THE STATE OF

PAKISTAN’S ECONOMY

Third Quarterly Report

for the year 2017-18 of the
Board of Directors of State Bank of Pakistan

State Bank of Pakistan

Contents Page No.
1 Overview 1
1.1 Economic Review 3
1.2 Economic Outlook 6

2 Real Sector 9
2.1 Overview 9
2.2 Agriculture 11
2.3 Industry 16
2.4 Services 22

3 Inflation and Monetary Policy 27

3.1 Overview 27
3.2 Liquidity conditions in the interbank market 29
3.3 Monetary aggregates 30
3.4 Budgetary borrowing 32
3.5 PSE credit 34
3.6 Credit to private sector 34
3.7 Inflation 38

4 Fiscal Policy and Public Debt 43

4.1 Overview 43
4.2 Revenues 45
4.3 Expenditures 49
4.4 Provincial fiscal operations 51
4.5 Public debt 54

5 External Sector 61
5.1 Overview 61
5.2 Current account 63
5.3 Financial account 67
5.4 Exchange Rate 70
5.5 Trade account 71

6 Special Section 1: Cement Industry: Current

Dynamics and Future Prospects 81
7 Special Section 2: Synthetic Textiles is Key to
Sustaining Export Growth Momentum 89

Annexure: Data explanatory notes 95

Acronyms 99

Box Items
Box 2.1: Impact of Growth on Job Creation 10
Box 2.2: Oilseeds Crops in Pakistan: A way to Crop
Substitution 14
Box 2.3: State of Internet Inclusiveness in Pakistan 24
Box 5.1: Dynamics of Remittances Inflows from Dubai and
Rest of United Arab Emirates 66
Box S1.1 Cost Efficiency in Cement Industry with Alternative
Energy 84
 Acknowledgment
Analysts:
Chapters:
1. Overview Manzoor Hussain Malik
2. Real Sector Manzoor Hussain Malik; Javed Iqbal;
Khurram Ashfaq Baluch; Ahmad Mobeen,
Sahar Masood
3. Inflation and Monetary Policy Asma Khalid; Talha Nadeem; Umer Khan
Baloch; Amjad Ali; Umar Mashhood
4. Fiscal Policy and Public Debt Fida Hussain; Muhammad Idrees; Imtiaz
Hussain; Hira Ghaffar
5. External Sector Muhammad Omer; Syed Ali Raza Mehdi;
Junaid Kamal; Sarmad Ellahi; Ruman Younis
Special Sections
1. Cement Industry: Current Dynamics Javed Iqbal
and Future Prospects
2. Synthetic Textiles is Key to Asma Khalid
Sustaining Export Growth Momentum

Formatting: Javed Iqbal; Ahmad Mobeen

Publication Manager: Manzoor Hussain Malik

Director: Omar Farooq Saqib
Publication Review Committees:
PRC of the Management Saeed Ahmed (Chairman); Inayat Hussain;
Syed Samar Husnain; Syed Irfan Ali;
Muhammad Ali Malik; Azizullah Khattak;
M. Ali Choudhary; M. Farooq Arby and
Muhammad Javaid Ismail

PRC of the Board Ardeshir Khursheed Marker (Chairman);

and Mohammad Riaz

The feedback from Research, Monetary Policy and Statistics & Data Warehouse
Departments, and logistic support by Office of the Corporate Secretary, and External
Relations Department are also appreciated.

For feedback and queries: quarterly.report@sbp.org.pk

1 Overview
The provisional information presents a mixed picture of Pakistan’s economy at the
end of Q3-FY18. Maintaining its upward trajectory, the real GDP growth is
estimated at a 13-year high of 5.8 percent in FY18, along with a benign
inflationary environment.
Table 1.1: Selected Economic Indicators
However, deterioration in
FY16F FY17P FY18P
external balances and high
Growth rate (percent)
fiscal deficit remains a major
Real GDP Jul-Jun 4.6 5.4 5.8
source of concern. (Table 1.1)
Agriculture Jul-Jun 0.2 2.1 3.8
Industry Jul-Jun 5.7 5.4 5.8
The estimates for FY18 also
o/w LSM Jul-Jun 3.0 5.6 6.1
suggest that compared to FY17
Services Jul-Jun 5.7 6.5 6.4
all the three sectors remained 2.6 4.0 3.8
CPI (period average)a Jul-Mar
vibrant. Agriculture sector on 8.1 9.9 9.1
Private sector credit b Jul-Mar
the back of improved cotton b 6.0 5.9 4.8
Money supply (M2) Jul-Mar
crop and record sugarcane is Exports b
Jul-Mar 13.0 -3.2 13.1
expected to comfortably Imports b Jul-Mar -4.4 18.3 15.9
surpass its growth target for Tax revenue –FBR c
Jul-Mar 17.7 8.6 15.8
FY18. Industrial sector, Exchange rate (+app/-dep%) b
Jul-Mar -2.8 0.0 -9.2
reflecting a robust domestic Policy Rate b
Mar 6.0 5.75 6.0
demand, is set to achieve a 10- ONMMR b
Mar 6.1 5.7 5.7
year high growth. The services billion US dollars
sector is estimated to maintain SBP’s reserves (end-period) b Mar 16.1 16.5 11.6
almost its last year growth Worker remittances b Jul-Mar 14.4 14.1 14.6
based on spillover impact of FDI in Pakistan b Jul-Mar 1.8 2.0 2.1
healthy performance by Current account balance b Jul-Mar -3.4 -8.0 -12.1
commodity producing sector. percent of GDP1
In the same encouraging vein, Fiscal balanced Jul-Mar -3.5 -3.9 -4.3
inflation remained within Current account balance Jul-Mar -1.6 -3.5 -5.0
manageable and supportive Investment Jul-Jun 15.7 16.1 16.4
levels, largely owing to decline P=Provisional; F= Final.
Data sources: a Pakistan Bureau of Statistics; b State Bank of
in its food component. Pakistan; c Federal Board of Revenue; and d Ministry of Finance

The combination of robust economic activity and low inflation had two important
implications. First, it boosted confidence in the economy, which along with
affordable cost of financing induced firms to borrow substantially. In particular,
energy, textiles, and cement sectors focused more on capacity expansion to gear
up for growing domestic demand. A healthy rise was also observed in working
capital requirements; while the consumer finance posted the highest Jul-Mar flow
The State of Pakistan’s Economy

during the last 12-years, driven mainly by a surge in auto and housing finance.
Ample liquidity in the wake of maturity of government securities also supported
this credit off-take.

The second impact relates to increased consumption, which along with recovering
oil prices, further inflated the import payments. Higher import bill, despite 10
consecutive months of exports growth and rising workers’ remittances, resulted in
record widening of current account deficit. Even higher financial inflows from
IFIs, bilateral sources, and issuance of sovereign bonds remained insufficient.
Thus, the remaining payment gap fell on the country’s FX reserves, which fell to
only two months of import cover by end-March, 2018. The foreign exchange
market also remained volatile and PKR depreciated by 9.2 percent against the US$
during Jul-Mar period of FY18.

These external sector developments started to impact inflation as well. The pass-
through of rising global oil prices to domestic fuel prices pushed up the energy
component of inflation, as the government passed on its impact to consumers.
Similarly, the impact of PKR depreciation started to translate into costly imports
and shoring up of inflationary expectations.

On the fiscal side, the healthy growth in revenue could not keep up pace with a
sharp rise in fiscal expenditure in the Q3-FY18. Particularly, the development
expenditure related to infrastructure and power projects increased sharply, with
major contribution coming from provinces. As a result, the fiscal deficit in Q3-
FY18 stood higher than corresponding period last year.

To finance the fiscal gap, the government had to rely both on SBP’s borrowing
and external sources. In particular, the government borrowings from SBP stood at
Rs2.2 trillion in Q3-FY18 – the highest level in a quarter. External debt, owing
both to higher commercial loans and revaluation impact of the PKR depreciation,
also rose considerably.

In short, ensuring the continuity of expansion in economic activities and low

inflation would depend on containing of current account and fiscal deficits. As
these vulnerabilities are posing challenges to Pakistan’s current growth cycle,
implementation of both short-term and medium term policies would be crucial in
this regard.

In short-term, concerted efforts could be made to rationalize fiscal expenditures

given the tax relief measures approved in budget FY19. In the medium term,

2
 Third Quarterly Report for FY18

reforms would be needed to expand tax base besides enhancing efficiency of the
existing system. Simultaneously, there is a need to arrange external financing in
the short term. Also, more policy measures are required to contain the widening
trade deficit. For this purpose, it is also crucial to resolve structural issues
affecting exports competiveness.

Economic Review
Real Sector
The real GDP is estimated to grow by 5.8 percent during FY18, surpassing the
decade-high growth of 5.4 percent achieved during FY17. This was achieved on
the back of strong performances by agriculture and services sectors, both of which
managed to grow at or above their targets.

The agriculture sector grew by 3.8 percent, higher than both the target of 3.5
percent and last year’s growth of 2.1 percent. The sector benefitted from a strong
showing by livestock and healthy production of major Kharif crops such as cotton
and sugarcane. This, alongside contributions from cotton ginning segments, more
than offset the contraction in wheat harvest due to decline in area under cultivation
and lack of water availability.

In services sector, the improvement in wholesale & retail trade and general
government services helped offset the deceleration in the finance & insurance and
transport, storage & communication segments. Overall, the sector was able to
keep its momentum intact and achieve the targeted growth of 6.4 percent during
FY18.

The value addition in industrial sector grew by 5.8 percent during FY18 compared
to 5.4 percent growth observed during last year. This was achieved on the back of
a rise in large-scale manufacturing, coupled with a recovery in mining activities
and continued surge in construction activities. However, the deceleration in
electricity generation and distribution constrained the overall growth of the
industrial sector below the target of 7.3 percent.

Inflation and Monetary Policy

Monetary Policy Committee (MPC) raised the policy rate by 25 basis points to 6
percent in January 2018 – this was the first hike since November 2014. The key
factors influencing the MPC’s January decision included: (i) PKR depreciation of
nearly 5 percent in December 2017; (ii) rising international oil prices; (iii)
monetary tightening by other central banks (particularly the US Fed and Bank of
England), with its concomitant impact on PKR interest rate differential; and (iv) a
possible overheating of the economy as indicated by increased capacity utilization

3
The State of Pakistan’s Economy

in a number of industries. Also, the expected rising trend in inflation and

aggregate demand remained a consideration. Subsequently, the policy rate was
maintained in March 2018.

Given that banks seemed to have already priced in the anticipated uptick in policy
rate during Q2-FY18, the January policy rate hike did not trigger a similar upward
adjustment in weighted average lending rates (WALR) for the most part. In fact,
retail rates moderated slightly during February and March 2018, as banks had
ample liquidity at their disposal. This stemmed largely from the banks’ reluctance
to roll over the bulk of maturing government securities in a perceived rising
interest rate scenario. In turn, this liquidity comfort nudged the overnight rates
below the policy rate during Q3-FY18.

With the cost of bank financing continuing to be attractive, demand for credit from
the private sector remained strong. Furthermore, steady economic activity
appeared to help maintain the growth in fixed investment loans, as both
manufacturing and non-manufacturing firms (largely cement and textile) borrowed
for the long term. As far as working capital loans is concerned, the sugar sector’s
borrowing was most notable during Q3-FY18, with the crushing season in full
swing.

The government’s reliance on SBP borrowings increased in Q3-FY18, as banks’

participation in government paper auctions stood relatively low in contrast to the
first two quarters. SBP lending to the government reached Rs2.2 trillion in the
third quarter. This, coupled with high credit off-take and increase in loans to PSEs,
led to an upsurge in the NDA of the banking system. However, the M2 growth
remained subdued due to a concurrent contraction in NFA.

Fiscal Operations
A sharp increase in expenditures, amid a slower growth in revenue in Q3-FY18,
led the fiscal deficit rising to 4.3 percent of GDP during Jul-Mar FY18 compared
with 3.9 percent last year, and a full year target of 4.1 percent. The growth in
revenue, though remained higher compared to last year, slowed down in Q3-FY18
compared to first two quarters of FY18. On the other hand, growth in
expenditures accelerated from 12.4 percent in Q1-FY18 to 23.4 percent in Q3-
FY18.

The slowdown in revenue collection was primarily due to direct taxes. More
specifically, the drag came from a decline in voluntary payments, while
withholding taxes and collection on demand increased considerably compared to
last year. The decline in voluntary payments can partially be attributed to

4
 Third Quarterly Report for FY18

reduction in corporate tax rate and lower bank profitability. Meanwhile, growth in
indirect and provincial taxes remained buoyant in line with expanding economic
activity, and the pass-through of rise in the oil prices to domestic consumers. The
non-tax revenue also recovered strongly, bolstered by a jump in provincial non-tax
revenue, higher markup payment, dividend income and PTA /postal service profit.

The acceleration in growth of expenditures was more due to higher provincial

spending, with both current and development expenditures growing sharply. The
provincial development spending grew by 36.7 percent during Jul-Mar FY18
compared to 13.6 percent in the corresponding period of last year. Growth in
federal development spending also remained high, close to 25 percent compared to
28.9 percent in last year. The push has come from urgency to complete the
ongoing project before the terms of assemblies came to an end. Similar to growth
in development expenditure, major contribution to a sharp increase in current
expenditure came from provinces, especially in Q3-FY18. Higher debt servicing
and defense spending at federal level and general public services, economic
affairs, and public order and safety in case of provinces contributed to the increase
in current expenditures.

The resulting higher fiscal deficit was largely financed through borrowing from
SBP and external sources. In case of external financing, government heavily
relied on commercial loans and sovereign bonds. Moreover, the revaluation
losses, resulting from appreciation of major currencies against US$ and the
depreciation of rupee against US$ also added significantly to external debt.
Overall, these developments led to considerable increase in public debt, with
record accumulation in Q3-FY18 since FY14.

External sector
The external account remained under pressure, despite a recovery in exports and
remittances. A rebound in global oil prices, together with higher machinery and
transport import, exacerbated the trade deficit. This led to the highest current
account deficit of US$12.1 billion, the country has seen during Jul-Mar of a fiscal
year.

Exports witnessed a broad-based growth of 13.1 percent YoY in Jul-Mar FY18

and reached US$ 17.1 billion. Notably, exports in Q3-FY18 alone recorded a
growth of 17.2 percent YoY, the highest growth in Q3 in more than six years.
Both traditional and non-traditional exports contributed to this improved
performance. Moreover, extension of GSP plus status by EU, additional
incentives announced by the government in October 2017 export package, and
recovery in global demand also supported the export growth. As regards imports,

5
The State of Pakistan’s Economy

the rising global crude oil prices together with lagged impact of machinery import
payments have inflated the import bill during Jul-Mar FY18. About 70 percent of
the import payments were contributed by three categories namely energy,
machinery and metals. However, the recent decline in machinery imports is likely
to reduce the payment pressure going forward.

A significant increase in financial inflows on account of a rise in official portfolio

investment and loans, and a marginal growth in net FDI could not completely
finance current account gap. In this scenario, the country’s official reserves
depleted by US$ 4.5 billion and reached US$ 11.6 billion by end-March FY18.
Consequently, PKR depreciated by 9.6 percent on a cumulative basis during Jul-
Mar FY18.

1.2 Economic outlook

The government has set a 6.2 percent real GDP growth target for FY19 largely on
the back of accelerating growth momentum of the last few years. Higher PSDP
and CPEC spending, a further ease in power supply, and continuation of industrial
expansion plans, are other reassuring factors. However, the growing external
vulnerability and high fiscal deficit will continue to pose major down side risks to
the achievement of this target. Moreover, on the real side, the ongoing dry spell
and water shortages may adversely impact the value addition potential of the
agriculture sector.

High domestic demand, lagged impact of adjustment in energy prices, and PKR
depreciation are likely to contribute to higher CPI inflation in FY19. Smooth
supply of staple food items and soft oil price on the other hand could offset these
underlying pressures and help keep inflation around the target of 6 percent set for
FY19.

The government has set fiscal deficit target at 4.9 percent of GDP for FY19, which
is based on a 12.7 percent anticipated growth in FBR tax revenues and a 10.0
percent increase in expenditures, with greater emphasis on current expenditure.
While the current budget has reduced tax rates without rationalizing expenditure,
achieving the fiscal deficit target in this backdrop appears challenging.

On the external side, the exports growth prospects remains encouraging on the
back of PKR depreciation; recovery in global demand; fiscal incentives for
exports; ease in power supply; and improved price outlook of rice and cotton in
the international markets. Also, the growth in workers’ remittances is expected to
further gather some pace, partly on account of the steps taken by the government
and SBP to attract inflows through the official channels. At the same time, a

6
 Third Quarterly Report for FY18

deceleration in imports is expected due to proactive monetary management by

SBP, PKR depreciation and the continuation of administrative measures to
dampen the domestic demand for non-essential import items.

However, the import bill is likely to stay high owing to a notable increase in
international commodity prices, especially of oil. This would keep the trade
deficit high in FY19 as well. Furthermore, the FDI inflows are expected to remain
lower in FY19 than last year as a number of CPEC energy projects are in their
advance stages of completion. Therefore, in overall terms, the high current
account deficit, together with limited financial inflows, would continue to keep the
balance of payments under pressure.

7
2 Real Sector

2.1 Overview
Provisional estimates put the Table 2.1: GDP and its Components
real GDP growth for FY18 at Share and growth in percent; contribution in percentage points
5.8 percent, up from 5.4 Growth Contri.
Share to
percent during FY17. This has
FY17R FY18P FY18T growth
been the highest growth Agriculture 18.9 2.1 3.8 3.5 0.7
achieved over the last 13 years, Of which
and is close to the overall Important crops 4.5 2.2 3.6 2.0 0.2
target of 6 percent set for Livestock 11.1 3.0 3.8 3.8 0.4
FY18. A healthy showing by Industry 20.9 5.4 5.8 7.3 1.2
Of which
agriculture, a sustained growth Mining and Quarrying 2.8 -0.4 3.0 3.5 0.1
in the services, and an uptick LSM 10.8 5.6 6.1 6.3 0.7
in large-scale manufacturing Electricity gen. & dist. 1.8 5.8 1.8 12.5 0.0
output contributed to this Construction
and gas dist. 2.8 9.8 9.1 12.1 0.2
performance. Services 60.2 6.5 6.4 6.4 3.8
Of which
Wholesale & retail trade 19.0 7.5 7.5 7.2 1.4
The GDP growth was Finance & insurance 3.4 10.8 6.1 9.5 0.2
supported by a host of factors, General govt. 7.9 5.9 11.4 3.9 0.9
such as: (i) improved energy GDP 100 5.4 5.8 6.0 5.8
supply; (ii) supportive policies Memorandum item
including low & stable interest Investment-GDP ratio 16.1 16.4
rates and fiscal incentives R: Revised; P: Provisional; T: Target
Data source: Pakistan Bureau of Statistics
through subsidies, easy credit
conditions, and rising PSDP
spending; iii) continuation of CPEC related investments & projects, and (iv)
favorable export demand. Moreover, the economy received benefits concomitant
with improved security and law and order.

On the agriculture front, impetus from livestock segment and substantial

improvement in production of cotton and sugarcane crops – the latter experienced
another record season - led the sector posting a growth of 3.8 percent, higher than
both the last year’s 2.1 percent and the targeted growth of 3.5 percent for FY18.
Improved quality of inputs like certified seeds and pesticides, increased
mechanization, and an uptick in credit disbursement helped to partially offset the
negative impact of inadequate water availability and lower fertilizer off-take for
crop sector.
The State of Pakistan’s Economy

The services sector is estimated to have almost achieved its targeted growth of 6.4
percent during FY18 on the back of strong performance by wholesale & retail,
which benefitted from improvement in commodity-producing segment, a rise in
import quantum and general government services. However, finance & insurance
and transport, storage & communication experienced deceleration as against
growth seen in the last year.

The industrial sector’s performance also remained constrained mainly on account

of steep deceleration in electricity and gas generation & distribution. This
deceleration also led GDP growth miss the 6 percent mark, as the services and
agriculture sector performed at or above their targeted rates. Encouragingly,
improvement in large-scale manufacturing output and a turnaround in mining and
quarrying helped keep overall growth of the sector at 5.8 percent, which stood
higher than last year’s performance of 5.4 percent.

The current growth paradigm stems from the strong performance of agriculture
and construction (and its allied) sectors – both of these promote employment in
the abundant unskilled segment of the country’s labor force. A recent World Bank
study for South Asia also validates this relationship between GDP growth and job
creation in case of Pakistan (Box: 2.1).

Box 2.1: Impact of Growth on Job Creation1,2

Employment is considered one of the key development indicators of an economy’s performance. A
recent World Bank’s study analyzes empirical relationship between growth and employment for the
South Asian economies. According to the report, growing labor force will outpace the population
growth in most of South Asia; however, increase in labor force would not be a problem if the
economy creates sufficient job opportunities.

In the case of Pakistan, it needs to create around 1.3 million jobs every year to maintain its current
employment level. Moreover, in order to achieve this, a certain threshold of economic growth would
be required. Empirical evidence on the relationship between growth and employments suggests that
every percentage point increase in growth results in creation of 0.2 million jobs. Going by these
calculations, Pakistan has to attain annual economic growth of around 6.6 percent to accommodate
all of its new job seekers. As the growth momentum has picked up, so has the country’s ability to
provide more job opportunities.

According to the study, the following factors may also create job opportunities. First, better
infrastructure is one of the important ways to promote employment opportunities as it facilitates
business activities. In the context of Pakistan, CPEC related infrastructure development is projected
to spur business growth, especially with development of Special Economic Zones. Second, more
integration with the global markets enhances productivity and thereby real wage rate. Recently,

1 Source: World Bank Publication, “South Asia Economic Focus, Spring 2018: Jobless Growth”.
2 While the region-centric study suffers from data limitations and equivalence issues, its key
takeaways are broadly applicable to Pakistan.

10
 Third Quarterly Report for FY18

Pakistan’s exports have started showing signs of recovery under supportive government policies and
recovery in global demand. Last, planned urban development plays an important role in job creation,
since metropolitan areas are hubs connecting a country to the outside world and act as engines of its
growth. Mega city development projects (especially mass transit) in Pakistan have boosted
economic activity and the same is expected after completion of ongoing developmental projects.

In addition to GDP growth, Pakistan can absorb more entrants per unit of growth through two
sources. First, a slight change in growth mechanics can spur employment growth. In particular,
SME-led growth can provide more employment opportunities than highly capital-intensive large-
scale industries. Second, within SMEs, a renewed focus on women entrepreneurial incubators would
yield high social welfare returns.3 Women-led SMEs are more inclined to hire women than men-led
ones.4 A national outreach program to motivate and attract female participation could also unlock a
substantial employment potential. Here, the regulatory bodies (SBP, SECP and SMEDA) need to
enhance collaboration amongst them to provide a platform for SMEs to grow and expand. Moreover,
they may support women-led SMEs to break the glass ceiling.

In this regard, SBP has also announced a policy for promotion of SME Finance in December 2017.
The policy has 9 key pillars, which include improving regulatory framework, upscaling of
microfinance banks, risk mitigation strategy, simplified procedures for SME banking, program-based
lending & value chain financing, capacity building & awareness creation, handholding of SMEs,
leveraging technology and simplification of taxation regime. Simultaneously, the SBP SME
framework set certain benchmarks for 2020, which include (i) an increase in SME share in private
sector credit, from existing 8 percent to 17 percent and (ii) increase in number of borrowers from
existing 164,000 to 500,000. These actions are likely to contribute towards employment generation
going forwards.

2.2 Agriculture Table 2.2 Agriculture Sector Value-addition

Share and growth in percent; contribution in percentage points
The agriculture sector
Contribution
experienced a broad-based Share Growth to
improvement of 3.8 percent in Growth
FY18, comfortably surpassing FY18 FY17R FY18TFY18P FY17R FY18P
both the targeted growth of 3.5 Crop Sector 36.9 0.9 - 3.8 0.3 1.4
percent and last year’s Important crops 23.6 2.2 2.0 3.6 0.5 0.8
performance of 2.1 percent. Other crops 10.8 -2.7 3.2 3.3 -0.3 0.4
Cotton ginning 2.5 5.6 6.5 8.7 0.1 0.2
Important crops posted a
Livestock 58.9 3 3.8 3.8 1.7 2.2
growth of 3.6 percent
Forestry 2.1 -2.4 10 7.2 -0.1 0.1
compared to 2.2 percent last Fishing 2.1 1.2 1.7 1.6 0 0
year, with notable overall 100 2.1 3.5 3.8
contributions coming from Data Source: Pakistan Bureau of Statistics, R: Revised, T: Target,
fisheries and cotton ginning P: Provisional
sectors (Table 2.2). The crop sector growth is attributed largely to record
performance by sugarcane and rice, contributing a share of 15.2 percent and 13.1
percent to the important crop sector. Record production of sugarcane and rice and

3 Female participation in labor force is still low in Pakistan, even by South Asian standards.
4 Source: “Women-led Businesses”, An independent report by BDRC, February 2015.

11
The State of Pakistan’s Economy

double-digit growth in cotton, hence more than offset the negative growth shown
by wheat and maize (Table 2.3).

The improved crop performance, despite a lower availability of certain inputs such
as fertilizer and water supply, can be attributed to higher yields on the back of
supportive government policies (attractive support prices and subsidies) along
with availability of other quality inputs (certified seeds and pesticides) and
expansion in agriculture credit.

Crop Sector: Table 2.3 Production of Important Crops

million tons; cotton in million bales; growth in percent
Inputs
Production Growth
A review of major inputs Share in
reveals an uptick in agriculture important FY17 FY18T FY18 FY17 FY18
credit, while a reduction in crops %
Cotton 23.3 10.7 13.6 11.9 7.6 11.8
fertilizer off-take and water
Rice 13.1 6.8 6.8 7.4 0.7 8.6
availability during Jul-Mar Sugarcane 15.2 75.5 68.5 81.1 15.3 7.4
FY18. Agriculture credit Wheat 38.4 26.7 26.5 25.5 4.1 -4.4
disbursements increased by Maize 10.0 6.1 5.6 5.7 16.4 -7.0
40.8 percent during Jul-Mar Data Source: Pakistan Bureau of Statistics, T: Target
FY18 compared to 23 percent growth during the same period last year. Similarly,
fertilizer off-take in Jul-Mar FY18 went down by 2.9 percent and 5.2 percent for
urea and DAP respectively. Irrigation water availability was also reduced by 6.1
percent in Jul-Mar FY18, compared to same period last year. Decline in fertilizer
off-take and water availability was more pronounced in Rabi season, which
adversely impacted wheat and maize crops.

