HALF YEAR REPORT

2022 - 23

THE STATE OF PAKISTAN’S

ECONOMY

STATE BANK OF PAKISTAN

 SBP BOARD OF DIRECTORS

Mr. Jameel Ahmad Governor (Chairperson)

Mr. Hamed Yaqoob Sheikh Secretary, Finance

Dr. Ali Cheema Member

Dr. Syed Akbar Zaidi Member

Mr. Najaf Yawar Khan Member

Mr. Fawad Anwar Member

Mr. Zahid Ebrahim Member

Mr. Mahfooz Ali Khan Member

Mr. Muhammad Ali Latif Member

Mr. Mohammad Mansoor Ali Corporate Secretary

 LETTER OF TRANSMITTAL

State Bank of Pakistan

Karachi.
May 19, 2023

Dear Mr. Chairman,

In terms of Section 39(2) of the State Bank of Pakistan Act, 1956,

the Half Year Report of the Board of Directors of the State Bank of
Pakistan on the State of the Economy for the year 2022-23 is hereby
enclosed for submission to the Majlis-e-Shoora (Parliament).

With warm regards,

Yours sincerely,

(Jameel Ahmad)
Governor
Chairperson, Board of Directors

Muhammad Sadiq Sanjrani

Chairman
Senate
Islamabad
 LETTER OF TRANSMITTAL

State Bank of Pakistan

Karachi.
May 19, 2023

Dear Mr. Speaker,

In terms of Section 39(2) of the State Bank of Pakistan Act, 1956,

the Half Year Report of the Board of Directors of the State Bank of
Pakistan on the State of the Economy for the year 2022-23 is hereby
enclosed for submission to the Majlis-e-Shoora (Parliament).

With warm regards,

Yours sincerely,

(Jameel Ahmad)
Governor
Chairperson, Board of Directors

Raja Pervaiz Ashraf

Speaker
National Assembly
Islamabad
 Analysts:
Acknowledgements

Chapters:
1. Overview Muhammad Mazhar Khan; Muhammad Akmal
2. Economic Growth Muhammad Mazhar Khan; Shah Hussain; Kainat
Khan
3. Inflation and Monetary Policy Syeda Sabina Khurram Jafri; Junaid Kamal; Hira
Ghaffar; Sakkhi Babar
4. Fiscal Policy and Public Debt Sajawal Khan; Sabahat; Muhammad Farhan
Akber; Almas Karim
5. External Sector Muhammad Akmal; Mudassar Ali Khan;
Muhammad Ijlal Khan; Afsah Khalid
Special Section: Pakistan’s Growing IT Sohaib Jamali; Muhammad Asghar khan; Ana
Exports and Tech Start-ups: Opportunities Khattak; Attaullah Abbasi
and Challenges

Muhammad Asghar Khan; Shah Hussain;

Editing:
Mudassar Ali Khan

Muhammad Farhan Akber; Afsah Khalid; Kainat

Formatting:
Khan

Publication Managers: Muhammad Mazhar Khan; Muhammad Akmal

Director: Omar Farooq Saqib

Publication Review Committees:

PRC of the Management: Syed Samar Husnain (Acting Chairman); Muhammad Ali
Malik; Arshad Mehmood Bhatti; M. Farooq Arby;
Muhammad Javaid Ismail; Fida Hussain; Muhammad
Nadeem Hanif; and Omar Farooq Saqib

Syed Akbar Zaidi (Chairman); Ali Cheema; Zahid

PRC of the Board
Ebrahim

The feedback and data support from Financial Stability; Monetary Policy; Research; Core
Statistics; Data Services & Innovations; Domestic Markets & Monetary Management;
SME, Housing & Sustainable Finance; Payment System Policy & Oversight; Foreign
Exchange Operations departments, Governor’s Office; and logistics support by Corporate
Services & Strategic Planning, External Communications departments are also
appreciated.
 Chapters
Contents

1 Overview 1

2 Real Sector 9
2.1 Economic Growth 9
2.2 Agriculture 12
2.3 Large Scale Manufacturing 19
2.4 Services 27
2.5 Labor Market 29

3 Monetary Policy and Inflation 37

3.1 Policy Review 37
3.2 Monetary Aggregates 42
3.3 Credit to Private Sector 48
3.4 Inflation 58

4 Fiscal Policy and Public Debt 73

4.1 Fiscal Trend and Policy Review 73
4.2 Revenues 76
4.3 Federal Expenditures 87
4.4 Provincial Fiscal Operations 93
4.5 Public Debt 96

5 External Sector 109

5.1 Pakistan’s Balance of Payments 109
5.2 Current Account 110
5.3 Financial Account 117
5.4 Exchange Rate and Reserves 121
5.5 Trade Account 122

Special Section: Pakistan’s Growing IT Exports and Tech Start-ups: 135

Opportunities and Challenges

Annexure: Data Explanatory Notes 173

 List of Acronyms 177

Box Items

Box 2.1: FY23 Flood Losses - Latest Assessment 10

Box 2.2: Trends and Patterns in Female Labor Force Participation in Pakistan 34

Box 3.1: Rising Inflation and Global Monetary Policy Responses 40

Box 5.1: The Declining Workers’ Remittances 114

The analysis and projections in this report were prepared on data outturns for the July-
December period of FY23 and finalized in March 2023, using data and developments as of then.

1.1 Overview
Selected Economic Indicators Table 1.1
Pakistan’s macroeconomic conditions FY22 FY23
deteriorated during H1-FY23. The policy H1 Q1 Q2 H1
measures introduced since last year had
Growth rate (percent)
succeeded in constraining domestic demand.
However, the fallout of flash floods, adverse LSM a 7.7 -1.5 -5.7 -3.7
global economic conditions, uncertainty National CPI a 9.8 25.1 24.9 25.0
surrounding the completion of IMF Private sector credit b 13.7 0.9 3.3 4.3
program’s 9th review, the foreign exchange
Money supply (M2) b 4.3 1.2 0.03 1.2
constraints, and political instability
Exports b 29.0 2.6 -15.2 -6.7
exacerbated the underlying domestic
structural issues posing challenges to Imports b 51.8 -5.8 -29.8 -18.2
macroeconomic stability. Exchange rate
-3.5 -26.7 -21.7 -24.1
app (+)/dep(-) b
FBR tax revenue c 32.1 16.9 17.9 17.4
During H1-FY23, both agriculture
production and Large scale manufacturing Policy rate (end period) b 9.75 15 16 16
(LSM) contracted substantially; whereas, billion US$
headline inflation rose to multi-decade high Remittances b 15.8 7.7 6.4 14.1
level. Despite policy induced improvement
FDI in Pakistan b 1.1 0.3 0.2 0.5
in external current account (on the back of
FX loans (net) b 9.8 0.1 -0.9 -0.9
curtailment in imports) and primary fiscal
balance (due to rationalization of non- Current account balance b -9.1 -2.4 -1.1 -3.6
interest current spending and decline in Change in SBP reserves b 1.6 -2.0 -2.3 -4.2
federal development spending), external percent of GDP
financing and low level of FX reserves
Fiscal balance c -2.0 -1.0 -1.0 -2.0
remained as major concerns (Table 1.1).
However, slowdown in external demand as Primary balance c 0.1 0.2 0.9 1.1

well as persistence of domestic structural Sources: a Pakistan Bureau of Statistics; b State Bank of
Pakistan; c Ministry of Finance
issues pulled exports below last year’s level.
Moreover, the below target growth in FBR
In addition to policy induced compression in
taxes also indicate the need to speed up the
domestic demand, flash floods also played a
structural reforms.
significant role in overall economic
downturn. The floods submerged a
Continuing with its contractionary stance,
substantial area of country’s land, and
SBP raised the policy rate by a further 225
inflicted heavy losses to lives, livelihood and
bps in H1-FY23, on top of the 675 bps
infrastructure. In agriculture, Kharif crops
increase during FY22. On the fiscal side, the
sustained considerable production losses due
government resorted to curtail federal
to floods. Low fertilizer offtake, on account
expenditures on grants, subsidies and
of higher prices in global markets, further
development. Furthermore, to contain
aggravated the situation. As per ministry of
pressures on external account the
National Food Security and Research
government and the SBP introduced various
(MNFS&R) estimates, cotton and rice
regulatory measures to restrict imports.
State Bank of Pakistan Half Year Report 2022-23

High Frequency Economic Indicators Figure 1.1

a: Growth in Sales of Demand Indicators b: Growth in GST Collection

120 percent, YoY percent, YoY

60

80
40
40

0
20
-40
0
-80
Sep-21

Jun-22

Sep-22
Aug-21

Dec-21

Aug-22

Dec-22
Apr-22
Jan-22
Nov-21

May-22

Nov-22
Oct-21

Mar-22

Oct-22
Jul-21

Feb-22

Jul-22

-20

Sep-21

Dec-21

Sep-22

Dec-22
Aug-21

Apr-22

Jun-22

Aug-22
Nov-21

May-22
Jan-22

Nov-22
Mar-22
Jul-21

Oct-21

Feb-22

Jul-22

Oct-22
Auto sales Domestic cement sales
POL sales Electricity generation

c: Growth in Credit to Private Businesses d: Business Confidence Index

percent, YoY 75 index
25

20 +ve Sentiments

15
50

10
-ve Sentiments

5
25
Sep-21

Dec-21

Sep-22

Dec-22
Aug-21

Apr-22

Jun-22

Aug-22
Nov-21

May-22
Jan-22

Nov-22
Mar-22
Jul-21

Oct-21

Feb-22

Jul-22

Oct-22

0
Sep-21

Sep-22
Dec-21

Dec-22
Aug-21

Nov-21

Jun-22

Aug-22
Apr-22
May-22
Jan-22

Nov-22
Jul-21

Oct-21

Mar-22

Jul-22

Oct-22
Feb-22

Business confidence PMI, Industry

Sources: SBP, APCMA, PAMA, OCAC, NEPRA & FBR

production witnessed a decline of 24.6 and 40 macroeconomic environment led some

percent respectively. The below par businesses to partially suspend operations
performance of agriculture and industry, during the period. In line with the overall
indicate subdued activity in services sector as downturn in economic activity, the labor
well. markets also showed contraction in
employment generation.
In manufacturing, LSM witnessed a broad-
based contraction, where output fell in 18 out Also, high frequency indicators showed a
of 22 sectors. In particular, production of downturn in general economic activities
textile, automobile, pharmaceutical, non- during H1-FY23 (Figure 1.1). In particular
metallic minerals, petroleum, and POL, cement and automobile sales posted
construction-allied sectors dipped double digit declines. The GST collection
significantly. Furthermore, the worsening

2
 Overview

National CPI Inflation Figure 1.2a Non-Food Non-Energy (Core) Figure 1.2b
Inflation - Urban
percent YoY percent YoY
30 18

20 12

10 6

0 0
Nov-2021

Apr-2022
May-2022
Jan-2022

Nov-2022
Jul-2021

Oct-2021

Mar-2022

Jul-2022

Oct-2022
Sep-2021

Feb-2022

Sep-2022
Aug-2021

Dec-2021

Jun-2022

Aug-2022

Dec-2022

Dec-2021

Dec-2022
Apr-2022
May-2022
Nov-2021

Jan-2022

Nov-2022
Jul-2021

Feb-2022
Mar-2022

Jul-2022
Sep-2021
Oct-2021

Oct-2022
Sep-2022
Aug-2021

Jun-2022

Aug-2022
CPI inflation Period average Core inflation Period average
Source: Pakistan Bureau of Statistics

also slowed down in line with The second round effect of these supply
weakening economic activity. The shocks to broader prices and wages along
deterioration in macroeconomic environment with rising inflation expectations pushed
affected business confidence in H1-FY23, core inflation to a nine-year high level in H1-
which also contributed to sluggish offtake in FY23. Importantly, consumer inflation
credit to private businesses. expectations continued to creep up and
remained at an elevated level during H1-
Despite visible contraction in domestic FY23, as shown by SBP-IBA Consumer
demand, inflation outturns have remained Confidence Survey (CCS) (Figure 1.3). A
stubbornly persistent since H2-FY22 (Figure persistent uptrend in domestic prices amid
1.2a). Elevated inflation expectations along supply shocks, adverse global commodity
with a range of domestic supply side factors price outlook, and exchange rate pressures
pushed the national CPI (NCPI) inflation to led to worsening of inflation expectations
25.0 percent during H1-FY23 as compared to during H1-FY23.
9.8 percent in the same period last year.
Higher food prices mainly drove overall Consumer Inflation Expectations Figure 1.3
percent
inflation followed by NFNE and energy 80
groups (Figure 1.2b). Particularly, flood
induced losses to agriculture produce and
livestock caused supply shortages in the food 70
group and excerbated the impact of high
global commodity prices. In addition, the
pass-through of PKR depreciation to 60

domestic prices also contributed to

inflationary pressures. Similarly, the
50
increase in power tariffs and energy prices
May-2022
Jan-2022

Nov-2022
Mar-2022

Jul-2022

Sep-2022

provided further impetus to inflationary

pressures during H1-FY23.
Source: State Bank of Pakistan

3
State Bank of Pakistan Half Year Report 2022-23

In the fiscal sector, contraction in major non- it aggravated debt servicing and repricing
interest current expenditure, particularly risk in the rising interest rate environment.
subsidies, grants, and development
spending, contributed to improvement in The higher government budgetary
primary surplus during H1-FY23. However, borrowing mainly drove expansion in net
fiscal deficit remained at last year’s level, in domestic assets (NDA) to the last year’s
terms of GDP, because of a sharp expansion level, whereas, private sector credit (PSC)
in interest payments. Rising interest rates, decelerated during H1-FY23 amid economic
depreciation in PKR and resumption of downturn. Within PSC the growth in
mark-up payments to foreign creditors after working capital loans weakened
end of the DSSI were instrumental in driving significantly, while fixed investment
growth in interest payments during H1- remained around the last year’s level. On the
FY23. On the revenues side, tax other hand, inadequate external inflows
administration efforts, inflation and higher along with scheduled repayments of external
return on deposits led to an expansion in debt resulted in sharp contraction of net
FBR taxes. However, a sharp contraction in foreign assets (NFA) during H1-FY23.
imports and an overall dip in economic Consequently, the broad money growth
activity constrained tax collection below the slowed down during H1-FY23.
target for the first half of FY23.
The external sector faced headwinds from
In the absence of sufficient external inflows, paucity of external financing, slowdown in
the government mainly relied on domestic global demand, and fallout of flash floods
bank and non-bank sources to meet its during H1-FY23. In particular, external
borrowing requirements. Specifically, the financing remained under significant
government fulfilled its financing pressure due to uncertainty regarding the
requirements mostly through medium term resumption of IMF program, along with tight
floating rate instruments. While the global financial conditions. Also, supply
lengthening of debt profile through these chain disruptions resulting from Russia-
floating rate bonds reduced the rollover risk, Ukraine conflict and China’s zero - Covid

Real GDP, Trade Volumes and Inflation - YoY Figure 1.4

a: Real GDP b: Trade Volume c: Inflation
8 percent 16 percent percent
12

6 12 9

4 8 6

2 4 3

0 0 0
Advanced
World
World

EMDEs
Advanced

EMDEs

World

Advanced

EMDEs

2021 2022
Sources: World Bank, CPB World Trade Monitor, International Monetary Fund

4
 Overview

policy, hampered global demand, which also in the backdrop of US dollar’s appreciation
weighed on Pakistan’s export performance against a basket of global currencies, led to
(Figure 1.4). On the supply side, flood- 24.1 percent depreciation in PKR during H1-
related disruptions led to lower crop FY23.
outturns, which not only dented the food
exports but also deteriorated the commodity Pakistan’s recurring external account
import outlook. vulnerabilities and increasing number of
supply side shocks, especially due to climate
Similarly, workers’ remittances also declined change underscore the necessity for building
during H1-FY23. In addition to the global economic resilience. Pakistan, in fact, is one
economic slowdown, increase in the use of of the most exposed country to natural
informal channels also affected remittances calamities with the frequency and severity of
flows to the country. However, the decline these events increasing by the year. H1-FY23
in exports and remittances was more than was no exception as Pakistan faced one of the
offset by a much larger fall in imports during worst flooding in its history with sizeable
H1-FY23, leading to a notable decline in loss to property, economic activity and most
current account deficit (CAD). importantly life. The country, therefore,
needs to direct policy attention towards
Despite this improvement in CAD, the building buffers to weather various shocks.
dearth of financial inflows led to significant
decline in FX reserves during H1-FY23. In Specifically, it is imperative to improve water
addition to the delays in the disbursements management to ensure water security in the
of the IMF tranches and the political country by building water reservoirs to
uncertainty in the country, higher net FX cushion against extremes and uncertain
outflows on account of scheduled debt events. In this regard, water received from
repayments, (including a US$ 1.0 billion abundant rainfalls and through the melting
Eurobond), as well as disinvestments added of glaciers should be preserved to make
to external account pressures (Figure 1.5). productive use of any windfall gain.
The combined effect of these developments, Similarly, there is an urgent need to ensure

Budget Estimates vis-a-vis Disbursements of External Loans Figure 1.5

a: H1-FY22 b: H1-FY23
12 billion US$ 24 billion US$
25
9 57.6 percent 18
20 of the target
6 15 12 24.4 percent
of the target
10
3 6
5
0 0 0
Budget estimate*Budget estimate*
Disbursements Disbursements
Budget estimate* Disbursements

Bilateral Multilateral Bonds Commercial Banks IMF NPCs

* Budget estimate for full year FY23
Source: Economic Affairs Division

5
State Bank of Pakistan Half Year Report 2022-23

availability of ample food stocks to address led IT exports and technology start-ups
the issue of food security in the country, appear as emerging signs of digitalization.
which requires addressing market failures However, as the Special Section in this
and investments in storage facilities and cold report shows, the country’s share in global IT
chain management. Also, as a net energy exports remains very small, dominated by
importer, enhancing storage capacity of small-sized firms and concentrated to a few
energy products assumes importance as well. markets. Domestic software usage is also
negligible; whereas, the start-up space also
Furthermore, maintaining FX reserves lags behind peer economies in terms of
buffers is crucial to ensure external account producing unicorns, funding, overall
sustainability to enhance the country’s ability ecosystem and their presence across the
to ward off the impact of adverse global economy. With a focus on software exports
supply shocks especially emanating from and technology start-ups, the special section
higher oil and commodity price. Given sheds light on the enabling policies that have
Pakistan’s huge dependence on food and facilitated growth in this space, such as
energy imports, any supply shock in Digital Pakistan Policy 2018 and the SBP’s
international market quickly erodes the Electronic Money Institutions regulations
country’s external sustainability through 2019. The section also highlights some of the
worsening of terms of trade. The long- critical gaps that are to be addressed, if
standing structural issues have weakened the recent growth in these sectors is to be
country’s ability to accumulate FX reserves sustained.
through conventional means, which has
increased the country’s dependence on 1.2 Economic Outlook
borrowed resources. Therefore, there is
urgent need to upgrade policy efforts for The demand management measures and
attracting foreign private investments and 2022 floods, have weighed heavily on the
expanding export earnings. growth outlook for FY23. The data on sales
volumes of automobiles, POL, and cement
In the same vein, unconventional means may recorded a significant decline in H1-FY23. In
also be used to reduce import dependence; agriculture sector, rice and cotton crops were
for example, by adopting energy severely damaged; the LSM output, on the
conservation measures. These may include, other hand, fell by 3.7 percent. Therefore,
introducing day-light saving, early closure of real GDP growth in FY23 is expected to
markets, introducing remote work, creating remain significantly lower than the previous
awareness about social responsibility, usage year’s growth rate, as well as SBP’s revised
of energy efficient technologies and a projection of around 2 percent. This reflects
gradual shift towards alternative energy a broad-based moderation in
sources, such as solar and wind. economic activity in the wake of dampened
performance of both agriculture sector and
1.1 In addition to addressing the above industrial output, with its negative spillovers
mentioned structural issues, Pakistan has to for the services sector.
prioritize its envisioned transition to
digitalization, which offers developing On the fiscal side, the deceleration in FBR tax
countries an opportunity to leapfrog. The collection on account of temporary import
recent sharp growth in Pakistan’s software-

6
 Overview

restrictions and subdued economic activity, global commodity prices, could improve the
alongside sharp growth in current current account deficit.
expenditures driven by higher interest
payments on public debt during H1-FY23 Meanwhile, NCPI inflation is projected to
have caused narrowing of the fiscal space. remain elevated within the range of 27-29
As a result, the contraction in federal percent in FY23. The deteriorating inflation
development expenditures to contain outlook is predominantly ascribed to the
deterioration in fiscal position has posed persistent uptick in food and energy
challenges for FY23 economic outlook. inflation, while core inflation may continue
Meanwhile, the anticipation of further to edge up as well. The near-term risks to
slowdown in economic activity amid inflation outturns could be explained by
monetary tightening and other demand various factors: the second round impact of
curtailing measures is likely to decelerate the recent exchange rate depreciations, fiscal
current growth momentum of tax collection, adjustments including upward revisions in
thus, widening the fiscal deficit. GST, gas and electricity tariffs, and an
upward drift in inflation expectations. In
Despite a substantial improvement in CAD addition, uncertainty regarding crude oil
by US$ 5.5 billion during the first half of price increase due to faster than expected
FY23, the external account pressures growth in Chinese economy and lower than
continued to persist amidst scheduled debt target wheat production in Pakistan are other
repayments and markedly lower foreign upside risks to the inflation outlook.
inflows which, in turn, resulted in a severe
drawdown in foreign exchange reserves. In Nonetheless, both the government and the
view of the prevailing domestic SBP have been undertaking policy measures
macroeconomic uncertainty, impact of flood, to tackle the current economic challenges.
and increasing interest rate environment The government has rationalized
globally, the external account vulnerabilities expenditures through contraction in
are likely to remain at an elevated level in subsidies and grants, and has introduced
FY23. However, the resumption of IMF’s additional revenue mobilization measures in
EFF program would help assuage the overall February 2023 aimed at fiscal consolidation.
external sector concerns by increasing access The SBP, on the other hand, has increased
to multilateral and bilateral financing policy rate by 625 basis points during 9M-
avenues. The downside risks to the external FY23, taking the total rate hike to 1300 basis
sector outlook are: sharper than expected points during the current cycle of monetary
slowdown in global demand that could tightening. Going forward, this policy mix,
impact exports and workers’ remittances alongside necessary structural reforms to
negatively. Likewise, global and domestic moderate the impact of various supply
uncertainty also pose downside risks. On the shocks, would help anchor inflationary
upside, more than expected slowdown in expectations in the medium term, and put
domestic demand or relatively sharp fall in the economy on a more sustainable growth
path.

7
2 Economic Growth
As a result of policy-induced contractionary measures, flood damages and lower demand in the global markets, the
economy experienced sharp slowdown during H1-FY23. In the agriculture sector, Kharif crops, such as rice, cotton
and sugarcane reported production losses due to floods. The manufacturing industry faced broad-based contraction
as eighteen out of twenty-two sectors registered negative growth. Textile, the largest component, followed by
automobile, pharmaceutical, non-metallic minerals, petroleum, and construction-allied sectors majorly contributed
in bringing about the decline in the large-scale manufacturing industry. Whereas, continuing their growth
momentum, wearing apparel and furniture sectors lessened the magnitude of overall LSM contraction during H1-
FY23. The services sector also corresponded to the reduction in agriculture and manufacturing production and
remained subdued during the current review period. Moreover, the labor market data for industrial and services
sectors, together with SBP Business Confidence Survey and Consumer Confidence Survey, all corroborated decrease
in employment during the current review period.

2.1 Economic Growth Affected Area - Major Crops Table 2.1

square km
The growth momentum of the last two years Flooded Area
Cultivated
was disrupted during H1-FY23. Both global Total Percent
and domestic factors played their part. The Rice
Russia Ukraine conflict, supply chain Sindh 11,900 7,043 59
disruptions, high energy and raw material Punjab 32,703 4,877 15
prices, monetary tightening by advanced Cotton
economies, while leading to global Sindh 7,637 1,048 14
downturn, also adversely impacted prices of Punjab 5,979 177 3
raw materials and partly demand for Sugarcane
Pakistan exports. In Pakistan, the situation Sindh 3,016 361 12
was exacerbated by heavy flooding, supply Punjab 23,475 639 3
chain disruptions, along with political Note: Geospatial flood impact analysis conducted by
uncertainty. The policy induced measures FAO, August 01-31, 2022
Source: Food & Agriculture Organization
aimed at demand and import compression
led to moderation in the manufacturing crop zone. After rice, cotton reported the
activity. most losses (Table 2.1). Sugarcane reported
relatively lower losses due to its resilience to
For agriculture, the H1-FY23 was particularly flooding. Moreover, pulses such as moong
challenging largely owing to climate and maash, along with chillies also witnessed
externalities. Pakistan witnessed a drought a decline in production mainly due to a
like situation in the beginning of the Kharif decrease in area under cultivation.
season (April 2022) followed by record
monsoon rains, which resulted in heavy Large-Scale Manufacturing (LSM) was
floods throughout the country. In addition, particularly affected by demand compression
the high global gas prices caused higher policies and measures as it experienced a
fertilizer costs leading to suppressed sizeable contraction during H1-FY23
fertilizer offtake during the review period. compared to a noteworthy growth in the
Consequently, important crops, such as, rice same period last year (Figure 2.1). The
and cotton sustained production losses, as downturn remained broad-based as eighteen
compared to last year. Within the important out of twenty-two sectors registered
crops, rice suffered the most, as the intensity contraction in their production in the current
of flood damages was the highest in the rice
State Bank of Pakistan Half Year Report 2022-23

LSM Growth in H1 Figure 2.1 decreased economic activity, damages to

percent infrastructure and increase in petroleum
9.0
7.7
prices, activities in the transport sector also
slowed down. Food and accommodation sector
6.0 was negatively impacted by the disruption in
tourist activities, caused by floods.
3.0 2.0 1.7
Infrastructural damages to educational
institutes and health facilities disrupted
0.0
health and education services.
-3.0 -1.2
On the other hand, banking and insurance
-3.7
-6.0 sector benefitted from the growth in assets of
FY19 FY20 FY21 FY22 FY23 the banking sector. Similarly, indicators for
Source: Pakistan Bureau of Statistics information and telecommunication also
showed a continuation of increased activity
review period. Textile, the largest and profitability of the sector.
component, remained the major drag.
Following textile, automobile, Contraction in manufacturing sector was also
pharmaceutical, construction-allied and food reflected in the labor market as employment
were other notable sectors to experience in both industrial and services sectors
downturn in the manufacturing industry. registered a downturn. The latest SBP
Two noteworthy exceptions were wearing Business Confidence Survey (BCS) and
apparel and furniture industries which, Consumer Confidence Survey (CCS), also
owing to their product specific demand exhibited deterioration in sentiments about
abroad, grew exceptionally high; partially job creation in the labor markets for the past
offsetting the magnitude of contraction in as well as in the next six months.
LSM.
The widespread flash floods also affected the
Losses in the agriculture sector and the economic activity during H1-FY23. The
contraction in the manufacturing sector had impact was not confined to agriculture only,
spillover impacts in the services sector and was spilled over to the manufacturing
during H1-FY23. Activities in the wholesale and services sectors as well. In this backdrop,
and retail trade sector slowed down, Box 2.1 outlines recent floods damages and
mirroring the contraction in commodity calls for developing a strategy for mitigating
producing sector, along with the decline in the risk emanating from climate change.
imports. Furthermore, in line with the

Box 2.1: FY23 Flood Losses - Latest Assessment1

The long spell of unprecedented monsoon rains and the subsequent flash floods in FY23, caused
widespread devastation in Pakistan at a time when the country was grappling with various
macroeconomic challenges. The floods inundated about 94 districts, mostly in the provinces of
Balochistan, Sindh, and Khyber Pakhtunkhwa (KP), including 19 out of 25 poorest districts in the country.
In the aftermath of these historic floods, millions of people, crops, livestock, essential infrastructure and
human settlements stood severely affected.

10
 Real Sector

More than 33 million people (approximately 15 percent population) were affected by the catastrophic
floods with more than 1700 causalities recorded. The infrastructure of the country including 2.3 million
houses, 13 thousand kilometers of roads, and more than 400 bridges, also sustained extensive damages
due to which accessibility and connectivity to several flood-hit areas for rescue and relief operations was
disrupted (Table 2.1.1). As per the latest estimates, the extreme floods and ensuing large-scale
destruction witnessed by the country, has resulted in overall economic losses amounting to US$ 30
billion.2

Cumulative Losses in Floods3 Table 2.1.1

roads in km; other indicators in number
Affected
Province/Region Roads Bridges Houses Livestock
Population
Sindh 8,389 165 1,885,029 436,435 14,563,770
Balochistan 2,222 58 241,659 500,000 9,182,616
Punjab 877 15 67,981 205,106 4,844,253
KP 1,575 107 91,464 21,328 4,350,490
GB 33 61 1,793 609 51,500
AJ&K 19 33 555 792 53,700
Total 13,115 439 2,288,481 1,164,270 33,046,329
Source: National Disaster Management Authority

The record flooding undermined the growth prospects in all sectors of the economy. Specifically, the
agriculture sector witnessed pronounced losses, emerging from damages to crops and livestock, which
have led to slowdown in industry and services sector through various channels. Moreover, this has also
raised concerns about food security situation in the country, necessitating import of food grains to meet
the supply-demand gap. The estimates indicated adverse effects of heavy rainfalls on the production of
important kharif crops. The flood inundation was the highest in the rice crop zone, followed by sugarcane
and cotton. The loss in rice production took its toll on the exportable surplus, resulting in decline in the
rice export volumes in the first half of FY23 as compared to same period last year. As a result of
prolonged rainfall and water logging in major cotton producing areas, crop production remained prone to
severe damages and recorded a 24.6 percent decline during H1-FY23. Thus, the availability of cotton to
factories has already declined by 18 percent, compared to the previous year as of 15th September, 2022. 4
Moreover, the floods also impacted the area cultivated under the relatively resilient sugarcane crop;
however, the decline in production remained contained as compared to other crops. The damages caused
by floods also spilled over to rabi crops vis-à-vis delayed planting of wheat and oil seeds etc.

In the same vein, the livestock sector, that contributes almost 60 percent to the agriculture sector,
remained highly vulnerable to floods. The significant loss of livestock caused shortages of meat, milk and
other dairy products. This, along with the shortages of other perishable food commodities such as onions
and tomatoes exacerbated food inflation.

The losses to crops, livestock and other rural infrastructure undermined the rural incomes, and had a
dampening impact on domestic demand. Similarly, raw material shortages and supply chain disruptions
affected various industries including textile, sugar, and leather.

The reduction in the output of agriculture and large-scale industry also impacted the services sector.
Specifically, the growth in wholesale and retail services slowed down amid downturn in commodity
producing sectors. The trade and transportation activities faced headwinds due to destruction of roads
and bridges, causing disruptions in supply chains. Moreover, health and education services were affected
by floods and recorded significant damages.

11
State Bank of Pakistan Half Year Report 2022-23

Flood Damages, Losses and Needs Figure 2.1.1

billion US$

16.3
2.3

5.6

14.9 3.3

3.7
15.2

Losses Needs Damages

Housing Agri, Food, Livestock & Fisheries Transport & Communications
Others
Source: Ministry of Planning, Development and Special Initiavtives

As reported by the Post Disaster Needs Assessment by Ministry of Planning, Development & Special
Initiatives, the total damage caused by floods is estimated at PKR 3.2 trillion (US$14.9 billion), total loss at
PKR 3.3 trillion (US$15.2 billion), and total needs at PKR 3.5 trillion (US$16.3 billion). Total damage and
loss, together, account for the effects of the crisis. Whereas, total needs (for recovery and reconstruction)
are estimated in terms of costs of replacement according to current prices and include a premium linked
to building-back-better principles. Among the sectors that were mostly affected by the damage are
housing at PKR 1.2 trillion (US$5.6 billion); agriculture, food, livestock, and fisheries at PKR 800 billion
(US$3.7 billion); and transport and communications at PKR 701 billion (US$3.3 billion). The transport and
communications sector has the highest reconstruction and recovery needs at PKR 1.1 trillion (US$5.0
billion); followed by agriculture, food, livestock, and fisheries at PKR 854 billion (US$4.0 billion), and
housing at PKR 592 billion (US$2.8 billion) (Figure 2.1.1).

The changing rainfall patterns and the concomitant occurrence of extreme weather events in Pakistan,
have increased the vulnerability of the country to climate change. It is likely that the area affected by
floods in Pakistan is likely to increase in future on the back of more intense rainfalls and rapidly melting
glaciers.5 In this backdrop, Pakistan has to develop and adopt a multipronged strategy to meet the rising
challenge of climate change.

______________________
1Based on NDMA and Post-Disaster Need Assessment by Ministry of Planning, Development & Special Initiatives
2Post-DisasterNeed Assessment by Ministry of Planning, Development & Special Initiatives;
www.pc.gov.pk/uploads/downloads/PDNA-2022.pdf
3NDMA Monsoon SITREP # 158 (June 14 – November 18, 2022); cms.ndma.gov.pk/storage/app/public/situation-

reports/November2022/N2n1eEarMt6q6Rb8ZYwn.pdf
4Pakistan Central Cotton Committee (PCCC) “Consolidated statement of cotton arrivals in factories of Pakistan”, 15th

September 2022
5World Bank Group (WBG) and the Asian Development Bank (ADB) “Climate Risk Country Profile: Pakistan”, 2022

2.2 Agriculture floods. The heavy monsoon rainfall during

the months of June, July and August
In H1-FY23, agriculture sector faced submerged almost one third of the country,
headwinds owing to country wide torrential

12
 Real Sector

thus resulting in severe crop losses.1 security situation by limiting the

affordability and availability of food.2,3 The
The 2022 floods coincided with the Kharif damages were more pronounced in the
season. Consequently, all important Kharif province of Sindh (Table 2.2).4
crops sustained damages. Within the
important crops, compared to last year, rice On the input side, unprecedented monsoon
reported the highest losses, as flood rainfall adversely impacted production of
inundation was the highest in rice producing important crops. Moreover, Fertilizer offtake
zones followed by cotton. Sugarcane and was dampened by high prices. To facilitate
maize reported relatively lower losses. recovery, the government channeled its
Damages to important crops and livestock, support through the Kissan package by
along with supply chain disruptions caused enhancing credit disbursements and
food shortages and worsened the food providing subsidized loans to farmers in
flood affected areas. To provide support to
Flood - Highest Impacted Districts Table 2.2
subsistence and landless farmers three
square km schemes were launched: markup waiver
Flood Extent in Sindh scheme for subsistence farmers, GoP markup
District
Affected Percent of subsidy scheme and interest free loans for
Area Total Area landless farmers.
Kambar Shahdad Kot 3,339 60%
Badin 2,853 43% Inputs
Dadu 2,278 28%
Jacobabad 2,261 84% Water Availability
Sujawal 1847 21%
Sindh 25, 440 18% Heavy rainfall resulted in flash floods
Flood Extent in Punjab
Rajanpur 1,666 13%
The weather conditions remained
Dera ghazi Khan 1,013 9%
unfavorable during Kharif season as a
Sheikhupura 901 25%
Sialkot 824 27%
drought like situation was followed by heavy
Bahawalpur 823 3% rains that caused flooding. In terms of water
Punjab 12,820 6% availability, the Kharif season began by
Note: Geospatial flood impact analysis conducted by witnessing the second driest month since
FAO, August 01-31, 2022 1961 – as national rainfall for the month of
Source: Food & Agriculture Organization

1 Source: Ministry of Planning Development and Special Initiatives (2022). Pakistan Floods 2022: Post
Disaster Need Assessment Supplemental Report. Islamabad: Ministry of Planning Development and
Special Initiatives.
2 As per post disaster needs assessment, around one million livestock are estimated to have perished.
3 As per PBS, urban food inflation was higher at 30 percent in H1-FY23 as compared to 10.6 percent in

H1-FY22
4 The province accounts for 16, 42, 23, and 31 percent production of wheat, rice, cotton and sugarcane

respectively. Source: International Centre for Integrated Mountain Development and Pakistan
Agricultural Research Council (2022). The 2022 Pakistan Floods: Assessment of Crop Losses in Sindh
Province Using Satellite Data. Kathmandu: ICIMOD and Islamabad: PARC

13
State Bank of Pakistan Half Year Report 2022-23

April was 74 percent, largely below normal.5, Departure of Rainfall from Normal* Figure 2.2
6 However, this situation changed in the during Kharif 2023
following months as the national rainfall percent (area-weighted)
during July remained 180 percent higher 700
than average. Rainfall in Sindh was
significantly above normal during the month 400
of August and remained the highest in the
last 62 years (Figure 2.2).7 100

In line with the rainfall patterns, irrigation -200

water availability remained lower in the start

Sep
Apr

Jun

Aug
May

Jul
of the season. However, towards the end of
Punjab Sindh
the season lesser irrigation water flows were
* Normal refers to area-weighted rainfall during 1981-2010
required due to the heavy monsoon rainfalls Source: Pakistan Meteorological Department
and floods.8 Overall, irrigation water
supplies remained lower than last year. from Russia-Ukraine conflict increased the
(Figure 2.3). prices (Figure 2.5). Furthermore, the
availability of DAP also remained strained as
Fertilizer China imposed a ban on DAP exports during
the review period, resulting in considerably
Fertilizer offtake shrank due to higher prices
lower imports of DAP from China (Figure
2.6).9
During H1-FY23, fertilizer offtake remained
much lower for kharif compared to last year. Irrigation Water Releases during Figure 2.3
Urea along with DAP offtake contracted by Kharif (Apr-Sep)
1.3 and 44.7 percent respectively, as 40 million acre feet
compared to last year. (Figure 2.4a and
2.4b).The decline in fertilizer offtake can be
attributed to lower demand from farmers as 30
agricultural land remained inundated during
Kharif.
20

Moreover, as Pakistan relies mostly on

imported supply of DAP, hence, domestic 10
prices move in tandem with the global prices. 2018 2019 2020 2021 2022
A confluence of factors, such as, production Punjab Sindh
cutbacks in ammonia and supply disruptions Source: Indus River System Authority

5 During Kharif sowing season begins from April-June and is harvested during October-December.
Source: Pakistan Economic Survey 2017-18
6 Source: Pakistan’s Monthly Climate Summary April 2022, Pakistan Meteorological Department
7 As per estimates by Pakistan Meteorological Department, August was recorded the wettest month since

1961.
8 Source: SUPARCO Crop Situation and Forecast Report, Volume XII (Issue 10), September 2022
9 Pakistan imports most of its DAP fertilizer from China. Source: CPFTA Import Analysis, Trade

Development Authority of Pakistan, 2022

14
 Real Sector

Urea Offtake and Price During Figure 2.4a DAP Offtake and Price During Figure 2.4b
Kharif (Apr-Sep) Kharif (Apr-Sep)
million tons Rupees 50kg/bag million tons Rupees 50kg/bag
4 2,300 12,500
11,000
3 9,500
2,000 1
8,000
2
6,500
1,700
1 5,000
3,500
0 1,400 0 2,000
FY21 FY22 FY23 FY21 FY22 FY23
Urea offtake Urea price DAP offtake DAP price
Source: National Fertilizer Development Centre

The prices of urea also increased due to the Global DAP & Urea Prices Figure 2.5
increasing cost of production but the offtake US$/mt
did not witness a significant decline, as urea 900
still remained relatively affordable compared
to DAP. To encourage production, subsidy 700
disbursements to fertilizer sector increased to
500
Rs 6.7 billion in H1-FY23, up from Rs 6
billion in H1-FY22. 300

Agriculture Credit Disbursements 100

Dec-21
Dec-19

Dec-20

Dec-22
Aug-19

Aug-20

Aug-21

Aug-22
Apr-19

Apr-20

Apr-21

Apr-22
Agriculture credit disbursements expanded to
keep up the high cost of production
DAP Urea
Source: World Bank
Agriculture credit disbursements for H1-
FY23 expanded by 31 percent - to Rs 842 Source-wise DAP Imports to Figure 2.6
billion in H1-FY23 as compared to 640.8 Pakistan
billion during the same period last year.
thousand MT
Majority of the disbursements were 1,210
production loans for the farm sector,
followed by the livestock and poultry 910
segment in the Non-farm sector (Table 2.3).
610
In the aftermath of floods, an increase in the
production loans was a consequence of the 310
rising cost of production, as well as the tight
liquidity condition of the farmers. Loans 10
during Q2-FY23 remained higher as FY20 FY21 FY22 FY23
compared to Q1-FY23, factoring in the Australia China Morocco Saudi Arabia
Source: Pakistan Bureau of Statistics

15
State Bank of Pakistan Half Year Report 2022-23

Agriculture Credit Disbursements Table 2.3

billion Rupees
Q1-FY22 Q2-FY22 H1-FY22 Q1-FY23 Q2-FY23 H1-FY23
Farm sector
A. Production 136.3 158.4 294.7 188.6 231.1 419.7
B. Development 8.1 16.8 24.9 8.4 16.9 25.3
Tractor 1.7 2.9 4.6 0.9 1.4 2.3
C. Total farm sector (A+B) 144.4 175.2 319.6 197 248 445
Non-farm sector
D. Livestock/dairy 76.3 82.4 158.7 94.3 103 197.3
E. Poultry 48.5 55.5 104.3 65.7 68.8 134.5
F. Other 8.9 14 22.9 15.1 16 31.1
G. Total non-farm sector 147.5 173.7 321.2 186.7 210.8 397.5
Total agriculture (C+G) 291.9 348.9 640.8 383.8 458.6 842.4
Source: State Bank of Pakistan

impact of flood related losses. In the non- farmers. To assist farmers in the flood
farm sector, poultry sector disbursements affected areas, GoP introduced the Kissan
increased by 28.8 percent mainly due to the Package which enabled restructuring and
rising cost of inputs such as poultry feed. rescheduling of agricultural loans.10

To encourage production and keep up with Under the Kisaan Package, markup waiver
the rising cost of inputs, SBP revised the scheme for subsistence farmers, GoP markup
indicative credit limits for important crops in subsidy scheme for agriculture sector was
August 2022 (Table 2.4). Schemes launched announced. In addition, interest free loans
by the State Bank of Pakistan, such as, the and risk sharing schemes for farmers in
scoring model and champion banks also affected flood areas were launched, to
helped ensure adequate provision of credit to
facilitate the revival of agriculture sector.11
Per Acre Indicative Agriculture Table 2.4
Output
Credit Limits for Crops
Rupees per acre
Sugarcane
Existing Revised
Crop
(Jan 2022) (Aug 2022)
Wheat 60,000 100,000 Sugarcane remained relatively resilient to
Cotton 70,000 95,000 floods
Rice 75000 102,000
Sugarcane 105,000 142,000 After a bumper sugarcane crop in FY22 of
Maize (Hybrid) 78,000 106,000 88.6 million tons, sugarcane production for
Maize 65,000 88,000 FY23 is estimated to be at 81.6 million - 7.9
percent lower than last year (Figure 2.7). The
Source: State Bank of Pakistan

10 Source: State Bank of Pakistan Press Release dated December 22, 2022
11 Source: AC&MFD Circular No. 03 of 2022, State Bank of Pakistan

16
 Real Sector

Area and Production of Sugarcane Figure 2.7 crops as the sugarcane is fairly resilient to
thousand tons area in thousand flooding. In Sindh, floods damaged 12
Yield in kg/ha hecatares 1,600 percent of the area cultivated under
95,000
sugarcane, but the estimated damages were
1,200
80,000 lower than cotton and rice, as sugarcane is
800 mostly grown in the northeastern districts,
65,000 where flood inundation remained relatively
400
lower.13
50,000 0
FY23(p)
FY19

FY20

FY21

FY22

Rice

Production Yield - rhs Rice crop suffered the most damages due to
Area- rhs floods
Source: Federal Committee on Agriculture (MNFSR),
and Pakistan Bureau of Statistics Production of rice crop declined by 40
percent as compared to last year (Figure 2.8).
area under sugarcane crop witnessed an Rice crop faced headwinds as major rice
increase, as farmers continued to substitute producing areas in Punjab and Sindh
cotton crop with sugarcane, due to better remained flooded prior to harvest.14 The
returns.12 damages were mainly concentrated in Sindh,
which contributes almost 42 percent of the
However, despite an increase in area during total rice production of the country. In
FY23, production of sugarcane crop declined Sindh, production went down by 88 percent,
because of the damage caused by floods. The as the main rice producing districts, such as,
decline is comparatively lower than other ArRice
Area, Yield and production of Figure 2.8 Production, Yield and Area of Figure 2.9
Rice Cotton
yield in kg/ha; production in '000 bales
thousand tons area in thousand ha 4,100 area in '000 hectares yield in kg/ha
11,000 12,000 800
8,500 3,200
9,000 600
6,000 2,300
6,000 400
3,500 1,400
1,000 500 3,000 200
FY19

FY20

FY21

FY22

FY23(p)

0 0
FY19 FY20 FY21 FY22 FY23(p)
Production Area-rhs
Area Production Yield-rhs
Yield-rhs
Source: Federal Committee on Agricutlture (MNFSR), Source: Federal Committee on Agricutlture (MNFSR),
and Pakistan Bureau of Statistics & Pakistan Bureau of Statistics

12 For more details see SBP Annual Report on the State of Pakistan’s Economy 2021-22
13 The 2022 Pakistan Floods: Assessment of Crop Losses in Sindh Province Using Satellite Data.
Kathmandu: ICIMOD and Islamabad: PARC
14 Source: A Rapid Geospatial Impact Analysis of Floods in Pakistan (2022), Food and Agriculture

Organization

17
State Bank of Pakistan Half Year Report 2022-23

Production, Area and Yield Figure 2.10 season, floods compounded the adverse
of Maize impacts. In the aftermath of floods, high
production in '000 tonnes; yield in humidity proved conducive to pest attacks,
area in '000 ha kg/ha such as pink bollworm.16 In line with the
12,000 8,000
trend, cotton arrivals have also decreased
9,000 6,000
significantly. As reported by Pakistan
Central Cotton Committee (PCCC), cotton
6,000 4,000 arrivals declined by almost 40 percent in
December 2022, adversely impacting the
3,000 2,000 textile sector and undermining cotton
exports.
0 0
FY19 FY20 FY21 FY22 FY23(p) Maize
Area Prodution Yield-rhs
Source: Federal Committee on Agricutlture (MNFSR) &
Maize crop suffered the least damages
Pakistan Bureau of Statistics
Maize production for FY23 was estimated to
Badin and Kambarshahdad Kot remained be 9.2 million tons, as compared to 9.5
inundated.15 Moreover, rice production in million tons last year- reflecting a flood
Punjab declined by 14 percent due to floods. related decrease of almost 3 percent over last
The production losses has also negatively year (Figure 2.10). Among important crops,
affected rice exports (see Chapter 5 External maize production for Kharif FY23 suffered
Sector). the least damages, as most maize producing
Cotton areas were not impacted by floods. Maize is a
multipurpose crop, and has gained
Production of cotton crop declined due to popularity in the last two decades, due to its
unfavorable weather conditions vast usage for food, feed and fodder.17

The estimated cotton production stood at 6.3 Wheat

million bales in FY23 as compared to 8.3
million bales last year – exhibiting a decline For Rabi FY23, the wheat production target
of 25 percent (Figure 2.9). Cotton production was set at 28.4 MMT from an area of 9.3
reported losses due to floods, as almost 14 million hectares (Table 2.5) by the
percent of area cultivated under cotton was government. The wheat production target for
damaged in Sindh. Punjab has been fixed at 21 million tons,
while Sindh’s target has been fixed at 4
Cotton sustained pressures since the million tons. To encourage farmers, Punjab
beginning of the season due to lower water and Sindh governments have fixed
availability and heat stress. Later in the Minimum Support Price (MSP) of Rs. 3000

15 Source: The 2022 Pakistan Floods: Assessment of Crop Losses in Sindh Province Using Satellite Data.
Kathmandu: ICIMOD and Islamabad: PARC
16 Source: SUPARCO Crop Situation and Forecast Report, Volume XII (Issue 10), September 2022
17 Source: Pakistan Economic Survey 2020-2021

18
 Real Sector

Wheat Crop Table 2.5 stood at 3.6 million tons, whereas in FY22, 2.2
area in million hectares; production in million MT million tons of wheat was imported.
Area Production
Minor Crops
FY22 FY23(T) FY22 FY23(T)
Punjab 6.6 6.7 20.0 21.0
Production of minor crops declined, resulting
Sindh 1.2 1.1 3.8 4.0
in higher prices
KP 0.8 0.9 1.4 1.8
Baluchistan 0.5 0.5 1.2 1.6
During FY23, production of kharif minor
Pakistan 9.1 9.3 26.4 28.4 crops such as moong, mash and chillies also
T: target declined by 30 percent, 36 percent and 54
Source: Federal Committee on Agriculture, Pakistan percent respectively as compared to last year
Bureau of Statistics
mainly due to a decline in area under
and 4000 per 40 kg respectively to encourage cultivation. Area declined due to heavy rains
wheat production.18 during the sowing season. In the aftermath
of floods, their prices remained elevated
As wheat is a widely used staple in the local (Figure 2.11)
diet, considerable demand and supply gaps
exist. As of FY23 demand for wheat Within minor crops, the FY23 Rabi season
consumption is estimated to be at 30.79 targets for onion and tomatoes look for an
million metric tons, as per estimates by increase in the area and production.
MNFSR – whereas, in last year, production Furthermore, target for potato crop is set
stood at 26.4 million metric tons – showing a lower than its output for FY22, as its bumper
shortfall of almost 3 million metric tons from production resulted in surplus. Targets for
the consumption requirements. To meet this area and production of gram are also
shortfall Pakistan has been importing wheat enhanced to meet the growing demand for
for the last two years. In FY21 wheat imports pulses. The increase was particularly
significant in gram as its area and production
Prices of Moong and Maash Figure 2.11
is targeted to increase by 14 and 75 percent
respectively (Table 2.6).
Rupees/kg
250

200
2.3 Large-scale Manufacturing

150 LSM contracted by 3.7 percent during H1-

100 FY23 down from an expansion of 7.7 percent
in the corresponding period last year. This
50
reflects the impact of tight monetary
0 conditions, lower PSDP spending, imports
compression measures, and increase in
Aug-21

Aug-22
Apr-21

Apr-22
Feb-21

Feb-22
Dec-20

Dec-21

Dec-22
Jun-21

Jun-22
Oct-21

Oct-22

power tariffs and fuel prices along with

lower demand in the domestic as well as
Pulse masoor Pulse moong
global markets.
Source: Pakistan Bureau of Statistics

18 Source: www.senate.gov.pk

19
State Bank of Pakistan Half Year Report 2022-23

Minor Crops (Rabi) Table 2.6

area in '000 hectares; production in '000 tons; growth in percent
FY22 Output FY23 Target Growth
Area Production Area Production Area Production
Potatoes 313 7,937 238 6,029 -23.9 -24.0
Onion 141 2,108 162 2,422 14.9 14.9
Gram 867 319 989 560 14.1 75.5
Tomatoes 50.3 586 50 622 -0.6 6.1
Sources: Federal Committee on Agriculture (MNFSR) and Pakistan Bureau of Statistics

With a few notable exceptions, the LSM The cumulative contraction in LSM can be
observed a broad-based downturn during attributed to textile followed by automobiles,
H1-FY23, with 18 out of 22 sectors witnessing pharmaceuticals, non-metallic mineral
contraction, compared to 6 sectors in the products, and coke & petroleum products
same time last year and an average of 12 (Table 2.7). Whereas, the wearing apparel
sectors in the corresponding period of the and furniture industries continued their
previous three years (Figure 2.12). growth momentum, which lessened the
magnitude of the LSM decline.
Despite decline in exports, the export-
oriented sectors tracked by LSM index, Textile followed by automobile, the largest
supported the manufacturing industry contributors, contracted by 13.1 and 30.2
during H1-FY23. Segregating the exports- percent, respectively, during H1-FY23,
oriented sectors, the magnitude of against an expansion of 3.5 and 68.2 percent
contraction worsened to 9.9 percent during in the same period last year. Moreover, a
H1-FY23 against an expansion of 6.1 percent sizable portion of the overall decline in LSM
in the corresponding period last year (Figure was also contributed by the decline in
2.13).19 pharmaceutical, non-metallic, and petroleum
Positive and Negative Growth Figure 2.12 Growth in LSM and LSM-- Figure 2.13
Sectors in LSM Excluding Export-Oriented Sectors
number
percent
25 30
20 20
6
11 10
15 13
18 0
10 -10
16
5 11 -20
9
Dec-21

Dec-22
Sep-21

Sep-22
Aug-21

Apr-22

Jun-22

Aug-22
May-22
Nov-21

Jan-22

Nov-22
Jul-21

Oct-21

Feb-22
Mar-22

Jul-22

Oct-22

4
0
H1-FY20 H1-FY21 H1-FY22 H1-FY23
LSM Excluding_Exports(26.4)*
Positive growth Negative growth
*weight in parentheses
Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics
19The tentative export-oriented sectors include textile, wearing apparel, furniture, and leather products
together with football and electric fans as the sub-sectors.

