Morning Call about Economy Overview – Arif Habib Limited

Karachi, June 25, 2012 (PPI-OT): GDP grows by 3.7% despite weak macroeconomic indicators

Pakistan’s economy seems to be on the road to recovery in terms of growth despite weak macroeconomic indicators.

According to Arif Habib Limited, though, this upturn is obstructed mainly by the twin deficit (fiscal and current account), the widening of these deficits and their financing are major challenges that this economy still faces. The continuous escalation in imports (16% YoY), lack of inflows and stagnant export growth (3.3% YoY) are exerting pressure on the current account. On the other hand, Arif Habib Limited’s fiscal account is adversely affected by low investment (-50% YoY), exorbitant government borrowing (PKR 848bn in 9MFY12) and insufficient productivity due to energy crisis.

Fiscal pressures and monetary management
Large fiscal deficit constrained the economic growth in FY12. The government’s current expenditure, particularly interest payments (+23% YoY) and subsidies outweighed other expenses. In order to meet its expenditures, government heavily relied on domestic borrowing (PKR 848bn) chiefly on SBP (PKR 227.9bn) in 2QFY12 as external financing was dried up. Regardless of rising deficit, inflation primarily remained controllable however from May-12 a rise is being observed (~1% MoM). Expecting inflation to be in control, SBP decided to keep its policy rate at 12%. Meanwhile the energy shortage and circular debt remained bottleneck on the supply side and still are major threats to the economy.

Less than expected C/A deficit and real sector growth bring new hope
Despite all these challenges, the economy has managed to exhibit positive outlook in the current account and real sector in FY12. The current account deficit shrank 15% QoQ in 2QFY12 and 36% QoQ in 3QFY12. Particularly, the deficit for 3QFY12 came out at USD 0.7bn, which was considerably lower than the deficits in the preceding two quarters. This was on account of larger flow of remittances (USD 3.4bn in 3QFY12 as compared to USD 3bn in 2QFY12) and a lower trade deficit during the quarter (USD 3.8bn in 3QFY12 as compared to USD 4.2bn in 1QFY12).

The real sector managed to bag a 3.7% growth in FY12, despite the obstacles like energy shortage, floods, fall in external demand and bleak law and order situation. Services sector largely contributed in this growth (2.1%) followed by industries (0.9%). Agricultural sector had sluggish growth due to losses to the cotton crop, decline in wheat production (-6.7% YoY) and other Rabi crops (-15% YoY)

Future Outlook
The feeble economy is on a roller coaster ride; recovering as well as deteriorating. The recovery is evident through modest growth, increased tax revenue(+22.7% YoY), lowered C/A deficit (-36% 3QFY12) where as low investments, fraught political situation, hobbled law and order situation, and other factors already discussed above, are deteriorating the economy. Having said that, future economic outlook seems quite exigent. With elections around the corner, due payments to IMF (USD 1.53bn), tax reforms introduced, materialization of foreign funds, PKR depreciating exchange rate, staggering twin deficits, developmental expenditure increased; it is surely going to be yet another challenging year for Pakistan’s economy. Arif Habib Limited foresees that recovery will continue with same pace if no floods or any other sort of adverse situation occurs. This upward growth trend will get a push if oil prices either remain stable or decline, thus improving Arif Habib Limited’s current account. Major structural reforms are immediately required to overcome the energy crisis and law and order situation. In short, it will be all about execution of appropriate policies at the right time in order to achieve Arif Habib Limited’s set targets for FY13.

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