Islamic Republic of Pakistan has faced various regimes of democracy and dictatorship since her birth. The macro as well as micro economic condition of Pakistan has seen ups and downs. Here as an over view of economic situation of Pakistan from 2005-2013. The data, statistics and facts have been extracted from the Monetary Policy decisions and Statements of fiscal year 2005-2013 published by State Bank of Pakistan.
2005:
Demand
pressures in the economy were observed as a result of which SBP increased the
policy rate by 100 bps and 150bps in two stages. Furthermore, adjustments in
reserve ratios were done. In order to increase the supply of money injections
of liquidity was done through open market operations. During the year 2005, SBP
did monetary targeting.
2006-2007
Due to exceptional
requirements of textile industry, there was excessive growth of reserve money.
The economy faced supply chain food problem, which affected prices of food
items. Significant rise in global community prices generated new inflationary
pressures in most economies. Pakistan CPI inflation stayed around the same
level much higher than target of 6.5%.
Due to bunching of heavy foreign exchange
inflows, slippage of money supply growth from its target was seen. As a result
of impact of FY07 developments, broad money supply grew by 13.7%, GDP growth increased
by7.2% and inflation target was 6.5%. Due to assassination of ex-prime Minister
Of Pakistan Benazir Bhutto, losses were faced by various private and public
sector enterprises. The policy rates announced by SBP were 9% in FY06 and 9.5%
in FY07. Monetary targeting regime was followed in 2006 and mixed approach was
adopted in 2007 considering various economic variables.
2008:
Due to development programs in first half of
FY08, monetary policy deviated from its frame work. The introduction of long
term financing facility (LTFF) facilitated export growth up to Rs 8million. As
a result of slippages from fiscal deficit target complications for monetary
management increased. Delays in privatization resulted in brought gap in financing
the deficit.
Issuance
of global depository receipts and sovereign bonds financed almost 41% of budget
deficit. Refinancing requirements were lower due to which reserve money growth
slowed to 9.6%(stronger growth than planned ) and central bank financing grew
to Rs.241.6 billion with market treasury stock reaching its record level of
Rs.624.6billion. Due to political
uncertainty and pressure of govt. borrowings on financial system, liquidity
management complications increased.
Liquidity
injections in the system and decline in effective cash reserve requirements (CRR)
resulted in private sector credit managed to grow by 10.4%. Export financing
provided by banks as well as SBP provided export benefit of Rs.139.6 billion
against export credit of Rs.131.6 billion.
During
FY 2008, inflation increased to 8.7% on year on year basis, CPI inflation
reached to 8.8%, food inflation was 12.2%.
Hence SBP adopted tight monetary policy which caused moderate increase
in KIBOR and banks lending rates, and flat monetary conditions Index(CMI) along
with fall in effective CRR. High annualized M2 growth was seen. Policy rate
increased by 50bps to 10% .During first half of FY 08 SBP adopted Inflation
Targeting Regime.
During
second half of FY 2008, US mortgage
crisis occurred which brought rise in commodity prices in international market
and slide in US dollar against various currencies. The impact was global shocks
in Pakistan, slow economy, along with inflationary and recessionary trend.
Monetary and fiscal deficit contributed to macroeconomic imbalances. Government
borrowing was within the limit i.e. only Rs 23.3 billion however resulted
somehow in stability and softening of interest rates in later months. Increase
in commodity prices in international markets brought economic stress and increase
in CPI by 4.3% which resulted in food inflation. Increase in CA deficit by 1.5%
resulted in pressure on exchange reserves. Hence SBP announced policy rate to
be increased by 50bps to 10.5%.
2009:
Subsidies
against increased electricity prices and poor supply chain administration
brought decrease in CPI. Core inflation also decreased from 12.6%-10.7%. Strong
foreign remittances resulted in surplus external current account and decrease
in cumulative external account deficit. Due to increase in oil prices and cost
push shocks lowered economic activities and slow down aggregate demand. The
decrease in aggregate demand also decreased imports.