20
 Real Sector

Growth and Contribution of Major LSM Sectors Table 2.7

percent
Growth Contribution
Sectors wt. H1-FY22 H1-FY23 H1-FY22 H1-FY23
LSM 78.4 7.7 -3.7 7.7 -3.7
Food 10.7 1.2 -2.6 0.2 -0.4
Beverages 3.8 5.0 -8.3 0.2 -0.4
Tobacco 2.1 21.6 -23.5 0.5 -0.6
Textile 18.2 3.5 -13.1 0.8 -2.8
Yarn 8.9 0.8 -14.2 0.02 -1.4
Cloth 7.3 0.3 -7.2 0.01 -0.6
Wearing apparel 6.1 20.4 46.6 1.6 4.1
Paper & board 1.6 17.3 -2.8 0.4 -0.1
Coke & petroleum products 6.7 0.7 -11.1 0.1 -0.8
Chemical products 6.5 3.3 -1.1 0.3 -0.1
Pharmaceutical products 5.2 -5.0 -21.6 -0.3 -1.2
Non-metallic mineral products 5.0 1.8 -11.7 0.1 -0.9
Iron & steel products 3.4 18.4 -2.1 0.8 -0.1
Electrical equipment 2.0 -3.8 -1.0 -0.2 0.0
Automobiles 3.1 68.2 -30.2 2.0 -1.4
Furniture 0.5 569.1 105.5 1.2 1.4
Source: Pakistan Bureau of Statistics

output. Meanwhile, on the back of product- materials also impeded the manufacturing
specific external demand, the wearing activities during the current period. Lower
apparel and furniture sectors expanded by demand owing to spike in energy prices in
46.6 and 105.5 percent during H1-FY23. the global markets, together with China’s
Consequent to the administrative increase in Covid policy of zero-tolerance reduced the
tariffs and fuel prices, the overall inputs cost country’s exports during H1-FY23.21
as reflected from Wholesale Price Index
(WPI) surged from 21.5 percent in the same Textile
period last year to 34.1 percent in the current
Exports reduction coupled with flood
review period. Similarly, the rising financial
damages dragged down the textile industry
cost owing to tight monetary conditions led
the decline in demand for bank borrowing by Textile sector, the largest component of
the manufacturing sector from Rs 674 billion manufacturing industry, registered a
in the last year to Rs 502.5 billion during the contraction of 13.1 percent during H1-FY23
current review period.20 compared to an expansion of 3.5 percent in
the corresponding period last year. The
Moreover, amid insufficient foreign production of yarn, cloth and woolen
exchange inflows and escalating pressure on blankets, representing 94 percent of textile
foreign exchange reserves and exchange rate, sector, contracted by 14.2, 7.2 and 55.0
the temporary restrictions on importing raw

20In addition to 675 bps increase during FY22, the SBP raised policy rate by 225 bps during H1-FY23.
21The Baltic Dry Index (BDI) measuring demand for commodities and raw material saw 56.0 percent
decrease during H1-FY23.

21
State Bank of Pakistan Half Year Report 2022-23

Production of Textile and Wearing Apparel Industry Table 2.8

quantity in million MT; growth in percent
Cumulative Quantity Growth
Weight
H1-FY21 H1-FY22 H1-FY23 H1-FY22 H1-FY23
Yarn 8.9 1.7 1.7 1.5 0.8 -14.2
Cloth* 7.3 523.8 525.3 487.5 0.3 -7.2
Jute goods 0.3 0.03 0.03 0.03 -9.7 5.6
Woolen blankets** 0.9 32.4 46.0 20.7 41.8 -54.9
Wearing apparel*** 6.1 18.0 21.7 31.8 20.4 46.6
*million square meters, **millions, ***million dozen
Source: Pakistan Bureau of Statistics

percent, respectively during H1-FY23 against policy rate also resulted into upsurge in the
a growth of 0.8, 0.3 and 41.8 percent in the borrowing cost of textile sector.22 Afterward,
same time last year (Table 2.8). As reported manifesting the downturn in textile
by PCCC, owing to flood damages, cotton production, the working capital loans to the
arrivals decreased significantly which, had textile sector saw reduction to Rs 137.3
adverse effects on the production of overall billion during H1-FY23 from Rs 260.1 billion
textile sector. in the same period last year.23

Following the China’s zero-Covid policy and Wearing Apparel

consequent reduction in demand
On the back of garments exports, wearing
undermined the textile demand from the
apparel continued its growth momentum
export sector. Specifically, the quantum
exports of cotton yarn and cotton fabric fell Maintaining its growth momentum, the
by 42.5 and 25.4 percent during H1-FY23, production of wearing apparel sector
respectively. In addition, exports of bedwear recorded an expansion of 46.6 percent during
and towels declined by 26.3 and 16.5 percent, H1-FY23, compared to a growth of 20.4
respectively. Moreover, sharp rise in percent in the same period last year (Figure
electricity tariffs and fuel prices, together 2.14). The sector benefited from higher
with tight monetary condition also remained exports volumes largely owing to higher
the important factors leading to contraction demand in traditional market and shifting
in the textile sector. orders from China to Pakistan (see Chapter 5
- External Sector).24 This was despite a sharp
In addition to 675 bps increase in FY22, increase in input prices, reflected from 37.2
further hike of 225 bps in the policy rate in percent increase in WPI of the wearing
H1-FY23 along with SBP announcement of apparel sector during H1-FY23 compared to
linking Export Financing Scheme (EFS) and 5.5 percent in the same period last year. To
Long-term Financing Facility (LTFF) to the cope with the rising cost, the sector expanded

22 Source: IH&SMEFD Circular No. 6, 7, 11 and 13 of 2022.

23 The textile sector, under the EFS and LTFF, retired Rs 18.8 billion and Rs 2.1 billion respectively during
H1-FY23 compared with borrowing of Rs 67.9 billion and Rs 64.6 billion in the same period last year.
24 It is pertinent to mention that unlike spectacular growth in volume, the exports of wearing apparel in

terms of US dollars expanded only by 0.1 percent during the current review period.

22
 Real Sector

Growth in Exports, Production & Figure 2.14 subsector contributed positively during the
Prices of Garment Sector in H1 current review period. The increase in the
percent
60 output of cooking oil and vegetable was
attributed to rise in imports of soyabean and
35
palm oil during H1-FY23.
10
Coke & petroleum
-15
Spike in prices and lower demand dwindled
-40 the production in petroleum sector
-65 Petroleum sector also witnessed a decline of
FY21 FY22 FY23
11.1 percent during H1-FY23, compared to an
Manufactured garments Exports of garments expansion of 0.7 percent in the same period
Price of garments
last year. With the exception of increase in
Source: Pakistan Bureau of Statistics
jet fuel oil, all sub-sectors of petroleum
borrowing for working capital during H1- industry recorded considerable reduction.
FY23.
Subsequent to the administrative increase in
Food fuel prices and higher depreciation of PKR,
Significant growth in sugar sub-sector the lower demand for petroleum products
moderated the decline in food sector. weighed on refining activity. According to
Oil Companies Advisory council (OCAC),
Food sector, the second largest component of the sale of petroleum products plummeted
LSM, shrank by 2.6 percent during H1-FY23, by 20.6 percent during H1-FY23.
against an expansion of 1.2 percent in the
same period last year. The reduction in
wheat & rice milling remained the prime Growth of Selected Food Sector Figure 2.15
reason leading to the decline of overall food Components in H1*
sector during H1-FY23 (Figure 2.15). Owing percent percent
120 50
to flash floods, the rice crop sustained
damages hence, its production and exports
60 25
cutback by 40.0 and 23.0 percent respectively.
0 0
Despite a delayed sugarcane crushing, the
production of sugar sub-sector posted -60 -25
healthy growth of 14.7 percent during H1- FY19 FY20 FY21 FY22 FY23
FY23 compared to 4.0 percent decline in the Food (10.7) - rhs
Sugar (3.4)
corresponding period last year.25 As a result, Wheat & Rice Milling (3.7)
the overall decline of food industry was * The QIM weight of the Food sector and selected sub-
moderated during the period. Similarly, the sectors is given in parentheses.
output in cooking oil and vegetable ghee Source: Pakistan
PBS Bureau of Statistics

25
The reported deadlock between the government and millers over exports of sugar delayed sugarcane
crushing.

23
State Bank of Pakistan Half Year Report 2022-23

Import Volume of Petroleum Figure 2.16 Urea Production by Large & Figure 2.17
Products in H1 Small Units in H1
million MT million tons
10 4

8 9.2
3
6 7.2

5.6 2
4 4.8 4.6 4.6
3.9 4.0
2 1

0
FY20 FY21 FY22 FY23 -1
FY21 FY22 FY23
Petroleum products Petroleum crude Large Urea Small Urea
Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics

Furthermore, the international oil prices Lower demand from flood affected
surged, on the average to 94 US$ per barrel agriculture land, prolonged turnarounds of
during H1-FY23 from 76 US$ per barrel in fertilizer companies, disruption in gas supply
the corresponding period last year, which and escalated gas prices were the main
further dented demand.26 As a result, import factors responsible for reduction in urea
quantum of petroleum products and crude production during the review period.
dropped down by 39.6 and 12.5 percent
respectively (Figure 2.16).27 Pharmaceuticals

Fertilizer Both domestic and global factors caused

notable decrease in pharmaceutical industry
The fertilizer sector recorded contraction of
2.0 percent during H1-FY23, compared to a The pharmaceutical sector experienced a
decline of 4.5 percent in the same period last decline of 21.6 percent during H1-FY23,
year. Urea production fell by 2.0 percent compared to 5.0 percent decrease in the same
during H1-FY23, compared to a 4.0 percent period last year. Tablets output, having
contraction in the same period last year more than 50 percent share in the
(Figure 2.17). Moreover, the imported pharmaceuticals, fell by 24.0 percent in H1-
fertilizer declined by 21.3 percent which was FY23 compared to a contraction of 27.4
restricted to 0.7 million metric tons during percent in the same period last year (Figure
H1-FY23 against 0.9 million metric tons in 2.18). Moreover, the quantum of imported
the same period last year. medicinal products also registered 12.8

26 In H1-FY23, the average price of Brent oil and Arab light rose from 76.4 and 77.1 dollars per barrel,
respectively, to 93.0 and 98.1 US dollars per barrel. Source: IMF Commodity Prices, accessed from
Bloomberg
27 It is important to mention that even though the import quantum of petroleum products and crude

respectively dwindled by 39.6 and 12.5 percent, however, owing to the price impact, the value of
petroleum products in terms of US dollars decreased only by 17 percent. Whereas, the import value of
crude increased by 15.2 percent.

24
 Real Sector

Growth in production of Medicinal Figure 2.18 Growth in Production of Figure 2.19

products in H1 Automobile Sector in H1
percent percent
60 100

40 50

20 0

0
-50
-20
-100

Alto Adj
Cars

Buses
Jeeps

Trucks

LCVs

Motorbikes
-40

cars
FY22 FY23
Tablets Syrups Injections Capsules Ointments
FY22 FY23
Source: Pakistan Bureau of Statistics Source: Pakistan Automotive Manufacturers Association

percent decline during H1-FY23 against a 2.20). Another factor attributable to demand
growth of 150.0 percent in the same period side is the SBP tightening prudential
last year. requirements for auto loans (see Chapter 3 -
Monetary Policy and Inflation).
Primarily, heavy reliance on imported raw
materials, the escalated prices of medicinal On the supply side, policy-induced import
raw materials and substantial depreciation of restrictions and significant depreciation of
PKR led to contraction in pharmaceutical PKR also contributed in imports reduction of
production during H1-FY23. The regulated completely knocked down (CKD) and semi
nature of medicine prices remained another knocked down (SKD) automobile kits during
constraint. the review period (Figure 2.21).

Automobile Construction-allied industries

Inflationary pressure and tight policy Dampened demand in local and global
regulations resulted into considerable fall in markets weighed down construction-allied
production of automobile sector industries

The automobile industry also posted 30.2 With a limited fiscal space, the government
percent contraction during H1-FY23, discontinued almost all subsidized lending
compared to 68.2 percent growth in the same schemes including Mera Pakistan Mera Ghar
period last year (Figure 2.19). The reduction from the start of the current financial year.
in production of automotive industry can be Resultantly, the flow of house building
attributed to both supply and demand side finance shrank to retirement of Rs 1.0 billion
factors. The primary reason on demand side during H1-FY23 from Rs 52.7 billion uptick
was customers cutback demand owing to in the same period last year. The growth in
surge in cars and fuel prices. As reported by PSDP spending also decelerated to 4.5
PAMA, the auto sale plummeted by 40.0 percent during H1-FY23 from 40.2 percent in
percent in the current review period (Figure the same period of last fiscal year, which led

25
State Bank of Pakistan Half Year Report 2022-23

Growth in Sale Automotbile Figure 2.20 Growth of Cement Dispatches* Figure 2.22
Products in H1 percent
26
percent
90
13
45
0
0
-13
-45
-26
-90 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1
Alto Adj

M. cycles
Cars

Buses
Jeeps

Trucks

LCVs
cars

FY17 FY18 FY19 FY20 FY21 FY22 FY23

Local Export Total
FY22 FY23 *Growth contribution for local and exports dispatches
Source: Pakistan Automotive Manufacturers Source: All Pakistan Cement Manufecturars
Association Association

to slowed down activity on large-scale reflected from 16.9 percent reduction in

infrastructure projects. domestic dispatches during H1-FY23,
compared to an expansion of 2.0 percent in
Cement the same period last year (Figure 2.22).
Downtrend in construction activity
Furthermore, subdued cement demand in the
translated to lower cement production
country’s export destinations also brought
down cement output. As reported by
The output in cement sector contracted by
APCMA, volume of cement exports to
15.1 percent during H1-FY23, compared to
countries other than Afghanistan declined by
0.92 percent decline in the same period last
49.0 percent during the current review
year. According to All Pakistan Cement
period in comparison with 32.5 percent
Manufacturing Association (APCMA), the
growth in same period last year (Figure 2.22).
decrease in cement production was mainly
attributed to lower construction demand as
Apart from devastating flood, the soaring
Imports of CKD/SKD of Figure 2.21 imported coal price owing to Russia-Ukraine
Automobile Kits war, import constraints on spare parts, tight
million US$ monetary conditions and lower PSDP
1,250 spending together with inflationary pressure
1,000 were the main factors causing lower demand
and production of cement during the review
750 period.
500 Steel
250
Global supply chain disruptions
0 Slowed down steel production
H1 H2 H1 H2 H1
FY21 FY22 FY23 The steel sector observed 2.1 percent decline
during H1-FY23 as opposed to an expansion
Source: Pakistan Bureau of Statistics

26
 Real Sector

Growth in Steel Sector in H1 Figure 2.23 Growth in Imports of Steel in H1 Figure 2.24
percent percent
45 60
39.1 36.7 39.9
30 40 29.9 29.2

20
15
2.7 8.8 3.7
0
0
-1.1 -20
-15 -21.0
-26.2 -11.1 -40
-17.5 -39.3
-25.9 -43.5
-30 -60
FY19 FY20 FY21 FY22 FY23 FY21 FY22 FY23

Flat steel Long steel Steel scrap Steel products

Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics

of 18.4 percent in the same period last year This slowdown can be majorly attributed to
(Figure 2.23). The decline in steel was the damages caused by floods, which had
mainly attributed to long steel, which fell by adversely impacted the production of
11.1 percent during H1-FY23 compared to important crops – cotton, sugarcane and rice.
significant growth of 36.7 and 39.1 percent, in Other than agriculture, growth in the
the same period last two years, respectively. industrial sector also moderated as evident
by the decline in the growth of LSM.
Imported scraps, the basic raw material of Moreover, imports also declined by 18
steel production, posted 39.3 percent percent during the H1-FY23, as compared to
reduction during H1-FY23 compared to 21.0 an expansion of almost 51 percent in the
percent in the corresponding period last year same period last year.
(Figure 2.24). Import constraints on raw
material, depreciation of PKR, and rising In line with the slowdown in the wholesale
energy cost along with payments of and retail sector, credit to the sector reported
demurrages on containers carrying steel retirement instead of more borrowing. This
scrap were attributed as the main factors was majorly driven by the non-specialized
causing lower production in steel industry. wholesale trade, which registered retirement of
Moreover, as per industry sources, most steel almost Rs 5.7 billion. Another significant
companies saw decline in volumes due to reason for this slowdown was the
floods in the first two months of H1-FY23. deceleration in borrowing from the wholesale
of solid, liquid and gaseous fuels and related
2.4 Services products, as the demand for fuel remain
subdued during H1-FY22
The indicators for services sector show a
slowdown in activities during H1-FY23, In the transport and storage sector, during H1-
mainly due to the contraction in commodity FY23 POL sales to the transport sector
producing sectors. Within the services declined by 19 percent as major
sector, the indicators for wholesale and retail infrastructure – roads and bridges - sustained
trade show a slight slowdown in the sector. damages due to floods (Table 2.9). In

27
State Bank of Pakistan Half Year Report 2022-23

Damages to Infrastructure Table 2.9 Damages and Losses in Selected Table 2.10
roads in km; bridges in number Sectors
billion Rupees
Province Roads Bridges
Sectors Damages Losses
Balochistan 2,222 58
Health 23 7
Punjab 877 15
Education 120 47
KP 1,575 107
Transport & Communications 701 60
Sindh 8,389 165
Tourism 2 20
Total 13,115 439
Source: Pakistan Floods 2022 Post Disaster Need
*Cumulative damages from June 14, 2022 to
Assessment Supplemental Report (Government of
November 11, 2022
Pakistan)
Source: National Disaster Management Authority
whereas, almost 10,980 education institutes
addition, demand was also dampened by the were categorized as partially damaged,
increase in prices of petroleum products. causing a disruption of teaching services.
Furthermore, sales of commercial vehicles These damages affected some 94 thousand
also showed a decline due to lower economic teachers and 2.6 million enrolled students.
activity. These trends are indicative of an
overall weakening in the transport sector. Within school education, primary schools
Infrastructure damages also impacted the sustained the highest damage, with an 80
food and accommodation sector by lowering percent share of all damaged institutions.29
tourism in the flood affected areas as access Other than education, 13 percent of the
to major tourist spots remained suspended health facilities were damaged, which in turn
during most part of H1-FY23. disrupted health service delivery.30 This
downturn in the services sector is also
Unlike other measures, the indicators for
manifested in the business confidence
information and telecommunication point
survey, which reflects the prevalent business
towards a continuation in the increasing
sentiment, conducted by State Bank of
trend of both tele-density and broadband
Pakistan. The results for H1-FY23 indicate a
subscribers. This increase reflects the higher
decline in the business confidence (Figure
profitability of the telecommunication sector
2.25).
along with an increased reliance on the
locally manufactured cellular devices.28
In the banking sector, assets registered an
increase of 19 percent. The increase in assets
The 2022 floods also caused significant
was primarily led by investments and
damages to health and education services
advances (Figure 2.26). Moreover, high
(Table 2.10). At least 6,225 education
interest rates also led to increased
institutions were assessed as fully damaged,
profitability (Table 2.11).

28 Source: Pakistan telecommunication authority (available at: https://www.pta.gov.pk/en/media-

center/single-media/telecom-revenues-rise-to-pkr-694-billion-in-2022-pta-annual-report-110123)
29 Source: Ministry of Planning Development and Special Initiatives (2022). Pakistan Floods 2022: Post

Disaster Need Assessment Supplemental Report. Islamabad: Ministry of Planning Development and
Special Initiatives
30 ibid.

28
 Real Sector

Services and Wholesale and Figure 2.25 Composition of Assets in H1 Figure 2.26
Retail Sector Confidence Index billion Rupees
1,800
70
1,500
60
1,200
50
900

40 600

30 300
Jun-19

Jun-20

Jun-21

Jun-22
Oct-19

Oct-20

Oct-21

Oct-22
Feb-19

Feb-20

Feb-21

Feb-22

0
FY22 FY23

Wholesale and retail Services Investments (net) Advances (net)

Source: State Bank of Pakistan Source: State Bank of Pakistan

2.5 Labor Market Jul-Nov FY23 from expansion of 4.4 percent

in the corresponding period last year. The
Following the decline in LSM, the industrial labor market data, reported by Punjab
employment in both Punjab and Sindh Bureau of Statistics (PBOS) and Sindh Bureau
experienced downtrend (Figure 2.27). In of Statistics (SBOS), showed decline in
Pakistan, the combined Punjab and Sindh employment in both industrial and services
employment reduced by 0.8 percent during sectors during Jul-Nov FY23 compared to the
Services Sector Indicators Table 2.11
H1-FY22 H1-FY23
Wholesale and Retail Trade
Sectoral credit off take- flow (billion Rupees) 55.4 -2.8
Imports (billion US Dollars) 40.8 31
Growth (percent) 66 -23
LSM (YoY growth in percent) 7.7 -3.7
Agriculture credit disbursements (billion Rupees) 640.8 842
Transport and Storage
POL sales to transport sector (growth) 11.2 -19.3
Teledensity (percent) 87.1 87.9
Broadband users (million) 109.6 124
Finance and Insurance Activities**
Assets (billion Rupees)*** 30,058 35,795
Deposits (billion Rupees)*** 21,719 23,461.4
ROA after tax (percent) 0.96 1.01
ROE after tax (percent) 14 16.9
Profit after tax (billion Rupees) 141.3 210
Infection ratio (end of Dec-2022) 7.9 7.3
General Government Services
Expenses - general govt & defense^ (billion Rupees) 730.4 865.5
**Banking sector only *** Stocks, as of end-December 2022 ^Only federal government
Sources: State Bank of Pakistan, Pakistan Bureau of Statistics, Oil Companies Advisory Council, Pakistan
Automotive Manufacturers Association, and Ministry of Finance
29
State Bank of Pakistan Half Year Report 2022-23

Industrial Employment* and LSM Figure 2.27 YoY Employment Growth in Figure 2.28
Indices in H1 Punjab
115 160 percent
8

100 130
4

85 100
0
70 70
Sep-20

Sep-21

Sep-22
Nov-20

May-21

May-22
Jan-21

Nov-21
Mar-21

Jan-22
Mar-22

Nov-22
Jul-20

Jul-21

Jul-22

-4

Apr-21

Apr-22
Jan-21

Jan-22
Jul-20

Oct-20

Jul-21

Oct-21

Jul-22

Oct-22
Employment LSM - rhs
*Punjab and Sindh combined
Source: PBS, PBOS and SBOS Source: Punjab Bureau of Statistics

same period last year. In addition, the SBP- Punjab

IBA BCS and CCS surveys also revealed
deterioration in employment sentiments As measured by the industrial employment
during the current review period. index, the overall manufacturing sector laid-
off workers in Punjab during H1-FY23
Besides employment in services and compared to last year (Figure 2.28).
industrial sectors, the gender wise Reported in the Monthly Survey of Industrial
segregation of employment over the years Production & Employment in Punjab, jobs
reveals that labor force participation of men creation declined by 0.8 percent during the
remain higher than women across all H1- FY23 compared to 1.4 percent growth in
professions in Pakistan, as reported by PBS same period last year.
in the latest labor force survey 2021-2022.
Box 2.2 briefly analyzes the trends and The decline in employment in industrial
patterns of female labor force participation in sector of Punjab was predominantly driven
Pakistan. by significant lay-offs in the automobile
industry, which dwindled by 21.0 percent
The industrial sector laid-off workers as during H1-FY23 against a growth of 0.3
output decreased and employment levels in percent in the same period last year. The
both Punjab and Sindh declined during the significant decline in employment in the
current review period. At the same time, automotive sector corresponded to its
SBP-BCS exhibited downturn in sentiments production, as evidenced by the industry's
towards employment creation in both output index, which fell by 59.0 percent
industrial and services sectors during H1- during H1-FY23 compared to the same
FY23. Likewise, deterioration in perceptions period last year.
about job growth was witnessed in SBP
Consumer Confidence Survey (CCS) for the Similarly, being the second largest sector,
next six months. employment in food Drinks & Tobacco

30
 Real Sector

Sector-wise Employment Growth Table 2.12 cotton and woolen textile increased by 0.3
in Punjab and 10.2 percent respectively, during H1-
H1-FY22 H1-FY23 FY23.
Food drinks & tobacco 0.6 -6.4
Textiles 1.0 1.3 Following the textile industry, Employment
Leather rubber & plastic 15.6 3.5 in the leather Rubber & plastic sector, though
Paper & paper board 2.4 1.2
decelerated, recorded an expansion by 3.6
Chemicals & petroleum -0.7 -0.7
percent during H1-FY23 compared with 15.2
percent in the corresponding period last
Non-metallic & mineral 5.4 -2.0
year. The growth in this sector was
Engineering products 0.7 0.6
attributed to footwear sub-sector; which
Automobile 0.4 -19.1
contributed by hiring 12,387 workers on the
Source: Punjab Bureau of Statistics average during the current period compared
with 11,781 persons in the same period last
industry, was pushed down by dairy and
year. This was in line with rise in footwear
sugar sub-sectors, where employment
production, which had expanded to 16.1
decreased by 18.5 and 9.2 percent
million pairs during H1-FY23 from 14.4
respectively, during H1-FY23 compared with
million pairs in the corresponding period of
13.5 and 2.8 percent in the corresponding
last year.
period last year (Table 2.12).31, 32 Moreover,
cement sector also followed the negative
trend and laid-off 8.8 percent of its workers Sindh
in H1-FY23 against an extension of 6.3
percent in the last year. Reported by Sindh Bureau of Statistics
(SBOS), the latest data from Monthly
Unlike other sectors, textile industry, being Industrial Production and Employment
the largest sector, expanded by 0.3 percent Survey (MIPE) revealed that growth in the
during H1-FY23 compared to 0.9 percent overall employment in manufacturing sector
growth last year. The registered growth in in Sindh contracted by 3.0 percent during
employment level of overall textile sector July-Nov, 2022 compared with 6.2 percent
was mainly contributed by jute textile sub- growth in the same period last year (Figure
sectors during the current review period. 2.29) .33
The increase in employment in textile sector
can be ascribed to the expansion in textile Beverages, leather tanning, beverages, textile,
output in Punjab. According to the Punjab and automotive sectors mainly drove the
Bureau of Statistics (PBOS), the cumulative deceleration in employment during the
output, as measured by its LSM index, for current review period. Whereas, wearing

31 Due to row over permission to export sugar, the sugar mills in Punjab delayed the sugarcane crushing
during the current review period.
32 During H1-FY23, most of the food sub-sectors registered output expansion; however, the Punjab LSM

index for sugar, wheat milling and cigarettes decreased by 16.7, 14.1 and 19.1 percent respectively.
33 It is important to note that due to change in the base year, sectors and sub-sectors, reported by Sindh

Bureau of Statistics, the recent employment data tables from November 2021 are no more comparable to
the earlier tables. Hence, the growth in employment was calculated for Jun-Nov 2021 and Jun-Nov 2022.

31
State Bank of Pakistan Half Year Report 2022-23

Employment Index in Sindh Figure 2.29 BCS Employment Diffusion Figure 2.30
base = Nov-21 Index for Industrial Sector
105 index
65

100 55

45
95

35
90

Aug-19

Dec-22
Aug-18
Dec-18

Dec-19

Aug-20
Dec-20

Dec-21

Aug-22
Apr-19

Apr-20

Apr-21
Aug-21

Apr-22
Nov-21

May-22

Nov-22
Sep-22
Jan-22

Mar-22

Jul-22

Past Six Months Next Six Months

Source: Sindh Bureau of Statistics Source: State Bank of Pakistan

apparel and steel industries recorded perceptions about overall employment

improvement in their employment. generation during the past and future six
months. According to the survey, on average
Food sector being the second largest 52.2 percent of respondents were optimistic
manufacturing sector, laid-off 0.5 percent about job growth during the next six months,
more workers during Jul-Nov FY23 as down from 55.8 over the same time last year.
opposed to hiring 23.6 percent in same (Figure 2.30) The data, reported in various
period last year. The employment situation surveys, also manifested that on average the
in textile sector deteriorated by 3.4 percent diffusion index regarding employment in
during Jul-Nov FY23, against a worthwhile manufacturing sector dropped to 48.0 and
contribution of 17.9 percent in jobs 52.2 respectively for the past and future six
generation in the last year. months during H1-FY23 from 54.3 and 56.0
in the corresponding period last year.
The automobile industry lost 3.9 percent
more workers during the Jun-Nov 2022 Similarly, the perception index about
period. Restrictions on imports of raw employment generation in the services sector
material through temporary measures and on the average deteriorated to 48.4 and 53.3
the inflationary pressure leading to lower for the past and future six month
demand in the local markets can be respectively during the current review
attributed as the main factors behind period from 53.5 and 56.2 in the same period
reduction in output and employment in last year (Figure 2.31).
automobile industry during the current
review period. Consumer Confidence Survey

SBP Confidence Surveys Moreover, the outcome of the SBP Consumer

Confidence Survey (CCS) highlighted
The latest data from SBP Business deteriorating expectations about the
Confidence Survey (BCS) conducted in domestic labor market. The recent round of
December 2022 exhibited deterioration in poll, conducted in January 2023, revealed

32
 Real Sector

BCS Employment Diffusion Figure 2.31 Future Unemployment Index for Figure 2.32
Index for Services Sector Next Six Months -SBP CCS
index index
65 80

55 70

45 60

35 50
Sep-20

Dec-21
Aug-18

Apr-20
Jun-19

May-22
Jan-19

Nov-19

Feb-21
Jul-21

Oct-22

Nov-19

Nov-20

Nov-21

Nov-22
Mar-21
Jul-19

Mar-20
Jul-20

Jul-21

Mar-22
Jul-22
Past 6 Months Next 6 Months FY20 FY21 FY22 FY23
Source: State Bank of Pakistan Source: State Bank of Pakistan

that 72.6 percent of respondents had next six months.

anticipated a rise in overall unemployment
over the following six months, compared to Wages
68.3 percent during the same time last year. The most recent wage indices released by the
(Figure 2.32) Pakistan Bureau of Statistics (PBS) show
upward trend in overall wages, which on the
Aligned with the declining trend in LSM, the average increased by 20.0 percent during H1-
Punjab and Sindh employment surveys along FY23 compared to a rise of 7 percent at the
with SBP surveys for employment generation same time last year. The growth in wages
in the past six months revealed deterioration can be attributed to the surge in inflation
in labor market during H1-FY23 from the which escalated to 25.0 percent on the
corresponding period last year. Moreover, average during the current review period
the SBP surveys also reported pessimistic from 9.8 in the corresponding period last
expectations regarding jobs creation in the year. (Figure 2.33)

Growth in Wages of Services Sector in H1 Figure 2.33

percent 29
30
Inflation
20 20 19 20
19
20 17
15 15
14
9 9 9 9
10 7 7 8 6
5
3

0
FY22 FY23
Overall Tailor Doctor Clinic Fee
Dental Services Hospitals Services Mechanical Services
Household servant Cleaning and laundring Garbage collection
Personal Grooming Services
Source: Pakistan Bureau of Statistics

33
State Bank of Pakistan Half Year Report 2022-23

During H1-FY23, with exception of hospital against an increase of 8.0 percent in the last
services, all categories of wages registered year. Similarly, remuneration of remaining
significant rise from the same time last year. categories of services sector on average
Wages of personal grooming services doubled during the current review period.
recorded an expansion by 29.0 percent

Box 2.2: Trends and Patterns in Female Labor Force Participation in Pakistan

Female labor force participation (FLFP) is a major Male and Female Labour Force Figure 2.2.1
driver of growth, as women constitute almost half of
percent
the working age population, their absence from the
labor force results in significant productivity losses. 100
This box aims to briefly discuss the trends and 80
patterns of female labor force employment in
60
Pakistan and explore the barriers restricting entry to Gender
the labor force. 40 gap
20
In Pakistan, gender gap in the labor force is one of
the highest in South Asia 0
Bangladesh

Nepal
Pakistan

India

Sri Lanka
Indonesia

Globally, the proportion of men participating in the

labor force is higher than women - the global labor
force participation rate for women is almost 50
percent, whereas for men it is almost 80 percent.34 Female Male
Source: World Bank
In line with the global trends, in Pakistan, the FLFP is
considerably lower than that of men. The findings from the labor force survey 2020-2021 suggests that
almost 44.9 percent of the overall population is in the labor force, out of which, men comprise 67.9
percent, whereas the female labor force participation (FLFP) is only 21.4 percent. Over the time, female
labor force participation has increased but despite this increase, Pakistan’s female labor force participation
is still one of the lowest among peer economies (Figure 2.2.1).35

Other regional countries like Bangladesh and Indonesia have made significant progress in terms of
increasing FLFP. Consider the example of Bangladesh, where female labor force participation is
estimated to be 37 percent, the growth in FLFP has mainly occurred on the back of expanding ready-made
garment sector.36 This development has played a crucial role in their economy and helped boost exports.
Bangladesh has managed to create more paid job opportunities as compared to Pakistan resulting in a
higher FLFP.37 Another reason for a higher FLFP in Bangladesh is lower education gaps between men
and women.38

34 Source: World Bank, 2022

35 In 2005, FLFP was at 11 percent, whereas, in 2022 it is reported to be at 21.5 percent
36 Source: World Bank (2019). Female labor force participation in Bangladesh, what do we know? How can we

address it in operations? Washington D.C: World Bank

37 Source: World Bank (2022). From Swimming in Sand to High and Sustainable Growth. Washington D.C:

World Bank
38 As per BBS labor force survey, 2016-17, In Bangladesh, 66 percent of men and 63 percent of women have

competed at least primary education. In Pakistan, as compared to 52 percent of working age men only 35
percent of working age women in Pakistan have completed primary education or above.

34
 Real Sector

Females in the labor force face a lack of occupational diversity 39

Most of the women are employed in the agriculture (Figure 2.2.2) and non-agriculture informal sector.
Women associated with agriculture are mostly involved in the harvesting of crops, farm maintenance, rice
nursery transplantation and the most of activities related to the livestock.

An analysis of the composition of employment in Pakistan reveals that at lower levels of education, urban
men are mostly engaged in construction and services, whereas, most urban women are engaged in jobs in
the textile and apparel sector or employed as domestic help . However, at higher levels of education, the
education sector features as the largest employer for urban women, whereas, urban men work across a
varied number of service-oriented jobs, in addition to being employed in the education sector. In rural
areas, broadly speaking, occupational choices are limited for both men and women, but the limitations
seem to be more pronounced for women than for men in rural areas too.

Wholesale and retail, and community and social services are the key sectors of employment for women in
the informal non-agriculture sector. Other than that, as per LFS 2020-2021 almost 29.7 percent of the
Females are employed as home based workers.40 Despite the home-based workers making a significant
economic contribution to the economy, they remain vulnerable to exploitation, longer working hours and
lower wages because of a lack of formal contractual agreements.41

Moreover, according to the Global Wage Report 2018-19 (ILO), on average, women in Pakistan earn 34
percent less than men. However, the average wages of women have grown over time but still remain
lower than men (Figure 2.2.3). In addition to lower wages, women remain underrepresented in
Managerial positions too. As per LFS 2020-2021, only 5.7 percent of employed women hold managerial
positions.

Distribution By Various Occupational Groups, 2022 Figure 2.2.2

percent
Elementary occupations
Plant/ machine operators & assemblers
Craft & related trades workers
Skilled agricultural, forestry & fishery workers
Service and sales workers
Clerical support workers
Technicians & associate professionals
Professionals
Managers
Female Male
0 10 20 30 40 50 60 70
Source: Labour Force Survey

39 This section borrows heavily from: World Bank (2022). From Swimming in Sand to High and Sustainable
Growth. Washington D.C: World Bank
40 Home Based Workers (HBWs) refer to the category of workers, who are employed in the informal

sector and work mostly within their homes or surrounding areas.

41 Source: International Labor Organization (2017). Pakistan’s Hidden Workers, Wages and Conditions of

Home-Based Workers and the Informal Economy. Geneva. International Labor Organization.

35
State Bank of Pakistan Half Year Report 2022-23

Education and Safe transit options are major drivers of female labor force participation

Women continue to be missing from the labor Average Wages Over Time Figure 2.2.3
market due to a number of barriers. The most (Managers)
important is low educational attainment. rupees
80,000
Participation in the labor force increases as
education levels rise.42 The gap between male and
70,000
female education needs to be bridged to ensure
equal labor force participation. Another major 60,000
driver of female labor force participation is access to
safe transit options. Women are more likely to 50,000
accept a job offer if it provides transportation.
Reducing mobility constraints has a positive impact 40,000
on job searching for women, including women who
are not searching for jobs to begin with. 30,000
2013 2014 2015 2018 2019 2021
Women’s respond positively to women-only modes Male Female
of transport, suggesting that safety and social
Source: Labour Force Survey
acceptability are key constraints.43 The monetary
and social and personal costs involved with transport to travel are formidable and should be taken into
consideration in planning interventions. Another important driver of FLFP is digital connectivity.
Despite improvement, digital connectivity gaps are still widely prevalent as Pakistani women are 49
percent less likely than men to use mobile internet and only one percent of the female internet users
reported to use it for work.44 Bridging connectivity gaps is crucial for enhancing FLFP.

In conclusion, absence of women from the labor market on this scale not only deprives women of
economic opportunities but also translates into lower productivity and lost growth potential for countries.
As per estimates, closing the FLFP gap can generate 19.3 million jobs and boost Pakistan’s GDP by almost
23 percent.45 Some key reform areas to focus on are availability of safe transportation for women, better
documentation of the economy and increasing educational attainment. Legislation to protect workers
lacking legal coverage will impact female labor force participation favorably.46

42 Institute of Labor Economics (2022). Returns to Education and Female Participation. University of Bonn.
Bonn.
43 Asian Development Bank (2022). Women’s Mobility and Labor Supply: Experimental Evidence from Pakistan.

Mandaluyong, Philippines: Asian Development Bank Working Paper No. 655

44 Groupe Speciale Mobile Association (2021). Addressing the Mobile Gender Gap in Pakistan. London:

Groupe Speciale Mobile Association

45
Source: World Bank (2022). From Swimming in Sand to High and Sustainable Growth. Washington D.C:
World Bank.
46 World Bank’s report titled, “Supporting legal reforms to increase women’s workforce participation in

Pakistan" dated July 08, 2022.

36
3 Monetary Policy and Inflation
Amid multi-decade high inflation outturns and persistent pressures on PKR, the monetary policy committee (MPC)
continued the tightening stance and increased the policy rate by a cumulative 225 bps during H1-FY23. As the
economy entered the first half of FY23, the risks to macroeconomic stability had increased. Elevated inflation
expectations, alongside a range of domestic supply side factors, including scarcity of food commodities amid floods,
large depreciation of PKR, temporary restriction on imports, administrative increase in electricity and fuel prices,
and second round effect of spike in food and energy prices pushed the national consumer price inflation to 25.0
percent during H1-FY23, from 9.8 percent in the same period last year. Meanwhile, the contractionary measures
introduced since the last year weighed down domestic demand during the first half. However, despite the sharp
decline in import demand and hence current account deficit, lower than expected realization of external inflows and
tightened global financial conditions, kept external account under significant pressure during H1-FY23, leading to a
large depreciation in PKR. Hence, the rising interest rates, overall deterioration in macroeconomic environment,
and a contraction in domestic demand discouraged private sector credit offtake during H1-FY23. Specifically, the
growth in working capital loans weakened considerably, whereas fixed investment loans remained around the last
year level.

3.1 Policy Review at the time of July 2022 meeting.

The Monetary Policy Committee (MPC) Furthermore, the MPC envisaged the real
continued the contractionary stance and economic growth for FY23 to moderate to a
increased the policy rate by a cumulative 225 range of 3-4 percent on the back of monetary
bps, amid worsening inflationary pressures tightening and commitment of fiscal
and consistent deterioration in external consolidation in the FY23 budget. The MPC
account during H1-FY23. Elevated inflation emphasized the need to introduce additional
expectations along with a range of domestic policy measures to contain energy demand to
supply side factors pushed the national CPI bring trade deficit to a sustainable level.
(NCPI) inflation to a multi-decade high level Based on these measures, with a significant
in H1-FY23, despite the policy-led retrenchment in import growth, the current
moderation in the pace of economic activity account deficit was projected to narrow to
and softening of global commodity prices. In around 3 percent of GDP during FY23.
the external sector, regardless of notable
contraction in the current account deficit However, the summer flash floods materially
(CAD), stringent external financing altered the macroeconomic outlook. Hence,
conditions resulted in a signficant decline in at the time of November 2022 MPC meeting,
SBP liquid reserves, which kept PKR under the committee made two revisions to these
pressure. projections after incorporating Post Disaster
Needs Assessment of the floods carried out
Considering the trend of macroeconomic by the government. First, the committee
indicators and anticipating strong second reduced the real GDP growth projection for
round impact of the supply side shock in the FY23 to 2 percent from the earlier estimated
shape of energy price increase, the Monetary range. Second, the MPC increased the
Policy Committee (MPC) projected average inflation forecast for FY23 to 21-23 percent
NCPI inflation for FY23 to fall within the from the pre-flood projection of 18-20
range of 18-20 percent percent.

1
State Bank of Pakistan Half Year Report 2022-23

Frequency Distribution of Inflation Figure 3.1

Urban Rural
100% 100%

80% 80%
60% 60%
40%
40%
20%
20%
0%
0%
Q1-FY19
Q2-FY19

Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q3-FY19
Q4-FY19
Q1-FY20
Q2-FY20
Q3-FY20
Q4-FY20

Q4-FY22
Q1-FY23
Q2-FY23

Q2-FY19

Q1-FY20

Q3-FY20
Q4-FY20

Q2-FY21

Q1-FY22

Q3-FY22
Q4-FY22

Q2-FY23
Q1-FY19

Q3-FY19
Q4-FY19

Q2-FY20

Q1-FY21

Q3-FY21
Q4-FY21

Q2-FY22

Q1-FY23
<0 0--5 5--10 >10
Source: Pakistan Bureau of Statistics

NCPI inflation soared to 25.0 percent in H1- despite softening global commodity prices.
FY23, nearly three times greater compared to Third, continuing the energy and fiscal
the same period last year’s level of 9.8 reforms under the IMF EFF, the government
percent. Maintaining the steep uptrend of introduced increase in power tariffs and re-
Q4-FY22, inflationary pressures continued to instated Petroleum Development Levy (PDL)
widen, as more than three-fourth of the on petroleum products, which led to a sharp
entire CPI items witnessed double-digit increase in energy inflation during H1-FY23.
inflation across rural and urban areas, in Finally, depicting second round effects of
both quarters of FY23 (Figure 3.1). In food and energy inflation into broader prices
addition, the disaggregated data suggests and wages, and elevated expectations core
that inflation momentum also remained inflation rose to double digits during H1-
elevated almost throughout H1-FY23 as FY23. Importantly, core inflation explained
indicated by monthly inflation outcomes. over one-quarter of the urban and rural
inflation during H1-FY23. This was despite a
Four factors underpinned the surge in notable contraction in domestic demand
inflation during H1-FY23. First, the flood since the start of FY23.
induced losses to agricultural produce and
livestock caused shortages of food Amid the ongoing demand compression
commodities and drove a sharp increase in measures and the fallout of floods, domestic
food prices. Particularly, inflation in economic activity considerably weakened
perishable commodities including fresh during H1-FY23. Almost all high frequency
vegetables and fruits shot up to around 50 demand indicators showed double-digit
percent across urban and rural segments. declines during H1-FY23 on yoy basis –
Second, since the country was reliant on the including sales of cement, automobiles and
imported food commodities, consistent petroleum products (POL). On the supply
depreciation of PKR further augmented side, LSM posted a broad based 3.7 percent
increase in domestic prices of food group, yoy contraction during Jul-Dec 2022.

38
 Monetary Policy and Inflation

The slowdown in demand translated into a the MPC emphasized the need of continued
sizeable reduction in imports and hence CAD fiscal consolidation to complement monetary
during H1-FY23. However, despite this tightening for preventing inflation from
improvement, domestic uncertainity and becoming entrenched and achieving stability
tightened global financial conditions kept in the external account. The committee also
PKR under pressure during H1-FY23. On the suggested the use of introducing
fiscal side, as opposed to the consolidation administrative measures to minimize supply
envisaged in FY23 budget, the budget deficit chain disruptions to contain food inflation.
for H1-FY23 remained around the level seen
in the comparable period last year. Lower Pakistan’s policy experience was in line with
than target collection of tax revenues and the global developments. In response to the
sharp increase in interest payments were multi-decade high inflation, countries across
mainly responsible for this deterioration. the globe continued to raise policy rates
during H1-FY23 (Box 3.1), despite concerns
In this stressed macroeconomic environment, about slowdown in global growth.
SBP faced the challenge to minimize risks to
price stability and financial stability, and to In line with the increase in policy rate, the
support economic growth. Hence, to prevent weighted average lending rate moved up
a de-anchoring of inflation expectations and sharply during H1-FY23. The increase in
provide support to PKR, SBP continued the lending rates during H1-FY23, alongside the
contractionary stance. The committee noted lagged impact of demand compression
that a strong, timely and credible policy measures introduced since last year,
action was a key to curtail domestic demand, discouraged private sector credit uptake
prevent a de-anchoring of inflation during H1-FY23. Specifically, growth in
expectations and reduce risks to external working capital loans lowered substantially,
stability. A delay in introducing the required whereas fixed investment showed a tepid
policy adjustment could lead to greater increase during H1-FY23. In addition to
macroeconomic instability that would have demand management measures, import
required more aggressive tightening and restrictions, which constrained the
would be more disruptive for economic availability of raw materials to industry,
growth. flood-induced disruptions to economic
activity as well as slowing global demand
In addition to changes in the policy rate, the also discouraged LSM production and hence
rates of EFS and LTFF were also linked to borrowing by the industry. Similarly,
SBP policy rate to strengthen the monetary softening global commodity prices of input
policy transmission.1 Furthermore, items, compared to the sharp increase seen in

1In July 2022, SBP linked the rates of EFS and LTFF with policy rates by keeping these rates 5 percent
below the policy rate. Mark up rate for financing under EFS (Part-I and Part-II) was increased from 7.5
percent to 10 percent per annum; and mark up rate for financing under LTFF is raised to 10 percent per
annum from 7 percent per annum. In December 2022, the mark-up rates of EFS and LTFF were increased
to 13 percent from 11 percent per annum by keeping the gap between these rates and policy rate at 3
percent. Sources: Infrastructure Housing and SME Finance Department. Circular No. 11 and 13 dated July
07 and December 29th, 2022. Karachi: SBP

39
State Bank of Pakistan Half Year Report 2022-23

Factors Affecting the Private Sector Growth Figure 3.2

YoY growth in percent YoY growth in percent
150 30

100 20

50 10

0 0

-50 -10
Jul-19

Sep-19

Jul-20

Sep-20

Jul-21

Sep-21

Jul-22

Sep-22
Aug-19

Dec-19

Jun-20

Aug-20

Dec-20

Dec-21
Apr-20

Apr-21

Jun-21

Aug-21

Jun-22

Aug-22

Dec-22
Jan-20

Jan-21

Apr-22
May-20

May-21

Jan-22

May-22
Nov-19

Nov-20

Mar-21

Nov-21

Nov-22
Oct-19

Mar-20

Oct-20

Feb-21

Oct-21

Mar-22

Oct-22
Feb-20

Feb-22
Private credit -rhs Non-food import LSM
Global commodity price WALR-rhs
Source: State Bank of Pakistan, International Monetary Fund, & Pakistan Bureau of Statistics

the same period last year (particularly, palm partly explain the moderation in private
oil and iron ore), sector credit during H1-FY23 (Figure 3.2).

Box 3.1: Rising Inflation and Global Monetary Policy Responses

Global inflation soared to 8.8 percent in 2022 as compared to 4.7 percent the last year. In advanced
economies, inflation rose to 7.3 percent on average (as compared to 3.1 percent in 2021) while in emerging
and developing market economies (EMDEs), inflation climbed to 9.9 percent in 2022 (in contrast to 5.9
percent in 2021).2 Higher food and energy prices mainly propelled the rise in global inflation.

The surge in inflation throughout 2022 was a collective outcome of a number of factors. First, from the
demand side, generous policy support to counter the pandemic-led recession resulted in quicker-than

CPI Inflation - Forecast versus Actual Figure 3.1.1

30 percent

20
10
0
Bangladesh
Mexico

CR**

S. Korea
Egypt

EM***
China

Kenya
UK
US

Pakistan

Philippines
India
Brazil

Colombia

Thailand
Chile

Indonesia

Ukraine
Taiwan

April 2022 forecast Average Inflation - H1-FY23* Inflation targets -2022 Policy rate
Note: The countries including US, UK, Bangladesh, Indonesia, Czech Republic, Chile, Colombia, Brazil, S. Africa,
Thailand, Mexico, Philippines, India, and Ukraine are the inflation targeting countries. *On fiscal year basis. Jul-
Dec covers data up till Nov 2022 for UK. Note: The inflation targets and forecasts are taken for 2022 (calendar year
basis) except for India, Pakistan, and Bangladesh (FY23 targets). ** Czech Republic; ***Emerging Markets
Source: Haver Analytics, IMF (WEO April 2022) ; Jahan 2012; Cbonds; and websites of respective central banks

2International Monetary Fund (2023). World Economic Outlook. Washington D.C: International Monetary
Fund

40
 Monetary Policy and Inflation

Policy Tightening in 2022 by Figure 3.1.2 Share of Economies with Figure 3.1.3
Inflation Increase in EMDEs Rising Inflation in 2022
Since end-2021 percent of countries
100 100
10 percentage points
80 80
8.3
8 60 60

6 40 40
20 20
4 3.0
0 0
2

Nov
Aug
Sep
Apr
Jan

Jun
Feb

Jul

Oct
May
Mar
0
Global
Double-digit Single-digit
EMDEs
inflation increase inflation increase
Advanced economies -rhs
Source: World Bank (GEP, January 2023) Source: World Bank (GEP, January 2023)

expected global economic recovery. Hence, the broadening supply-demand gaps, along with soaring
freight costs gave rise to inflationary pressures in various economies. Second, from the supply side lens,
shortages of key commodities (such as wheat and crude oil) followed by Russia-Ukraine conflict hit the
food and energy segments that seeped into various sectors of the economy thus augmenting the overall
inflation. Specifically, the low income economies where the share of food is highest in the overall
inflation basket, witnessed surge in inflation. Third, some countries also experienced supply-demand gap
in labor markets, which further added to rising wages and higher input and production costs. Fourth,
despite the slowdown in global commodity prices, currency depreciation in many economies amid capital
outflows following US hawkish monetary policy stance, intensified the price pressures in local
currencies.3 As a result, the levels of actual inflation exceeded both the target of 2022 as well as forecast
levels in various economies across the globe during
H1-FY23 (Figure 3.1.1). Trend in Global Commodity Prices Figure 3.1.4

YoY growth
Rising price pressures prompted monetary policy 200
tightening across advanced economies and most 150
EMDEs. Out of the sample of 71 EMDEs, forty-nine
with a single digit inflation since 2021, on average, 100
increased the policy rates by around 3.0 percentage 50
points. However, the twenty-two economies with
double-digit inflation raised the interest rates by a 0
Mar-22

Aug-22
Aug-21

Jan-22

Apr-22

Dec-22
Dec-21

Jul-22
Jun-22

Nov-22
Oct-22
Jul-21

Oct-21

May-22
Nov-21

Feb-22
Sep-21

Sep-22

cumulative 8.3 percentage points (Figure 3.1.2).

Particularly, economies such as Argentina and
Ghana with double-digit inflation in H1-FY23,
Composite Price Index
introduced steeper increases.4 Furthermore, the Food Price Index
developed economies such as UK and US also Energy/fuel price index
introduced substantial increase in policy rate in H1- Crude oil price index
FY23 to arrest inflation. Weakening global demand, Source: International Monetary Fund

3 World Bank (2023). Global Economic Prospects. Washington D.C.: World Bank
4 The central bank of Argentina raised the policy rate to 75.0 percent in H1-FY23 (an increase of 1,250
basis points). Likewise, Ghana’s monetary policy decided to lift the policy rate to 27.0 percent with an
increase of 800 basis points. Source: Respective central banks.

41
State Bank of Pakistan Half Year Report 2022-23

Trend in Major Food Prices Table 3.1.1 YoY Percent Change in Foreign Figure 3.1.5
YoY growth Exchange Rates during H1-FY23
H1-FY22 H1-FY23
10
Wheat 46 16.8
Dairy 16.3 16.6 0
Meat 21.6 5.3 -10
Palm oil 54.6 -25.1
-20
Food Index 29.9 4.2
Source: FAO and IMF -30
-40
tight monetary conditions and easing supply
-50
conditions of various commodities pulled down

Uruguay

India

Pakistan
Brazil

Egypt
Mexico

UK
Czech Rep.

Namibia

Morocco

Colombia
China
Chile

Bangladesh
Phillppines
Mauritious

Malaysia

Taiwan

Hungary

Argentina
Nigeria
global inflation towards the end of 2022 (Figure
3.1.3).

Amid the slowdown in global growth, commodity Source: Haver Analytics

prices somewhat eased in H1-FY23 albeit at varying
rates. In particular, global crude prices exhibited a sharp slowdown towards the end of 2022 (Figure
3.1.4). Although food prices continued to remain elevated during Jul-Dec 2022, especially the food staples
such as wheat and dairy products, the pace of increase was lower (Table 3.1.1).

Pakistan witnessed relatively higher inflation compared to various EMDEs, which mainly reflects the
impact of domestic factors and larger currency depreciation (Figure 3.1.5). The country has introduced
aggressive tightening in policy rate since FY21 to quell inflationary pressures.5 However, in the face of
supply side issues, inflationary pressures gained further momentum during H1-FY23.

3.2 Monetary Aggregates deficit and inadequate inflow of external

financing in H1-FY23, net budgetary
The broad money growth slowed to 1.2 borrowings from the banking system
percent during H1-FY23 compared to 4.3 remained at an elevated level of Rs 457.2
percent during the same period last year. billion compared to Rs 246.8 billion in H1-
Growth in the Net Domestic Assets (NDA) of FY22. Meanwhile, private sector credit also
the banking system, with an increase of Rs edged up during the review period amid
1,489.3 billion, primarily drove the expansion growing inflationary pressures,
in money supply during H1-FY23. However, which drove the demand for credit to meet
a sharp contraction of Rs 1,150.4 billion in the high input costs.
Net Foreign Assets (NFA) mostly offset this
impact during the review period (Table 3.1). Meanwhile, despite the improvement in
CAD, the dearth of external financing amid
On the asset side, higher government uncertainty surrounding the resumption of
budgetary borrowing from the banking IMF program and deteriorating
system was instrumental in expanding NDA macroeconomic conditions, along with
during H1-FY23. Given the large fiscal scheduled repayments of external

5SBP increased the policy rate by 900 basis points from end-June 2020 (7.0 percent) till end-November
2022 (16.0 percent). Source: State Bank of Pakistan

42
 Monetary Policy and Inflation

Monetary Aggregates (P) Table 3.1

flow in billion Rupees; growth in percent
Change in Stock Growth in H1
FY22 FY23
FY22 FY23
Q1 Q2 H1 Q1 Q2 H1
M2 (A+B) 149.5 897.9 1047.3 331.6 7.3 338.9 4.3 1.2
A. NFA -32.8 -194.7 -227.5 -561.7 -588.7 -1150.4 - -
B. NDA 182.3 1092.6 1274.9 893.3 596.0 1489.3 5.4 5.3
Budgetary borrowing* 76.7 170.0 246.8 551.6 -94.4 457.2 1.6 2.5
SBP -212.7 185.1 -27.6 441.9 -294.5 147.4 -0.5 2.9
Scheduled banks 289.5 -15.1 274.4 109.7 200.1 309.8 2.7 2.3
Commodity operations 9.5 -24.1 -14.6 -6.9 12.1 5.2 -1.6 0.5
Private sector credit 226.4 816.7 1043.1 86.2 310.2 396.4 13.7 4.3
PSEs 11.6 55.5 67.1 76.9 3.9 80.8 4.8 5.9
Other items net -141.5 70.8 -70.7 185.6 -153.2 32.3 3.9 -1.6
Reserve money -195.9 236.7 40.8 -30.3 6.8 -23.4 0.5 -0.3
Currency in circulation 111.6 -41.9 69.7 80.2 34.5 114.7 1.0 1.5
Deposits 35.6 924.0 959.6 248.4 -31.3 217.1 5.5 1.1
P: provisional
*These numbers are based on accrual basis. They do not tally with the amount of bank financing on cash-basis, as
presented in Table 4.1.
Source: State Bank of Pakistan

debt resulted in sharp contraction of NFA of percent during the review period (Figure
the banking system in both the quarters of 3.4). On cumulative basis, during H1-FY23,
FY23. Cumulatively, in H1-FY23, the NFA the deposits of commercial banks grew by Rs
fell sharply by Rs 1,150.4 billion compared to 217.1 billion, against Rs 959.6 billion in the
a decrease of Rs 227.5 billion in the same
period last year (Figure 3.3). The impact
Quarterly Flows of NFA Figure 3.3
mainly came from the contraction in NFA of
the SBP as the NFA of commercial banks 1,000 billion Rupees
only posted a decrease of only Rs 116.7 500
billion compared to Rs 8.0 billion in the
corresponding period last year.6 0

-500
As far as the liability side of broad money is
concerned, the growth of currency in -1,000
circulation accelerated to 1.5 percent during -1,500
H1-FY23 compared to a growth of 1.0 percent
Q1-FY23
Q1-FY21

Q2-FY21

Q3-FY21

Q4-FY21

Q1-FY22

Q2-FY22

Q3-FY22

Q4-FY22

Q2-FY23

in the corresponding period last

year, whereas the deposit mobilization
slowed from 5.5 percent in H1-FY22 to 1.1 SBP Scheduled Banks Total
Source: State Bank of Pakistan

6The contraction in NFA of the SBP was on the back of bilateral and multilateral loan repayments during
H1-FY23 including Eurobond payments of US$ 1 billion and some long-term loan repayments of US$ 1.2
billion.

