Morning Call about): 1. Economic Survey of Pakistan: What do numbers suggest 2. MSCI Review: Pakistan to gain from exclusion of Qatar and UAE – Arif Habib Limited

Karachi, June 12, 2013 (PPI-OT): Economic Survey of Pakistan: What do numbers suggest?
The new gov’t seems hopeful for Pakistan’s economy to pick up pace in FY14, expecting it to grow at 4-4.4%.

According to Arif Habib Limited but this comes with some major challenges as reality unfolds in the Economic Survey presented by the Finance Minister on Tuesday 11 th June 2013. The key highlights are as follows:

Economic Growth
The economy of Pakistan during the last five years grew on average at the rate of 2.9% per annum. In FY13, real GDP growth stood at 3.6% as compared to 4.4% last year

In FY13, growth rates remained at:
Commodity producing sector: 3.4% (FY12: 4.1%)

Agriculture Sector: 3.3% (FY12: 3.5%)

Manufacturing sector: 3.5% (FY12: 2.1%)

Services sector: 3.7% (FY12: 5.3%)

Pakistan’s recent slowdown is mainly rooted in domestic causes such as;

energy shortages, floods and heavy rains, unfavourable law and order situation, and a number of other factors hampering investment and economic growth.

Fiscal Account
During 9MFY13 fiscal deficit stood at PKR 1.05trn which translates into 4.6% of GDP against 6.4% recorded last year

During 9MFY13:
Total expenditures: PKR 3,188bn (9MFY12: PKR 2,641bn),+21% YoY

Current expenditures: PKR 2,642bn

Development expenditures and net lending: PKR 445bn

Total revenue: PKR 2,141bn (9MFY12: PKR 1747bn), +23% YoY

During 10MFY13:
FBR tax collection: PKR 1,505bn, +5.5% YoY due to energy/gas shortages, security issues, failure to implement tax reforms and decline in imports

The survey calls for an increasing revenue collection hinting at some immediate tax measures that the gov’t might have to take up. On the other hand, need of the hour is prioritization of expenditure which is being expected from this gov’t as they intend to focus more on development placing PKR 1.1trn for it and curtailing overall subsidies.

External Account

During 10MFY13, Current Account Deficit stood at USD 1,418mn over last year same period’s USD3,354mn

During 10MFY13:
Exports reached USD 20,147mn (10MFY12: USD 19,329mn)

Imports remained at USD 36,665mn (10MFY12: USD 37,042mn), -1% YoY

Exchange rate of Pak Rupee depreciated by 4%

Going forward, all eyes are on the expected new loan program with IMF worth USD 5bn as reserves remain at a critical level.

Monetary Policy and Inflation
SBP has adopted relatively an expansionary policy stance for the past two years

Policy rate was reduced by cumulative 400bps from 13.5% in Aug’11 to 9.5% in Dec’12

During 10MFY13, on average:
CPI stood at 7.8% (10MFY12: 10.8%)

Core inflation remained 9.9% (10MFY12: 10.4%)

However, talks on the town are that gov’t is hoping to keep inflation within the range of 7-8% in FY14. This would be a challenging task as medium term rising food as well as energy inflation exist. With hopes of low inflation, one may expect further cuts in policy rate going forward but concerns regarding weakening balance of payment and gov’t borrowing (especially if an financial instrument is issued to resolve circular debt worth PKR 500bn) still remain. Having said that; lower interest rates could provide an additional fillip to investment activity provided some of the regulatory, structural and financial impediments to investment are eased.

Challenges ahead…
A sneak through the past does put up a question mark on the future but things look promising as the new gov’t instills hope of betterment in years to come. For now, Arif Habib Limited believes FY14 would be a trail year for the gov’t keeping growth at around 4%. Moreover, fiscal deficit is expected to hover around 5-5.5% of GDP in Arif Habib Limited views. Also, with base effect fading off and expected pass-on of subsidies inflation is expected to touch double digits in FY14. Consequently, SBP might keep a cautious stance. But if economic conditions start improving as per gov’t plan, signaling investment to boost up, further monetary easing would play a vital role.

MSCI Annual Review; Pakistan to gain from exclusion of Qatar and UAE
In its latest annual review, MSCI has reclassified Qatar and UAE (16.8% and 12.4% weights in FM) from Frontier Markets to Emerging Markets effective from May-14. Whereas, Morocco would be included in the Frontier Market index from semi annual review in Nov-13. This reclassification is expected to increase Pakistan’s weight in the FM Index from current 5%, which would attract further foreign interest in the MSCI Pakistan Index Stocks e.g OGDC, MCB, FFC, POL, ENGRO, UBL, PPL, NBP, HUBC and PSO.

Despite meeting the quantitative criteria, Pakistan has not been considered for reclassification into Emerging Market. Pakistan was excluded from EM Index in 2008 after the imposition of floor in the stock market.

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