Increase
in portfolio inflow, increase in IMF inflow, adequate DFI and decrease in non
IMF official inflows resulted in improved financial accounts, increase in
exchange reserves and increase in NFA. Decrease in Government borrowing caused
fiscal pressure. Moreover, retirement of wheat financing and improvement in
external flows brought improvement in market liquidity and flow of private to
credit sector. Stagnant private sector investment decrease potential OP of
economy.
Due to some
risk to inflation, gradual stabilization of economy, uncertain fiscal
consolidation and electricity crisis, SBP announced policy rate to be 13%
following mixed approach in September 2009.
Decrease
in inflation to 8.9% brought improvement in current external account. Government
borrowing was within limits hence M2 remained along projected path. There was
real sector improvement, which resulted in large Scale Manufacturing recovery
phase after declining. Due to poor administration in supply chain, higher
fiscal deficit than projected, increase in commodity prices in International
Market and increase in gas and electricity prices, inflation increased between
0.5%-1.7%, CPI Basket also showed monthly increase than benchmark.
The
Global economy started to revive which improved flow of liquidity across borders.
This brought increase in Exports of Pakistan and private financial inflows.
Decrease in DFI, decrease in portfolio inflow, decrease in official inflow, decrease
in IMF inflow and uncertain non-IMF inflow caused problem of liquidity
management and government budgetary financing.
Strong inflow of worker remittances improved
current account deficit. Increase public sector borrowing resulted in increase
in net domestic assets (NDA), risk averseness of bank, increase in LMS and decreased
chances to early retirement of borrowing for rice procurement. Improvement in
electricity supply brought increase in private borrowing.
Hence it
was concluded that Increase in economic risk and uncertainties because of
increase in borrowing and limited economic growth, the policy rate decreased by
50bps to 12.5 for November 2009. SBP adopted mixed approach.
2010:
With
increase in energy sector prices, the economy faced persistent inflation
pressure. Improved BOP position, decrease in external current account deficit
and decrease in external financial flows resulted in increase in foreign
exchange reserves. With increase in LMS due to improvement in electricity
supply and security, the private sector grew due to which Government and public
debt decreased.
Weak
fiscal position brought increase in uncertainty. The Government decided to
decrease development expenditures, as a result of which surge in domestic
prices and decrease in public sector investment was seen. Uncertain non tax
revenues on account of foreign re-imbursement brought even more fiscal
complications.
Increase
in financing by friends of Democratic Pakistan (FDoP) and increase in debt
financing by IMF caused banking sector resources to increase. Increase in
circular debt resulted in risk averseness by banks and they would tend to
negotiate higher rates in risk free securities e.g. KIBOR increased from 1.5 to
2%.
There
was uncertainty in fiscal sector and MP stance had difficulty in maintaining
the balance between inflation, financial stability and economic growth during
FY 2010. The policy rate remained at 12.5% and SBP adopted mixed approach in March
2010.
Due to
economic stabilization efforts in May 2010, contraction in external current
account deficit containment of excessive recovery growth and reduction in
inflation were seen. Power crisis decreased economic activities, weaken the
fiscal situation and decrease in macroeconomic stability hence, bringing
increase in inflation. Steady worker’s
remittances increased in exports and coalition support funds (CSF). Along with
that increase in NFA and M2 liquidity increased in rupee value.
Increase
in government borrowing for budgetary support resulted in increase in NDA,
decrease in private sector credit and increase in fiscal account. Tax
collection was less than required and another collection of Rs 354 million was
needed. FBR tax-GDP ratio was less than 10% which was one of the lowest in the
world. Tax-GDP ratio was needed to be increased. Revenue deficit was 1.5% of GDP and might cross 2% by the end of the
year. Government cut developmental expenditure to decrease revenue deficit
which resulted in damage to infrastructure, limited productive capacity and
increase in inflation.
Decrease
in productivity, increase in inflation, increase electricity prices and increase
in petroleum brought increase in CPI, increase in sensitive Price Index and increase in Non food, non energy price index. SBP
while using mixed approach announced policy rate for May 2010 to be 12.5%.