43
State Bank of Pakistan Half Year Report 2022-23

Quarterly Deposit Flows Figure 3.4 Government Borrowings from the Figure 3.5
2,400 billion Rupees
Banking System

1,800 3,000 billion Rupees

2,000 552
1,200
77 170
600 1,000 -94

0 0

-600 -1,000
Q3-FY20
Q1-FY20
Q2-FY20

Q4-FY20
Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Q2-FY23 -2,000

Q4-FY20

Q2-FY23
Q1-FY20
Q2-FY20
Q3-FY20

Q1-FY21
Q2-FY21
Q3-FY21
Q4-FY21
Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Government NFPSE NBFIs
Businesses Personal Others* SBP Scheduled banks
* Others include: trusts and non-resident deposits Net borrowings
Source: State Bank of Pakistan Source: State Bank of Pakistan

same period last year. However, the overall restricted a sharp increase in these deposits
currency to deposit ratio slightly improved despite the favorable interest rates.
to 38.5 percent, on average, during H1-FY23,
from 41.2 percent in the same period last Government Borrowings
year.
The government budgetary borrowing from
The deceleration in deposit mobilization the banking system increased during H1-
mainly came from decline in the deposits of FY23, compared to the same period last year
NBFIs and private businesses.7 As suggested (Figure 3.5). Specifically, in H1-FY23 the
by an uptick in non-bank budgetary government ended up borrowing Rs 309.8
borrowings during H1-FY23, NBFIs shifted a billion from scheduled banks against Rs
portion of their investments portfolio from 274.4 billion in the corresponding period last
bank deposits to government securities for year. This mainly reflects the impact of an
higher returns. Meanwhile, in the case of overall large fiscal deficit and the absence of
business deposits, the rising cost of adequate external inflows, which amplified
borrowing amid persistent inflationary the financing pressure on scheduled banks.
pressures have caused businesses to utilize
their existing funds for increased liquidity On the other hand, the government deposits
requirements. On the contrary, personal held by the central bank posted a
deposits posted a slight growth on YoY basis considerable decline during the review
during H1-FY23. The increasing period, which inched up the government’s
macroeconomic uncertainty along with net liability to the SBP by Rs 147.4 billion.8
growing inflationary pressures might have

7 The deposits of non-financial public sector enterprises (NFPSEs) also posted a decline during H1-FY23,
however, this was mainly on account of the reclassification of some NFPSEs as federal government
institutes from December 2022 onward.
8During H1-FY23, the government deposits held by the SBP posted a decline of Rs 525.5 billion against Rs

476.9 billion in the corresponding period last year.

44
 Monetary Policy and Inflation

Primary Auctions In the case of MTBs, the government

allocated highest pre-auction target to 6M T-
During H1-FY23, the government was able to bills followed by 12M paper. Contrary to the
meet its deficit financing requirements targets, the market was increasingly keen on
through treasury bills and floating coupon investing in 3M T-bills: The offered to target
PIBs (PFLs). Cumulatively, the government ratio for 3M T-Bills stood at 3.7 times
assigned around 63 percent of the targets on compared to 0.6 times and 0.8 times for 6M
net-of-maturity basis to PFLs, followed by and 12M T-bills, respectively. Amid
around 37 percent to Ijarah Sukuk. expectations of further monetary policy
However, for T-bills and fixed rate PIBs, on tightening, the market’s participation was
cumulative basis, the pre-auction targets heavily concentrated in 3M T-Bills.
were slightly lower than their respective
maturities during the first half of FY23. As a result, the government made large
Consequently, the government relied acceptances of 3M T-bills, to rollover 96
on floating rate PIBs and Ijarah Sukuk to percent of its maturing amount due during
meet its financing requirements (Table 3.2). H1-FY23 (Figure 3.6). However, in overall

Auction Summary Table 3.2

billion Rupees
Target Maturity Offered* Accepted
Treasury Bills
3-month 3,500.0 8,857.7 1,2901.2 8,515.3
6-month 3,725.0 1,727.8 2,307.5 422.5
12-month 3,575.0 274.5 2,996.1 839.2
Jul-Dec FY23 10,800.0 10,860.0 18,204.8 9,776.9
Pakistan Investment Bonds
Fixed Rate
3-year 350.0 658.0 656.5 238.5
5-year 350.0 1,497.8 689.8
10-year 205.0 474.0 794.6 14.3
15-year 60.0 5.7 0.0
20-year 30.0 0.0 0.0
30-year 30.0 0.0 0.0
Jul-Dec FY23 1,025.0 1,132.0 2,954.5 942.6
Floating ate
2Y-Quarterly 405.0 1,341.5 846.9
3Y-Quarterly 405.0 1,919.8 1,185.2
5Y-Semi annual 325.0 1,821.6 1,232.3
10Y-Semi annual 325.0 188.8 99.6
Jul-Dec FY23 1,460.0 - 5,271.7 3,363.9
Ijarah Sukuk
GIS-VRR 505.0 592.3 344.9
GIS-FRR 195.0 83.7 19.9
Jul-Dec FY23 700.0 - 676.0 364.8
*Competitive bids only
Source: State Bank of Pakistan
45
State Bank of Pakistan Half Year Report 2022-23

Auction Summary of T-bills during H1-FY23 Figure 3.6

3-month 6-month 12-month
percent percent billion Rupees percent
2,000 billion Rupees 20 2,000 billion Rupees 20 2,000 20

1,600 16 1,600 16 1,600 16

1,200 12 1,200 12 1,200 12

800 8 800 8 800 8

400 4 400 4 400 4

0 0 0 0 0 0

29-Dec-22
3-Nov-22
11-Aug-22

6-Oct-22
8-Sep-22
14-Jul-22

1-Dec-22
3-Nov-22

29-Dec-22
11-Aug-22

6-Oct-22
8-Sep-22
14-Jul-22

1-Dec-22

1-Dec-22
3-Nov-22

29-Dec-22
11-Aug-22

6-Oct-22
8-Sep-22
14-Jul-22

Accepted (all) Offered Target Cut-off -rhs 6.7

Maturity
6.5
Source: State Bank of Pakistan

terms, the government mobilized slightly On the contrary, in the case of fixed rate PIBs,
lower-than target amount from short-term despite the market’s preference to lock funds
MTBs. in long-term bonds at high interest rates, the
government made close-to-target
In the long-term bonds, the market’s interest acceptances. On aggregate, the government
remained intact in floating coupon PIBs with made issuances amounting to Rs 942.6 billion
offers reaching nearly four-times the amount of fixed coupon PIBs against the target of Rs
of pre-auction target. The rising interest rate 1,025.0 billion, leaving almost 68 percent of
environment made investment in floaters the offers unmet to avoid high cost of
more lucrative and safe as they provide borrowing, as the market offered amounts on
variable return in line with the interest rate significantly higher rates.
cycle to better hedge against the repricing
risk and have medium to long-term Besides, the government continued to raise
maturities. In this backdrop, the government financing via Shariah-compliant instruments.
mobilized Rs 3,363.9 billion from PFLs In line with the trend observed in
against the target of Rs 1,460.0 billion during conventional bonds, the market’s interest
H1-FY23. This is likely to have favorable remained skewed towards investing in
implications for diversifying the outstanding variable rental Sukuk (GIS-VRR). In
stock of sovereign bonds and curtailing the comparison, the participation remained
roll over risk emanating from excessive muted in fixed rental Sukuk (GIS-FRR).
reliance on short-term MTBs. However, it Likewise, the government made higher
will increase the government’s debt servicing cumulative acceptances amounting to Rs
cost in an increasing interest rate scenario. 354.9 billion of GIS-VRR (Table 3.2).9

9In line with the government efforts to diversify its debt stock, the share of Ijara Sukuk in domestic debt
rose from 5.3 percent in December 2021 to 8.1 percent in December 2022.

46
 Monetary Policy and Inflation

Secondary Market Yields Figure 3.7 Overnight Repo Market Figure 3.8
percent
18 20 percent billion Rupees
6,200
16.69 16 5,200
12 4,200
16 15.5 8 3,200
4 2,200
13.99 0 1,200
14.98

27-Dec-22
02-Aug-21

08-Dec-21

18-Jun-22

21-Aug-22
09-Jan-22

15-Apr-22
17-May-22
06-Nov-21
01-Jul-21

20-Jul-22

25-Nov-22
03-Sep-21
05-Oct-21

10-Feb-22
14-Mar-22

24-Oct-22
22-Sep-22
14

13.5
13.5 Outstanding Floor
12 OMO - rhs
3M 6M 1Y 3Y 5Y 10Y 15Y 20Y Policy rate Ceiling
30-Jun-22 30-Sep-22 30-Dec-22 O/N rate
Source: Financial Markets Association of Pakistan Source: State Bank of Pakistan

In the secondary market, the short-term scheduled banks augmented the liquidity
yields exceeded the long-term yields, requirements of the banking system.
highlighting increased expectations of a rate- Meanwhile, amid slower deposit
cut in the near term. Consequently, the yield mobilization, commercial banks were not
curve became downward slopping, with able to meet the additional high liquidity
yields falling steeply for longer-tenor bonds needs.
(Figure 3.7). The persistently high inflation,
external sector weaknesses, global as well as Keeping in view the pressures stemming
domestic economic uncertainty, and limited from insufficient inflows in the system, the
financing avenues for the government SBP scaled up its OMO injections. As a
resulted in pushing the yields of up to one- result, the average outstanding OMOs soared
year papers above the longer-maturity from Rs 1,983.7 billion in H1-FY22 to a high
bonds. of Rs 4,887.5 billion during the review period
(Figure 3.8). Additionally, in order to ease
In response to a cumulative 225 bps hike in out liquidity pressures in the market, twenty-
the policy rate during H1-FY23, 3-month two longer tenor OMO injections were
yields rose by 171 bps, while for 6M they conducted during Jul-Dec FY23, that
picked up by 184 bps. However, at the included 60-day, 63-day, 70-day, 73-day, and
longer end of the curve, the yields for 10- 74-day auctions.
year, 15-year and 20-year bonds rallied by 78
bps, 55 bps and 49 bps, respectively. On quarterly basis, the liquidity conditions
particularly tightened during Q2-FY23.
Interbank Liquidity Pressures emanating from pick up in private
sector demand for credit alongside the
The liquidity conditions in interbank money government’s increased reliance on
market remained relatively tight throughout scheduled banks for its financing needs in
H1-FY23 compared to the corresponding the absence of central bank borrowing,
period last year. A sizeable increase in affected the liquidity conditions. However,
government budgetary borrowings from with regard to the supply of funds, the

47
State Bank of Pakistan Half Year Report 2022-23

Average Absolute Deviation of Figure 3.9 these weekly OMO auctions stood at Rs 490.8
Overnight Rates from the Policy Rate billion during H1-FY23. These injections
basis points help the Islamic banking institutions in
50
46 43
41 38 effectively managing their liquidity.
40 Currently, this mechanism only allows
33
28 Islamic banks to borrow from the central
30
bank via OMO injections or through the
20 ceiling facility; while OMO mop-ups and
floor facility are not available to the market
10 yet.
0
Q1 Q2 H1 3.3 Credit to Private Sector
FY23 FY22
Source: State Bank of Pakistan The uptrend in private sector credit
witnessed during the previous year, lost
deposits of scheduled banks posted a decline steam in H1-FY23. The growth in loans to
during Q2-FY23, which weighed on the private sector businesses almost halved to 8.3
interbank liquidity, resulting in an increase percent in H1-FY23, from 15.1 percent in the
in average outstanding OMO stock to Rs same period last year.10 This slowdown was
4,935.9 billion in Q2-FY23 against Rs 4,839.1 mainly seen in working capital loans, while
billion in the preceding quarter (Figure 3.8). fixed investment loans posted a marginal
increase (Figure 3.10a). In overall terms,
Meanwhile, the overnight money market most of the expansion in private loans to
displayed signs of higher volatility in H1- businesses came in the month of December
FY23. The average absolute deviation of 2022 (Figure 3.10b).
overnight rates from the policy rate increased
to 43 bps during the review period compared A range of factors shaped private sector
to 33 bps in H1-FY22 (Figure 3.9). The credit dynamics during H1-FY23. First,
market’s underlying expectations of rate policy driven moderation in the pace of
hikes in the light of rising inflationary economic activity pared credit demand of
pressures; growing borrowing needs of the industries. In particular, SBP raised the
government coupled with greater demand policy rate by a further 225 bps in H1-FY23
for credit from the private sector resulted in on the heels of a 675 bps increase during
higher volatility in the overnight lending FY22. In addition, for strengthening the
rates. transmission mechanism of monetary policy,
the central bank also linked the rates on EFS
In addition, the SBP conducted Shariah and LTFF to the policy rate.11 On the fiscal
Compliant Mudarabah Based Open Market side, the government significantly scaled
Operations for Islamic Banking Institutions back development spending during H1-
(IBIs). The average outstanding stock of FY23, which in turn discouraged credit

10The growth in credit to private sector decelerated to 4.3 percent in H1-FY23 from 13.7 percent last year.
11SBP raised the rates of EFS (from 3 percent in H1-FY22) and LTFF (from 5 percent in H1-FY22) to over
10 percent in H1-FY23. Source: IH&SMEFD Circular No. 6, 7, 11 and 13 of 2022, State Bank of Pakistan

48
 Monetary Policy and Inflation

Quarterly Credit Flows Figure 3.10a Loans to Private Sector Figure 3.10b
(Monthly Flows)
1,000 billion Rupees
FY22 FY23 billion Rupees
600
750
458
400
500

250 200

0 0

-250
-200
H1

H1
Q1

Q2

Q1

Q2

Mar-21

Mar-22
Jun-20

Jun-21

Jun-22

Sep-22
Sep-20

Sep-21
Dec-20

Dec-21

Dec-22
WC^ FI* CF** Total
^Working capital, *Fixed investment, **Constr. fin.
Source: State Bank of Pakistan Source: State Bank of Pakistan

uptake by construction industry. Amid the

Credit Demand Slows Down Amid Table 3.3
ongoing demand compression measures Lower Economic Activity
economic activity visibly slackened during percent change
H1-FY23, as seen from a decline in LSM Jul-Dec
production. FY22 FY23
Cost of production
Second, in addition to the policy-led slack,
domestic demand received a further blow Exchange rate* (PKR/USD) -10.7 -9.5
from the disruptions caused by flash floods Electricity tariffs 32.1 31.4
at the start of the year that caused significant Domestic fuel prices 26.3 70.5
loss of lives, livelihood and infrastructure. Construction input items 9.9 28.3
Hence, all major high frequency demand Economic activity
indicators including POL, cement, and
LSM 7.7 -3.7
automobiles sales posted double-digit
Electricity (Jul-Nov) 9.0 -8.3
declines during H1-FY23 (Table 3.3).
Export volume index (Jul-Sep) 19.9 0.4
Third, following the dearth of external Automobile sales 8.6 -34.8
financing SBP and the government took PoL sales 12.1 -19.2
some regulatory measures to contain Cement dispatches 1.9 -16.9
imports.12 Furthermore, in June 2022 and PSDP 40.2 4.5
August 2022, the government imposed/
Remittances 11.4 -11.1
raised regulatory duties on the import of
* end-period exchange rate, on mark-to-market basis
some luxury and non-essential items.13 In Source: SBP, MoF, PBS, PAMA, World Bank
addition, amid the deteriorating external

12 Source: EPD Circular Letter No. 09 and 11 of 2022; and BPRD Circular Letter No. 09 and 25 of 2022
13 Source: FBR, S.R.O. 966(l)/2022, dated June 30, 2022; and S.R.O. 1571(I)/2022, dated August 22, 2022.

49
State Bank of Pakistan Half Year Report 2022-23

Business Confidence Index Figure 3.11 Current Capacity Utilization of Figure 3.12
70 Industry
percent
90
60
80
50

64 70
40 61
52 53 53 55 81
46 46 71 72 71
30 42 40 60 69 70 70 67
64 62
20 50
Aug-21
Jun-21

Dec-21

Jun-22

Aug-22

Dec-22
Apr-22
Oct-21

Oct-22
Feb-22

Jun-21

Jun-22
Oct-21

Oct-22
Feb-22
Source: State Bank of Pakistan Source: Business Confidence Survey, State Bank of Pakistan

liquidity condition of the country, In overall terms, the unfavorable

international rating agencies downgraded macroeconomic environment as reflected by
Pakistan’s credit ratings, which further a spike in the cost of production, flood-
hampered imports, as foreign banks became induced disruption in economic activity,
cautious in confirming the letters of credit uncertainty surrounding the resumption of
(L/Cs) opened by local banks.14 The decline IMF program and import restrictions amid
in imports of raw material and capital goods the dearth of foreign exchange lowered the
discouraged manufacturing operations and overall business confidence during H1-FY23.
hence discouraged credit uptake. As gauged by the SBP Survey, the overall
business confidence remained significantly
Fourth, the global economic slowdown lower in H1-FY23, compared to a year ago
weighed on manufacturing activity of export (Figure 3.11). The deterioration in business
sectors. Specifically, with the exception of sentiments led various industries to partially
wearing apparel, exports of almost all textile close manufacturing operations, which is
products edged down compared to last year, also evident from a notable decline in
which reflected in a notable slowdown in capacity utilization during H1-FY23 (Figure
credit uptake by textile sector during H1- 3.12).
FY23. Lastly, some ease in the international
prices of input items (particularly, palm oil Low economic activity dampened the
and iron ore) lowered borrowing needs of demand for working capital loans
few manufacturing businesses, such as edible
oil, and basic iron and steel. Working capital loans rose by Rs 370.1 billion
in H1-FY23, compared to Rs 607.7 billion in

14Moody’s downgraded its outlook on Pakistan from stable to negative in June 2022, and further
downgraded the country’s rating from B3 to Caa1 in October 2022, citing external vulnerability risks and
higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022.
Source: Moody’s

50
 Monetary Policy and Inflation

Loans to Private Sector Businesses in H1 Table 3.4

flow in billion Rupees
Total Loans* Working Capital** Fixed Investment
FY22 FY23 FY22 FY23 FY22 FY23
Private Sector Businesses 860.2 574.5 607.7 370.1 199.8 205.4
Manufacturing 670.9 503.1 527.4 343.2 136.3 161.1
Textile 326.5 188.2 260.1 137.3 63.3 51.8
Rice Processing 70.5 67.9 67.4 68.0 2.9 -0.1
Fertilizers 5.9 53.7 -5.6 45.7 11.5 8.1
Refined petroleum 35.9 42.6 34.4 37.2 1.5 5.4
Cement, lime and plaster 11.6 45.8 10.0 23.6 1.6 22.3
Wearing apparel 22.5 28.8 15.1 23.4 7.0 5.4
Motor vehicles 13.5 14.4 6.9 13.8 6.6 0.6
Paper & paper products 24.8 20.8 17.6 9.5 7.2 11.3
Basic pharmaceutical products -3.2 10.8 -2.1 9.2 -1.4 1.9
Basic chemicals 16.0 22.8 12.2 8.9 3.7 13.8
Electrical equipment 22.5 14.7 23.1 6.3 -0.5 7.5
Basic iron and steel 57.8 7.4 49.6 4.2 8.2 3.3
Vegetable and animal oils and fats 17.4 3.2 15.4 2.6 1.7 0.6
Sugar -45.9 -64.6 -45.3 -59.7 -0.6 -4.9
Agriculture, forestry and fishing 30.6 23.5 23.9 9.7 5.6 13.9
Construction 31.1 11.0 0.3 7.5 -3.6 1.6
Mining and quarrying -0.9 1.2 -2.0 3.5 1.2 -2.3
Telecommunications 20.8 35.0 -13.2 3.4 34.0 31.6
Power generation, transmission and distribution 27.4 2.7 7.6 0.2 19.9 2.6
Real estate activities 3.8 0.6 1.0 0.2 -0.5 0.3
Transportation and storage 11.4 -5.9 8.6 -2.2 2.2 -3.7
Wholesale and retail trade 49.3 -7.4 46.9 -2.8 1.2 -4.6
*Total loans in H1-FY22 and H1-FY23 include net borrowing of Rs 52.7 billion and net retirement of Rs 1.0
billion, respectively, under construction financing. The data on credit/loans has been revised since June 2020
due to inter-sectoral adjustment in private sector business (see IH&SMEFD Circular Letter No. 28 of 2020). As
fixed investment loans exclude construction financing; therefore, in this table, total loans may not be equal to
the sum of working capital and fixed investment loans. ** Working capital includes trade financing
Source: State Bank of Pakistan

the same period last year (Table 3.4). The 2022 due to a delayed start of crushing
disaggregated analysis shows that around 80 season than last year.15 In addition, fertilizer
percent of this increase came solely in sector increased borrowings in order to
December 2022. This is partially attributed to finance the import of fertilizers, as reflected
the seasonal borrowings by rice processing by a fivefold increase in quantum imports of
and sugar businesses. Specifically, sugar fertilizers in December 2022, over last year.
firms resorted to bank financing in December

After a persistent retirement of Rs 123.4 billion working capital loans during Jul-Nov FY23, sugar-
15

manufacturing businesses availed Rs 63.7 billion loans in December 2022.

51
State Bank of Pakistan Half Year Report 2022-23

Lower external demand along with import FY23, compared to an offtake of Rs 43.8
restrictions trimmed textile sector’s loan billion last year.20
offtake
Rising cost of production along with
Although textile sector dominated the overall worsening financial positions raised
borrowings, the sector posted a relatively borrowing needs of few sectors
lower offtake of Rs 137.3 billion during H1-
FY23, compared to Rs 260.1 in the same The deteriorating macroeconomic
period last year. Three main factors explain environment dented financial position of
this decline. First, the global economic various businesses. Amid weakening
slowdown amid inflationary pressures and domestic demand, a number of industries
rising cost of living has also affected the such as fertilizers, refined petroleum and
demand for Pakistan’s textile products, as automobiles saw piling up of inventories that
reflected by lower export volumes of major weakened their cash flow positions. Sluggish
textile products during H1-FY23 (Chapter 5). sales together with rising cost of production
Second, the summer flash floods induced eroded profitably of these sectors (Figure
significant damage to crops. In particular, 3.13). Hence, deteriorating financial
according to preliminary estimates, cotton indicators led these businesses to resort to
crop production fell by 24.7 percent during bank financing to finance their working
FY23, which constrained the availability of capital needs.
domestic cotton for textile industry.16, 17
Sluggish global demand and low domestic Multifaceted issues including government
cotton availability led textile sector to fiscal constraints, impact of demand
partially close manufacturing units.18 Hence management policies, rising cost of
despite a 23.2 percent YoY increase in the construction inputs, weakening real incomes
domestic cotton prices, working capital and flash floods suppressed construction
requirements of the sector during H1-FY23, activity in both public and private sectors
remained lower than last year.19 Lastly, in during H1-FY23 (Figure 3.14). Hence, local
order to further improve the monetary policy cement dispatches fell by 16.9 percent on
transmission, SBP linked EFS rates with the YoY basis during H1-FY23, which led to
policy rate, raising the rate of EFS from 3 piling up of inventories in the sector.21
percent during H1-FY22 to over 10 percent in
H1-FY23. Consequently, textile businesses Furthermore, cement production witnessed
retired Rs 10.4 billion loans under EFS in H1- 15.1 percent decline during H1-

16 Source (cotton production data): Federal Committee on Agriculture

17 Textile manufacturing declined by 13.1 percent YoY in H1-FY23. Source: PBS
18 For details, see Interloop Limited’s Half Year Report for the period ended December 31, 2022.
19 Source: Karachi Cotton Association.
20 The mark-up on EFS was increased in April 2022 (5.5 percent), May 2022 (7.5 percent), July 2022 (10.0

percent), November 2022 (11.0 percent), and December 2022 (13.0 percent). Source: IH&SMEFD Circular
No. 6, 7, 11 and 13 of 2022, State Bank of Pakistan
21 Cement sector’s inventories jumped by around 69 percent YoY in Q1-FY23.

52
 Monetary Policy and Inflation

Selected Financial Indicators of Major Private Sector Businesses (Jul-Sep) Figure 3.13
Inventory Operating Margin*
billion Rupees percent
600 30

450
20
300
150 10

0
0
Chemicals
Textile

Auto

Steel

Paper
Cement
Refinery

Fertilizer

Chemicals

Textile

Auto

Steel
Paper
Cement

Refinery
Fertilizer
FY22 FY23
*Operating margin = operating profit/sales
Source: SBP - Quarterly financial statement analysis of selected non-financial listed companies, SBP staff calculation

FY23, over the same period last year. Despite With regards to refined petroleum, the
the decline in production, borrowing by impact of higher oil prices in the
cement sectors rose to Rs 23.6 billion during international market, along with PKR
H1-FY23, compared to an offtake of Rs 10.0 depreciation seems quite dominant in the
billion in the same period last year. A increased borrowings by petroleum
general increase in cost of production amid refineries. In addition to this, lower demand,
rising fuel, power and coal prices contributed increase in fuel prices and overall economic
in raising the sector’s borrowing needs.22 slowdown led to the sector’s inventory
buildup.24 Consequently, the sector
Likewise, fertilizer sector borrowed Rs 45.7
Prices of Construction Input Items Figure 3.14
billion in H1-FY23, compared to a net
retirement of 5.6 billion, a year earlier. The 40 YoY growth in percent
cash flow constraints stemming from lower
sales and inventory buildups induced many 30
firms to leverage during the period.23 In
addition, a 7.4 percent YoY increase in DAP 20
prices in the international market, coupled
with the depreciation in the Pak rupee jacked 10
up firms’ short-term financing requirements,
despite 2.0 percent decline in fertilizer 0
manufacturing during the period (Figure
Oct-21

Oct-22
Jul-21

Jul-22
Jan-22
Feb-22
Mar-22

May-22
Aug-21
Sep-21

Aug-22
Sep-22
Jun-22
Nov-21

Nov-22
Apr-22
Dec-21

Dec-22

3.15).

Source: Pakistan Bureau of Statistics

22 Coal prices in the international market rose by 103.6 percent YoY during H1-FY23. Source: International
Monetary Fund
23 Fertilizer sector’s operating profit declined by around 29 percent YoY during Q1-FY23. Source: State

Bank of Pakistan, Financial Statements Analysis of Non-Financial Listed Companies for September 2022
24 POL sales declined by 19.2 percent YoY in H1-FY23.

53
State Bank of Pakistan Half Year Report 2022-23

basis, sugar sector retired Rs 59.7 billion in

International DAP Prices Figure 3.15
H1-FY23, compared to a net retirement of Rs
US$/mt 45.3 billion last year.
1,000
H1-FY22 avg: H1-FY23 avg:
800 US$ 667 US$ 716
Sluggish demand and declining production
restricted borrowing by iron & steel, basic
600 chemicals and paper & paper products

400 The working capital borrowing of iron and

steel firms rose only by Rs 4.2 billion during
200
H1-FY23, compared to an increase of Rs 49.6
0 billion during the same period last year. An
overall slowdown in the construction activity
Dec-21

Dec-22
Apr-22
Aug-21
Sep-21

Aug-22
Sep-22
Jun-22
May-22
Nov-21

Jan-22

Nov-22
Jul-21

Oct-21

Feb-22
Mar-22

Jul-22

Oct-22

tapered off the demand for construction-

Source: World Bank allied sectors, including iron and steel. This
is in line with a marginal 4.5 percent rise in
borrowed Rs 37.2 billion in H1-FY23, slightly PSDP spending during H1-FY23, compared
higher than Rs 34.4 billion offtake during the to a growth of 40.2 percent last year.
same period last year. Furthermore, import restrictions impeded
the availability of raw material for the
Borrowings by sugar and rice processing industry and discouraged steel
firms followed seasonal pattern manufacturing during H1-FY23, 25 which
also explain the sector’s muted demand for
Borrowings by the rice processing firms
working capital loans. In addition, a decline
remained around the last year’s level. While
in prices of base metals in the international
the borrowing in H1-FY22 was attributed to
higher production and exports of rice, this
time around, rice production and quantum International Palm Oil Prices Figure 3.16
exports posted a YoY decline of 12.3 percent
US$/mt
and 23.0 percent, respectively. 2,000
The lower production pushed up the rice H1-FY22 avg: H1-FY23 avg:
WPI by 27.7 percent YoY in H1-FY23, which 1,600 US$ 1,218 US$ 961
propped up the borrowing needs of rice 1,200
processors during the review period.
800
On the other hand, after posting the seasonal
400
loan retirements by the sugar sector in Q1-
FY23, the sector resorted to bank financing in 0
Nov-21

Nov-22
Mar-22
Aug-21

Aug-22
Feb-22

Apr-22
Dec-21

Dec-22
Jul-21

Jun-22
Jul-22
Jan-22

the subsequent quarter. However, offtake in

Sep-21

Sep-22
May-22
Oct-21

Oct-22

Q2 was unable to offset loan retirements in

the preceding quarter. On a cumulative
Source: World Bank

25Steel manufacturing declined by 2.1 percent on YoY basis during H1-FY23, whereas import quantum of
iron and steel products dipped by 40.3 percent YoY in this period.

54
 Monetary Policy and Inflation

market also contributed in lowering the First, SBP linked LTFF rates with the policy
borrowing needs of iron and steel sector.26 rate in order to further improve the monetary
policy transmission, raising the rate of LTFF
Apart from iron and steel, borrowings by from 5 percent during H1-FY22 to over 10
paper and paper products and basic percent in H1-FY23.27 Second, the
chemicals sectors remained lower than last disbursement under TERF remained
year. The underlying factor is 2.8 percent significantly lower in H1-FY23, compared to
and 1.1 percent YoY decline in the the same period last year. This is because of
production of paper and board and the fact that this scheme had matured in
chemicals during H1-FY23, which reduced March 2021, after which no further financing
the borrowing needs of these sectors. limits were available. Out of the approved
amount, bulk of the disbursements had been
Some ease in input prices lowered borrowing already made by end-June 2022.28
needs of edible oil sector
It is pertinent to mention that beside capacity
Another drag to working capital loans came expansion, some of the sectors including
from relatively lower offtake by edible oil chemicals, fertilizers, cement, paper and
manufacturing businesses. Borrowings by paper products have borrowed long-term
the edible oil sector dropped to Rs 2.6 billion loans for balance sheet re-profiling, owing to
in H1-FY23, compared to an offtake of Rs deteriorating financial positions. Basic
15.4 billion in the same period last year. chemicals borrowed Rs 13.8 billion in H1-
Weakening edible oil prices in the FY23, compared to an offtake of Rs 3.7 billion
international market leading to a notable last year. The increase is explained by higher
borrowings by a leading chemical
deceleration in the unit value of edible oil
imports mainly explain the sluggish credit
offtake in this sector (Figure 3.16). Gross Disbursements under Figure 3.17
LTFF & TERF
Fixed investment loans remained intact 120 billion Rupees
100
The borrowings under fixed investment 80
loans were Rs 205.4 billion in H1-FY23, 60
slightly higher than the offtake of Rs 199.8 40
billion last year. The increase was despite a 20
slowdown in the disbursement of SBP’s 0
concessionary financing schemes (LTFF and
Q3-FY21

Q4-FY21
Q1-FY21

Q2-FY21

Q1-FY22

Q2-FY22

Q3-FY22

Q4-FY22

Q1-FY23

Q2-FY23

TERF), which almost halved in H1-FY23,

compared to last year (Figure 3.17). Two
factors explain the lower disbursements. TERF LTFF
Source: State Bank of Pakistan
26 During H1-FY23, the prices of base metals dropped by 26.5 percent YoY, in the international market.
Source: World Bank
27 Source: IH&SMEFD Circular No. 6, 7, 11 and 13 of 2022, State Bank of Pakistan
28 Out of the total approved amount of Rs 436 billion under TERF, Rs 383 billion (around 88 percent) were

disbursed by end-December 2022.

55
State Bank of Pakistan Half Year Report 2022-23

manufacturer during Q2-FY23 for balance offtake of Rs 34.0 billion last year. The
sheet re-profiling, beside capacity expansion. increase represents syndicate financing
On the other hand, paper sector borrowed Rs facility availed by a major telecom firm for
11.3 billion in H1-FY23, compared to an the purpose of equity injection into its wholly
offtake of Rs 7.2 billion last year, as paper owned subsidiary, during the review period.
and paperboard manufacturers resorted to
bank financing for capacity expansion, up- Net retirement in construction financing
gradation of paper & board machinery and amid slowdown in construction activities
rescheduling their loans.
The vibrancy in construction activities
Within the manufacturing sector, textile witnessed in FY22 on the back of support
businesses dominated in the fixed measures introduced by government and
investment loans by borrowing of Rs 51.8 SBP lost momentum even before H1-FY23
billion during H1-FY23, compared to an (Figure 3.18).29 Construction financing
offtake of Rs 63.3 billion last year. Textile posted net retirement of Rs 1.0 billion in H1-
businesses borrowed long-term loans in FY22, compared to an offtake of Rs 52.7
order to enhance production capacity, billion last year. Three factors underpin the
besides rescheduling their loans. sluggishness in construction activities. First,
a rise in cost of inputs affected the demand
Cement was the second biggest user of fixed for construction-allied sectors, as supported
investment loans in the manufacturing sector by 28.3 percent YoY jump in prices of
after textile, as it increased borrowings by Rs construction input items during H1-FY23.
22.3 billion during H1-FY23, compared to Rs Second, policy measures such as temporary
1.6 billion last year. The entire increase was halt in fresh disbursements under the ‘Mera
concentrated in Q1-FY23, as a major listed
cement manufacturer resorted to bank Housing and Construction Finance Figure 3.18
financing for capacity expansion, which
500 outstanding stock in billion Rupees
includes investing in a cement plant in
Mianwali district and another in Haripur
district of KP. Another listed firm borrowed 400
for capacity expansion, and investing in solar
power projects at its plants in KP and Sindh 300
provinces for cost saving purpose by
reducing the reliance on costlier fuel. 200

Among non-manufacturing entities, the

100
telecommunications sector dominated by
Dec-20
Sep-20

Sep-21

Dec-21

Sep-22

Dec-22
Jun-20

Jun-21

Jun-22
Mar-21

Mar-22

availing long-term loans amounting Rs 31.6

billion during H1-FY23, compared to an
Source: State Bank of Pakistan

29Beside government’s incentive package for the construction sector, SBP announced targets for banks in
July 2020 to increase their housing and construction finance portfolio. For details, see Chapter 3 of SBP’s
Annual Report FY22 on the State of the Pakistan’s Economy.

56
 Monetary Policy and Inflation

Consumer Financing Table 3.5 Consumer Loans Figure 3.19

flow in billion Rupees
40 YoY growth in percent
H1-FY22 H1-FY23
Total loans 104.8 -2.6 33
House building 40.2 14.2
Credit cards 10.1 13.8 26
Personal loans 7.3 0.2
Consumers durable 1.7 -0.5 19
Auto loans 45.5 -30.4
12
Source: State Bank of Pakistan
5
Pakistan Mera Ghar’ scheme, and suspension

Sep-22
Sep-21
Aug-21

Dec-21

Jun-22

Aug-22

Dec-22
Apr-22
Jan-22

May-22
Nov-21

Nov-22
Jul-21

Oct-21

Mar-22

Jul-22

Oct-22
Feb-22
of SBP’s targets for housing and construction
contributed to waning demand for
construction financing.30 Third, heavy floods Source: State Bank of Pakistan
and rising domestic policy uncertainty also
dampened the demand for construction manufactured or assembled cars during
financing. January 2022.33 The lag impact of regulatory
measures was visible in the overall
Consumer financing dwindled slowdown in consumer financing (Figure
3.19). Furthermore, following the increase in
Consumer financing posted a net retirement cost of production, automobile
of Rs 2.6 billion in H1-FY23, compared to an manufacturers have introduced multiple
offtake of Rs 104.8 billion last year (Table increases in car prices since last year, which
3.5). The major drag came from automobile further slumped vehicle’s demand. On the
loans, which posted a net retirement of Rs other hand, raw material availability issues
30.4 billion in H1-FY23, compared to an led to drastic reduction in automobile
offtake of Rs 45.5 billion a year earlier. production during H1-FY23. The
Besides higher interest rates, the decline is combination of these factors pulled down
due to the lagged impact of SBP’s macro- auto financing during H1-FY23.
prudential measures aiming to moderate the
domestic demand in the economy by slowing Other than auto loans, slowdown in
the overall import growth in general, and house building loans also contributed to the
automobile imports in particular to support contraction in consumer loans during the
the country’s balance of payments position.31, review period. Amid the sluggishness in
32 In addition, the government increased construction sector, house-building segment
federal excise duty (FED) on locally borrowed Rs 14.2 billion during H1-FY23,

30 Source: IH&SMEFD Circular Letter No. 08 of 2022, State Bank of Pakistan

31 SBP policy rate increased by 900 bps during September 2021 to December 2022.
32 These measures included: (i) reduction in maximum tenure of the auto finance facility from seven years

to five years; (ii) maximum limit of Rs 3 million in aggregate, allowed to be availed by a person from all
banks/DFIs; (iii) increase in the minimum down payment for auto financing from 15 percent to 30
percent. Source: SBP press release, dated September 23, 2021
33 In January 2022, the FED was raised to 2.5 percent on up to 1300cc cars, 5 percent on 1301-2000cc cars,

and 10 percent on greater than 2000cc cars. Source: www.fbr.gov.pk/Categ/Federal-Excise-Act/346

57
State Bank of Pakistan Half Year Report 2022-23

compared to an offtake of Rs 40.2 billion last

year. Inflation Trends during Figure 3.20
H1 (Urban)
growth in percent
3.4 Inflation 120
100
The NCPI inflation rose to a multi-decade
80
peak of 25.0 percent in H1-FY23 compared to
60
9.8 percent during the same period last year,
with inflation in rural areas being higher 40
than in the urban. In terms of composition, 20
while food inflation remained the major 0
driver of NCPI inflation, the core inflation FY19 FY20 FY21 FY22 FY23
also edged up followed by energy inflation in Food Energy NFNE
H1-FY23. Following the global commodity *FY19 is taken as base year.
super-cycle, NCPI inflation has been on a Source: Pakistan Bureau of Statistics
sharp uptrend since last year. To put things
in perspective, the domestic factors further IMF EFF program, PKR depreciated by 24.1
augmented the impact of global supply percent during H1-FY23.34 This along with
shock pushing the food and energy prices the lagged impact of 23.1 percent PKR
above the pre-pandemic level by around 90 depreciation in FY22, fueled imported
percent during H1-FY23 (Figure 3.20). inflation. Fourth, the temporary restrictions
on imports, raised concerns about continued
While domestic demand showed visible domestic supplies of various commodities
slowdown, a confluence of supply side which further stoked inflationary pressure
factors compounded inflation dynamics during this period. Finally, the sharp
during H1-FY23. First, the outbreak of large- increase in food and energy prices also
scale flash floods in July 2022, inundated a seeped into broader prices, wages and
large part of the country, and inflicted heavy inflation expectations that contributed to a
losses to agriculture produce that caused large increase in core inflation during H1-
supply shortages in the food market and FY23, despite sluggishness in domestic
further exacerbated the effect of higher economic activity. In addition, few
global commodity prices. Second, budgetary measures such as increase in tax
continuing the fiscal and power sector rates and minimum wage rate also partly
measures, the government introduced contributed to NFNE inflation during H1-
increase in electricity tariffs and imposed FY23.
PDL on POL products that lifted energy
inflation during H1-FY23 (Figure 3.21). Food inflation registered at 30.7 percent
during H1-FY23 - more than three times the
Third, despite a sharp contraction in current average inflation recorded in the similar
account deficit during H1-FY23, amid the period of last five years. Core segment
uncertainty surrounding the resumption of recorded a double-digit inflation since FY13.
Similarly, the inflation in the energy group

34On average, the PKR depreciated by 24.1 percent in H1-FY23 on YoY basis, as compared to around 3.5
percent depreciation in same period last year.

58
 Monetary Policy and Inflation

Supply Side Interruptions Figure 3.21

Losses in agriculture and livestock due to heavy Monsoon rains and associated floods

- Global - Global - Global - Global - Global - Global

commodity prices commodity commodity commodity commodity commodity
index increased prices index prices index prices index prices index prices index
A decline of 4 percent (YoY) in wheat production.

by 38.9 percent increased by increased by unchanged increased by increased by

(YoY) 48.1 percent 28.3 percent (YoY) 4.7 percent 4.2 percent
(YoY) (YoY) (YoY) (YoY)
PKR depreciation of 23.1 percent;

- PKR depreciated
Roll back of fiscal package;

by 32.1 percent - PKR - PKR - PKR - PKR - PKR

(YoY) depreciated by depreciated depreciated depreciated depreciated
23.9 percent by 25.3 by 22.3 by 21.5 by 22.0
- Electricity (YoY) percent percent percent percent
tariffs: (YoY) (YoY) (YoY) (YoY)
AR*: Rs 3.50 per - Regulatory
kwh duty on import - One time - Electricity - Annual - PDL rate
QTA**: Rs 1.55 of goods relief on tariffs: limit of US$ increased to
per kwh power tariffs AR*: Rs 0.91 30,000 per Rs 50 per
- Electricity per kwh individual liter (on
- PDL rate tariffs: QTA**: Rs on card average)
increased to Rs 10 AR*: Rs 3.50 per - PDL rate 3.21 per kwh based cross-
per liter (on kwh increased to border
average) QTA**: Rs 0.51 Rs 37.5 per transactions
per kwh liter (on - PDL rate
- Finance Act 2022 average) increased to - PDL rate
- PDL rate Rs 39.8 per increased to
increased to Rs liter (on Rs 50 per
20 per liter (on average) liter (on
average) average)

FY22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22

* Annual re-basing; **Quarterly tariff adjustment
Source: SBP, PBS, IMF, NEPRA, and MoF

elevated to 38.8 percent during H1-FY23 energy prices.35 In addition, the likely course
against 25.1 percent a year ago. Nonetheless, of current and expected food, non-food and
the energy inflation slowed down in Q2-FY23 non-energy prices, employment situation,
after rising sharply in Q1-FY23 (Figure 3.22). interest rates and household income also
have a bearing on these expectations. As
Reflecting these developments, the inflation regards the business confidence surveys,
expectations of both consumers and these depict the expectations of the business
businesses increased as gauged by SBP-IBA community regarding current and expected
Consumer Confidence Survey (CCS) and economic conditions and average exchange
Business Confidence Survey (BCS) (Figure rates, employment, average selling price,
3.23). Households’ perceptions about financial conditions, and demand.36, 37 A
expected inflation mainly track the trend in

35 H. Abbas, S. Beg, and M.A. Choudhary (2015). Inflation Expectations and Economic Perceptions in a
Developing Country Setting. www.dsqx. sbp. org. pk/ccs/survey% 20information/paper. pdf.
36 Source: State Bank of Pakistan Surveys
37 Literature also suggests that inflation expectations are based on trend in energy and food prices,

average exchange rate, global commodity price outlook, previous expectations regarding inflation and

59
State Bank of Pakistan Half Year Report 2022-23

persistent uptrend in domestic prices amid

Composition of CPI Inflation Figure 3.22
supply shocks, increase in global commodity
YoY growth in percent
prices, and ER pressures led to worsening of
30
inflation expectations during H1-FY23.
25 Urban
Food group remained the major driver of 20
inflation
15
Food group contributed nearly one-half to 10
NCPI inflation during H1-FY23. In terms of
5
contribution, non-perishable segment was
the major driver of this increase. 0

Specifically, price pressures in milk fresh, -5

wheat, wheat flour, ready-made food, and 30
edible oil (cooking oil and vegetable ghee) 25 Rural
were the major contributors to the rising non- 20
perishable food inflation. Quarter-wise
15
analysis suggests that the flood induced
10
damages to agriculture produce and
livestock that caused supply shortages of 5
both perishable and non-perishable 0
commodities, exacerbated food inflation -5
during Q2-FY23 (Figure 3.22).
Q2

Q4

Q2
Q1

Q3
Q4
Q1
Q2
Q3

Q1
Q2
Q3
Q4
Q1
FY20 FY21 FY22 FY23
The supply shortages of food products
necessitated greater imports of wheat and NFNE Energy
pulses (Table 3.6). While the global food Non-perishable food* Perishable food
Headline
prices had started to ease from August 2022,
*inclusive of alcohol beverages and readymade food
a steep depreciation of PKR partly Source: Pakistan Bureau of Statistics
neutralized the impact of lower prices and
added further pressure to the price uptrend Soaring operational & transportation cost
in food group. Specifically, imported and worsening supplies explain inflation in
commodities in the non-perishable food fresh milk
basket (wheat, cooking oil, vegetable ghee,
tea, pulses) contributed around 6.7 Inflation in fresh milk more than doubled in
percentage points in food inflation in urban both urban and rural areas during H1-FY23
areas during H1-FY23 against 2.9 percent, a and had the largest contribution in overall
year earlier (Figure 3.24).38

monetary policy decisions. Sources: R. Moessner (2022). Determinants of Inflation Expectations in the
Euro Area; M. D. Patra and P. Ray (2010). Inflation Expectations and Monetary Policy in India: An Empirical
Exploration. International Monetary Fund.
38 The contribution of wheat, cooking oil, vegetable ghee, pulses, and tea remained around 10.9 percent in

the rural segments during H1-FY23 as compared to 3.6 percent in H1-FY22.

60
 Monetary Policy and Inflation

Inflation Expectations Figure 3.23

Consumer Business
percent
80 80
75 75
70 70
65 65
60 60
55 55
50
50
Nov-19

Nov-20

Nov-21

Nov-22
Mar-20

Mar-21

Mar-22
Jul-19

Jul-20

Jul-21

Jul-22

Dec-19

Dec-20

Dec-21

Dec-22
Aug-19

Aug-20

Aug-21

Aug-22
Apr-20

Apr-21

Apr-22
Overall Food Energy NFNE
Source: State Bank of Pakistan

inflation in H1-FY23 (Table 3.7).39 A number cost of the sector, which further escalated
of factors explain this increase. First, amid milk inflation. Third, according to the
the ongoing scaricty of agriculture products, anecdotal evidence, second round impact of
the cost of livestock feed input such as maize fuel and food inflation to wages also partly
pith, sorghum, and oil cakes rose contibuted to the uptick in milk inflation.
substantially, leading to an increase in milk Finally, according to the estimates, 2022
prices (Figure 3.25). Second, the increase in flooding caused significant damage to
energy and fuel prices amplified operational livetsock population.40 The loss of such large

Contribution of Items in Food Figure 3.24 Average Prices of Livestock Figure 3.25
Inflation that Impacted from Feed Input (Urban)
Exchange Rate Depreciation percent
percent 300
35
28 250

21 200

14 150
7
100
Jul-21

Sep-21

Jul-22

Sep-22
Aug-21

Dec-21

Jun-22

Aug-22

Dec-22
Apr-22
Jan-22

May-22
Nov-21

Nov-22
Oct-21

Mar-22

Oct-22
Feb-22

0
H1-FY21 H1-FY22 H1-FY23
Others
Cooking oil, veg. ghee, tea, wheat, pulses Maize Sorghum (Jowar)
Oil Cakes
CPI food inflation (Urban)
Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics

39 Milk inflation contribution in overall inflation rose to 1.9 and 2.5 percentage points in urban and rural
areas during H1-FY23, from 0.8 and 0.9 percentage points in the same period last year.
40 Over 1.1 million livestock was damaged during the heavy rains and associated flash floods.