Wheat: Figure 2.1: Wheat Production and Area

Wheat production stood at 25.5 Production Area under crop (rhs)
27 9.3
million in FY18, down 4.4
percent from last year, and 26 9.2
missing the target of 26.7 9.1
million hectares
million tons

25
million tons set for FY18. 9
According to revised estimates 24
8.9
by PBS, FY17 witnessed 23
record wheat production of 8.8
26.7 million tons with yield 22 8.7
displaying a YoY growth of 6.9 21 8.6
percent compared to FY16.
FY09

FY12
FY10
FY11

FY13
FY14
FY15
FY16
FY17
FY18

The country was not able to

match last year’s performance Data source: Pakistan Bureau of Statistics
as both area and yield declined in FY18 by 2.7 and 1.8 percent respectively

12
 Third Quarterly Report for FY18

(Figure 2.1).

Wheat production suffered mainly due to four factors. First, delay in sugarcane
crushing led to unavailability of land for wheat cultivation. Second, water
availability declined significantly during Rabi FY18. This was evident from 14.5
percent lower irrigation flows compared to same period last year. Third, fertilizer
off-take remained lower during the season for phosphate nutrient5, which
witnessed a 13.3 percent contraction on a YoY basis. Fourth, higher than normal
temperatures in March also adversely impacted the yield of wheat crop in Punjab
and Sindh.

Despite contraction in wheat output, FY18 witnessed another bumper crop, which
further increased the stockpile. While government agencies are set to procure
around 6.9 million6 tons of wheat this year, the stocks at end April (start of
procurement season) are already standing at 6.9 million tons; the estimated wheat
stockpiles with government storage houses would easily cross 10 million mark
this year.

Some relief to wheat stocks position came from exports during Feb-Mar 2018. In
December 2017, the government allowed export of 2 million tons7 to create room
for the next crop until June 2018. Attractive subsidies on 2 million tons of wheat
export were offered: US$ 159 per ton by sea and US$ 120 per ton by land. 8
During Feb-Mar 2018, wheat exports achieved 0.3 million tons9 mark (Chapter
5). Exports of wheat provided some respite to local procurement agencies;
however, they occurred at a cost to the government in terms of export subsidies to
compensate for price differential between domestic and international prices.10

Cotton:
According to the latest estimates, cotton production stood at 11.9 million bales
during FY18, registering an increase of 11.8 percent over last year, while missing
the annual plan’s envisaged target of 13.6 million bales. Like wheat harvest,
lower cotton production may also be attributed to substitution of area under
sugarcane cultivation.

5 Phosphate is an important nutrient for wheat crop.

6 Source: Annual Plan 2017-18
7 The Economic Coordination Committee allowed exports of 1.5 million tons for Punjab and 0.5

million tons for Sindh before June 30 2018.

8 Source: Ministry of National Food Security and Research.
9 Wheat exports are to Bangladesh, Indonesia, Vietnam, Oman and Muscat at prices of 185-200$ per

ton.
10 Public expenditure of up to $320 million is expected given the entire amount is exported at the full

subsidy.

13
The State of Pakistan’s Economy

Supportive pricing policies for wheat and sugarcane have been attractive for
growers hence resulting in surplus production of these commodities. Offloading
stocks in the global market is hindered by low international prices without hefty
subsidies. Hence, excessive stockpiles of wheat and sugar have added a significant
financial strain to the government. Current scenario requires price rationalization
for crops that sufficiently provide for local consumption and directing resources to
other crops. Promotion of oilseeds provides one such crucial avenue given the rise
in edible oil import bill (see Box 2.2).

Box 2.2: Oilseeds Crops in Pakistan: A Way to Crop Substitution

In spite of being an agrarian economy, Pakistan had to import11 2.7 million metric tons of edible
oils12 worth US$ 2.0 billion in FY17 and 2.2 million metric tons worth US$ 1.7 billion in Jul-Mar
FY1813 in order to fulfill the needs of its domestic edible oil industry. Major oilseed’s14 imports
stood at US$ 0.8 billion in Jul-Mar FY18 compared to US$ 0.6 billion in the same period in FY17.
As per the United States Department of Agriculture report, import of oilseeds is further expected to
exceed imported edible oil imports.15 The country is capable of producing sizeable quantities of
oilseeds that will reduce the import bill majorly for oilseeds and partly for edible oil.

Current Scenario: Major oilseed crops in the country are cottonseed, sunflower, rapeseed/mustard
and canola16. Local oil production on average remained 0.6 million tons during FY08-FY17;
whereas the total edible oil availability stood at 3.2 million tons, indicating low quantity produced
domestically. Furthermore, the import of seeds for poultry feed manufacturing has been on the rise
too17.
Various policies have led to lower oilseed production besides heavy reliance on imports. Supportive
pricing policies for wheat and sugarcane have had a distortionary impact on oilseed production as
evident from decline in area under oilseeds (Fig2.2.1). Oilseed cultivation is further disadvantaged
by absence of adequate machinery18and high yielding seed varieties.19 Furthermore, import
supportive policies and free trade agreements for oil imports reduce incentives for local oilseed
production. In July 2015, custom duty on soybean seed was reduced to 3 percent compared to 10
percent on soymeal imports (used in poultry feed), hence resulting in increase in imports of soybean
seed compared to soymeal. Furthermore, starting July 2014 the sales tax on soybean was reduced to
6 percent compared to 16 percent on canola or sunflower for solvent extractors, resultantly the

11 These imports form 88 percent of total edible oil supplies. Source: Pakistan Oilseeds Development
Board
12 The figure consists of soybean and palm oil imports.
13 Source: PBS imports data.
14 Major oilseed imports consist of soybean, sunflower and canola seed.
15 Source: GAIN Report, 2018: Oilseeds and Products Annual Islamabad Pakistan.
16 Source: PARC: Other oilseeds crops include groundnut, sesame, safflower, linseed, jojoba, castor,

Salicornia and salvadora.

17 Soybean seed is used to extract protein for soyameal production; a major component of poultry

feed.
18 Proper machinery, which includes planters, harvesters, and seed driers for crops such as canola

and sunflower crops, is not available.

19 In FY08,1.1 million acres was area under sunflower with production of 643,000 tons. In FY17, the

area reduced to 0.2 million acres and production to 104,000 tons.

14
 Third Quarterly Report for FY18

import of soybean for solvent extraction went up from a mere 50,000 thousand tons in FY15 to
640,000 tons in FY17.20
Fig 2.2.1 Oilseeds Area & Production
Sunflower area Canola area Rapeseed/Mustard area Total production (rhs)
1200 1200

1000 1000
thousand acres

thousand tons
800 800

600 600

400 400

200 200

0 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Data source: Pakistan Oilseeds Development Board

Glut of wheat and sugar in the market provides opportunity for oilseed crop promotion to shift
farmers focus away from surplus-producing crops.21
Required Policy Actions:
 Oilseed Policy: The Pakistan Oilseed Development Board needs to develop an Oilseeds
Policy for promotion of oilseeds in the country, in collaboration with all stakeholders22
and get it approved by the government at the earliest. In this regard, special focus is
required on the demarcation of responsibilities and goals for federal and provincial
governments respectively.
 Production of quality seeds and development of hybrid seeds: Several projects are
already underway to develop quality oilseeds. In this regard, Pakistan Agriculture
Research Council (PARC) has developed a hybrid canola seed variety and planted the
same in Northern Punjab and KPK. Furthermore, the olive plantations have been initiated
in the Potohar valley. Despite this, more focus is still required on production of quality
hybrid seeds locally mainly to reduce input costs of ultimate beneficiaries.
 Incentivizing farmers: Pricing support or subsidy may be provided to oilseed growers in
order to bring their profitability at par with crops, such as wheat. For Rabi crop FY18, the
government of Punjab has announced a cash payment of Rs.5000 per acre for upto two
acres for sowing of canola and sunflower crops. As a result, the area and production under
these crops increased, thereby indicating the significance of maintaining incentives in
boosting up oilseeds production.

20 This is distortionary in a sense that soybean oil extraction ratio is only 17-18 percent, compared to
sunflower’s 47 percent and rapeseed/canola’s 43 percent.
21 Sugarcane was planted on an area of 1.3 million hectares, with cane production of 81.1 million

tons in FY18. This will produce about 6.3 million ton sugar, whereas the country’s requirement is
around 3.4 million ton (16.3 kg per capita consumption). This means 0.6 million hectares is cropped
extra than required which can be used for oilseed cultivation. Source: Pakistan Oilseeds
Development Board.
22 Stakeholders consist of farmers, solvent extractors and poultry feed manufacturers.

15
The State of Pakistan’s Economy

 Tariff rationalization and fixation of quota on imported oilseeds and edible oil: Tariff
on import of oilseeds and edible oil may be rationalized so as to promote domestic oilseed
production. Furthermore, quota fixation may be introduced in order to limit oilseeds
imports. Especially, the imports of oilseeds and edible oil may be discouraged during the
harvesting seasons mainly to protect local oilseed production.

2.3 Industry23
Industrial production has witnessed the highest growth in the current fiscal year
since FY08. The performance can be traced to noteworthy contributions from
construction and manufacturing activities. Public sector development program
(PSDP) and CPEC related expenditure have had a spillover impact on
manufacturing sub-sectors
Table 2.4: YoY Growth in LSM Jul-Mar
such as steel, cement and
percent
automobiles. All of these Contribution in
industries posted record YoY Growth Growth
production numbers. wt. FY17 FY18 FY17 FY18
LSM 70.3 5.4 5.9
Textile 20.9 0.8 0.4 0.2 0.1
However, the industry could
Cotton Yarn 13.0 0.8 0.1 0.1 0.0
not achieve the growth target Cotton Cloth 7.2 0.5 0.0 0.0 0.0
set for FY18 on account of a Jute Goods 0.3 -7.9 33.4 0.0 0.1
lower increase in gross value Food 12.4 10.0 2.7 2.2 0.6
addition (GVA) by electricity Sugar 3.5 29.3 -11.7 2.5 -1.2
generation and gas Cigarettes 2.1 -42.5 84.9 -0.9 0.9
Vegetable Ghee 1.1 2.3 -1.8 0.0 0.0
distribution. Higher cost of
Cooking Oil 2.2 1.1 15.6 0.0 0.5
production due to an uptick in Soft Drinks 0.9 22.2 5.9 0.5 0.2
international fuel prices, along POL 5.5 -0.3 12.3 0.0 0.7
with limited revenue growth Steel 5.4 16.6 27.5 0.6 1.0
under an administered pricing Non-Metallic
Minerals 5.4 7.1 12.1 0.8 1.3
mechanism, led to slowdown Cement 5.3 7.2 12.2 0.8 1.3
in GVA of this sector. Further, Automobile 4.6 11.4 19.0 0.7 1.3
the closure of inefficient Jeeps and Cars 2.8 4.7 22.1 0.2 0.7
furnace oil based power plants Fertiliser 4.4 1.3 -8.3 0.1 -0.5
in a phased-manner also Pharmaceutical 3.6 9.0 4.4 0.7 0.4
Paper 2.3 9.8 9.0 0.3 0.3
contributed to lower GVA. In Electronics 2.0 18.0 45.2 0.3 0.8
this backdrop, it could only Chemicals 1.7 -2.4 -0.4 -0.1 0.0
manage 1.8 percent growth Caustic Soda 0.4 -0.6 21.1 0.0 0.1
over last year’s performance of Leather Products 0.9 -18.8 -9.1 -0.4 -0.1
5.8 percent, despite an Excl. Sugar 66.8 3.2 7.9
improvement seen in electricity Data source: Pakistan Bureau of Statistics

23
This section is based on actual data up to March 2018. Therefore, number reported in this section
would not tally with those presented in Table 1, which are annual estimates.

16
 Third Quarterly Report for FY18

generation.24

Large-scale manufacturing
LSM marginally improved on a YoY basis, growing by 5.9 percent during Jul-Mar
FY18, compared to 5.4 percent in the corresponding period last year (Table 2.4)25.
The factors which facilitated LSM growth mainly included: (i) increased capacity
utilization due to ease in energy supplies; (ii) high credit off-take owing to low
interest rates; (iii) output stimulus in associated industries due to widespread
construction activities; and (iv) an improved business environment on the back of
CPEC related projects and favorable law and order situation.

Construction allied and consumer durable industries registered a notable growth.

However, sugar industry was not able to capitalize on record sugarcane
production; in stark contrast to last year, when it was the main driver of LSM
growth. Barring sugar, LSM registered remarkable growth of 7.9 percent during
Jul-Mar FY18 compared to 3.2 percent during the same period last year. A
detailed industry-wise analysis is as follows:

Automobile
The automobile subsector grew by 19.0 percent during Jul-Mar FY18 on top of the
11.4 percent growth witnessed during the same period last year (Table 2.4). A
healthy performance by the passenger car and tractor segments, coupled with a
rebound in production of light commercial vehicles, contributed to this improved
performance (Table 2.5).

From the demand side, rising incomes, prevalent low interest rate environment,
introduction of new variants, and the widening scope of ride hailing services in
major urban areas of the country helped maintain consumers and businesses
interest in the passenger car segment high, which had the highest weight in the
automobile sector. In response, the industry players resorted to double shifts and
continued to invest in various debottlenecking activities26 during the period to
meet the rising demand. The high demand also allowed the manufacturers to pass
on impact of the PKR depreciation in the form of increased prices without an
adverse impact on sales. High demand facilitated the production of the jeeps and
cars to grow by 22.1 percent during Jul-Mar FY18 compared to 4.7 percent
growth observed during the corresponding period of last year.

24 During Jul-Mar FY18, electricity generation increased by 12.9 percent compared to same period
last year.
25 The GDP estimates for FY18 compiled by National Income Accounts are based on projected LSM

growth of 6.2 percent.

26 Indus Motors’ debottlenecking has added about 10,000 units annual capacity.

17
The State of Pakistan’s Economy

Table 2.5: Automobile production during Jul-Mar

Growth (percent)
Units FY16 FY17 FY18 FY17 FY18
All Cars 137,067 143,317 166,166 4.6 15.9
Cars <800 cc 53,130 45,390 53,705 -14.6 18.3
Cars between 800-1000 cc 19,139 26,180 38,377 36.8 46.6
Cars >1000cc 64,798 71,747 74,084 10.7 3.3
Trucks 3,940 5,489 6,907 39.3 25.8
Buses 746 893 555 19.7 -37.8
Light Commercial Vehicles 29,529 18,637 22,605 -36.9 21.3
Sports Utility Vehicles 621 812 7,034 30.8 766.3
Tractors 21,942 37,938 52,551 72.9 38.5
Motorbikes 998,040 1,211,454 1,410,034 21.4 16.4
Data source: PAMA

Improved purchasing power in the rural areas on the back of a rise in agriculture
output, a rise in agri-lending, and lower sales tax led to strong demand for tractors.
This, in turn, contributed to a 38.5 percent growth in tractor production on top of
the 72.9 percent increase achieved during Jul-Mar FY17.

LCV sector rebounded strongly in Jul-Mar FY18, growing by 21.3 percent, after
contracting 36.9 percent during corresponding period last year. In the HCV
segment, trucks continued on their upward trajectory. Truck production benefitted
from pickup in trade activities, alongside various CPEC and public sector led
infrastructure projects Figure 2.2: Supply of Finished Steel Products (Jul-Mar)
underway in the country. Domestic Imports
12
Steel
10
The domestic steel industry
continued to benefit from a 2.9
million tons

8
host of factors. Increase in 2.4
construction activities under 6 2.4
1.7
PSDP and CPEC, imposition of 1.4
4
anti-dumping duty on finished 7.2
5.6
steel products, housing 2 4.6 4.8
3.6
schemes in private sector, and a
surge in demand for appliances 0
FY14 FY15 FY16 FY17 FY18
and automobile drove growth Data source: Pakistan Bureau of Statistics, SBP
of the industry. The overall
increase in steel production stood at 27.5 percent during Jul-Mar FY18 against
16.6 percent growth witnessed during the same period last year (Figure 2.2).

18
 Third Quarterly Report for FY18

The overall demand for steel outpaced the growth in domestic supplies by a
significant margin, which led to continuing reliance on imports to cover the
deficit. Resultantly, the country imported 20 percent more finished steel products
during the first nine months of FY18 compared to last year. Encouragingly,
leading private producers have fast-tracked their expansionary plans (which are
expected to come on-line in the next two to three years) to consolidate their
market share.

Cement
Cement manufacturing witnessed an increase of 12.2 percent during Jul-Mar
FY18 compared to 7.2 percent during the same period last year. Strong local
dispatches (which rose by 17.9 percent) enabled this performance. On the other
hand, cement exports continued to slide. Exports shrank by a further 8.2 percent in
Jul-Mar FY18 in continuation of the contraction of 14.8 percent witnessed during
same period last year. This occurred despite a significant rise recorded in
shipments to Madagascar, Senegal and Afghanistan during the period (Figure
2.3).

Similar to steel, the growth in cement industry is also driven by CPEC related
projects, public sector development spending and private housing schemes.
Anticipating growing demand in the years ahead, the industry players are
investing heavily in capacity expansions, mainly to consolidate their positions in a
high margin market.
Figure 2.3: Cement Sales (Jul-Mar)
Addition of 3 million tons Domestic Exports
production capacity so far in 30.0
FY18 has affected market
25.0
dynamics of the industry.
20.0
Analysis of financials of major
million tons

cement companies reveals that 15.0

their profitability has gone 10.0
down by 6 percentage points 5.0
during the period under review.
0.0
This is a direct consequence of North South North South North South North South
increased competition and FY15 FY16 FY17 FY18
difference in pricing,
particularly in the northern Data source: APCMA
parts of the country. This trend is likely to continue until the dust settles on
market shares in the wake of expansionary phase (see Special Section 1: Cement
Industry: Current Dynamics and Future Prospects).

19
The State of Pakistan’s Economy

Food
The food industry grew by 2.7
percent during Jul-Mar FY18 Figure 2.4: Tre nd in Sugar Production (Jul-Mar)
compared to a growth of 10.0 Production Growth
7.0 35
percent during Jul-Mar FY17.
Contraction in the production 6.0 28
of sugar offset the otherwise 5.0 21

million tons
appreciable performance of rest

percent
4.0 14
of the sector. Cigarette
3.0 7
production rebounded, while
the edible oil subsector 2.0 0
maintained its growing 1.0 -7
momentum during the period 0.0 -14
under review. FY14 FY15 FY16 FY17 FY18

Data source: Pakistan Bureau of Statistics

Despite a record crop harvest,
the production of sugar industry contracted 11.7 percent during Jul-Mar FY18,
after witnessing a 29.3 percent increase during the same period last year (Figure
2.4). Start of the crushing period was delayed due to: (i) price disputes between
the growers and the millers; and (ii) a court order in Punjab affected the operations
of some manufacturers; resulted in below par performance of the industry.
However, growth in sugar production gained some momentum during Q3-FY18,
following indicative price adjustments in Sindh and the temporary permission by
court for relocated sugar mills in Punjab to resume production. Provided that the
crushing season continues during Q4-FY18, the industry can be expected to at
least match, if not surpass, last year’s production level.

It is pertinent to point out here that domestic breakeven price remained around 30
percent higher than international price.27 Sitting atop significant stockpile already,
surplus production will further add to the sugar reserves during FY18. The federal
government announced an export subsidy for sugar to the tune of Rs 10.7 per
kilogram and allowed exports of 2.0 million tons of the commodity. Subsequently,
the country was successful in offloading around 1 million ton by end March 2018.
While this helped reduce the excess reserves, the cost of the subsidy so far has
been Rs 10.8 billion during Jul-Mar FY18.

A sharp recovery was witnessed in the production of cigarettes during Jul-Mar

FY18 with a growth of 84.9 percent compared to a contraction of 42.5 percent

27Ministry of Industries and Production calculated the breakeven price of domestic sugar at US$ 499
per ton.

20
 Third Quarterly Report for FY18

during the same period last

Figure 2.5: Trend in Cigarette Production (Jul-Mar)
year (Figure 2.5). Introduction
Production Growth (rhs)
of a third tier in Federal Excise 60 120
Duty (FED) and crackdown on
illicit trade has proved to be 50 90
beneficial for the formal
40 60
cigarette industry. The

percent
billion
rebound of formal cigarette 30 30
industry shows that the
government initiatives are 20 0
working; however, this comes 10 -30
at a social cost. 28 The
cigarettes in the third tier are 0 -60
cheaper than they were a year FY14 FY15 FY16 FY17 FY18
before.29 Data source: Pakistan Bureau of Statistics

Pharmaceuticals
The pharma sector managed to register growth during Jul-Mar FY18, growing by
4.4 percent in addition to the 9.0 percent growth witnessed during the same period
of last year. The government allowed increase in drugs prices in Q3-FY18 under
Drugs Pricing Policy which helped boost incomes of pharmaceutical firms.

Meanwhile transformation of public healthcare systems at the federal and

provincial levels led to efficient and effective health management. This is evident
from the Prime Minister National Health Program and Sehat Sahulut Program in
KPK. Such programs have already enrolled millions of people from the targeted
lower income group.

Electronics
Improvement in energy supplies and significant demand from the consumers
played important role in healthy performance of the electronics sector. It posted a
45.2 percent increase during Jul-Mar FY18 compared to 18.0 percent during the
same period last year. Electric motors, electric transformers and air conditioners
were the key contributing products.

28 The three-tier duty structure may bring in revenues but it would escalate health cost for the
government in future.
29 Financials of duopoly of Pakistan Tobacco Company and Philip Moris Pakistan showed combined

revenues increased by 31 percent while cost of sales surged by only 13 percent during the first 9
months of FY18 compared to same period last year. The profitability jumped to 254 percent during
the same comparison period.

21
The State of Pakistan’s Economy

While performance of electric motors improved due to enhanced data coverage of

the sector, the government’s increased focus on electricity distribution segment
resulted in enhancing demand for transformers. Meanwhile, the early onset of
summer season, improvement in energy efficiency of air conditioners, stable
prices and rising incomes helped appliance producers to cash in on higher
demand.

POL
The performance of POL sector, albeit impressive, was not commensurate with
the substantial expansion in the industry’s operational capacity during the period
under review. This was mainly on the back of a month long shutdown of furnace
oil based power plants (the biggest consumers of the product) in the country
during Q2-FY18; the industry suffered two consecutive months of production
contractions on a YoY basis. However, after the relaxation in earlier policy
measures on imports and production of furnace oil, the POL sector, rebounded
strongly. It posted a healthy overall growth of 12.3 percent during Jul-Mar FY18
compared to a stagnation observed during the corresponding period of last year.

Textile
Textile production remained constrained during the period under review. The
sector grew by a marginal 0.4 percent – half the level achieved during the
corresponding period last year. However, the industry managed to increase its
exports in value terms by 10.8 percent during the first 9 months of FY18.

2.4 Services
The services sector continued on Table 2.6: Performance of the Services Sector
Contr. to
its upward momentum and Growth
Share (percent) Services
achieved a growth of 6.4 percent in GDP Growth
during FY18 on top of the 6.5 FY17R FY18PFY17R FY18P
percent improvement observed Wholesale and retail trade 19 7.5 7.5 35.7 36.4
Transport, storage and
last year. Major thrust came communication
13 4.4 3.6 15.6 12.4
from wholesale & retail trade Finance and insurance 3.4 10.8 6.1 9 5.4
and general government Housing services 6.5 4.0 4.0 7 6.9
services, while finance & General government services 7.9 5.9 11.4 11.6 22.3
insurance and transport, storage Other private services 10.4 8 6.1 21 16.5
Services 60.2 6.5 6.4 100 100
& communication experienced
Data source: Pakistan Bureau of Statistics
deceleration during the period
under review. Overall, the share of services in real GDP has now crossed the 60
percent mark for the first time (Table 2.6)

22
 Third Quarterly Report for FY18

The wholesale & retail trade segment was a direct beneficiary of the improved
agriculture and manufacturing performances. This, coupled with a continued rise
in import quantum, led to the subsector surpassing the growth target of 7.2 percent
and witnessing a 12-year high growth of 7.5 percent during FY18.

On the other hand, the

Table 2.7: Transport, Storage & Communication
slowdown in growth of Growth
transport, storage & GVA (Rs billion) (percent)
communication continued for FY17R FY18P FY17R FY18P
Railways 1,778 4,755 -74.6 167.4
the third consecutive year, as Water transport 52,415 49,387 13.4 -5.8
the sector posted a growth of Air transport 99,742 110,693 3.6 11.0
3.6 percent compared to 4.4 Pipeline transport 1,890 1,496 -2.4 -1.4
Communication 262,467 267,734 5.6 2.0
percent during FY17. This was Road transport 1,117,655 1,155,754 4.4 3.4
mainly on the back of subdued Storage 398,45 42,953 7.8 7.8
performance of road transport Total 1,575,792 1,632,771 4.5 3.6
and communication (Table Data source: Pakistan Bureau of Statistics

2.7).

On the transport front, the deceleration in road transport was in sharp contrast to
the increase in cargo handling activities and sales of commercial vehicles
witnessed during the period under review. Encouragingly, however, both railways
and air transport segment showed significant improvement on a YoY basis, with
the former experiencing a turnaround by growing 167.4 percent during FY18 as
against the 74.6 percent contraction last year.30 Going ahead, the growth trend is
likely to continue, with Pakistan Railways in the middle of implementing its
“Revitalization Strategy” focusing on financial stability and service delivery,31 and
PIA launching a five-year strategic business plan to revamp its services model in
the short-to-medium term.

The overall performance of the communications segment suffered as a result of a

constrained growth in the profits of PTCL.32 On a positive note, however, the
number of broadband subscribers reached to 59.6 million, an increase of more

30 Pakistan Railways witnessed a 26.7 percent increase in gross earnings on a YoY basis during Jul-
Dec FY18, as the number of passengers carried, freight carried and freight tonnes earnings improved
by 4.7 percent, 55.8 percent and 62.1 percent respectively.
31 Ministry of Railways launched its Vision 2026 in 2014. The objective was to enhance its share in

transportation sector by improving the rail infrastructure and adding new locomotives to its network
– 205 wagons were to be imported from China while 595 were planned to be built at home. The first
phase of the plan was completed in 2017.
32 After accounting for the one-off expense booked by PTCL under the voluntary separation scheme

introduced by the company for its employees during 2016, profit after tax effectively declined by
30.2 percent during 2017 on a YoY basis.

