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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$1 in 2008, largely as result of the widening current-account deficit. Nevertheless, inflows of foreign aid, remittances from Pakistanis working overseas and a broader weakness of the US dollar in the international foreignexchange market are expected to continue to support the rupee. The rate of the currency's depreciation against the US dollar could, however, be faster if the domestic political situation deteriorates or if international oil prices come under renewed upward pressure.* * The Economic Intelligence Unit Ltd., July 2006 Key Information Contacts Government of Pakistan www.pak.gov.pk Ministry of Finance www.finance.gov.pk Privatization Commission www.privatisation.gov.pk State Bank of Pakistan www.sbp.org.pk Security and Exchange Commission of Pakistan www.secp.gov.pk 2004/05-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a) Services Agriculture Mining & manufacturing Electricity, gas & water supply Construction 2004/05-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (a) Private consumption Government consumption Fixed investment & Stockbuilding Imports of goods & services Exports of goods & services 53.4 21.6 20.2 2.5 2.3 80 70 60 50 40 30 20 10 0 -10 -20 80.0 7.8 16.9 15.3 -19.9 PAGE 84
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 KARACHI STOCK EXCHANGE PAKISTAN ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (a) GDP at market prices (PRs billions)(b) 4,163 4,402 4,823 5,533 6,548 GDP (US$ billions) (b) 71.2 71.5 82.3 96.2 110.7 Real GDP growth (%) (b) 2.6 3.2 5.0 6.4 7.8 Consumer price inflation (av; %) 3.1 3.3 2.9 7.4 9.1 Population (million) 144.6 147.7 (c) 150.7 (c) 153.7 (c) 156.4 (c) Exports of goods fob (US$ millions) 9,131.0 9,832.0 11,869.0 13,297.0 15,383.0 Imports of goods fob (US$ millions) -9,741.0 -10,428.0 -11,978.0 -16,693.0 -21,560.0 Current-account balance (US$ millions) 1,878.0 3,854.0 3,573.0 -817.0 -3,463.0 Foreign-exchange reserves excl gold (US$ millions) 3,640.0 8,078.0 10,941.0 9,799.0 10,033.0 Total external debt (US$ billions) 31.7 33.7 35.9 35.7 38.9 (c) Debt-service ratio, paid (%) 24.7 17.9 16.0 21.2 10.3 (c) Exchange rate (av) PRs:US$ 61.93 59.72 57.75 58.26 59.51 (a) Actual. (b) Fiscal years ending June. (c) Economist Intelligence Unit estimates. ECONOMIC FORECAST SUMMARY 2006 2007 2008 2009 2010 2011 Real GDP growth (%; fiscal years ending Jun 30th) 6.6 6.6 6.1 6.1 5.8 5.9 Consumer price inflation (av; %) 7.9 7.0 5.5 5.0 5.1 5.6 Budget balance (% of GDP; fiscal years ending Jun 30th) -4.3 -4.6 -4.0 -3.4 -3.4 -3.3 Current-account balance (% of GDP) -4.5 -4.9 -4.9 -3.9 -4.2 -4.1 Short-term interest rate (av; %) 8.6 8.7 7.8 7.0 7.0 7.0 Exchange rate PRs:US$ (av) 60.4 62.8 64.1 66.1 67.6 68.6 Exchange rate PRs:¥100 (av) 51.9 59.8 65.7 69.2 72.3 74.7 2004/05-PRINCIPAL EXPORTS (ab) (US$ millions) Cotton fabrics 1,863 Knitwear 1,632 Bedwear 1,450 Cotton yarn & thread 1,058 Rice 933 2004/05-PRINCIPAL IMPORTS (ab) (US$ millions) Machinery & transport equipment 5,956 Mineral fuels etc 4,295 Chemicals 3,604 Manufactures 2,258 Food & live animals 1,087 2004/05-MAIN DESTINATION OF EXPORTS (%) (a) 2004/05-MAIN ORIGINS OF IMPORTS (%) (a) USA UAE UK Saudi Arabia China UAE Afghanistan Germany Other USA Japan Other 24.0 7.6 12.3 8.9 6.2 55.9 8.3 5.2 7.6 4.8 7.0 52.2 (a) Fiscal years ending June 30th. (b) Customs basis. The Economic Intelligence Unit Ltd., November 2006 PAGE 85
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