Source: Ministry of Planning Development and Special Initiatives (2022). Pakistan Floods 2022: Post
Disaster Need Assessment Supplemental Report. Islamabad: Ministry of Planning Development and
Special Initiatives

61
State Bank of Pakistan Half Year Report 2022-23

Average CPI Inflation and YoY Contribution Table 3.7

percent Urban Rural
H1 H1 Cont.* Q1 Q2 H1 H1 Cont.* Q1 Q2
Items Wt.* H1- Wt.* H1-
FY22 FY23 FY23 FY23 FY22 FY23 FY23 FY23
FY23 FY23
CPI 100.0 10.1 23.1 23.1 23.7 22.6 100.0 9.4 27.9 27.9 27.3 28.5
Food 36.8 10.6 30.7 11.8 29.0 32.4 45.9 8.4 33.6 16.0 30.9 36.2
Perishable 4.5 -4.8 48.3 2.1 41.9 54.1 5.8 -6.4 52.1 3.0 42.9 68.8
Potatoes 0.4 -20.4 22.5 0.1 20.5 25.1 0.7 -19.6 19.0 0.2 16.1 21.8
Onions 0.6 -15.7 169.1 0.8 69.4 277.1 0.9 -14.8 178.1 1.1 74.8 289.2
Tomatoes 0.3 -17.4 61.5 0.3 55.3 65.8 0.5 -20.4 72.3 0.4 59.2 81.7
Fresh fruits 1.4 9.4 28.5 0.3 27.0 29.9 1.5 7.1 34.3 0.4 31.4 37.2
Fresh vegetables 1.5 1.0 36.1 0.6 50.3 24.3 2.1 3.5 36.6 0.8 50.7 25.7
Non-perishable 25.9 12.9 28.5 9.7 27.4 29.5 35.1 10.8 29.5 12.4 29.3 31.4
Milk fresh 7.1 11.6 26.9 1.9 26.1 27.7 10.4 8.9 26.1 2.5 23.4 28.7
Ready-made food 5.5 11.3 31.0 1.7 28.6 33.4 3.8 10.4 30.7 1.2 30.7 30.7
Vegetable ghee 1.0 44.5 51.9 0.8 66.9 38.7 2.4 43.6 55.9 2.0 70.2 43.2
Cooking oil 1.0 42.9 56.2 0.8 70.8 43.3 0.6 46.3 56.5 0.5 71.2 43.6
Wheat flour 3.0 15.8 31.2 1.0 24.1 37.8 3.4 14.3 28.8 1.0 21.1 36.0
Meat 2.0 16.8 24.5 0.6 25.9 23.3 1.7 17.3 24.7 0.5 25.8 23.6
Chicken 1.4 10.1 32.1 0.4 46.6 20.9 1.5 11.1 32.0 0.5 46.0 20.9
NFNE (Core inflation) 53.7 7.0 14.1 7.2 13.4 14.7 42.6 7.2 17.4 7.1 16.2 18.5
House rent 19.3 6.3 5.4 1.0 5.6 5.3 8.6 6.3 5.9 0.5 5.9 5.9
Transport services 1.7 5.4 38.0 0.6 42.2 34.2 1.8 2.1 57.8 0.9 56.5 58.9
Appliances and articles 2.9 12.0 21.9 0.6 19.2 24.6 2.3 8.8 14.6 0.3 13.0 16.2
Education 4.9 2.2 10.6 0.5 10.2 11.0 2.1 3.8 9.9 0.2 8.9 10.8
Appliances/articles/produ
cts Cotton cloth 2.2 9.6 22.2 0.5 21.8 22.6 2.8 8.4 15.5 0.5 15.0 16.0
Washing
Appliances/articles/produ 1.4 13.4 37.3 0.5 30.5 43.9 1.7 12.4 33.2 0.5 28.9 37.3
soap/detergents
cts Marriage halls 1.7 5.5 21.6 0.4 23.4 19.9 2.2 4.6 19.6 0.4 20.4 18.8
Communication services 1.9 2.3 0.5 0.0 0.5 0.5 1.6 0.7 0.2 0.0 0.2 0.2
Energy 9.5 25.1 38.8 4.2 55.9 24.2 11.4 22.7 41.0 4.8 52.3 31.0
Electricity charges 4.6 32.1 31.4 1.5 56.6 11.4 3.4 32.1 31.4 1.1 56.6 11.4
Gas charges 1.1 0.0 0.0 0.0 0.0 0.0 - - - - - -
Motor Fuel 2.9 26.3 70.5 2.5 88.5 55.2 2.5 25.1 73.4 2.1 92.3 57.3
Liquefied Hydrocarbons 0.5 63.7 23.8 0.2 43.8 7.6 1.0 49.2 36.1 0.4 54.5 20.8
Solid Fuel 0.4 6.1 20.3 0.1 16.0 24.4 4.5 9.5 27.8 1.2 22.8 32.5
*wt. = weight, Cont.= Contribution
Source: Pakistan Bureau of Statistics

number of animals worsened supply Flood related supply shortages weighed

situation in the sector causing upward heavily on wheat and wheat flour prices
pressure on prices.
The inflation in wheat and wheat flour
soared to 48.6 and 31.2 percent, respectively

62
 Monetary Policy and Inflation

in the urban segment during H1-FY23.41 The Average Wheat Prices (Urban) Figure 3.26
country witnessed 4.0 percent yoy decline in 300 percent
wheat production during FY22 giving rise to
a demand-supply gap of the commodity, 250
which had started to push wheat price
upward since June 2022 (Figure 3.26). The 200
summer flash floods added additional
150
impetus to price uptrend because of various
factors. First, the concerns about supply 100
shortages further amplified, as floods

Sep-21

Sep-22
Aug-21

Dec-21

Jun-22

Aug-22

Dec-22
Nov-21

Apr-22
May-22

Nov-22
Jan-22
Jul-21

Oct-21

Mar-22

Jul-22

Oct-22
Feb-22
partially damaged government’s wheat
storage facilities as well as the grain stocks
stored by farming community for household Wheat Wheat flour
Source: Pakistan Bureau of Statistics
Consumption.42, 43 Second, uncertainty about
the prospects of timely plantation of wheat,
given relatively higher global commodity
because of delays in drainage of standing
prices and persistent depreciation of PKR,
water from the fields tainted the outlook for
the uptrend in wheat flour prices could not
FY23 wheat crop that further swelled wheat
be reversed.
inflation. These factors magnified the effect
of a large increase in the Minimum Support
Edible oil prices continued uptrend amid
Price (MSP) of Wheat announced in FY22.44
increase in cost of production

To close the supply-demand gap the The prices of edible oil (cooking oil and
government imported a significant quantity vegetable ghee) increased by more than 50
of wheat during H1-FY23.45, 46 However, percent during H1-FY23 in both urban and

41 In rural areas, the inflation in wheat and wheat flour accelerated by 46.6 and 28.8 percent, respectively,
compared to 5.0 and 14.3 percent same period last year
42 Farmers in Pakistan store around 60 percent of their wheat production for fulfilling requirements of

seeds, village and household food consumption. Source: United States Department of Agriculture Grain
and Feed Report, April 2020
43 International Centre for Integrated Mountain Development and Pakistan Agricultural Research Council

(2022). The 2022 Pakistan Floods: Assessment of Crop Losses in Sindh Province Using Satellite Data.
Kathmandu: ICIMOD and Islamabad: PARC.
44 The government increased MSP by 22 percent to Rs 2,200 per 40 kg in 2022. Source: Agriculture

Marketing Information Service. Source: www.amis.pk/Agristatistics/SupportPrice/wheat/wheat.html

45 The import quantum of wheat jacked up by 9.5 percent in H1-FY23 in contrast to a decline in last year.

The ECC permitted to provide 1.00 MMT of imported wheat from PASSCO’s stock to Punjab (0.50 MMT),
Sindh (0.30 MMT) and KPK (0.20MMT) in view of the urgent demand of Provincial Food Departments of
Punjab, Sindh, Khyber Pakhtunkhwa and Baluchistan.
Source: Press Release No. 173 dated October 28, 2022, Finance Division
46 The ECC permitted to provide 1.00 MMT of imported wheat from PASSCO’s stock to Punjab (0.50

MMT) , Sindh (0.30 MMT) and KPK (0.20MMT) in view of the urgent demand of Provincial Food
Departments of Punjab, Sindh, Khyber Pakhtunkhwa and Baluchistan.
Source: Press release No. 173 dated 28th October 2022. Finance Division

63
State Bank of Pakistan Half Year Report 2022-23

Edible Oil Inflation versus Figure 3.27 of wheat, edible oil, chicken, electricity and
Global Palm Oil Prices transportation was mainly responsible for
100 YoY inflation in percent index 2,000 this increase. Furthermore, anecdotal
80 1,600 evidence suggests that the inadequate
60 1,200 availability of gas remained another drag
because of supply-demand mismatches
40 800
particulalry at the onset of winters. Given
20 400
the country’s increasing dependence on
0 0 imports, the uptrend in global LNG price
Oct-21

Oct-22
Aug-21
Sep-21

Dec-21

Aug-22
Sep-22

Dec-22
Jan-22

Apr-22

Jun-22
May-22
Nov-21

Nov-22
Mar-22
Jul-21

Feb-22

Jul-22

togther with PKR depreciation inflated cost

of imported gas.49 Since, restauarants and
Domestic cooking oil inflation various food chains generally use natural gas
Domestic vegetable ghee inflation
Global palm oil prices -rhs and LNG cylinders or liquefied
Source: Pakistan Bureau of Statistics hydrocarbons for cooking purposes, higher
cost of these energy sources along with lower
rural segments (Table 3.7). Despite a sharp availability of local supplies spurred price
yoy decline in global palm oil prices from the increase in the ready-made food group
month of July 2022 (Figure 3.27), domestic during H1-FY23.
edible oil prices continued to inch up, albiet
at a lower pace, on account of PKR The prices of chicken also showed a rising
depreciation and increase in domestic cost of trend during H1-FY23. Rising cost of poultry
production.47 Particularly, the prices of feed including soyabean meal was one of the
vegetable ghee especially in the the rural key factors behind this increase since the
areas also soared sharply during H1-FY23.48 country predominantly relies on soybean
meal imports. However, during H1-FY23
Rising cost of food and energy fanned reportedly the government placed
inflation in ready-made food
restrictions on the import of the grain
because it did not meet certain seed import
Inflation in ready-made food spiked
regulations.50 This, inturn, led to acute
by 31.0 percent during H1-FY23 in contrast to
supply shortfall and uptrend in the prices of
11.3 percent a year earlier. The hike in prices

47 A decline in global palm oil prices during H1-FY23 was due to weaker demand of key buyers of
Malaysian palm oil (India and China) emanating from higher preference for soybean oil over Malaysian
palm oil. Source: United States Department of Agriculture (2022). Malaysia: Oilseeds and Products
Update. Washington D.C.: United States Department of Agriculture
48 The contribution of vegetable ghee in the rural inflation remained higher than that of urban areas. This

is due to the difference of consumption baskets within rural and urban centres. People in rural areas
prefer vegetable ghee over cooking oil for cooking purposes; hence, due to higher weight in the rural food
basket, vegetable ghee had greater contribution in the rural inflation.
49 The import value of liquefied gas rose by 6.8 percent in H1-FY23. Although the import quantum

declined by 94.4 percent, the import prices increased by 9.6 percent in H1-FY23. Source: Pakistan Bureau
of Statistics
50 Soybean is predominantly a genetically modified crop; its meal is an important component of poultry

feed.

64
 Monetary Policy and Inflation

Drivers of Perishable Food Figure 3.28 imported tea prices at elevated level.53,54 In
Inflation addition, rising domestic tea prices amid
YoY contribution in percent foreign exchange constraints, further
30
exacerbated tea inflation during H1-FY23.
20 Specifcially, tea inflation jumped to 56.0
percent during Q2-FY23, from 27.9 percent in
10 Q1-FY23.
0
Perishable food inflation rose significantly
-10
H1-FY22 H1-FY23
Inflation in perishble food group rose
Potatoes Onions substantially by 48.3 percent in H1-FY23 as
Tomatoes Fresh vegetables compared to a decline of 4.8 percent in urban
Fresh fruits areas. This rise primarily originated from
Source: Pakistan Bureau of Statistics
significant losses of fresh fruits and
poultry feed. Furthermore, livestock losses vegetables in summer flooding that lifted
followed by the heavy rains and floods also inflation in almost all components of the
created supply disruptions in chicken and perishable food group during H1-FY23
meat (mutton and beef) during H1-FY23 (Figure 3.28).
(Table 3.7).51
In particular, the prices of onions shot up in
Prices of tea having a share of around 2.3 October 2022 (on m-o-m and y-o-y basis)
percent in the urban food basket, rose due to significant damages to onion crop in
sharply by 42.7 percent during H1-FY23 in Sindh and Balochistan that usually arrives in
contrast to 4.7 percent increase in the the month of October of every year. The
previous period.52 While the global tea non-availability of onions placed pressures
prices had started to decline from September on prices in domestic market in both urban
2022, persistent PKR depreciation kept and rural areas. In order to minimze the
supply gaps, the country imported the

51 Sindh was the most affected province with a loss of over 378,000 animals. These fatalities were largely
reported in goat population followed by sheep, cattle, and buffalo. In addition, Balochistan remained the
second most affected province with a loss of 325,000 animals out of which, over 200,000 private poultry
facilities ruined in the district of Lasbela alone. In KP, around 93,500 animals lost out of which nearly half
are commercial poultry. Approximately 2,150 deaths of mainly goats, sheep, and cattle were reported in
other provinces. Punjab and special regions were the least affected areas with around 1,580 and 550
animal losses respectively, mainly goats and sheep.
Source: Ministry of Planning Development and Special Initiatives (2022). Pakistan Floods 2022: Post
Disaster Need Assessment Supplemental Report. Islamabad: Ministry of Planning Development and
Special Initiatives
52 The price of tea rose by 38.8 percent in H1-FY23 against 4.0 percent in H1-FY22.
53 The global tea prices declined by 5.6 percent in H1-FY23 as compared to a growth of 14.5 percent last

year. Source: IMF

54 The import quantum of tea fell by 0.2 percent during H1-FY23, whereas PKR value of imported tea rose

by 39.8 percent during this period, compared to same period las year. Source: Pakistan Bureau of Statistics

65
State Bank of Pakistan Half Year Report 2022-23

Onion Prices Figure 3.29 NFNE - YoY Trends Figure 3.30

percent
Rupees per kg Rupees per kg 20
60
180
15
40
120
10

20 60 5

0 0 0

Q2-FY23
Q1-FY22

Q2-FY22

Q3-FY22

Q4-FY22

Q1-FY23
Sep-22
Sep-21
Aug-21

Aug-22
Jul-21

Nov-21

Nov-22
Oct-21

Jul-22

Oct-22

Domestic prices - rhs Import prices Urban Rural

Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics

commodity from Iran and Afghanistan.55 In areas showing higher inflation in H1-FY23
addition, the import prices remained in contrast to a year ago (Figure 3.31).
relatively higher than last year;56 this In addition to elevated inflation expectations,
together with a sharp PKR depreciation the rising trend of core inflation also mirrors
elevated the domestic price of onions on YoY cost-push factors, whereas aggregate
basis (Figure 3.29). demand showed clear signs of contraction

NFNE Inflation intensified in both urban and NFNE Dispersion - H1-FY23 Figure 3.31
rural areas
Rural
38
Core (NFNE) inflation reached a nine-year
40 Urban
peak of 14.1 percent in H1-FY23, compared
to 7.0 percent in H1-FY22.57 Continuing
the double-digit increase of Q4-FY22, core
inflation gathered further momentum in
both quarters of H1-FY23 across urban and
7
rural segments (Figure 3.30). In terms of
5
dispersion, NFNE inflation broadened
considerably with about eighty-five Sub-indices showing inflation less than or equal to
percent sub-indices in urban and rural H1-FY22
Sub-indices showing inflation more than H1-FY22
Source: Pakistan Bureau of Statistics

55 The import quantum of onions from Afghanistan rose sharply by almost 87 percent to 188 thousand
metric tons during Jul-Oct FY23. Furthermore, the country also imported from Iran (47 thousand metric
tons) during the same period with no onion imports in the last corresponding period. Source: Pakistan
Bureau of Statistics
56 The import prices of onions in PKR (per kg) in Jul-Nov FY23 increased by 37.0 percent as compared to a

decline of 0.4 percent in the last corresponding period. Source: Pakistan Bureau of Statistics
57 NFNE inflation (urban) recorded double-digit inflation soaring to 14.1 percent in H1-FY23 - first time in

nine years since H1-FY13.

66
 Monetary Policy and Inflation

Sources of NFNE Inflation Figure 3.33

Wage Inflation during H1 Figure 3.32
(Urban)
percent YoY growth in percent
25 30,000 50
45
20 25,000 40
35
15 20,000 30
25
10 15,000 20
15
5 10,000 10
5
0 5,000 0
FY19 FY20 FY21 FY22 FY23 Q1 Q2 Q3 Q4 Q1 Q2

Urban Rural Minimum wage -rhs FY22 FY23

Services index Goods index House rent
Source: Pakistan Bureau of Statistics & Ministry of
Source: Pakistan Bureau of Statistics
Finance

during H1-FY23. A host of factors such as significant damage to agriculture production

the demand compression measures and livestock caused by floods, rural incomes
introduced since last year, flood-induced also weakened during H1-FY23. In addition,
losses to agriculture, temporary restrictions remittances also saw a substantial YoY
on imports, and overall deterioration in decline in H1-FY23. As a result, all major
macroeconomic environment weighed down domestic demand indicators including sales
economic activity and hence domestic of automobiles, cement, and petroleum
demand during H1-FY23. In particular, LSM products showed considerable yoy declines
production dipped by 3.7 percent during during H1-FY23 (Table 3.3).
July-December FY23, against an 8.2 percent
On the other hand, the combined effect of
increase in the last corresponding period. In
higher energy and fuel prices, PKR
addition, amid a slowdown in global
depreciation, temporary restrictions on
demand and unfavorable domestic economic
selected imports, and increase in taxes and
environment export growth (in rupee terms)
other levies propelled cost-push inflation in
fell by 24.3 percent in H1-FY23 from 29.5
NFNE segment.58 Furthermore, heightened
percent growth in H1-FY22.
food and energy prices squeezed real
The significant contraction in economic incomes and wellbeing of labor that pushed
activity dented incomes of various sectors of up wage inflation in both urban and rural
the economy. Moreover, as indicated by the areas during H1-FY23.59 Moreover, the

58 The government started to charge Petroleum Development Levy (PDL) in the petroleum prices with
effect from July 1, 2022. Source: OGRA (www.ogra.org.pk/e-10-gasoline-prices). The regulatory duty on
paper and paperboard, wires (made of iron and alloys), and optic fiber cable was increased to 10, 30, and
20 percent, respectively. The regulatory duty on motor vehicles also increased from 15 percent to 100
percent in August 2022. Source: Revenue Division (MoF) and FBR
59 The wage index comprises of the prices of tailoring, cleaning and laundering, construction wage rates,

garbage collection, household help, doctor fee, dental services, mechanical services, and personal
grooming services.

67
State Bank of Pakistan Half Year Report 2022-23

Top Contributors of NFNE Inflation (Urban), YoY growth Figure 3.34

2021 2022
Wt. Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Core Inflation 53.7 6.8 6.3 6.4 6.7 7.6 8.3 8.2 7.8 8.9 9.1 9.7 11.5 12.0 13.8 14.4 14.9 14.6 14.7
House Rent 19.3 6.0 6.0 6.0 6.6 6.6 6.6 6.1 6.1 6.1 5.6 5.6 5.6 5.6 5.6 5.6 5.3 5.3 5.3
Transport services 1.8 8.5 -0.8 -0.3 0.8 12.2 12.7 11.6 9.3 19.1 20.3 22.4 34.8 39.7 44.6 42.4 41.3 33.4 28.4
Appliances/articles 3.0 12.1 11.6 12.1 12.5 12.0 11.7 11.6 9.0 9.9 9.5 10.3 14.4 15.8 19.6 22.1 23.8 24.3 25.7
Cotton Cloth 2.2 9.8 9.8 9.8 9.8 8.6 9.9 10.1 11.3 10.9 12.5 12.5 15.7 18.1 23.5 23.7 24.2 22.2 21.4
Washing soap/detergent 1.4 12.2 12.6 12.3 12.5 14.4 16.6 18.0 17.1 16.7 17.2 18.7 22.6 24.7 28.9 37.7 41.5 43.4 46.6
Marriage hall charges 1.8 3.4 2.5 2.6 2.2 9.2 12.6 12.8 13.5 13.3 13.2 13.2 21.5 21.7 24.2 24.3 24.5 18.8 17.0
Motor vehicles 0.8 2.8 2.8 2.4 3.3 8.0 8.0 7.6 8.5 10.3 16.2 19.7 20.9 24.0 38.4 34.9 34.3 28.2 27.5
Red: Highest; Green: Lowest
Source: Pakistan Bureau of Statistics

impact of relatively higher minimum wage in input items in H1-FY23 (Figure 3.35). Motor
FY23 also reflected in the wage inflation vehicles’ price rose considerably during H1-
during the period under review (Figure FY23, reflecting the impact of strong
3.32).60 depreciation of PKR and rising cost of
production.
In terms of contribution, inflation in goods
and services rose considerably during The services index of core inflation also rose
H1-FY23, with a prominent contribution of sharply in both urban and rural areas during
the former (Figure 3.33). In overall terms, H1-FY23. The services that are energy-
appliances and articles including beauty intensive such as transport and personal
products and toiletries, transport services,
washing items including soaps and
Inflation in Construction Figure 3.35
detergents, cotton cloth, marriage hall
Input Items (Urban)
charges, and motor vehicles remained the
major drivers of urban core inflation during 60
H1-FY23 (Figure 3.34).
40

A general hike in cost of production 20

including, electricity and fuel prices, wages,
input prices and PKR depreciation mainly 0
Cement blocks

explains heightened inflation in these

Bricks

Iron bars
Gravel

Sand
Cement

categories. Moreover, the higher prices of

cement and cement blocks, bricks, gravel
(bajri), sand, and iron bars explained a
significant rise in the index of construction H1-FY22 H1-FY23
Source: Pakistan Bureau of Statistics

60The federal government increased the minimum wage to Rs 20,000 (from Rs 17,500) in 2021-22. In 2022-
23, the provinces raised the minimum wage rates to Rs 25,000 per month. Source: Notifications pertaining
to provincial Labour and Human Resource departments.

68
 Monetary Policy and Inflation

Top Contributors to NFNE Table 3.8 Energy Inflation (Urban) Figure 3.37
Inflation in Services (Urban) 10
percent percent
40
Average Inflation
H1-FY22 H1-FY23 5 20
NFNE Inflation (Services) 4.4 15.4
Transport services 5.4 38.0 0 0
Education 2.2 10.6
Marriage hall charges 5.5 21.6 -5 -20
Personal grooming
7.0 26.0
services -10 -40
Tailoring 8.3 16.6

Nov-21

Nov-22
Mar-22
Aug-21

Aug-22
Feb-22

Apr-22
Dec-21

Dec-22
Jul-21

Jun-22
Jul-22
Jan-22
Sep-21

Sep-22
May-22
Oct-21

Oct-22
Source: Pakistan Bureau of Statistics

grooming services, took the biggest hit due YoY MoM -rhs
to higher energy cost. In particular, transport Source: Pakistan Bureau of Statistics
services surged sharply on account of followed by the increase in electricity
swelling motor fuel prices during H1-FY23 charges. However, in the case of rural areas,
(Table 3.8). Other such services related to a rise in solid fuel prices also had a noticeable
mechanical, cleaning/laundering, tailoring, contribution in energy inflation during H1-
and wedding hall arrangements also FY23 (Figure 3.36).
contributed to the rising prices of services in
the non-food non-energy basket. The spike in electricity prices during H1-
FY23 emanated from the annual and
Energy Inflation continued to rise
quarterly adjustment in the electricity tariffs
under the IMF program (Table 3.9).
Energy inflation rose significantly on YoY Specifically, the government introduced
basis in both urban and rural areas during combined annual rebasing of electricity
H1-FY23. Hike in motor fuel prices mainly tariffs for FY22 and FY23 in three phases
dominated energy inflation in this period, during Jul, August and Oct 2022, which led
to increase in power charges in these months
Contribution in Energy Figure 3.36 (Figure 3.37). However, a downturn in
Inflation global oil prices from August 2022 onwards,
percent percent
60 Annual and Quarterly Adjustments Table 3.9
45 39 41 in Electricity Tariff
40 Notified Tariff w.e.f
30 25 23
Annual Rebasing (AR)
15 20 First stage (Rs 3.50/ kwh) July 25th 2022
Second stage (Rs 3.50/kwh) August 1st 2022
0 0 Third stage (Rs 0.91/kwh) October 1st 2022
H1-FY22 H1-FY23 H1-FY22 H1-FY23 Quarterly Tariff Adjustment (QTA)
Urban Rural Q1-FY22 (Rs 0.57/kwh) June 1st 2022
Electricity L. hydrocarbons Q2-FY22 (Rs 1.55/kwh) July 7th 2022
Solid fuel Motor fuel Q3-FY22 (Rs 0.51/kwh) August 23rd 2022
Energy inflation -rhs Q4-FY22 (Rs 3.21/kwh) October 20th 2022
Source: Pakistan Bureau of Statistics Source: IMF, NEPRA, MoF

69
State Bank of Pakistan Half Year Report 2022-23

Fuel Charge Adjustment (FCA) Figure 3.38 Composition of Petrol Prices Figure 3.39
250 Rupees per litre
Rs per kwh
200

Jul-22
Aug-22
10.0
Mar-22

150
Apr-22
Dec-21

Sep-22
Jan-22

Jun-22
100
May-22
Feb-22
Nov-21

6.0
Oct-21

50
Sep-21

Nov-22
Dec-22
Oct-22
0
2.0
-50

Aug-21
Sep-21

Dec-21

Aug-22
Sep-22

Dec-22
Apr-22
Jan-22

Jun-22
May-22
Nov-21

Nov-22
Oct-21

Mar-22

Oct-22
Jul-21

Feb-22

Jul-22
-2.0
Oct-21

Oct-22
Sep-21

Dec-21

Sep-22
Aug-21

Jan-22

Apr-22

Jun-22

Aug-22
May-22
Nov-21

Mar-22
Jul-21

Feb-22

Jul-22

Base price Margins

Price diff. claim PDL
Note: x-axis indicates months for which FCA was
GST Total Price
charged
Source: National Electric Power Regulatory Authority Source: Oil & Gas Regulating Authority

contained the pace of increase in electricity also slightly cushioned petrol prices during
tariffs during Q2-FY23 because of lower fuel H1-FY23 as compared to the last
charge adjustment (Figure 3.38). corresponding period (Figure 3.39).

Furthermore, during the month of September Apart from motor fuel, solid fuel including
2022, the government announced a relief coal and firewood also contributed to energy
package for power consumers that led to a inflation in rural areas during H1-FY23. In
dip in energy inflation during this month. rural areas, solid fuel is used as a substitute
Reflecting the impact of softening global oil of gas. Anecdotal evidence suggests that the
prices and the relief package the m-o-m gas shortages further increased the demand
growth of in energy prices remained for coal and firewood, which led to increase
negative during September, November and in the prices of solid fuel in H1-FY23.
December 2022.61
The higher inflation spell has affected the
Furthermore, prices of motor fuel edged up consumers in highest consumption basket the
during H1-FY23 reflecting the impact of most
imposition of Petroleum development levy
(PDL), higher global prices of oil and ER Consumers in all consumption baskets were
depreciation. However, the global crude adversely affected by the surge in inflation
prices started to ease from August 2022, during H1-FY23, compared to last year.
which led to a slowdown in motor fuel However, within the consumption groups,
inflation on m-o-m basis. Furthermore, as the lower consumption quintiles (with
opposed to H1-FY22 when petroleum prices consumption up to Rs 17,732 and 22,888)
were subject to GST, the absence of sales tax faced relatively lower inflation during H1-

61The m-o-m growth in energy prices declined by 31.1, 0.2, and 1.9 percent while the y-o-y price growth
in energy was recorded at 18.9, 24.5, and 15.4, in the months of September, November, and December
2022, respectively in urban centers. Source: Pakistan Bureau of Statistics

70
 Monetary Policy and Inflation

Inflation-Consumption Quintile Figure 3.40 Electricity Price Trends (Urban) Figure 3.41
45 percent
YoY growth in percent
80
35 60

25 40
20
15
0
5
-20
Sep-19
Dec-19

Sep-20
Dec-20

Sep-21
Dec-21

Sep-22
Dec-22
Jun-19

Jun-20

Jun-21

Jun-22
Mar-20

Mar-21

Mar-22

Q1- Q2- Q3- Q4- Q1- Q2-

FY22 FY22 FY22 FY22 FY23 FY23
Q1 Q2 Q3 Electricity Charges upto 50 Units
Q4 Q5 Electricity Charges 51-100 Units
Note: SPI is compiled on 2015-16 base Electricity Charges 101-300 Units
Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics

FY23 than the highest consumption basket share of items such as meat and fruits as well
(more than Rs 44,175) (Figure 3.40).62 as food from hotels and restaurants.64 In
overall terms, the consumption basket of this
Difference in the consumption preferences of quintile has lower share of food group and
lowest and highest quintiles mainly explains includes broad range of products such as
this trend. Lower consumption quintiles textile, clothing and footwear. Within energy
have a larger weight of food products such as group, consumers in higher consumption
wheat, milk, sugar and vegetable ghee. For quintiles have greater preference for
meeting energy requirements this group electricity and gas. Hence, the consumers in
prefers low cost products including firewood lower consumption quintiles were relatively
and agriculture waste.63 Whereas, in less affected by the impact of sharp increase
addition to these basic food items, higher in electricity prices during H1-FY23 (Figure
consumption quintile has relatively large 3.41).

62 The consumption of quintiles: Q1 (up to Rs. 17,732); Q2 (Rs. 17,733 - 22,888); Q3 (Rs. 22,889 - 29,517); Q4
(Rs 29,518 - 44,175); Q5 (above Rs. 44,175). Source: Pakistan Bureau of Statistics
63 Source: Household Integrated Economic Survey 2018-19
64 Source: Household Integrated Economic Survey 2018-19

71
4 Fiscal Policy & Public Debt
Fiscal deficit remained unchanged as percent of GDP in H1-FY23 from last year; whereas, primary surplus recorded
notable improvement, mainly on account of marked slowdown in non-interest spending, aided by relatively higher
pace of expansion in overall revenue. Non-interest spending slowed down mainly through substantial decline in
subsidies and grants. Government’s revenue mobilization measures, inflation, and elevated interest rates led to
higher tax collections—mainly direct taxes; whereas, increase in the petroleum levy and mark-up payments by the
PSEs and provinces augmented non-tax revenue collections. On the other hand, the revenue deficit deteriorated,
reflecting the higher pace of growth in current expenditure relative to overall revenues. While government exercised
restraint in development expenditure, interest spending rebounded sharply from last year’s fall. Moreover, FBR
missed the half-year target due to import contraction, and lackluster economic activity. Due to the paucity of
external financing, government resorted to domestic resources to finance its fiscal deficit. Additional debt
accumulation was tilted towards longer-tenor, floating instruments—PIBs and Ijara Sukuks. While lengthening of
debt profile lowered the prospects of rollover risk, it stoked the repricing risk amid the rising interest rate
environment.

4.1 Fiscal Trends and Policy Review1 However, revenue balance, which gauges the
capacity of overall revenues to finance
Fiscal deficit stood at 2.0 percent of GDP in current expenditures, deteriorated in H1-
H1-FY23—unchanged from the same period FY23 compared to last year (Figure 4.1c).
last year (Figure 4.1a).2 However, This was driven by substantial acceleration
moderation in non-interest spending along in markup payments compared to the same
with the decent increase in revenues led to period last year. Besides, the aggregate
higher surplus in the primary balance. The provincial accounts also posted a lower
primary balance posted a surplus of 1.1 surplus of 0.1 percent of GDP compared to
percent of GDP in H1-FY23, against 0.1 0.7 percent last year (Table 4.1).
percent in H1-FY22 (Figure 4.1b).

Fiscal Balance Figure 4.1a Primary Balance Figure 4.1b Revenue Balance Figure 4.1c
billion Rupees percent percent 1.2 percent
0 0.0 1,200 billion Rupees 0 billion Rupees 0.0

-500 -0.6 800 0.8 -400 -0.5

-1,000 -1.2 400 0.4 -800 -1.0

-1,500 -1.8 0 0.0 -1,200 -1.5
-2,000 -2.4 -400 -0.4 -1,600 -2.0
Q1 Q2 H1 Q1 Q2 H1 Q1 Q2 H1 Q1 Q2 H1 Q1 Q2 H1 Q1 Q2 H1
FY22 FY23 FY22 FY23 FY22 FY23
Overall Budget Balance Revenue Balance
Primary Balance
Percent of GDP-rhs Percent of GDP-rhs Percent of GDP-rhs
Source: Ministry of Finance

1 Revised GDP is used to measure H1-FY23 performance of different indicators and variables as percent of
GDP in this section and the rest of the chapter.
2 In H1-FY23, fiscal deficit was 44.3 percent of the annual target, compared to 28.9 percent in H1-FY22.

1
State Bank of Pakistan Half Year Report 2022-23

Consolidated Fiscal Indicators in H1 Table 4.1

values in billion Rupees; growth in percent
Values Growth As Percent of GDP
FY22 FY23 FY22 FY23 FY22 FY23
1. Total Revenue (a+b) 3,956.0 4,698.9 18.0 18.8 5.9 5.6
(a) Tax Revenue 3,191.0 3,731.9 29.9 16.9 4.8 4.4
Federal 2,919.8 3,428.8 32.1 17.4 4.4 4.1
Provincial 271.2 303.0 10.3 11.7 0.4 0.4
(b) Non-Tax 764.9 967.1 -14.6 26.4 1.1 1.1
Federal 697.4 896.4 -17.8 28.5 1.0 1.1
Provincial 67.6 70.7 43.1 4.5 0.1 0.1
2. Total Expenditure (a+b+c) 5,327.8 6,382.4 18.7 19.8 8.0 7.6
(a) Current expenditure 4,675.7 6,061.2 16.0 29.6 7.0 7.2
Mark-up payments 1,452.9 2,573.1 -1.5 77.1 2.2 3.1
Defence 520.5 638.9 7.0 22.7 0.8 0.8
Non-markup current
3,222.8 3,488.2 26.2 8.2 4.8 4.1
expenditure
(b) Development expenditure &
571.5 636.6 24.8 11.4 0.9 0.8
net lending
(c) Statistical discrepancy 80.6 -315.4 4,145.4 -491.2 0.1 -0.4
3.Overall budget balance -1,371.8 -1,683.5 20.6 22.7 -2.0 -2.0
4.Primary balance 81.1 889.6 -76.0 997.3 0.1 1.1
5. Revenue balance -719.7 -1,362.3 6.1 89.3 -1.1 -1.6
6. Financing (a+b) 1,371.8 1,683.5 20.6 22.7 2.0 2.0
(a) External (Net) 1,025.6 -296.3 125.7 -128.9 1.5 -0.4
(b) Domestic (Net) 346.2 1,979.8 -49.4 471.9 0.5 2.4
Source: Ministry of Finance

To put things into context, amid the ongoing Growth in the overall expenditures in H1-
fiscal consolidation efforts under the IMF FY23 remained marginally higher than last
Extended Fund Facility (EFF) program, the year, attributed to expansion in both current
government had envisaged a significant and development spending. More than half
reduction in budget deficit to 4.9 percent of of the entire increase in current spending
GDP in FY23 from 7.9 percent recorded in came from large markup payments, which
the previous year. A strong expansion in tax rebounded sharply due to higher
collection and rationalizing of energy outstanding debt stock in an increasing
subsidies and grants were the key elements interest rate environment and growing share
of the desired fiscal outcomes. However, a of floating rate debt. The non-interest
sharp increase in interest spending and current spending declined on account of
below target growth in FBR taxes kept the substantial fall in subsidies and grants,
fiscal deficit during H1-FY23 almost at the whereas other expenses including pension,
same level seen during H1-FY22, in terms of running of civil government and defence
GDP. services recorded sizeable increase in

74
 Fiscal Policy and Public Debt

H1-FY23. The higher expenditures incurred revenue impact of elevated inflation and
on running of civil government reflects the interest rates; and higher collections through
announcement of ad-hoc relief allowances FBR’s demand notices. FBR’s tax
and upward adjustment in salaries of federal administration efforts and reforms also
civil, defence and PSEs employees. Similarly, complemented these developments.
pension payments also scaled up due to
yearly increment in pension rates.
Import-related taxes caused a drag on tax
On the other hand, the power sector revenue, which were mirrored in the
subsidies including tariff differential slowdown of imports. Weakening demand,
payments under Circular Debt Management disruptive floods, and zero GST on imported
Plan (CDMP) to Discos, IPPs Wapda/Pepco crude and POL products to give relief to
and K-Electric remained largely short of masses also proved challenging for tax
budgeted targets irrespective of higher collections. Together, these factors also led
accumulation in circular debt during H1- to deceleration in tax revenue, with the FBR
FY23. Similar contraction is also visible in missing the half-yearly target. Non-tax
the volume of overall grants, mainly due to revenue, on the other hand, was lifted by
absence of Covid-related payments.3 The higher petroleum levy, mark-up payments
flood payouts disbursed through National (from PSEs and others) to government, and
Disaster Management Authority (NDMA) royalties on oil and gas paid by government
and Benazir Income Support Program (BISP) entities when oil prices were trending high.
were among the largest federal grants. The
Amid a large fiscal deficit, the government’s
overall development spending showed a
financing needs increased in H1-FY23. With
moderate growth during H1-FY23 compared
limited external financing, most of the deficit
to same period last year.
was financed through domestic resources. In
terms of composition, the public debt was
On the revenue side, both tax revenue and
skewed towards long-term, variable rate
non-tax revenue grew in H1-FY23.
instruments, particularly PIBs and GoP Ijara
Specifically, non-tax revenue reversed trends
Sukuks. The government partially retired its
from last year, and aided in pushing revenue
stock of T-bills and external commercial
growth slightly higher than the same period
loans. While the lengthening of debt profile
last year. The entire growth in tax revenue
through floating rate instruments reduced
emanated from domestic taxes (direct taxes,
the rollover risk, repricing risk came to the
sales tax, FED), unlike last year when import-
fore in the backdrop of high interest rate
related taxes had mainly propelled the
environment. Moreover, the repayment
growth. Growth in domestic taxes, in turn, is
capacity of the country deteriorated during
almost completely explained by direct taxes,
H1-FY23 on account of increasing interest
which received major stimulus from
payments, accompanied by the lower-than-
revenue-mobilization measures introduced
targeted FBR revenue collections and
in the FY23 budget—including imposition of
insufficient external financing.
new super tax on banks and non-bank firms;

3The Covid-related grants remained a major source of federal grants in H1-FY22 with an outlay of Rs 102
billion.

75
State Bank of Pakistan Half Year Report 2022-23

Total Revenue Collection in Pakistan Table 4.2

billion Rupees; growth in percent
Collections Growth
Q1 Q2 H1 Q1 Q2 H1
FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23
Total Revenue
1,809 2,017 2,147 2,682 3,956 4,699 22.3 11.5 14.7 24.9 18 18.8
(1+2)
1.Tax Revenue 1,533 1,782 1,658 1,950 3,191 3,732 36.6 16.3 24.4 17.6 29.9 16.9
Federal 1,398 1,634 1,522 1,795 2,920 3,429 38.3 16.9 26.9 17.9 32.1 17.4
Provincial 135 148 136 155 271 303 20.6 9.9 1.8 13.5 10.3 11.7
2.Non-Tax
276 235 489 732 765 967 -22.6 -14.8 -9.2 49.7 -14.6 26.4
Revenue
Source: Ministry of Finance

4.2 Revenue
Percent Contribution in Revenue Figure 4.2
percentage points
Total revenue rose by 18.8 percent in H1- 25 25
FY23, registering a slight increase from last 20 18.8 20
year’s 18.0 percent growth (Table 4.2). While 18.0
15 5.1 15
growth rate of tax revenue, a major
10 21.9 10
contributor, almost halved from last year,
13.7
growth of non-tax revenue (NTR) turned 5 5
from negative to notable positive (Figure
0 0
4.2). -3.9
-5 -5
Quarterly data shows that total revenue H1-FY22 H1-FY23
accelerated sharply in Q2 vis-à-vis Q1 of Tax Non-tax Total revenue (rhs)
FY23. It was due to positive contribution of
Source: Ministry of Finance
non-tax revenue in the second quarter,
which, in turn, was propelled by mark-up FBR Taxes
payments (from PSEs and others), oil and gas
royalties, and transfer of SBP’s surplus profit FBR’s net tax collection posted 17.4 percent
(including arrears from last year). Tax expansion in H1-FY23, against last year’s 32.5
revenue grew at an almost the same pace in percent (Table 4.3). Almost the entire
both the quarters. growth was achieved on the back of domestic
direct taxes, which recorded 56.3 percent
While the federal tax revenue received growth in H1-FY23. There was also growth
impetus from administrative and revenue in domestic sales tax and FED collections;
mobilization measures of the FBR, as well as however, it was overshadowed by the
the revenue impact of inflation and rising decline in import-related counterparts
interest rates, they faced headwinds from the (including customs duties). All domestic
slowdown in imports, floods, and lackluster taxes (direct taxes, sales tax, and FED) drove
economic activity. Exchange rate growth in H1-FY23, as opposed to last year
depreciation partially offset the impact of when import-related taxes (sales tax, customs
declining imports. duties, and FED) had played a pivotal role
(Figure 4.3).

76
 Fiscal Policy and Public Debt

FBR Tax Revenue in H1 Table 4.3

billion Rupees; growth in percent
Collections Percent Change Contribution
Target Percent of
in FY23
FY22 FY23 FY22 FY23 (H1-FY23) Target
Growth
A. Direct Taxes 1,021 1,526 23.6 49.4 17.3 1,547 99
Imports 141 149 n.a* 6.1 0.3 - -
Domestic 881 1,376 n.a* 56.3 17.0 - -
B. Indirect Taxes (1+2+3) 1,899 1,903 37.8 0.2 0.2 2,099 91
1. Sales Tax 1,275 1,272 39.1 -0.2 -0.1 1,376 92
Imports 892 825 75.4 -7.6 -2.3 - -
Domestic 383 447 -6.2 16.8 2.2 - -
2. FED 146 164 15.3 12.3 0.6 179 92
Imports 12 6 27.6 -53.3 -0.2 - -
Domestic 134 159 14.3 18.3 0.8 - -
3. Customs 477 467 42.8 -2.1 -0.4 543 86
Import 477 467 42.8 -2.1 -0.4 543 86
Domestic - - - - - - -
Grand Total (A+B) 2,920 3,429 32.5 17.4 - 3,646 94
*Bifurcated data for Direct Taxes not available
Source: Federal Board of Revenue

There was deceleration in tax revenue Further, tax collections were impeded by
growth in H1-FY23 compared to last year, zero GST on imported petroleum products
which is traced to the import contraction, and crude, and temporary exemptions on all
crimping demand, downbeat economic duties and taxes extended under the ambit of
activity amidst devastating floods, and FBR flood relief. Moreover, refunds issued in H1-
missing targets due to some revenue- FY23 were also 18.1 percent higher than the
enhancing measures being contested in the same period last year.
courts.
That being said, the growth in tax revenue in
H1-FY23 was achieved on the back of
Contribution in Tax Revenue Figure 4.3 following major factors:
percentage points
35 35 a) Revenue mobilization measures
32.5
28 5.9 28
introduced in the Finance (Supplementary)
Act 2022 and Finance Act 2022, including
21 17.4 21 revisions in income tax rates; imposition of
14 14 super tax on high-earning persons; measures
26.5
20.0 to widen tax base—for example tax on
7 7 deemed income from property; and removal
0 0 of domestic GST exemptions. b) FBR’s
-2.6
administrative efforts to improve tax
-7 -7
H1-FY22 H1-FY23
compliance and ease of doing business,
including rollout of Synchronized
Import-related Domestic Total (rhs) Withholding Administration and Payment
Source: Federal Board of Revenue System (SWAPS); revamping of Alternate
Dispute Resolution Mechanism; National

77
State Bank of Pakistan Half Year Report 2022-23

Sales Tax Return; Track and Trace System import compression in the second quarter led
(TTS) for tobacco and sugar. c) Inflation in to tax collections from imports falling short
goods and services, as well as increase in of the target (Table 4.3).
government salaries, also cushioned tax
collections in the first half. d) Rising interest FBR’s administrative measures
rates pushed up returns on government Various administrative measures taken by
securities, saving deposits, saving the FBR in FY22 and FY23 proved
certificates, banks’ profitability, and income instrumental in propelling tax collection,
taxes paid thereof. improving tax compliance, and propping up
In terms of budget targets, aggregate tax ease of doing business. Some of those
collections accounted for 94 percent of the measures are worth-accentuating here:
target in H1-FY23; last year in the first half, a) Alternative Dispute Resolution (ADR),
these collections had surpassed the an out-of-court dispute-solving mechanism
cumulative target by a large margin. that facilitates ease of doing business, was
Monthly data indicates that the major revamped through the Finance Act 2022, to
slippage occurred only in the month of make it more efficient and effective.
December 2022 (Figure 4.4). According to
the FBR, it was because of some revenue- b) Automated System of Collection and
enhancing measures, worth Rs 250 billion, Deduction of Withholding Taxes (SWAPS)
announced in the Finance Act 2022 that could was introduced in the Finance Act 2022 that
not be implemented, as they were being aims to simplify and streamline collection
contested in courts.4 In addition to that, and deduction of withholding tax by the
withholding agents.
Monthly Performance of Actual Figure 4.4
Collections vis-a-vis Targets c) Discontinuance of gas and electricity
1000 billion Rupees connections of sales tax agents, including
800
Tier-1 retailers, who fail to register for sales
tax purpose, or notified tier-1 retailers
600
registered but not integrated with the
400 Board’s Computerized System. This measure
200 was announced in the Finance Act 2022.
0
d) A Point-of-Sale (POS) Prize Scheme,
Aug

Aug
Oct
Jul

Dec

Oct

Dec
Jul
Nov

Nov
Sep

Sep

rolled out during late 2021, encourages

FY22 FY23 consumers to buy from Tier-1 retailers,
Target Actual which are registered and integrated with the
Source: Federal Board of Revenue Press Releases FBR’s online POS system.5

4 Source: FBR Press Release dated December 31, 2022. Source: www.fbr.gov.pk/pr/fbr-achieves-
unprecedented-growth-of-66-in-di/173748/2022
5 A consumer wins cash prizes in electronic draws by verifying the invoices through Tax Asaan

application, which become part of the draws. First draw was held on 15-January-2022, followed by

78
 Fiscal Policy and Public Debt

Contribution of Direct and Indirect Figure 4.5 Direct Taxes Collected in H1 Table 4.4
Taxes in Tax Revenue Growth in H1 billion Rupees; growth in percent
percentage points Collections YoY Growth
35 35
32.5 FY22 FY23 FY22 FY23
28 28 Collection on
20.3 49.2 -47.3 142.7
Demand
21 23.6 0.2 21 Voluntary Payment 312.0 543.7 21.5 74.2
17.4
Advance tax 245.3 449.0 15.9 83.0
14 14
Withholding taxes 665.1 923.8 16.8 38.9
7 17.3 7 Bank interest &
8.9 64.5 138.4 -4.6 114.6
securities
0 0 Contracts 133.8 183.3 11.2 37.1
FY22 FY23 Salaries 84.5 117.7 21.0 39.3
Direct taxes Indirect taxes Total (rhs) Electric bills 31.8 55.7 22.9 74.9
Imports 132.4 148.5 45.8 12.1
Source: Federal Board of Revenue
Transfer of
immoveable 35.6 68.7 n.a 93.3
e) Introduction of National Sales Tax property
Return (NSTR) in January 2022 to increase Net Direct Tax (DT) 1,021 1,526 23.6 49.4%
ease of doing business by simplifying and Note: Net DT is adjusted for DT refunds. Other
consolidating the sales tax returns filing. 6 amounts in the table are on gross basis.
Source: Federal Board of Revenue
f) Track and Trace System (TTS) for
Withholding taxes (WHT)
tobacco and sugar industries, introduced in
Q2-FY22, is bearing positive results. In H1- Withholding tax collection from bank interest
FY23, sales tax collected from the sales of and securities increased markedly due to two
sugar and cigarettes increased by 9.2 percent main factors: a) withdrawal of exemption of
and 25.9 percent respectively. reduced rate benefit on investment in federal
government securities. Earlier, profit on debt
Direct taxes drove the YoY increase in tax
of all persons other than banking companies
revenue
was taxed at 15 percent; now under the
Direct taxes’ growth rate and contribution to Finance Act 2022, this rate applies only to
tax revenue doubled in H1-FY23 vis-à-vis the those persons whose profit does not exceed
same period last year, whereas indirect taxes Rs 5 million;7 the rate is doubled for those
stood stagnant (Figure 4.5 and Table 4.4). not on the Active Taxpayer List (ATL); b)
The breakdown of direct taxes shows that Rising interest rates led to higher returns on
major contributions came from withholding bank deposits investment in government
taxes, voluntary payments, followed by securities, and national saving certificates,
collection on demand. which aided WHT collections.

monthly draws until October 15, 2022. The scheme was temporarily suspended on November 15, 2022
until January 15, 2023.
6 NSTR is being implemented gradually across the country.
7 The scope of this reduced rate benefit has been cut back.

79
State Bank of Pakistan Half Year Report 2022-23

In case of contracts, taxable services were Withholding Tax on Retailers Table 4.5
expanded to incorporate REIT management and Service Providers
Gross Monthly Bill WHT
services and National Clearing Company of
Where the amount does not exceed Rs.
Pakistan Limited.8 Second, sale of goods or 30,000
Rs 3,000
services under section 153, including edible Where the amount exceeds Rs. 30,000
Rs 5,000
oils, rice, transport services, freight but does not exceed Rs 50,000
forwarding services, air cargo services, Where the amount exceeds Rs. 50,000
Rs 10,000
but does not exceed Rs 100,000
courier services, among others, led to higher Retailers and service providers as
WHT collection due to inflationary Up to Rs
notified by the Board in the income tax
200,000
spillovers.9 general order
Source: Finance Act 2022
Withholding tax collection from electric bills
also witnessed growth due to rise in per unit was also enhanced from 1 percent to 2
cost of electricity.10 Moreover, in order to percent. Furthermore, this tax was to be
increase tax net, retailers and some service collected irrespective of the holding period.13
providers have to pay fixed income tax For purchasers not on the ATL, it would be
through their electricity bills (Table 4.5).11 increased by 250 percent. These measures
led to higher WHT collections from the
Similarly, progressive rates for income tax property transactions. Lastly, WHT
slabs were revised upward in the budget. collections from imports also received a push
While slabs were reduced from 12 to 7, there from increased tax rates—up from 2 percent
was an increase in the tax liability of salaried to 3.5 percent; the rate is double for those
individuals with taxable income nearer to the importers not on the ATL.
upper bound of the middle slab (Rs 2.4
million to Rs 3.5 million) or exceeding Rs 3.6 Voluntary payments
million (top three slabs), when compared to Collections under this head rose significantly
their tax liabilities under FY22 slabs. Besides by 74.2 percent in H1-FY23, surpassing last
this, salaries of government officials or year’s 21.5 percent growth (Table 4.4). This
employees were also raised in the FY23, growth can be traced to three main factors:
which propped up the taxable income. These
measures led to higher WHT collections a) Minimum tax on banks’ income increased
under the sub-head of salaries in Table 4.4.12 from 35 percent to 39 percent for FY23.

Additionally, withholding tax on sale, b) Tax on income generated from investment

purchase or transfer of immoveable property in government securities, which is linked to

8 ‘Contracts’ here refer to section 153 of the Income Tax Ordinance 2001. And, section 153 includes sale of
goods or services, and execution of contracts.
9 For instance, transport services witnessed 57.8 percent YoY inflation in H1-FY23. Source: Pakistan

Bureau of Statistics
10 Electricity charges grew 31.4 percent in H1-FY23 over last year. Source: Pakistan Bureau of Statistics
11 Source: Finance Act 2022
12 BPS-2022 replaced BPS-2017 pay structure, and the pay brackets were revised upwards. Furthermore,

ad-hoc relief fund at 15 percent of the basic pay was also rolled out; earlier it was 10 percent. Source:
Ministry of Finance. Source: ww.finance.gov.pk/circulars/circular_01072022.pdf
13 Earlier this tax was zero if holding period was more than 4 years.

80
 Fiscal Policy and Public Debt

Income Tax on Earnings from Table 4.6 Super Tax on High Earning Table 4.7
Government Securities Linked to Persons for Fiscal Year 2023
Advance-to-Deposit (ADR) Ratio Rate for
S.No Income under section 4C
FY23
Slab FY22 & onwards Previous Rate
Where income does not exceed
ADR =< 40% 55% 40% 1 0%
Rs.150 million
40% < ADR =< 50% 49% 37.5% Where income exceeds Rs. 150
35% for FY22* 2 million but does not exceed Rs. 1%
ADR > 50% 35%
39% for FY23* 200 million
*they are equal to the minimum taxes on banks' Where income exceeds Rs. 200
income in respective Tax Years 3 million but does not exceed Rs. 2%
Source: Finance Act 2022 250 million
Where income exceeds Rs. 250
advances-to-deposit ratio (ADR), was 4 million but does not exceed Rs. 3%
enhanced for FY22 and onwards (Table 4.6). 300 million
Where income exceeds Rs. 300
5 4%
million
c) Imposition of cascading super tax on Where income exceeds Rs. 300
high-earning persons under the new section 6 million and the business is 10%
4C (Table 4.7). There was an upward banking
Where income exceeds Rs 300
revision in super tax from 4 to 10 percent for
million and persons are engaged
the banking companies whose income in the business of airlines,
exceeded Rs 300 million for FY23.14 For non- automobiles, beverages, cement,
10% for
bank firms, super tax of 10 percent was chemicals, cigarette & tobacco,
7 the
fertilizer, iron & steel, LNG
imposed retrospectively for FY22. FY22*
terminal, oil marketing, oil
Furthermore, banks’ profitability amidst a refining, petroleum & gas
high-interest rate environment was also exploration & production,
considerably higher than the year before. In pharma, sugar & textiles
Jan-Dec 2022, banks’ overall profit-before-tax Note: S.No. 1 to 5 pertain to income from any
business--banking or otherwise. S.No. 6 & 7 pertain
was 55.8 percent higher than the comparable to banking & a group of specific businesses,
period last year. This resulted in higher respectively, provided their income levels are
income tax collections from banks in H1- exceeding Rs 300 million apiece.
FY23. *This tax applies retrospectively for the FY22
Source: Finance Act 2022
Collection on Demand:
2021. In H2-FY22 and H1-FY23, impact of
Reversing the declining trend from last year, this extension tapered off.15
collection on demand grew by 142.7 percent
Another factor could be that issuance of
in H1-FY23, against a low base. Main reason
assessment order in demand notices was
was that last year the recovery date of the tax
extended from five to six years in the Finance
payable claimed in demand notices by the
Act 2022. Furthermore, FBR was also able to
FBR had been extended beyond 90 days—
collect due income taxes from banks, which
instead of 30 days—through the Finance Act
had not earlier deposited their quarterly

14 Until FY2022, super tax was being applied under section 4B—“Super tax for rehabilitation of temporary
displaced persons”. In FY2023, a new section, 4C, was introduced---“Super tax on high-earning persons”,
targeting the wealthier sections of the country.
15 In H2-FY22 and H1-FY23, CoD grew by 94 percent and 142.7 percent, respectively.

81
State Bank of Pakistan Half Year Report 2022-23

advance tax payments (voluntary payments). and FED in the first half (Figure 4.6a and
Given banks’ high profitability, CoD received 4.6b).
a major boost in H1-FY23.
All these taxes declined in tandem with the
Indirect taxes levelled off fall in PKR-denominated imports bill in the
second quarter.16 Steep depreciation in the
Indirect taxes stood stagnant in H1-FY23, as first quarter had offset the revenue impact of
they recorded a mere 0.2 percent YoY decrease in USD-denominated imports bill.
increase in the first half. Last year, they had However, in the second quarter, a steep
grown by 37.8 percent, receiving major decline in import growth outweighed the
impetus from import-related taxes. In impact of exchange rate depreciation. The
contrast, this year domestic collections stood adjacent fall in import-related taxes in the
out, as import-related taxes slumped below second quarter resulted in decline in the first
last year levels (Figure 4.6a). half collections, compared to the same period
Declining imports bring down import-related last year.17 That said, PKR depreciation
tax collection served as a cushion against the otherwise
sharply contracting USD imports in the first
Collections under indirect import-related half.
taxes dropped by 6.1 percent in the first half
of FY23, against last year’s high growth In terms of products, the decline in imports
(Table 4.8). This year imports (in PKR terms) (in PKR terms) in the second quarter
fell in the second quarter, leading to lower occurred in most of the major import
collections under customs duties, sales tax, categories, including vehicles, electrical and
mechanical machineries, POL products, and

Breakdown of Indirect Taxes in H1 Figure 4.6a Growth Rates of Import-related Figure 4.6b
Indirect Taxes and Imports
billion Rupees growth in percent percent percent
1,600 80 100 60
1,200 60 75 45
800 40 50 30
400 20
25 15
0 0
0 0
-53.3 -25 -15
-400 -20 -50 -30
FED (D)

Customs (M)

Import-related
Domestic

FED (M)
Sales tax (D)

Sales tax (M)

Q1

Q2

Q1

Q2

FY22 FY23
Imports (PKR) Imports (US$)
Import-related taxes ER dep(-)/app(+) -rhs
FY22 FY23 FY22 (rhs) FY23 (rhs) Source: Federal Board of Revenue & Pakistan Bureau of
Source: Federal Board of Revenue Statistics

16 Import-related taxes and duties are assessed in PKR. Imports bill, originally recorded in US$, is
converted into PKR using the current exchange rate.
17 Collections of import-related taxes are directly linked to the PKR-denominated imports bill, other

things constant.