23
The State of Pakistan’s Economy

than 12 million in the first 9

months of the current fiscal FY16 FY17 FY18 (Jul-Mar)
year. Cellular network 60
subscriptions were a major
50
contributor in this regard (see
Figure 2.6). As highlighted 40

million
before in the SBP reports, the
30
introduction of mobile
broadband services has opened 20
the door for digital and 10
financial inclusion in the
country. However, there is still 0
CMPak PMCL Ufone Telenor Total
a long way to go in terms of (Zong) (Jazz)
enabling an inclusive internet Data source: Pakistan T elecommunication Authority
and mobile connectivity
environment in the country, given that Pakistan lags behind regional economies in
terms of both consumer readiness (inadequate digital literacy and skewed
male/female participation ratio), and availability of relevant content (refer to Box
2.3 for more detail).
Table 2.8: Finance & Insurance
On the finance & insurance Share in Growth (percent)
side, the deceleration in growth FY18 FY17 FY18
Central Banking 1.9 -11.9 3.6
of gross value addition of
scheduled banks dragged down Other Monetary Intermediation
Scheduled Banks
86.9
82.5
10.7
9.5
8.8
7.2
the subsector’s growth from Non-scheduled Banks 4.4 57.1 52.3
10.8 percent last year to 6.1 Other Financial Services 1.4 0.8 1.1
Insurance, reinsurance and
percent during FY18 (Table pension fund 3.7 6.2 2.1
2.8). While low interest rates Activities auxiliary to financial
have continued to hurt the services 6.1 24.8 -19.0
Finance and Insurance 100.0 10.8 6.1
profitability margins of Data source: Pakistan Bureau of Statistics
commercial banks, it was
mainly a slower increase in deposits that affected the output of the sector.33

Box 2.3: State of Internet Inclusiveness in Pakistan

Internet penetration has been rising in Pakistan at an appreciable pace. Ever since the introduction of
3G/4G services, mobile telecom operators have led the exponential increase in broadband
subscriptions in the country. This has opened the door for digitization of services provision via
broadening the scale of e-commerce, facilitating the dissemination of agricultural knowledge, and
enabling online access to various government-to-citizen (G2C) services, etc. However, cross-country

33During Jul-Mar FY18, the deposits of the banking sector grew by 4.8 percent compared to the 6.4
percent growth witnessed during the corresponding period of last year.

24
 Third Quarterly Report for FY18

statistics reveal that there exists ample room of improvement in this regard, not least from the
demand side.
According to The Economist Figure 2.3.1 : Inclusive Internet Index Ranking
Intelligence Unit’s Inclusive Internet Score (lhs) World Avg Ranking*
Index of 2018, Pakistan ranks 68th 100 80
in overall terms amongst the 86
countries surveyed, with a mean score 80 64
of 54.5 relative to the South Asian 60 48
average of 61 (out of 100) (Figure
2.3.1). Among the four dimensions 40 32
considered for the ranking; namely, 20 16
availability, affordability, relevance,
and readiness; the country shows 0 0

China
Pakistan

Sri Lanka

India
Bangladesh
average to poor performance in all of
them (Figure 2.3.2).

Under the availability dimension, the Data source: T he Economist Intelligence Unit
index compares the performance of * Ranking out of 86 countries. Importance in descending
the countries across indicators order
pertaining to infrastructure, electricity,
usage, and quality of the internet Figure 2.3.2: Index Score Comparison
access provided. The overall ranking Pakistan Bangladesh Sri Lanka India China
of Pakistan is a lowly 77th, owing
100
primarily to the dismal performance in
the usage criterion. There exists a
80 74
huge disparity between the number of
male and female internet users in the 64
country. In fact, Pakistan ranks 60 53
lowest worldwide in the gender access
parity, with a 266 percent gap in 36
40
internet access rates and a 121.2
percent gap in mobile ownership in
20
favor of men. This poses a policy
challenge in light of currently
underway National Financial 0
Availability Affordability Relevance Readiness
Inclusion Strategy (NFIS).
Data source: T he Economist Intelligence Unit
On the customer readiness front, the
poor literacy rate and sub-optimal level of web accessibility leads the country posting second-to-
lowest score in the digital literacy environment indicator. However, the higher standing in the
parameters pertaining to policy (owing to concentrated effort of the government in the form of NFIS)
and trust (in which Pakistan ranks 15th in the world, benefitting from the existence of strong and
enabling regulations and safety protocols) helped improve the country’s overall dimension ranking
somewhat to 68th.

25
The State of Pakistan’s Economy

On affordability terms,34 the country sits in the middle of the rankings (43 rd), bolstered primarily by
the dominant market share of wireless internet providers and the strong level of competition between
them (i.e. absence of oligarchy). Pakistan ranks joint-first in the wireless operators category,
alongside 23 other countries.35,36 On the consumer side, however, the performance is not at a
commensurate level due to high mobile phone procurement cost and substantial pre- and post-paid
tariffs.

Lastly, the relevance parameter measures the extent of local and relevant content available online to
the public. It can be taken as an indicator of ease and usefulness of internet access in a country.
Pakistan fares badly compared to regional and worldwide counterparts, with an overall ranking of 70
out of 86. While the amount of local language content is comparable to other developing countries,
the absence of adequate domestically produced content (in areas of e-finance, e-health, and e-
entertainment facilities) hurts the overall standing of the country. Once again, the lower level of
general, and particularly digital and financial, literacy holds the country back.

In overall terms, hence, it is imperative to note that expanding the coverage by improving the digital
infrastructure, though beneficial to the overall progress of the country, would not be sufficient unless
there is a concurrent focus on demand side factors such as public literacy, gender parity, and
specialized content generation and availability. The recently introduced Digital Pakistan Policy
2017 is a welcome development in this regard; however, concentrated and sustained efforts would be
required to improve the unsatisfactory performance by Pakistan in terms of inclusive internet
accessibility.

34 The index measures affordability in terms of the cost of acquiring access to internet with respect to
per capita income level of the country, and the level of competition in the internet marketplace (that
helps keeps the prices down).
35 The competitiveness parameter is calculated based on the Hirschman-Herfindahl Index.
36 However, the absolute score was affected after Warid Telecom merged with Mobilink in mid-

2016.

26
3 Inflation and Monetary Policy
3.1 Overview
The thirteen-quarter long spell Figure 3.1: Policy Rate and Secondary Market Yields
of monetary easing that led to a Spread* (rhs) 3-M
3-Y Policy rate
historic low policy rate in the 8.0 200
country, came to a close in Q3- 7.5
FY18.1 Market players had 150

basis points
7.0
percent

been anticipating a reversal in

6.5 100
monetary policy stance for
6.0
some time already, as indicated 50
by their subdued participation 5.5

in auctions of government 5.0 0

23-Oct-17
20-Jul-17

8-Feb-18

16-Mar-18
3-Jan-18
8-Aug-17

9-Nov-17
4-Oct-17
3-Jul-17

22-Jan-18
15-Sep-17

27-Feb-18
25-Aug-17

28-Nov-17
15-Dec-17
securities except for the 3-
month paper, and the rising
secondary market yield spread
*between 3-M and 3-Y secondary market yields
(Figure 3.1). Data source: State Bank of Pakistan

For the MPC, four key developments motivated the January 2018 decision to raise
the policy rate by 25 bps: (i) PKR depreciation of nearly 5 percent in December
2017; (ii) rising international oil prices; (iii) monetary tightening by other central
banks (particularly Fed and Bank of England), with its concomitant impact on
PKR interest rate differential; and (iv) an overheating of the economy as indicated
by increased capacity utilization in a number of industries. Thus, in view of the
expected rising trend in inflation and aggregate demand, the committee
overwhelmingly voted in favor of increasing the policy rate to 6 percent.2

The policy rate was kept unchanged when the MPC met again in March 2018.
The status quo was considered prudent to allow more time for the full impact of
the January rate hike and other policy measures taken by the government and SBP
to play out. While inflation forecast was still on a higher side, some comfort came

1 Monetary easing began in November 2014, when SBP cut the policy rate by 50 bps to 9.5 percent.
The historic low policy rate of 5.75 percent was set in May 2016.
2 MPC’s concerns turned out to well-grounded as core inflation did surge to 5.8 percent in March

and 6.9 percent in April 2018, even though headline CPI inflation still remained on track to fall
within the annual target. The spike in core inflation may have been triggered in part by the two
episodes of exchange rate depreciation, as prices of a number of non-food items (particularly those
with an import component, like motor vehicles) rose sharply.
The State of Pakistan’s Economy

from moderation in core inflation from its 5.5 percent average in H1-FY18, to 5.2
percent in Jan-Feb 2018. Moreover, it was expected that the combined impact of
the two depreciations on the trade balance would become fully apparent over the
next few months, since exchange rate movements tend to be accompanied by a
lagged impact and second round effects.

As for the interbank market, it appears that banks had already priced in the
expected policy reversal on lending rates offered to their customers. Specifically,
weighted average lending rate (WALR) that started inching up from October 2017
onwards, had shown a cumulative increase of 16 bps by end December 2017.
Thus, when the policy rate was increased by 25 bps in January 2018, it attracted a
muted response from banks; if anything, WALR shed 10 bps (on average) in
February and March 2018. This softening of retail rates stemmed from ample
liquidity that was available to banks, primarily on account of sizeable maturity of
government securities, which they were not keen to roll over in a perceived rising
interest rate scenario.3 To a lesser extent, deposit mobilization during the third
quarter was also higher than it had been during Q3-FY17. Importantly, this
liquidity comfort played a part in pushing the average deviation of overnight rates
from the policy rate into the negative territory (i.e. minus 3 bps) during Q3-FY18.

Thus, with virtually unchanged financing cost for the private sector, credit
expansion continued unabated during the third quarter. In fact, growth in private
credit during Q3-FY18 was twice that of last year.4 While borrowing for working
capital by the textiles sector was the largest in terms of volume during the quarter,
the revival of fixed investment loans was the highlight of the period under review.
A number of sectors – manufacturing and non-manufacturing alike – seemed to
shrug off some of the hesitancy that appeared to have slightly held back long-term
borrowing during the preceding quarter.

Other than interest rates, the steady continuation of economic activity – reflected
by promising LSM numbers throughout the quarter – kept the credit demand
strong. Additionally, the exchange rate adjustment in December 2017 may have
helped ease the perception of an overvalued rupee among certain quarters,
especially firms considering long-term fixed investment. Furthermore, the active
decision-making by the government also helped subdue the element of uncertainty
that had earlier put some businesses in a wait-and-see mode.

3 Banks’ reduced lending to the government ultimately prompted the highest-ever quarterly
budgetary borrowing from the central bank.
4 Credit to private sector grew by 3.2 percent in Q3-FY18 on QoQ basis, compared to 1.6 percent in

the same period last year.

28
 Third Quarterly Report for FY18

A key supporting factor that Figure 3.2: Infection Ratio (IR) of Ene rgy & Te xtile Loans
I.R.: Energy (rhs) I.R.: Textile (rhs)
encouraged banks to cater to Loans to Energy Loans to Textile
financing requirements of the 1,400 40
private sector was a steady 1,200
32
improvement in perceived

billion rupees
1,000
credit quality. The overall non-

percent
800 24
performing loans declined as
600 16
percent of outstanding loans
400
from 9.9 percent as of March 8
2017 to 8.3 percent at end- 200
March 2018. The infection 0 0
Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18
Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17
ratio was particularly
reassuring in the energy sector
(under 4 percent, private and Data source: Financial Soundness Indicators, SBP
public entities combined), where banks’ exposure is growing the most.5 As shown
in Figure 3.2, the credit quality in energy sector looks much favorable especially
when compared with the traditionally largest recipient of bank loans: textiles.

3.2 Liquidity Conditions in the Interbank Market

Liquidity conditions eased up considerably during Q3-FY18. In addition to the
downward deviation of overnight rates from the policy rate mentioned earlier,
another indicator of liquidity comfort was the reduced need for commercial banks
to approach the central bank for support. During Q3-FY18, commercial banks
utilized SBP’s reverse repo facility on just four occasions, to borrow Rs 59.4
billion; in contrast, eight such instances were documented in the third quarter a
year ago that had led to borrowings four times as high (Rs 160.8 billion to be
precise).

The easy liquidity conditions mainly stemmed from lower investment in

government securities by scheduled banks. While there were sizeable maturities
of PIBs and T-bills in the third quarter, scheduled banks’ participation in auctions
of government securities remained sparse, except for the 3-month paper (Section
3.4).6 The government, therefore, relied on SBP for budgetary borrowings. This
was a reversal from the earlier pattern in H1-FY18, when commercial banks had
funded budgetary borrowings and the government had retired its SBP debt. To a

5 Admittedly, a significant portion of this borrowing has been directed towards productive capacity
enhancements and increased running costs of operating new power plants. At the same time, some
portion of energy sector loans was meant to fulfill liquidity shortages stemming from rising circular
debt.
6 Maturities of government securities amounted to Rs 5.6 trillion during Q3-FY18, comprising Rs

5.1 trillion for T-bills and Rs 526.8 billion for PIBs (principal only; excluding coupon).

29
The State of Pakistan’s Economy

lesser extent, some liquidity cushion also came from a minor uptick in deposit
generation during the third quarter.7

These developments more than offset the liquidity pressure that may have
emanated from FX interventions in the interbank, particularly in the aftermath of
the December 2017 exchange rate adjustment. Such interventions during Q3-
FY18 exceeded the amount observed in the earlier two quarters of the fiscal year.
Specifically, the volume of FX injections in January 2018 was the highest monthly
injection of FY18 thus far, though it subsequently subsided to an extent in
February and March.

In view of the excess liquidity and in keeping with SBP’s operational target, the
central bank gradually unwound its outstanding stock of OMO injections in the
third quarter.8 The average outstanding OMO position fell to Rs 1.1 trillion during
Q3-FY18, from Rs 1.5 trillion
in the previous quarter.9 In Figure 3.3: Repo (Mop-up) Acceptances
fact, the outstanding OMO 1,600
position was negative Rs 36
billion as of end-March, in 1,200
sharp contrast to the historic
billion Rs

high of Rs 2 trillion that had 800

been touched in Q2-FY18.
Furthermore, repo (mop-ups) 400
featured prominently during
the third quarter, on a scale not 0
Q1-FY17

Q4-FY17
Q1-FY14
Q2-FY14
Q3-FY14
Q4-FY14
Q1-FY15
Q2-FY15
Q3-FY15
Q4-FY15
Q1-FY16
Q2-FY16
Q3-FY16
Q4-FY16

Q2-FY17
Q3-FY17

Q1-FY18
Q2-FY18
Q3-FY18
witnessed since Q1-FY14
(Figure 3.3).

3.3 Monetary Aggregates Data source: State Bank of Pakistan

While broad money growth had been subdued during H1-FY18 compared to a
year earlier, it picked up during the third quarter (Table 3.1). This was due to an
increase in net domestic assets (NDA) of the banking system, with the impetus

7 Total deposits with banks grew by 1.8 percent during Q3-FY18, compared to 0.3 percent in Q3-
FY17. That said, deposit generation of 4.8 percent for Jul-Mar FY18 remained lower than the 6.4
percent growth seen in Jul-Mar FY17.
8 SBP’s operational target is to maintain the weekly weighted average overnight repo rate close to

the policy rate.

9 The average outstanding level of OMO injections was Rs 961 billion in Q3-FY17. However, in this

instance, Q2-FY18 serves as a better reference point, particularly since the outstanding stock had
briefly touched a historic high of Rs 2 trillion in just the previous quarter.

30
 Third Quarterly Report for FY18

coming from higher budgetary borrowing and private sector credit during Q3-
FY18 compared to the third quarter last year.
Table 3.1: Monetary Aggregates
flows in billion Rupees
Q3 Jul-Mar
FY17 FY18 FY17 FY18
M2 110.2 366.0 756.1 702.4
NFA -264.2 -308.6 -284.8 -483.1
SBP -189.7 -277.8 -155.2 -464.3
Scheduled banks -74.5 -30.8 -129.7 -18.7
NDA 374.4 674.7 1,040.9 1,185.5
Budgetary borrowing* 287.6 481.8 694.7 813.5
SBP -100.5 2,162.5 792.2 2,159.9
Scheduled banks 388.0 -1,680.8 -97.5 -1,346.3
Private sector credit 77.9 177.4 438.6 473.7
PSE credit 114.0 107.6 197.0 173.6
Commodity operations -55.1 -43.9 -137.9 -58.4
Reserve money 50.3 181.6 314.3 198.4
Other items (net) - SBP 337.2 -1,714.7 -432.1 -1,573.5
Reverse repo 298.7 -1,628.5 -408.4 -1,516.4
*On cash basis
Data source: State Bank of Pakistan

At the same time, the net Figure 3.4: Quarterly Flows in Net Foreign Assets
foreign assets (NFA) of the SBP Scheduled Banks Overall
banking system declined. 200
Following a brief respite in Q2-
FY18, when the NFA of SBP 100
billion Rupees

and scheduled banks had both 0

registered minor recoveries, the
indicator fell in the third -100
quarter (Figure 3.4). This was
-200
because the positive flow in
NFA of SBP in the previous -300
Q3-FY16

Q4-FY16

Q1-FY17

Q2-FY17

Q3-FY17

Q4-FY17

Q1-FY18

Q2-FY18

Q3-FY18

quarter owed to a one-off

development (i.e. issuance of
Eurobond and Sukuk in the Data source: State Bank of Pakistan
international capital market)
rather than a sustained trend reversal.

31
The State of Pakistan’s Economy

As for reserve money, its growth picked up during the third quarter, primarily
because of the elevated budgetary borrowing from SBP.10 That said, reserve
money growth would have been even larger in proportion to the scale of budgetary
borrowings from the central bank had it not been partially neutralized by the
unwinding of outstanding OMO injections (Table 3.1). To a lesser extent, the
declining NFA of SBP also contributed to a much contained increase in reserve
money.

3.4 Budgetary Borrowings Figure 3.5: Quarterly Budgetary Borrowing (Flows)

billion Rupees
The government’s budgetary
borrowings from the banking Banking system SBP (rhs)
800.0 2,500
system took their cue from
2,000
fiscal developments. During 600.0
1,500
H1-FY18, the fiscal deficit was 400.0
1,000
relatively contained, and
200.0 500
sizable external financing was
0
also available in Q2; thus, 0.0
-500
budgetary borrowings from the
-200.0 -1,000
banking system during the half
Q1-FY15

Q1-FY17
Q3-FY13
Q1-FY14
Q3-FY14

Q3-FY15
Q1-FY16
Q3-FY16

Q3-FY17
Q1-FY18
Q3-FY18
as a whole were lower
compared to last year.
However, as fiscal slippages Data source: State Bank of Pakistan
began to emerge in the third quarter and the buffer provided by Eurobond and
Sukuk issuances subsided, the government increasingly tapped the banking system
to bridge the shortfall. Moreover, the onus to provide financing fell squarely on
SBP (Figure 3.5). The central bank lent nearly Rs 2.2 trillion to the government
during the third quarter. Not only did this amount represent the highest quarterly
borrowing from SBP ever, it also meant that the limit of zero quarterly borrowing
from central bank – laid out in SBP Act – was not met.

As mentioned earlier, the government’s heavy reliance on SBP borrowing in the

third quarter may be attributed in part to banks’ lackluster participation in auctions
of government securities. The March 2018 PIB auction was the 8th successive
such auction to be scrapped amidst low participation by scheduled banks.
Furthermore, the disinterest in 6- and 12-month T-bills which had surfaced in the
previous quarter continued in Q3-FY18, with either no bid received for these
tenors in a majority of the auctions, or the bids placed being rejected since they
were on the higher side.

10 Reserve money grew 3.7 percent in Q3-FY18, compared to 1.2 percent growth in Q3-FY17.

32
 Third Quarterly Report for FY18

Table 3.2: Tenor-wise Offers and Acceptance in T-Bill Auctions* (Gross)

in billion Rupees
3-month 6-month 12-month
Mat. Off. Acc. Mat. Off. Acc. Mat. Off. Acc.
Q1-FY17 267.1 814.5 410.5 400.6 1,378.4 863.4 510.3 873.1 490.1
Q2-FY17 389.7 1,086.2 827.1 441.2 497.2 216.1 227.5 127.3 56.3
Q3-FY17 841.7 1,748.7 1,203.8 863.4 1,972.1 1,391.0 817.1 599.0 369.6
Q4-FY17 1,189.2 1,479.9 1,383.2 216.1 698.2 502.7 266.7 76.4 20.6
Q1-FY18 1,800.4 3,501.6 3,463.1 1,391.0 942.8 895.5 490.1 66.8 47.7
Q2-FY18 3,045.9 4,284.7 3,298.4 502.7 296.8 302.8** 56.3 5.0 0.0
Q3-FY18 3,794.1 5,311.0 4,214.7 895.5 80.3 0.0 369.6 5.3 0.0
* In face value. Mat.= Maturity; Off.= Offered; Acc.= Accepted
Offered columns contain competitive bids only; Accepted columns contain all acceptances
** Consists of Rs 291.8 billion competitive and Rs 11.1 billion non-competitive bids
Data source: State Bank of Pakistan

The pattern of offers and acceptances for the 3-month T-bill also presented a
striking picture (Table 3.2). The gap between net-of-maturity offers and
acceptances of the 3-month tenor, which had widened considerably in the second
quarter, remained close to Rs 1 trillion even in Q3-FY18. During Q3 in particular,
higher bid rates motivated the relatively low acceptance against the shortest tenor
(Figure 3.6).

Figure 3.6a: Bidding Pattern for 3-month T-Bill Fig 3.6b: Composition of Bids for 3-m T-bills
Lowest bid Highest bid Upto cutoff Higher than cutoff
Cut-off yield Policy rate* 100%
11% 7%
7.00
30%
6.75 80%
number of bids

6.50
percent

6.25 60%

6.00 89% 93%

40%
5.75 70%
5.50
20%
25-Oct-17
11-Oct-17
19-Jul-17

14-Mar-18
28-Mar-18
6-Dec-17
3-Jan-18
2-Aug-17

8-Nov-17
5-Jul-17

13-Sep-17
27-Sep-17

14-Feb-18
28-Feb-18
17-Jan-18
31-Jan-18
20-Dec-17
16-Aug-17
30-Aug-17

22-Nov-17

0%
Q1-FY18 Q2-FY18 Q3-FY18
Data source: State Bank of Pakistan Data source: State Bank of Paksitan

Commodity Operations
Commodity financing posted lower retirements during Q3-FY18 compared to the
same period last year (Table 3.3). This was primarily driven by developments in
wheat, which constitutes around 80 percent of the overall lending under
commodity operations.

33
The State of Pakistan’s Economy

By contrast, sugar and fertilizer witnessed a modest credit expansion during Q3-
FY18 compared to the same Table 3.3: Commodity Operations
period last year. This marginal flow in billion Rupees
increase was mainly related to Q3 Jul-Mar
finance cost of the outstanding FY17 FY18 FY17 FY18
loans against pending subsidies Wheat -56.52 -44.28 -134.33 -55.43
Sugar 0.78 0.30 4.25 -1.82
and the commodities procured
Fertilizer 0.60 0.08 -5.99 -1.40
earlier. In case of sugar, local
Cotton 0.99 1.05 -1.88 0.06
suppliers demonstrated their Rice 0.02 0.02 0.06 0.15
reluctance to participate in a Total -55.11 -43.86 -137.90 -58.44
tender issued by TCP in January Data source: State Bank of Pakistan
2018, mainly because of
differences over payment terms.
Table 3.4: Credit to PSEs
3.5 PSE Credit flow in billion Rupees
While credit to PSEs Q3 Jul-Mar
Q3-
experienced a slowdown during FY17 FY18 FY17 FY18
Q3-FY18 on YoY basis, its Credit 114.0 107.6 197.0 173.6
Loans 76.1 110.4 111.5 212.3
subcomponent of loans
Of which
remained higher compared to
Energy related PSEs 51.6 115.7 70.9 166.6
the same period last year (Table Investment 37.9 -2.8 85.5 -38.7
3.4). Energy-related PSEs (like Data source: State Bank of Pakistan
PSO, Power Holding Private
Limited - PHPL, WAPDA) continued to dominate this segment.

During the third quarter, WAPDA settled Rs 150 billion outstanding dues of net
hydel profit to the governments of Punjab and KP – part of which was financed
through borrowings from commercial banks. The government also raised funds
through PHPL to settle its dues to IPPs and PSO. Meanwhile, PSO was able to
reduce its outstanding receivables from Rs 313 billion to Rs 304 billion during
Q3-FY18, mainly on the back of funds received as part of circular debt
settlement.11

3.6 Credit to Private Sector

The third quarter marked a pickup in fixed investment loans, which was
instrumental in pushing overall flows of credit to private sector during the Jul-Mar
period beyond the level seen last year (Figure 3.7). Specifically, the Rs 77.2

11Having said that, PSO’s financial woes are still a matter of concern and it is imperative for the
company to negotiate with key stakeholders, both on the asset as well as the liability side, in order to
smoothly manage payments related to FO and LNG.

34
 Third Quarterly Report for FY18

billion flow of fixed investment Figure 3.7: Quaterly Flows of Credit to Private Sector
during Q3-FY18 was the
Q1 Q2 Q3 Jul-Mar
highest quarterly flow of the 600
ongoing fiscal year.12 More
broadly, the Jul-Mar FY18 400
fixed investment lending

Rs billion
represented a 12-year high. 200

The textile sector was the single

0
largest group accounting for
long-term loans during Jul-Mar
-200
FY18, having taken advantage

FY18
FY12

FY13

FY14

FY15

FY16

FY17
of SBP’s refinance schemes.13
This development was Data source: State Bank of Pakistan
consistent with the sector’s
improved performance, as export-oriented firms in particular continued to benefit
from the government’s export package, as well as a recovery in major markets like
the EU to which Pakistan has favorable access via the GSP plus regime.14

Apart from textiles, the cement sector also registered noteworthy fixed investment
borrowing during Jul-Mar FY18. In fact, the sector’s fixed investment loan
uptake in the third quarter alone amounted to Rs 16.9 billion, amid reports that
some key players remained keen on capacity expansions. Domestic
dispatches grew at a robust pace, increasing by nearly 17.9 percent to 31.3 million
tons during Jul-Mar FY18.

Meanwhile, the power sector’s fixed investment appetite recovered in the third
quarter, after a relatively modest offtake in H1-FY18.15 This included financing
for: a gas-fired power plant being developed in the public-private partnership
mode in Sindh; a coal-based CPEC power project in Hub; and wind energy
projects being set up in Jhimpir by two textile firms.

12 Fixed investment loans had risen by Rs 56.7 billion and Rs 41.8 billion in Q1-FY18 and Q2-
FY18.
13 Nearly 63 percent of the textile sector’s fixed investment borrowing was facilitated by SBP’s Long

Term Finance Facility during Jul-Mar FY18. To a lesser extent, one-third of the sector’s flow of
working capital was also financed through the Export Finance Scheme.
14 For further discussion of the textile sector’s borrowing, refer to SBP’s Second Quarterly Report

for FY18.
15 The power sector borrowed long-term loans worth Rs 25.3 billion in Q3-FY18, compared to net

retirement of Rs 8.9 billion in H1-FY18.

