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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 KARACHI STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment General Musharraf will continue to dominate the political scene. The fact that the army currently presides over the political framework ensures a high degree of political stability in a volatile country in which the military has traditionally played a political role. Pakistan is scheduled to hold parliamentary elections by October 2007, and an electoral college is due to choose a president in the same year. To conter the possibility that his supporters could perform poorly in the parliamentary elections, in June 2006 General Musharraf brought forward the date of the presidential election so that it would be held with the current assemblies in place, thereby virtually ensuring his re-election. The opposition, although weak, is severely critical of his rule. The government's support of the US-led "war on terror" will raise political tensions with the opposition parties, and militant groups in Waziristan and Baluchistan will continue to try to undermine federal rule. Relations between Pakistan and its longstanding rival, India, have been improving since a low in 2002, and despite occasional setbacks and negative statements released by both sides to the media, relations are forecast to improve and deepen throughout the forecast period. Both governments will continue to go beyond general statements of their desire for peace to discuss conflictavoidance initiatives and deepen relations via establishing transport, trade, sporting and people-to-people links. In December 2005 and January this year a new bus service and rail link were established between Amritsar in India and Lahore in Pakistan. However, this positive development was followed by a war of words over Pakistan's attempt to quell an insurgent uprising in Baluchistan, and the core dispute over Kashmir also remains unresolved. International oil prices and domestic inflation are high at present, and could undermine macroeconomic stability and economic growth prospects. Action to stem inflation has come late, and a failure to control consumer price inflation remains the main policy risk in 2006-07. Inflation apart, 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. The need to improve Pakistan's social infrastructure and raise foreign investment levels are now the focus of the administration's policy agenda. Economic Performance Real GDP growth is forecast to slow in 2005/06 and 2006/07, but will still be relatively strong, at 6.6% and 6.1% year on year in the two years respectively, driven by the continued expansion of textile production and other manufacturing output. The strength of the industrial sector means that growth in services output should remain buoyant. Agricultural growth is expected to be slower in 2005/06 and 2006/07 than in 2004/05, which experienced exceptional harvests. Reconstruction in earthquake-hit areas will boost investment provided international aid commitments are honoured. But higher interest rates, although helping to rein in inflation, will constrain GDP growth. Private consumption growth is estimated to have slowed to 9.1% in 2005/06 after notching up exceptionally rapid growth, at 16.8%, in 2004/05, and will decelerate further, to 6.1%, in 2006/07. The import boom will moderate, but import growth will continue to outstrip export growth. The main domestic policy risks to the economy include a possible reversal of economic reforms (perhaps caused by a political crisis) or a much sharper than expected tightening of monetary policy (triggered by a surge in inflation). Inflationary pressures remain the biggest threat to economic growth. Monetary tightening by the State Bank of Pakistan (SBP, the central bank) in April 2005, when the bank raised benchmark interest rates by 150 basis points to 9%, have slowly begun to have an effect on inflation. Year-on-year consumer price inflation fell from a peak rate of 11.1% in April 2005 to 6.2% in April 2006, but rose to 7.7% in June. Meanwhile, core inflation (excluding food and energy prices) fell steadily from a peak of 7.9% in April 2005 to 6.3% in June this year. On balance, consumer price inflation is expected to average at 10.1% in 2006 and 6.7% in 2007 as efforts by the central bank and the government to control price rises eventually begin to bear fruit.* * 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 86
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 KARACHI STOCK EXCHANGE PAKISTAN ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (b) GDP at market prices (PRs billions)(c) 4,163 4,402 4,823 5,533 6,548 (a) GDP (US$ billions)(c) 71.2 71.5 82.3 96.2 110.7 (a) Real GDP growth (%)(c) 2.6 3.2 5.0 6.4 7.8 (a) Consumer price inflation (av; %) 3.1 3.3 2.9 7.4 9.1 Population (millions) 144.6 147.7 (b) 150.7 (b) 153.7 (b) 156.4 Exports of goods FOB (US$ millions) 9,131.0 9,832.0 11,869.0 13,297.0 16,071.9 Imports of goods FOB (US$ millions) -9,741.0 -10,428.0 -11,978.0 -16,693.0 -20,425.8 Current account balance (US$ millions) 1,878.0 3,854.0 3,573.0 -817.0 -1,109.0 Foreign exchange reserves excl gold (US$ millions) 3,640.0 8,078.0 10,941.0 9,799.0 10,033.0 (a) Total external debt (US$ billions) 31.7 33.7 36.4 35.7 (b) 38.8 Debt-service ratio, paid (%) 24.7 17.9 16.0 20.8 (b) 11.1 Exchange rate (av) PRs:US$ 61.93 59.72 57.75 58.26 59.51 (a) (a) Actual. (b) Economist Intelligence Unit estimates. (c) Fiscal years ending June. ECONOMIC FORECAST SUMMARY Key indicators 2005 2006 2007 2008 2009 2010 Real GDP growth (%) 7.8 6.6 6.0 5.5 5.9 5.7 Consumer price inflation (av; %) 9.3 8.3 6.7 5.5 5.0 5.1 Budget balance (% of GDP) -3.3 -3.2 -3.2 -3.1 -2.8 -2.8 Current account balance (% of GDP) -3.3 -3.7 -3.9 -3.8 -3.5 -3.4 Short-term interest rate (av; %) 5.0 6.1 6.9 7.0 7.0 7.0 Exchange rate PRs:US$ (av) 59.6 60.5 62.8 64.1 66.1 67.6 Exchange rate PRs:¥100 (av) 54.9 58.3 65.2 64.6 66.1 67.6 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 Source: Economist Intelligence Unit ViewsWire PAGE 87
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