82
 Fiscal Policy and Public Debt

Major Revenue Spinners of Import-related Indirect Taxes in H1 Table 4.8

billion Rupees; growth and contribution in percent
Collections Growth Contribution in
FY22 FY23 in FY23 FY23
Customs duties (M) 477.2 466.9 -2.1 -0.7
POL 112.5 90.1 -19.9 -1.6
Vehicles 94.5 43.7 -53.7 -3.7
Iron and steel 33 5.9 -82 -2.0
Photosensitive semiconductor devices 29 10.6 -63.4 -1.3
Machinery 23.4 12.2 -47.8 -0.8
Animal/vegetable fats & oils 20.4 14.1 -30.7 -0.5
Sales Tax (M) 892.3 824.9 -7.6 -4.9
POL 282.3 155.4 -45 -9.2
Vehicles 70.7 46 -34.9 -1.8
Iron and steel 71.8 65 -9.5 -0.5
Oil seeds & fruits 22.7 18.8 -17.5 -0.3
Photosensitive semiconductor devices 34.5 31.6 -8.5 -0.2
Animal/vegetable fats & oils 55.7 82.2 47.6 1.9
FED (M) 12.4 5.8 -53.3 -0.5
Import-related, total 1,381.8 1,297.5 -6.1 -4.4*
Indirect taxes, total 1,898.5 1,903.2 0.2 -
* Contribution in ‘indirect taxes, total’. All other contributions are in relation to ‘import-related, total’
Source: Federal Board of Revenue
iron and steel. The decline was due to the tax collections dropped more sharply (7.6
strong regulatory and administrative percent in H1 and 15.2 percent in Q2) than
measures to curtail imports by the the custom duties collection (2.1 percent in
government, among other factors.18 H1 and 8.3 percent in Q2).20

With regards to the specific taxes, sales tax Collections of domestic sales tax and FED
received bigger hit than the customs duties shored up indirect taxes
(Table 4.8). One reason was zero GST on Domestic collection of indirect taxes (sales
four imported POL products, including tax and FED) increased by 17.2 percent in
petrol, kerosene, high-speed diesel oil, light H1-FY23, after declining by 1.1 percent same
diesel oil.19 Another reason was that sales period last year. This increase was led by
tax is calculated on top of customs duties. different factors, including removal of GST
With dutiable imports receding by 0.5 exemptions through the Finance
percent in H1-FY23 (10.6 percent in Q2), sales

18 For more details, see Chapter 5 – External Sector

19 GST on these products was removed in January 2022 through the Finance (Supplementary Act) 2022.
20 For example, the assessed value of an imported good is Rs 100, customs duty is 10 percent and sales tax

is 17 percent. First, customs duty is applied (Rs 100*1.1 = Rs 110), and then the sales tax on the resulting
value (Rs 110*1.17 = Rs 128.7). Say, the same imported good is worth Rs 90 now; the values after customs
duty and sales tax will be Rs 99 and Rs 115.83 respectively. The fall in sales tax collection (Rs 12.87) is
more than customs duty collection (Rs 11).

83
State Bank of Pakistan Half Year Report 2022-23

(Supplementary) Act 2022 and Finance Act Furthermore, some revenue-mobilization

2022.21 measures were taken in the Finance Act 2022.
For instance, the ambit of Tier-1 retailers was
Elevated inflation in the first half of FY23 expanded by adding jewelers (except those
also translated into higher GST collections, with shop size less than 300 square feet) to
offsetting the adverse impact of lackluster the Tier-1 retailers’ list.
economic activity and zero GST on the four
imported POL products, as well as crude.22 Besides, to make Tier-1 and other retailers
Growth in the national CPI accelerated more compliant in their responsibility to
markedly in H1-FY23 from the year before register and integrate with the FBR’s real-
(Figure 4.7). Major revenue spinners of time reporting of sales system, a disincentive
domestic indirect taxes are shown in Table was created in the form of discontinuance of
4.9. Electrical energy was the major spinner gas and electricity bills of retailers not
for sales tax, given one-third increase in registering for sales tax purposes. This
electricity charges in H1-FY23 from the year provision was also applicable on other sales
ago. In case of cigarettes and sugar, the tax agents. Moreover, a monetary penalty
Track and Trace System also aided in higher system was also implemented in FY23 for the
collections. non-compliant Tier-1 retailers.23

Table 4.9 shows there was a jump in GST

Growth in National CPI and its Figure 4.7 collections from the sales of POL products.
Components in H1
percent With zero GST on four imported POL
National CPI products and crude, these collections
Motor vehicles
represent still-in-place tax on other POL
products, including furnace oil, HOBC, JP-1,
Liquified hydrocarbons and JP-8. With international crude prices
Electricity charges trending higher than the year before and
tying into the products prices, GST
Misc. goods & services
collections from other POL products came
Clothing & footwear out 12.4 percent higher than last year.
Tobacco, alc. beverages
Domestic FED collection, which witnessed
Food, non-alc. beverages greater growth than last year, was propelled
80 60 40 20 0 20 40 60 80
by increase in the tax on cigarettes and air
travel in club, business and first class (Table
FY23 FY22
4.9).
Note: alc. is short for 'alcoholic'
Source: Pakistan Bureau of Statistics

21 This phenomenon reflected in the revised tax expenditures for FY22, which showed year-on-year
declines in sales tax exemptions for FY22. Source: Finance Act 2022
22 GST on crude and products was removed through the Finance (Supplementary) Act 2022 in January

2022 and in March 2022 through FBR’s SRO No. 321(I)/2022, respectively.
23 Penalty of Rs 500,000 for first default; one million for second default after 15 days of order for first

default; two million rupees for third default after fifteen days of order for second default; three million
rupees for fourth default after fifteen days of order for third default; notwithstanding above, premises
might be sealed as well.

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 Fiscal Policy and Public Debt

Major Revenue Spinners of Domestic Indirect Taxes in H1 Table 4.9

billion Rupees; growth and contribution in percent
Collections Growth in Contribution
FY22 FY23 FY23 in FY23
Sales Tax (D) 382.7 447.1 16.8 12.4
Electrical energy 78.7 131.9 67.6 10.3
POL 68.9 77.5 12.4 1.7
Cigarettes 14 17.6 25.9 0.7
Sugar 31 33.9 9.2 0.6
Natural Gas 17.8 20.7 16.0 0.6
Cement 17.1 18.6 9 0.3
Aerated waters/beverages 9.8 10.5 6.7 0.1
Cotton Yarn 40.7 26.1 -35.9 -2.8
FED (D) 134 158.5 18.3 4.7
Cigarettes 52.6 63.1 20 2.0
Concentrates used in beverages & foods 8.3 13.3 59.9 1.0
Air travel 3.2 8 154 1.0
Motor Cars 6.9 11.5 67 0.9
Domestic, total 516.7 605.6 17.2 4.7*
Indirect taxes, total 1,898.5 1,903.2 0.2 -
* Contribution in ‘indirect taxes, total’. All other contributions are in relation to ‘domestic, total’
Source: Federal Board of Revenue

Non-tax Revenue In terms of budgeted annual targets,

collections under the NTR were 50 percent of
Non-tax revenue (NTR) swelled by 26.4 the target this year, as compared to last
percent in H1-FY23, after declining by 14.6
year’s 36.8 percent. This was due to higher
percent last year (Table 4.10). Major drivers
collections under the aforementioned sub-
were petroleum levy, mark-up on loans
heads compared to the budgeted estimates.
extended to PSEs and others by the
government, royalties on oil and gas, and
dividend payments from PSEs.24 Quarterly Collections from petroleum levy in H1-FY23
data further shows that the entire growth in surpassed last year’s level. It was due to
the NTR occurred in the second quarter. higher levels of the levy imposed in H1-FY23
Among other things, this was due to the (Figure 4.8), which also compensated for
below-target petroleum levy collections in declining POL sales. It may be pointed out
the first quarter, and change in mechanism of here that collections from petroleum levy
transfer of SBP’s profits to the government in were just 20.8 percent of the target, despite
H2-FY22.25 excelling last year’s percentage. It was
because the levy increased gradually to Rs 50

24 ‘Mark-up to PSEs and others’ refers to mark-up collected from: cash development loans to the
provincial governments; loans to local bodies, financial and non-financial institutions and other
corporations; capital outlays of the Federal Government in the commercial departments.
25 Instead of quarterly transfers, transfers are made annually—starting FY23. Notwithstanding that, the

second quarter saw transfer of SBP’s profits, which were arrears from last fiscal year.

85
State Bank of Pakistan Half Year Report 2022-23

Non-Tax Revenue (NTR) Collection in Pakistan Table 4.10

billion Rupees; growth in percent
Collections Growth
Q1 Q2 H1 Q1 Q2 H1
FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23
Petroleum levy 13.3 47.5 56.7 130.3 70 177.8 -90.2 255.7 -59.2 130 -74.6 154
Mark-up
19.5 28.8 13.1 48.8 32.6 77.6 -24.1 48 -28.4 272.1 -25.9 138.2
(PSEs/others)
Royalties on
21.7 20.7 17.3 36 39.1 56.7 48.5 -4.9 -15.5 107.7 11.2 45
oil/gas
Dividend 1.9 24.7 24.1 16.2 26 40.8 27.3 1,195.4 132 -32.8 118.8 57.2
Surplus profit
109 0 271 371.2 380 371.2 3.8 -100 1.3 37 2 -2.3
of SBP
Profit PTA 30.1 13.1 8.8 19.5 38.9 32.6 269.2 -56.6 -16.1 122.1 108.9 -16.2
Passport fee 6.1 6.7 4.3 9.7 10.4 16.4 106.7 9.9 6.8 126.2 49.2 57.9
Defense
2.8 3.8 4.9 5.5 7.7 9.3 -1.3 33.5 34.3 11.4 18.6 19.5
receipts
GIDC 6.5 3 4.6 3 11.2 6 30.8 -54 2.1 -35.1 17.1 -46.1
Total NTR 275.7 234.9 489.2 732.2 764.9 967.1 -22.6 -14.8 -9.2 49.7 -14.6 26.4
Source: Ministry of Finance

per litre—as budgeted—during the first half FY22, Ministry of Finance had raised the
of FY23, in order to mellow down associated mark-up rate from 10.3 to 11.2 percent,
inflationary impact on the masses. leading to higher mark-up payments to the
government in FY23.26
Mark-up payments by PSEs and others also
saw a jump of 138.2 percent against last Royalty payments also witnessed growth in
year’s decline. This was in tandem with the H1-FY23. Elevated international crude
trend of policy rate (Figure 4.9). For the year prices, coupled with exchange rate

Quaterly Petroleum Levy Collections Figure 4.8 Mark-up Payments Linked to Figure 4.9
Vis-a-Vis Annual Targets Policy Rate Environment
percent
billion Rupees Rupees/liter 50 billion Rupees 25
1,000 80
40 20
800 64
30 15
600 48
20 10
400 32
10 5
200 16 0 0
Q3

Q1
Q1
Q2

Q4
Q1
Q2
Q3
Q4

Q2

0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
FY21 FY22 FY23
FY21 FY22 FY23 Mark-up payments Policy Rate Avg. (rhs)
Target Levy collection Levy (rhs)
Source: Ministry of Finance & State Bank of Pakistan
Source: FBR, MoF, and OGRA

For the year FY21, the government had cut back the mark-up from 12.2 percent to 10.3 percent. Source:
26

www.finance.gov.pk/circulars/circular_17112022.pdf

86
 Fiscal Policy and Public Debt

State of Federal Expenditures in H1 Table 4.11

billion Rupees, growth in percent
Percent Contribution in As Percent of
Cumulative Flows YoY Growth
Expenditure Growth GDP
FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23
Total expenditures* (a+b) 3705.7 4567.2 20.4 23.2 20.4 23.2 5.6 5.6
(a) Current expenditure 3351.3 4390.2 19.4 31.0 17.7 28.0 5.0 5.2
Mark-up payments 1452.9 2573.1 -1.5 77.1 -0.7 30.2 2.2 3.1
Domestic 1312.5 2273.5 -3.3 73.2 -1.4 25.9 2.0 2.7
Foreign 140.4 299.6 18.7 113.4 0.7 4.3 0.2 0.4
Non-interest current spending 1898.5 1817.1 42.5 -4.3 18.4 -2.2 2.8 2.2
Defence affairs and services 520.5 638.9 7.0 22.7 1.1 3.2 0.8 0.8
Pension 251.7 321.2 19.6 27.6 1.3 1.9 0.4 0.4
Running of civil govt. 209.9 226.7 7.4 8.0 0.5 0.5 0.3 0.3
Subsidies 313.4 196.6 143.0 -37.3 6.0 -3.2 0.5 0.2
Grants to provinces and others 603.0 433.7 94.1 -28.1 9.5 -4.6 0.9 0.5
Grants to provinces 54.1 44.6 19.4 -17.6 0.3 -0.3 0.1 0.1
Grants to others 548.9 389.2 106.9 -29.1 9.2 -4.3 0.8 0.5
(b) Development expenditure
354.3 177.0 31.2 -50.1 2.7 -4.8 0.5 0.2
and net lending
Total development expenditure 288.3 161.7 18.6 -43.9 1.5 -3.4 0.4 0.2
PSDP 288.3 161.7 24.2 -43.9 1.8 -3.4 0.4 0.2
Development grants to
88.7 25.3 56.5 -71.4 1.0 -1.7 0.1 0.0
provinces
Net lending 66.0 15.2 145.3 -77.0 1.3 -1.4 0.1 0.0
Provinces 59.9 -30.5 -456.4 -150.9 2.5 -2.4 0.1 0.0
Others 6.1 45.7 -86.1 650.6 -1.2 1.1 0.0 0.1
* Excluding statistical discrepancy
Source: Ministry of Finance

depreciation, led oil and gas exploration increase in current spending, mainly the
public sector enterprises, like OGDC and markup payments, pension, defence affairs
PPL, to thrive and generate higher sales and services and running of civil
revenues, thereby pushing up payments of governments (Table 4.11). The federal
royalties and levies.27, 28 development spending on the other hand fell
sharply during first half of FY23.
4.3 Federal Expenditures29 Federal Current Expenditures

During H1-FY23, federal expenditures grew Federal current expenditures witnessed

by 23.2 percent compared to 20.4 percent in significant growth of 31.0 percent during H1-
the corresponding period last year. The FY23, as compared to 19.0 percent growth in
upsurge was mainly led by broad based H1-FY22. Almost 60 percent of the

27 According to the Ministry of Finance, royalty is 12.5 percent of the gate value of petroleum. Source:
Explanatory Memorandum on Federal Receipts
28 Royalty paid by the OGDC and PPL rose by 37.8 percent and 74.5 percent in H1-FY23, respectively.
29 The discussion in this section is based on expenditures excluding statistical discrepancy.

87
State Bank of Pakistan Half Year Report 2022-23

expansion seen in current spending came Growth Contribution in Federal Figure 4.10
from interest payments, which were mainly Current Expenditures
driven by domestic markup payments. Rest percentage point
of the contribution came from higher 30

spending on defence affairs and services, 20

running of civil government and pension
10
accounts (Table 4.11). The fall in non-
interest current spending in H1FY23 was in 0
line with the downward revisions in
-10
quarterly ceilings on grants and H1-FY22 H2-FY22 H1-FY23
appropriations (Figure 4.10).30 Dom. markup Foreign markup
Defence Pension
Interest spending increased sharply Civil govt. Subsidies
Grants
The markup payments grew by 77 percent Source: Ministry of Finance
and reached Rs 2.6 trillion in H1-FY23 mainly
on account of substantial surge in interest payments to bilateral creditors after
expense on domestic debt. External debt expiration of Debt Service Suspension
servicing also showed a significant increase Initiatives (DSSI).32
of 113.4 percent during H1-FY23. The increasing share of interest spending not
In Budget FY22-23, the government had only puts pressure on existing constrained
allocated Rs 3.9 trillion for markup on both resources, it also reduces available fiscal
external and domestic debt.31 However, the space for other expenditures, specially the
interest payments have crossed 65 percent of development spending (Figure 4.11a and
full year target in December 2022. This is in 4.11b).
contrast to H1-FY22, when the interest Broad-based deceleration in grants and
payments could only had stretched to 47.5 subsidies
percent of fiscal year target of Rs 3.0 trillion.
Consequently, the full year payments also The expenses on federal grants and subsidies
remained broadly under the assigned limits. experienced marked slowdown during H1-
The significant escalation in outstanding debt FY23 compared to H1-FY22. The sluggish
stock, increasing interest rate environment movement in these outlays is also visible
and growing share of floating rate debt from lower actual expenses relative to
mainly explain the rising momentum in budgeted targets in H1-FY23 (Figure 4.12)
domestic interest payments during H1-FY23.
Grants: The disbursement of grants fell by
The foreign interest payments edged up due 28.1 percent to Rs 433.7 billion in H1-FY23
to sharp depreciation of PKR against the US from Rs 603 billion in H1-FY22. The
dollar and the resumption of markup deceleration was broad-based with notable

30 On 24 Aug 2022, the Finance Division squeezed the target of recurrent budget to maximum of 17% in
quarter 1, previously the assigned limit was 20% for Q1-FY23. Source: Budget Updates, No F.
3(l)FO/2022-23, dated August 24, 2022, Budget Wing, Finance Division.
31 The target was around 30 percent higher than Rs 3.1 trillion envisaged for FY22.
32 For details, see Section 4.5

88
 Fiscal Policy and Public Debt

Trend in Interest Payments in H1 Figure 4.11a Markup Payments Relative to Figure 4.11b
Development Expenditures and
billion Rupees percent
3,200 4.0
percent
440
2,400 3.0
404
322
1,600 2.0 330
254
800 1.0
220
0 0.0
FY20 FY21 FY22 FY23 110 60 69
46
Foreign debt servicing
Domestic debt servicing 0
Domestic debt servicing as % of GDP-rhs FY21 FY22 FY23
Foreign debt servicing as % of GDP-rhs
Development expenditure Tax revenue
Source: Ministry of Finance Source: Ministry of Finance

decline observed in grants payout to ongoing programs including Unconditional

contingent liabilities account, Covid-related Cash Transfer (UCT) and Conditional Cash
programs, railways and HEC. Transfer (CCT) programs. Under the major
UCT scheme i.e., ‘Benazir Kafaalat’, BISP
The Benazir Income Support Program (BISP) released Rs 55 billion to disburse per family
was a major beneficiary of federal grants of cash assistance of Rs 7000 to around 7.7
Rs 192 billion in H1-FY23, compared to Rs million families. Within CCT program,
65.4 billion in same period last year. A part ‘Benazir Taleemi Wazaif’ scheme received
of the BISP was allocated to provision of Rs 13 billion to dispense scholarships to the
emergency cash assistance to flood affected children of BISP beneficiaries.34 To support
families. Initially the government had
announced a cash assistance package of Rs 28 Target Versus Actual Estimates of Figure 4.12
billion, however with heightened severity of Federal Subsidies and Grants
human crisis, the target was increased to Rs billion Rupees
1,200
70 billion. Through BISP, government
provided emergency cash assistance of Rs 900
25000 per family in calamity hit districts; as
of December 2022, around 2.76 million 600
families were assisted under BISP in flood 51% of
300
affected regions of all provinces including target 36% of 46% of 30% of
GB (Figure 4.13).33 target target target
0
Grants to Others Subsidies
The rest of BISP payments of around Rs 122
billion were directed to support other FY22 Target H1-FY22 Actual
FY23 Target H1-FY23 Actual
Source: Ministry of Finance
33 Source: Benazir Income Support Program. www.bisp.gov.pk/
34 According to BISP, Benazir Taleemi Wazaif Scheme was initially introduced in Nov 2012 in five districts

around the country; the coverage expanded gradually, and in 2020 all districts of the country were

89
State Bank of Pakistan Half Year Report 2022-23

Disbursement of Federal Grants Figure 4.13 Pandemic Response Effectiveness in

Pakistan.37 These grants were supported by
billion Rupees
Reimb. of TT charges multilateral institutions such as World Bank,
Contigent liability
IDB and ADB. Besides, in H1-FY22,
government also disbursed Rs 102 billion to
NDMA
NDMA for National Disaster Management
Railways
Fund (Covid-19). During H1-FY23, NDMA
HEC
received funds of Rs 18.0 billion to arrange
Other grants procurement of relief goods and logistics
AJK and GB related to flood related rescue, relief and
BISP rehabilitation activities (Figure 4.14).
0 50 100 150 200
Subsidies: The volume of overall subsidies
H1-FY22 H1-FY23 declined to Rs 196.6 billion during H1-FY23
Source: Ministry of Finance compared to Rs 313.4 billion in the same
period last year. In terms of GDP, overall
children's health, BISP runs another CCT
subsidies recorded at 0.8 percent in H1-FY23
program named as ‘Benazir Nashonuma’ the
against 1.3 percent in H1-FY22.
coverage of this program has been extended
to 118 districts with 169 facilitation centers The releases of both energy and non-energy
are made operationalized.35, 36 subsidies remained low (Figure 4.15), most of
the deceleration was evident in subsidies to
The major fall in grants came under grants to
energy sector. The payments to major
National Disaster Management Authority
energy entities such as IPPs, Wapda/Pepco,
(NDMA), mainly due to suspension of
K-Electric and SNGPL remained
Covid-related programs in FY23. During
considerably lower than the amount
FY22, government issued number of grants
envisaged in budget 2022-23 (Figure 4.16).
to Ministry of National Health Services
These payments were due against different
Regulation and Coordination (NHSR&C)
heads including: 1) industrial support
under different vaccine programs such as
packages;38 2) RLNG support to general
IVAC, Asia Pacific Vaccine program, and

covered. Under this scheme, the children of BISP families are provided with quarterly stipend (varied
with sex, age and education level) with the condition of enrolment in school and 70 percent attendance in
enrolled institution. As of Jun 2022, 9.4 million children have been enrolled in the scheme, Rs 40 billion
has been disbursed, of which Rs 20 billion was disbursed in FY22 alone to 5.2 million students.
35 The objective of Benazir Nashonuma program is to address the stunting prevention in children during

the first two years. Under this CCT scheme, the additional quarterly payments (Rs 2000- Rs2500) are made
to BISP beneficiary families with the condition that mother attends regular antenatal health checks and
awareness sessions during pregnancy, consuming specialized nutritious food (SNF), and completes
child’s immunization and regular health checks.
36 Source: Press Release No. 290, Finance Division, Government of Pakistan
37 Source: Finance Division, Government of Pakistan
38 The industrial support package was announced in November 2020, in which the peak and off-peak

tariff structure for industrial consumers were abolished initially for the period from Nov2020 till April
2020, however the package was extended till Jun 2022 and then till October 2023. (Source: NEPRA (2021,
State of Industry Report)

90
 Fiscal Policy and Public Debt

Coverage of Emergency Cash Figure 4.14 Baluchistan and 5) tariff differential subsidy
Assistance through BISP to AJK government.
million
50 billion Rupees 2.0
Keeping in view the growing volume of
40 1.6 outstanding subsidies, government initiated
30 1.2 different measures to resolve prevalent
20 0.8 structural issues especially in power and gas
10 0.4 sector. For instance, to address the growing
0 0.0
circular debt in gas sector, ECC approved the
upward revision in gas prices for different
Sindh

Punjab

Balochistan
KP

consumer categories including commercial

Total cash disbursement
connections, general industry, domestic
Total beneficery families-rhs consumers, captive power and CNG sector
Source: National Disaster Management Authority, etc.39 These prices were approved and
Floods (2022) SITREP - 2022 subsequently announced by OGRA in
February 2023 and are applicable from
industry, zero-rated export sectors and
January 2023.40 The ECC also streamlined
consumers; 3) consumers of FATA; 4) tube
subsidized energy charges to five export-
well subsidy to agriculture-sector in
oriented sectors;41 particularly the RLNG

Disbursement of Federal Subsidies Figure 4.15 Energy Subsidies--Absolute Figure 4.16

Amount and Realized as Percent of
billion Rupees Budgeted Expenditures
Other Subsidies percent
Fertilizer 250 billion Rupees 100
USC 200 80
150 60
Energy revol. fund
100 40
LNG-consumers
50 20
K-Electric
0 0
WAPDA
Int. disco-TD

WAPDA-Rec. FATA

KEL-TD
IPPs

RLNG- Industry

RLNG-consumers
Industrial sector

KEL- Indus.supp.

Exch. losses-PSO
IPPs
Industrial sector
Int. disco tariff differ.

0 50 100 150

H1-FY22 H1-FY23 Budgeted Actual-H1-FY23

percent of budg. exp-rhs
Source: Ministry of Finance Source: Ministry of Finance

39 The circular debt in gas sector rose due to non-revision of gas prices in line with revenue requirement,
gas sector CD edged up to Rs 1.2 trillion by end-June 2022 from Rs 3 billion in end-June 2018.
40 Source: Oil and Gas Regulatory Authority, Gas Price Notification, effective January 01, 2023.
41 In August 2021, the government announced to provide energy to five export-oriented sectors namely

textile, jute, leather, carpet, surgical and sport goods at regional competitive rates with an objective to
reduce cost of manufacturing and enhance exports. Source: Press Release No. 79, Ministry of Finance

91
State Bank of Pakistan Half Year Report 2022-23

charges increased from US$ 6.5 per MMBTU Federal Development Expenditures
to US$ 9 per MMBTU in July 2022.42
Government also made upward revisions in In the absence of sufficient fiscal space and
electricity tariff in Jul-Dec FY23. external support to deal with catastrophic
floods, government made a major
Pension and salaries expenses rose significantly
reallocation of funds from development
during H1-FY23
projects to flood relief activities. Resultantly,
the outlays of federal PSDP slashed by 44
Similar to H1-FY22, both pensions and
percent from Rs 270 billion in H1-FY22 to Rs
running of the civil government
162 billion in first half of FY23 (Figure 4.17).
expenditures grew significantly during H1-
FY23. In addition to relief measures for
current and retired employees announced in Aside from flash floods, fiscal imbalances
FY22, the government provided 15 percent that began to rise in H2-FY22 also put a dent
ad-hoc relief allowance to all federal on the development spending. In the last
employees and employees of autonomous/ two quarters of FY22, the government
semi-autonomous bodies and corporations in realigned the spending priorities and cut
July 2022.43 Besides, government also number of projects from 371 to 170, the full
announced upward revisions in salary scale year PSDP recorded at Rs 550 billion against
of BPS-1 to BPS-21 civil servants.44 the target of Rs 900 billion. The government
was cognizant of the lingering fiscal issues
and set a lower PSDP target of Rs 800 billion
For pensioners, the government made
for FY23. However, the unprecedented
upward adjustments in existing rate of floods further narrowed the PSDP spending
increase in pension from 10 percent granted
which could only reach 25.4 percent of the
in 01-April-2022 to 15 percent with effect full year target in H1-FY23 (Figure 4.17).
from Jul 1st, 2022, this revision was applicable These disbursements did not even meet
for civil and armed forces retirees.45 All of revised targets announced in federal PSDP
these measures accelerated the overall release strategy in August 2022.46 The
expenditures incurred on running of civil limited provision of development funds is
government (mainly salaries). also visible from the current

42 Source: Economic Survey 2021-22 and Press Release No. 79, Ministry of Finance
43 Measures from FY22 included ad-hoc relief allowance of 10 percent for federal and autonomous/semi-
autonomous bodies and corporations, increase in integrated orderly allowance and minimum wage and
upward revision in pension.
44 Office Memorandum F. No. 1(2) lmp/2022-283, dated July 01, 2022, Regulations Wing, Finance Division
45 Office Memorandum No. F.4 (1) Reg.6/2022-486, dated July 01 , 2022, Regulations Wing, Finance

Division
46 In the initial PSDP release strategy announced in July 2022, PSDP was targeted at the level of 20 percent

for Q1, 5 percent for Q2, 30 percent for Q3 and 25 percent for Q4. In August 2022, government issued a
revised release strategy according to which the funds shall be released at maximum level of 10 percent for
Q1, 20 percent for Q2, 30 percent for Q3 and 40 percent for Q4 of the approved budget. Source: Strategy

92
 Fiscal Policy and Public Debt

PSDP Targets vs. Disbursements Table 4.12

Half Yearly Trend in Federal Figure 4.17
billion Rupees
PSDP
billion Rupees percent Expenditure
500 65 Ministry/ PSDP
Division Allocation Percent of
Jul-Dec
400 58.3 52 Allocation
Provinces and
300 39
25.4 Special Areas
200 26 (Previously 139.6 20.6 14.7
100 13 under
FD/KA&GB)
0 0 National
H2FY20

H1FY21
H1FY20

H2FY21

H1FY22

H2FY22

H1FY23

Highway 117.3 25.9 22.1

Authority
Water Resources
Federal PSDP 97.6 22.1 22.6
Division
PSDP as % of Budget estimates-rhs Cabinet Division 87.1 13.2 15.2
Source: Ministry of Finance and Planning Commission Higher
Education 44.7 5.2 11.6
ministry/division-wise summary of PSDP Commission
allocation during Jul-Dec 2023 (Table 4.12). NTDC / PEPCO 43.0 36.5 84.8
Planning,
The major development projects envisaged in Development &
Budget 2022-23 include; i) ongoing Special 37.2 1.4 3.8
Initiatives
development project in merged districts of Division
Khyber Pakhtunkhwa; ii) construction of 3 Railways
32.6 4.5 13.7
roads and infrastructure specially motor way Division
sections; iii) major dams, including Diamer Housing &
18.7 2.6 14.1
Works Division
Basha and Mohmand dams; and iv) power
Sources: PSDP 2022-23, Ministry / Division-wise
projects such installation of coal fired power Summary (July - December, 2022), Planning
project in Jamshoro and enhancement in Commission Ministry of Planning, Development &
transmission capacity of NTDC system etc. Special Initiatives

4.4 Provincial Fiscal Operations percent of fiscal year target which recorded
at a mere 0.1 percent of GDP.
The consolidated provincial surplus declined From the provincial accounts, the most
to Rs 101.2 billion during H1-FY23, from Rs notable deceleration came from Punjab
480.8 billion in same period last year. The followed by Balochistan and Sindh. KPK on
deceleration in surplus mainly came on the other hand posted a deficit of Rs 5.4
account of lower revenue generation in Q1- billion (Figure 4.19).
FY23, which was further exacerbated by
higher development and current Provincial Revenues
expenditures incurred during Q2-FY23
(Table 4.13 and Figure 4.18). By the end of The overall provincial revenues witnessed a
H1-FY23, the surplus could only reach 13.5 relatively modest growth of 2.6 percent

for Release of Funds for Development Budget Financial Year 2022-23, issued on July 07, 2022 and August
04, 2022.

93
State Bank of Pakistan Half Year Report 2022-23

Provincial Fiscal Operations Table 4.13

billion Rupees, growth in percent
YoY growth YoY growth
H1- H1- H1- H1- Q1- Q2- Q1- Q2-
FY22 FY23 FY22 FY23 FY23 FY23 FY23 FY23
A. Total revenue (a+b+c) 2,235.8 2,293.1 34.8 2.6 1,050.7 1,242.4 -2.5 7.3
a. Provincial share in
1,694.3 1,880.0 32.4 11.0 880.3 999.7 9.0 12.7
federal revenue
b. Fed loans and transfers 202.7 39.4 138.0 -80.6 -10.6 49.9 -110.4 -50.8
c. Provincial own revenue 338.8 373.7 15.6 10.3 180.9 192.8 7.0 13.5
Taxes 271.2 303.0 10.3 11.7 148.2 154.9 9.9 13.5
Non-taxes 67.6 70.7 43.1 4.5 32.8 37.9 -4.3 13.6
B. Total expenditures
1,755.0 2,191.9 25.1 24.9 832.7 1,359.2 4.0 42.4
(a+b+c)
a. Current 1,396.2 1,733.3 9.0 24.1 714.0 1,019.3 10.2 36.2
b. Development 365.8 454.4 60.7 24.2 152.2 302.2 -1.0 42.6
c. Statistical discrepancy -6.9 4.1 -93.4 -160.0 -33.6 37.7 3,693.2 -724.3
Overall balance (A-B) 480.8 101.2 88.4 -79.0 218.0 -116.9 -21.3 -157.3
Source: Ministry of Finance

during H1-FY23; this was mainly due to billion. Within tax revenues, sales tax on
slowdown in growth of federal transfers to services witnessed significant collection in all
provinces and provincial own revenues. provinces followed by other taxes and stamp
duties.
Further deceleration came from fall in federal
loans and transfers. The own-source revenue The province-wise breakup suggests that
collection posted an increase of Rs 373.7 Punjab posted the largest tax collection,
billion in H1-FY23 against Rs 338.8 billion in followed by Sindh and KPK (Figure 4.20). In
H1-FY22. Most of the expansion emerged their respective budgets presented for 2022-
from tax revenues, which edged up by Rs 303 23, different tax measures were announced

Provincial Revenues and Figure 4.18 Provincial Surplus during H1 Figure 4.19
Expenditures (YoY Growth)
billion Rupees
600
percent
40
450
30
300
20
150
10 0

0 -150
H1-FY20 H1-FY21 H1-FY22 H1-FY23 H1-FY20 H1-FY21 H1-FY22 H1-FY23
Total revenue Total expenditure Punjab Sindh KPK Balochistan
Source: Ministry of Finance Source: Ministry of Finance

94
 Fiscal Policy and Public Debt

by the provinces. For instance, tax reform The non-tax provincial revenues decelerated
measures undertaken by Punjab revenue sharply from 43.1 percent in H1-FY22 to 4.5
authorities include; 1) extension of the percent in H1-FY23. The dismal growth is
reduced rate of sales tax on services for more mainly attributed to non-transfer of
than 30 sectors; 2) synchronization of hydroelectricity profit in the provincial
provincial tax procedures with other revenue exchequer specifically to the accounts of
authorities including FBR; 3) 90 percent Khyber Pakhtunkhwa.
motor vehicle registration and token tax
exemption on electric vehicles; 4) increase in Federal loans and grants which are mainly
stamp duty for urban areas from 1 percent to released to finance ongoing development
2 percent; 5) increase in rate on luxury house expenditures in merged districts of Khyber
tax.47 Pakhtunkhwa received only Rs 39.0 billion in
current year as against Rs 202.7 billion in H1-
Similar to the last fiscal year, the provincial FY22.
authorities in Sindh did not announce any
new tax in Budget 2022-23. Moreover, GoS Provincial Expenditures
has undertaken number of measures
including; 1) special moratorium is placed on The growth in overall provincial
collection of cotton fee, professional tax and expenditures remained almost unchanged at
entertainment duty; 2) exemption of levy on 24.9 percent during H1-FY23 compared to
Sindh Infrastructure Development Cess for last year. The expansion was driven by
export oriented sector; 3) exemption of sales current expenditures; whereas, development
tax on services on toll manufacturing services expenditures saw moderation in growth
and reduced rate on recruiting agents; 4) during H1-FY23 (Figure 4.21).
reduced rate of levy of 10 percent for services
provided by cable TV operators, whereas Major Source of Provincial Revenues Figure 4.20
those operating in rural areas with PEMRA (Excl. Share in Federal Revenues)
license ‘R’ are exempted from SST; 5) billion Rupees
200
Reducing the rate of SST from 13 percent to 8 150
percent for commission charges received by 100
food delivery channels from home chefs.48 50
0
The KPK government maintained the
-50
reduced rate of taxes announced in last fiscal FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23
year for Budget 2022-23. Besides, on first
Punjab Sindh KPK Balochistan
time registration of motor vehicles, consumer
will get 20 percent exemption in excise duty. Sales tax on services Stamp duties
The government also announced zero tax on Motor vehicles tax Other taxes
land with full exemption from capital value Hydro elect. profits Others incl. forest
Fed. loans & transfers
tax (CVT) and registration fee.49 Source: Ministry of Finance

47 Source: Budget Highlights, 2022-23, Finance Department, Government of Punjab

48 Source: Budget Speech, 2022-23, Finance Department, Government of Sindh
49 Source: Budget Speech, 2022-23, Finance Department, Government of Khyber Pakhtunkhwa

95
State Bank of Pakistan Half Year Report 2022-23

The increase in current expenditures is provinces in H1-FY23. Specific to education

primarily attributed to expenses by executive sector, Sindh spent Rs 115.5 billion during
& legislative organizations, financial and H1-FY23, the amount represents around 22
fiscal affairs which mainly cover salaries and percent of province’s current expenditures
pension expenditures of respective and surpassed the aggregate education
provinces. More specifically, Punjab has expenses of Punjab, KPK and Balochistan of
announced 15 percent increment in salaries Rs 88.6 billion. Health spending remained a
for all employees along with a special major focus in almost all of the provinces
allowance of 15 percent for those employees with most of the spending directed to
who are currently receiving allowances hospital services and health administration.
lower than the assigned limits.50
The spending under transfers remained
Whereas, Sindh provided the adhoc relief robust specifically in Punjab, this spending
allowance at the rate of 15 percent in reflects the transfer of funds to district health
addition to disparity allowance of 33 percent and education authorities with an aim to
(on basic pay) for employees fall in the grade empowering local governments to address
of BPS1-16 and 30 percent for higher cadre public needs.51
employees. Khyber Pakhtunkhwa issued an
adhoc relief allowance at the rate of 15 The provincial development spending
percent excluding disparity reducing increased by 24.2 percent in H1-FY23 against
allowance (DRA); the province also the expansion of 60.7 percent achieved in H1-
announced 15 percent increment in pensions FY22. Construction and transport remained
for FY23. priority of development spending in Punjab,
KPK and Balochistan. The focus of Sindh’s
Moreover, education, health, public order development spending was remained on
and safety and social protection remained agriculture and allied sectors and provision
focus of current spending for almost all of social protection services. KPK disbursed
most of the development spending on
Provincial Current and Development Figure 4.21 transport and construction, agriculture and
Expenditure Revenues during H1
allied sectors, community development
800 billion Rupees program and tertiary education affairs and
services during H1-FY23 (Figure 4.22).
600
4.5 Public Debt
400

200 The stock of outstanding public debt edged

up to Rs 52.7 trillion at the end of December
0 2022- an addition of Rs 3.5 trillion in H1-
FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23
FY23 compared to Rs 2.8 trillion in H1-FY22.
Punjab Sindh KPK Balochistan The pace of debt accumulation during H1-
Current expenditure Development expenditure FY23 was around 7.2 percent, quite similar to
Source: Ministry of Finance
50 Budget Speech, 2022-23, Finance Department, Government of Punjab
51 Source: White Paper, Budget FY2022-23, Finance Department, Government of Punjab

96
 Fiscal Policy and Public Debt

Development Spending Priorities Figure 4.22 GoP had to rely on domestic debt to fulfil its
(Share in Development Expenditures) financing requirements.
percent
60 Moreover, there was a decline in the stock of
Economic affairs Social
protection external debt (in US dollar) which resulted
45 from scheduled principal repayments and
Housing &
community limited foreign financing.
General
30 amenities
Public Education In terms of maturity, the public debt inclined
Health Services affairs towards long-term instruments with the
15 addition of PIBs and GoP Ijara Sukuks, and
the retirement of short-term instruments
0 such as T-bills (net of maturity) and external
Punjab Sindh KPK Balochistan commercial loans (Figure 4.25a, 4.25b &
Source: Ministry of Finance 4.25c).

Although the lengthening of debt profile has

the corresponding period last year. Whereas,
reduced the rollover risk, the repricing risk
in terms of GDP, the public debt reduced to
has increased as a bulk of financing was
62.7 percent at the end of December 2022
raised through floating rate instruments. As
compared to 63.8 percent in end-December
these instruments’ coupon payments (or
2021 (Figure 4.23).52
rental rates) are linked to 3-month and 6-
The major increase in the public debt during month T-bills, spike in interest rates has led
H1-FY23 came from domestic sources; it to repricing risk along with soaring interest
contributed around 58.9 percent (Figure payments on domestic debt.
4.24). The underlying cause of this increase
In the backdrop of growing debt servicing,
in domestic debt was a large fiscal deficit and
both domestic and external, accompanied by
inadequate external inflows. Resultantly, the

Debt Indicators as Percent of GDP Figure 4.23 Composition-wise Change in Figure 4.24
percent percent Public Debt
80
90 billion rupees PKR/USD
60 240
70 4,000
40 50 220
3,000
20 30
2,000 200
0 10
180
Dec-21

Dec-22
Jun-22

1,000

0 160
H1-FY22 H2-FY22 H1-FY23
Public External Debt*
Domestic Debt Domestic debt
Total Debt and Liabilities-rhs External debt*
*Government External Debt + Debt from IMF US$ last day weighted avg. exchange rate-rhs
Estimated GDP for FY23 *including debt from the IMF
Source: State Bank of Pakistan Source: State Bank of Pakistan

52 Public debt for the end of December 2022 is measured against the estimated GDP for FY23.

97
State Bank of Pakistan Half Year Report 2022-23

Composition of Figure 4.25a Composition of Figure 4.25b Composition of Figure 4.25c

Public Debt Domestic Debt External Debt
60,000 billion Rupees percent percent
100 100
21.1 21.9 18.6
45,000 80 80
60 60
30,000 98.6 98.5 99.1
40 78.9 78.1 81.4 40
15,000 20 20 1.5 0.8
1.4
0 0 H1-FY22
0

H2-FY22

H1-FY23
H1-FY22

H2-FY22

H1-FY23

H1-FY22

H2-FY22

H1-FY23
Short Term-ST Long Term-LT Domestic ST Domestic LT External LT External ST
Source: State Bank of Pakistan Source: State Bank of Pakistan Source: State Bank of Pakistan

lower than targeted FBR revenues and lower decreased (Figure 4.27). The slack in NPCs
external inflows, the repayment capacity of came from monetary tightening by the
the country has deteriorated during H1-FY23 central banks, especially Fed, and rise in the
(Figure 4.26).53 The FBR’s revenue collection country risk. Moreover, in line with
remained below the target owing to a sharp increasing Fed rate, the uptick in LIBOR
drop in imports54 , whereas, the decline in amplified external interest payments due to
foreign exchange earnings (FEE) was due to flexible rate external debt.
sluggish exports and workers’ remittances.
Moreover, the investments in NPCs also Domestic Debt
The stock of domestic debt increased to Rs
Figure 4.26
33.1 trillion at the end of December 2022- a
Debt Repayment Capacity
growth of 6.7 percent in H1-FY23 compared
80 percent
65.7 to 1.8 percent in H1-FY22 (Table 4.14). The
underlying factors for this surge were
60
42.4 increase in financing requirements and
39.4
40 inadequate external inflows, which
25.0 compelled the government to rely on
20.9
20 13.9 domestic market despite high interest rates.

0 Most of the government debt was financed

H1-FY22 H2-FY22 H1-FY23 through non-banks in H1-FY23
EDS/FEE* Interest payment/FBR Tax The institution-wise data illustrates that most
*EDS: External debt Servicing of the domestic debt during H1-FY23 came
*FEE: Foreign Exchange Earnings from non-banks amid their keen interest in T-
Source: Ministry of Finance & State Bank of Pakistan

53 The repayment capacity is assessed by two ratios: (1) domestic interest payments-to-FBR taxes and (2)
Public external debt servicing (EDS)-to-Foreign Exchange Earnings (FEE).
54 The import-related taxes contributed around 42 percent (on net basis) in the total tax revenues in H1-

FY23 compared to 52 percent in H1-FY22.

98
 Fiscal Policy and Public Debt

Quarterly Investments in NPCs Figure 4.27 Schemes (NSS) (net of prize bonds) and T-
million US$ bills registered net outflows during H1-FY23
1,200
(Figure 4.29).
1,000
The increase in reliance on long-term
800 528
instruments resulted from GoP’s strategy to
600 439 enhance public debt profile by shifting
towards long –term and Shariah-compliant
400 instruments. However, the large
329
571
200 399 concentration of domestic debt in floating
181 rate instruments has increased the share of
0 floater PIBs and GoP Ijara Sukuks (VRR)
H1-FY22 H2-FY22 H1-FY23
from 41.6 percent at the end of June 2022 to
Coventional Islamic 49.5 percent at the end of December 2022.
State Bank of Pakistan Consequently, the repricing rate risk has
increased in rising interest rate environment.
bills and other government securities due to While, it is putting pressure on interest
lucrative rates and low risk (Figure 4.28a & payments, it has decreased rollover risk due
4.28b). to lengthening of public debt profile.

The entire increase in domestic debt was Pakistan Investment Bonds (PIBs)
concentrated in PIBs and GoP Ijara Sukuks The stock of PIBs grew by 14.8 percent in H1-
Most of the expansion in domestic debt in FY23 to reach Rs 20.3 trillion, compared to
H1-FY23 resulted from PIBs and Shariah the growth of 4.0 percent in H1-FY22 (Table
compliant bonds. Whereas, National Saving 4.14). This sharp increase in PIBs was

Government Domestic Debt and Liabilities (Jul-Dec) Table 4.14

billion Rupees
Share in
Stock Flows Growth
Domestic Debt
Dec-21 Dec-22 Dec-21 Dec-22 FY22 FY23 FY22 FY23
I. Permanent Debt 17,452.2 23,829.6 65.3 72.0 1,548.1 2,985.9 9.7 14.3
GOP Ijara Sukuk 1,297.8 2,644.6 4.9 8.0 632.5 364.8 95.1 16.0
Bai-Muajjal of Sukuk 128.5 23.2 0.5 0.1 -72.6 - -36.1 -
PIBs 15,174.9 20,301.2 56.7 61.3 584.9 2,614.2 4.0 14.8
Prize Bonds 372.0 381.6 1.4 1.2 -71.7 7.0 -16.2 1.9
II. Floating Debt 5,643.5 6,156.3 21.1 18.6 -1,036.9 -647.7 -15.5 -9.5
Market Treasury Bills 5,592.2 6,091.1 20.9 18.4 -1,084.8 -661.3 -16.2 -9.8
III. Unfunded Debt 3,604.0 3,073.2 13.5 9.3 -42.0 -262.8 -1.2 -7.9
NSS (Net of Prize
3,465.3 2,961.1 13.0 8.9 -32.6 -247.2 -0.9 -7.7
Bonds)
IV. Foreign Currency
7.5 9.5 0.0 0.0 0.8 0.8 11.3 9.8
Instruments
V. Naya Pakistan
39.2 47.5 0.1 0.1 10.9 2.5 38.6 5.6
Certificates
Government Domestic
26,746.5 33,116.3 100.0 100.0 481.1 2,078.8 1.8 6.7
Debt (I+II+III+IV+V)
Source: State Bank of Pakistan

99
State Bank of Pakistan Half Year Report 2022-23

Increase in Domestic Debt Holding Figure 4.28a Non-bank Investments in Figure 4.28b
by Institution Domestic Debt (Net Flows)
billion Rupees
4,000 billion Rupees 1,500
3,353

3,000 1,000

1,808 500
2,000

935
1,000 0
444
272
37
0 -500
H1-FY22 H2-FY22 H1-FY23 H1-FY22 H2-FY22 H1-FY23
Banks Non-banks T-bills Other securities NSS
Source: State Bank of Pakistan Source: State Bank of Pakistan

majorly due to floating-rate PIBs (PFLs)- GOP Ijara Sukuk

around 78.3 percent, as the investors were
The Government mobilized Rs 364.8 billion
investing in PFLs due to lucrative returns.
worth of Ijara Sukuks (on net basis), mainly
However, PFLs has increased the cost of
variable rental rates (VRR), during H1-FY23
borrowing for the government amidst rising
compared to Rs 632.5 billion in H1-FY22
interest rates (Figure 4.30a). Furthermore,
(Figure 4.31a and Table 4.14). Like the
the offered amount in the auction profile of
conventional debt instruments, the investors
fixed PIBs shows that due to high interest
remained inclined towards investing in
rates, the investors were more interested in
flexible rate Shariah-compliant instruments
medium term instrument (Figure 4.30b).
to benefit from lucrative returns. However,
Instrument-wise Net Flows of Figure 4.29 the government accepted less than the
Domestic Debt targeted amount in H1-FY23 due to higher
billion Rupees rates and longer maturity of sukuks (Figure
6,000
4.31b).55
4,500
Prize Bonds
3,000
1,500 The prize bonds exhibited net inflows in H1-
FY23, for the first time after H1-FY19 (Table
0
4.14). Most of the net inflows came from Rs
-1,500 1500 denomination bonds followed by Rs 750
H1-FY22 H2-FY22 H1-FY23
and Rs 25000 (premium) denomination
Prize Bonds NSS*
bonds. The government discontinued higher
GOP Ijara Sukuk PIBs
T-bills NPCs denomination bearer bonds56 and replaced
Others them with premium bonds of Rs 25000 and
Source: State Bank of Pakistan

55 Most of the Sukuks are of five years; only Rs 10 billion Sukuks are of three-year tenors, issued at
variable rates.
56 Government has discontinued Prize bonds of Rs 7,500; Rs 15,000; Rs 25,000 and Rs 40,000 in FY21.

100
 Fiscal Policy and Public Debt

Auction of PFLs Figure 4.30a Auction of Fixed PIBs Figure 4.30b

billion Rupees percent billion Rupees percent
4,000 2,000
14 10
3,000 1,500
9
2,000 11
1,000
8
1,000 8 500 7

0 5 0 6

T
O
A
T
O
A
T
O
A
T
O
A
T
O
A
T
O
A
T
O
A
T
O
A

Q1-FY22 Q2-FY22 Q1-FY23 Q2-FY23 Q1-FY22 Q2-FY22 Q1-FY23 Q2-FY23

2-Y 3-Y 5-Y 10-Y Avg lending rate-rhs 3Y 5Y 10Y 15Y 20Y 30 Y Wgt Avg coupon-rhs
T: Target O: Offered A: Accepted
T: Target O: Offered A: Accepted
Source: State Bank of Pakistan Source: State Bank of Pakistan

Rs 40000 to improve documentation of the (Figure 4.32). Moreover, the investors’

economy and to further strengthen the Anti- interest in 3-month T-bills amidst increasing
Money Laundering and Combating the interest rate put a pressure on government’s
Financing of Terrorism (AML/CFT) regime. financing which compelled the government
Consequently, the investors decided to move to accept less than the targeted amount.
towards other bearer bonds.
National Saving Schemes (NSS)-net of Prize
T-bills Bonds
The government retired T-bills worth Rs There was a decline in gross receipts in most
661.3 billion (net of maturity) during H1- of the NSS schemes in H1-FY23 compared to
FY23. Resultantly, the stock of T-bills has H1-FY22 (Figure 4.33). Moreover, there are
reduced to Rs 6.1 trillion. The main reason continuous net outflows in Defense Saving
behind this reduction is the acceptance of less Certificates (DSC) and Special Saving
than targeted amount due to high bid rates Certificates (SSC) since Q2-FY21 in the

Auction of GoP Ijara Sukuks-VRR Figurea 4.31a Auction of GoP Ijara Sukuks-Fixed Figure 4.31b
billion Rupees percent billion Rupees percent
750 20 300 15

600 16 12
200
450 12
9
300 8
100
6
150 4

0 0 0 3
Q1

Q2

Q1

Q2
Q1

Q2

Q1

Q2

FY22 FY23 FY22 FY23

Total Offered Target Total Offered Target
Total Accepted Avg Policy Rate Total Accepted Fixed Rental-Avg
Source: State Bank of Pakistan Source: State Bank of Pakistan

101
State Bank of Pakistan Half Year Report 2022-23

Auction of T-bills: Instrument-wise Figure 4.32 National Saving Schemes Gross Figure 4.33
Inflows in H1
billion Rupees percent
8,000 20
billion Rupees
400
6,000 15
300
4,000 10
200
2,000 5

0 0
100
12M

12M

12M

12M
6M

6M

6M

6M
3M

3M

3M

3M

DSC

BSC
SSC

SA

SSA
RIC

PBA
Q1-FY22 Q2-FY22 Q1-FY23 Q2-FY23
Offered (all) Accepted (all)
Maturity Cut off-wgt avg FY22 FY23
Source: State Bank of Pakistan Source: State Bank of Pakistan

backdrop of institutional withdrawal and of increase in the policy rate (Figure 4.34a).
relatively low returns. 57 Meanwhile, Resultantly, the cut off rates of T-bills and
Pensioners’ Benefit Account (PBA) exhibited coupon rates of PIBs increased in H1-FY23 by
continuous inflows during the same period almost 700-800 bps compared to H1-FY22.
due to pensioner’s interest in these papers as Moreover, on the back of rising share of
a result of increasing profit rates. However, floating rate PIBs in the outstanding debt
the Regular Income Certificates (RIC) and stock, the interest payments on these
Special Saving Accounts (SSA) showed net instruments have particularly increased.59 In
outflows after H1-FY22 due to non- addition, the interest payments on T-bills
competitive profit rates compared to also intensified due to 3-month paper. The
government securities. Meanwhile, Behbood government mobilized most of the amount in
Saving Certificates (BSC) exhibited outflows T-bills through these papers and on a high
in H1-FY23 as a result of downward revision interest rate in Q4-FY22 and Q1-FY23 which
of profit rates.58 led to increase in interest payments of 3-
There was a significant increase in domestic month T-bills in H1-FY23 (Figure 4.34b).
interest payments in H1-FY23
The higher interest payments were also
The interest payments on domestic debt witnessed in NSS, specifically in Special
raised to Rs 2.2 trillion in H1-FY23 compared Saving Accounts (SSA) and in Special Saving
to Rs 1.3 trillion in H1-FY22. The increase in Certificates (SSC) as a consequence of
interest rate in H1-FY23 largely emanated increase in profit rates and profit payments
from PIBs, T-bills and NSS as a consequence on previous stock (Figure 4.34c).

57
On average, the spread between SSC and the government securities (PKRV-monthly average) was
around 200bps in H1-FY23 whereas, for DSC and government securities the average spread was around
64bps.
58In October 04, 2022, the profit rate on BSC was revised to 13.92 percent from 14.16 percent.
59Quarterly and semi-annual interest payments of floater PIBs are linked to the cutoff rates of 3-month
and 6-month T-bills.