35
The State of Pakistan’s Economy

Table 3.5: Loans to Private Sector Businesses in Jul-Mar (Flow, in billion Rupees)
Total Loans Working Capital* Fixed Investment
FY17 FY18 FY17 FY18 FY17 FY18
Private Sector Businesses 382.2 417.7 221.3 242.0 160.9 175.7
Manufacturing 259.7 244.1 161.9 158.3 97.8 85.8
of which
Textiles 87.0 124.2 60.8 89.8 26.2 34.3
Cement 11.7 35.9 2.9 12.5 8.7 23.4
Rice processing 9.4 31.1 8.4 30.3 1.0 0.8
Electrical machinery 6.5 28.2 5.0 25.6 1.5 2.6
Sugar 101.1 25.2 85.5 15.1 15.5 10.1
Edible oil and ghee -4.5 16.4 -5.0 14.4 0.5 2.0
Iron and steel 0.5 13.9 -0.6 14.9 1.1 -1.0
Bakery etc 0.6 12.9 0.1 9.1 0.5 3.7
Basic chemicals 0.8 12.1 -1.3 9.8 2.2 2.2
Domestic appliances 6.2 10.1 4.8 5.7 1.3 4.4
Fertilizer -14.7 -69.2 -25.6 -56.1 10.9 -13.1
Electricity, gas and water supply 44.9 66.1 24.1 43.0 20.9 23.1
Production., transmission and distribution
of electricity (power sector) 46.1 60.8 24.4 44.4 21.7 16.4
Manufacture of gas; distribution of gaseous
fuels through mains 0.7 5.2 1.6 -1.3 -0.9 6.6
Commerce and trade 20.1 38.5 20.3 24.9 -0.3 13.6
Real estate, renting and business activity 7.6 24.3 1.2 9.5 6.4 14.8
Transport, storage and communications -0.3 19.5 -9.1 -3.5 8.8 22.9
Construction 22.4 13.6 6.6 7.7 15.8 5.8
*includes trade financing
Data source: State Bank of Pakistan

Moving on to working capital loans, the textile sector again accounted for the bulk
of these borrowings during Jul-Mar FY18, which were relatively higher compared
to last year. This may be attributed to rising export quantums and increased
procurement of cotton pushing up the requirement for short-term loans, even
though domestic cotton prices continued to remain soft compared to a year
earlier.16 Other sectors that registered notable working capital borrowing during
Jul-Mar FY18 included: (i) the power sector, where projects coming online pushed
up the financing requirement for fuel purchases; and (ii) rice processing, which
saw double digit growth in exports.

That said, during the third quarter only, it was the sugar sector which
overwhelmingly drove the off-take for working capital loans. It would appear that
16The wholesale price of cotton grew by 5.3 percent in Jul-Mar FY18, compared to 24.3 percent in
Jul-Mar FY17.

36
 Third Quarterly Report for FY18

the delayed onset of the Figure 3.8: Loans to Sugar Sector

sugarcane crushing season this Working capital Fixed investment
year primarily explains the 125
disruption in timing of the 100
related credit flows, 75

billion Rupees
particularly during Q2 and Q3- 50
FY18 (Figure 3.8). While 25
0
crushing typically gets
-25
underway in November, this -50
year a majority of mills -75

Q1

Q1
Q2

Q3

Q2

Q3
Jul-Mar

Jul-Mar
delayed crushing by around 15-
30 days. Hence, it is possible
that the borrowing cycle may FY17 FY18
overflow into the fourth quarter
Data source: State Bank of Pakistan
as well, such that full year
flows to the sugar sector would normalize by the year end. Given that there was a
record production of sugarcane this season, there is little reason to suspect that
working capital borrowing by the sector would be significantly lower as compared
to last year.

In contrast, there was no recovery in borrowing activity by the fertilizer sector –

neither in terms of short or long-term borrowing, nor in any of the three individual
quarters of FY18. In the backdrop was the continuing decline in production,
which spilled over to Q3-FY18 as a number of small units remained closed due to
unavailability of cheap gas feedstock.17

Consumer financing Table 3.6: Consumer Financing in Jul-Mar

Consumer financing kept up its flows in billion Rupees
FY17 FY18
growing momentum and rose by
Total 50.1 57.2
Rs 57.2 billion in Jul-Mar FY18,
Auto financing 26.2 34.6
compared to Rs 50.1 billion last House building 8.2 15.1
year. This is the highest flow in Credit cards 3.0 4.7
the last 12 years in any Jul-Mar Consumer durables 0.8 1.0
period, and was driven primarily Personal loans 11.9 1.8
by auto and housing finance Data source: State Bank of Pakistan
(Table 3.6).

17Small fertilizer producers could only achieve 9 percent capacity utilization during Jul-Mar FY18,
compared to 69 percent utilization in Jul-Mar FY17. In contrast, large fertilizer producers’ capacity
utilization was around 100 percent in both periods.

37
The State of Pakistan’s Economy

That said, it is worth noting

that merely eight banks have Figure 3.9: Average CPI Inflation (Jul-Mar)
Non-food Food NFNE
accounted for around 70 Target Headline
percent of the outstanding auto
10.0
and housing loans over the last
couple of years. The credit 8.0
card segment is even more
concentrated, with only five 6.0
banks holding nearly 78 percent 4.0
percent market share. Given
that the per capita income has 2.0
increased in recent years, banks
may benefit by diversifying 0.0
FY14 FY15 FY16 FY17 FY18
into these largely untapped
segments. Data source: Pakistan Bureau of Statistics

3.7 Inflation
Table 3.7: Average CPI Inflation and Contribution during Jul-
Rising global commodity Mar
prices and strong domestic Growth Contribution
demand played a key role in Wt FY17 FY18 FY17 FY18
determining the trend of Headline 100 4.0 3.8 4.0 3.8
domestic prices during Jul-Mar Food 37.5 3.8 2.0 1.6 0.8
FY18. This was particularly Cigarettes 1.4 15.1 -17.8 0.3 -0.4
Fresh vegetables 1.7 17.9 -3.0 0.3 -0.1
true for non-food inflation,
Sugar 1.0 8.3 -18.2 0.1 -0.2
which rose by just under one
Pulses 1.1 11.9 -17.9 0.2 -0.3
percentage point YoY; Onion 0.5 -38.1 90.2 -0.3 0.4
however, its impact was more Meat & chicken 3.8 2.0 7.4 0.1 0.3
than offset by a decline in food Rice 1.6 -0.6 14.3 0.0 0.2
inflation (Figure 3.9). On Milk Fresh 6.7 3.8 3.9 0.3 0.3
aggregate, the headline Non-food 62.5 4.2 5.0 2.4 3.0
inflation remained lower than House rent 21.8 6.4 6.4 1.2 1.2
last year. Education 3.9 10.3 12.1 0.4 0.5
Clothing, shoes 7.6 4.3 4.1 0.4 0.3
Motor Fuel 3.0 -5.7 10.4 -0.1 0.2
Commodities that showed
Data source: Pakistan Bureau of Statistics
lower inflation during Jul-Mar
FY18 were (a) cigarettes; (b)
fresh vegetables; (c) sugar; and (d) pulses (Table 3.7). Here, it is important to
mention that developments related to these items were actually triggered in Q1-
FY18, but continued to subdue CPI inflation until the third quarter. These
included: (a) fall in cigarette prices due to a change in the regulatory duty

38
 Third Quarterly Report for FY18

structure; (b) normalization of fresh vegetable prices as their supplies eased in

FY18; and (c) excess supply of sugar and pulses in the country.

Motor vehicle prices spiked during Q3-FY18

Regulatory duty on car imports and a rising Japanese Yen against PKR during Jul-
Mar FY18 had a significant impact on car prices in the CPI basket.18 Car
manufacturers raised the prices of several variants that are part of the CPI, and
have an import-related component (Figure 3.10). Resultantly, the motor vehicle
index rose by 5.7 percent during Q3-FY18 against 4.3 percent during the same
period last year.
Figure 3.10: Spike in Car Prices
Toyota 1300 CC Honda* 1500 CC (rhs) Suzuki 800 CC Suzuki 1000 CC (rhs)
2,100 2,500 750 1,400
thousand Rpees
thousand Rupees

725 1,300

1,950 2,400
700 1,200

1,800 2,300 675 1,100

Mar-18
Jun-17

Mar-18

Jun-17
Sep-17

Feb-18

Sep-17

Feb-18
Jan-18

Jan-18
Dec-17

Dec-17
Aug-17

Oct-17
Nov-17

Aug-17

Oct-17
Nov-17
Jul-17

Jul-17
Apr-18

Apr-18

* Civic Data source: Pakistan Bureau of Statistics

Pass-through of change in global oil prices to domestic POL

Demand and supply-related factors drove up global oil prices at a brisk pace.19
Resultantly, the government raised domestic fuel prices quite frequently during
Jul-Mar FY18 in order to keep them aligned with international prices (Figure
3.11). Cumulatively, petroleum prices rose from their lowest level recorded in
CPI (in August 2017) to Rs 88.1 per litre, a growth of 26.7 percent.20
Consequently, the motor fuel index rose by 10.4 percent during Jul-Mar FY18,
after declining for previous three consecutive years in the same 9-month period.
The impact of this rise also started to spill over to transport services, as the index

18 The PKR depreciated by 13.5 percent against Japanese Yen during Jul-Mar FY18.
19 Average prices of WTI, Brent, Dubai Spot and Saudi Arabian Light increased by 43.1 percent
during Jul-Mar FY18. For details, see Chapter 5.
20 Diesel prices were also adjusted, rising by just over 27 percent during the same period. In

comparison, international oil prices (average of WTI, Brent, Dubai Spot and Arabia light Spot)
increased from its recent trough by registering a 43 percent increase during Jul-Mar FY18.

39
The State of Pakistan’s Economy

rose by 1.3 percent during Q3- Figure 3.11: Domestic and International Oil Prices
FY18 against declines in the Domestic Petrol International (rhs)*
same periods of FY15-FY17. 90 70
85 65
Rice prices on a rise despite 80 60

US$/barrel
sufficient supply

Rs/litre
75 55
In case of rice, its prices have
been steadily rising since the 70 50
beginning of FY18. First, 65 45
during Jul-Mar FY18, the 60 40
Jun-16

Jun-17
Feb-17

Feb-18
Dec-16

Dec-17
quantum of rice export rose by
Aug-16

Aug-17
Oct-16

Oct-17
Apr-17
about 16.8 percent compared to
the same period of FY17. * Average of WTI, Brent, Dubai Spot and S Arabia Light
Second, the mid-December Data source: Bloomberg and Pakistan Bureau of Statistics
2018 exchange rate
depreciation appeared to boost the foreign demand of Pakistani rice. By
extension, this enhanced external demand may have played an important role in
maintaining the upward trajectory of rice prices.

Regulatory duties affected various CPI items

Alteration in the structure of regulatory duties of cigarettes had prompted an
unintended, abrupt fall in prices of cigarette items in the CPI during Q1-FY18.21
In the third quarter, it was betel nut prices that felt a direct impact of regulatory
duties; these prices rose by over five times during Q3-FY18.22 This can be
attributed to three factors, one of which was the FBR’s decision to increase the
regulatory duty on import of the commodity from 25 percent to 55 percent.23
Second, attempts to illegally import betel nuts, and that too without proper
medical certificate, had been made unsuccessful by customs authorities.24 Third,
there was a crackdown on the sale of the commodity in some parts of the
country.25

21 For a detailed analysis of how the altered regulatory duties affected cigarette prices, please refer to
SBP’s First Quarterly Report on The State of Pakistan’s Economy, 2017-18.
22 While the weight of betel nuts in the CPI is negligible (0.02 percent), such an exponential increase

in prices is worth highlighting.

23 Through S.R.O.1035 (I)/2017.
24 The Ministry of Commerce requires valid import permit as well as phytosanitary (health)

certificate for the import of many food items (Ministry of Commerce, S.R.O. 1076).
25 For instance, the Punjab Food Authority gave an ultimatum to retailers and wholesalers to stop

selling betel nuts and close their respective businesses by 30th April, 2018, before legal action was
taken against them.

40
 Third Quarterly Report for FY18

In addition, regulatory duty of 30 percent imposed on maize in October 2017 had

an indirect impact on chicken prices. According to the Pakistan Poultry
Association (PPA), maize is the key ingredient of poultry feed, having about 60
percent weight. Given that domestic production of maize also remained low, the
association holds that regulatory duty on maize has brought about a significant
increase in input costs for the poultry producers. In the meantime, these
developments appear to have contributed to an 18.4 percent increase in prices of
chicken during Q3-FY18; in comparison, they had remained on the lower side
during Jul-Mar FY15, FY16 and FY17.

More broadly, the export quantum of meat grew by 3.4 percent during Q3-FY18,
compared to a decline of 29.9 percent in Q3-FY17. Thus, the relatively lower
supply in the domestic market may partially explain a rise in meat prices, which
was the highest during Jul-Mar FY18 compared to similar periods since FY14.26
Specifically, in case of beef and mutton, the growth in prices almost doubled
during the period compared to Jul-Mar FY17.

Core inflation picked up

The non-food non-energy (NFNE) inflation displayed stable YoY growth during
H1-FY18 (Figure 3.12). It even moderated somewhat in January and February
2018, as: (a) the house rent index witnessed the lowest YoY growth since FY10 in
the first 2 months of 2018, and
Figure 3.12: Non-Food Non-Energy Index
(b) the health index maintained
single-digit (less than 5 10
percent) growth during the
8
same period, compared to more
percent (YoY)

than 12 percent average YoY 6

growth during 2017.27 28
4
However, during March and
April 2018, the core index rose 2
to its highest level in 36
0
months, due to rapid growth in
Jan-15

Jan-16

Jan-17

Jan-18
Oct-14

Oct-15

Oct-16

Oct-17
Jul-14

Jul-15

Jul-16

Jul-17
Apr-15

Apr-16

Apr-17

Apr-18

an overwhelming majority of
its components.29 Two points Data source:Pakistan Bureau of Statistics

26 Meat (mutton and beef) and chicken have a combined CPI share of 3.8 percent.
27 The house rent index is NFNE’s heaviest component, with a 40 percent share.
28 Average YoY growth in the health index was 8.7 percent during Jan-Apr FY18, compared to 9.9

percent in the comparable period a year earlier.

29 CPI includes clothing and footwear, construction related indices, motor vehicle and its accessories,

mechanical services and education.

41
The State of Pakistan’s Economy

are worth highlighting. First, the education index showed a YoY growth of 17.6
percent during March 2018, which is the highest ever since the rebasing of CPI;
courtesy of majority of items in the index that showed double-digit growth.30
Second, due to two rounds of exchange rate depreciation in December 2017 and
March 2018, the higher cost of imported items evidently led to a broad-based
impact on non-food CPI items.

30The items include the fee charged by educational institutions in both the public sector (average
increase of 25 percent) and private sector (average increase of 15 percent).

42
4 Fiscal Policy and Public Debt
4.1 Overview
The impressive growth in Figure 4.1 : Quarterly Tre nds in Revenue, Expe nditure
revenue collection witnessed and Fiscal Deficit
during the first two quarters Deficit (rhs) Revenue Expenditure
could not be sustained in Q3- 60 3
FY18. Yet, on a cumulative

percent of GDP
percent growth
basis during Jul-Mar FY18, it 40 2
remained considerably higher
20 1
compared to corresponding
period of last year. On the 0 0
other hand, building on the
momentum seen in first two -20
Q2
-1
Q1
Q2
Q3
Q4
Q1

Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
quarters, expenditures grew
sharply in Q3-FY18 (Figure FY15 FY16 FY17 FY18
4.1). Data source: Ministry of Finance

Together these have resulted in Figure 4.2: Fiscal Balance Indicators During Jul-Mar
fiscal deficit rising to 4.3 Fiscal balance Revenue balance Primary balance
percent of GDP during Jul-Mar 0.0
FY18, against full year target
of 4.1 percent and 3.9 percent -1.0
percent of GDP

deficit recorded in the

corresponding period of last -2.0

year. Similar to overall fiscal

-3.0
balance, the improvement in
primary balance could not be -4.0
sustained either, signifying that
the non-interest expenditure -5.0
grew at a faster pace relative to FY17 FY18
last year. The improvement in Data source: Ministry of Finance, SBP calculations
revenue balance, nevertheless, shows that revenue growth still managed to outpace
the increase in current expenditures (Figure 4.2).

Thus, acceleration in growth of expenditures was more due to development

spending, both at federal and provincial level. The provincial governments in
particular, revved up the pace of development spending to fast track completion of
the ongoing projects before the term of current assemblies came to an end. The
 The State of Pakistan’s Economy

growth in federal development spending, albeit slightly lower compared to last

year, still remained high, above 24 percent (Table 4.1).

Table 4.1: Summary of Fiscal Operations (Jul-Mar)

billion rupees
Actual (Jul-Mar) % of GDP FY18
Budget
FY18 FY17 FY18 FY17 FY18 Q1 Q2 Q3
A. Total revenue 6,167.2 3,145.5 3,650.0 9.8 10.6 1,025.1 1,359.6 1,265.3
Tax revenue 4,912.5 2,694.3 3,076.2 8.4 8.9 911.0 1,115.9 1,049.3
Non-tax revenue 1,254.7 451.2 573.8 1.4 1.7 114.0 243.8 216.0
B. Total expenditure 7,646.8 4,383.6 5,130.9 13.7 14.9 1,465.9 1,715.1 1,949.9
Current 5,393.9 3,605.1 4,075.4 11.3 11.8 1,241.0 1,304.2 1,530.2
Interest payments 1,363.0 1,094.5 1,172.8 3.4 3.4 445.4 306.1 421.4
Defence 920.2 535.7 623.8 1.7 1.8 181.9 211.5 230.5
Development 2,265.2 803.9 1,042.5 2.5 3.0 220.5 392.5 650.0
Net lending -12.3 -34.2 9.2 -0.1 0.0 0.9 1.3 7.9
C. Statistical discrepancy 0.0 8.8 3.8 0.0 0.0 4.0 15.9 -16.1
Fiscal balance (A-B-C) -1,479.6 -1,238.1 -1,480.9 -3.9 -4.3 -440.8 -355.5 -684.6
Revenue balance 773.3 -459.6 -425.5 -1.4 -1.2 -215.9 55.4 -264.9
Primary balance -116.6 -143.6 -308.1 -0.4 -0.9 4.5 -49.4 -263.2
Financing 1,479.5 1,238.0 1,480.9 3.9 4.3 440.8 355.5 684.6
External sources 511.4 220.2 524.3 0.7 1.5 16.0 368.1 140.2
Domestic sources 968.1 1,017.9 956.6 3.2 2.8 425.0 -12.8 544.4
Banks 390.1 694.7 813.5 2.2 2.4 408.0 -76.2 481.8
Non-bank 528.0 323.2 143.1 1.0 0.4 17.0 63.4 62.7
Privatization 50.0 - - - - - - -
% Growth
Total Revenue 6.2 16.0 18.9 20.5 9.6
Tax revenue 8.6 14.2 21.4 12.7 10.1
Non tax revenue -6.2 27.2 2.2 76.8 7.1
Total Expenditure 10.4 17.0 12.8 15.1 22.3
Current 5.8 13.0 15.9 11.4 12.2
Development 14.9 29.7 15.4 28.4 39.8
Data source: Ministry of Finance

Meanwhile, growth in current expenditures, the major contributor in absolute

terms, also increased sharply. Again, the major push came from higher provincial
spending. The increase in federal current expenditures largely reflects higher

44
 Third Quarterly Report for FY18

spending related to debt servicing, defense, general public services1, economic

affairs2, and public order and safety.

The pace of revenue collection, still quite high compared to last year, slowed
down considerably in Q3-FY18 compared to the first two quarters. The major
setback came from a slower growth in direct tax collection, owing to lower
corporate profitabilty, especially banks’s profitability. The indirect tax collection,
on the other hand, has continued to remain buoyant on the back of robust growth
in economic activity, strong domestic demand, and pass-through of rise in
international commodity prices to domestic prices.

Growth in non-tax revenue also rebounded with a significant increase in provincial

non-tax revenue on account of transfer of hydel profits. Higher mark-up income,
dividend income and PTA/postal service profit also contributed to higher non-tax
revenue during Jul-Mar FY18.

Yet, the the growth in overall revenue collection edged lower compared to that of
expenditures during Jul-Mar FY18. The resultant higher financing requirement
was mostly met through external sources and increased recourse to SBP
borrowings. In case of external finance, government heavily relied on commercial
loans and bonds. In addition, revaluation losses due to appreciation of major
currencies against US$, along
Figure 4.3 : Contribution to Growth in FBR Taxes
with depreciation of rupee, also
Direct tax Indirect tax
added to external debt. This 25
has led to a considerable
increase in debt during Jul-Mar 20
FY18, with record
accumulation in Q3-FY18
percent

15
since FY14.
10
4.2 Revenue
5
The total revenue collection
increased by 16.0 percent
0
during Jul-Mar FY18 Q1-FY18 Q2-FY18 Q3-FY18
compared to 6.2 percent
Data source: Federal Board of Revenue, SBP calculations

1 The general public services refer to the administrative activities of the provincial government such
as handling executive and legislative organs, financial and fiscal affairs and transfers etc.
2 This includes general economic affairs, commercial and labor affairs, agriculture, food, irrigation,

etc.

45
The State of Pakistan’s Economy

growth realized in the same period of last year. The revenue growth was also
broad-based, contributed by both tax (FBR and provincial) and non-tax revenues.
While growth in revenue collection still remained impressive compared to last
year, the pace slowed down considerably in Q3-FY18. This was primarily due to
slower pace of FBR tax collection as growth in non-tax and provincial own tax
collection remained strong.

FBR taxes
FBR tax collection grew by 15.8 percent during Jul-Mar FY18 compared to 8.6
percent growth last year. Though the growth was significantly higher compared to
last year, its pace has consistently tapered off during 2nd and 3rd quarters of FY18.
The major drag came from a slower growth in direct tax collection, while growth
in indirect tax collection also weakened somewhat (Figure 4.3). The latter also
reflects higher payment of tax refunds, especially to export-oriented industries,
that increased by 34.4 percent (Rs 100.7 billion) during Jul-Mar FY18 (Table
4.2).

Table 4.2: FBR Tax Collection (Jul-Mar)

billion rupees
Collections % Growth
Budget FY18
FY17 FY18 FY17 FY18
Direct Taxes 1594.9 900.5 1001.4 11.2 11.2
Indirect Taxes 2418.1 1,368.2 1,626.4 7.0 18.9
Customs Duty 581.4 343.4 428.4 24.4 24.8
Sales Tax 1605.2 897.7 1,053.7 1.3 17.4
FED 231.5 127.2 144.3 8.6 13.5
Total Taxes 4013.0 2,268.7 2,627.8 8.6 15.8
Data source: Federal Board of Revenue and SBP’s calculations

Direct taxes
The growth in direct tax collection decelerated to 9.3 percent in Q3-FY18 from
21.0 percent in first quarter. The cumulative growth however, remained at 11.2
during Jul-Mar FY18, same as witnessed during the corresponding period of last
year. The voluntary payments (VP), having a share of 22.6 percent in total direct
taxes, decreased by 3.1 percent during Jul-Mar FY18 compared to 7.7 percent
increase in the corresponding period of last year.3 The decline in FY18 can be
attributed to reduction in corporate tax rate and lower bank profitability.4 The

3The decline in VP was mainly concentrated in Q2 and Q3 FY18.

4Banking sector profit fell by 20 percent to Rs180.9 billion during Jul-Mar FY18 compared to Rs
226.9 billion in the corresponding period of last year.

46
 Third Quarterly Report for FY18

impact of decline in VP on overall pace of direct tax collection during Jul-Mar

FY18 was
partially offset by higher
withholding taxes and Table 4.3: Break-up of Direct Taxes Jul-Mar FY18
billion rupees
Collection on Demand
Actual Growth
(COD). Acceleration in FY17 FY18 FY17 FY18
growth of withholding taxes I. Collection on demand 51.9 68.4 9.9 32.0
in particular reflects higher II. Voluntary payments 247.7 240.0 7.7 -3.1
collection from rising trade III. Withholding taxes 645.7 749.7 12.3 16.1
volumes, contracts, salaries Imports and exports 159.0 180.0 7.4 13.2
and dividend income (Table Contracts 165.2 194.6 14.7 17.8
Salary 75.2 95.2 19.3 26.6
4.3). The withholding Interest & securities 31.0 32.3 -15.8 6.7
taxes, also greatly benefited Cash withdrawal 21.8 25.1 4.1 15.4
from the government’s Dividends 31.0 39.3 24.4 27.0
policy of differential Electric bills 17.9 24.0 -3.2 33.9
taxation, especially in case Telephone 36.8 38.0 8.9 3.3
of dividend income, Others 106.6 119.0 26.8 11.6
Data source: Federal Board of Revenue
registration of motor
vehicles and sale and purchase of immoveable property etc.5
Figure 4.4: Contribution to Growth in FBR Taxes
Differential taxation was aimed Direct taxes Sales tax FED Customs
at increasing cost for non-filers 100
besides encouraging them to
file tax returns and become part 80
of the formal system. This 60
percent

intervention, to some extent,

helped increase number of tax 40
filers. In addition, FBR drive 20
for broadening of tax base has
helped in bringing filers into 0
the tax net.6 Despite these -20
efforts, however, the number of Q1-FY18 Q2-FY18 Q3-FY18
tax filers continue to remain Data source: Federal Board of Revenue, SBP calculations
small compared to size of the

5 However, it continues to have negative implications for financial intermediation as reflected in the
increase in the currency-to-deposit ratio since its scope was extended to include financial
transactions in 2015.
6 According to FBR, the number of tax filers have crossed 1.3 million. Specifically, the campaign to

broaden tax base has added 0.2 million new tax filers during FY14 to FY17 in response to 0.5
million notices served to potential tax payers.

47
The State of Pakistan’s Economy

population.

Indirect taxes
The indirect tax collection grew by 18.9 percent during Jul-Mar FY18, compared
to a subdued growth of 7.0 percent in last year. This sharp growth was supported
by all segments – sales tax, customs, and FED – in line with strong domestic
demand and increased sale volumes, surge in imports, and better manufacturing
activity. The major contribution, nevertheless, came from a rebound in sales tax
collection (Figure 4.4).