In
September flood hit the country resulting in fragile macroeconomic stability,
low growth, increased inflation, stressful BOT and fiscal accounts. There was
increase in government borrowing as well. Due to loss of infrastructure and
agricultural damages, growth slowed down and exports decreased. This resulted
in shortage of food leading to food inflation.
There
was increase in private consumption the Government got busy meeting demand of
food by victims and rehabilitation leading to deterioration of fiscal accounts.
Increased electricity prices, induction of reformed GST and increased
government borrowing from SBP caused increase in inflation. Decreased
investment in domestic national savings increased foreign borrowing.
Budget
deficit brought increase in government borrowing from SBP leading to unstable
macro economic variables. Increase in external CA deficit and uncertain foreign
inflows resulted in decrease in foreign reserves and pressure on exchange rate.
With expansion in broad money, NFA increased. SBP adopted inflationary
targeting and increased policy rate by 50bps to 13% as affective from September
2010.
High
inflation, fiscal slippages and power and energy crisis caused destabilization
of economy. Along with that, adjustment in fuel prices and energy, post flood
disruption in supply chain added inflation increment. Increase in Govt.
borrowing from SBP. Increase In security expenditures and flood related
expenditures along with power sector subsidies, narrow tax base, decreased tax
to GDP ratio, depreciation in rupees, increase in total debt, and decrease in
productivity by private sector enhanced fiscal complications.
Increase
borrowing and money creation resulted in high inflation leading high interest
rate. With increase in petroleum and electricity prices and food prices due to flood, increase in CPI by
0.6% on month on month basis occurred. Widening of tax by introducing reformed
GST, power sector subsidies and limited Govt. borrowing from SBP resulted in
long term economic growth.
Increase
in working capital credit requirement of private sector resulted in higher in
private sector prices and increased interest rates by banks. Decreased growth
in NFA and deposits bought challenges of liquidity management. With real real growth of 2.5% and decrease in public and
private sector debt caused decrease in external CA deficit. Higher cotton
prices made export earnings to be increased tp $7.1 Billion.
In
conclusion economy was having emerging risk and uncertainty, there was a need
to decrease private sector borrowing to manage fiscal position, there was
restless govt. borrowing from SBP along with that increase in NDA ratio was
associated with CPI inflation. Considering all factors SBP announced policy
rate to be increased to 14%. Inflation targeting regime was followed in
November 2010.
2011:
Improvement
in external account deficit retrained Govt. borrowing from SBP and stable
financial markets allowed Govt. to focus more on fiscal improvement. Check on
Govt. borrowing, tax reforms, subsidies and forward looking debt strategies
lead to economic growth. Dissipation of effect of flood on food prices,
incomplete pass through of oil prices, smaller adjustment in electricity
prices, subsidy of power sector, decrease in the Govt. borrowing and GST
exemption to some extent resulted in inflation rate to decrease from 15.5 to
12.9%.
Monetary
expansion aligning with productive economic capacity increased NFA. Increase
public debt and decrease bank credit of private sector resulted in challenges
of monetary management. Implementation of credit medium term budgetary frame
work decreased revenue deficit. Middle East and North Africa uprising and
damaged economy of Japan due to Earth quake affected Pakistan in many ways.
Improvement in BOP caused increase in foreign exchange reserves. Using mixed
approach SBP decided to keep policy rate at 14% for March 2011.
Persistent
inflation, weak OP growth and decrease in private investment resulted in large
budget deficit. Strong export earning along with robust growth in remittances
however brought CA surplus of $748 million, increase in Foreign exchange
reserves, increase in NFA and stable and liquid rupees.
Increase
in cotton prices increased exports by $ 25 Billion. Private sector working
capital was 3.2% and total deposits were 5.3% which gave increase to private
sector credit. GDP growth was below 4%, which brought decrease in real private
investment and increase in consumption demand. Increase in domestic demand and
aggregate supply of OP and rising debt caused difficulty in bringing inflation
down.
