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FEDERATION OF EURO-ASIAN STOCK EXCHANGES ANNUAL REPORT JUNE 2010KARACHI STOCK EXCHANGEECONOMIC AND POLITICAL DEVELOPMENTSPolitical OutlookAlthough the army has reported a number ofvictories in the course of its new offensiveagainst Tehrik-i-Taliban Pakistan (an allianceof around 13 Pakistan-based militant Islamistgroups) in the Federally Administered TribalAreas (FATA), the medium-term success ofthe current conflict remains far from assured.There is little chance that the fight againstIslamist militancy will be won decisively in thelong term, even if broader political stabilityreturns, which is itself unlikely. An uneasypolitical stability has held since the resolutionof a lengthy judicial crisis in March 2009, buttensions between the two main politicalparties will persist, hampering governmenteffectiveness. National security will remain themost pressing issue on the domesticagenda, but the government's focus is likelyto waver.The US's policy towards Pakistan andAfghanistan encompasses developmentassistance–exemplified by a new, US$7.5bnnon-military aid bill (military aid and targetedstrikes on suspected militants, but the US isstill seeking co-operation and accountabilityfrom Pakistan. The US was always going tohave difficulty in achieving its goal in theregion–nullifying Islamist militancy–even if itwere to have received unstinting and effectivelong-term co-operation from the Pakistanigovernment and military, which was in anycase unlikely.Pakistan’s macroeconomic environment ismore stable than it was in 2008 because ofthe disbursement of emergency financingfrom the IMF. The second review of Pakistan’sstand-by arrangement with the IMF tookplace in August 2009; the Fund accepted thatPakistan’s economy had continued tostabilise, but also warned that themacroeconomic outlook for 2009/10remained difficult and that the externalposition was subject to considerabledownside risks. The government’s attemptsare believed to improve economic stability willbe impeded by the unfavourable internationaleconomic environment and by a range ofdomestic factors. The task of the governmentand the SBP will be simplified to a degree, inthe sense that these institutions have lost aconsiderable amount of autonomy ineconomic policymaking as a result ofPakistan’s acceptance of IMF assistance.Economic PerformanceThe weak performance of most countries willbe partially offset by continued GDP growthin China and India, but even theseeconomies will suffer from some of theadverse effects of the downturn. Moreover,the downside risks to the global economyremain high.The global financial crisis has provoked aliquidity crunch in Pakistan. This means thatinvestment, which was previously a crucialdriver of economic expansion, is set to growby just 1.7% in 2009/10, after contracting by6.5% in 2008/09; this compares with averageannual investment growth of 15.7% in theboom years of 2004/05-2006/07. Thegovernment’s need to contain the fiscaldeficit means that public consumption growthalso will be significantly curtailed. Privateconsumption will provide support to theeconomy, growing by 3% in 2009/10. It sforecasted that real GDP will grow by just2.4% in 2009/10, below the government'starget of 3.3% and just shy of the SBV'sprojection of 2.5%-3.5%. Economicexpansion will accelerate to 3.8% in 2010/11,driven partly by a resumption of growth ininvestment as financial constraints ease.Year-on-year consumer price inflation slowedto 10.1% in September 2009, from 10.7% inAugust. Although inflation has been on adeclining trend since November 2008, it hasnot fallen nearly as rapidly as in many otherAsian countries, and remains high.Estimated that the Pakistan rupee willaverage PRs82.9:US$1 in 2009, representinga nominal depreciation of 15% from itsaverage level in 2008. In 2010-11 the rate ofdepreciation will moderate to 0.7%. Thecurrency's weakening against the US dollar in2009 was limited by the improvement inPakistan’s economic fundamentals thatresulted from the IMF financing package; theboost to investor confidence from bilateralpledges of aid and assistance; andintervention by the SBP in foreign-exchangemarkets to limit volatility.The IMF’s emergency financing packageforestalled a balance-of-payments crisis inlate 2008. The programme that Pakistan mustnow follow includes traditional austeritymeasures designed to reduce domesticdemand. Therefore estimated that imports willcontract sharply in 2009, allowing the tradedeficit to narrow to US$10.1bn this year, fromUS$16.8bn in 2008. In 2010-11 import growthwill resume, in line with stronger economicexpansion and higher oil prices. Exportgrowth will be anaemic, as a broad range ofstructural factors will impede Pakistan’s abilityto boost its exports. As a result, the tradedeficit will widen again in 2010-11, to anannual average of US$13.6bn.** The Economist Intelligence Unit Limited, November 2009Key Information ContactsGovernment of Pakistan www.pak.gov.pkMinistry of Finance www.finance.gov.pkPrivatization Commission www.privatisation.gov.pkState Bank of Pakistan www.sbp.org.pkSecurity and Exchange Commission of Pakistan www.secp.gov.pkREAL GDP(PKR millions)CONSUMER PRICES (% CHANGE PA; AV)(%)6543218580757065600552005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010PAGE 100