Sales tax collection recovered strongly, growing by 17.4 percent during Jul-Mar
FY18 against a marginal increase of 1.3 percent in the corresponding period of last
year. It generally reflects increase in domestic demand supported by sustained
expansion in real economic activity, which has resulted in substantial rise in
domestic sales as well as imports. It can also be attributed to higher domestic
prices of petroleum products as government promptly passed on the increase in
international oil prices to domestic consumers. Moreover, rationalization of sales
tax rates on petroleum products at the time of rising sales also contributed to
higher collection, especially in Q3-FY18.7

Substantial rise in imports and Figure 4.5: Revenue Spinners of Custom Duty during Jul-
Mar
increase in regulatory duty FY17 FY18
helped to keep the growth 80
momentum of custom duty
collection, that grew by 24.8 60
percent in Jul-Mar FY18, on
billion Rs

top of 24.4 percent in the 40

same period last year.
Depreciation of rupee also 20
contributed to higher custom
duty collection by increasing 0
the landed price of imports. Vehicles Machinery POL Iron and
Products Steel
Largely, higher import of Data source: Federal Board of Revenue
vehicles, POL products and
iron and steel contributed to increase in custom duty collection during Jul-Mar
FY18 (Figure 4.5). It is also worth mentioning that the prime objective of

7FBR vide SROs 1331(I)/2017 dated 31st December 2017;SRO 98( I)/2018 dated 31st January 2018;
and SRO 265(I) 2018 dated 28th February 2018; raised sales tax rate on Kerosene and Light Diesel
Oil up to 17 percent from previously applicable zero percent.

48
 Third Quarterly Report for FY18

increase in regulatory duty was to address pressures on balance of payments and

revenue collection was only a by-product.
Likewise, collection from federal excise duty grew by 13.5 percent during Jul-Mar
FY18 compared to 8.6 percent growth observed in the corresponding period of last
year. This acceleration can be attributed to increase in production of cement and
cigarettes. Higher collection from cement reflects both increase in demand for
cement and an upward revision in duty structure. Similarly in case of cigarettes,
introduction of three-tier duty structure has helped partially recover FED
collection.

Non-tax revenue Table 4.4: Non-tax Revenues (Jul-Mar)

The non-tax revenue grew by billion rupees
Actual
27.2 percent during Jul-Mar Budget FY18 FY17 FY18
FY18 compared to a decline of Mark-up (PSEs & others) 96.0 12.1 21.7
6.2 percent in the same period Dividends 93.3 22.1 33.6
SBP profits 260.0 144.8 143.2
of last year. The growth looks Defense (incl. CSF) 141.8 64.4 9.3
impressive in the absence of Profits from post
CSF and given the SBP profit office/PTA (3G) 11.3 0.7 8.8
Royalties on gas & oil 58.5 40.3 42.4
was almost same as in last Passport & other fees 28.0 13.6 11.9
year. In fact, the growth in Discount retained 10.0 5.9 6.5
non-tax revenue largely owes Windfall levy 8.0 1.0 2.3
Other* 547.8 146.3 294.1
to one-off increase in Total non-tax revenue 1,254.7 451.2 573.8
provincial non-tax revenue – * Includes provincial non-tax revenue
transfer of hydel profits to Data source: Ministry of Finance
provinces (mainly Punjab and Figure 4.6: The trends in Expenditure and Fiscal Deficit
KP). Moreover, receipts from Fiscal deficit* (rhs) Expenditure
35 4.0
mark-up, dividend income, and
30 3.5
profits of PTA/post office were 25 3.0
percent of GDP

also higher during Jul-Mar

percent growth

20 2.5
FY18 (Table 4.4). 2.0
15
1.5
10 1.0
4.3 Expenditures 5 0.5
The overall fiscal spending 0 0.0
-5 -0.5
grew sharply by 17.2 percent,
Q1-FY16
Q3-FY16
Q1-FY17
Q1-FY13
Q3-FY13
Q1-FY14
Q3-FY14
Q1-FY15
Q3-FY15

Q3-FY17
Q1-FY18
Q3-FY18

almost three times the growth

observed during the
corresponding period of last * T he negative value means surplus
Data source: Ministry of Finance, SBP calculations
year. This was broad-based as
both current and development
expenditures were significantly higher across federal and the provincial
governments (Table 4.5).

49
The State of Pakistan’s Economy

Quarter-wise data reveals that the acceleration in expenditure growth mainly came
from a jump in spending by 23.4 percent in Q3-FY18 (Figure 4.6).

Table 4.5: Analysis of Fiscal Spending

billion rupees
Jul-Mar Abs. change Growth
FY17 FY18 FY17 FY18
Current expenditures 3,605.1 4,075.4 470.3 5.8 13.0
Federal 2,439.3 2,653.3 214.0 3.0 8.8
of which
Interest payments 1,094.5 1,172.8 78.4 1.4 7.2
(i) Domestic Debt Servicing 1,009.9 1,071.4 61.5 0.7 6.1
(ii) Foreign Debt Servicing 84.6 101.4 16.8 10.5 19.9
Defense 535.7 623.8 88.2 10.9 16.5
Public order and safety 81.9 94.0 12.1 8.6 14.8
Others 727.3 762.7 35.4 -0.5 4.9
Provincial 1,165.8 1,422.1 256.3 12.3 22.0
Development expenditures 803.9 1,042.5 238.6 14.9 29.7
PSDP 764.6 980.5 215.9 22.7 28.2
Federal 324.0 402.8 78.8 28.9 24.3
Provincial 422.7 577.8 155.1 13.6 36.7
Others (including BISP) 57.2 61.9 4.7 -24.7 8.3
Net lending -34.2 9.2 43.4 -417.0 126.8
Total Expenditure* 4374.7 5127.1 752.4 6.3 17.2
* Excluding statistical discrepancy
Data source: Ministry of Finance

The disaggregated data further shows that provinces contributed the most to
improvement in growth of current expenditures. The overall current expenditures
grew by 13.0 percent as compared to 5.8 percent recorded last year. The federal
current expenditures, being larger in absolute terms, increased by 8.8 percent
mainly due to higher interest payments and security-related spending. Going
forward, higher interest payments could narrow space for development spending
for sustaining higher growth in medium term.

Similar to current expenditures, acceleration in growth of development

expenditures was also spearheaded by higher spending from provinces, though
growth in federal spending also remained high above 24 percent. Higher
development spending mainly reflects government’s efforts to complete ongoing
development projects before the term of current assemblies comes to an end. The
breakup of PSDP releases shows that the major chunk of PSDP was allocated for

50
 Third Quarterly Report for FY18

infrastructure development followed by Special Development Programs’, and

Power and Energy (Figure 4.7).

Figure
44 4.7 : The Development Spending during Jul-Mar FY18 (as percent of total PSDP spending)
Powe r and
11.3 % Ene rgy Infrastructure Spending 44.9%
3.9 %
Education O thers 0.5 %
Spe cial Development
14 % Programs He alth 1.9 %

PM's Global SDGs Achievement Programme 5.5 %

Spe cial Fe deral Development Programme 5.2 %

Ene rgy For All 2.2 %

ERRA 0.9 %

Data source: PSDP Releases as on 30-03-2018

Moreover, growth in other development expenditures, especially aimed at poverty

reduction, also rebounded with 8.3 percent increase against a decline of 24.7
percent recorded last year.8

4.4 Provincial Fiscal Operations

The provinces posted a combined surplus of Rs 191.1 billion during Jul-Mar
FY18, down from Rs 227.6 billion in the corresponding period of last year. All
the provinces, except for Balochistan, recorded decline in surplus (Table 4.6).
Quarter-wise data shows that the drag came in Q3-FY18, when provincial
expenditures grew sharply (38.3 percent) against a relatively slower revenue
growth in the quarter (Figure 4.8 and 4.9).

As discussed in Section 4.3, a sharp increase in both current and development

expenditure led to a 25.8 percent increase in provincial expenditure during Jul-
Mar FY18 compared to 12.6 percent increase in last year (Table 4.5 and 4.6).

8 This was due to higher allocation under Poverty Reduction Strategy Paper (PRSP) for both federal
and provincial levels during Jul-Dec FY18 that are more concentrated on education and
infrastructure projects.

51
The State of Pakistan’s Economy

Figure 4.8: Province-wise Surplus* During FY18 Figure 4.9: Provincial Fiscal Position During FY18
Punjab Sindh KP Balochistan Total Revenue Total Expenditure
120 50

90 40

percent growth YoY

60 30
billion Rs

30 20

0 10

-30 0
Q1 Q2 Q3 Q1 Q2 Q3
* Negative financing numbers represents surplus
Data source: Ministry of Finance Data source: Ministry of Finance, SBP calculations

The composition of provincial expenditures elucidates that most of the current and
development expenditures were allocated towards general public service and
economic affairs followed by public order, housing, education, and social
protection (Figure 4.10).

Figure 4.10: Provincial Expenditures During Jul-Mar FY18

Gen. public service Public order Economic affairs Housing
Health Education Social protection Others

Development

Current

0 20 40 60 80 100
percent
Data source: Ministry of Finance

On the other hand, lower provincial revenue in Q3-FY18 was mainly because of a
negligible growth in federal transfers; these were significantly higher in Q2-FY18,
bolstered by higher federal revenue receipts. In contrast, provincial own revenue
maintained the growth momentum, rising to Rs 233.3 billion in Q3-FY18. Yet, on
a cumulative basis during Jul-Mar FY18, revenue collection increased by 25.8

52
 Third Quarterly Report for FY18

percent compared to 13.7 percent reported in last year. The higher growth during
Jul-Mar FY18 was mainly supported by provincial own revenue collection and
federal loans and transfers (Table 4.6).

Though growth in provincial revenue collection remained strong during Jul-Mar

FY18, it was mainly supported by higher growth in non-tax revenue (Table 4.6).
Slight deceleration in growth of tax revenue was mainly due to a slower growth in
GSTS, motor vehicle tax, and other miscellaneous taxes. However, collection
from stamp duties recorded a sharp increase of Rs 44.9 billion while excise duties
rebounded during the period under review that followed trends in domestic
production.

Table 4.6: Provincial Fiscal Operations during Jul-Mar

billion rupees
Punjab Sindh KP Balochistan Total Growth
FY18
A. Total Revenue 1036.0 603.1 361.4 184.1 2184.6 25.8
Provincial share in federal revenue 801.7 418.1 269.3 159.9 1648.9 16.0
Provincial Revenue (I+II) 221.2 156.2 81.2 15.6 474.2 63.6
I. Taxes 141.2 119.3 13.0 6.5 280.0 21.4
II. Non-tax revenue 80.0 36.9 68.2 9.1 194.2 227.5
Fed loans and transfers 13.1 28.9 10.9 8.6 61.5 154.1
B. Total expenditure 1018.8 529.1 321.4 141.2 2010.4 25.8
Current** 659.5 413.9 237.7 121.6 1432.7 21.8
Development 359.3 115.2 83.7 19.6 577.8 36.7
Gap (A-B) 17.3 74.1 40.0 42.9 174.2 26.6
Financing* (overall balance) -62.8 -50.0 -24.5 -53.8 -191.1 -16.1
FY17
A. Total Revenue 808.4 500.3 263.1 164.3 1736.1 13.7
Provincial share in federal revenue 665.6 382.2 224.3 150.0 1422.1 13.5
Provincial Revenue (I+II) 132.8 107.4 41.3 8.3 289.8 25.2
I. Taxes 112.3 101.7 12.1 4.5 230.5 23.5
II. Non-tax revenue 20.6 5.7 29.2 3.9 59.3 32.6
Fed loans and transfers 10.0 10.7 -2.4 5.9 24.2 -42.4
B. Total expenditure 723.0 455.5 290.2 129.8 1598.5 12.6
Current** 484.0 363.4 216.4 112.1 1175.9 12.3
Development 239.1 92.1 73.8 17.7 422.7 13.6
Gap (A-B) 85.4 44.8 -27.1 34.5 137.6 28.2
Financing* (overall balance) -82.7 -41.9 -67.0 -36.0 -227.6 2.9
*Negative sign in financing means surplus. ** Current expenditure data may not match with those given in Table
4.5 as numbers reported here includes the markup payments to federal government.
Data source: Ministry of Finance and SBP calculations

Provincial non-tax revenue jumped by Rs 134.9 billion on account of transfer of

profits from hydroelectricity (mainly to Punjab and KP) and PSDP grants. A

53
The State of Pakistan’s Economy

strong showing by non-tax revenue contributed significantly to 63.6 percent

growth in provincial revenue during Jul-Mar FY18 (Table 4.6).

4.5 Public debt

Both a large fiscal deficit and widening of current account deficit led to a
considerable accumulation in public debt during Jul-Mar FY18, which was more
than double the increase recorded in the corresponding period of last year. Most
of the addition in debt was concentrated in third quarter of FY18, Rs 1.3 trillion,
the highest increase seen in a quarter since FY14.9 Moreover, external debt
contributed the most to overall rise in debt during Jul-Mar FY18. This is in
contrast to last year when 90 percent of the increase was due to domestic debt in
the same period (Table 4.7).
Table 4.7: Pakistan's Public Debt Profile
billion rupees
Flow
Stock
Jul-Mar FY18
Jun-17 Mar-18 FY17 FY18 Q1 Q2 Q3
Gross Public Debt 21,408.7 24,076.3 1,197.2 2,667.6 651.2 761.0 1,255.5
Domestic debt 14,849.2 16,074.1 1,120.1 1,224.8 526.3 61.9 636.7
External debt 5,918.7 7,269.6 83.8 1,350.9 111.1 662.8 577.0
Debt from the IMF 640.8 732.6 -6.7 91.9 13.8 36.3 41.8
External liabilities 373.8 432.0 -9.0 58.1 6.3 23.1 28.7
Total Debt of the
19,635.4 22,059.7 1,070.8 2,424.3 558.8 685.1 1,180.4
Government*
*Gross public debt minus government deposits with the banking system.
Data source: State Bank of Pakistan

Figure 4.11: PKR Depreciation and Exte rnal Debt

Besides higher external Exchange Rate Foreign Borrowings
financing needs, revaluation
700
losses due to appreciation of
600
major international currencies 500
against US$ also added to the 400
billion Rs

external debt in dollar terms. 300

At the same time, depreciation 200
of Pak rupee further increased 100
external debt in rupee terms 0
(Figure 4.11). The combined -100
Mar-18
Sep-17

Feb-18
Dec-17

Jan-18
Aug-17

Nov-17
Jul-17

Oct-17

impact of currency changes

(both PKR and other currencies
Data source: State Bank of Pakistan & Economic Affairs
Division
9 Previously, the highest increase in gross public debt was recorded in Q1-FY14, when debt
increased by a little less than Rs 1 trillion.

54
 Third Quarterly Report for FY18

against US$) added around 2.1 percent in overall debt/GDP ratio.

With these developments, gross public debt rose by Rs 2.7 trillion during Jul-Mar
FY18 to reach Rs 24.1 trillion as of end-March 2018. Within gross public debt,
the government debt increased by Rs 2.4 trillion to reach Rs 22.0 trillion as of
end-March 2018.

Domestic debt Table 4.8:Absolute Change in Government Domestic Debt

billion rupees
With an addition of Rs 1.2
FY17 FY18 FY18
trillion, domestic debt reached Jul-March Q1 Q2 Q3
16.1 trillion as of end-March Government
1,120.10 1,224.8 526.3 61.9 636.7
2018. The entire increase in domestic debt
domestic debt during the period Permanent debt -561.8 -999.3 -510.5 15.2 -503.9
came from short-term debt, of which
mostly in 3-month T-bills, as the PIBs -644.9 -1,067.7 -541.0 0.0 -526.8
Prize bond 83.1 68.5 30.4 15.2 22.9
government retired maturing
Floating debt 1599.9 2,174.7 1,017.8 20.4 1,136.5
longer-term debt (Table 4.8). of which
MTBs 1077.9 -57.0 745.9 1.8 -804.7
Continuing the trends observed MRTBs 734.6 2,231.7 271.9 -188.7 2,148.5
in Q2-FY18, banks remained Unfunded debt 82 49.0 19.0 26.1 3.8
reluctant to invest in long-term Foreign
0 0.4 0.0 0.2 0.2
currency loans
government securities in Data source: State Bank of Pakistan
anticipation of increase in
interest rates. This was
Table 4.9: Auction of Government Securities*
particularly reflected in PIB ratios
auctions where the offered Offer/ Accepted/
Target/ maturity
amount was about a quarter of maturity maturity
the target and only a fraction T-bills
Q1-FY18 1.2 1.1 1.2
of maturities in Q3-FY18 Q2-FY18 1.3 1.0 1.0
(Table 4.9). Against this, the Q3-FY18 1.1 1.1 0.8
government rejected all the PIBs
bids as banks demanded higher Q1-FY18 0.2 0.5 0.1
rates. As shown in Figure Q2-FY18
Q3-FY18 0.1 0.4 0.0
4.12, there was a clear upward
shift in yield curve since * Face value in case of offer and accepted amounts. Moreover,
accepted amount is only from competitive bids.
December 2017; the situation
Data source: State Bank of Pakistan
did not change much after 25
bps increase in the policy rate in January 2018.

In case of T-bills too, the offers from commercial banks were heavily tilted
towards 3-month tenor, and also at relatively higher rates. These factors made it

55
The State of Pakistan’s Economy

hard for the government to raise the targeted amount, which also included
incremental amounts, over and above maturities during the quarter. Similar to
commercial banks, the non-bank entities also shifted their investment towards
short-term bills.
Figure 4.12: Secondary Market Yield Curve
In this backdrop, for retirement 30-Jun-17 29-Sep-17
29-Dec-17 30-Mar-18
of maturing long-term 9.0
government securities and to
8.5
meet its additional financing
requirement, government 8.0 percent

heavily relied on SBP 7.5

borrowings. This led to the
7.0
highest ever creation of
MRTBs, Rs 2.1 trillion, in a 6.5
single quarter since FY14, 6.0
pushing the outstanding stock 5.5
of MRTBs to a record Rs 4.7 3M 6M 1Y 3Y 5Y 10Y
trillion. As a result, the share Data source: MUFAP
of MRTBs in domestic debt
rose to 29.2 percent in March 2018 from 16.5 in December 2017.
Figure 4.13: Composition of Domestic Debt
The resulting surge in stock of
LT ST
3-month T-bills and MRTBs 60
led to a significant increase in
the share of short-term debt in 56
overall domestic debt (Figure
percent share

52
4.13). Though these
developments bode well in 48
terms of debt servicing cost, the
rollover risk has increased.10 44

40
Unfunded debt:
Mar-17

Mar-18
Sep-16

Sep-17
Jan-17

Jan-18
Nov-16

Nov-17
Jul-16

Jul-17
May-17

The stock of unfunded debt

increased only moderately
Data source: State Bank of Pakistan
during third quarter of FY18
(Figure 4.14). The increase was primarily driven by inflow under Behbood
saving certificates and pensioner’s benefit account, while other major schemes

10To revive commercial bank’s interest in PIBs, the government has recently decided to issue PIBs
on floating rates ( Source: State Bank of Pakistan, DMMD Circular No. 09 of 2018)

56
 Third Quarterly Report for FY18

recorded net retirement during the period. This is despite several efforts by CDNS
to attract savers, and largely reflects lower rates of return. As SBP has increased
the policy rate cumulatively by 75 bps since January 2018, a concurrent increase
in NSS rates may revive
savers’ interest going forward. Figure 4.14: Stock of Unfunded Debt
2.9
External Public Debt
External debt rose by US$ 6.7 2.8
billion during Jul-Mar FY18, to
reach US$ 69.3 billion as of trillion Rs
2.8
end March 2018 (Table 4.10).
Along with higher external
2.7
borrowings, revaluation losses
due to appreciation of major
borrowing currencies against 2.7

Mar-17

Mar-18
Jun-17
Sep-16

Feb-17

Sep-17

Feb-18
Dec-16

Dec-17
Jan-17

Jan-18
Aug-16

Nov-16

Aug-17

Nov-17
Jul-16

Jul-17
Oct-16

Oct-17
May-17
Apr-17
US dollar also added to
external debt in US$. During
Jul-Mar FY18, these losses Data source: CDNS
added US$ 1.7 billion to
country’s external debt. Out of this, around US$ 1.0 billion was realized in Q3-
FY18 alone, when Japanese Yen and SDR – having a combined share of
around 40 percent in external debt – appreciated by 5.6 and 2.0 percent
respectively.

Table 4.10: Public External Debt & Liabilities

billion US dollars
Stock Flows
End-period Jul-Mar FY18
Jun-17 Mar-18 FY17 FY18 Q1 Q2 Q3
External public debt & liabilities
66.1 73.0 0.6 6.9 0.9 3.5 2.5
(i+ii+iii)
External Public debt (i+ii) 62.5 69.3 0.7 6.7 0.9 3.5 2.4
i. Government debt 56.4 62.9 0.8 6.5 0.8 3.4 2.3
Of which;
Paris club 12.0 12.3 -0.8 0.4 0.1 -0.2 0.4
Multilateral 27.6 28.4 -0.4 0.8 0.3 0.0 0.5
Other bilateral 5.8 7.2 0.8 1.4 0.4 0.2 0.7
Euro/Sukuk bonds 4.8 7.3 1.0 2.5 0.0 2.5 0.0
Commercial loans 4.8 5.7 1.3 0.9 -0.1 0.5 0.5
Short term 0.9 1.5 -0.5 0.6 0.0 0.4 0.2
ii. IMF 6.1 6.3 -0.1 0.2 0.1 0.0 0.1
iii. Foreign exchange liabilities 3.6 3.7 -0.1 0.2 0.0 0.0 0.1
Data source: State Bank of Pakistan and Economic Affairs Division

57
The State of Pakistan’s Economy

Figure 4.15: Entity-wise Exte rnal Borrowing Figure 4.16: Net Borrowing viz-a-viz Financing
(Gross) During Jul-Mar Needs
Net borrowing Current account deficit
FY17 FY18
3000 5
2500 4
million US$

2000 3

billion US$
1500 2
1000 1
500 0
0 -1
China

IDB (ST)
Bonds

IDA
Others
ADB
Comm banks

-2

Q1-FY17

Q3-FY17

Q4-FY17

Q2-FY18
Q2-FY17

Q1-FY18

Q3-FY18
Data source: State Bank of Pakistan Data source: State Bank of Pakistan

The gross external disbursement recorded US$ 2.6 billion YoY increase to
reach US$ 7.6 billion during Jul-Mar FY18. More than half of the inflows
were in the form of commercial borrowings by the government (US$ 1.7
billion from banks and US$ 2.5 billion from Sukuk and Eurobonds).
Moreover, CPEC related Table 4.11: Servicing of Public External Debt during Jul-Mar
million US dollars
inflows from China recorded FY17 FY18 Change
moderate increase, while loans Principal (Long-term)
from multilateral donors i. Government debt 2,045.5 2,045.3 -0.2
of which
remained almost at last year’s Paris club 153.8 321.8 168.0
level. (Figure 4.15). Overall, Multilateral 999.6 1,069.6 70.0
most of increase in debt during Other bilateral 233.4 190.1 -43.3
Euro/Sukuk bonds 0.0 0.0 0.0
Jul-Mar FY18 was in the form SAFE China deposits 500.0 0.0 -500.0
of non-project loans, with its Commercial loans 138.8 463.9 325.1
share rising to 70 percent in ii IMF 0.0 43.6 43.6
iii. External liabilities 0.0 0.0 0.0
Jul-Mar FY18 from 50 percent I. Total (i+ii+iii) 2,045.5 2,088.9 43.3
in the same period last year. Interest
Such large borrowing primarily i.ofGovernment
which
debt 814.1 997.6 183.5

reflects requirements arising Paris club 129.6 128.2 -1.4

from financing of widened Multilateral 233.3 273.0 39.7
Other bilateral 166.8 190.6 23.9
current account deficit (Figure Euro/Sukuk bonds 201.9 171.9 -29.9
4.16). SAFE China deposits 10.3 0.0 -10.3
Commercial loans 43.1 177.9 134.8
ii. IMF 60.9 94.6 33.7
External debt servicing was up iii External liabilities 55.7 16.3 -39.4
by US$ 221.2 million only, II. Total (i+ii+iii) 930.7 1,108.5 177.8
reaching US$ 3.2 billion Grand Total (I+II) 2,976.2 3,197.4 221.2
Data source: State Bank of Pakistan

58
 Third Quarterly Report for FY18

during Jul-Mar FY18 (Table 4.11). This was mainly due to higher interest
payments, as the principal repayment recorded only a marginal increase.
Repayment to both multilateral donors and the commercial lenders increased
significantly during the period.

The interest payments grew quite significantly, particularly to commercial banks

and multilateral/bilateral donors, in line with recent borrowing trends. Along with
the higher borrowing amount, increase in the benchmark rate i.e. LIBOR, at which
most debt is contracted, also contributed to higher interest payments this year.

59
5 External Sector
5.1 Overview
Changes in global currency and commodity dynamics besides the recovery in the
advanced economies, and persistence in domestic aggregate demand mostly drove
Pakistan’s external balance during Jul-Mar FY18 (Figure 5.1). While a weakening
Pak rupee against major currencies and the rebound in the advanced economies
have strengthened Pakistan’s
Figure 5.1: International Crude Prices & Dollar Index
FX receipts from exports and Arab light $ Index (rhs)
workers’ remittances, the PKR-USD parity (rhs)
increase in oil prices and 80 118

Index points and US$/Rupee

higher import payments for
70
US$/barrel

machinery, transport and 108

metals continued to keep the 60
country’s current account
98
under pressure (Table 5.1). 50
Consequently, the country has
witnessed the highest current 40 88

3-Mar-18
3-Sep-17

3-Feb-18
3-Dec-17
3-Oct-17

3-Jan-18
3-Jul-17
3-Aug-17

3-Nov-17

3-May-18
3-Apr-18
account deficit during Jul-Mar
of a fiscal year.
Data source: Bloomberg
A significant increase in
portfolio inflows and a marginal growth in net FDI – amid lower net loan
disbursements – were insufficient to fill the widening gap in the current account.
As some of the import payments were made from interbank market, this drained
FX liquidity from the interbank market. At the same time, with the expectation of
PKR depreciation consolidating throughout the year, FE-25 deposits with banks
continued to rise. Resultantly, the kerb rate increased swiftly from October 2017
onwards, ahead of the PKR depreciation in December 2017 and March 2018
(Figure 5.2).1

Managing FX liquidity in such circumstances proved to be quite challenging for

the central bank. SBP’s market-stabilization efforts during the period were
constrained by the continuously declining stock of official liquid reserves, barring
an uptick in December 2017 owing to official portfolio inflows. By end-March,
official reserves had declined by US$ 4.5 billion and reached US$ 11.6 billion;

1There is sufficient anecdotal evidence to show that retail investors and the general public, in
anticipation of a PKR depreciation, started purchasing dollars from exchange companies (i.e. kerb
market) and depositing them in their FCY accounts.
 Third Quarterly Report for FY18

these were sufficient to cover over two months of the merchandize import bill.

