipts was offset by a rise in expenditures. However, adjusted overall fiscal deficit in FY07 dropped to 3.9 per cent of GDP.

The country’s debt indicator continued to improve in FY07 with total debt and liabilities as a share of GDP drooped to 56.7 per cent in FY07. However, in absolute terms it rose by 10 per cent in FY07 to Rs 5, 024 billion, which principally reflects the country’s large current account and fiscal deficits.

The SBP governor said the increase in Total Debt Liabilities (TDL) was contributed by an increase in both domestic and external debt domestic debt recorded 11.9 per cent growth to reach Rs 2,597 billion, whereas External Debt Liabilities (EDL) stock recorded an 8 per cent YoY growth to reach $ 40.1 billion during FY07.

Two-thirds of the rise in domestic debt was caused by growth in floating debt (which comprises T-bills). Similarly, 62.5 per cent of the rise in EDL during FY07 was contributed by floating interest rates loans. “The rising share of short-term and floating rate debt in the country’s TDL indicates a relatively greater vulnerability of debt servicing costs of adverse future interest rate movement,” Dr Akhtar said.

The rates of growth of trade and current account deficits decelerated in FY07, however the size of current account deficit rose to $7 billion, 4.98 per cent of GDP. The country’s import bills, exports slowdown and income account deficit were the key factors that contributed to widening of the external current account imbalance.

Slowdown in export growth was broad based as the textile exports growth declined from last years average of 14.4 per cent to only 4.9 per cent during FY07, whereas non-textile growth declined from the last four years’ average of 19.2 per cent to only 0.6 per cent in FY07.

The poor rice, fruit and cotton crops together with EU ban on fish and fish preparations imports form Pakistan and industry-specific issues are considered as some of factors behind the sluggish growth in non textile export during FY07.

In addition, the broad-based slowdown in imports’ growth was mainly attributed to moderate decline in global oil prices, reduction in excess demand, gradual absorption of one-off impact of liberalizing of automobile and telecommunication sectors and improved domestic production of food items such as sugar and wheat.

The Karachi Stock Exchange (KSE), one of the most active markets in the region, recorded a full year appreciation of around 38 percent during the year ended June 30, 2007, with the benchmark KSE-100 index closing at an all-time high at 13,772 points.