102
 Fiscal Policy and Public Debt

Interest Payments of Figure 4.34a Interest Payments Figure 4.34b Interest Figure 4.34c
Domestic Debt of T-bills Payments of NSS
billion Rupees
2,500 500 billion Rupees 400 billion Rupees

2,000 400
300 76
431 101
1,500 300 45
294 200 8 76
1,000 200
293 1,299 145
188 69 71
302
500 865 100 50
701 100
109 18 29 75
0 70
0 0
H1-FY22 H2-FY22 H1-FY23
H1-FY22 H2-FY22 H1-FY23 H1-FY22 H2-FY22 H1-FY23
Others NSS
T-bills P-Bonds DSC SSC RIC
PIBs GOP Ijara Sukuk 3-Months 6-Months 12-Months BSC PBA SSA
Source: State Bank of Pakistan Source: State Bank of Pakistan Source: State Bank of Pakistan

Public External Debt & Liabilities drivers behind this reduction were: first,
higher principal repayments; second, limited
The outstanding stock of public external debt
external financing amidst delays in the
reduced by around US$ 2.2 billion in H1-
completion of IMF’s ninth review and third,
FY23 compared to an addition of around US$
tight financial market conditions.
4.1 billion in H1-FY22 (Table 4.15). The main

Public External Debt in Jul- Dec Table 4.15

million US$
Share in Public Change in
Growth in
Stock External Debt Stock during
H1 (percent)
(percent) H1
Dec-21 Dec-22 Dec-21 Dec-22 FY22 FY23 FY22 FY23
Public external debt (1+2) 90,556 86,565 4,099 -2,273 5 -3
1. Government external debt 83,824 78,949 93 91 4,751 -2,992 6 -4
of which
i) Long term (>1 year) 82,547 78,261 91 90 4,332 -2,331 6 -3
Paris club 10,146 8,459 11 10 -580 -773 -5 -8
Multilateral 34,634 36,376 38 42 798 2,353 2 7
Other bilateral 17,929 18,035 20 21 3,107 -18 21 -0
Euro Sukuk global bonds 7,800 7,800 9 9 - -1,000 - -11
Commercial loans/credits 10,218 6,894 11 8 522 -2,587 5 -27
Naya Pakistan Certificates 1,338 658 1 1 529 -295 65 -31
ii) Short term (<1 year) 1,277 688 1 1 419 -661 49 -49
of which
Multilateral 1,067 687 1 1 561 -640 111 -48
Local Currency Securities 210 - 0 - -142 -22 -40 -99
2. From IMF 6,732 7,616 7 9 -651 719 -9 10
Foreign exch. liabilities 11,642 10,979 - - 2,879 -155 33 -1
Central Bank deposits 2,700 2,700 - - - - - -
Allocation of SDR 4,149 3,906 - - 2,739 9 194 -
Source: State Bank of Pakistan

103
State Bank of Pakistan Half Year Report 2022-23

Gross External Disbursement Figure 4.35a

3%

21%
33%

47%
H1-FY22 H1-FY23
4%
59%

17% 13%
3%

Multilateral Bilateral Bonds

Commercial Banks IMF NPCs
Source: Ministry of Economic Affairs, EAD

Naya Pakistan Certificates(NPCs) (held by organizations, most of the financing in H1-

non-residents) recorded net outflows FY22 came from commercial banks and Euro
bonds. Whereas, in H1-FY23, multilateral
In the backdrop of global increase in interest
was followed by IMF and friendly countries
rates and hike in the country risk, NPCs
(Figure 4.35a). However, no amount was
(held by non-residents) exhibited a net
raised through Eurobonds in H1-FY23
outflow of around US$ 295 million in H1-
despite having budget estimates of US$ 2.0
FY23, despite upward revision of rate of
billion for FY23 and only US$ 200 million
returns in November 2022. Moreover,
were received from commercial banks
Moody and Fitch’s rating downgrades may
against commitments of US$ 7.4 billion due
have undermined the investors’ trust in
to macroeconomic uncertainty.
Pakistani bonds.

There were limited Gross External Moreover, within Multilateral category,

Disbursements against Budget Estimates in around 57 percent of the financing came
H1-FY23 from Asian Development Bank (ADB),
followed by Asian Infrastructure Investment
Pakistan received around US$ 5.5 billion in Bank (AIIB) and World Bank group(WB) in
H1-FY23 as Gross external disbursements H1-FY23. Whereas, in H1-FY22, most of the
(including public grants & loans) against external financing was from ADB, WB and
budget estimates of US$ 22.8 billion for FY23. Islamic Development bank (IsDB/IDB)
Whereas, in H1-FY22, US$ 6.1 billion (Figure 4.35b).
(excluding time deposits) were disbursed
against a budget estimate of US$ 14.0 billion Meanwhile, in bilateral category, Saudi
in FY22.60 The disaggregated analysis shows Arabia was the main financer in H1-FY23,
that multilateral sources were the main followed by China and the USA. Whereas, in
source of financing in first halves of both H1-FY22, most of the financing came from
FY22 and FY23. After multilateral

60 Source: Ministry of Economic Affairs, Economic Affairs Division

104
 Fiscal Policy and Public Debt

Gross External Disbursements - Multilateral Figure 4.35b

Institutions

IsDB IsDB
ADB WB 5%
28% 37% 21%
H1-FY22
H1-FY23
ADB
WB AIIB 57%
33% 16%
AIIB
1%

ADB AIIB WB IsDB Others

Source: Economic Affairs Division

the latter two countries (China and the USA) growth of around 78.8 percent while the
(Figure 4.35c). interest payments grew by around 65.8
percent in H1-FY23 compared to the same
A bulk of foreign inflows were utilized for
period last year.
program/budgetary support
The analysis shows that most of the external Further analysis depicts that a bulk of debt
financing was utilized for program/ servicing was of Commercial Banks,
budgetary support in H1-FY23, followed by followed by Euro Bonds and Multilateral
project aid and short-term credit for the organizations. The reason for higher debt
import of oil and LNG (Table 4.16). servicing in H1-FY23 was first, scheduled

External Debt Servicing recorded a significant Gross External Disbursement Figure 4.35c
increase in H1-FY23 - Bilateral
Pakistan repaid US$ 8.9 billion public 800 million US$

external debt in the first half FY23 compared 600

to US$ 5.0 billion in the same period last year 400
(Table 4.17).61 Moreover, US$ 111 million
200
was paid against Foreign Exchange
Liabilities in H1-FY23 compared to US$ 173 0
million in H1-FY22. H1-FY22 H1-FY23
China DEU+ FRA+UK Japan
The disaggregated analysis shows that both
Korea Saudi Arabia* USA
principal repayments and interest payments
contributed in the soaring debt servicing in * does not include time deposit of US$ 3.0 billion in
H1-FY22
H1-FY23. However, the major increase was
Source: Eonomic Affairs Division
in principal repayments which posted a

61 Sovereign debt includes both principal and interest payments.

105
State Bank of Pakistan Half Year Report 2022-23

Gross External Disbursement and Utilization of Major Donors in H1 Table 4.16

million US$
Project Program/Budgetary Support Others Total
FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23
ADB 753 282 310 1,624 - - 1,063 1,906
AIIB 38 21 - 500 - - 38 521
IsDB 4 16 - - 800* 161* 805 177
IMF - - - 1,166 - - 1,166
WB 513 380 425 293 24^ 16^ 962 690
China 366 55 - - - - 366 55
Saudi Arabia 1 - - - 3,000** 600* 3,001 600
USA 33 14 - - - 33 14
*Short-term credit; ^TDPs
** Time deposits; not included in public external debt as they are part of external liabilities.
Source: Economic Affairs Division

principal repayments;62 second, increase in debt servicing in H1-FY22. In the absence of

LIBOR rates amidst global monetary this relief the external debt servicing
tightening. For instance, the LIBOR rate for increased in H1-FY23.
12M USD increased from 3.5 percent to 5.4
percent during H1-FY23. As most of external External Debt Sustainability deteriorated in the
first half of FY2364
loans were contracted on LIBOR rate63, the
uptick in LIBOR has led to increase in Most of the debt sustainability indicators
interest payments. Third, expiry of DSSI in deteriorated in H1-FY23 amidst higher debt
December 2021 which helped in deflating
Public External Debt (Jul-Dec) Table 4.17
million US$
Total Principal Interest
FY22 FY23 FY22 FY23 FY22 FY23
1. Public external debt (a+b+c) 5,055 8,927 4,202 7,512 853 1,415
a. Government debt 4,189 7,485 3,420 6,232 769 1,253
Paris Club 6 621 5 521 1 101
Multilateral 1,059 1,096 843 820 216 276
Other Bilateral 71 818 23 558 47 260
Euro/Sukuk global bonds 1,307 1,319 1,000 1,000 307 319
Commercial loans /credits 1,732 2,960 1,549 2,722 183 238
NPCs - 645 - 610 - 35
b. IMF 585 617 516 480 69 137
c. Short-term government debt 281 825 266 801 15 24
2. Foreign exchange liabilities 173 111 - - 173 111
Source: State Bank of Pakistan

62 According to Annual Debt Review FY2021-22 of Ministry of Finance, around US$ 14.0 billion Public
External Debt is maturing in FY23.
63 Source: Ministry of Economic Affairs, Economic Affairs division.
64 See SBP’s Annual Report on State of Pakistan Economy 2021-22 for explanation of External Debt

Sustainability

106
 Fiscal Policy and Public Debt

Solvency Indicators in H1 Figure 4.36a Liquidity Indicators in H1 Figure 4.36b

50
percent 14 percent
12
40
10
30
8
20 6
10 4
2
0
FY20 FY21 FY22 FY23 0
Total reserves (liquid) /TEDL FY21 FY22 FY23
SBP reserves (net) /TEDL
EDS/FEE STPED/PEDL STPED/Total Reserves
EDS/EE STPED/SBP Reserves
Source: State Bank of Pakistan & Economic Affairs Source: State Bank of Pakistan & Economic Affairs
Division Division

servicing and lower external inflows, to- Export Earning (EE) and EDS- to- Foreign
particularly export earnings (EE) and Exchange Earning (FEE) ratios in H1-FY23. It
remittances. The slowdown in global is important to note that H1-FY22 showed
demand amidst inflation and floods in the better solvency indicators as a result of: (1)
country has led to reduction in export decrease in EDS due to restructuring of debt
receipts. Moreover, higher kerb premium under DSSI, and (2) uptick in both exports
may have diverted a part of the external and remittances.
inflows such as remittances to informal
channels. Furthermore, delays in The factors that underpinned weakened
disbursement of IMF’s tranche has impeded liquidity indicators were reduction in foreign
financing from bilateral and multilateral reserves and increase in debt servicing
creditors. (Figure 4.36b). Meanwhile, the slight
improvement in Short Term Public External
Consequently, there was deterioration in Debt (STPED) -to-Public External Debt and
Total Reserves- to- Total External Debt and Liabilities (PEDL) resulted from retirement of
Liabilities (TEDL) and SBP reserves- to- short-term commercial loans and inflows
TEDL ratios (Figure 4.36a). Moreover, the from multilateral organizations and IMF
decline in export receipts and remittances (long-term)
exacerbated External Debt Servicing (EDS) -

107
5 External Sector
Despite a significant improvement in the current account balance in H1-FY23, Pakistan’s external account
remained under stress during the period, mainly owing to scheduled repayments of loans and lower financial
inflows. The decline in CAD was largely due to a fall in imports, resulting from demand management policies taken
by the SBP and the government. Global economic slowdown due to the Russia-Ukraine conflict, tight monetary
policy amid persistently high inflationary pressures, and a slowing Chinese economy brought about negative
externalities in Pakistan’s external sector through fall in exports and workers’ remittances. Domestic political
uncertainty and delay in concluding IMF’s review also exacerbated the situation, leading to a drawdown in foreign
exchange reserves and persistent pressures on country’s exchange rate.

5.1 Pakistan’s Balance of Payments Domestically, insufficient official inflows

amid delay in the resumption of IMF
Pakistan’s overall external account remained program put a major drag on the external
under pressure, despite a significant account during the review period. Together
improvement in the current account deficit in with this, uncertainty stemming from
H1-FY23. Central to this distress was the political noise affected overall financial
lack of adequate financial inflows owing to inflows, especially resulting in muted private
both global and domestic factors. capital inflows. Floods in the earlier months
of the year undermined the rice exports and
The demand side pressures, supply-chain deteriorated the commodity import outlook
disruptions arising from the Russia-Ukraine due to damages to cotton production.
conflict and China’s zero-Covid policy
resulted in sizable inflationary pressures Nonetheless, Pakistan’s current account
across advanced and emerging economies in recorded a significantly lower deficit of US$
2022. The rising inflationary outlook 3.6 billion during H1-FY23, mainly on the
prompted central banks around the world to back of a substantial reduction in imports.
tighten monetary policies (Figure 5.1). The Although exports growth reduced as well,
global monetary policy tightening added to the overall impact of the imports’ reduction
financial distress, leading to capital flight, as dominated. The decline in imports was
reflected in the fall in emerging markets’ mainly in the backdrop of policy and
capital flow indices during H1-FY23 as administrative measures taken to rein in
compared to last year (Figure 5.2).

Change in Inflation and Policy Rate during H1-FY23 Figure 5.1

percent percent
25 10
Advanced Emerging
Economies Economies
15 5

5 0

-5 -5
Mongolia
Indonesia

Poland

Egypt
Peru
USA

Russia

Serbia
EU
Australia

Thailand

Albania

Philippines
India

Colombia
New Zealand

Malaysia

Chile

Tunisia
South Korea

Georgia
Norway

China

Vietnam

Morocco

Kenya
Saudi Arabia

Romania

Brazil
South Africa

Mexico

Pakistan
Canada

Change in inflation Change in policy rate - rhs

Source: International Monetary Fund
State Bank of Pakistan Half Year Report 2022-23

Global Uncertainty and EM Figure 5.2 Real GDP Growth Figure 5.3
Capital Flow Indices percent
9 8.4
360 index index 180
6.7
270 160 6.2 5.9
6 5.4 5.2
Russia-Ukraine
180 lifting of 140
conflict begins 3.9
China's zero- 3.5
90 120 3.4
Covid policy 2.7 3.0
3 2.0
0 100
Aug-21

Aug-22
Sep-21

Sep-22
Dec-21

Dec-22
Apr-22
Jan-22

Jun-22
May-22
Nov-21

Nov-22
Oct-21

Mar-22

Oct-22
Jul-21

Feb-22

Jul-22

0
Global Uncertainty Index World AEs EMDEs Euro USA China
Capital Flow Index - rhs Area
Sources: Economic Policy Uncertainty Index & 2021 2022
Bloomberg Source: International Monetary Fund

demand during FY22 and FY23. Meanwhile, loan disbursements higher than last year, the
the decline in exports mostly stemmed from financial account posited a net outflow due
textile and food products amid damages to sizable amortizations along with
caused by floods and slowdown in the disinvestments. Thus, financial outflows
demand in the traditional markets, as resulted in the worsening of the country’s
reflected in decelerating global GDP growth foreign exchange reserves and depreciation
rates (Figure 5.3). in PKR during H1-FY23. (Table 5.1).

Services account deficit also fell during H1- 5.2 Current Account
FY23 due to a decline in freight payments on
the back of lower imports of goods. Interest The current account recorded a significantly
payments on external loans increased, thus lower deficit of US$ 3.6 billion during H1-
raising the primary income account deficit. FY23, against a deficit of US$ 9.1 billion in
Workers’ remittances during the review the same period last year (Figure 5.4). The
period also recorded a decline from all major predominant factor behind this improvement
corridors including both advanced was the 26.6 percent decrease in the
economies and GCC countries – with the merchandize trade deficit led by a substantial
marginal exception of USA. A number of fall in import payments mainly due to policy
factors came to play that reduced the inflow and administrative actions to arrest demand
of remittances including lower demand in pressures. The import decline of 18.2 percent
major remittance sending countries (UK and was large enough to have contained the CAD
EU), inflationary pressures (in case of UK, despite lower export receipts and workers’
EU and Saudi Arabia) and easing of travel remittances. Slowing global demand and
restrictions. high domestic input prices was mainly
behind the 6.7 percent drop in export
The adverse global and domestic receipts; floods in the H1-FY23 also
environment took its toll on the financial contributed in this under performance in the
inflows, as there were net outflows during food exports. The services deficit also
the review period. Despite foreign exchange plunged from last year’s levels by 85.1

110
 External Sector

Pakistan's Balance of Payments Table 5.1

million US$
FY23 YoY Change in H1-FY23
H1-FY22 Q1 Q2 H1 Absolute Percent
Current account balance -9,091 -2,446 -1,111 -3,557 5,534 -60.9
Balance on trade in goods -20,853 -8,989 -6,317 -15,306 5,547 -26.6
Exports of goods 15,242 7,391 6,831 14,222 -1,020 -6.7
Imports of goods 36,095 16,380 13,148 29,528 -6,567 -18.2
energy imports 8,571 6,079 3,987 10,066 1,495 17.4
non-energy imports 27,524 10,301 9,161 19,462 -8,062 -29.3
Services account balance -2,139 -281 -38 -319 1,820 -85.1
Primary income balance -2,554 -1,028 -1,576 -2,604 -50 2.0
Interest Payments 1,399 2,224 949 3,173 1,774 126.8
Secondary income balance 16,455 7,852 6,820 14,672 -1,783 -10.8
Workers' remittances 15,808 7,686 6,426 14,112 -1,696 -10.7
Financial account (net)* -10,105 -217 1,418 1,201 11,306 -111.9
Direct investment (net)* -1,070 -205 873 668 1,738 -162.4
Portfolio investment (net)* 374 30 1,001 1,031 657 175.7
Build-up in FX assets abroad 415 36 -1,391 -1,355 -1,770 -426.5
FX Loans & liabilities 9,823 77 -937 -860 -10,683 -108.8
Banks 573 -25 -107 -132 -705 -123
General Government 5,868 245 -519 -274 -6,142 -104.7
Disbursements 4,971 2,206 3,151 5,357 386 7.8
Amortization 2,676 1,861 3,560 5,421 2,745 102.6
SDR Allocation 2,773 0 0 0 -2,773
Other Sector 606 -146 -311 -457 -1,063 -175.4
Disbursements 936 81 173 254 -682 -72.9
Amortization 532 315 500 815 283 53.2
SBP's Liquid FX Reserves 17,686 7,860 5,586 5,586 -12,100 -68.4
PKR dep (-) / app (+) – YoY in percent -3.5 -26.6 -21.8 -24.1 - -
*as per BPM6, negative sign means net FX inflow into Pakistan and vice versa.
Source: State Bank of Pakistan

Current Account Balance Overview Figure 5.4 percent mainly on account of lower outflows
billion US$ billion US$ 20
of freight and insurance services as both are
160
linked to imports of goods. Contrary to the
120 15
upward trajectory over the last few years,
workers’ remittances registered a decrease of
80 10 10.7 percent as inflows from nearly all the
major corridors showed a decline mainly
40 5 because of rising living cost on the back of
high inflation and lower demand. The
0 0
primary income deficit increased by 2.0
FY21 FY22 H1-FY22 H1-FY23
percent during the period mainly on the
Imports Exports
account of higher interest payments on
Worker's Remittances Trade Deficit
government external debt.
CAD - rhs
Source: State Bank of Pakistan

111
State Bank of Pakistan Half Year Report 2022-23

Breakdown of Services Trade Account in H1 Table 5.2

million US$
Import (M) Export (X) Balance (X-M)
YoY YoY YoY
FY23 FY23 FY23
Change Change Change
a) Transport 2,181.1 -702.0 429.9 54.1 -1,751.2 756.0
Sea freight 1,563.9 -623.4 79.0 47.5 -1,484.8 671.0
Air passengers 434.3 103.1 216.0 14.7 -218.3 -88.4
Air freight 30.9 -93.1 16.6 1.9 -14.4 94.9
b) Travel 556.1 -19.9 255.2 -26.8 -300.9 -7.0
Education exp. 162.1 38.0 5.2 -1.1 -156.9 -39.2
Other (personal) 387.8 -55.2 247.3 -25.7 -140.6 29.4
c) ICT Services 167.1 -162.9 1,333.2 31.3 1,166.1 194.2
Software consultancy services 82.5 -28.6 391.7 23.4 309.2 51.9
Other Computer services 21.6 -20.0 366.8 -24.6 345.3 -4.6
Export of Computer software 39.0 -100.5 302.4 30.7 263.3 131.1
Call centers 0.0 -0.1 107.0 5.3 107.0 5.4
Subtotal (a+b+c) 2,904.3 -884.7 2,018.3 58.6 -886.0 943.3
Total services 3,884.4 -1,686.9 3,527.0 95.2 -357.5 1,782.1
Source: State Bank of Pakistan

Services Account Personal travels including religious and

recreational travel also posted a visible
The services trade deficit contracted by 85.1 decline in H1-FY23, this could be traced to a
percent to US$ 319 million in H1-FY23 from large base impact last year owing to high
US$ 2,139 million last year. The fall in the pent-up demand for international travel,
deficit was due to a sharp decline in services
imports (Table 5.2). Global Shipping Cost and Freight Figure 5.5
Factor
Disaggregated data shows that the US$ ratio
8
contraction was attributed mainly to the fall 10,000
in the transport sector followed by travel 6
7,500
services. Within transports, sea freight
remained the major contributor to the decline 5,000
4
on the back of lower merchandized imports
during the period. Moreover, the global 2,500 2
shipping cost dropped significantly in H1-
FY23 compared to last year. Moderating 0 0
Apr-19

Apr-20

Apr-21

Apr-22
Jan-19

Jan-20

Jan-21

Jan-22
Jul-19

Jul-20

Jul-21

Jul-22
Oct-19

Oct-20

Oct-21

Oct-22

global oil prices and normalization of post-

Covid logistics demand, which helped
decrease the freight costs (Figure 5.5).1 Global shipping cost Freight Factor (rhs)

Source: Bloomberg and State Bank of Pakistan

1CIF margin also dropped in Q2-FY23 to 4.14 percent from 5.03 percent last year. SBP estimates freight
payments by applying a uniform factor to import payments based on survey from logistics and freight
companies.

112
 External Sector

Primary Income Deficit and Interest Figure 5.6 Meanwhile, the increasing global interest
Payments during H1 rate environment also contributed to the rise
3,000
million US$ in Pakistan’s debt servicing.
2,554 2,625
On the contrary, the profit repatriation by
2,000 foreign companies posted a decline of US$
673.9 million during H1-FY23 compared to
1,000 2,233 the corresponding period last year.
1,399 Particularly, this trend can be explained by:
(i) a slowdown in economic activity resulting
0 in lower profitability of corporates; and (ii)
FY22 FY23
Repatriation of dividends & profits substantial PKR depreciation.
Inerest payments
Primary income deficit
Workers’ Remittances
Source: State Bank of Pakistan
Remittances showed a mixed trend across
when the travel restrictions amid Covid were
the major recipient economies. For instance,
eased out.
remittances fell in Egypt and Pakistan;
decelerated in Mexico; and slightly increased
On the other hand, exports of information
in Bangladesh, Sri Lanka and the Philippines
and communication technology (ICT) growth
(Figure 5.7). In case of India, remittances
recorded a slight improvement of 2.4 percent
showed robust growth on account of short-
YoY in H1-FY23 compared to last year. This
term and long term trends such as post-
growth in ICT exports was due to the higher
Covid resumption of work; and Indian
usage of tech-driven services amid the
migrants’ gradual shift from mostly blue
lockdown related restrictions across the
collar employment in the GCC countries to
globe.2 Within ICT services exports, a slight
largely high-skilled white collar employment
improvement in computer and call center
services was seen during the period. Growth in Remittances to Major Figure 5.7
Recipients in Jul-Dec
Primary Income Account percent, YoY
50
The primary income deficit rose by 2.0 25
percent to US$ 2.6 billion in H1-FY23.
0
Higher interest payments on government
external debt primarily contributed in -25
widening of the deficit, however, profit and -50
Bangladesh

Philippines

Pakistan
Egypt*
India

Mexico
Sri Lanka

dividend repatriation by foreign companies

declined during the period (Figure 5.6). In
line with the elevated external borrowing in
the past few years, the interest payments rose 2021 2022
considerably from US$ 1.4 billion in H1-FY22 *2022 growth for Jul-Sep latest available data
to US$ 3.2 billion during the review period. Source: Haver Analytics and State Bank of Pakistan

2 See Special Section on, ‘Pakistan’s Growing IT Exports and Tech Start-ups: An Opportunity to Leapfrog?
in this report.

113
State Bank of Pakistan Half Year Report 2022-23

Workers' Remittances Table 5.3

million US$
Q1-FY22 Q2-FY22 Q1-FY23 Q2-FY23 H1-FY22 H1-FY23 Growth (%)
US 762.5 731.2 813.1 726.2 1,493.7 1,539.3 3.1
UK 1,137.3 1,009.6 1,085.1 898.7 2,146.9 1,983.8 -7.6
Germany 132.7 127.5 123.2 119 260.2 242.2 -6.9
France 131.1 126.5 112.9 103.6 257.6 216.5 -15.9
Italy 230.4 216.8 226.8 191.6 447.3 418.4 -6.5
Australia 189.7 200.6 170.8 142 390.3 312.8 -19.9
Canada 170.4 169 160.7 128.4 339.4 289.1 -14.8
GCC 4,610.7 4,238.3 4,232 3,491.2 8,849.0 7,723.2 -12.7
Saudi Arabia 2,095.4 1,938.7 1,885.6 1,598.9 4,034.0 3,484.4 -13.6
UAE 1,601.1 1,407.3 1,468.4 1,136.1 3,008.4 2,604.5 -13.4
Other GCC 914.3 892.3 878 756.3 1806.6 1634.3 -9.5
Other countries 833.6 789.2 762.1 625.3 1,622.80 1,387.4 -14.5
Total remittances 8,198.6 7,608.6 7,686.6 6,426.0 15,807.2 14,112.6 -10.7
Source: State Bank of Pakistan

in advanced economies such as the United

States, the United Kingdom, Singapore, Inflows from all the major corridors
Japan, Australia, and New Zealand.3 including advanced economies and GCC
showed a decline in the first two quarters of
In contrast, Pakistan received lower FY23 on YoY basis except a nominal growth
remittances amounting to US$ 14.1 billion in in remittances received from USA during
H1-FY23 compared to US$ 15.8 billion in the first half of FY23 (Table 5.3).
corresponding period last year. Quarterly
data shows that QoQ decline of 16 percent in Along with various global and domestic
Q2-FY23 is the highest in the last 22 years. developments affecting remittance flows,
The reduction in remittances is broad based Pakistan also remained vulnerable to the
as evident from the decline from major changing labor dynamics and exchange rate
sources, including Saudi Arabia, the UAE movements (details in the Box 5.1).
and the UK.

Box 5.1: The Declining Workers’ Remittances

Remittance flows remained on a declining trajectory throughout H1-FY23 with a more pronounced
decrease in Q2-FY23. It is also noteworthy that, for Pakistan, remittances have recently been almost at par
with exports in terms of generating FX inflows and containing current account deficit. Where the recent
decline in remittance flows is a serious concern, it has also led to conjectures regarding its causes. A host
of recent domestic and global developments may have affected the flow of remittances to Pakistan in H1-
FY23.

Based on the average annual workers’ remittances received during last three years (i.e. FY20 – FY22),

3 Source: Migration and Development Brief 37, October 2022, World Bank

114
 External Sector

Saudi Arabia (KSA), UAE, UK and USA are the top YoY Inflation in Major Host Figure 5.1.1
four host countries respectively, and contributed 69.5
Countries
percent of total remittances. percent
15
Rising Inflation, Monetary Tightening and
12
Slowdown in the High-Income Host Countries
9
While overall global commodity prices have started
moderating during H1-FY23, energy and food prices 6
still remained vulnerable to shocks such as supply 3
disruptions in the wake of Russia-Ukraine war.
Consequently, inflation in UK and EU reached multi- 0

Mar-22
Nov-21

Nov-22
Jul-21

Jul-22
Jan-22
Sep-21

Sep-22
May-22
year high levels in 2022, which in turn, led to lower
real wages of workers and curtailed their ability to
remit to home (Figure 5.1.1).
USA UK EU KSA
Monetary contraction in response to higher inflation Source: Haver Analytics
led to slowdown in these economies. Further,
impact of fiscal stimulus provided during the pandemic to support economic activity in the host countries
began to wane as well.4 Hence, slowdown in these host countries could be another factor affecting
employment opportunities and income levels of the Pakistani diaspora limiting their capacity to remit to
home.

Changing Labour Market Dynamics in GCC Countries

Historically, flows from Saudi Arabia and UAE have been steering the overall remittances for Pakistan.
Any change in the economic indicators of these countries can have a direct impact on remittance flows to
Pakistan. Annual inflation in Saudi Arabia increased to its 18 months high level of 3.3 percent in
December 2022 mainly on the back of rising prices of housing, food and transport.5 In addition to higher
inflation, the effects of global slowdown have also seeped into GCC economies through lower oil demand
and moderating crude oil prices. As a result, higher cost of living and lower employment opportunities
have added constraints on the ability of Pakistani workers in GCC to remit funds to home.

In other developments, Saudi Arabia continued implementation of its Saudi Nationalization Scheme (also
known as ‘Saudization’ or ‘ Nitaqat’). Nitaqat is a policy that was announced with an intention to
increase the percentage of Saudi nationals employed in the private sector and reduce the dependence on
expatriate labor. During 2022, various decisions have been issued under this policy focusing on newer
professions and sectors to attract Saudi nationals.6 As this scheme is more focused towards white collar
employment, increased tendency to prefer Saudi workers over expatriate workers reduces employment
opportunities for non-Saudi white collar workers. This could, in turn, lead some of the white collar
workers of other nationalities to temporarily compete for even relatively less skilled workers including
blue-collar workers of Pakistani origin.

4 Source: Migration and Development Brief 37, October 2022, World Bank
5 Source: Trading Economics
6 Source: www.zawya.com/en/economy/gcc/20-000-new-jobs-for-citizens-as-mhrsd-starts-

implementing-saudization-of-four-key-professions-rhev7bns, retrieved on 25-February-2023

115
State Bank of Pakistan Half Year Report 2022-23

GDP Growth of Top Host Figure 5.1.2 Exchange Rate Margin for Remitting to Figure 5.1.3
Countries Pakistan from Major GCC Corridors*
percent percent
40 3
20
2
0
1
-20
0
-40

Q1-FY22

Q2-FY22

Q3-FY22

Q4-FY22

Q1-FY23
Q4-FY19

Q4-FY20
Q1-FY21

Q1-FY22

Q2-FY23
Q1-FY20
Q2-FY20
Q3-FY20

Q2-FY21
Q3-FY21
Q4-FY21

Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23

UAE Saudi Arabia USA UK

KSA UK US *percent of transaction amount of US$ 200
Source: Haver Analytics Source: World Bank Remittance Prices

Moreover, current property boom in UAE (particularly in Dubai) might also have been an incentive for
Pakistani diaspora to retain their savings in UAE in the shape of investments in real estate instead of
remitting to Pakistan amid uncertain economic conditions.7

Informal Channels

The resumption of cross-border air travel may have led to shifting of some remittance inflows to informal
channels as blue-collar workers (particularly from KSA and UAE) mostly depend on the personal
networking to send remittances back home. Further, GoP’s withdrawal of the incentive to banks (that is
20 Riyal rebate as a remittances fee on the remittances originating from KSA) may also have diverted
some inflows to informal channels.8

In order to contain the soaring external account pressures, administrative and regulatory measures were
taken to limit imports. It, in turn, also provided respite to PKR against USD and monthly average
exchange rate, that had reached the peak of 231 in September 2022, moderated to the level of 225 in
December 2022.

However, speculations in the open market caused the kerb market premium to increase substantially
during Q2-FY23, which incentivized the informal money transfer channels to resurface and attract
expatriate workers with higher exchange rate. Hence, official remittance flows to Pakistan are further
decreased.

The data on remittance prices by World Bank also shows a slight increase in exchange rate margins
charged by money transfer operators (MTOs) and exchange companies in Saudi Arabia and UK dis-
incentivizing workers to use formal channels for remitting to Pakistan (Figure 5.1.3).9

7 Average residential prices in Dubai and Abu Dhabi increased in 2022 by 9.5% and 1.5% respectively.
Overall 90,881 transactions were reported in Dubai’s residential market during 2022 breaking the record
of 81,182 transactions in 2009. UAE Real Estate Market Review Q4 2022 – CBRE. Source: www.cbre.ae
8 For details, see SBP Annual Report on State of Pakistan’s Economy FY22.
9 Source: Remittance Prices Worldwide, World Bank

116
 External Sector

5.3 Financial Account from countries including China and the US,
along with the settlement of a mining case.
The net official external financial outflows
amounted to US$ 1.2 billion in Jul-Dec FY23, Foreign Direct Investment
against an inflow of US$ 10.1 billion last year
Global trends
(Figure 5.8). Within the financial flows,
Pakistan’s net outflow of FX loans and
CY22 was a challenging year for investments,
liabilities amounted to US$ 860 million in Jul-
especially for cross-border FDI; a host of
Dec FY23, in contrast to net inflows of US$
events including the Russia-Ukraine conflict,
9.8 billion in Jul-Dec FY22. In the month of
spiking inflationary pressures, a zero-Covid
August, the government received US$ 1.2
policy in China and rising debt pressures
billion tranche from the IMF, following the
affected global FDI flows.
successful 7th and 8th combined reviews by
the Fund. The ADB disbursed loans of US $
Cross-border mergers and acquisitions faced
1.6 billion for flood relief projects. Due to the
declines after record-highs in CY21, pointing
downgrading of Pakistan’s credit rating by
to the prevailing uncertainty and tighter
Fitch and Moody’s (Oct-22), and S&P (Dec-
financial conditions (Figure 5.9). The fall in
22), the repayment of a Sukuk bond, the
cross-border FDI was particularly sharp in
rising CDS rates of the country, and the
H1-FY23 (Figure 5.10). Following monetary
downgrading to a frontier market economy
tightening by the US, the UK and the EU, the
by MSCI, net FPI outflows in Pakistan
number of cross-border deals dropped
amounted to US$ 1.0 billion in Jul-Dec FY23.
globally.10 The venture capital industry
Net FDI decreased by 44.1 percent in Jul-Dec
(which expanded in CY21 and at the
FY23, largely on the back of a drop in inflows
beginning of CY22) reversed course with the

Financial Account Breakdown Figure 5.8

12 billion US$

8
4
0
-4
Q1 Q2 Q3 Q4 Q1 Q2 FY22 FY23
FY22 FY23 H1
FDI Equity FPI Debt FPI
Build-up of FX assets abroad FX loans & liab. (net) Others
Financial flows (net)
Source: State Bank of Pakistan

10The number of deals fell by 21.3 percent in North America, 14.4 percent in Oceania, 12.1 percent in Asia
and 8.6 percent in Europe YoY. Source: fDi Intelligence

117
State Bank of Pakistan Half Year Report 2022-23

Cross-Border Mergers and Figure 5.9 FDI in Major EMs Figure 5.10
Acquisitions billion US$
8
1,800 billion US$ thousands 12

1,500 10 4
1,200 8
900 6 0
600 4
-4
300 2

Vietnam

Pakistan
Thailand

Argentina

Philippines
Indonesia

Chile
Mexico

Turkey

India

Sri Lanka
0 0
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022*

Value of Deals Number of Deals - rhs Q1-FY22 Q2-FY22 Q1-FY23 Q2-FY23

*estimated by PitchBook
Source: PitchBook Source: Haver Analytics

onset of the weak macroeconomic The decline in FDI into the power sector was
environment.11 However, India outpaced the largely due to the completion of a few
US, UK and China in attracting 225 FDI projects under CPEC, such as the HUBCO
projects into research and development, Thar Coal Power Project.13 This was
reflecting the shift of multinational indicative in the decline in FDI inflows from
companies towards developing their own China – a downturn of US$ 163.7 million in
divisions on R&D in India over using H1-FY23 from the same period last year.
intermediary providers.12 There were also net FDI outflows due to the
settlement of an investment dispute over a
Developments in Pakistan mining project, causing a disinvestment from
mining and quarrying sector. Furthermore,
Overall FDI in Pakistan declined to US$ 461 inflows fell from the USA due to the shutting
million in H1-FY23 from US$ 1.1 billion in down of an online grocery service14 (a
H1-FY22 (Table 5.4). Sector-wise FDI data decline in transport sector) and a fall in
depicts a drop in most sectors (power inflows in the banking service.15
especially coal, financial firms,
communications particularly telecom, and With respect to the telecom industry in
electrical machinery); however, there have Pakistan, it has faced challenges because of
been increases in the hydel, chemicals and the floods, causing service degradation and
food sectors. hindering the proper implementing of
projects; additionally, a popular micro-

11 From July to September 2022, global venture capital funding was at US$ 82.2 billion – one-third of its
value in the past quarter; Crunchbase
12 Data is up to October 2022. Source: fDi Intelligence
13 The project was completed in September 2022, according to CPEC Authority.
14
Airlift, initially a bus service that later pivoted to grocery delivery, shut down its operations in Pakistan
in July 2022.
15 The major reasons quoted by said bank included global monetary tightening, inflation-led uncertainties

and a slowdown in economic growth.

118
 External Sector

Sector-wise Net FDI Flows in Jul-Dec Table 5.4 MSCI World Equity Index Figure 5.11
million US$ thousand US$
Absolute 3.4
FY22 FY23
Change
3.2
Power ⬇ 345.3 237.1 -108.2
Coal ⬇ 234.3 61.7 -172.6 3
Hydel ⬆ 38.9 70.7 31.8
Mining & Quarrying ⬇ -3.3 -226.1 -222.8 2.8
Financial firms ⬇ 230.2 176.0 -54.2 2.6
Oil & gas** ⬇ 130.5 100.5 -30.0
Communications ⬇ 159.6 -24.9 -184.5 2.4
Telecom ⬇ 70.3 -51.4 -121.7
2.2
IT ⬇ 89.3 26.5 -62.8

Sep-21

Feb-22

Apr-22

Sep-22
Dec-21

Dec-22
Aug-21

Jun-22

Aug-22
May-22
Nov-21

Jan-22

Nov-22
Jul-21

Oct-21

Mar-22

Jul-22

Oct-22
Trade ⬇ 39.0 20.9 -18.1
Electrical machinery ⬇ 31.4 0.9 -30.5
Transport ⬇ 23.5 8.5 -15.0 Source: Bloomberg
Electronics ⬇ -21.2 -25.3 -4.1
Chemicals ⬆ 15.3 16.2 0.9 The tighter monetary policies affected EMDE
Food* ⬆ -0.9 3.3 4.2 capital flows; China saw considerable debt
Others ⬇ 162.0 173.8 13.0
market outflows in CY22, with other EMDEs
Total ⬇ 1,114.7 460.9 -653.9
facing weak debt and equity flows. The
*includes food packaging; **exploration & refining
appreciating US dollar has compressed
Source: State Bank of Pakistan
borrower countries’ ability to borrow that
financing company has witnessed higher net have a greater degree of net dollar exposures,
FDI outflows in H1-FY23. Additionally, the
thus adding on to inflation in these net
oil and gas sector also faced downfall largely dollar-debtor economies. Resultantly,
on the back of a lower demand for furnace oil EMDEs with larger dollar-denominated debt
and the dearth of sufficient technology for burdens used forex reserves, monetary
further exploration.
tightening or both as buffers against the
Foreign Portfolio Investment pressures on their domestic currencies.
EMDE bond issuance dropped to its lowest
Global trends level in CY22 since CY11 (Figure 5.12);16, 17
net energy-importer economies with weaker
Global financial conditions underwent credit ratings noted an increase in their
considerable tightening in H1-FY23; risk sovereign spreads.18
appetites dampened as global growth
plunged further amidst persistent Developments in Pakistan
inflationary pressures and tightening of
monetary policies. The MSCI world equity Pakistan underwent higher net FPI outflows
index declined in H1-FY23 in US dollar terms in H1-FY23, amounting to US$ 1.0 billion
(Figure 5.11). against outflows of US$ 374 million during
the same period last year. Most outflows of

16 Global Economic Prospects, World Bank

17 EAP = East Asia Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean;
MNA = Middle East and North Africa; SAR = South Asia; SSA = Sub-Saharan Africa
18 United Nations (2023). World Economic Situation and Prospects 2023, OCHA, United Nations

119
State Bank of Pakistan Half Year Report 2022-23

Bond Issuance in EMDEs Figure 5.12 generation and distribution enterprises and
600
trillion US$ textile companies (Figure 5.14).
500
Furthermore, decline in PSX returns and
400 downgrading of Pakistan’s credit ratings by
300 international credit-rating agencies resulted
200
in FPI outflows.19 The CDS rates of major
EMs remained elevated; Pakistan’s rates rose
100
steeply, adding on to the difficulty in tapping
0 funds from international markets (Figures
2011

2013
2014
2015
2016
2017
2018
2019

2021
2022
2012

2020

5.15a and 5.15b).20

EAP ECA LAC MNA SAR SSA FX Loans and Liabilities

Sources: Bloomberg and World Bank H1-FY23 saw net outflows of FX loans and
liabilities of US$ 860 million. The IMF
US$ 1.0 billion were from debt securities
disbursed US$ 1.2 billion as part of the 7 th
(Figure 5.13).
and 8th combined reviews of the EFF. US$
1.6 billion were received from the ADB in
Sector-wise FPI saw net outflows in H1-FY23
order to help the Pakistani government
from commercial banks, along with fertilizer
provide social protection nets, promote food
and cement companies. However, there
security, and support employment for its
were net inflows from technology and
people with the onslaught of the floods and
communication companies, oil and gas
global supply chain bottlenecks. Other loans
exploration/marketing corporations, power
received included US$ 600 million from

PSX-Returns and FPI into Pakistan Figure 5.13 Sector-wise FPI in H1-FY23 Figure 5.14
percent
3 billion US$ 18 80
million US$
12
0 40
6
0
0
-3
-6 -40
-6 -12 -80
FY22

FY23
Q1-FY22

Q2-FY22

Q3-FY22

Q4-FY22

Q1-FY23

Q2-FY23

Fertilizer

Cement

Food*

Textile
Banks

Oil and Gas^

Technology
Power**

FY22 FY23 H1
*Food and personal care products **Power generation
Debt FPI Equity FPI PSX Returns-rhs
and distribution ^Oil and gas exploration and marketing
Source: State Bank of Pakistan & Haver Analytics Source: National Clearing Company of Pakistan Limited

19These included S&P, Moody’s and Fitch.

20A CDS, akin to an insurance contract, provides the purchaser of the fixed income product with
protection against various risks. It does so by transferring the risk to another party without transferring
the ownership of the bond itself. Higher CDS rates indicate greater risk.

120
 External Sector

Average CDS Rates in Major EMs Figure 5.15a Pakistan's CDS Rates Figure 5.15b
basis points
800 10000 basis points

600 8000

400 6000

4000
200
2000
0
S Korea 0
Turkey

Philippines

Thailand
Indonesia

Malaysia
S Africa
Vietnam

India
Brazil

China

Apr-20

Apr-21

Apr-22
Jan-20

Jan-21

Jan-22
Oct-20

Oct-21

Oct-22
Jul-20

Jul-21

Jul-22
H1-FY22 H1-FY23
Source: Bloomberg Source: Bloomberg

Saudi Arabia for oil imports and loans from outflows reached to US$ 1.2 billion in H1-
the IDA branch of the World Bank for crisis- FY23, as compared to net inflows of US$ 10.1
resilient social protection, Sindh Resilience billion during the same period last year.
Project, and the Pakistan Met Department
(among other projects – summing to a total Foreign exchange inflows materialized in the
amount of US$ 548.1 million). shape of IMF tranche of US$ 1.2 billion in
August 2022 subsequent to successful 7th
Amortization of loans amounted to US$ 5.4 and 8th reviews, multilateral loans (ADB,
billion in Jul-Dec FY23, up from US$ 2.7 AIIB & IDA) totaling more than US$ 3 billion
billion during the same period last year. This and Saudi oil facility of US$ 600 million.
was mainly due to the repayment of However, amortizations of gross official
commercial loans of US$ 2.7 billion, IDB loans and liabilities almost doubled in Q2-
short-term loans of US$ 800.7 million, along FY23 from the previous quarter and
with other multilateral (ADB, IDA-World amounted to US$ 5.4 billion in H1-FY23. In
Bank) and bilateral (China, Saudi) loans. addition, falling FDI and FPI resulted in
overall net financial outflows that continued
5.4 Exchange Rate and Reserves to exert pressure on foreign exchange
reserves and exchange rate.
Despite a considerable decline of 60.9 percent
in the current account deficit from US$ 9.1 While SBP’s FX reserves fell substantially
billion in H1-FY22 to US$ 3.6 billion in H1- during first half of FY23, FX reserves held
FY23, SBP’s foreign exchange reserves with commercial banks were not under the
dropped to US$ 5.6 billion by end-December same level of pressure and declined merely
2022 due to persistent pressures emanating by US$ 376 million. This may be attributed
from net outflows under financial account. to lower trade financing as a consequence of
External financial inflows during the period demand management measures taken during
remained lower than the planned the period. SBP’s reserves recorded a major
commitments and, hence, were inadequate to decline mainly on account of repayment of
meet repayments causing FX reserves to long term liabilities of US$ 1.6 billion and
decline. Net official external financial

121
State Bank of Pakistan Half Year Report 2022-23

Breakdown of Change in Pakistan's Figure 5.16 On the other hand, Real Effective Exchange
Liquid FX Reserves in H1-FY23 Rates (REER) of most of the EMs remained
million US$ relatively stable during H1-FY23 (Figure 5.17
1
b). As captured by the Relative Price Index
(RPI), price pressures contributed positively
0
to the change in REER of some EMs such as
Pakistan, Argentina and Turkey, offsetting a
-1
general weakening in the nominal effective
-2
exchange rates (NEERs). Pakistan’s REER
appreciated by 2.4 percent during the period.
-3
Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22
5.5 Trade Account21
SBP Banks Total
In the backdrop of economic slowdown,
Source: State Bank of Pakistan
demand contraction measures, and a slight
amortization of Sukuk bond of US$ 1 billion moderation in oil prices, the trade deficit
in the months of November and December contracted by US$ 8.5 billion (YoY) during
2022 respectively (Figure 5.16). Jul-Dec FY23 compared to last year (Figure
5.18). This decline was mainly led by a 23.0
Deteriorating external account position along percent decrease in the imports. Exports also
with broad-based strengthening of USD dropped by 5.7 percent during the period
against other currencies led to 9.5 percent owing to lower global demand due to the
depreciation of end-period mark-to-market monetary tighten, supply chain disruptions
exchange rate in H1-FY23 (Figure 5.17a). amid Russia-Ukraine conflict, higher input
cost and flood losses, particularly in rice
production (Table 5.5).

Change in Major Currencies Figure 5.17a Change in REERs of Major EMs Figure 5.17b
against US Dollar in H1-FY23 during H1-FY23*
percent; change b/w end-Jun and end-Dec 2022 percent; change b/w end-Jun and end-Dec 2022
10 30

0 10

-10
-10
-20
-30
Argentina

Philippines

Taiwan
S Korea

Indonesia
Chile

Thailand

S. Africa
Russia
Malaysia

Egypt
Brazil
Turkey

Vietnam
India

China
Pakistan

-30
Russia

Bangladesh

Philippines
Indonesia

Australia
S. Africa

UK

Thailand
China

Malaysia

Japan
Euro
Brazil
Turkey

India
Pakistan

NEER RPI REER

Source: Haver Analytics and State Bank of Pakistan *JP Morgan Effective Exchange Rates (deflated by CPI)

21This section is based on customs data reported by the PBS. The information in this section does not
tally with the payments record data, which is reported in Section 5.1. To understand the difference
between these two data series, see Annexure on Data Explanatory Notes.

122
 External Sector

Breakdown of YoY Change in Figure 5.18 letter of credit by banks; (ii) monetary
Trade Deficit during H1 tightening; (iii) imposition of 100 percent
billion US$ CMR on additional 177 items, and ban on
48
non-essential imports in April 2022; (iv)
36 foreign exchange concerns and; (v) increase
25.4
in regulatory duty on import of various items
24 in August 2022.
16.8 17.0
11.7 12.3
12 The decline in exports reflects the global
slowdown in the demand in Europe, the UK
0 and the US amid higher inflation on the back
FY19 FY20 FY21 FY22 FY23 of growing energy expenditure, monetary
tightening, and withdrawal of fiscal stimulus
Exports Imports Trade Deficit
extended during Covid,. Also, the
Source: Pakistan Bureau of Statistics
slowdown in Chinese economy pushed the
Imports witnessed a sharp dip of 23.0 exports downward. The decline in exports
percent during H1-FY23 compared to 66.2 was mainly pronounced in the textile
percent growth during the same period last products amid decreasing prices along with
year. This decline was a result of multiple the lower export volumes. Moreover, at
factors: i) continued demand-moderating domestic front, the disruptions due to the
measures by the government and the SBP, recent floods, and slowdown in economic
including SBP’s prior approval on opening of activity, further dented the exports.22

Trade Balance during Jul-Dec Table 5.5

million US$
Change (YoY)
H1-FY22 H1-FY23 Absolute Percent
Trade Balance -25,438.0 -16,987.0 8,451.0 -33.2
Exports 15,125.0 14,258.0 -867.0 -5.7
Textile 9,381.2 8,717.5 -663.7 -7.1
Knitwear 2,500.3 2,466.8 -33.5 -1.3
Bed-wear 1,659.7 1,427.7 -231.9 -14.0
Cotton yarn 610.4 381.5 -228.9 -37.5
Non-textile 5,744.1 5,553.3 -190.7 -3.3
Rice 1,066.8 926.6 -140.2 -13.1
Sports goods 163.8 208.6 44.8 27.3
Imports 40,562.7 31,217.0 -9,345.7 -23.0
Energy 10,181.8 9,285.5 -896.2 -8.8
Non-energy 30,381.2 21,959.5 -8,421.8 -27.7
Palm oil 1,843.9 2,082.3 238.3 12.9
Machinery 5,915.4 3,236.2 -2,679.2 -45.3
Transport 2,318.5 1,163.0 -1,155.5 -49.8
Source: Pakistan Bureau of Statistics

22Business Confidence Index (BCI) declined by 6.0 points during H1-FY23 on account of macroeconomic
conditions. Source: State Bank of Pakistan’s Business Confidence Survey.

123
State Bank of Pakistan Half Year Report 2022-23

Destination-wise Exports of Table 5.6 With respect to direction of exports, the drop
Pakistan during Jul-Nov was mainly seen in the major traditional
million US$ markets, including US, China, and UK
YoY change in (Table 5.6). Exports to Malaysia, Bangladesh
FY22 FY23
FY23 and Africa declined during Jul-Nov FY23.
EU-27 4,082.0 3,667.5 -10.2 The fall could be traced from lower exports
Netherlands 629.9 706.1 12.1 of food products and textile raw materials to
Spain 473.7 593.1 25.2 Malaysia and Bangladesh respectively; amid
Italy 397.1 453.4 14.2 the production disruptions due to recent
Germany 712.6 730.9 2.6 floods.
US 2,697.6 2,307.7 -14.5
China 1,322.4 859.3 -35.0 On quarterly basis, there was a sharp dip in
UK 920.6 815.4 -11.4 YoY growth of exports during Q2-FY23
Africa 633.7 604.2 -4.6 compared to Q1-FY23. This could be traced
UAE 500.5 593.5 18.6 to the base effect, as exports recorded a
Bangladesh 385.5 330.6 -14.3 growth of 22.5 percent in Q2-FY22, highest
Afghanistan 274.8 418.6 52.4 since FY12 for the same period (Figure 5.19).
Malaysia 183.6 128.2 -30.2 Last year, the revival of economic activity
S. Arabia 154.1 74.7 -51.5 and the subsequent pent-up demand in
Source: Pakistan Bureau of Statistics
major export markets drove overall exports
in Q2-FY22.
Exports Drag in textile sector dented the exports
during H1-FY23
The merchandize exports declined to US$
14.3 billion in H1- FY23 from US$ 15.1 billion Textile exports declined by 7.1 percent to
last year. Disaggregated PBS data of Jul-Dec US$ 8.7 billion during H1-FY23 from US$ 9.4
FY23 shows that the fall in exports was
Trend in Exports Figure 5.19
driven by both declining trend in export
volumes and unit values. More specifically, percent
20 billion US$ 100
high value added (HVA) textiles and food 16 80
group, mainly contributed to the decline in 12 60
exports.23 This decline owed to the weak 8 40
global demand and lackluster performance 4 20
of the domestic economy amid the demand 0 0
curtailing measures and rising input cost.24 -4 -20
The non-textile exports also fell by 3.3 -8 -40
percent during H1-FY23 compared to 23.2
Q4-FY20

Q2-FY21

Q4-FY21
Q1-FY20
Q2-FY20
Q3-FY20

Q1-FY21

Q3-FY21

Q1-FY22
Q2-FY22
Q3-FY22
Q4-FY22
Q1-FY23
Q2-FY23
H1-FY22
H1-FY23

percent growth last year reflecting lower

external demand.
Exports Growth - rhs
Source: Pakistan Bureau of Statistics

23 High value added products include apparel and home textile

24 Large-scale manufacturing declined by 3.7 percent in H1-FY23 compared to a 7.7 percent rise last year.

124
 External Sector

Major Textile Sector Exports Table 5.7

million US$
H1-FY22 H1-FY23 Change VE PE
Apparel 4,332 4,300 -33 921 -953
Home textiles 2,184 1,919 -265 -513 248
Cotton Fabrics 1,135 1,066 -68 -271 202
Cotton Yarn 610 382 -229 -259 30
Other Textile Made-up (excl.
422 378 -45
Towels & Bedwear)
Other Textile Material 385 367 -18
Art Silk and Synthetic Textiles 225 209 -16 -42 26
Total Textile Exports 9,381 8,717 -664 - -
Note: VE: Volume Effect; PE: Price Effect
Source: Pakistan Bureau of Statistics

billion last year, mainly stemmed from the inflation and lingering Russia-Ukraine
negative volume impact in the main conflict. In particular, exports of home textile
categories (home textiles, cotton fabrics and fell due to lower demand in EU, US, and UK
cotton yarn). However, in case of apparel the (Figure 5.20a and 5.20b). Meanwhile, the
fall in unit values more than offset the higher slowed economic activity on the back of
volume impact, resulting in deterioration in Covid outbreak in China affected the export
its exports (Table 5.7). of cotton yarn and fabric.