While the reserves balance is indeed a concern, there has been some improvement
in the trade account as the year progressed. Pakistan’s exports, after a lackluster
FY17, witnessed a broad-based recovery in Jul-Mar FY18, with strong
performances from textiles and rice, and welcome contributions by sugar, wheat,
POL products and fertilizer.
Table 5.1: Pakistan’s Balance of PaymentsP (billion US$)
Jul-Mar Q3
FY17 FY18P Abs change FY17 FY18P Abs change
Current account balance -8.0 -12.1 -4.1 -3.3 -4.2 -0.9
Trade balance -18.5 -22.3 -3.8 -7.1 -7.7 -0.6
Exports 16.3 18.3 2.0 5.7 6.5 0.8
Imports 34.8 40.6 5.8 12.8 14.2 1.4
Energy 7.8 9.8 2.0 2.8 3.5 0.7
Non-Energy 27.0 30.8 3.8 10.0 10.7 0.7
Services balance -2.9 -3.9 -1.0 -0.6 -1.2 -0.6
CSF 0.6 0.0 -0.6 0.6 0.0 -0.6
Primary income balance -3.4 -3.6 -0.2 -1.0 -1.0 0.0
Interest payments 1.4 1.8 0.4 0.5 0.6 0.1
Secondary income balance 16.8 17.7 0.9 5.5 5.8 0.3
Workers’ remittances 14.1 14.6 0.5 4.6 4.9 0.3
Capital account balance 0.3 0.3 0.0 0.2 0.1 -0.1
Financial account balance -6.3 -7.7 -1.4 -1.6 -1.3 0.3
Direct investment in Pakistan 2.0 2.1 0.1 0.6 0.6 0.0
Portfolio investment in Pakistan 0.6 2.4 1.8 -0.1 0.0 0.1
Eurobond / Sukuk 1.0 2.5 1.5 0.0 0.0 0.0
Other investment 0.6 2.4 1.8 -1.2 -0.7 0.5
Net incurrence of liabilities -3.7 -3.3 -0.4 1.0 0.6 -0.4
General government 1.2 2.3 1.1 -0.3 0.7 1.0
Private sector (excl. banks) 1.8 0.6 -1.2 0.9 0.0 -0.9
Banks 0.9 0.2 -0.7 0.4 0.0 -0.4
SBP's liquid reserves (end-period)* 16.5 11.6 -4.5 16.5 11.6 -2.5
Total liquid reserves (end-period)* 21.6 17.8 -3.6 21.6 17.8 -2.4
PKR app(+) / dep(-) against US$ (in %) 0.0 -9.2 - -0.2 -4.4 -
P
Provisional Data source: State Bank of Pakistan * change during Jul-Mar FY18 and Q3-FY18

On the contrary, in case of imports, three categories – energy, machinery and

metals – were responsible for 72.0 percent of the YoY increase in import
payments during Jul-Mar FY18. SBP data suggests that payments for machinery
items imported earlier for CPEC projects are now being made from the interbank
market. However, customs data depicts a YoY decline in machinery imports in
the same period (Section 5.5), which indicates that payment pressure from these

62
 Third Quarterly Report for FY18

imports will subside soon.2

Figure 5.2. Growth in FCY Deposits & Kerb Rate
Nonetheless, as of now, the FCY account deposits Kerb rate (rhs)
absolute magnitude of 8 114
machinery import payments is 112
still quite high, averaging US$ 6 110
720.2 million per month in

PKR/US$
billion US$
108
FY18. The timing of these 4
higher payments is not ideal as 106
they have coincided with 2 104
increasing global crude prices.3 102
Not only have higher prices 0 100
significantly inflated the

Mar-17

Mar-18
Sep-16

Sep-17
Jan-17

Jan-18
Nov-16

Nov-17
Jul-16

Jul-17
May-17
country’s crude imports, but it
also offset the positive impact Data source: State Bank of Pakistan
of a slowdown in quantum
POL product imports in the year.

To sum up, there are two main concerns at this point: the country’s vulnerability
to external shocks, and its ability to keep financing the BoP deficit given the
gradual erosion in the FX reserves position. The country’s growth prospects are
encouraging, with benign inflation and favorable outlooks for exports and
remittances, and some relief expected from reduced non-energy import payments
down the road. However, until there is a significant improvement in the current
account balance, the payment pressure will continue to fall on the country’s
reserves. This, in turn, creates the constant need to arrange external financing so
that the FX reserves position offers some level of comfort.4

5.2 Current account

The current account deficit increased to US$ 12.1 billion in Jul-Mar FY18, the
highest the country has seen during Jul-Mar of a fiscal year. In the same period of
last year, the CAD was US$ 8.0 billion only. However, the pace of its increase
slowed down for the first time in the last two years (Figure 5.3). This slowdown
resulted from a deceleration in the import pressure spurred up in the last two years
with the initiation of power and infrastructure-related projects under

2 As the year progressed, the YoY growth of machinery import payments has also slowed down from
46.3 percent in Q1 to 23.3 percent in Q2 and further to 3.0 percent in Q3-FY18.
3 Saudi Light oil prices were, on average, 22.0 percent higher in Jul-Mar FY18 as compared to Jul-

Mar FY17 (source: Bloomberg).

4 Already in April, with official liquid reserves dipping to US$ 10.9 billion, the government

borrowed US$ 1.0 billion from a Chinese commercial bank.

63
 Third Quarterly Report for FY18

CPEC. Moreover, the Figure 5.3: YoY Change in CAD in Jul-Mar

adjustment in the exchange rate 1,000
also helped tame the expansion 695
in the current account deficit by 0
contributing to the export

million US$
-1,000 -1,437 -1,370
growth and encouraging
remittance inflows from the UK -2,000
and the US.
-3,000
5
5.2.1 Trade in services -4,090
-4,000 -4,623
Following the widening trend of
the merchandize trade deficit, -5,000
the services deficit increased by FY14 FY15 FY16 FY17 FY18
more than a third on YoY basis Data source: State Bank of Pakistan
during Jul-Mar FY18 to US$
3.8 billion. While services Table 5.2 Pakistan's Trade in Services (Jul-Mar)
exports declined 10.4 percent Value (US$ billion) Growth (%)
to US$3.9 billion, services FY16 FY17 FY18 FY16 FY17 FY18
imports rose by 7.3 percent Exports 4.1 4.3 3.9 -14.1 5.6 -10.5
Imports 6.4 7.2 7.7 -2.5 13.3 7.3
YoY to US$ 7.7 billion (Table
Trade Balance -2.3 -2.9 -3.9 28.7 27 33.8
5.2).
Data source: State Bank of Pakistan

Export of government goods and services, which constitute a major part of

services exports, declined by 38.0 percent to US$ 957.0 million. Inflows under
this category comprise amounts received on account of diplomatic and defense
provisions, which also include Coalition Support Fund (CSF) receipts. In the
absence of CSF inflows in FY18, under which Pakistan received US$ 550.0
million in FY17, the decline in government services exports was expected.
Meanwhile, Telecommunications, computer and information services exports
grew by 13.4 percent during Jul-Mar FY18 to US$ 787.0 million.

Among major categories, imports of transport services during Jul-Mar FY18 stood
at US$ 3.0 billion, up from US$ 2.8 billion last year. Freight import – which is
the largest sub-component of the services account– rose by 15.2 percent to US$
1.9 billion during the period. Further impetus to higher freight charges came from
the rise in international oil prices.

5 The
analysis in this section is based on the data compiled by State Bank of Pakistan. The data is
compiled as per BPM6 (EBOS-2010) classification and is aligned with MSITS-2010.

64
 Third Quarterly Report for FY18

Meanwhile, almost 23.5 percent of the services import bill consists of ‘Other
Business Services’, which include professional, technical and management
consulting services. China and the US remained key service providers in this
category, with their exports to Pakistan valued at US$ 542.1 million and US$
397.2 million, respectively.6

5.2.2 Workers’ remittances Table 5.3: Workers' Remittances to Pakistan

Remittances sent by overseas (million US$)
Pakistani workers rose by 3.6 Q3 Jul-Mar
percent YoY to US$ 14.6 FY17 FY18 FY17 FY18 Change
billion during Jul-Mar FY18 Total 4,600 4,861 14,105 14,606 501
(Table 5.3). Apart from the GCC 2,902 2,783 8,929 8,603 -326
UAE, inflows from other GCC S. Arabia 1,343 1,160 4,078 3,691 -387
UAE 1,007 1,104 3,143 3,265 122
countries, specially Saudi
Dubai 662 811 1985 2426 441
Arabia, continued their
Abu Dhabi 333 281 1120 796 -324
declining trend. Fiscal Other GCC 552 520 1,707 1,648 -59
consolidation and job Non-GCC 1699 2077 5176 6003 827
nationalization policies USA 567 667 1,739 1,948 209
undertaken by the Saudi UK 561 680 1,658 2,031 373
government restricted foreign EU 102 164 333 479 146
labour demand in the kingdom, Others 469 566 1,446 1,545 99
which also led to repatriation Data source: State Bank of Pakistan
of a number of foreign workers to their home countries.

Contrary to the trend witnessed from the rest of the GCC, remittances from the
UAE increased by US$122.0 million in Jul-Mar FY18, primarily due to US$
441.0 million uptick from Dubai. Remittances from Dubai increased sharply after
October 2014, and remained strong since then even when inflows from the next
important state, Abu Dhabi has been declining. The dynamic of remittance
inflows from the UAE is less straightforward as compared to other GCC countries.
Box 5.1 further analyzes the trend in workers’ remittances from the UAE to
Pakistan in the recent past.

Fortunately, remittances from non-GCC countries compensated the decline in

inflows from the Gulf region. The low unemployment rate in both USA and UK
amid rising economic activity in these economies and appreciation of their
currencies against the Pak rupee led to higher remittances from these corridors.

6Business services imports from mainland China stood at US$ 415.3 million and those from Hong
Kong at US$ 126.8 million.

65
 Third Quarterly Report for FY18

Going forward, the recent tax reform is expected to further stimulate the US
economy, as investment is picking up in the country. Higher employment in US is
likely to augment remittances inflow in Pakistan. In addition, Saudi Arabia plans
to build a mega city, ‘Neom,’ on the Red Sea coast that will stretch into Egypt and
Jordan. As labour demand may resurge in the KSA, the declining trend of
remittances from the kingdom may reverse in the near future.

Box 5.1: Dynamics of Remittances Inflows from Dubai and Rest of United Arab Emirates
The United Arab Emirates (UAE), on the back of inflows from Dubai, is the second-largest source of
remittances for Pakistan. Dubai, a commercial hub of the Middle East, is one of the seven states of
the UAE, and is least dependent on oil revenue. In the passing decade, the state of Dubai has
invested heavily in infrastructure projects, which led to a sharp increase in labour demand from
Pakistan, specifically since 2012 (Figure 5.1.1).
Figure 5.1.1: Remittances and Work-relatedEmigration
However, inflow of workers’ to UAE
remittances from Dubai remained No. of emigrants (rhs) Dubai Abu Dhabi
almost similar to those from Abu
400 40,000
Dhabi until October 2014, when
federal law on combating money 300 30,000
million US$

laundering crimes came into force in

the UAE. The new anti money 200 20,000
laundering (AML) law passed by the
UAE Federal National Council 100 10,000
prohibits funding of unlawful
organisations, directs regulatory 0 0
Mar-14

Jun-15

authorities and courts to freeze

Sep-16
Feb-17
Dec-12

Dec-17
Jan-15
Oct-13

Aug-14

Nov-15
Jul-12

Jul-17
Apr-16
May-13

accounts, and seize funds related to

money laundering or terrorism-
financing offences, and clarified that Data source: State Bank of Pakistan, Bureau of Emigration
money laundering is an offence in its and Overseas Employment
own right.

Remittance inflows from Dubai have witnessed a sharp jump since then, and continued to rise even
when falling oil prices created a recession-like situation in the GCC countries, forcing many of them
to adopt retrenchment measures.

With some caveats, there could be a few economic explanations.7 For example, as Dubai’s economy
is least dependent on oil, the downsizing, as witnessed in the broader GCC region in response to the
oil price decline, was less severe in Dubai. Workers mostly stayed there and continued to send their
savings back home. Second, foreign exchange inflows from Dubai may be attracting intense
scrutiny of AML monitoring institutions, as the state has graduated to a major international financial

7 There are caveats that need to be considered in disentangling the remittance inflow trend from
Dubai and other UAE states with precision. First, states in the UAE are in vicinity of each other, and
spillover between the sending sources is not beyond possibility. Second, the head offices of most of
the remitting entities are located in Dubai, which blurs the remittance inflows by source states. And
third, disaggregated monthly data on workers emigrating from Pakistan to the UAE for work is not
available, which could have helped pin down the source of remittances precisely.

66
 Third Quarterly Report for FY18

hub in recent years. This could have discouraged the hundi/hawala activity between Dubai and
Pakistan.

Third, the Pakistani government started disbursing the rebate on remittance transactions more
regularly, which may have incentivized the remittance transmitting entities in the UAE to opt for the
legal channel.

More recently, in December 2017, the Government of Pakistan conducted the ‘First Pakistan
Remittance Summit 2017’ in Dubai, in cooperation with the Pakistan Remittance Initiative. The aim
of the summit was to engage overseas Pakistanis and the remitting agencies to send money through
legal channels. This initiative, among others, may have led to a US$ 149.0 million increase in
remittances from Dubai in Q3-FY18 (Table 5.3).

These kinds of initiatives, if undertaken in the other Gulf countries as well, may help reverse the
declining trend of workers’ remittances from the rest of the GCC corridor.

5.3 Financial account

Although higher than last year, financial inflows in Jul-Mar FY18, at US$ 7.7
billion, could only partially cover the current account deficit in the period.
Besides a marginal growth in FDI, the government’s recourse to foreign financing
led to reasonably high portfolio investment inflows and an uptick in official loans.
At the same time, external borrowing by commercial banks and non-bank private
firms was much lower than last year.

Foreign direct investment

Although net FDI in Pakistan Table 5.4: FDI inflows to Pakistan (Jul-Mar)
rose by 4.4 percent YoY in Jul- million US dollars
Mar FY18; excluding one-time FY17 FY18 Change
acquisition inflows received Total FDI (net) 2,005 2,094 89
Construction 263 525 263
last year in the food and
Power 468 712 244
electronics sectors, the YoY Telecommunications -108 -33 75
growth in FDI this year jumps Financial business 230 256 26
to 47.7 percent. FDI in Jul- Food 509 93 -417
Mar FY18 remained Electronics 151 42 -110
concentrated in power, Others 492 499 7
construction and financial Data source: State Bank of Pakistan
business sectors (Table 5.4).
China was the major source of FDI inflows in the power and construction sectors,
as its investments remained focused on CPEC projects (Figure 5.4).

67
 Third Quarterly Report for FY18

On the contrary, the telecom Figure 5.4: Source of Net FDI Flows to Pakistan
sector continued to witness FDI China Non-China
outflows, albeit in reduced 1,200
volume as compared to last 1,000 Investment by T urkey in electronics
and Netherlands in food sector

million US$
year. An inflow of US$ 110.0 800
million from Malaysia was
600
more than offset by a relatively
higher outflow from a 400
Norwegian telecom company. 200
The Malaysian firm had
0
acquired the operation of

Q3-FY17
Q1-FY17

Q2-FY17

Q4-FY17

Q1-FY18

Q2-FY18

Q3-FY18
telecom towers from one of the
leading cellular service
providers in Pakistan. Data source: State Bank of Pakistan
Meanwhile, the outflow in this
sector represents the repayment of intercompany loans to the parent company by
its subsidiary operating in Pakistan.

Foreign portfolio investment

Foreign portfolio investment increased to US$ 2.4 billion in Jul-Mar FY18 from
US$ 0.6 billion in the same period of FY17. The FPI was dominated by the public
sector, as the government raised US$ 2.5 billion in Eurobond and Sukuk in
December 2017. On the contrary, private equity investment witnessed a net
outflow of US$ 93.3 million in Jul-Mar FY18. An inflow of US$ 539.8 million
from the US was offset by the
outflow of US$ 694.2 million Figure 5.5: Private FPI to Pakistan by Source and Trend
to other countries. in the Dollar Index
USA Others Dollar index (rhs)
200 95
The weakening of the US
dollar against a basket of major 100 92.5
index points
million US$

international currencies, as
suggested by the Dollar Index, 0 90
explains this divergence in the
private equity flow trend to and -100 87.5
from Pakistan. The portfolio
realignment by foreign -200 85
Mar-18
Sep-17

Feb-18
Dec-17

Jan-18
Aug-17

Oct-17

Nov-17
Jul-17

investors in the wake of

weakening US dollar increased
volatility in the global capital Data source: State Bank of Pakistan, Bloomberg
flows, as well as in Pakistan,
specifically in Jul-Jan FY18 (Figure 5.5).

68
 Third Quarterly Report for FY18

The growing concern on the US inflation outlook in recent months and the
expected increase in the Fed policy rate instigated further uncertainty in the global
portfolio investment flows. Not surprisingly, Q3-FY18 witnessed sell-offs in
equity markets across the globe, triggered by concerns over higher interest rates
and their impact on corporate profitability in the US.

Therefore, foreign investors repatriated funds by liquidating emerging market

assets, including in Pakistan. Excluding US$ 92.4 million inflow from the US in
January 2018, net FPI saw an outflow in Q3-FY18. On the back of the nonresident
portfolio flow, the PSX remained roughly unchanged in Q3-FY18.
Figure 5.6: PSX performance and Foreign Investors' Net
On a cumulative basis, the PSX Buying(+) / Selling(-)
FIPI (net) PSX-100 (rhs)
witnessed net foreign selling of
100
US$ 124.0 million during Jul- 50
Mar FY18, compared to net 50

'000 index points

40
million US$

selling of US$ 483.0 million in 0

the corresponding period of last 30

year (Figure 5.6). -50 20

-100 10
Apart from the global currency
-150 0
movements that instigated
Mar-17

Mar-18
Sep-17
Sep-16

Jan-17

Jan-18
Nov-16

Nov-17
Jul-16

Jul-17
May-17

private equity outflow,

investors’ confidence was
Data source: National Clearing Company of Pakistan Ltd.,
further dented by the recent Figure Stock
Pakistan 5.7: Net Incurrence of Liabilities
Exchange
downgrade in Pakistan’s credit Jul-Mar FY17 Jul-Mar FY18
outlook by Fitch, which raised 2.5
yields of Pakistani Eurobond in
secondary markets in February. 2.0
Moreover, the political
million US$

uncertainty arising due to 1.5

upcoming general election may
have dampened the prospect of 1.0
further inflows in the portfolio
investment, as investors may 0.5
hold their fund till new
government unfolds its future 0.0
Banks Other sectors Government
policy direction. Data source: State Bank of Pakistan

69
 Third Quarterly Report for FY18

Other investment
Within external borrowings, net Table 5.5: Sources of Official Borrowings
government loans more than (gross disbursements in million US dollars)
Jul-Mar Jul-Mar
doubled in Jul-Mar-FY18 over FY17 FY18
Change
the same period last year Total external loans 4,955 7,529 2,574
(Figure 5.7). This increase is Eurobond/Sukuk 1,000 2,500 1,500
mainly due to relatively higher Comm. banks 1,315 1,722 407
gross borrowings and lower China 1,033 1,215 182
payments during the period. IDB (ST) 351 950 599
ADB 757 586 -171
IDA 158 240 83
The government continued to
IBRD 178 130 -48
borrow from commercial banks
Others 164 187 23
and from China – for BoP
Source: Economic Affairs Division
support as well as for
infrastructure projects. Moreover, to finance the oil import bill, the government
borrowed from the Islamic Development Bank on short-term basis (Table 5.5).

5.4 Exchange rate Table 5.6: Appreciation(+) / Depreciation(-) of Selected

The Pak rupee vis-à-vis US Currencies against US Dollar
Q3 Jul-Mar
dollar depreciated by 9.2 percent
FY17 FY18 FY17 FY18
during Jul-Mar FY18 in two
PKR -0.24 -4.81 -0.01 -9.61
episodes: 4.4 percent in INR 4.72 -2.33 4.09 -0.7
December 2017 and 4.3 percent JPY 4.31 5.73 -8.23 5.34
in March 2018. In contrast, most CNY 0.75 3.38 -3.61 7.9
of the major currencies, like Euro 1 2.34 -4.15 8.08
euro, British pound and GBP 1.22 3.72 -7.77 8.24
Japanese yen, gained against the THB 4.12 4.07 2.23 8.94
US dollar, leading to a sharp MYR 1.37 4.04 -8.99 11.09
decline in the Pak rupee during Data source: State Bank of Pakistan
Jul-Mar FY18 against these currencies (Table 5.6).8

As a result, the PKR’s Nominal Effective Exchange Rate (NEER) depreciated by

11.1 percent in this period. While inflation in Pakistan remained benign, the
depreciation in NEER almost similarly translated into the Real Effective Exchange
Rate (REER), which depreciated by 10.6 percent.

The depreciation of REER indicates that Pakistan’s export competiveness in real

terms has increased in the global market over this period (Figure 5.8). As

8During Jul-Mar FY18, the PKR depreciated against the euro (16.0 percent), Japanese yen (13.9
percent) and the British pound (16.1 percent).

70
 Third Quarterly Report for FY18

inflationary expectations are gaining strength in the western economies, the PKR’s
REER may remain low in the next couple of months if inflationary pressures in
Pakistan remain subdued.

5.5 Trade account9 Figure 5.8: REER Appre ciation(+)/ Depreciation(-) of Major
Despite strengthening export Asian Currencies
growth and decelerating import Jul-Mar FY18 Jul-Mar FY17
growth, Pakistan’s trade deficit Malaysia
reached a historic high of US$ China
9.5 billion in the third quarter Thailand
of FY18.10 A broad-based Vietnam
increase in export quantums India
was overshadowed by an Philippines
upsurge in import quantums, Indonesia
with higher commodity prices Pakistan*
further aggravating the -12 -9 -6 -3 0 3 6
percent
situation. Cumulatively, during *State Bank of Pakistan
Jul-Mar FY18, the trade deficit Data source: Haver Analytics
reached US$ 27.4 billion, up
17.6 percent from the same period last year.

Exports
Exports grew by 13.1 percent YoY in Jul-Mar FY18 and reached US$ 17.1 billion.
Exports in Q3-FY18 alone recorded a growth of 17.1 percent YoY, the highest
growth in Q3 in more than six years, with FX earnings rising to US$ 6.1 billion.
The impetus came from higher shipments of traditional items (e.g., textiles and
rice), as well as non-traditional products, like sugar, seafood, fruits and POL
products (Table 5.7).

Three major factors explain the growth in multiple exporting sectors. First, higher
domestic production of cotton, rice and sugar, and surplus wheat stock, ensured
that the country had exportable surplus available this year.11

9 This section is based on customs data reported by the PBS. The information in this section may not
tally with the SBP data reported in Section 5.1. To understand the difference between these two data
series, please see Annexure on data explanatory notes.
10 The Jul-Mar FY18 trade deficit was also the highest on record. Meanwhile, according to SBP

data, Q3-FY18 marked the second-highest trade deficit in the country’s history; the highest gap (US$
8.2 billion) was recorded in Q4-FY17.
11 Domestic rice production reached a record-high of 7.4 million tons this year, whereas cotton

production also grew 11.9 percent to 11.9 million bales.

71
 Third Quarterly Report for FY18

Second, favorable movements in Pak rupee against the US dollar and the euro,
especially from December 2017 onwards, played a role in pushing up exports of
textiles and rice in both quantum and value terms in the third quarter. In case of
textiles, Pakistani exporters to the EU were able to make most out of the
dual advantage of the PKR depreciation against the euro and the zero-duty access
under GSP Plus.12
Table 5.7: Pakistan's major exports during Jul-Mar
million US dollars
Items FY17 FY18 Abs. change Quantum impact Price impact
Food group 2,679.1 3,403.3 751.2 - -.
Basmati rice 290.9 368.2 77.3 46.2 31.0
Non-basmati 879.8 1,126.5 246.7 147.5 99.3
Seafood 275.8 315.6 39.8 75.2 -35.4
Textile group 9,270.8 9,983.3 712.5 - -
Raw cotton 41.1 55.8 14.7 17.0 -2.3
Cotton yarn 941.4 987.6 46.2 111.3 -65.1
Cotton fabrics 1,614.3 1,630.6 16.3 61.4 -45.1
Knitwear 1,734.4 1,971.8 237.4 29.0 208.5
Bedwear 1,594.0 1,674.0 80.0 70.3 9.7
Towels 591.3 598.8 7.6 54.7 -47.1
Readymade garments 1,704.6 1,918.9 214.3 215.9 -1.6
POL group 138.4 297.7 159.3 - -
POL products 56.3 142.5 86.2 61.6 24.6
Crude oil 49.6 115.9 66.2 46.2 20.0
Other manufactures 2,283.8 2,527.7 243.9 - -
Leather 252.4 196.8 -55.7 65.0 -120.7
Leather manufactures 375.2 354.6 -20.6 - -
Plastic 164.7 162.4 -2.3 25.2 -27.5
Pharma 158.2 153.8 -4.5 3.6 -8.1
Cement 191.5 107.9 -83.6 -16.2 -67.4
Total exports 15,096.5 17,069.0 1,972.5 1,822.0* 27.0*
Data source: Pakistan Bureau of Statistics
*: for 27 items whose price and quantum data is available

Third, a strengthening consumer demand in the US, as reflected by growing share

of consumption in real GDP growth and rising retail sales of clothing and
accessories (Figure 5.9) has boosted the demand for clothing imports in that
country.13 Pakistan, along with other EMs, catered to this higher demand;

12 The PKR was on average 17.3 percent lower against the euro and 5.2 percent against the dollar in
Dec-Mar FY18 over Dec-Mar FY17. Meanwhile, the EU’s GSP Plus status for Pakistan was
renewed for two more years in February 2018.
13 For instance, in the US, QoQ growth in personal consumption expenditures has exceeded overall

real GDP growth in five of the last seven quarters (source: Haver Analytics).

72
 Third Quarterly Report for FY18

however, Pakistani exporters benefited less compared to the other countries

(Table 5.8).