There
was a need to Increase private investment and productive activities to manage
debt burden. Along with implementation of fiscal reforms should be made.
Decrease in Govt. borrowing was required to decrease fiscal deficit. SBP
announced policy rate to remain at 14% and adopted mixed approach in May 2011.
Reduction
in policy rates by 50bps in July 2011 lead to Decline in CP inflation and
decline in govt. borrowings from SBP resulted in external current account position stability, decline in foreign
exchange reserve as well due to payments. Severe energy crisis and precarious
law and order conditions made domestic economic environment least conductive
for productive activities.
Flood in
Sindh resulted in falling short of the annual GDP growth target. Persistence of
govt. borrowings from scheduled banks , exchange rate depreciation and upward
adjustments in the administered prices of energy increased inflation to
9.5%. Closing aggregate demand and
supply gap reduced inflation pressure. Due to decline in foreign financial
inflows and increase in oil import payments there was depreciation in rupee of
1.7% against US $, decline in foreign exchange reserves and stressed liquidity
conditions.
SBP
decided to reduce polcy rate by 200bps to 12% by following exchange rate
targeting in October 2011.
Decrease
in policy rate by total 200 bps resulted in support of private investment in
the economy. Average CPI inflation remained within the announced target. Fiscal
weaknesses and falling foreign financial inflows lead to risks of macroeconomic
stability and challenging market liquidity situation.
Increase
in wheat support price by Rs.100 to Rs1050 per 40 k and CPI inflation, along
with growing government borrowing from the banking system resulted in
inflationary pressure. Abnormally high cotton prices, high international oil
prices of $110 per barrel and strong growth in non oil imports brought increase
in total imports growth and trade deficit.
Net
direct and portfolio inflow were $207million due to which larger external
current account deficit was seen. Net outflow $113 million in official loans
decreased liquid foreign exchange reserves. Decline in financial inflows and
external current account deficit resulted in reduction of Rs.115 billion in net
foreign assets(NFA). To increase the demand for money liquidity injections by
SBP through OMOS of rs.340 billion was done.
SBP
announced that the policy rate would remain at 12% and mixed approach was
adopted in September 2011.
2012:
Low level of exports, increased oil prices and lack of
financial inflows resulted in stressed liquidity conditions in the market.
Decline in private investment had adverse impact on medium term inflation
Growth and employment prospects. Shortfall in external sources increased
Government borrowings. Growing government borrowing requirement (from 218
billion – 373 billion), weak private demand, increase in international oil
prices caused adverse effect on inflation.
Increase in Size of fiscal borrowing, lack of investments decreased
medium term productive capacity of economy.
Decline in investment to GDP ratio was a cost of economy
more visible in term of private and government borrowings. Adjustments in
fiscal position brought liquidity injections by SBP to keep the payment system
functioning and financial markets stable. Liquidity pressure and short term
liquidity injections resulted in increase in Inflationary risk.
External current account deficit, declining foreign inflows,
declining trend of export quantum, substantial external debt payment led to
decline in foreign exchange reserves and external position under pressure. Few
developments in external sector exerted downward pressure on rupee liquidity.
Encouragement of depositors to put their savings in govt.
securities through investors portfolio securities (IPS) account brought improvement
in financial deepening and competition in banking system and better returns on
deposit overtime. Introduction of
5%floor on all categories of savings/PLS saving product caused average deposit
rate of all saving related products increased from 2.1 % to 5.25%.
Economy needed significant fiscal and energy sector reforms,
early realization of planned financial inflows was required and banks were
required to pay a minimum profit rate of 6% on PKR saving/PLS saving products.
Considering all these conditions SBP adopted mixed approach and decided to have
same policy rate of 12% in April 2012.
Inflationary
pressures, external and fiscal pressures, scheduled banks avoidance in
extending loan to private businesses, energy shortages resulted in slow-moving
GDP growth and adverse impact on economic conditions. Fiscal borrowing from
banking system, particularly from SBP was within path so inflation was
controlled. Expansionary fiscal position and aggregate demand pressures led to
offsetting of weak private demand especially investment demand.
