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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007
KARACHI STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
General Musharraf will continue to dominate
the political scene, although his position is
becoming more insecure. General Musharraf,
who came to office in a military coup in 1999,
retains the power to dismiss parliament and
the prime minister (and thereby impose full
military rule) in his capacity as chairman of
the National Security Council, and his firm
control over the army and its corps
commanders remains his ultimate guarantor
of power. However, the opposition is severely
critical of his rule, and has been campaigning
aggressively for a return to full democracy.
Despite being weak, it is gaining in
popularity.
Historically acrimonious relations between
Pakistan and its long-standing military rival,
India, have been slowly improving since a low
in 2002. Despite setbacks and negative
statements released by both sides to the
media, relations should continue to improve.
Most importantly, all-out war is likely to be
avoided (although skirmishes in border areas
will continue). However, bilateral relations in
2006 have been far from smooth. In July
2006 India's commercial capital, Mumbai,
was hit by a series of bombs that killed over
200 people, and in late September the city's
police stated that the attack had been
planned by Pakistan's Inter-Services
Intelligence (ISI) agency and carried out by
operatives of a militant group, Lashkar-e-
Toiba. Nevertheless, reinforcing the view that
bilateral relations are maturing is the fact that,
despite the July attacks, India and Pakistan
pledged to continue peace talks on the
disputed territory of Kashmir. Indeed, a third
round of foreign-secretary level talks (aimed
at improving dialogue over the issue of
terrorism) that were cancelled following the
bombings will take place in mid-November.
Moreover, India's prime minister, Manmohan
Singh, told reporters on October 20th that he
had accepted an invitation, made by General
Musharraf in September, to visit Pakistan.
(The timing has yet to be agreed.)
International oil prices and domestic inflation
are high at present, and could undermine
macroeconomic stability and economic
growth prospects. Action to stem the rising
trend in consumer price inflation came late.
This lack of timely action, coupled with an
overheating of the economy, is the main
source of economic policy risk in 2007-08.
Pakistan's policymakers have in the past few
years created an environment within which
the private sector has begun to thrive. These
policy measures include substantial
privatization, reforms in the banking and utility
sectors, and efforts to reduce red tape.
Economic Performance
The rate of real GDP will slow from 6.6% in
2006/07 to a still respectable 6.1% in
2007/08. Growth will be driven by the
continued expansion of textile production and
other manufacturing output. The strength of
the industrial sector will in turn stimulate
growth in services output, particularly in the
commerce, trade and transport sub sectors.
Agricultural growth will also remain fairly
healthy. Indeed, the improving outlook for the
monsoon season has resulted in an expected
improvement; real GDP figures in 2006/07 are
being raised from 6.4% last month to 6.6%
currently–growth in the agricultural sector is
now expected to be more buoyant in that
year.
Inflationary pressures remain the biggest
threat to economic growth. Monetary
tightening by the central bank in July will
assist in controlling consumer price inflation.
Year-on-year inflation fell from a peak rate of
11.1% in April 2005 to 6.2% in April 2006, but
had risen to 8.1% in October. Part of the
reason for the persistence of inflationary
pressure in 2006 is that wholesale price
inflation has remained high; it averaged 8.7%
year on year in the first ten months of 2006.
Nevertheless, this masks a gradual declining
trend, as year-on-year wholesale price
inflation has decelerated from 9.1% in June to
6.7% in October. A slowdown in domestic
demand growth and an improvement in food
supplies will also contribute to a fall in
inflation, partly offsetting some of the upward
pressure on domestic prices caused by high
international oil prices. On balance,
consumer price inflation is expected to
average 7% in 2007 and then slow to 5.5% in
2008.
The Pakistan rupee's average exchange rate
is estimated at PRs60.4:US$1 in 2006. It is
forecast to depreciate to an average of
PRs62.8:US$1 in 2007 and PRs64.1:US$1 in
2008, largely as result of the widening
current-account deficit. Nevertheless, inflows
of foreign aid, remittances from Pakistanis
working overseas and a broader weakness of
the US dollar in the international foreignexchange
market are expected to continue to
support the rupee. The rate of the currency's
depreciation against the US dollar could,
however, be faster if the domestic political
situation deteriorates or if international oil
prices come under renewed upward
pressure.*
* The Economic Intelligence Unit Ltd., July 2006
Key Information Contacts
Government of Pakistan www.pak.gov.pk
Ministry of Finance www.finance.gov.pk
Privatization Commission www.privatisation.gov.pk
State Bank of Pakistan www.sbp.org.pk
Security and Exchange Commission of Pakistan www.secp.gov.pk
2004/05-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a)
Services Agriculture Mining & manufacturing
Electricity, gas & water supply Construction
2004/05-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (a)
Private consumption Government consumption Fixed investment & Stockbuilding
Imports of goods & services Exports of goods & services
53.4
21.6
20.2
2.5
2.3
80
70
60
50
40
30
20
10
0
-10
-20
80.0
7.8
16.9 15.3
-19.9
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