Textile Figure 5.9: Growth in Retail Clothing Sales in the US*

3.0
Pakistan’s textile exports grew
by 7.7 percent YoY to US$ 2.5

percent change YoY

10.0 billion in Jul-Mar FY18. 2.0
Encouragingly, quantums
1.5
played a dominant role in
boosting export earnings. In 1.0
some cases, like readymade 0.5
garments, higher quantums 0.0
even compensated for lower
Q2-FY17
Q1-FY17

Q3-FY17

Q4-FY17

Q1-FY18

Q2-FY18

Q3-FY18
unit values during the period
(Figure 5.10).
*Seasonally adjusted by source
Data source: US Census Bureau
In terms of market, exports to
the EU where Pakistani textiles Table 5.8: Textile and Apparel Imports by the US (Jul-Mar)
enjoy zero-rated status under Growth (%) Share (%)
FY17 FY18 FY17 FY18
the GSP Plus scheme,
Bangladesh -1.9 0.9 3.4 3.3
continued on their rising Cambodia -10.0 11.3 1.6 1.7
trajectory. Similarly, textile China 0.0 7.4 48.6 49.8
exports to the US also India 8.4 5.6 7.8 7.8
Indonesia -2.0 -8.0 2.7 2.4
rebounded, though they were
Vietnam 4.7 5.6 7.3 7.3
pulled down by lower unit Pakistan -5.2 3.3 3.9 3.8
values during the period. US' textile and apparel imports 0.0 4.8 - -
Data source: OTEXA
Non-textile Figure 5.10: Price & Q uantum Impact of Change in
Pakistan’s food exports rose by Te xtile Exports During Jul-Mar FY18
a solid 28.0 percent to US$ 3.4 Quantum impact Price impact Abs. change in value
300
billion in Jul-Mar FY18, amid
healthy contributions from rice, 200
million US$

sugar and wheat. 100

0
Pakistan’s rice exports
rebounded strongly in Jul-Mar -100
Synthetic textiles
Cotton fabrics
Raw cotton
Towels

Bedwear

Garments
Cotton yarn

Hosiery

FY18, rising by 27.7 percent to

US$ 1.5 billion in the period.
Both basmati and non-basmati
sales grew by double digits, as
exporters capitalized on: (i) Data source: Pakistan Bureau of Statistics

73
 Third Quarterly Report for FY18

emerging demand in African countries; and (ii) one-off weather shocks in

Bangladesh and Madagascar, which damaged their paddy crops and necessitated
hefty imports. Availability of an exportable surplus as well as the PKR
depreciation in December also contributed to the uptick in exports.14
Figure 5.11: Tre nd in India and Pakistan's Basmati
In terms of markets, Pakistan’s Exports to Ke y EU Countries
basmati rice exporters partially Belgium Italy Spain UK
captured India’s share in the 20
lucrative EU market, 15
'000 T ons
particularly in the UK and
10
Belgium (Figure 5.11). This
occurred as the bloc’s ban on 5
use of a pesticide on crops 0
came into effect from January 12-m Dec-17 Jan-18 12-m Dec-17 Jan-18
2018 and severely dented average* average*
India’s basmati exports to the India Pakistan
region. Fortunately for *average exports in previous 12 months
Pakistan, higher shipments to Data source: APEDA, Pakistan Bureau of Statistics
the EU completely offset the
decline in quantum exports to the traditional Middle Eastern markets (UAE, Qatar
and Yemen).

Meanwhile, a strong pick-up in shipments of non-basmati rice to African

countries, particularly Madagascar and Senegal, helped completely offset the
impact of lower quantum exports to Asian countries, like Afghanistan, China and
Indonesia.15

Going forward, this year’s one-off positive demand shock from Bangladesh and
Madagascar will no longer be in play, and exports to these countries will likely
normalize.16

Meanwhile, export subsidy announced by the government led to significant export

14 The YoY growth in both quantum and value rice exports was the strongest in the third quarter of
FY18. Quantum rice exports grew 31.1 percent YoY in Q3, after rising by 22.0 percent and 1.9
percent in Q1 and Q2 respectively. Similarly, in value terms, rice exports went up 40.9 percent in
Q3, against 32.0 percent and 12.6 percent in Q1 and Q2.
15 This is based on latest available Jul-Feb FY18 detailed data released by the PBS.
16 Bangladesh’s rice import is projected to decline by 25.0 percent in the 2018 season, on the back of

a rebound in domestic production. Same is the case with Madagascar, which is likely to recover
from a 13-year low rice production in 2017 due to a weather shock (source: Rice Market Monitor
April 2018, FAO). Importantly, Madagascar accounted for over 69.9 percent of the YoY increase in
Pakistan’s quantum non-basmati exports during Jul-Feb FY18.

74
 Third Quarterly Report for FY18

of both sugar and wheat. Specifically, sugar exports gained momentum from
November 2017 onwards, as the government allowed exports of 500,000 MT, at a
subsidy of up to Rs 10,700 per MT.17 Though the export quota was enhanced later
to 2.0 million MT, yet exporters could sell only half the allowed quota (i.e. 1.0
million MT) abroad by end-March 2018. Afghanistan and India emerged as the
largest purchasers of Pakistani sugar this year.

Similarly, wheat exports gained momentum from February 2018 onwards. In

fact, quantum wheat exports are on-track to be the second-highest ever, with over
0.3 million MT already shipped abroad in Jul-Mar FY18. Consecutive bumper
crop production over the past two years have led to a sizable build-up of stocks
with procurement agencies (Chapter 2).18 This led the government to allow
exports, despite having to subsidize them.

Moreover, Pakistan’s seafood exports rose 14.4 percent to US$ 315.6 million in
Jul-Mar FY18. China, Japan and Indonesia were the top buyers of Pakistan’s
seafood items. Major export products under this category included shrimp, crabs
and lobsters.
Figure 5.12: Growth in Pakistan's Imports
Imports 40
Pakistan’s merchandise imports
30
amounted to US$ 44.4 billion
percent change YoY

in Jul-Mar FY18, up 15.8 20

percent from the same period 10
last year. While the growth in
imports has slowed down from 0
last year (Figure 5.12), it was -10
still enough to completely
-20
offset the healthy growth in
Q1-FY16

Q2-FY16
Q3-FY16

Q4-FY16

Q1-FY17

Q2-FY17
Q3-FY17

Q4-FY17

Q1-FY18

Q2-FY18
Q3-FY18

exports. The favorable impact

of lower machinery imports
and subdued food imports were Data source: Pakistan Bureau of Statistics
more than offset by a mainly
price-led surge in energy and metal purchases, and swelling transport imports
(Table 5.9).

17 The fiscal cost of Pakistan’s 1.0 million MT of sugar exports during Jul-Mar FY18 amounts to Rs
10.8 billion (or US$ 97.0 million, at the average kerb rate of Rs110.84 for a US Dollar for the period
Nov-Mar FY18). However, it is not certain if the government has released the entire amount accrued
in sugar export subsidy, yet.
18 In January 2018, the government allowed 2.0 million MT of wheat to be exported, at a subsidy of

up to US$ 159 per MT. The subsidy will stay in place till end-June 2018.

75
 Third Quarterly Report for FY18

Table 5.9: Pakistan's Major Imports during Jul-Mar

million US dollars
Items FY17 FY18 Abs. change
Energy group 7,756.2 10,224.3 2,468.2
POL products 4,848.0 5,459.9 611.9
Crude 1,840.7 2,933.5 1,092.8
LNG 887.2 1,610.6 723.4
Machinery group 8,824.1 8,470.7 -353.5
Power gen 2,370.3 1,922.8 -447.5
Electrical 1,661.6 1,591.2 -70.5
Construction 373.2 268.1 -105.1
Textile 401.1 424.2 23.1
Other machinery 2,531.1 2,678.1 147.0
Transport group 2,287.4 3,248.0 960.6
Cars 770.5 952.5 182.0
Trucks & buses 420.5 468.2 47.6
Aircraft & ships 329.6 762.1 432.5
Food group 4,526.7 4,728.3 201.6
Tea 411.2 451.3 40.1
Palm Oil 1,384.1 1,543.9 159.8
Pulses 722.7 408.0 -314.6
Textile group 2,377.1 2,534.9 157.8
Raw cotton 487.3 573.5 86.2
Synthetic yarn 486.4 487.5 1.1
Agri and chemicals 5,546.7 6,481.7 935.0
Fertilizer 478.5 615.3 136.7
Metals group 3,148.0 3,992.3 844.3
Iron & steel scrap 767.5 1,164.8 397.3
Iron & steel 1,530.6 1,842.8 312.2
Total imports 38,369.2 44,438.6 6,069.4
Data source: Pakistan Bureau of Statistics

Energy imports
Pakistan’s energy imports – mainly comprising POL products, crude oil and LNG
– shot up 31.8 percent to US$ 10.2 billion in Jul-Mar FY18. Importantly, the
price effect was more dominant, accounting for 85.6 percent of the YoY increase
in imports of crude and POL products. This tallies with the rising trend in global
oil prices during the period, which were, on average, 22.0 percent higher in Jul-
Mar FY18 than in the same period last year. Similarly, average benchmark global
LNG prices were 17.6 percent higher this year as compared to Jul-Mar FY17.19

19 This refers to LNG import price (cif) for Japan (source: Haver Analytics).

76
 Third Quarterly Report for FY18

With regards to POL products, their quantum imports dropped 9.8 percent YoY
during Jul-Mar FY18; however, this was more than offset by an increase in their
unit prices. As a result, import values rose 12.6 percent to US$ 5.5 billion.

Meanwhile, this quantum Table 5.10: Pakistan's Quantum Energy Imports (million MT)
decline was almost entirely due Jul-Mar Q3
to lesser purchases of furnace Growth Growth
FY17 FY18 FY17 FY18
oil (FO) in all three quarters of (%) (%)
the year (Table 5.10). A shift HSD 2.7 3.0 8.8 0.9 0.9 -2.8
Furnace oil 5.0 3.2 -36.0 1.3 0.2 -82.5
in power generation away from
Crude oil 6.3 7.8 24.1 2.0 2.6 31.7
FO towards coal and LNG, and Petrol 3.7 3.9 4.2 1.1 1.2 2.3
an increase in domestic Other 0.1 0.2 110.7 0.0 0.1 142.2
production of the fuel, have Total 17.8 18.0 1.2 5.4 5.0 -7.9
lowered the import demand for LNG* 2.1 3.6 71.4 - - -
the fuel this year.20 Furnace oil Data source: Oil Companies Advisory Council *PBS, Data for
sales to the power sector also Jul-Feb
dropped 26.5 percent this year.21
Figure 5.13: Trend in Petrol Prices and Imports
Among other products, Imports as % of sales Petrol price (rhs)
quantum imports of petrol and 80 90
high speed diesel (HSD) 85
continued to rise, reflecting 76
80

Rs/litre
strong demand from the
percent

72
transport sector. That said, a 75
gradual slowdown has been 68
70
noted in case of petrol imports. 64 65
Rise in domestic production as
well as the pass-through of 60 60
Q1-FY17

Q2-FY17

Q3-FY17

Q4-FY17

Q1-FY18

Q2-FY18

Q3-FY18

higher international oil prices

to domestic ones, have likely
suppressed demand for petrol Data source: Oil Companies Advisory Council
imports (Figure 5.13).22

Meanwhile, imports of LNG and coal surged, both in quantum and value terms, in

20 In fact, FO’s share in total power generation during Jul-Mar FY18 slipped to 20.7 percent, from
30.4 percent last year (source: National Electric Power Regulatory Authority).
21 Source: Oil Companies Advisory Council.
22 During Jul-Mar FY18, the government raised petrol prices by a cumulative Rs 15.27 per litre (21.0

percent). In the same period, domestic petrol production had risen 18.6 percent on YoY basis.

77
 Third Quarterly Report for FY18

line with mainly higher demand from the power sector (Table 5.11).23 LNG
imports have risen by 81.5 percent and reached US$ 1.6 billion by end-Mar FY18.
In tandem, quantum of LNG imports had risen by a sizable 65.9 percent by end-
February 2018.
Table 5.11: Power Generation by Source (in GWh)
Jul-Mar Abs
With regards to coal, its FY17
Jul-Mar FY18
change
quantum imports more than Hydro 22,944 20,904 -2,039
doubled during Jul-Jan FY18, Gas 22,087 28,804 6,717
mainly reflecting demand from Furnace oil 23,011 17,720 -5,292
two major power projects that Coal 58.64 7,393 7,335
came online this year, as well as Nuclear 4,284 6,572 2,287
from cement manufacturing Others 3,349 4,158 810
Total 75,734 85,552 9,818
firms that use it as a raw
Data source: National Electric Power Regulatory Authority
material.24 At the same time, a
13.3 percent increase in average international coal prices during this period further
pushed up the value of coal imports.25

Non-energy imports
Machinery imports
Machinery imports, the largest group of non-energy imports, declined 4.0 percent
to US$ 8.5 billion during Jul-Mar FY18. This is in sharp contrast to last year,
when these purchases had surged 42.0 percent and played a major role in inflating
the country’s overall imports.

Further analysis of sub-categories shows that the imports required for CPEC
projects – i.e. power generation, electrical, and construction machinery – have all
declined this year, as most of the early harvest CPEC power projects are nearing
completion.

On the other hand, mobile phone imports rose 15.1 percent to US$ 603.4 million
in the nine-month period, which pushed up overall telecom sector imports to US$
1.1 billion. Interestingly, while the overall number of mobile phones imported has
gone down, their import values have risen – indicating the changing public’s

23 According to the Economic Survey of Pakistan 2017-18, 63 percent of the LNG imported during
Jul-Feb FY18 was utilized by the power sector.
24 The two projects are Sahiwal and Port Qasim, which were inaugurated in July and November 2017

respectively. Meanwhile, domestic cement production rose 12.1 percent in the comparable period
(i.e. Jul-Jan FY18), leading to higher demand for coal.
25 During Jul-Feb FY18, the country imported 7.7 million MT of coal, at a cost of US$ 772.5

million.

78
 Third Quarterly Report for FY18

preference towards the expensive, high feature phones.26

Transport
The country’s transport imports Table 5.12: Breakdown of Transport Imports
surged 42.2 percent and reached Abs.
million US dollars FY17 FY18
change
US$ 3.3 billion in Jul-Mar Cars 770.5 952.5 182.0
FY18. Aircraft parts and CBU 294.9 360.5 65.6
engines imports contributed the CKD 475.6 592.0 116.4
most, in nominal terms, to the Buses & trucks 420.5 468.2 47.7
YoY increase in transport CBU 236.7 186.1 -50.6
imports during the period. CKD 183.8 282.1 98.3
Besides, car imports (both CBU Motorcycles 68.3 83.3 15.0
Parts 351.0 436.8 85.8
and CKD) continued on their
Others 201.2 212.6 11.4
upward trajectory, growing 23.6
Aircrafts, ships and boats 329.6 762.2 432.5
percent and almost touching Other transport equipment 146.3 332.6 186.3
US$ 1.0 billion mark (Table Transport group 2,287.5 3,248.0 960.6
5.12). In terms of contribution Data source: Pakistan Bureau of Statistics
to growth, CKD imports
dominated, as domestic assemblers continued to operate at elevated capacity levels
(Chapter 2).27

Meanwhile, the breakdown of CBU car imports showed that the highest number of
cars imported belonged to the 1,000-1,500 cc category, whereas in terms of YoY
increase, 800-1,000cc category cars were the most prominent. Due to their
reportedly better mileage and navigation features, these vehicles are being
increasingly used not only by car hailing service providers, but also by middle and
high-income groups.

Food
Overall food group imports rose 4.5 percent to US$ 4.7 billion in Jul-Mar FY18.
The increase would have been much higher had pulses’ imports maintained their
last year’s growth momentum. As it turned out, these imports dropped 43.5
percent, almost entirely due to lower quantums. While domestic pulses
production in FY18 was about the same as last year, ample stocks available due to

26 During Jul-Feb FY18, the number of cell phones imported in the country stood at 6.9 million,
down 29.4 percent from the same period last year. Yet, the import values amounted to around US$
527.1 million this year, up 14.7 percent from Jul-Feb FY17 (source: Pakistan Bureau of Statistics).
27 Domestic car production was 15.9 percent higher in Jul-Mar FY18 as compared to the same period

last year. This corresponded with a 15.6 percent rise in car sales during the period (source: Pakistan
Automobile Manufacturers Association).

79
 Third Quarterly Report for FY18

hefty imports in FY17, led to reduced demand for its imports.28

On the other hand, FX savings from lower pulses imports were partially offset by
higher edible oil imports. Within this category, palm oil imports rose 11.5 percent
to US$ 1.5 billion, while those of soybean oil rose 52.6 percent to US$ 110.6
million. While soybean oil still has a minor share in the country’s edible oil
imports, interestingly, its quantum imports have more than doubled this year.
That said, a drop in both quantum and value terms was noted for both palm and
soybean oil in the third quarter.

Iron and steel

Pakistan’s iron and steel imports surged by 30.9 percent to US$ 3.0 billion in Jul-
Mar FY18, reflecting continued momentum in domestic construction activities.
Within this category, while finished products were dominant in terms of value
(US$ 1.8 billion), it was scrap imports that posted the higher growth (up 51.8
percent to US$ 1.2 billion) in the period. The higher scrap imports, in turn, led to
a healthy growth in local production: billets and sheets production rose 31.7
percent and 23.4 percent YoY respectively in Jul-Mar FY18.29 The quantum
imports of both scrap and finished products was dominant during the period, as the
price impact was slightly affected by lower international prices in the second and
third quarters.30

28 Cumulative domestic pulses production (of Gram, Mung, Mash and Masoor) was 473,000 tons in
FY18, as compared to 474,000 tons last year (source: Economic Survey of Pakistan 2017-18). In
fact, average domestic pulses prices were down 17.9 percent in Jul-Mar FY18 over Jul-Mar FY17.
29 The presence of a favorable regulatory environment for the domestic industry (with heavy duties

imposed on imported finished steel products), also contributed to the sector’s better performance this
year. For details on the regulatory duties in place on steel imports, please see Section 5.5 in SBP’s
First Quarterly Report on the State of Pakistan’s Economy for FY18.
30 Average international iron ore prices were 10.9 percent lower in Oct-Mar FY18 as compared to

the same period last year (source: Bloomberg).

80
Special Section 1: Cement Industry-Current Dynamics and Future Prospects
Sustained expansion in economic activity and investment in various infrastructure
projects under PSDP and CPEC, coupled with increased demand from private
housing schemes have bolstered construction sector during last few years. This has
had a spillover impact on the allied segments of cement and steel as well. Rising
demand and healthy margins has also induced cement manufacturers to expand
their production capacities aggressively, from 49.4 million tons to 72.8 million
tons in the next few years. This capacity may further expand if other small firms
also joined the campaign of maintaining market share. In this backdrop, the
section analyzes the overall potential of the industry to sustain its growing
momentum in the medium to long run.

Overview of the cement industry

The cement industry is important for the economy. Besides making a direct
contribution of 7.5 percent to large-scale manufacturing, the industry influences
growth in the allied segments (e.g., steel; chemicals, wood etc). At present, there
are 24 manufacturing units operating in the country with a total installed annual
capacity of 49.4 million tons.1 The industry operates in two separate zones -
North and South - with Northern Zone representing around 80 percent of the total
production capacity and sales.2
The manufacturers in the South Figure S1.1: Production Capacity
Zone have more room for 80
3rd Wave

revenue diversification as they

70
can tap a number of export 2nd Wave
60
markets (via sea).3 The export
million tons

50
potential for manufacturers in 1st Wave
40
the Northern Zone, however, is
30
limited to Afghanistan and
4 20
India only.
10
0
Large capacity expansion is FY95 FY00 FY05 FY10 FY15 FY21E
underway E: Expected
The cement industry is Data Source: APCMA and Companies Financials

1
Source: All Pakistan Cement manufacturers Association (APCMA).
2
Punjab, KPK, AJK, GB are part of North Zone (with 19 players) while South Zone (with 5 players)
includes Sindh and Balochistan.
3
However, the key export markets for South Zone players (Nigeria, Tanzania, Mozambique, Iraq,
Ethiopia and DR Congo) are undergoing local capacity expansion, their reliance on imports may
reduce thereby affecting dispatches, going forward.
4
Even exports to Afghanistan are under pressure due to worsening relations with the country, and
slowdown in construction activities along with influx of cheaper Iranian cement.
The State of Pakistan’s Economy

currently undergoing a major

Table S1:Expansionary plans
transformation, as a number of
players are planning capacity Expansion US$
expansions (Figure S1.1 & Company mln tons mln Completion
Table 1). Specifically, almost Lucky Cement Ltd 2.3 200 FY18-FY21
half of the players in the Attock Cement
Pakistan Ltd 1.1 120 FY18-FY19
industry have so far announced Cherat Cement
capacity expansion (more than Company Ltd 4.6 315 FY17-FY19
D G Khan Cement
3.0 million tons capacity has Company Ltd 2.6 200 FY18-FY21
already been added during Fecto Cement Ltd 1.0 100 FY18-FY20
FY18). In cumulative terms, Gharibwal Cement Ltd 2.4 200 FY18-FY21
this would add 23.4 million tons Bestway Cement
towards the production facility – Pakistan 1.7 190 FY19-FY20
Pioneer Cement Ltd 2.3 225 FY19
a staggering increase of about
Power Cement Ltd
50 percent in next few years – to Maple Leaf Cement
2.1 235 FY18-FY19

reach around 72.8 million tons. Ltd 2.3 225 FY19

The expected expansion may be Kohat Cement
Company Ltd 1.0 110 FY19-FY21
even higher if other firms (with
Total 23.4 2120
8.1 million tons in pipeline) also
Data source: Companies’ Financials/PSX notices
join this campaign.

The factors behind this extraordinary expansionary drive in cement industry

mainly include:
a) Continued activity under CPEC related projects: The prospect of growing
cement demand are stemming from CPEC related project which include
construction of an integrated road infrastructure; modernization of railways;
and development of Gwadar city, seaport and airport. Moreover, the
development of special economic zones across the country may also sustain
demand for cement going forward.
b) Increased focus on development spending by the government: The demand
for cement is also likely to remain high as government has a planned
numerous mega projects. In this regard, the worth noting mega water and
power sector projects include: Dasu, Diamer Bhasha5 and Bunji multipurpose
projects; and major rehabilitation and expansion of Mangla, Tarbela and
Warsak power stations. In addition, large highway and motorway projects

5
The construction of a project of the size of Diamer Bhasha is estimated to create an additional
cement demand of about 10 million tons. Likewise, ten nuclear power projects are planned for
construction in the country by 2030, while work on two of these projects in Karachi is in progress.

82
 Third Quarterly Report for FY18

(which are outside the ambit of CPEC) have been initiated by the
government;6
c) Huge construction activities due to housing deficit: 7,8 The demand pressures
may continue going Figure S1.2: Cement Per Capita Consumption (2017)
forward due to persistent 490
housing shortages 420
(bridging this gap would 350
require huge quantity of
Kgs
280
cement and related 210
construction materials). 140
The room for growth is 70
evident from the fact that 0
per capita cement

Afghanistan
Japan

Pakistan
Sri Lanka
India
Thiland

Indonisia
consumption in Pakistan is
the lowest amongst
regional economies Data source: All Pakistan Cement Manufacturers Association,
(Figure S1.2).9 Global Cement Magazine

Figure S1.3: Market share to remain unchanged

Major players’ drive to Before-Expansion After-Expansion
maintain market share intact: 21
Manufacturers also strive to 18
maintain their market share, 15
which drives up their 12
production capacity. A 9
historical review of the 6
industry suggests that the firms 3
strategize their capacity 0
ACPL
Lucky

CHCC

DGKC

KOHC
Gharibwal

MLCF
PIOC

POWER

Bestway
Fecto

expansions to uphold position

in the market. In some cases,
established and strong Data source: Companies Financials
manufactures even acquire

6
The government has allocated Rs 2113 billion for development expenditure in FY18, which is more
than 26 percent higher than last year. This includes Rs 320 billion for NHA.
7
The rural-urban mix for the country has shifted from 65:35 in 2005 to 60:40 in 2016 (Economic
Survey 2015-16).
8
For example, the development work on Bahria Town, DHA City, Fazaia, and ASF Housing
Schemes and other private housing projects across the country has been in progress.
9
According to estimates, the housing shortage in the country stood at 10 million units in 2017
(source: The World Bank - Pakistan Housing Finance Project- Report No: 114473, March 2017).
Bridging this gap would require huge quantity of cement and related construction materials.

83
The State of Pakistan’s Economy

smaller firms.10 As a result, the overall market share of large firms undergoes
only a minor change following an expansionary phase (Figure S1.3).

Industry’s high profit margin: Figure S1.4: Gross profit to sales ratio (last 5 year average)
Healthy profit margin is 40
35
another important factor that 30
helps the industry to undergo 25
capacity expansion (Figure 20
15
S1.4). Specifically, the gross 10 percent
profit to sales ratio has 5
averaged around 33 percent for 0

Chem. and Pharma

Mineral products
Food products

Cement
Sugar

Autos & Autoparts

PaperProducts
Energy Sector
Textile

Overall
the last five years – more than
double the manufacturing
sector’s overall average.11 The
industry benefited from a
slump in global market for raw
Data source: FSA 2010-2015, SBP and Companies financials
material (e.g., POL and coal)
and historic low domestic interest rates. The margins for the industry strengthened
when, instead of passing on the benefit to consumers, firms increased the local
retail prices.

Industry’s diversification plans: Further gains to industry were achieved due to

the economies of scale, improvement in cost efficiency (Box S1.1), and a decline
in the debt-to-equity ratio.12 This has led to a number of firms diversifying their
operations towards other sectors of the economy as well.

Box S1.1 Cost efficiency in Cement Industry with Alternative Energy

Several factors are contributing to lower overall cost efficiencies in the industry. Size of plant and
technology are of great significance, which determine economies of scale, energy efficiency 13 and
simple operation and maintenance, thus keeping the overall cost structure competitive. The sector
has proactively pursued captive power generation to meet their energy needs.

10
It is expected that large manufacturers that have not yet announced their capacity expansion plans
would acquire small firms (Thatta Cement, Dandot Cement, Dewan cement etc). In fact, Dewan
Cement is already up for sale with three local firms (Lucky cement, Kohat cement, and Bestway
cement) and one Chinese player competing to acquire the plant.
11
The interest shown by one of the foreign firms in local manufacturing indicates that the prevailing
margins in the industry are quite attractive.
12
The debt-to-equity ratio fell from 143 percent in 2010 to less than 60 percent in 2017.
13
Investment in Refuse Derived Fuel (RDF) provides the solution for affordable and efficient fuel
alternatives, which is modern technology using the municipal waste to produce energy. Fauji Cement
has successfully adopted this technology, blending RDF with coal, and others are currently
implementing similar projects, providing economical fuel besides other advantages.

84
 Third Quarterly Report for FY18

Particularly, they have installed waste heat recovery (WHR) units that utilize existing plants heat to
generate power. While coal prices in
the global market have been falling in Table S1.1:Cement industry energy projects
Company WHR Coal Power Plant
tandem with oil prices since December
Fauji 12-MW -
2014, these together have brought down Lucky 10-MW 660-MW
energy costs. ACPL 6-MW 40-MW
CHCC 6-MW -
DGKC 12-MW 30-MW
On the efficiency and cost fronts, since PIOC 12-MW -
most firms have installed Waste Heat MLCF 6-MW 40-MW
Recovery units that help them reducing Dewan 6-MW -
dependence on fuels, major changes in Bestway 27-MW -
KOHC 15-MW -
energy costs and a recovery in oil and Data source: Companies Financials/ PSX notices
coal prices will not affect them hard.
Therefore, the margins of industry are expected to persevere at the current level (Table S1.1).