Limiting
and retiring budgetary borrowing from banking system and implementation of
consistent and credible policies proved to be helpful in moving away from the
undesirable equilibrium. Persistent energy shortages, unstable law and order
conditions, no energy sector reforms brought decline in investment to GDP ratio
moreover and shrank the demand for fresh private credit.
Absence
of fiscal reforms, sheer volume of borrowings from banking system, expectation
that the trend of borrowing would continue the gap between fiscal revenues and
expense increased and there was a fall in private investment to GDP ratio to
12.5%.
No
increase in additional revenues caused difficulty in reducing the scale of
borrowings from scheduled banks and retiring the borrowings from SBP. External
current account deficit (3.4 billion cushioned by workers remittance) and lack
of sufficient external inflows to finance deficit led to Lack of development in
external sector.
Repayment
of IMF loan resulted in SBP’s net liquid foreign exchange reserves declined to
$ 11.3 billion. Problem of euro zone increased the uncertainty in the global
economy. Moreover, appreciation of us dollar decreased oil prices and oil bill
of oil payments. However, it had positive development (save up to $700 million
from import payments in FY13).
Economy
needed fundamental reforms to improve the economic performance. Borrowing from
banking system rose to Rs.1098 billion and from SBP Rs.414billion in the same
period. Year on year CPI inflation raised to 12.3%. Borrowings should be
minimized.SBP did no specific targeting and announced same policy rate of 12%
in June 2012.
Resumption
of monetary easing brought change in
behavior of borrowers in private sector and scheduled banks to improve
economic conditions. Reduction in fiscal borrowing needs from the banking
system improved supply of credit to the private sector. Increase in private
investment demand reduced inflation. Retirement of Rs. 412 billion of fiscal
borrowing from SBP brought down core inflation by having beneficial Impact on
inflation expectations. Weak financial inflows and deficit in current account
balance made it difficult to create money from accumulation of net foreign
assets of banking system.
Decline
in year on year growth in loans to private sector businesses from 22.4% in FY08
to 0.7% on end of FY12 and declining interest rate environment helped to reorganize
strategy of scheduled banks . Scheduled banks initiated again performing their
basic intermediary role and channel loan able funds to private sector.
Consistent shortage of energy, lack of effective utilization of installed
productive capacity and weak global economy adversely effected the demand for
fresh credit. Export growth remained unresponsive.
Energy
sector reforms were needed for Revival of private credit, investment,
sustainable medium to long term economic growth . To strengthen the liquidity
management framework SBP should have implemented certain measures.
Comprehensive fiscal reforms, broadening tax base, reduction in waste full
subsidies, and better co- ordination between federal and provincial government
in terms of keeping consolidated fiscal position under control, were required
to keep borrowing from SBP under control and avoid negative consequences of
excessive borrowings from scheduled banks.
The
policy rate in October 2012 was declared to be reduced to 200bps to 10%.
Exchange rate targeting was adopted.
Credit
extended to private businesses remained muted, deceleration in CPI inflation is
faster than the projected path and small Current account deficit position n
were events led to improvement in economic performance. Declining financial
inflows and substantial debt repayment resulted in stress on external position
and decline in reserves of SBP from $10.8 billion to $8.6 billion.
Direct
and portfolio investment flows led to total net capital and financial account
inflows declined from 7.2 % of GDP in FY07 to 0.7% of GDP in FY12. Decline in
foreign exchange reserves resulted in contraction of rupee liquidity.
Depreciation in rupee by 3.3% affected the size of outstanding external debt in
rupee. Lower interest rates resulted in potential effect on credit demand,
increase in imports and return on rupee
denominate assets relative foreign currency assets.
Year on
year growth of 26.4 % fiscal borrowing from banking system led to monetary
expansion. Persistent energy shortages and output gap resulted in stagnant
economic conditions coupled with deceleration in CPI inflation (November 2012
6.9%), food inflation dropped down to 5.3%
and non food inflation to 8.1%.