This performance was a result of both the Exports of apparel (knitwear and readymade
demand and supply side factors. On garments) also remained under pressure,
demand side, the main factor that which dropped by US$ 33 million in H1-
undermined the textile exports was the FY23 from last year. This drag was the
slowdown in the major importing economies outcome of fall in unit prices which held
due to tight monetary policies amid high back the values, more than offset the rise in

Growth in Quantum Home Textile Figure 5.20a Growth in Quantum Home Textile Figure 5.20b
Imports of the EU and the US in H1-FY23 Imports of the UK
12 percent 18 percent
0 9
-12 0
-24 -9
-36 -18
-48 -27
Pakistan

Vietnam
Bangladesh

Indonesia
World

China

India

World
Bangladesh

India
China

Pakistan

EU-27 US Jul-Nov FY22 Jul-Nov FY23

Source: Emerging Textiles Source: Emerging Textiles

125
State Bank of Pakistan Half Year Report 2022-23

Decline in Unit Prices of Apparel Figure 5.21 Apparel Imports of EU27 - YoY Figure 5.22
50 percent Growth
percent
40
40
30
20
20

10 0

0 -20

Bangladesh

Cambodia
Mar-22

Aug-22

World
Apr-22

Vietnam
Feb-22

Indonesia
Dec-21

Jul-22
Jan-22

Pakistan
Sep-22
Jun-22
May-22

India
Oct-22

World Bangladesh Indonesia

India Combodia Pakistan Jul-Oct FY22 Jul-Oct FY23
Source: Eurostats Source: Eurostats

volume gains (Figure 5.21).25 A sharp dip of Non-textile exports growth subdued in the
23 percent in unit value of apparel explained H1-FY23
the deterioration in its export receipts in H1-
Non-textile exports declined by 3.3 percent to
FY23. This muted the impact of higher
US$ 191 million in H1-FY23. The decline was
apparel volume exports. Apparel registered
mainly driven by the agro-food products
higher demand in the traditional markets
amid the lower production in the flood-
like EU-27 (Figure 5.22). Also, the Covid
affected areas. The quarterly data in non-
lockdowns in China led the export orders to
textile exports showed a similar trend like
the alternate markets, resulting in higher
textile exports. The decline was visible in
volume exports from Pakistan.26
Q2-FY23 due to a large base impact of same
On supply side, various factors kept the period last year, reflecting higher external
textile exports under pressure during the demand of these products (Table 5.8).
review period: the increased production cost Within agro-food exports, the negative
amid rising electricity and gas prices, volumes subdued the higher unit price
monetary policy tightening, a slowdown in impact mainly in rice, and oil seeds exports.
the disbursement of SBP’s concessionary Rice, having a largest share in food exports,
refinance schemes (LTFF and TERF), and sharply declined on account of a drop in the
shortage of raw material on account of flood production of the rice amid the recent floods
losses. in the country that mainly affected the non-

25 It is important to note that the significant increase in unit prices of apparel in FY22 was driven by
higher demand for apparel exports arising in the backdrop of partial resumption of industrial activity and
export order delays in other competing markets.
26 US apparel volume imports from China dropped by 2.4 percent in 2022 compared to last year. While,

shipments from all other countries increased by 14.8 percent during the period. Source: Emerging
Textiles

126
 External Sector

Major Non-textile Exports (Jul-Dec) Table 5.8 Growth in Prices of Basmati Rice Figure 5.23
million US$ percent
90
FY22 FY23 Change
Leather products 320 315 -4 60
Chemicals 300 337 38
30
Ethyl alcohol 129 201 72
Rice 1,067 927 -140 0
Basmati rice 304 279 -25 -30
Non-basmati rice 763 648 -115
Fish and fish -60
200 225 24

Sep-21

Sep-22
Jun-22
Aug-21

Dec-21

Aug-22

Dec-22
Jan-22

Apr-22
May-22

Nov-22
Nov-21
Oct-21

Mar-22

Oct-22
Jul-21

Feb-22

Jul-22
preparations
Sports goods 164 209 45
Total 3,246 3,140 -106
India basmati Pakistan basmati
Non-textile, total 5,744 5,553 -191
Source: Food and Agriculture Organization
Source: Pakistan Bureau of Statistics
sports goods, almost the entire increase came
basmati cultivation areas.27 As a result the from footballs amid the higher demand on
exports of non-basmati rice declined by US$ account of the FIFA world cup in November
114.8 million during H1-FY23. Whereas, the and December 2022. Exports of fish and fish
price impact remained positive owing to the preparations also increased by US$ 24
higher global rice prices. This surge in prices million in H1-FY23. This increase was
of rice was mainly driven by the supply side attributed to higher volume exports to China.
constraints, as India imposed ban on export
of rice in September 2022, aimed at managing Imports
the national food security in the backdrop of
rising inflationary pressures (Figure 5.23). In contrast to a historically rising trend,
Pakistan’s imports plunged by 23.0 percent
YoY to US$ 31.2 billion, in H1-FY23 (Figure
The exports of various products including
5.24) and this decline persisted throughout
oils seeds, cement and clinkers registered a
H1-FY23. Where exchange rate depreciation
decline in H1-FY23. The decrease was
had a role in impacting the overall imports,
mainly driven by the negative volume
administrative and regulatory measures
impact, particularly visible in exports to
taken by the government and SBP also
China. The volume of these exports to
remained pivotal in compressing imports
China, the main destination, fell by 9.7
and constraining the domestic demand
percent and 96.4 percent, respectively, amid
pressures on external account amid depleting
a slowdown in the Chinese economy during
foreign exchange reserves (Figure 5.25).
the review period.
For instance, SBP has imposed 100 percent
However, sports goods and chemicals
cash margin requirements (CMRs) on the
showed improvement in H1-FY23. Within

27The production of rice declined by 40 percent as compared to last year. Area under cultivation also
declined. The flood damage was most severe in Sindh province where mostly non-basmati with higher
yields is cultivated (Chapter 2).

127
State Bank of Pakistan Half Year Report 2022-23

Quarterly and Half-yearly Trend Figure 5.24 imports was mainly volume based.
in Imports Contribution of all other sectors, except food,
percent to the overall imports growth remained
51 billion US$ 75
negative in H1-FY23 (Figure 5.26).
34 50
22 21
17 15 Energy Imports
17 12 10 13 25
15 19 18 16
11 12 11 Energy imports, which more than doubled in
0 0
H1-FY22 predominantly due to higher
-17 -25 international crude oil prices and rising
H1-FY20

H2-FY20

H1-FY21

H2-FY21

H1-FY22

H2-FY22

H1-FY23

energy demand, declined by 8.8 percent to

US$ 9.3 billion in H1-FY23 from US$ 10.2
billion in the same period last year.
Q1 Q2 Growth(rhs)
Source: Pakistan Bureau of Statistics
A confluence of factors could explain the
import of 114 mostly non-essential items in declining trend in petroleum imports: i)
September 2021, and then on another 177 Overall slowdown in the economic activity
items in April 2022.28 amid monetary policy tightening reduced the
demand for petroleum products; ii) The
While global commodity prices also started restricted mobility and infrastructural
tapering off during the period, the decline in damages in the wake of monsoon floods

Regulatory Measures and Import Growth Figure 5.25

growth in percent
50
Prior approval from Imposition of an 1. Regulations
SBP for import annual limit of for exchange
40 companies
payments of 25 high US$ 30,000 per
value capital goods person on card tightened
30 Increase in based cross-
2. 100% cash
regulatory duty border
margin on 177
20 on various items transactions
items extended

10

-10 Import ban on

100% cash margin over 500 non-
imposed on 177 essential items
-20 import items
Prior approval list
-30 expanded by adding Amendment in the
chapters 84 and 85 prudential regulation
-40 of HS codes for consumer financing
Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22

Import growth Average growth

Source: State Bank of Pakistan, Ministry of Commerce and Federal Board of Revenue

28CMR was initially imposed in February 2017. As of December 2022, the total number of products
attracting CMRs to 702.

128
 External Sector

Key Sectors Driving the Half- Figure 5.26 Factors that Underpinned the Figure 5.27
Yearly and Quarterly Imports Downturn in Energy Imports
percent percent 120 percent
75 5
1.5 90
60 0
-4.2 -5.4 60
45 -5
-5.8 30
-10 -9.1
30 15.9
0
-15
15 22.1 -7.3 -30
-2 -20
0 -60
-6.8 -25

Jun-22
Apr-22
Jul-21

Jan-22
Feb-22
Mar-22

Jul-22
Sep-21

Sep-22
Oct-22
Oct-21
Nov-21

Nov-22
Aug-22
May-22
Aug-21

Dec-21

Dec-22
-15 -30
-30 -35
H1-FY22 H1-FY23 Q1-FY23 Q2-FY23 Import Quantum POL
PKR Depreciation Crude oil
Energy Agri & chem Machinery
Transport Metal Food Source: SBP, IMF, OCAC and PBS
Textile Others
Source: Pakistan Bureau of Statistics for the industrial sector as a result of slower
economic activity.29 Further, furnace oil sales
dented transport sector’s demand; iii) declined mainly in the power sector on
Reduced power generation amid suppressed account of lower power generation. (Figures
commercial usage also contributed towards 5.29a & 5.29b).
declining POL sales (Figure 5.27).
However, in the case of petroleum crude, the
The decline was mainly led by the negative positive price effect was more pronounced
volume impact of energy imports which compared to the negative volume impact
more than offset the positive price effect, owing to the growth in global crude prices.
with an exception of petroleum crude where Meanwhile, the imports of coal and LNG
the positive price effect was more
pronounced (Figure 5.28).
Petroleum Imports Figure 5.28
Energy imports fell mainly due to 36.9 billion US$
4.5
percent decline in the imports volume of
petroleum products. Among petroleum 3.0
products, import volumes of HSD and
furnace oil almost halved partly on account 1.5
of lower demand amid economic slowdown.
A broad-based decline is recorded in the POL 0.0
sales across all sectors reflecting a general
-1.5
slowdown in domestic demand for these
products. Particularly, High Speed Diesel -3.0
(HSD) sales declined for the transport sector H1-FY22 H1-FY23
due to higher petroleum prices and flood Volume Impact Price Impact
related damages to road infrastructure; and Source: Pakistan Bureau of Statistics

29 Data Source: Oil Companies Advisory Council sectoral sales data

129
State Bank of Pakistan Half Year Report 2022-23

Growth in Sector-wise Sales of Figure 5.29a Electricity Generation Declined in Figure 5.29b
Furnace Oil & HSD H1-FY23
percent percent
30
Furnace Oil

Power
20

Industry 10

0
Transport
HSD

-10
Industry
-20

Sep-22
Sep-21

Dec-21
Aug-21

Apr-22

Jun-22

Aug-22

Dec-22
Jan-22

May-22
Jul-21

Nov-21

Nov-22
Oct-21

Mar-22

Jul-22

Oct-22
Feb-22
-80 -30 20 70
H1-FY22 H1-FY23

Source: Oil Companies Advisory Council Source: National Electric Power Regulatory Authority

also registered a decline in H1-FY23. The tightening by 225 bps, Ministry of Commerce
weak demand arising from the coal based ban on 566 items for a limited time,
power generation plants was mainly driving imposition of CMR on additional 177 items 30,
the decline in coal imports. However, the and condition of prior approval from SBP
supply chain disruptions in the backdrop of before opening L/Cs of CKD cars and items
Russia-Ukraine crisis explained a decrease in under Ch. 84 & 85 of HS Codes etc.31
LNG imports.
Agriculture and Chemical
Non-energy Imports
Agriculture and Chemical imports declined
Non-energy imports declined by 19.3 percent by 34.8 percent to US$ 5.2 billion from US$
to US$ 22 billion in H1-FY23 from US$ 27.2 7.9 billion in the same period last year.
billion in the same period last year. Except Within this group, imports of medicinal
for a 2.4 percent growth in Food imports, products fell by 76.3 percent (Figure 5.30).
non-energy imports witnessed a broad-based This sharp decline can be explained by lower
decline during the period. In addition to imports of Covid vaccines as country
economic slowdown, import compressing imported its significant volume last year, and
measures taken by government and SBP also contributed 5.8 percent to the overall 23
contributed to the decline in imports percent decline in imports. With the
particularly non-energy imports. These exception of minor growth in the imports of
measures include, monetary policy insecticides, plastic material, other chemicals

30 Imposition of cash margin requirements on additional 177 items in April 2022

(www.sbp.org.pk/bprd/2022/CL9.htm), along with reporting requirements for banks to report CMR
collected on the related imports, sunset clause of which was later extended to March 31, 2023
(www.sbp.org.pk/bprd/2022/CL37.htm)
31 Requirement for banks to obtain prior approval from SBP before opening L/Cs of 25 high value capital

goods, including CKD cars in May 2022; (www.sbp.org.pk/epd/2022/FECL9.htm), to which complete

Chapters 84 and 85 of HS codes were included in July 2022 (www.sbp.org.pk/epd/2022/FECL11.htm)

130
 External Sector

and fertilizer imports remained lower than Agriculture and Chemical Figure 5.30
the level of previous year. Imports - Contribution in Growth
percentage points
40
The decline of 10.7 percent in fertilizer
imports is mainly driven by the substantially
declining volume of DAP imports. 20

Particularly, this trend is on the back of

supply shortages caused by Russia-Ukraine
0
conflict, unavailability of ammonia, primary
raw material, resulting in production decline
of DAP, and export restrictions imposed by -20
China to meet its domestic DAP H1-FY22 H1-FY23
requirements. Meanwhile, the global Other Chemicals Medicinal Products
Plastic Material Insecticides
fertilizer prices (including DAP and Urea) Fertilizer Manufactured Agri. & other chemicals
showed signs of YoY growth in Q1-FY23, Source: Pakistan Bureau of Statistics
sliding prices in Q2-FY23 kept the half yearly
growth of fertilizer prices moderate. followed by power generating machinery,
other machinery and textile machinery.
Machinery
Previously higher mobile prices due to
Machinery group imports were recorded at shortage of semiconductor chips have started
US$ 3.2 billion in H1-FY23 (lowest in nine to moderate as inventories for semiconductor
years), 45 percent down from US$ 5.9 billion chips have begun to pile up amid lower sales
in H1-FY22. While monetary tightening of mobile phones.32 Moreover,
during the period made financing of administrative measures focusing
machinery more expensive in general, particularly on chapter 85 under HS codes
aligning of LTFF rates with the policy rate also led to lower import under this category.
and exhaustion of TERF have also dis-
incentivized the financing of machinery The impact of these measures also reflected
imports as also depicted in the significantly in the lower imports of power generating
lower disbursements under these schemes. machinery which dropped to US$ 288 million
In addition, other regulatory and in H1-FY23 from US$ 990 million in H1-
administrative measures (such as prior FY22. Further, completion of various CPEC
approval of SBP before opening L/Cs) were projects cause these imports to decline.
particularly focusing on non-essential items
under the machinery group and caused Similarly, textile machinery imports declined
machinery imports to drop significantly. by 44 percent to US$ 242 million in H1-FY23
against the US$ 435 million imports in the
Within machinery group, the major decline same period last year. In addition to import
was recorded in the import of mobile phones compression measures, lower disbursements

Source: https://asia.nikkei.com/Business/Tech/Semiconductors/Chip-glut-to-last-most-of-2023-
32

while-automotive-crunch-persists

131
State Bank of Pakistan Half Year Report 2022-23

under TERF also caused the textile aircrafts, ships and boats fell by US$ 353
machinery imports to decline. million to US$ 88 million in H1-FY23.

Transport Metals
Overall lower economic activity and lower
Transport group imports recorded a 50 demand in auto and housing sectors along
percent drop to the level of US$ 1.2 billion in with demand compressing measures led the
H1-FY23 from US$ 2.3 billion H1-FY22. metal imports to fall by US$ 1 billion and
CKD/SKD vehicles imports decreased by that is largely under the category of iron and
US$ 489 million and steered the overall steel and its scraps. The average unit value
decline in transport imports (Figure 5.31). of iron and steel slightly increased as
Within CKD/SKD vehicles, motor car opposed to the lower average unit value of
imports declined significantly and reached their scrap. On the other hand, international
the level of US$ 498 million in H1-FY23 from iron ore prices also saw a decline during the
US$ 808 million in H1-FY22. Regulatory period. Overall import of steel dropped on
measures taken by SBP during H1-FY22 and the account of lower construction activity.
H2-FY22 started to impact the import of road As evident in the quantum index numbers of
motor vehicles in general and import of large scale manufacturing (LSM) industries,
CKD/SKD motor cars in particular during declining production of iron and steel
H1-FY23.33, 34 Following this, imports for products, and automobiles also led to lower
demand for imported iron and steel and their
Transport Imports during H1 - Figure 5.31
scrap (Figure 5.32).
Contribution in Growth
Food
percentage points
7
Unlike the broad-based decline in the
4
imports of all other sectors, food imports
grew by 2.4 percent during H1-FY23.
1 Growth in food imports was mainly driven
by the growth in the imports of palm oil,
-2 pulses and wheat (Figure 5.33).
-5
Although volume of palm oil imports
FY22 FY23
declined over the period, substantial increase
Road Motor Vehicles Motor Cars (CBU)
Motor Cars (CKD)
in its price caused the import value to rise.
Source: Pakistan Bureau of Statistics
On the other hand, imports of pulses and
wheat increased both in volume and price.

33 SBP attempted to restrict the demand for automobiles by amending the prudential regulation for
consumer financing in H1-FY22. The key measures include, restricting the amount of the amortized
payments to 40 percent of the monetized salary of the borrower, reducing the maximum tenure for the car
financing from seven years to five years, increasing the minimum down payment from 15 percent to 30
percent, and limiting the overall auto financing limits by one person from all banks/DFIs (in aggregate) to
Rs. 3,000,000 at any point in time. Source: www.sbp.org.pk/bprd/2021/CL29.htm
34 Requirement for banks to obtain prior approval from SBP before opening L/Cs of 25 high value capital

goods, including CKD cars, in May 2022 (H2-FY22). Source: www.sbp.org.pk/epd/2022/FECL9.htm

132
 External Sector

Average Unit Value of Iron & Figure 5.32 Trend in Food imports Figure 5.33
Steel and Scrap Imports billion US$ percent
5.0 90
US$/MT
1000
4.0 2.2 72
2.4
800 2.2 1.9
3.0 2.2 54
600 2.0 1.5 36
1.5
2.4 2.3 2.7
400 1.0 2.2 18
1.4 1.7
1.1
0.0 0
200
-1.0 -18
0 H1-FY20 H1-FY21 H1-FY22 H1-FY23
FY22 FY23
Iron and Steel Scrap Iron and Steel Q1 Q2 Growth (rhs)
Source: Pakistan Bureau of Statistics Source: Pakistan Bureau of Statistics

Uptick in wheat imports volume may also be surged as a result of supply disruptions amid
attributed to Government’s efforts to ensure Russia-Ukraine war. On the other hand,
sufficient stocks until next harvest in April sugar imports decreased to US$ 3.3 million in
2023. Whereas, wheat prices also H1-FY23 mainly due to the base effect.

133
Special Section: Pakistan’s Growing IT Exports and Tech Start-
ups: Opportunities and Challenges1
Information Technology (IT) sector presents an opportunity for developing economies to leapfrog due to its
transformative nature and lower entry barriers. IT facilitates this transition by improving efficiency and
productivity across public and private sectors, potentially benefiting nearly all aspects of socio-economic life.
However, IT-led leapfrogging depends on various factors such as the absorptive capabilities of individuals,
businesses, and governments; effective coordination among stakeholders; availability and access to IT. The recent
growth in Pakistan's IT service exports and tech start-up funding appear as emerging signs of digitalisation amid
Pakistan's large young population alongside regulatory developments aimed at increasing digital adoption and
online payments. Further benefitting from Covid-19, which led to increased demand for digital services, the growth
in Pakistan’s IT service exports averaged 24 percent between FY20-FY22, whereas start-up funding between CY21-
CY22 reached around US$ 709 million compared to approximately US$ 100.8 million in CY19-CY20. However, to
continue this trajectory and benefit from the transformative impact of IT, the digitalisation of the economy has to be
prioritized across public and private sectors with a focus on bridging the increasingly noticeable human resource gap
in the sector, providing a facilitative environment for investment in local start-ups, addressing the issue of
availability and affordability of IT services, and the provision of cross-cutting technology and ancillary frameworks.

S1.1 Introduction
The Information Technology (IT) sector has a Supported by the proliferation of telecom,
transformative impact on developed and internet and computing technologies, the
developing economies. It is steadily growth in IT industry is being driven by two
becoming a key driver of economic growth related but distinct categories that broadly
and has been changing the structure of encapsulate a wide and evolving field. The
economies in many ways (Figure S1.1). This first, which forms the basics of IT led
includes faster growth in capital and labour digitalisation, includes software production
productivity; increased efficiency in and its usage by individuals, businesses and
traditional business operations; new governments. The second relates to broader
opportunities for employment and digitalisation of economy via technology
entrepreneurship, especially for women and based solutions typically offered by start-ups
marginalised segments; fostering financial that explore untested innovative ways of
inclusion and financial sector development; business models across various facets of
and enabling knowledge spillover that economy and society.3, 4
stimulates innovation.2

1 This special section draws on discussions with various public and private sector stakeholders including
software exporting firms, relevant government bodies, incubators and start-ups from multiple sectors.
2 Asian Development Bank (2010). Information and Communication Technology for Development ADB

Experiences. Manila, Philippines: Asian Development Bank; T. Niebel (2018). ICT and economic growth: S.
Asongu and B. Moulin (2016). The role of ICT in reducing information asymmetry for financial access,
Research in International Business and Finance, Elsevier, vol. 38(C), pp. 202-213: W. Sutherland and M. H.
Jarrahi (2018). The Sharing Economy and Digital Platforms: A Review and Research Agenda, International
Journal of Information Management, vol. 43, pp. 328-341: C. Corrado, J. Haskel, C. J. Lasinio (2017).
Knowledge Spillovers, ICT and Productivity Growth, Oxford Bulletin of Economics and Statistics, Vol. 79(4):
3 World Bank report (2022). South Asia’s Digital Opportunity Accelerating Growth, Transforming Lives,

Washington D.C: World Bank

4 The definition of start-ups is in want of consensus in academic and non-academic contexts. In this

Special Section, the term is being used in the context of firms that explore new untested technology (or
tech) based business models that disrupt the old way of economic organisation, production process or
service delivery.
State Bank of Pakistan Half Year Report 2022-23

ICT's Impact on Economic Growth and Development Figure S1.1

*Some Startups may scale up and invest abroad.

Source: SBP based on various papers cited in this special section chapter particularly: (a) J. Grace, C. Kenny, C.
Zhen and W. Qiang (2004). Information and Communication Technologies and Broad-Based Development, World
Bank Working Paper No. 12. Washington D.C: World Bank (b) M. Andrianaivo and K. Kpodar (2011).ICT,
Financial Inclusion, and Growth: Evidence from African Countries, IMF Working Paper, Vol. 73. No.11, Washington
D.C: International Monetary Fund (c) S. Asongu and B. Moulin (2016). The role of ICT in reducing information
asymmetry for financial access, Research in International Business and Finance, Elsevier, vol. 38(C), pp. 202-213.

While there are certain commonalities vis archetypical productivity-enhancing IT

between these two categories –such as need and software usage within existing business
for programmers and coders, cloud storage models. For example, generic or bespoke
and computing and digitisation of records – accounting or customer management
both are also quite distinct. Software and software for financial or non-financial
other IT firms can have large established company.
players and SMEs, whereas tech start-ups are
generally young firms with less than ten or The latter includes internet or telecom-based
even five years of operations. They are also services – such as ride sharing solutions, e-
distinct in their usage, application and commerce ventures, fintech, and education,
intended impact. The former includes agriculture and health technology solutions
software production and design, software (edTech, agriTech and healthTech) – where
troubleshooting, software consultancy vis-à- the defining feature is a technology-based

136
 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

product or business model that has been built on the third industrial revolution that
untested or little tested before. For example, focused on IT and electronics.5 Unlike the
an accounting mobile app that enables previous revolutions, the pace of
families and individuals to maintain easy to advancement of the 4IR is exponential,6
use household accounting ledgers connected which implies that the opportunity cost for
directly with their bank accounts, credit card inaction or late action can be massive for
as well as credit bureaus for credit scoring. developing countries.

Both these categories are also commonly The multi-faceted impact of IT sector
known for different reasons. Software and therefore, has particularly persuaded
other IT services have gained attention developing economies to focus on IT as a
because of its growing share in international development strategy because it provides an
services trade, even though it is their usage opportunity to leapfrog i.e. growth and
in domestic economy across various sectors development through adoption of latest
and operations thereof that leads to a technology in areas where earlier versions of
transformative impact on economy. Start- technological means and methods were not
ups have gained prominence due to the way adopted. Since IT alters the way consumers,
they are disrupting old ways of economic producers, governments and citizens operate
and social organisation given the cross- and interact with each other, increased focus
cutting technology solutions they work on. on its production and usage - both domestic
While start-up services are also tradable usage of IT and software services and
across countries, they are typically tailored to expanding footprint of start-ups - helps
their respective local environment at the time bypass the traditional pathways to
of their launch. development; hence the leapfrog. Moreover,
businesses and governments in developing
Globally, start-ups have also started using countries are comparatively swift to switch
frontier technologies, i.e. new generation to new technologies because they have no or
technologies which are reshaping industry relatively less sunk investments in legacy (i.e.
and communication, paving the way for the older or soon to be outdated) technologies
fourth industrial revolution (4IR). These whereas IT sector has low entry barriers,
include Artificial Intelligence (AI), Virtual making it an equalizing agent between
Reality, Big Data, the Internet of Things individuals and countries.7
(IoTs) and other technologies that are being

5 World Intellectual Property Organization website: (Available at:

www.wipo.int/export/sites/www/about-ip/en/frontier_technologies/pdf/frontier-tech-6th-
factsheet.pdf), Geneva: WIPO
6 K. Schwab (2016). The Fourth Industrial Revolution: What It Means, How to Respond. Fourth Industrial

Revolution. Geneva: World Economic Forum

7 C. Parez and L. Soete (1988). Catching up in Technology: Entry Barriers and Windows of Opportunity in

Technical Change and Economic Theory, Open Access publication from Maastricht University, Maastricht,
Netherlands; K. Lee (2019). Economics of Technological Leapfrogging, working paper 17, United Nations
Industrial Development Organization, Vienna: Austria; J. Manyika, M. Chui, P. Bisson, J. Woetzel, R.
Dobbs, J. Bughin, D. Aharon (2015). The Internet of Things: Mapping the Value Beyond the Hype, New York:
Mckinsey & Company

137
State Bank of Pakistan Half Year Report 2022-23

For governments, the growing prevalence of However, leapfrogging through IT-led

digital data repositories, telecom and growth and development depends on many
internet, for example, opens new, effective enabling factors. These include absorptive
and easily scalable ways to provide data capabilities of individuals, businesses and
driven policy and fiscal support. It also governments to learn, adopt and adapt to
supports the private sector to leap frog; for new technologies. This, inter alia,
instance, the internet has allowed farming necessitates improving IT-focused human
communities and other marginalised capital, wider digital literacy, and
segments of economy, such as women
affordability of technology. Moreover, given
entrepreneurs, to by-pass the conventional
the cross cutting nature of IT, the
brick-and-mortar way of retailing and
development of complementary technologies
directly venturing into web-based or mobile-
as well as rules and procedures in interlinked
app-based retailing (e-commerce & m-
commerce). This is often across national industries and sectors need to be upgraded
boundaries as IT services exports and IT- to affect IT spillover and leapfrogging.9
enabled exports can flourish without capital
intensive investments. Similarly, digital In this regard, digitalisation of both public
financial technologies (fintech) are fast and private sectors of economy plays a
tracking financial inclusion and digital critical underlying role as it directly impacts
financial payments in countries that have the addressable market for both domestic
had significantly poor performance in brick usage and exports of software, as well as
and mortar banking networks and credit start-ups. A large addressable domestic
card penetration. market provides a strong base for software
firms to ultimately grow and cater to
While the hardware aspects of IT remains
prominent, a transformational shift from IT regional and foreign markets. Given the fast
manufacturing sector to IT services has been evolving nature of IT technology and that
witnessed recently. The move from a technological adaption is a continuous and
hardware to software-centric growth has cumulative process, the public sector has an
been particularly pronounced in developing important role to play. This includes
countries, due to declining costs of improving coordination among stakeholders;
broadband internet, telecom services, and increasing awareness and usage of sector-
other new technologies that facilitate growth specific technologies; ensuring affordability
in both basic form of digitalisation i.e. and access to hardware and IT services,
software and software related services and strong domestic demand for digitalisation;
wider form of digitalisation via start-ups.8

8 Measuring the Information Society Report 2018, Vol.1, pp. 1-189, Geneva, Switzerland: International
Telecommunication Union
9 W.E SteinMueller (2001). ICTs and the possibilities for leapfrogging by developing countries, International

Labour Review, Vol. 140, Issue No.2 ; M. W. L. Fong (2009). Technology leapfrogging for developing
countries. Encyclopaedia of Information Science and Technology. Khosrow-Pour, Mehdi, ed. Information
Science Reference, Hershey, Pa, USA, pp. 3707-3713.

138
 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

availability of infrastructure, and provision Pakistan's IT Exports as Percent of Figure S1.2

of an enabling regulatory environment.10 Other Foreign Exchange Earning
Avenues
percent percent
100 160
In Pakistan, the recent growth in IT exports 75 120
and start-ups appear as emerging signs of 50 76 65 80
16 16 18 57 15 47
digitalisation. Driven by both enabling 25 2 7 40
policies of the government and the central 0 0

Rice

Bedwear

Garments†

Remittances
Knitwear
bank, availability of low-cost human capital,
and the onset of the pandemic, both IT
exports and tech start-ups have witnessed
sharp growth in recent years. IT exports – FY13 FY22 growth*-rhs
mainly led by software and software-related *Refers to growth in proceeds from above-mentioned
exports - rose to $2.1 billion in FY22 from export products and remittances between FY13-FY22
†Readymade
$0.89 billion in FY19 and $0.29 billion in Source: State Bank of Pakistan
FY13. As a result, IT exports is increasingly
becoming one of the leading foreign domestic tech start-ups on the other hand are
exchange earning segments of economy concentrated in fintech and e-commerce that
(Figure S1.2). Likewise, the size of funding cumulatively accounted for 71 percent of
and the number of deals in technology start- total funding of all publicly reported deals
ups rose from around US$ 37.5 million and between 2015-22.12 Start-up activity as
29 in 2019 to US$ 347.4 million and 70, indicated by funding and deal count is not
respectively, in 2022, led largely by widespread across various sectors of
international investors.11 economy, such as education, health and
other sectors where digital transformation
However, as discussed in next section, this can have large positive externalities.
growth stems from a negligible base. While
software usage in domestic economy is Moreover, both IT exports and domestic tech
uncommon, implying low level of basic form start-ups have substantially large room to
of digitalisation, the country’s IT exports are grow. Even after such fast paced growth in
dominated by small-sized software exporters recent years, Pakistan’s share in global export
most of whom export less than $0.1 million a of computer services is only 0.3 percent.
year. IT exports are not diversified, where Similarly, the start-up space still lags far
the share of US alone is more than half. The behind regional and global players vis-à-vis

10 C. Xavier, D. Comin and M. Cruz (2022). Bridging the Technological Divide: Technology Adoption by Firms
in Developing Countries. Washington, DC: World Bank: D. Suarez and E. Abdallah (2019) Public Sector
Readiness in the Age of Disruption in partnership with Seven Imperatives to Navigate your Journey to Readiness,
World Government Summit in partnership with PwC: J. Tanburn and A. D. Singh (2001). ICTs and
Enterprises in Developing Countries: Hype or Opportunity? ILO Working Paper. Geneva: ILO
11 Funding refers to an investment by any type of foreign or local investor in a start-up firm, usually

against an equity stake in the firm, whereas deal refers to the number of funding transactions regardless
of the size of funding. Investments by same investors in different funding rounds are reported as distinct
deals.
12 Source: Data Darbar

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State Bank of Pakistan Half Year Report 2022-23

the presence of unicorns (start-up with $1 also ought to be made as top priority agenda
billion valuation or more), venture capital alongside streamlining of sectoral policies
(VC) funding and overall start-up ecosystem. and regulations.

Lastly, the enabling factors needed for With a focus on software exports and
domestic tech start-ups within the broader IT
digitalisation are wanting. At the one end,
sector, this Special Section is organized as
human capital constraints have begun to follows. The next section discusses trends in
emerge in the form of demand-supply gaps, Pakistan’s IT exports and start-ups space,
skill-mismatch and inadequate quality of followed by Pakistan’s comparison with
technical and soft skills. At the other end, regional and global players. Section S1.3
low levels of basic literacy and weaker levels discusses the above mentioned enabling
of digital literacy among population impairs factors that have supported IT exports and
absorptive capacity of technology. start-ups thus far but are far from being
adequate for digital transformation. The last
section summarizes key insights and
Similarly, despite recent gains digital emphasizes the importance of enabling
connectivity remains a challenge both in environment necessary for leapfrogging,
terms of access and usage as the cost of which necessitates whole-of-the-government
mobile phone devices and internet is higher approach given IT’s cross cutting nature.
in Pakistan compared to both advanced and
peer economies and thus a constraint to S1.2 Trends in Pakistan’s IT Exports
potential digital transformation. From the and Technology Start-ups
perspective of underlying enabling
technologies and frameworks such as cloud Pakistan’s IT exports and technology start-
computing, strong cybersecurity and ups have gained prominence in recent years.
interoperability, policy framework has The former, led by software and software-
started moving in the right direction. related services, grew at a CAGR of 24.4
However, in this regard, Pakistan is lagging percent between FY17 and FY22, whereas the
behind peer economies. latter rose significantly during the same
period, both in terms of deal count and in
Finance is another area that warrants terms of funding.
attention, from the perspective of limited
access to finance and fintech’s current level IT Exports – Software and Software Related
of penetration in the face of low mobile Services Leading the Way
money account ownership and the challenge
of low levels of financial literacy. And while In terms of export classification, IT is part of
the country needs to improve significantly on the larger ICT sector in Pakistan, which stood
e-government indicators to fast track at only $269 million in FY06 when reporting
digitalisation of economy that can increase of ICT exports began as per BPM6
the size of domestic market for software standard.13 It took more than 10 years before
firms and start-ups, digital transformation the country’s ICT exports was able to cross

13In line with Balance of Payments and International Investment Position Manual (BPM6), the
classification ‘ICT exports’ is divided into three broad sub-categories: Telecommunication Services;
Computer Services, and Information services. Each of these comprise different sub-categories that
correspond to different nature of transactions as per the Purpose Codes currently adopted by the SBP.

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Growth Trajectory of ICT & IT Figure S1.3 exports in FY22 with the rest of inflows
Services Exports stemming from Telecommunication Services
billion US$ category (including Call Centres) and a
3.0
negligible share of Information Services
(Figure S 1.4).
2.0

IT exports as classified under the category

1.0 Computer Services comprise five sub-sectors:
(a) Export of Computer Software; (b)
0.0 Software Consultancy Services; (c) Other
Computer Services; (d) Hardware
FY20
FY06

FY08

FY10

FY12

FY14

FY16

FY18

FY22

Consultancy Services; and (e) Maintenance

ICT exports IT exports and Repairs of Computers. Of these,
Source: State Bank of Pakistan
software and software related exports – i.e.
Exports of Computer Software and Software
the $1 billion mark in FY18. However, the Consultancy Services – have the largest share
pace of growth accelerated sharply since in Pakistan’s IT exports rising to 52 percent
then, with ICT exports crossing $2 billion by in FY22 from 32 percent in FY13, as a result
FY21 and $2.5 billion by FY22. (Figure S1.3). of an increase from $255 million to $1.4
The share of ICT exports in total service
billion during this period.
exports increased from 7.2 percent in FY06 to
37.7 percent in FY22 which makes it the
largest contributor of service exports. However, these official statistics do not fully
capture the share of software and software-
The growth in exports of Pakistan’s ICT related exports. By definition, the category
sector is mainly led by Computer Services (IT of Other Computer Services also includes a
exports), which contributed 80.5 percent (or host of unspecified hardware, software and
$2.1 billion) of Pakistan’s ICT services software related services, of which, industry

Breakdown of ICT Exports Figure S1.4

3.0 billion US$

2.0

1.0

0.0
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

Software consultancy services Other computer services Export of computer software

Telecom services Call centres Others*
*Others include Hardware Consultancy Services, Maintenance & Repair of Computers, Information Services
Source: State Bank of Pakistan

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State Bank of Pakistan Half Year Report 2022-23

Top 10 Exporters of Computer Figure S1.5 combination of these factors imply that total
Services - 2021 share of software and software-related
billion US$ percent exports in Pakistan’s IT exports may actually
250 35
28.8 be higher than what is reported as per official
200 28
150 21
classification.
100 11.5 14
7.5 6.6 4.7 Small Firms; Undiversified Markets
50 3.6 3.5 3.4 2.3 2.3 0.3 7
0 0
From the perspective of global trade, while
Singapore
USA

UK
China

France
Ireland

Germany
India

Israel
Netherlands

Pakistan
Pakistan’s share in global exports of
Computer Services remain small; it has
increased from 0.17 percent in 2017 to 0.3
Exports Share in global exports-rhs percent in 2021. (Figure S1.5) However,
Source: State Bank of Pakistan & International Trade analyses of Pakistan’s export markets and
Centre firm-wise exports point towards substantial
room for improvement.
estimates suggest, Pakistan mostly exports
software and software-related exports since In terms of export diversification, total IT
the country’s hardware industry is not as exports are concentrated to a few markets
developed as software industry. 14 Moreover, where the share of USA has averaged more
the official statistics of Other Computer than 55 percent between FY13-FY22 (Figure
Services also currently includes export S1.6). Moreover, while Pakistan’s exports to
proceeds ($265 million in FY22) from its top five destinations has increased slightly
Freelance of Computer and Information
Services, which is also estimated to include Pakistan's Share in Computer Table S1.1
software and software related consultancy Services Imports of its Top
exports by freelancers.15 Export Destinations
Ranking Top Exporters 2014 2021
Lastly, an additional $1.5 billion of IT 1 USA 0.7% 3.9%
(including software and software 2 Singapore 0.1% 0.4%
consultancy) and IT-enabled exports was 3 UK 0.4% 1.4%
estimated to be in the grey market in 2019, 4 Ireland 0.0% 0.4%
which as per current industry estimates may 5 UAE 9.6% 7.1%
have grown to $2.5 billion by FY22.16 The Source: State Bank of Pakistan and International
Trade Centre

14 SBP’s purpose codes for services export classification are currently based on sub-sectors that have large
inflows, and several hardware and software related services (identified in IMF’s BPM 6th Edition) that do
not have large export inflows are currently clubbed as Other Computer Services. The full list of services
included in other computer services may be reviewed at:
(www.imf.org/external/pubs/ft/bop/2007/pdf/bpm6.pdf page. 176-177 accessed on February 02, 2023)
15 Freelance of IT-enabled exports such as online tuitions, report writing and other services other than

those related to computer and information systems are reported in a separate category-(Chapter 10)
16 State Bank of Pakistan (2019). Special Section: Performance of ICT Exports of Pakistan, The State of

Pakistan’s Economy, First Quarterly Report 2018 – 2019, Karachi: SBP

142
 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Pakistan's Top 5 Export Destinations Figure S1.6

a. Export of Computer Software b. Other Computer Services c. Software Consultancy
billion US$ billion US$ Services
68 68 billion US$
68
51 51
51
34 34 34
17 17 17
0 0 0
UK

UAE
USA

Singapore

Canada

Singapore
USA

UAE

UK
Ireland

UAE
USA

UK
Ireland

Singapore
FY13 FY22

Source: State Bank of Pakistan

in recent years (Table S1.1), its export share Pakistan Export's Share in the Table S1.2
in the top importers of Computer Services Top Importers of Computer
remains negligible except for an increase in Services
the share of US imports (Table S1.2). This Ranking Top Importers 2014 2021
underscores the need to explore new and 1 Germany 0.0% 0.1%
other big markets. 2 USA 0.7% 3.9%
3 China 0.1% 0.1%*
Among the various reasons behind export
4 Singapore 0.1% 0.4%
market concentration is the existence of small
5 Japan 0.0% 0.0%
IT firms that do not have adequate means to
explore international markets, especially 6 France 0.0% 0.0%
non-traditional markets (i.e. markets other 7 Netherlands 0.0% 0.1%
than USA, UK, UAE) with which Pakistan 8 India 0.0% 0.0%
does not have strong commercial or 9 Belgium 0.0% 0.0%
historical ties.17 Analysis of firm-wise data 10 Sweden 0.0% 0.1%
shows that more than 80 percent of firms in * based on 2019 data
Pakistan export less than $0.1 million and Source: State Bank of Pakistan and International
more than 90 percent export less than $0.5 Trade Centre
million per year.18 In terms of percentage of
each of the major sub-categories of Computer
total receipts, relatively small firms
Services (Table S1.3).
contribute the most to total annual receipts in

17 Pakistan’s export market concentration is a structural issue affecting all sectors of the economy. The
reasons for this concentration includes low level of export competitiveness and product diversification,
and negligible investment in Research and Development (R&D) etc. (SBP website:
www.sbp.org.pk/publications/staff-notes/SN-2-17-Export-Prefor-Pak.pdf and SBP website:
www.sbp.org.pk/reports/annual/arFY16/Chapter-06.pdf)
18 NTN Reporting Firms.

143
State Bank of Pakistan Half Year Report 2022-23

Distribution of Firms by Size of Export Receipts - FY22 Table S1.3

Exports of Computer Software Software Consultancy Services Other Computer Services**
Exports No. of Cumulative No. of Cumulative No. of Cumulative
Proceeds
<0.1 Firms
769 (65) Proceeds
19 (4) Firms
3351 (80) Proceeds
69 (12) Firms
2185 (86) Proceeds
38 (16)
Ranges (millions US$) (millions US$) (millions US$)
0.1-0.5 237 (20) 56 (11) 643 (15) 143 (25) 281 (11) 60 (26)
(million US$)
0.5-1.0 84 (7) 59 (12) 124 (3) 85 (15) 32 (1) 22 (10)
1.0-5.0 69 (6) 146 (29) 84 (2) 156 (27) 32 (1) 56 (24)
5.0-10.0 8 (1) 50 (10) 5 (0) 32 (5) 2 (0) 15 (7)
10.0-50.0 7 (1) 120 (24) 5 (0) 97 (17) 1 (0) 40 (17)
>50 1 (0) 59 (12) 0 (0) 0 (0) 0 (0) 0 (0)
Total* 1,175 506 4,212 582 2,533 231
Figures in parentheses show percent of total. *The total may not match the official total figure as this figure
includes the export proceeds of only NTN Reporting Firms. A firm may be reporting exports in more than one
Soft information
category. suggests
** Excluding that
freelance the existence
proceeds of $265 million interventions to drive IT consumption by
ofSource:
small State
firms Bank of Pakistanmay be attributed
in Pakistan domestic businesses and individuals.
to a variety of factors including the nascent This is because large domestic demand
stage of domestic IT industry, the challenge enables the typically small software firms to
of access to finance, increasingly evident test their products, and gain competiveness,
human capital constraints, and insufficient scale and managerial capabilities, which
domestic demand. While these are discussed readies them for international competition.
in Section 3, it’s important to note that Even in India and Ireland, demand for
although IT has garnered attention from the software by quality conscious domestic
perspective of exports in Pakistan and in consumers, such as local multinational
other developing economies, domestic subsidiaries in financial and non-financial
software demand has an important role in sectors, served as conduit for many firms to
fostering IT industry. the export market. Moreover, India and
Ireland have recently started focusing on
While countries like India and Ireland – top domestic market digitalisation which
two global IT exporters – mainly benefitted includes plans for both increased usage of
from global demand, several other leading productivity-enhancing software by
software exporting countries, such as both domestic businesses and increased frontier
the earliest adopters of IT (Western European
technologies’ usage across the economy.19
countries, and the US), and late followers
(China, Brazil, Korea, and Russia) primarily
thrived on strong domestic demand. This Technology Start-ups
growth in domestic demand is partly
supported by increased usage of IT by the Pakistan’s start-up ecosystem is still nascent
government and government policy but evolving, having grown manifolds in the

19UNCTAD (2012). Information Economy Report: The Software Industry and Developing Countries, Geneva:
UNCTAD; R. Heeks and B. Nicholson (2011). Software export success factors and strategies in
“follower” nations, Competition & Change Journal, Vol. 8 No. 3, pp. 267-303; McKinsey Report (2019).
Digital India: Technology to transform a connected nation, New York: McKinsey & Company; Government of
Ireland website: (www.gov.ie/pdf/?file=https://assets.gov.ie/214584/fa3161da-aa9d-4b11-b160-
9cac3a6f6148.pdf#page=null); European Investment Bank Report (2019). The digitalisation of small and
medium enterprises in Ireland Models for financing digital projects, Luxembourg: EIB

144
 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

last seven years as measured by three key 2021, local start-ups raised about US$ 330 to
metrics: total funding raised by start-ups, US$ 362 million, compared to US$ 60 to US$
total number of deals or deal count, and 63 million in 2020. Similarly, the total
growing interest by international venture number of deals increased to 82-84 in 2021
capitalists and other investors. from 47 in 2020.

Local start-ups have raised roughly a total of Sectoral division of these inflows shows that
US$ 837 to US $ 872 million between e-commerce and fintech accounted for 71
2015 and 2022 with noticeable inflows percent of total funding between 2015-2022.
witnessed in the last couple of years. Of the Similarly, in terms of deal count, the e-
start-ups that closed deals between 2015- commerce and fintech sectors had a share of
2022, about 11.4 percent are now inactive, about 43 percent in total deals during 2015-
with the rest either acquired or active. In 22. On the contrary, during this period,
edtech, healthtech, agritech and foodtech
Deals & Fundings - Pakistan's Figure S1.7 cumulatively attracted only 9.4 and
Startups 22.2 percent of the funding and deal count,
440 million US$ number 80 respectively.20, 21 These indicators suggest
that start-up activity is not widespread
330 60 across different sectors, particularly those
220 40 where digital transformation can have a large
positive spillover (Figure S1.7).22
110 20

0 0 Nevertheless, international players have

2015 2016 2017 2018 2019 2020 2021 2022 started investing in Pakistan’s start-up
Others
Healthtech ecosystem in recent years. For instance,
Transport/Logistics Kleiner Perkins, an American venture capital
Fintech
E-commerce firm and one of the investors in notable
Undisclosed Deals* - rhs companies like Google, Amazon, and
Disclosed Deals - rhs Twitter, made its first investment in Pakistan
* for the undisclosed deals the amount is not disclosed.
Note: The total number of deals and funding may not in 2021.23 Similarly, Sequoia Capital, which
match from different sources because of differences in partnered with companies like Instagram,
classifications and cateogrisaiton of the startups and Airbnb, Apple, and Zoom, also entered
deals. Hence, the data is indicative and not exhaustive.
Source: Data Darbar

20 Deal count includes disclosed and undisclosed deals.

21 Estimates are based on the deal flow tracker by Invest2Innovate and Data Darbar. The data is reported
on calendar year basis; data prior to CY15 is incomplete and inconsistent. Start-up-related statistics, in
general, and the funding and deal count numbers, in particular, used in this section are indicative, and
figures from different sources may vary. This variation originates from the differences in the classification
and categorisation of the deals.
22 Ignite (2023), Study for Assessment of Pakistan’s Startup Ecosystem
23 Kleiner Perkins (www.kleinerperkins.com/partnerships/alumni [accessed on December 1, 2022] and

www.kleinerperkins.com/perspectives/Tajir-new-funding/, [accessed on November 27, 2022]

145
State Bank of Pakistan Half Year Report 2022-23

Total Number of Unicorns Figure S1.8 Pakistan’s Start-ups in Global Landscape

Created (2010-2022)
Pakistan’s start-up funding growth in 2021
Others,
Indonesia, 10 353 was in line with global funding boom. In
Turkiye, 3 2021, total venture funding worldwide rose
Malaysia, 2 by 114.5 percent to reach US$ 638.4 billion, as
Nigeria, 2
Egypt, 1 UK, 66 Unicorns United
compared to 14.8 percent growth in 2020. 27
States, Despite significant progress, Pakistan’s start-
India,
108 865 up ecosystem is still small compared to
global leaders, and also lags behind regional
China, players in multiple indicators.
224

For instance, India, with approximately more

than 100 unicorns, is currently third in the
Source: Traxcn
list of countries with the most unicorns
Pakistan’s start-up ecosystem.24 Y (Figure S1.8).28 Likewise, other countries
Combinator, an American accelerator that Funding and Deal Count (2022) Figure S1.9
helps start-ups grow and includes alums like
Dropbox and Stripe, has also been involved 2,000 million US$
in different Pakistani start-ups. 1,600 Turkiye
UAE
Further, other local and international firms, 1,200
such as Pakistan’s Habib Bank Limited Saudi Arabia
800 Nigeria
(HBL) and Brazil’s Nubank, one of the Kenya
Egypt
largest digital banks in the world, have also 400
funded local start-ups.25 Foreign start-ups 0 Pakistan
South Africa
are also attracted to Pakistan’s market; for 0 100 200 300
instance, in 2021, Trella, a trucking and Number of Deals
logistics start-up from Egypt, started its Note: Size of bubbles represents share in total funding
operations in Pakistan.26 raised in Middle East, Africa, Turkiye and Pakistan
Source: Emerging Venture Markets Report, Magnitt

24 Sequoia Capital (www.sequoiacap.com/our-companies/#spotlight-panel accessed on December 1,

2022) and Bloomberg (www.bloomberg.com/news/articles/2022-07-28/sequoia-enters-pakistan-s-start-
up-economy-by-backing-fintech?leadSource=uverify%20wall [accessed on December 1, 2022])
25 HBL (www.hbl.com/news-and-media/hbl-inks-landmark-investment-in-finja-pakistans-leading-

digital-sme-lending-fintech, accessed on January 10, 2023 and TechCrunch

(www.techcrunch.com/2022/07/27/sequoia-kleiner-perkins-nubank-invest-in-pakistan-fintech-dbank/,
accessed on January 10, 2023)
26 Trella (www.blog.trella.app/expansion/trella-in-pakistan-the-land-of-trucking-opportunity/ accessed

on 26 Nov 2022) and Innvest2Innovate (i2i) (2021). Pakistan Start-up Ecosystem Report (PSER) 2021.
Islamabad: i2i
27 CB Insights (2022). State of Venture. New York: CB Insights.
28 Source: Traxcn (www.tracxn.com/d/unicorn-corner/unicornlist, accessed on January 25, 2022).

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

with population trends similar to Pakistan populous countries not to have produced a
have also produced their first unicorns. For local unicorn by 2022.29
instance, Indonesia had its first unicorn in
2016 and had produced approximately ten Further, funding in Pakistan’s ecosystem is
such companies by 2022. Nigeria, which also still very small when compared with global
features in the top ten populous countries leaders in the start-up space. For instance, of
list, had its first unicorn in 2019. In the disclosed deals during 2015-2022, local
comparison, Pakistan and Bangladesh are the start-ups raised roughly US$ 831 to US$ 872
only countries from the list of top ten million.30 In contrast, total funding of US$
136 billion, US$ 837 billion, and US$ 2.7
trillion were raised by the start-ups in India,
Global Startup Ecosystem Index Table S1.4 China, and the USA respectively in the 2014-
2022 2022 period.31 Pakistan's funding level is also
Highest Total No. not yet at par with other emerging regional
Country
Country Ranked of Featured
Ranking
City Cities
players. Of the US$ 7.2 billion raised in 2022
San in the Middle East, Africa, Pakistan, and
United
States
1 Francisco 257 Turkiye, the country's share was only 4.4
Bay (1st) percent of total funding (Figure S1.9).32 In
Bangalore
India 19
(8th)
38 case of African countries, Nigeria, Egypt,
Jakarta Kenya and South Africa take up majority of
Indonesia 38 5
(32nd) tech investment in Africa owing mainly due
Istanbul to favorable ecosystems in their major cities
Turkey 46 4
(66th)
Lagos
amid growing presence of fintech.33
Nigeria 61 3 In comparison to Pakistan, these African
(81st)
Kenya 62
Nairobi
2
economies had better ranking in Global Start-
(163rd) up Ecosystem Index 2022 (Table S1.4). The
Cairo
Egypt 65
(160th)
1 index ranks 1000 cities in 100 countries on a
Karachi host of criteria including the number of
Pakistan 76 3
(291st) incubators, exits; and a mix of business and
Dhaka economic indicators. None of the cities in
Bangladesh 93 1
(326th)
Pakistan featured in the top 100 ecosystems
Total Countries = 100; Total Cities = 1000
in the world. In contrast, India’s Bangalore is
Source: Startup Blink

Note: The total number of unicorns may vary from different sources.
29 ibid
30 Estimates based on deal flow compiled by Invest2Innovate and Data Darbar.
31 Inc42 (2022). Indian Tech Start-up Funding Report 2022. New Delhi: Inc42; The variation in the

comparable period ( i.e., 2015-22 for Pakistan and 2014-22 for other countries) is because the data used is
from different sources. As highlighted above, in general, the datasets used to analyse the start-up space
are indicative.
32 Magnitt (2023). Venture Investment Report. Emerging Venture Markets Report. Dubai: Magnitt
33 A. Dushime (2022). “These four countries are leading Africa’s start-up scene — here's why” Geneva:

World Economic Forum. (www.weforum.org/agenda/2022/08/africa-start-up-nigeria-egypt-kenya-

south-africa/, [accessed on March 03,2023])

147
State Bank of Pakistan Half Year Report 2022-23

ranked 8th, with four other ecosystems from 19, the pandemic increased the pace of
the country are also ranked in the top 100 growth to a CAGR of 24 percent between
list. Similarly, Jakarta, Istanbul and Lagos FY20-FY22 compared to 14 percent in the
also feature in top 100 ecosystems. The preceding five years.
highest-ranked ecosystem from Pakistan is
Karachi, with a rank of 291, followed by Tech start-ups also saw pronounced increase
Lahore (305) and Islamabad (438).34 in the pace of growth after Covid. As
highlighted in earlier section, start-up
Similarly, Pakistan ranked 97th out of 113 funding in Pakistan witnessed
countries in the Asian Development Bank’s unprecedented growth in the post-Covid
Index of Digital Entrepreneurship Systems period. The global shift towards virtual
(AIDES) 2021 that tracks various aspects of meetings facilitated this, which allowed
digitalisation of economy and society, such Pakistani founders to pitch remotely to
as market conditions, physical infrastructure global investors. Also, as Pakistan was one
and policy and institutional support. While of the largest untapped markets, global
Pakistan’s rank is better than Nigeria (101st) funding activity in the country increased.38
on AIDES; it lags behind India (75th), Egypt
(73rd) and Indonesia (71st).35 While Covid-19 provided an unexpected
impetus to growth, a host of other factors
S1.3 Assessment of Drivers and such as Pakistan's large population,
Enabling Factors increased adoption of digital modes, and
favorable regulatory developments also
The onset of Covid-19 provided a unique explain the recent trends in software exports
opportunity for businesses offering digital and start-ups. However, as the ensuing
services as consumer habits changed from discussion shows the country’s overall
offline to online.36 Measures such as social economic and sectoral policy environment
distancing, lockdowns, and working from needs to improve to enable leapfrogging via
home, led to wider adoption of e-commerce, digital transformation.
digital payments, and online modes of
communication, while fast-tracking the Market Size
overall digitalisation of economies across the
Pakistan is the fifth most populous country
world. As a result, while total global services
in the world, with 72 percent of the
exports contracted by 17 percent year-on-
population less than or equal to 34 years of
year in 2020, IT service exports continued to
age.39 This serves as an advantage for the
grow.37 In Pakistan too, while the country’s
tech-centric start-ups in the country as
IT exports had been growing prior to Covid-
young people are generally early adopters of

34 Source: Startup Blink (www.startupblink.com/)

35 E. Autio, E. Komlosi, L. Szerb, and M. Tiszberger (2021). Asian Index of Digital Entrepreneurship
Systems 2021. Background Paper. Manila: ADB
36 Invest2innovate (2021). Pakistan Start-up Ecosystem Report (PSER) 2021. Islamabad: i2i
37 Source: World Bank and International Trade Centre
38 Invest2innovate (2021). Pakistan Start-up Ecosystem Report 2021. Islamabad: i2i
39 Source: UN Population Division, World Population Prospects 2022.