Financing requirements Table S2: Investment and Financing

Industry needs FX to finance Total estimated projects cost (billion USD)1 2.2
machinery imports: According in billion Rs (@ Rs115.6 per US$) 254
to information collected from Machinery and equipment (billion USD)2 1.5
firms and PSX notices, the in billion Rs (@ Rs115.6 per US$) 178
additional capacity would Financing Requirements (billion Rs)
result in the imports of Equity component
machinery of around US$ 1.5 @30 percent equity 76
billion (near Rs 178 billion) @40 percent equity 102
over next few years. In the @50 percent equity 127
cement industry, cost of @60 percent equity 153
machinery imports comes Borrowing
around 70 percent of total cost @70 percent bank finance 178
of the unit/project. This @60 percent bank finance 153
means, the overall estimated @50 percent bank finance 127
cost of expansion would be @40 percent bank finance 102
1
around Rs 254 billion (Table Expansion plans announced so far
2
2). Assuming machinery is 70 percent of the project cost
Data source: Companies Financials/ PSX notices
Despite healthy cash position, industry’s borrowing needs will increase: Given
the healthy cash position of the leading players who have undertaken capacity
expansions, the equity component has dominated the financing requirements14.
However, if smaller players also join the campaign aggressively, in such case the
financing pattern would change in favor of bank financing.15 While the prevailing

14
Cement Sector has availed Rs 34 billion for fixed investment purposes during July 2016 till March
2018.
15
Even if 30 percent is assumed as equity component, this leaves significant financing burden on
banking sources

85
The State of Pakistan’s Economy

low interest rates would encourage firms to borrow more from the banking
system, the commercial banks would also be willing to take
exposure on the industry due to Table S3 : Demand Needed to Absorb Production Capacity
a decline in infected loan ratio, million tons
and healthy balance sheets of Growth in
cement manufacturing firms.16 Total sales Exports Domestic sales Domestic Sales
(percent)
Actual
Future prospects FY13 33.4 8.4 25.1
Current expansion phase is FY14 34.2 8.1 26.1 4.2
FY15 35.4 7.2 28.2 8.0
skewed towards domestic FY16 38.9 5.9 33.0 17.0
market: In the current scenario, FY17 40.3 4.6 35.7 8.2
the absorption of announced FY18E 46.5 4.4 42.1 18.0
capacities would require the @11.1 percent growth in total sales (last five year average growth)
FY19 51.2 4.4 46.8 11.1
industry to maintain its last five FY20 56.4 4.4 52.0 11.1
years’ CAGR in cement sales FY21 62.2 4.4 57.8 11.1
over the next 3-4 years (Table Assumptions
3). Moreover, domestic sales of 1. The absorption of this production would require continuity
of last five year growth rate (11.1 percent) in domestic sales; it
cement indeed recorded a will help the industry to operate at 86 percent capacity utilization;
strong average growth of 12.6 2. Despite the decline trending, we assumed stagnant exports
percent during FY16-FY17. for our analysis;
3. The burden for absorbing higher cement production would
This trend also continued in therefore fall on domestic sales.
FY18, where Jul-Apr growth Data source: APCMA
stands at 17.5 percent on the back of strong domestic demand.

High PSDP and CPEC related spending still remain crucial to keep cement
demand high: Even normalized local dispatches growth of 7-9 percent in next 3-4
years would be sufficient to keep industry’s capacity utilization above 70 percent
post expansions. Factors like; (i) growing income levels; (ii) real estate boom and
housing backlog of 10 million units;17 (iii) demand emanating from CPEC
projects; (iv) higher PSDP spending; and (v) increased focus of banking sector
towards housing finance would be vital in keeping domestic demand at this level.

Capacity expansion is also beneficial for economies of scale and export of

cement: On the export front, with influx of cheap Iranian cement in Afghanistan
and imposition of anti-dumping duties on Pakistani cements in South Africa (the
two main export destinations), exports may remain a challenge. For a sound
market share in export market, the cement manufacturers will have to compete
16
The infected loan ratio fell from 18.5 percent in December 2010 to 5.9 percent in December 2017.
17
Apart from the needs, people in Pakistan rank real estate (plots, houses and buildings) investment
amongst the safest avenues, resulting in improved demand (source: The World Bank - Pakistan
Housing Finance Project- Report No: 114473, March 2017).

86
 Third Quarterly Report for FY18

with Iranian and Chinese cement manufacturers through improvement in cost

efficiencies. With current expansion plans, the industry might be able to exploit
economies of scale and gain competitive advantage. While there is a need to
explore new markets to utilize their excess capacities post expansion, efforts in
this regard could also increase export earnings in coming years.

87
Special Section 2: Synthetic Textiles is Key to Sustaining Export Growth
Momentum
Pakistan’s textiles exports have grown by 10.8 percent in the first 9 months of the
ongoing fiscal year. Keeping in view a consistently weak performance by the sector
over the past 3 years and its repercussions on the country’s overall balance of
payments, the revival in exports is indeed comforting. However, this momentum
needs to be sustained. In this context, while the extension in GSP plus status is
encouraging, the textiles sector must undergo a paradigm shift and diversify the range
of products it offer over the medium to long term. Most importantly, Pakistani
manufacturers should penetrate aggressively in the global synthetics products market
which has long surpassed the cotton market. Though starting late, Pakistan’s
exporters can still sail through if allowed to access essential raw materials at
competitive prices. This section explains in detail the dynamics of global synthetic
textiles market and why local manufacturers have had been laggard so far.

Background
The share of cotton in global fiber consumption has fallen from nearly 70 percent
back in 1960, to only 27 percent by end 2016.1 Its place has now been captured by
synthetic or man-made fibers (MMF) – especially polyester. Synthetic polymers are
popular with respect to travel and sportswear, mostly due to their superior resistance
to wrinkling and moisture compared to conventional cotton counterparts. Despite its
growing appeal, however, Pakistan’s textile industry is advancing into synthetics at a
snail’s pace, at best: the fiber mix still stands at 80:20 in our garment exports with
only 25 percent of Pakistan’s spinning machines currently using MMF to produce
blended yarn.2 Moreover, the country’s share in MMF apparel market is almost
negligible (only 0.4 percent in the US market).

More than 80 percent of the world’s production of polyester staple fiber (PSF) takes
place in China, India and Southeast Asian countries. Therefore, it is not surprising that
these countries are also the dominant exporters of synthetic textiles.3 The production
1 Source: International Cotton Advisory Committee
2 Kamal and Islam (2010) note “The bulk of Pakistan’s garment industry remains cotton based, with
roughly 72% of the total textile related investments and 82% of the textile industrial units based in cotton
spinning, weaving and processing”. Complete source: Munir, Kamal A., Dr., and Faheem Ul Islam, Dr.
Accelerating Economic Transformation Program: Profile of Textile & Clothing Industry of Pakistan.
Rep. no. TA-7137(PAK). N.p.: Asian Development Bank, 2010. Print.
3 For instance, they have a combined share of 68.2 percent in 2016 in the US’ import of man-made textile

items.
 Third Quarterly Report for FY18

of synthetic polymers (such as polyethylene terephthalate, or PET) is a capital and

technology intensive task, and one that requires availability of a fully integrated
chemical industry.4 However, this does not suggest that only countries with a
complete indigenous value-chain can export synthetic textiles; Vietnam, Bangladesh,
and Cambodia import man-made fibers, yarns and fabric from other countries to
produce and export synthetic garments. In fact, Vietnam is the second biggest
exporter of synthetic textile to the US (with China being the biggest), followed by
Bangladesh and Cambodia at 7th and 11th positions, respectively.

This implies that with adequate availability of raw materials in the country, Pakistan
too could have excelled in global synthetic textiles market.5 As described below
however, domestic policies and market conditions have hindered the country’s foray
into this emerging market.

Anti-export bias
Local manufacturers in chemical industry have historically enjoyed high protection
rates – especially with respect to products such as purified terephthalic acid (PTA)
and PSF. In this regard, the imposition of import tariff of 25 percent back in 1998-99
was the most prominent; this was the year when the share of man-made fibers in
domestic fiber consumption peaked in the country (at 22 percent).6 More importantly,
this was also the year around which the MMF-based textiles began to dominate the
global textile industry. Nonetheless, the high tariff rate remained in place for the next
5 years, during which the use of synthetic fiber consumption in Pakistan stagnated. In
2003 however, tariffs were reduced to 20 percent to encourage the use of synthetic
fibers and spur competition in the industry. With the implementation of 2005-06
budget, the tariffs were eventually reduced to only 6.5 percent (Figure S2.1).

4 In particular, hydrocarbons (like naphtha and ethylene) obtained from petroleum refining process are
broken down to collect valuable compounds (olefins) which are eventually processed to form various
polymers. Although Pakistan has developed a petroleum refining industry in the country, it does not have
facilities to break down these hydrocarbons.
5 As there are only 3 producers of polyester fiber and filaments in the Pakistan, the country heavily

depends upon imported materials to meet its demand.

6 Cotton-Textile-Apparel Sectors of Pakistan: Situations and Challenges Faced: By Caesar B. Cororaton,

Abdul Salam, Zafar Altaf, David Orden and Reno Dewina, Nicholas Minot, Hina Nazli.

90
The State of Pakistan’s Economy

Figure S2.1: Explaining the Tre nds in Import of Man-made Staple Fiber in Pakistan (Code 55)
T he GSP+ Ani-dumping
1,000
status in the duties imposed
900 Record-high on imports
Ani-dumping duties global prices of EU improved from China for
800 imposed on imports cotton pushed up competitievene
from Indonesia, Korea ss in textiles 5 years
the demand for
700 and T hailand for 5 PSF
million US$

600 years Ani-dumping

Import tariff duties imposed
500 reduced from on imports
400 20% to 6.5% from China for
Import tariff 5 years
300 reduced from
25% to 20%
200
100
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Data source: Pakistan Bureau of Statistics; National Tariff Commission; and Ministry of Commerce

However, the tariff liberalization was implemented in a non-uniform manner. This is

evident from the higher level of protection enjoyed by finished products compared to
raw materials such as tow and fibers. This escalating tariff structure benefits domestic
producers, but at the expense of weakened backward linkages and stymied
competition and diversification in
the domestic market. Although Figure S2.2: Import of Man-made Fiber Value-Chain
Across Countries (2016)
Pakistan gives some tariff
Tow Fibers Yarn Fabrics
concessions to SAFTA countries,
these are not very effective: India Pakistan
is the only country within SAFTA
that produces man-made fibers, and
Bangladesh
trade with India is quite restricted.7
Similarly, concessional tariffs
under Pakistan-China Free Trade Vietnam
Agreement are also not applicable
on most synthetic products (these Cambodia
items are included in the ‘no
concession’ list for the agreement). 0% 20% 40% 60% 80% 100%
This has skewed Pakistan’s imports Data source: International Trade Center

7In fact, polyester fibers and yarns are among 1,209 items included in the negative list for trade with the
eastern neighbor.

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 Third Quarterly Report for FY18

predominantly towards fibers, whereas regional economies such as Vietnam and

Cambodia import the entire value chain of synthetic textiles (Figure S2.2). In
addition to customs tariffs, the import of synthetic textiles inputs is also disrupted by
the imposition of anti-dumping duties on major suppliers.

Just a rough comparison of tariff structure on synthetic raw-material with other

countries indicates that while major players in value-added exports are encouraging
cheap influx of the raw material, Pakistan is still protecting its domestic value chain
(Table S2.1). Pakistan is only importing fibers and that too at a very high tariff rates
compared to other countries. As noted by Hamid and Nabi (2017), “Global trends
demand that Pakistani firms move to a 50:50 mix to stay competitive. High duties on
the import of yarn or fabric made from artificial fibers also prevent firms from
diversifying their product range or reaching out to new high-end clients”.

Table S2.1: Tariff Structure of Various Products of Man-made Fibers Across Countries
Preferential Preferential Preferential Preferential
Pakistan treatment Bangladeshtreatment Vietnam treatment Cambodiatreatment
Synthetic filament yarn (other than
sewing thread), not put up for retail 0% for
sale, including synthetic Malaysia
monofilament of less than 67 and Sri
decitex : Textured yarn : Of nylon Lanka;
or other polyamides, measuring per 5% for
single yarn more than 50 tex China and
(540232) 11% SAFTA 10% 3% for SAFTA 0% None 0% None
0% for Korea,
Synthetic filament yarn (other than AANZFTA,
sewing thread), not put up for retail ASEAN, China,
sale, including synthetic Eurasian
monofilament of less than 67 3% MFN; Economic
decitex : Textured yarn : Of 5% for 4.5 % non- Union; and 1%
polyesters (540233) 11% SAFTA 25% None MFN for Japan 0% None
0% for
ASEAN, China,
AANZFTA,
Synthetic staple fibers, not carded, Korea, Eurasian
combed or otherwise processed for 2% MFN; Economic
spinning : Of polyesters : Of 3% non- Union; and 1%
polyesters not (550320) 7% 5% SAFTA 5% 0% SAFTA MFN for Japan 0% None
Synthetic staple fibers, not carded,
combed or otherwise processed for
spinning : Acrylic or modacrylic
(550330) 0% 5% SAFTA 5% 0% SAFTA 0% None 0% None
Artificial staple fibers, not carded,
combed or otherwise processed for
spinning : Of viscose rayon
(550410) 0% None 5% 0% SAFTA 0% None 0% None

92
The State of Pakistan’s Economy

Artificial staple fibers, not carded,

combed or otherwise processed for 0% Sri
spinning : Other (550490) 0% Lanka 5% 0% SAFTA 0% None 0% None
0% for
ASEAN, China,
AANZFTA,
Korea, Eurasian
Yarn (other than sewing thread) of Economic
synthetic staple fibers, not put up 5% MFN; Union; 2% for
for retail sale : Containing 85 % or 7.5% non- India; and 1%
more by weight (550921) 11% 5% SAFTA 10% None MFN for Japan 0% None
0% for
ASEAN, China,
Korea, Eurasian 0% for
Economic ASEAN
Woven fabrics of artificial staple 5% Union; 8% for and China;
fibers : Containing 85 % or more by SAFTA; 12% MFN; India and Chile; 5% for
weight of artificial staple fibers : 0% Sri 18% non- and 5% for India and
Dyed (551612) 16% Lanka 25% None MFN AANZFTA 7% Korea

Source: International Trade Centre

Despite all the protection available to the domestic polyester industry, it becomes
pertinent to ask why the domestic industry is not flourishing enough. The escalating
tariff structure (and resulting high costs of production) is leading to a rise in informal
trade of value-added polyester products from other countries. Major industrial players
specifically highlight the role of Afghan Transit Trade route in facilitating cheaper
influx of synthetic products in the country.
Table S2.2: Import of Synthetic Fibers in Jul-Jan Exempted
Recent measures and policy from Customs Duty via SRO/39(1)/2017
recommendations (000 US$)
In January 2017, the government %
(upon recommendation from the FY17 FY18 change
Ministry of Textiles) exempted 55031100 Of aramids 3,153 8,485 169.1
customs duty on the import of a 55031900 Other 646 940 45.5
number of synthetic fibers (acrylic, 55033000 Acrylic or modacrylic 6,760 15,368 127.4
viscose and nylon), which are not 55039000 Synthetic staple not carded 713 762 6.9
produced locally. As shown in 55041000 Of viscose rayon 129,698 160,030 23.4
Table S2.2, the import of these 55049000 Other fiber not carded 27,402 39,955 45.8
items posted a sharp increase 55063000 Acrylic fiber carded 835 3,214 284.8
during Jul-Mar FY18. Data source: Pakistan Bureau of Statistics

However, for other (and probably more commonly used) fibers like polyester, the
government has kept the customs duty at 7 percent as part of protectionist policy in
favor of local manufacturers. To give some relief to garment exporters, the

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 Third Quarterly Report for FY18

government allowed duty drawback on the use of imported as well as domestically

produced synthetic fiber on deemed import basis. This mechanism has now been fully
implemented.

Although this measure will be helpful in increasing the use of these fibers in garment
manufacturing, the drawback settlement mechanism needs to be streamlined in order
to smoothen firms’ cash flows. Importantly, it is not just man-made fibers, but for all
other inputs also (where exporters are eligible for refunds), the cost and delays are
significant irritants. According to one estimate, these constitute minimum 10 percent
of the value of the refund claim.8

Therefore, while the duty exemptions granted on the import of various fibers are
yielding positive results, there is a room to broaden their scope. The government can
reconsider protectionist policies for polyester fiber and filaments, if a meaningful
change in the fiber mix is to be achieved in the country.9 Finally, local industry would
benefit and tariff-based policy measures to enhance the use of man-made fibers in
domestic textile industry will become effective, only if the influx of smuggled goods
is contained.

8 “Implementing Policies for Competitive Garments Manufacturing” Final Report, International Growth
Centre, January 2017, F-37211-PAK-1.
9 Presently, exporters are paying 11 percent customs duty, as well as 5 percent regulatory duty, on the

import of filament yarn.

94
Annexure: Data Explanatory Notes

1) GDP: SBP uses the GDP target for the ongoing year, as given in the Annual
Plan by the Planning Commission, for calculating the ratios of different
variables with GDP, e.g., fiscal deficit, public debt, current account balance,
trade balance, etc. SBP does not use its own projections of GDP to calculate
these ratios in order to ensure consistency, as these projections may vary
across different quarters of the year, with changing economic conditions.
Moreover, different analysts may have their own projections; if everyone uses
a unique projected GDP as the denominator, the debate on economic issues
would become very confusing. Hence, the use of a common number helps in
meaningful debate on economic issues, and the number given by the Planning
Commission better serves this purpose.

2) Inflation: There are three numbers that are usually used for measuring
inflation: (i) period average inflation; (ii) YoY or yearly inflation; and (iii)
MoM or monthly inflation. Period average inflation refers to the percent
change of the average CPI from July to a given month of the year over the
corresponding period last year. YoY inflation is percent change in the CPI of a
given month over the same month last year; and monthly inflation is percent
change of CPI of a given month over the previous month. The formulae for
these definitions of inflation are given below:

 t 1 
  I t i 
Period average inflation (πHt) = t 1  i 0
 1  100
 
  I t 12i 
 i 0 
 I 
YoY inflation (πYoYt) =  t  1  100
 I t 12 
 I 
Monthly inflation (πMoMt) =  t  1  100
 I t 1 

Where It is consumer price index in tth month of a year.

3) Change in debt stock vs. financing of fiscal deficit: The change in the stock
of public debt does not correspond with the fiscal financing data provided by
the Ministry of Finance. This is because of multiple factors, including: (i) The
stock of debt takes into account the gross value of government borrowing,
The State of Pakistan’s Economy

whereas borrowing is adjusted for government deposits with the banking

system, when calculating the financing data; (ii) changes in the stock of debt
also occur due to changes in the exchange rate, which affects the rupee value
of external debt, and (iii) the movement of various other cross-country
exchange rates also affect the US Dollar rate and, hence, the rupee value of
external debt.

4) Government borrowing: Government borrowing from the banking system

has different forms and every form has its own features and implications, as
discussed here:

(a) Government borrowing for budgetary support:

Borrowing from State Bank: The federal government may borrow directly
from SBP either through the “Ways and Means Advance” channel or
through the purchase (by SBP) of Market Related Treasury Bills
(MRTBs). The Ways and Means Advance is extended for the
government borrowings up to Rs 100 million in a year at an interest
rate of 4 percent per annum; higher amounts are realized through the
purchase of 6-month MTBs by SBP at the weighted average yield
determined in the most recent fortnightly auction of treasury bills.

Provincial governments and the Government of Azad Jammu &

Kashmir may also borrow directly from SBP by raising their debtor
balances (overdrafts) within limits defined for them. The interest rate
charged on the borrowings is the three month average yield of 6-
month MTBs. If the overdraft limits are breached, the provinces are
penalized by charging an incremental rate of 4 percent per annum.

Borrowing from scheduled banks: This is mainly through the fortnightly

auction of 3, 6 and 12-month Market Treasury Bills (MTBs). The
Government of Pakistan also borrows by auctions of 3, 5, 10, 15, 20
and 30 year Pakistan Investment Bonds (PIBs). However, provincial
governments are not allowed to borrow from scheduled banks.

(b) Commodity finance:

Both federal and provincial governments borrow from scheduled banks to

finance their purchases of commodities e.g., wheat, sugar, etc. The
proceeds from the sale of these commodities are subsequently used to
retire commodity borrowing.

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 Third Quarterly Report for FY18

5) Differences in different data sources: SBP data for a number of variables,

such as government borrowing, public debt, debt servicing, foreign trade, etc.,
often does not match with the information provided by MoF and PBS. This is
because of differences in data definitions, coverage, etc. Some of the typical
cases are given below:

(a) Financing of budget deficit (numbers reported by MoF vs. SBP):

There is often a discrepancy in the financing numbers provided by MoF in
its quarterly tables of fiscal operations and those reported by SBP in its
monetary survey. This is because MoF reports government bank
borrowing on a cash basis, while SBP’s monetary survey is compiled on
an accrual basis, i.e., by taking into account accrued interest payments on
T-bills.

(b) Foreign trade (SBP vs. PBS): The trade figures reported by SBP in the
balance of payments do not match with the information provided by the
Pakistan Bureau of Statistics. This is because the trade statistics compiled
by SBP are based on exchange record data, which depends on the actual
receipt and payment of foreign exchange, whereas the PBS records data
on the physical movement of goods (customs record). Furthermore, SBP
reports both exports and imports as free on board (fob), while PBS records
exports as free on board (fob) and imports include the cost of freight and
insurance (cif).

In addition, the variation in import data also arises due to differences in

data coverage; e.g., SBP import data does not include non-repatriable
investments (NRI) by non-resident Pakistanis;1 imports under foreign
assistance; land-borne imports with Afghanistan, etc. In export data, these
differences emerge as PBS statistics do not take into account short
shipments and cancellations, while SBP data does not take into account
land-borne exports to Afghanistan, export samples given to prospective
buyers by exporters, exports by EPZs, etc.

1The non-repatriable investment (NRI) consists of small investments made by expatriate

Pakistanis transporting machinery into the country that has been bought and paid for abroad and the
purchases made from the duty-free shops.

97
Acronyms
3-M Three month
3-Y Three year
AANZFTA ASEAN-Australia-New Zealand Free Trade Area
Acc. Accepted
ACPL Attock Cement Pakistan Ltd
ADB Asian Development Bank
AML Anti-Money laundering
APCMA All Pakistan Cement Manufacturers Association
ASEAN Association of Southeast Asian Nations
BDRC Business Development Research Consultants
BISP Benazir Income Support Programme
BoP Balance of Payments
CAGR compound annual growth rate
CBU Completely Built Up
cc. Cubic centimeters
CDNS Central Directorate of National Savings
CHCC Cherat Cement Company Ltd
CKD Completely Knocked Down
CNY Chinese Yuan
COD Collection on Demand
CPEC China Pakistan Economic Corridor
CPI Consumer Price Index
CSF Coalition Support Fund
CSF Coalition Support Fund
DAP Diammonium phosphate
DGKC D G Khan Cement Company Ltd
EIU Economist Intelligence Unit
EM Emerging Markets
EU European Union
ERRA Earthquake Reconstruction and Rehabilitation Authority
FBR Federal Board of Revenue
FDI Foreign Direct Investment
FE Foreign Exchange
The State of Pakistan’s Economy

Fed Federal Reserve

FED Federal Excise Duty
FO Furnace oil
FPI Foreign Portfolio Investment
FX Foreign Exchange
FY Fiscal Year
GAIN Global Alliance for Improved Nutrition
GBP Great British Pound
GCC Gulf Cooperation Council
GDP Gross Domestic Product
GSP Generalized System of Preferences
GSTS General Sales Tax on Services
GVA Gross Value Addition
H1 First Half
HCV Heavy Commercial Vehicle
HSD High Speed Diesel
IBRD International Bank for Reconstruction and Development
IDB Islamic Development Bank
IMF International Monetary Fund
INR Indian Rupee
IPP Independent Power Producer
IR Infection Ratio
JPY Japanese Yen
KOHC Kohat Cement Company Ltd
KP/KPK Khyber PakhtunKhwa
LCV Light Commercial Vehicle
LIBOR London Interbank Offer Rate
LNG Liquefied Natural Gas
LSM Large Scale Manufacturing
M2 Broad Money
Mat. Maturity
MFN Most Favored Nation
MLCF Maple Leaf Cement Ltd
MMF Man Made Fiber

100
 Third Quarterly Report for FY18

MoF Ministry of Finance

MPC Monetary Policy Committee
MRTBs Market Related Treasury Bills
MUFAP Mutual Funds Association of Pakistan
MYR Malaysia Ringgit
NDA Net Domestic Assets
NEER Nominal Effective Exchange Rate
NFA Net Foreign Assets
NFIS National Financial Inclusion Strategy
NFNE Non-Food-Non-Energy
NSS National Savings Certificate
Off. Offered
OMOs Open Market Operations
PAMA Pakistan Automotive Manufacturers Association
PARC Pakistan Agricultural Research Council
PBS Pakistan Bureau of Statistics
PET Polyethylene Terephthalate
PHPL Power Holding Private Limited
PIB Pakistan Investment Bond
PIOC Pioneer Cement Ltd
PKR Pakistani Rupee
POL Petroleum, Oil, and Lubricants
PPA Pakistan Poultry Association
PSDP Public Sector Development Programme
PSEs Public Sector Enterprises
PSF Polyester Staple Fiber
PSO Pakistan State Oil
PSX Pakistan Stock Exchange
PTA Pakistan Telecommunication Authority
PTA Purified Terephthalic Acid
PTCL Pakistan Telecommunication Company Limited
Q1 First Quarter
Q2 Second Quarter
Q3 Third Quarter

101
The State of Pakistan’s Economy

Q4 Fourth Quarter
QoQ Quarter-on-quarter
Repo Repurchase Agreement
Rhs Right Hand Side
SAFE State Administration of Foreign Exchange
SAFTA South Asian Free Trade Area
SBP State Bank of Pakistan
SDR Statutory Drawing Right
SECP Securities and Exchange Commission of Pakistan
SME Small and Medium Enterprises
SMEDA Small and Medium Enterprise Development Authority
SPI Sensitive Price Index
SRO Statutory Regulatory Order
SDG Sustainable Development Goals
T-Bills Treasury Bills
TCP Trading Corporation of Pakistan Private Limited
THB Thai Baht
UAE United Arab Emirates
UK United Kingdom
US United States
US$ United States Dollar
USA United States of America
USD United States Dollar
VP Voluntary Payments
WALR Weighted Average Lending Rates
WAPDA Water and Power Development Authority
WHR Waste Heat Recovery
WPI Wholesale Price Index
WTI West Texas Intermediate
YoY Year-on-Year

102