Fiscal
authority relied on domestic sources and not on SBP for financing fiscal
deficit ,comprehensive fiscal reforms along with scaling down of liquidity
injections were required by SBP. To remove fiscal deficit, tax collection
capability should have been improved and decrease in expenditure of interest
payments were required in FY2012. Contraction took place in the manufacturing
sector due to energy shortage, Targets of Improvement in availability of energy
and reduction in fiscal borrowing had not been achieved. Demand for and supply
of credit to the private sector remained sub optimal.
Policy
rate further declined to 50bps to 9.5%. SBP adopted exchange rate targeting.
2013:
Debt
repayments declined foreign exchange reserves by $2 billion (from $8.7 billion
in January 2013 to $6.7billion in march
2013). Decrease in year on year inflation by 1.5% points (from 8.1% to 6.6%)
provided ease in policy rate. (divergent policy choices for SBP). Low financial
inflows and high debt payments provided difficulty to finance external current
account deficit of $700 million, hence
there was more pressure on BOP.
Increase
in interest rates discouraged speculative demand for dollars by keeping rupee
denominated assets sufficiently money spinning. Substantial decline in
inflation resulted in increase in real return on rupee denominated asset and depreciation
of 5.2% in nominal effective exchange rate (NEER). Moreover, The real effective
exchange rate depreciated by 4.2% along with increase in competitiveness of
external trade sector.
Increase
in real cost of borrowing led to decline in private investment and low growth
economy. Loans to private business increased by 173.3 billion along with that 450
bps decline in policy rate since beginning of FY12 led to modest growth 2.9% in
large scale manufacturing (LSM) sector and encouragement of further borrowings
by private sector. Excessive borrowings from the banking sector including SBP (
on cash basis for budgetary support $925billion) resulted in fiscal imbalance,
upward pressure on systems liquidity, market rate increase and restraining
growth in private sector credit.
Untargeted
subsidies, lack of tax reforms, high borrowings and increased debts servicing
expenditure provided liquidity through open market operation (OMOs) as long as
inflation expectation remained manageable. High level of subsidies financed by
government, high rate of fiscal borrowings used to pay already accumulated
debt, muted private sector investment expenditures led to substantial fiscal
borrowings, high growth in M2 inflation, dampening effect on aggregate demand.
SBP
announced policy rate to be 9.5% and adopted mixed approach in April 2013.
Elections
in May 2013 brought clarity in political front, change the behavior of banks in
auction of government securities. Stock market also reacted to the event and
showed rise in index. Improvement in consumer confidence, inflation expectations
and economic conditions were observed.
Absence
of financial inflow, high fiscal borrowings, power shortages and worse security
conditions led to strong impediments to growth and stressed BOP. Increase in
GST by 1& ( from 16% to 17%) changed the tax structure for some goods and
services along with adjustment in electricity tariff resulted in average inflation
increment from target of 8% with
moderate aggregate demand. Muted real economic activity especially private
investment expenditure led to decline in inflation trend. Declining inflation
trend and below target GDP growth resulted in reduction in policy rate.
Repayment
of IMF loan and lack of financial inflows stressed out BOP. Relative political
certainty caused continuation of economic policies for some time. Decline in
inflation brought increase in real return on rupee denominated assets. Absence
of tax reforms, untargeted subsidies and energy sector problem increased the
fiscal deficit (8.8% of GDP , higher than earlier projections).
Zero net
external financing resulted in more pressure on domestic sources in particular
banking system. High fiscal borrowings (Rs.1230 billion for budgetary support
and 413 billion from SBP brought upward pressure on system’s liquidity, increase
in short term market interest rates, restrained growth in private sector credit.
CPI
inflation was 5%, core inflation was 6.7%, provisional estimate of GDP growth
for FY 13 was 3.6% (which is lower than 4.3% target of the year), private fixed
capital formation was1.8%, and growth in LSM was 4.8%, stressed bop but
inflation under control.
SBP
announced reduction in policy rate by 50bps to 9%. The exchange rate targeting
was adopted.
.jpg)
.jpg)