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

technology. For instance, the percentage of

A.T. Kearney GSLI 2021 Figure S1.10
adults who own a smartphone is generally score
higher in the 18-34 age group compared to Singapore
those above 50 years of age in emerging and UAE
Turkiye
advanced economies.40 Thailand
Malaysia
In addition to population, growing middle Egypt
Sri lanka
class and income levels have a positive Bangladesh
impact on the start-up landscape in the Vietnam
Pakistan
country.41 Although Pakistan's GDP per Indonesia
capita income is lower than peer countries, it Philippines
has risen from US$ 531 in 2000 to US$ 1,282 China
in 2015, reaching US$ 1,505 in 2021.42 The 0 1 2 3 4 5
Financial Attractiveness
country was the 15th largest consumer People Skills and Availability
market in 2020 and is expected to become the Source: A.T. Kearney Global
seventh-largest by 2030.43 This collectively
serves as an opportunity for start-ups to cognitive abilities whose impact is not fully
foster as domestic consumption grows in the reversible.44 Other constraining factors
country; and hence attracts the attention of include Pakistan’s recurring balance of
venture capitalists. payment crisis, boom-bust cycles of
economic growth and overall
However, several factors present a challenge macroeconomic instability; as well as low
to the prospects of digitalisation in general female labour force participation that can
and growth of start-ups in particular, given impair the country’s absorptive capacity.
their detrimental impact on purchasing
power and the addressable market size. For Human Capital
instance, the potential of Pakistan's
increasing working age population may be As per some estimates, Pakistan has supply
limited by a substantially low level of literacy of 20,000 – 25,000 fresh engineering and IT
and a high prevalence of stunting that affects

40 PEW Research Center (www.pewresearch.org/global/2019/02/05/smartphone-ownership-is-growing-

rapidly-around-the-world-but-not-always-equally/)
41 A. Syed and A. Bokhari (2019). Starting up: Unlocking Entrepreneurship in Pakistan. New York: McKinsey

& Company
42 Data are in current U.S. dollars. Source: World Bank [accessed on February 28, 2023]
43 H. Kharas and W. Fengler (2021). Which will be the top 30 consumer markets of this decade? 5 Asian markets

below the radar. Brookings Institution Blog. Available at www.brookings.edu/blog/future-

development/2021/08/31/which-will-be-the-top-30-consumer-markets-of-this-decade-5-asian-markets-
below-the-radar/, accessed on December 22, 2022.
44 An estimated 54 percent of working-age population in 2031 will be illiterate or have only primary level

education, whereas 27 percent of the working age population in 2033 is estimated to be those who
suffered from stunting in childhood years. Details in Chapter 7, The Promise of Pakistan’s Demographic
Dividend?, State Bank of Pakistan Annual Report 2021-2022.

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State Bank of Pakistan Half Year Report 2022-23

How Easy or Difficult is Hiring Figure S1.11a Why is Hiring Skilled Employees Figure S1.11b
Skilled Employees? Difficult?
percent percent
Lack of required technical
5 skill 5
7
Demand high salaries
4 7
1 = very difficult
5 = not difficult;

Applicants prefer 41
3 bigger/established firms
13
Lack of social skills
2
Demand high fringe
1 benefits 22
Other
0 10 20 30 40

Source: SBP Startups Survey 2022-2023 (unpublished)

graduates every year.45 So far this has inadequately educated workforce as the
provided a stable base and supported the second biggest challenge after political
growth in software exports and start-up instability; 22 percent of these firms report
industry.46 Moreover, IT sector wages in the workforce as a major problem, the most by
country are at par with peer economies, as any other sector.47 This resonates with the
indicated by the financial attractiveness SBP’s forthcoming survey on start-ups whose
component of Kearney’s Global Service preliminary results show that majority of IT
Location Index. This is representative of the firms face high level of difficulty in hiring
relatively favorable wage rates in Pakistan skilled employees (Figure S1.11a). In part,
compared to those in more established this is because IT firms, being typically small
destinations such as Singapore and China. and nascent, also find it difficult to pay high
(Figure S1.10). However, evidence suggests salaries, perks or otherwise compete in terms
that the country has started to face human of employees’ choice with bigger and
capital constraints in IT sector which, if left established companies that are mostly found
unaddressed, will hamper future growth in in the traditional non-IT sector (Figure
the industry. S1.11b).

Skilled human resource is a challenge for all Considering the estimates of over 40,000 new
sectors of the economy in Pakistan. However, job openings in just 140 companies in 2021,
of all the major problems faced by businesses the shortage of skilled resources in Pakistan
in the country, IT related firms report is considered to be biggest bottleneck in

45 These numbers are not annually reported but are rather rough estimates quoted widely by public and
private sector organisations (including Ministry of Information Technology and Telecommunication and
Pakistan Software House Association.) This underscores the need for periodic estimates of the supply of
labour in the fast-evolving industry of increasing importance.
46 World Bank Report (2020). Pakistan Economic Policy for Export Competitiveness; Digital Pakistan: A Business

and Trade Assessment; Pakistan Software Export Board. Washington DC: World Bank
47 World Bank Report (2019). Pakistan: Skills Assessment for Economic Growth, Washington DC: World Bank

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Digital Skills Gap Index - Selected Countries Figure S1.12

score Overall Score
9

Research Intensity 6 Digital Skills Institutions

0
Data Ethics & Integrity Digital Responsiveness

Supply, Demand & Competitiveness Government Support

Singapore Pakistan Malaysia India

Source: Wiley Digital Skills Gap Index, 2021

achieving the desired growth in software improve skills required for a growing wave
exports and tech start-ups. Moreover, the of frontier technologies such as AI, robotics,
adequacy and quality of skills in the trained and IoTs. With a rank of 146 out of 158
workforce is also a stumbling block. Only 10 countries, the country scores 0.09 out of 1 in
percent of the IT graduates are employable, the skills component of UNCTAD’s Frontier
given different levels of weaknesses in both Technology Readiness index 2019 compared
technical as well as soft skills; soft skills to Indonesia’s score of 0.28, India’s 0.31,
include marketing, social skills, problem Nigeria’s 0.33, Egypt’s 0.45 and Malaysia’s
solving or critical thinking, entrepreneurship 0.46.49
mindset, and English language proficiency
needed to engage international buyers or These gaps need to be addressed if Pakistan
investors as the case may be.48 is to grow its IT exports and fast track
digitalisation. Indeed, labour input has been
These challenges exist mainly because of a the most important factor behind growth in
large industry-academia divide and other IT exports of leading exporters like India and
institutional gaps as also reflected in Ireland.50 One obvious solution is to
Pakistan’s performance on various metrics of significantly increase the number, and
digital skills (Figure S1.12) including employability, of university graduates to be
performance of digital skills educational able to drive export growth and
institutions, and supply, demand and digitalisation of domestic economy alongside
competitiveness aspects. In addition to consistent wide ranging improvements in the
improvements in skills for existing quality of their skills. However, since
technologies, investments are also needed to university education takes a long time, there

48 PASHA (2022). The Great Divide: The Industry – Academia Skill Gap Report, Karachi: P@sha
49 UNCTAD (2019). Frontier Technology Readiness Index, Geneva: Switzerland
50
R. Heeks and B. Nicholson (2011). Software export success factors and strategies in “follower” nations,
Competition & Change Journal, Vol. 8 No. 3, pp. 267-303

151
State Bank of Pakistan Half Year Report 2022-23

is a need to scale up ongoing interim these firms are typically young, and without
solutions being offered by the public and large parcels of land or plants that could be
private sector.51 These include on-site and used as collateral.55 Accordingly, the absence
off-site IT skill bootcamps and other skills of collateral affects software export growth
development programmes, such as train-the- prospects since IT firms do not necessarily
trainer modules and training via social- have the working capital needed to meet
media platforms, to quickly address the skill export orders, nor a collateral to avail
gap in specific IT related skills including data financing under Export Financing Schemes.
analytics, cloud computing, coding, software One exception was the currently suspended
development and app design.52 SME Asaan Finance which is sector-agnostic
concessionary financing provided to SMEs in
To this end, top-tier global bootcamp which loans maybe secured against personal
companies may be invited to set up camps guarantees.56
across the country under various forms of
public-private-partnership models. In the case of start-ups, non-bank means of
Considering that male staff comprise more financing, such as venture capital, plays a
than 90 percent of IT sector’s human much more important role. This is because
resources, there is a need to focus these the prospects of start-ups are untested, given
efforts on females as well to reduce the
gender gap.53 Lastly, to incentivize employee Venture Funding Per Capita in Figure S1.13
training and to increase attractiveness of IT Selected Countries*
sector in terms of employee choice, fiscal US$
60
incentives may be offered on employee stock
options in line with international best 45 50
42
practices.54 30
29 29
15 20 6
Access to Finance and Investor Funding 4 1 1
0
Russia

Nigeria
Japan

Bangladesh
Brazil

Mexico

India

Pakistan
China

Access to credit in Pakistan, one of the lowest

among emerging markets, is rather limited
due to a host of demand and supply side
challenges including lack of collateral. For *Investment totals are for the 12 months ending October,
technology companies (software oriented or 2021
otherwise) it is even more difficult since Source: Crunchbase

51 These include Ignite’s DigiSkills Program, and various skills development training program by Pakistan
Software Export Promotion Board and provincial IT boards
52 Bootcamps refer to short, often 3-6 month, high-intensity, immersive training
53 PASHA (2021). Pakistan IT Skills Survey Report. Islamabad: PASHA
54 Ignite-National Technology Fund (2021). Study for Assessment of Pakistan’s Start-up Ecosystem &

Freelancing Ecosystems
55 For weak private sector credit penetration in Pakistan, see, Chapter 7, Understanding Low Private Credit

Penetration in Pakistan Contextualizing Recent Policy Reforms in the SBP’s FY20 Annual Report on the State
of Pakistan’s Economy Report.
56 Source. State Bank of Pakistan (www.sbp.org.pk/smefd/circulars/2021/C9.htm)

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

the innovative nature of the business- that

Funding by Type of Rounds Figure S1.14
founders have to develop, launch, and then
300 million US$ number 120 scale. As discussed in Section 2, start-up
90
funding has increased in recent years.
200 However, despite recent high growth in
60 start-up funding, venture funding per capita
100 in the country is small at approximately US$
30
1 (Figure S1.13).
0 0
Angel

Series A

Series B
Pre-Seed

Series C
Seed
Accelerator

Pre-Series A

In addition, funding breakdown shows that

angel rounds are scarce in Pakistan, which is
a constraint to new start-up formation.57 In a
Funding Undisclosed deals-rhs growing start-up ecosystem, young firms in
Disclosed deals-rhs need of angel or pre-seed investments are
Note: Deals classified as convertible notes, corporate generally greater in number than the
investments, and with the "undisclosed" round type are not
included in the figure. However, the mentioned rounds may relatively large firms that are looking to raise
contain the deals whose amount was not disclosed. Series A funding and beyond, since several
Accelerator: funding from accelerator programs (generally,
accelerators focus on early-stage and growth-driven startups and firms die in the process between ideation and
provide mentorship as well) relative maturity. In light of this, the fact that
Angel: typically, an early-stage funding round conducted by
angels (high-net-worth individuals)
only 65 of total 270 deals were classified as
Pre-seed: funding at the early or ideation stage angel round and pre-seed round in Pakistan
Seed: generally referred to as the first formal round; at this stage, between 2015 and 2022 indicates that even
companies have a minimal viable product with a better
understanding of the market and low to no revenue. when start-ups saw heightened interest,
Pre-series A: a mid-round between seed and series A investor focus on start- ups at ideation or
Series A: first formal round of venture funding; startups at this
stage generally grow revenue, expanding teams and customers. initial stages was low compared to those that
Series B: Typically succeeds Series A, with startups focusing on graduated out of angel phase to seed phase
scaling and exploring new markets.
Series C and Beyond: Late-stage rounds with companies
and beyond (Figure S1.14).
showing success.
Note: The definition of terminologies about startups is evolving. On the other hand, while seed stage funding
For instance, pre-seed was earlier considered a pre-institutional
round, but now with VCs investing at this stage, it is also is the highest in Pakistan, late-stage funding
becoming a formal round. has not witnessed large number of deals thus
Source: Data is from Data Darbar and definitions are from
various sources including Pitchbook and Crunchbase. far. Only two rounds, of US$ 6.5 million in
2015 and US$ 20 million in 2016, were
classified as Series C.58 Likewise, only seven

57 Angels are high-net-worth individuals who usually invest in a start-up's early phase and may also play
the role of mentor for founders and facilitator for subsequent rounds. Financing by angels is crucial as it
positively impacts the growth trajectory and survival rate of the start-ups they invest in regardless of the
external environment for entrepreneurs in a country. Source: J. Lerner, A. Schoar, S. Sokolinski and K.
Wilson (2015). The Globalization of Angel Investments: Evidence across Countries. NBER Working Paper
Series, W. P. No. 21808. Cambridge, Massachusetts: National Bureau of Economic Research.
58 Source: Crunchbase, available at www.crunchbase.com/funding_round/zameen-com-series-c--

c0e336e5 and www.crunchbase.com/organization/rozee-pk/company_financials accessed on January 22,

2023.

153
State Bank of Pakistan Half Year Report 2022-23

rounds are classified as Series B, with one in offices by local business groups is very low
2008 and two in every year since 2020.59 A in Pakistan; for instance, in India, there are
similar trend can be witnessed in the exit rate 2600 family offices while in Pakistan, less
of start-ups in the country.60 In the last five than 1 percent of that. In addition, the
years, there have been eight exits in the number of impact investors in the country
ecosystem, with 6 of them in 2022.61 For are also very few, which presents a big
comparison, Turkiye's ecosystem recorded 31 challenge for social enterprise and impact
exits in 2022, and India, a larger ecosystem, startups to raise capital since.66
recorded 240 mergers and acquisitions in
2022.62 However, as start-ups in the country To improve financing conditions in the
mature, Pakistan’s ecosystem may witness an country, a host of measures may be
increase in exits and late stage funding as considered. These include the introduction
well; this may increase confidence of local of bank lending based on Intellectual
and international VCs to invest further. Property Rights, cash-flows, or other
alternative means of collateral such as
Moreover, the start-up funding in Pakistan is reputational collateral based on credit scores
led by foreign investors.63 For instance, in for technology firms, particularly software-
2021, local VC investments amounted to oriented firms.67 To this end, enabling
approximately 10 percent of the international legislation and regulations may also be
VC investments during the year.64 Soft introduced for technology firms. For
information suggests that this is mainly instance, Italy introduced Start-up Act in
because local investors, including high net 2012, which offered tax incentives for equity
worth individuals, family houses and VCs, investors, fundraising through equity
do not have large fund size, neither do they crowdfunding campaign, and public
have the risk appetite and the long term guarantee on loans to start-ups provided by
patient investment mindset that is financial institutions. Similarly, under
characteristic feature of investments in start- Senegal’s Start-up Act in 2019, the
ups.65 The number of family investment

59 Source: Data Darbar

60 A start-up exit refers to the sale of partial or full stake by founder and early investors; exit transactions
usually happen after several rounds of funding and may take the shape of mergers, acquisitions, or listing
at the stock market. An exit in start-up ecosystem is seen as a sign of success of a firm whose previously
untested business idea has finally been validated by the market.
61 Magnitt (2023). Venture Investment Report. Emerging Venture Markets Report. Dubai: Magnitt
62 Inc42 (2022). Indian Tech Start-up Funding Report 2022. New Delhi: Inc42.
63 SECP (2022). A Diagnostic Review of Pakistan’s Private Funds Industry. Islamabad: SECP
64 Invest2innovate (2021). Pakistan Start-up Ecosystem Report 2021. Islamabad: i2i
65 McKinsey & Company (2019). Starting up: Unlocking Entrepreneurship in Pakistan. New York: McKinsey

& Company
66
Ignite (2023), Study for Assessment of Pakistan’s Startup Ecosystem
67 Source: Ignite – National Technology Fund, Policy Recommendations for Promotion of Start-ups in

Pakistan; Special Section – Private Credit Bureaus in Pakistan – Enhancing Credit Penetration by Addressing
Information Asymmetries in Third Quarterly Report of the Board of Directors of the State Bank of Pakistan
on the State of the Economy for the Year 2020-21.

154
 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

government guarantee on loans are provided and IT-enabled firms at the GEM Board by
to start-ups by financial institutions.68 providing financial and technical assistance
for listing is a promising development. 70 In
The stock market may also have to be addition to the GEM, a venture exchange
developed to facilitate exits and late-stage may be created as a venture capital market
funding. While raising capital through the place for over the counter trading of unlisted
stock market is not a natural route for tech shares of emerging and innovative
start-ups in the country, neither for funding companies.
nor exit, as it may not offer the same
valuation level as venture funding, the Fintech as an Enabler of Digitalisation
Growth Enterprise Market (GEM) Board of
Technology-led advances and innovation in
Pakistan Stock Exchange (PSX) offers a
financial services (fintech) is transforming
potential opportunity for relatively mature
the financial ecosystem in different ways. It
software exporting companies and other
is contributing to increase in financial
start-ups.69
inclusion and economic growth as well as
narrowing the digital access gaps. This is
To this end, the MOU between PSX and done by unbundling of financial services,
Pakistan Software Export Board (PSEB) to increased customization of services, lowering
mutually facilitate the listing of up to 40 IT the cost of services, and reduction in

Payment Systems Figure S1.15

Payment cards, mobile, internet & E-commerce merchants & POS
E-banking
active branchless banking account machines
2,000 million trillion Rupees 200 48 millions 8
thousands thousands
120
Thousands

1,500 160 32 6 80
120 4
1,000 16 2 40
80
0 0
500 40 0
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-16

Dec-17

Dec-18

Dec-19
Dec-20

Dec-21

Dec-22

0 0
CY17
CY18
CY19
CY20
CY21
CY22

No. of mobile phone banking users No. of registered eCommerce

No. of ebanking transactions No. of internet banking users merchants
Debit and credit cards No. of point of sale (POS) machines -
Value of ebanking transactions - rhs
No. of branchless banking active a/c rhs

Source: Easy Data, State Bank of Pakistan

68 A. A. Ghanghro (2020). Legal Framework for Start-ups in Pakistan. Islamabad: Karandaaz

69 For instance, the average funding raised in 37 IPOs between FY15-22 was approximately US$ 14.7
million, compared to an average of US$ 32.9 million raised in the six Series B rounds in 2015-2022. Source:
SECP 2021. Annaul Report 2021. Islamabad: SECP; SECP 2022. Annaul Report 2022. Islamabad: SECP; and
Data Darbar.
70 Pakistan Stock Exchange (www.psx.com.pk/psx/files/?file=162113-1.pdf, accessed on February 17,

2022.)

155
State Bank of Pakistan Half Year Report 2022-23

information asymmetries.71 In addition, Banking Interoperability, and more recently,

fintechs’ role in enabling payments for other Regulations for Electronic Money Institutions
start-ups- such as e-commerce and e-health (EMI) through which the SBP provided a
companies- implies that fintechs have an framework for non-banking entities to offer
essential role in fostering the digitalisation of digital payment instruments like wallets and
the economy. contactless payment.73 The SBP also
introduced RAAST, an instant payment
In Pakistan, digital payments have gained gateway, and Licensing and Regulatory
traction in recent years with improvements Framework for Digital Banks in Pakistan74,
in payment infrastructure. The number of e- under which NOCs to five applicants have
banking transactions nearly doubled been issued.75
between CY17 and CY21. The number of
branchless banking active accounts have also Despite this growth, there is substantial
outpaced total debit and credit cards, which room for fintech development both in terms
shows the potential of technology in fast of breadth and depth. For instance, Pakistan
tracking financial inclusion (Figure S1.15).72 is far behind peer economies when it comes
to using mobile phone or the internet to
While Covid-induced restrictions amid check account balances, which is a basic
growing internet penetration led to increased service. The overall account ownership as
use of internet and digital payments for well as mobile money account ownership is
various activities, a host of policy efforts also low compared to regional averages and
already had been driving these trends prior income groups (Figure S1.16). Pakistan’s
to Covid. These include National Payment low rank, 116 out of 152 nations, in
Systems Strategy for digital payments, UNCTAD’s Business-to-Consumer E-
Branchless Banking Regulations, Rules for commerce Index, 2020, also points in the
Payment System Operators and Payment same direction.76 This is in part due to
Service Providers, Regulations for Mobile relatively high cost of internet connectivity

71 Y. W. Tok and D. Heng (2022). Fintech: Financial Inclusion or Exclusion? IMF Working Paper no.
WP/2022/080. Washington D.C.: IMF; T. Beck (2020). Fintech and Financial Inclusion: Opportunities and
Pitfalls. ADBI Working Paper 1165. Tokyo: Asian Development Bank Institute.; E. Feyen, J. Frost, L.
Gambacorta, H. Natarajan and M. Saal (2021). Fintech and the Digital Transformation of Financial Services:
Implications for Market Structure and Public Policy BIS Papers No 117; X. Zhang, Y. Tan, Z. Hu, C. Wang, G.
Wan (2020). “The Trickle-down Effect of Fintech Development: From the Perspective of Urbanization”
China & World Economy Vol. 28, Issue 1, pages 23-40.
72 Data for Mar-22 is provisional. Source: SBP Easy Data
73 SBP (www.sbp.org.pk/ps/PDF/NPSS.pdf; www.sbp.org.pk/bprd/2019/C10-Branchless-Banking-

Regulations.pdf; www.sbp.org.pk/psd/2014/C3-Annex.pdf; www.sbp.org.pk/bprd/2016/C3-Annx-

A.pdf; www.sbp.org.pk/psd/2019/C1-Annex-A.pdf, [accessed on March 24, 2023])
74 SBP (www.sbp.org.pk/bprd/2008/annex_c2.pdf,); (www.sbp.org.pk/psd/2014/C3-Annex.pdf);

(www.sbp.org.pk/bprd/2016/C3-Annx-A.pdf); (www.sbp.org.pk/PS/PDF/List-of-EMIs.pdf);
(www.sbp.org.pk/dfs/Digital-Bank-Regulatory.html) accessed on February 20, 2023
75
Source State Bank of Pakistan (www.sbp.org.pk/press/2023/Pr1-13-Jan-2023.pdf)
76 For details, see www.unctad.org/system/files/official-document/tn_unctad_ict4d17_en.pdf, accessed

on March 21, 2023.

156
 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Selected Indicators From Findex - Figure S1.16 On the supply side, there is a limited supply
2021 of skilled human resources who understand
percent of age 15+
100 technology and finance to the degree that
80 they can create innovative solutions,
60
particularly targeting the financially
40
20
excluded segments.79 An underdeveloped
0 credit reporting system, marked by
Account Used mobile Mobile money incomplete and insufficient pool of credit
phone/internet to account information available with the credit
check account
balance bureaus, is also a stumbling block in this
Upper middle income East Asia & Pacific regard.80
Middle income South Asia
Lower middle income Sub-Saharan Africa
From the perspective of depth, the funding
Low income Pakistan
Source: The Global Findex Database, World Bank
trend suggests that the country’s fintech
industry is mainly concentrated in payments,
and affordability of mobile devices.77 and credit and financing. Relatively few
Moreover, on the demand side, financial startups are operating in the field of
literacy is a significant challenge, with only insurance, investment and savings, and other
14.3 percent of the country’s adult facets of financial sector development where
population considered financially literate.78

Mobile Cellular Subscribers and Figure S1.17a Total Broadband Subscribers Figure S1.17b
Mobile Data Usage and Penetration Rate
millions million GBs 12,000 millions percent
300 150 58

200 8,000 110 42

100 4,000 70 26

0 0 30 10
2017-18

2018-19

2019-20

2020-21

2021-22

2017-18

2018-19

2019-20

2020-21

2021-22

Annual mobile cellular subscribers

Broadband subscribers
Mobile data usage - rhs Total Broadband penetration - rhs
Source: Pakistan Telecommunication Authority

77 I. Khan and K. H. Jaffar (2021). Searching for the Binding Constraint to Digital Financial Inclusion in
Pakistan: A Decision Tree Approach. CGD Policy Paper 218. Washington, DC: Center for Global
Development.
78 M. Termezy and H. Razi (2021). Fintech Ecosystem of Pakistan, Landscape Study. Islamabd: Karandaaz

Pakistan
79 Ibid
80 Special Section: Private Credit Bureaus in Pakistan - Enhancing Credit Penetration by Addressing

Information Asymmetries in the State of Pakistan's Economy - Third Quarterly Report 2020-21

157
State Bank of Pakistan Half Year Report 2022-23

large and swift improvements are needed in start-up in the education or health sector
Pakistan. would generally reach the final user and
receive payments for their service digitally,
To advance the fintech industry, it is all of which are enabled by the ICT
important to encourage tech-based financial infrastructure. Likewise, better access to
literacy initiatives tailored for different affordable ICT infrastructure also enables IT
segments of society. For instance, under services exports.
National Financial Literacy Program for
Youth, an e-learning game, PomPak, was However, despite these developments,
launched focused on children and youth. 81 Pakistan’s digital connectivity indicators still
Further, digitisation of civil registries; remains rather low – both in terms of access
development of credit reporting systems, and usage – which is a constraint to the
fintech-focused courses and university prospects of sustained growth in IT, and IT-
programs; and availability of enabling enabled exports as well as digitalisation of
technology factors, such as cloud storage and domestic economy (Figure S1.18). This in
computing, cyber security mechanisms and part is because the cost of mobile devices, as
interoperability, are also needed to bring well as fixed and mobile broadband prices
about digital transformation in the country. are noticeably high in Pakistan (Figures
S1.19 & S1.20).
Digital Connectivity and Affordability
Moreover, the speed of internet also plays a
Pakistan has made considerable progress in
pivotal role in digital connectivity as internet
connectivity indicators in the past five years.
speed sets the parameters of the effectiveness
Mobile cellular subscription has increased
and efficiency of internet use. According to
from approximately 152 million to 195
2022 Netflix ISP Index, Pakistan’s internet
million between FY18 and FY22, whereas
speed is 2.8 Mbps compared to global
total broadband subscribers increased at
average of 3.5 Mbps and lower middle
CAGR of 15.1 percent, with total broadband
income countries average of 3.3 Mbps.82
penetration reaching 54 percent in FY22.
This translated into increased user data
The upcoming telecom infrastructure sharing
consumption, with a CAGR of 48 percent
framework proposed by the Ministry of
during the period (Figures S1.17a & S1.17b).
Information Technology &
Telecommunication (MoITT) offers an
This growth has had positive implications for opportunity to lower rollout costs and boost
digitalisation of economy as the use of network coverage and performance.
internet directly impacts the addressable However, since affordable mobile devices
market for tech start-ups. For instance, a tech and services holds the key to increasing

81 National Financial Literacy Program for Youth is implemented by the State Bank of Pakistan and
National Institute of Banking and Finance Source: www.nflpy.pk/pompak/ accessed on February 21,
2023.
82 World Bank’s classification has 54 countries in the lower middle income countries (LMIC

) category. Due to data unavailability of internet speed for all countries in Netflix ISP index, the average
of 8 LMICs has been taken.

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Digital Connectivity Indicators for Selected Countries Figure S1.18

2021 2021 2020 megabit/s
subscriptions per 100 inhabitants percent of population covered 84 percent 150
150 27 by
120
56 100
100 18 80
40 28 50
50 9
0 0 0
0 0

Sri Lanka

Bangladesh
Egypt
Sri Lanka

Bangladesh

Indonesia

Pakistan
Türkiye
Egypt

India

Nigeria
Indonesia

Pakistan
Türkiye

India

Nigeria
Bangladesh
Sri Lanka
Egypt
Indonesia
Türkiye

Pakistan
Nigeria
India

Mobile-cellular network Individuals using the internet

Fixed broadband-rhs
Active mobile-broadband At least a 3G mobile network International bandwidth per
Mobile-cellular At least a 4G mobile network internet user-rhs
Source: International Telecommunication Union

digital connectivity, fiscal incentives need to reduction in import tariff has been one of the
be considered.83 For instance, in Kenya, key drivers of increased penetration of ICT in
following the exemption of taxes on mobile technology clusters of India.85
phones and mobile services, mobile phone
purchases increased by 200 percent and The opportunity to leapfrog that ICT offers is
teledensity more-than-trebled to 70 percent not only by way of producing ICT hardware
in 2011 in a span of two years.84 Similarly, but rather the software as well as the

Smartphone Price as a Percent of Figure S1.19 Mobile Cellular Basket as Figure S1.20
GNI Per Capita 2022 Percent of GNI Per Capita - 2021
percent percent
UK Sri Lanka
Singapore
Ireland
China
USA Ireland
UAE Türkiye
USA
Singapore Bangladesh
Thailand Malaysia
India India
Nigeria
Pakistan Pakistan
0 10 20 30 40 50 0.0 0.5 1.0 1.5 2.0
Source: Alliance for Affordable Internet Source: International Telecommunication Union

83 MoITT (2023). Telecom Infrastructure Sharing Framework. Draft. Islamabad: MoITT

84 The Groupe Speciale Mobile Association Report 2020. The Mobile Economy Asia Pacific 2020. London:
GSMA
85
R. Heeks and B. Nicholson (2011). Software export success factors and strategies in “follower” nations,
Competition & Change Journal, Vol. 8 No. 3, pp. 267-303

159
State Bank of Pakistan Half Year Report 2022-23

ubiquitous usage of ICT hardware and develop frameworks to improve digital

software in all facets of economy.86 To this competence of their citizens but also
affect, Pakistan’s accession to the periodically measure it to identify gaps in
international IT Agreement that entails digital skills of citizens and accordingly tailor
across the board drop in tariff, taxes and digital literacy programs. One such example
other duties may be considered in the is European Countries’ Digital Competence
interest of large positive spillover of Framework for Citizens to support their plan
technology on the economy. of reaching a minimum 80 percent
population with basic digital skills by 2030.
Digital Literacy In recognition of the importance of digital
Digital literacy refers to general and basic literacy of wider population, the EU’s Digital
digital skills that all citizens need to have to Economy and Society Index tracks citizens’
adapt to digital transformation of economic progress on a high bar across five diverse
and social life, and form addressable markets areas: (a) information and data literacy (b)
for digital products, services and content. communication and collaboration (c) digital
This is regardless of an individual’s general content creation (d) cyber safety and (e)
literacy level and employment in technology problem solving.88
or non-technology sector. Rapid digital
innovations are pushing the boundary of The level of digital literacy of a population
digital literacy beyond basic skills. Indeed, depends on economic development, policy
over the course of years, the evolution and priorities and the nature of a particular
increasing penetration of frontier business ecosystem. Pakistan, where general
technologies, such as AI, will reshape literacy level is already very low, also fares
personal and professional life and require considerably low in digital literacy in relation
constant improvements in digital literacy.87 to other economies even in the much less
diverse and easy standards tracked by
These exigencies have influenced developed International Telecommunication Union
and developing countries to not only (ITU) (Figure S1.21).89 Only 37 percent of the

86 S.J. Ezell and J. Wu (2017). Assessing the Benefits of Full ITA Participation for Indonesia, Laos, Sri Lanka, and
Vietnam, The Information Technology and Innovation Foundation, Washington D.C.: ITIF
87 Word Bank (2022). “South Asia’s Digital Opportunity: Accelerating Growth Transforming Lives”,

Washington D.C: World Bank; C. Dahlman, S. Mealy and M. Wermelinger (2016). Harnessing the digital
economy for developing countries, Working Paper No. 334, Paris: OECD; A. M. Oyelakin (2022). Increased
Digital Literacy Skills as a Catalyst for Driving Nigerian Digital Economy- An Overview, Malaysian Journal of
Applied Sciences, vol.7(3)
88 European Commission, DigComp 2.2 2022. “The Digital Competence Framework for Citizen”, (website:

www.schooleducationgateway.eu/en/pub/resources/publications/digcomp-22.htm);
Digital Economy and Society Index 2022. www.digital-strategy.ec.europa.eu/en/policies/desi; G20,
Priority Issue 2, 2022. “Toolkit-for-Measuring-Digital-Skills-and-Digital-Literacy”
89 The ITU measures digital literacy on basic and standard ICT skills on the basis of different computer

based activities. Basic Skills include copying or moving a file, folder or information within a document,
sending e-mails with attached files, and transferring files between devices. Standard Skills include using
basic arithmetic formula in a spreadsheet; connecting and installing new devices; using presentation
software; and finding, downloading, installing software.

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Digital Literacy: Cross Country Figure S1.21 be made to ensure that those currently in
Comparison - 2021 schools meet desired level of digital literacy
percent
Pakistan*
by the time they graduate.
Iran
Viet Nam In this context, lessons may also be learnt
Bangladesh from international best practices by
Türkiye increasing the standard of digital literacy
Singapore
beyond basic skills, and ensure frequent
Egypt*
Germany
monitoring to correspond to the fast
Malaysia changing technological environment. For
instance, Singapore’s National Digital
0 20 40 60 80
Literacy Program is built around four
Individuals with standard ICT skills
Individuals with basic ICT skills competencies: (a) gathering and evaluating
* 2020 data information safely and effectively); (b)
Source: International Telecommunication Union
interpreting and analyzing data, and solving
population reports being aware of the problems; (c) using digital means,
internet, and 87 percent of those who know knowledge and skills, and (d) producing
about e-commerce platforms do not use them digital products, and collaborating online.
to buy goods or services.90 Moreover, while Similarly, Europe’s Digital Decade program
Pakistan Bureau of Statistics has begun sets targets for digital skills at various stages
tracking ICT skill indicators, mostly based on and segments of the economy and society
ITU’s basic and standard skills, the country with an annual cooperation cycle based on (i)
does not have an official framework for shared and transparent monitoring system,
periodically assessing skills in wide ranging (ii) annual report on the state of Digital
cross-cutting themes that evolving pace of Decade and (iii) adjusting Digital Decade
technologies entail.91 roadmap every two years.92

To ensure a digitally literate workforce that E-government

can absorb the technologies for digital
transformation, Pakistan needs to develop a E-government, which refers to ICT usage by
framework to target growth in digital literacy the government, is essential to digital
in both educated and uneducated segments transformation. The development outcomes
of population. Since basic education is the of e-government are not the same for every
foundation for technical and digital literacy, country, and benefits to vulnerable
both segments may need differently tailored communities are uneven. However, in
strategies. At the same time, efforts need to general, ICT usage helps governments

90 UNESCO (2018). “A Global Framework of Reference on Digital Literacy Skills for Indicator 4.4.2”,
Information paper No. 51, Paris: UNESCO; World Bank report (2019). Pakistan: Skills Assessment for
Economic Growth, Washington D.C.:World Bank.
91 Pakistan Bureau of Statistics, Social and Living Standards Measurement Survey (PSLM) 2019-20.
92 Source: www.moe.gov.sg/microsites/cos2020/refreshing-our-curriculum/strengthen-digital-

literacy.html; www.commission.europa.eu/strategy-and-policy/priorities-2019-2024/europe-fit-digital-
age/europes-digital-decade-digital-targets-2030_en#the-path-to-the-digital-decade

161
State Bank of Pakistan Half Year Report 2022-23

become more efficient, tailor better policies, Index (EGDI) 2022, compared to India and
and enhance public service delivery. Bangladesh that are ranked 105th and 111th
Moreover, since public sector is largest buyer respectively.96 Although the country fares
of ICT goods and services, e-government relatively better in UN’s e-Participation
helps create a demand for services offered by index helped in part by the citizen’s portal, it
local software firms and tech start-ups.93 has substantial room for improvement in
terms of overall maturity of government’s
Pakistan has taken multiple initiatives ICT usage across four key areas: core
towards e-government. These include government services, public service delivery,
development of e-office to help government digital citizen engagement, and government
ministries become efficient and paperless, as tech enabler (Figure S1.22).
and the launch of citizen portal that allows
the public to register complaints and provide Soft information complements these
feedback on government performance. findings. For instance, while e-office and
Similarly, to foster education via distance digitisation of government records have been
learning in the time of Covid-19, rolled out, their implementation and usage is
the Ministry of Federal Education introduced not widespread. Given that public sector’s
e-Taleem, a distance learning platform in usage of ICT has a positive spillover on
collaboration with various organisations.94 digital absorption by citizens, federal and
provincial governments need to scale up
However, despite these initiatives, the their ICT usage in all facets of governance,
government’s adoption of technology is where efforts need to be made to reduce
much lower compared to peer economies.95 digital divide to ensure that e-government
Pakistan is ranked 150th out of 193 countries does not create disparities.97 In addition, the
in the UN’s E-Government Development country’s public procurement rules, which

93 World Bank (available at www.worldbank.org/en/topic/digitaldevelopment/brief/e-government,

accessed on February 7, 2023; United Nations (2022). E-Government Survey 2022, the Future of Digital
Government. New York: United Nations Department of Economic and Social Affairs; J. Lee (2016). Digital
Government Impacts in the Republic of Korea: Lessons and Recommendations for Developing Countries. In T. G.
Karippacheril, S. Kim, R. P. Beschel Jr., C. Choi (eds.). Bringing Government into the 21st Century: The
Korean Digital Governance Experience. Directions in Development. Washington D.C.: World Bank; H. M.
Zangana, N. E. Tawfiq, Dr. M. Omar (2020). “Advantages and Challenges of E-Government in Turkey.”
International Journal of Creative Research Thoughts Volume 9 Issue 11 A. Imran and S. Gregor (2005).
Strategies for ICT Use in the Public Sector in the Least Developed Countries: A Cross-Country Analysis.
ACIS 2005 Proceedings - 16th Australasian Conference on Information Systems.
94 Source: National Information Technology Board

(www.nitb.gov.pk/ProjectDetail/MzUyZTQwNDktZDYwMi00OTJkLTlmMGQtMTQzZmYxN2U2MWN
k accessed on February 13, 2022.); E-Taleem (www.etaleem.gov.pk/ accessed on February 13, 2022.) ;
NITB (www.nitb.gov.pk/AllProjects accessed on February 13, 2022.)
95 World Bank (2020). “Pakistan: Digital Economy Enhancement Project.” Project Information Document

Report No: PIDC29750. Washington D.C.: World Bank

96 EGDI is composite of three sub-indices namely: online service delivery, telecommunication and human

capital. Source: United Nations Department of Economic and Social Affairs

97 World Bank (2020). “Pakistan: Digital Economy Enhancement Project.” Project Information Document

Report No: PIDC29750. Washington D.C.: World Bank

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

E-Government Index E-Participation Index GovTech Maturity Figure S1.22

Index
score score score
1.0 1.0 1.0
0.8 0.8 0.8
0.6 0.6 0.6
0.4 0.4 0.4
0.2 0.2 0.2
0.0 0.0 0.0

Bangladesh

Nigeria
UAE

UAE

Indonesia
Malaysia

Malaysia

Egypt

Kenya

Iran
Iran

India
Singapore

Pakistan

Sri Lanka
Singapore

Nigeria
Bangladesh
Indonesia

Egypt

Kenya
India
Sri Lanka

Pakistan

UAE

Malaysia

Iran
Indonesia

Nigeria
Bangladesh

Egypt
Kenya
India

Pakistan
Sri Lanka
Singapore

Source: United Nations Department of Economic and Social Affairs; and World Bank

currently favour established and large IT government-to-government partnerships.

firms, need to be revised to promote Some of the largest Singaporean IT exporting
domestic IT industry typically comprising firms have grown through such initiatives.99
small and young firms.98 Sri Lanka’s ICT Agency also helps the
development of local ICT firms by promoting
While relaxing public procurement joint ventures between foreign and local
regulations for small and less established IT firms and giving such JVs higher points in
firms are a difficult proposition because of public procurement criteria.100 Similar
risks of nepotism, poor quality of public initiatives may be considered in Pakistan
services, and ineffective utilization of public where one solution could be to mandate or
funds, there is an increasing realization that incentivize IT contractors to sub-contract a
public procurement can be a useful certain percentage of work to small domestic
mechanism to incentivize local firms. This IT service firms that do not currently meet
helps domestic IT firms to grow and public procurement criteria on their own.
eventually become capable to compete in
international markets. Key Cross-cutting Technology Enablers

Digital transformation of both public and

For instance, Singapore’s government
private sectors needs a set of cross-cutting
encourages local ICT firms to develop
technologies and ancillary frameworks that
solutions for different government bodies,
serves as a foundation for growth in both
and promotes successful firms through
software and start-ups led digitalisation.

98 World Bank Report. Pakistan Economic Policy for Export Competitiveness Digital Pakistan: A Business
and Trade Assessment, Washington D.C.: World Bank
99 V. Grant (2018). Critical Infrastructure Public-Private Partnerships: When is the Responsibility for

Leadership Exchanged?, Security Challenges Journal, Vol. 14, Issue 1 , pp. 40-52
100 UNCTAD (2013). Promoting Local IT Sector Development Through Public Procurement. Geneva: United

Nations Conference on Trade and Development

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State Bank of Pakistan Half Year Report 2022-23

Some of the most important ones include In Pakistan, the first government national
cloud storage and computing; cybersecurity; data center – that offers various services
databases and interoperability. including cloud - was established in 2016.104
This was considerably late compared to India
A digital economy produces and thrives on and Bangladesh which had launched their
large datasets whose storage and usage first national data centers in the year 2008
requires various types of cloud services, such and 2009 respectively.105 However, in
as cloud storage and computing.101 The recognition of cloud’s importance, the
inevitability of the use of cloud technology in MoITT’s 2018 Digital Pakistan Policy - that
future can be gauged from the fact that, by envisions accelerated digitilisation in the
2025, more than 51 per cent of ICT spending country - gave a policy direction to promote
within the area of application software and cloud infrastructure and its associated
infrastructure market along with business services. Accordingly, in 2022 it launched
processing services will shift to the public Pakistan Cloud First Policy (PCFP) that aims
cloud.102 However, globally, particularly in to guide and empower organisations,
developing countries like Pakistan, several including public sector enterprises, to
barriers have decelerated the pace of cloud transition to cloud-based solutions. Prior to
migration and adoption. These include weak the launch of PCFP, SBP had also allowed
or unreliable internet connectivity; weak or banking industry to use cloud based
absence of regulations and standardization, solutions for non-core banking operations,
stringent data localization rules, and lack of which have recently been expanded now to
professionals with expertise on cloud-based use cloud based solutions for core
security solutions etc.103 operational data as well.106 Securities
Exchange Commission of Pakistan (SECP)
also issued draft Cloud Adoption Guidelines

101 Cloud storage refers to digital data storage on servers at off-site locations while cloud computing refers
to the delivery of different services through the internet. The servers are maintained by a third-party
service providers.
102 Source: GARTNER. (website: www.gartner.com/en/newsroom/press-releases/2022-02-09-gartner-

says-more-than-half-of-enterprise-it-spending accessed on January 18, 2023)

103 S.T. Koudah, B.E. Popovsky and A. Tsete (2014). Barriers to Government Cloud Adoption, International

Journal of Managing Information Technology, Vol.6, No.; T. Vemu and P. Sravya (2019). A Study on Cloud
Migration Models and Security Issues in Cloud Migration, Department of Computer Science and Engineering,
SSRN Electronic Journal, Vol. 6, Issue 4; Cloud Insights survey, Longitude Research, (2017). Oracle Cloud
Platform. Move Workloads to the Cloud; Accenture Report. Sky high hopes: Navigating the barriers to
maximizing cloud value. Dublin: Ireland
104 Source: National Telecom Center website (www.ntc.net.pk/orderbooking/home.asp accessed on

January 25, 2023)

105 India National Informatics centre website. (www.nic.in/servicecontents/data

centre/#:~:text=The%20National%20Data%20Centres%20form,and%20NDC%20Bhubaneshwar%20in%2
02018. accessed on January 26, 2023); GovTech Maturity Index Update 2022. Trends in Public Sector
Digital Transformation, The International Bank for Reconstruction and Development: Washington D.C
106 SBP Circular No. 4 of 2020. (www.sbp.org.pk/bprd/2020/C4.htm); SBP Circular No. 1 of 2023

(www.sbp.org.pk/bprd/2023/C1.htm)

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

The Cloud Ecosystem Index - 2022 Figure S1.23 Moreover, the role and responsibilities of
score
Pakistan each department also need to be clearly
Bangladesh defined with regard to data residency,
Nigeria security protocols and certification
Indonesia accreditation to avoid ambiguity.110
India
Turkiye
China Other areas that warrant attention for wider
Malaysia cloud adoption across public and private
UAE sector include improvements in cloud
Ireland
infrastructure, relevant human capital, as
USA
UK well as security, as evidenced by Pakistan’s
Singapore 73rd rank in global cloud ecosystem out of 76
0 7 14 21 28 35 countries evaluated by MIT Technology
Infrastructure Review on four key metrics (Figure S1.23).
Ecosystem Adoption To this end, one solution that may be
Security and Assurance considered, is attracting large foreign cloud
Talent and Human Capital operators to set up cloud operations in
Source: Massachusetts Institute of Technology Pakistan. This may be done by allowing data
Technology Review
centers to be set up as special technology
in 2021 for its regulated sectors; 107 however zones where the government can provide or
those guidelines have not been finalized as of lease subsidized land and ensure electricity,
yet. high speed internet under the planned 5G
rollout.
The potential of cloud adoption in public
sector is immense as federal government Cybersecurity poses a key risk to the
alone has more than 40 divisions and 600 prospects of digitalisation as, breaches of
affiliated departments.108 However, cybersecurity, privacy and data sovereignty
successful implementation of PCFP in public are a challenge for storage and processing
hinges on coordinated efforts from different infrastructure. It also risks loss of digital
government departments; for instance, identity, financial losses, private personal
ensuring cloud usage in public sector records and several other facets of digital
development programme (PSDP) and in existence. This is why regulators see
public procurement.109 This is an area that cybersecurity as among the top risks to
presently requires a detailed action plan for digitalisation, where fintech and other
migration and continuous implementation.

107 SECP website: (www.secp.gov.pk/document/draft-cloud-adoption-guidelines-for-incorporated

companies/?wpdmdl=42956&refresh=63d22f61ceced1674719073 accessed on January 26, 2023)
108 Government of Pakistan website. (www.pakistan.gov.pk/ministries_divisions.html accessed on

January 25, 2023)

109 H. Fatima and N. Qazi (2022). Untethering from Legacy Infrastructure: Pakistan's Cloud First Policy,

Centre for Digital Transformation, Islamabad: Tabadlab

110 World Bank (2020). Pakistan: Digital Economy Enhancement Project (P174402), Project Information

Document (PID), Concept Stage, Report No: PIDC29750 Washington D.C.: World Bank

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State Bank of Pakistan Half Year Report 2022-23

financial organisations rate cybersecurity Global Cyber Security Index- Table S1.5
risks at par with liquidity risks. 2020
Score Rank
USA 100.0 1
To this end, a Prevention of Electronic
UK 99.5 2
Crimes Act (PECA) was passed in 2016
Singapore 98.5 4
followed by the passing of Data Protection
India 97.5 10
Bill (DPB) in 2021 to help ensure the Turkiye 97.5 11
protection and confidentiality of online data, Indonesia 94.9 24
upholding privacy of the citizens. A Vietnam 94.6 25
National Cybersecurity Policy (NCP) was Thailand 86.5 44
also announced in 2021 aimed at ensuring Bangladesh 81.3 53
security, confidentiality, integrity, and Iran 81.1 54
availability of digital assets across the public Philippines 77.0 61
and private sector. Pakistan 64.9 79
Sri Lanka 58.7 83
*GCSI calculated on basis of legal, technical,
Moreover, in line with global best practices,
organisational, capacity building and cooperative
the MoITT has prepared draft rules for measures
Computer Emergency Readiness Team Source: International Telecommunication Union
(CERT), an important part of the overall
capacity to tackle cyber incidents. The rules cybersecurity on five aspects: legal; technical;
are in the process of finalization; once they organisational; capacity building and
are finalized and approved, all government cooperation measures. The recent passing of
authorities will form CERT for their DPB and NCP can be expected to improve
regulated sectors and assist the private Pakistan’s global rankings in legal
sector.111 For instance, the PTA has launched component of cybersecurity index
its CERT to protect telecom sector.112 A henceforth. However, considering that
National Cybersecurity Act is also currently cybersecurity breaches also cause loss of
being reviewed by the MoITT’s legal wing; it public trust leading to setbacks on the path to
is expected to take up to a year for eventual digitalisation, the country’s substantially low
approval from the Parliament, where PECA scores suggest that cybersecurity efforts need
2016 is also being reviewed for possible to be mainstreamed across various aspects
amendments to keep pace with the fast (Table S1.5). These include the need for
evolving digital world.113 cybersecurity audit and compliance; national
curriculum for basic cybersecurity literacy
While these are promising developments, and skills; human resource development
Pakistan still lags behind its peers in Global programs for technical staffing in public and
Cyber Security Index 2020 that assesses private sector; and special courts related to
cybersecurity.114

111 As per correspondence with officials of MoITT

112 Pakistan Telecommunication Authority website (www.pta.gov.pk/en/media-center/single-
media/pta-launches-cert-portal-for-telecom-industry--050421 accessed on March 16, 2023)
113 As per correspondence with officials of MoITT
114 Source: International Telecommunication Union, Global Cybersecurity Index Report 2020

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Data registries and interoperability, which institutional support to encourage innovation

refers to the ability of digital systems to policies, infrastructure, and ensure
exchange and use information, is another appropriate technological standards and
important technology enabler. One example safety.115 In Pakistan, the government has
of it is digital identity, such as Nadra’s taken a host of policy and institutional
national ID systems. Other examples of it initiatives to support the many facets of IT
include cloud-based health, police, court, ecosystem from the perspective of
taxation and land records and utilities promoting IT exports and digitalisation of
payment history. These are not only needed economy. These include the setting up of
for a thriving fintech industry, such as for National Incubation Centre (NIC) in 2016;
their KYCs and credit scores, but also for launch of Digital Pakistan Policy 2018; and
other industries such as- hospitals and better the e-Commerce Policy 2019.
public policymaking especially during
emergencies. Though the country has a Similarly, SBP has also promoted digital
relatively strong national ID system and payments and fintech in the country, with
payment system respectively, the lack of policy measures such as Regulations for
interoperability frameworks and Digital On-Boarding of Merchants.116
mechanisms acts as a barrier to public and Recently, the SBP had further facilitated IT
private sector’s capacity to exchange data exporters by advised banks to mandatorily
securely and seamlessly and thus, hampers credit 35 percent of the exports proceeds into
the transition towards e-documentation, e- these exporters’ special foreign currency
signatures and e-invoicing. account.117 SECP has provided Regulatory
Sandbox to offer tailored regulatory
Policy and Institutional Support conditions for testing new and innovative
products and services at a limited scale to
To fast track digitalisation, governments, assess their viability.118 In addition, several
especially of developing economies eyeing policies and regulations are currently in draft
the opportunity of technology-led stages; once approved, these are expected to
leapfrogging, need to provide policy and further facilitate the sector (Figure S1.24).

115 UNCTAD (2018). Leapfrogging: Look Before You Leap. Policy Brief. Policy Brief No.71. Geneva: UNCTAD;
K. Lee (2021). Economics of Technological Leapfrogging, in J. Lee, K. Lee, D. Meissner, S. Radosevic, and N. S.
Vonortas (eds.) The Challenges of Technology and Economic Catch-up in Emerging Economies. Oxford: Oxford
University Press
116 Source: SBP www.sbp.org.pk/bprd/2020/CL1-Annex-A.pdf [accessed on March 24, 2023])
117
Under Para 36, Chapter 12 of the Foreign Exchange Manual, exporters of services are allowed to retain
35 percent of their export proceeds in their special foreign currency accounts in Pakistan upon request to
banks. In January 2023, SBP had made this facility mandatory for IT exporters and freelancers (wide EPD
Circular Letter No. 2 of 2023), to further encourage them to bring their foreign exchange earnings into the
country. However, these instructions are valid until March 31, 2023. These instructions will be reviewed
in the light of incremental export performance by IT sector and realization of export proceeds thereof
during this period. (www.sbp.org.pk/epd/2023/FECL2.htm)
118 Source: SECP (www.secp.gov.pk/regulatory-sandbox/what-is-regulatory-sandbox/ accessed on 27

November 2022)

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State Bank of Pakistan Half Year Report 2022-23

Recent Regulatory and Policy Developments Figure S1. 24

Policies in Draft Stages
Digital Pakistan Regulations for Digital On- National Cyber Security National
Policy (MoITT) Boarding of Merchants (SBP) Policy (MoiTT) Broadband Policy
Pakistan Cloud 2021 (MoiTT) Telecom
Regulations for Regulatory First Policy Infrastructur
Electronic Sandbox Raast – Instant (MoiTT) e Sharing
Personal Data
Money (SECP) Payment System (SBP) Framework
Protection Bill
Institutions (SBP) (PTA)
2021 - (MoiTT)

2018 2019 2019 2019 2019 2020 2021 2021 2021 2021 2021 2022
5G Strategic Plan &
National Payment Licensing and Policy Guidelines
Systems Strategy (SBP) Policy on (MoiTT)
Regulatory National
Business
Framework for Freelancing Facilit
The Special Incubation
Digital Banks ation Policy -
e-Commerce Policy Technology Zones Centers (HEC)
(SBP) Consultation Draft
of Pakistan (MoC) Authority Act
(MoiTT)
Note: This is not an exhaustive list of policies
Source: SBP, SECP, MoC, MoITT and National Assembly

However, there are at least four key areas Indicative PSDP on Digitalisation* Table S1.6
that warrant attention from the perspective Allocated Amount No. of Projects
(as percent of total (as percent of total
of government policy and institutional PSDP spending) PSDP projects)
support. First, given the cross cutting nature FY19 0.7 4.5
of digitalisation across sectors, the degree of FY20 2.2 5.6
coordination and concerted efforts needed FY21 1.7 5.4
for digital transformation, requires highest FY22 2.7 7.3
government offices to be leading the FY23 2.3 7.1
digitalisation agenda across federal and * These are indicative allocations as formal estimates of
provincial governments. actual PSDP spending on digitalisation are not
available. These are based on the sum of all projects
that explicitly relate to the following keywords: cyber,
For instance, in Singapore, the Smart Nation digital (digitalisation, digitisation), data (for e.g. storage),
and Digital Government Office, which AI, cloud, knowledge economy, computers and computing,
prioritizes and promotes digital mobiles and broadband, e-learning, smart projects. These
estimates do not include any allocated spending on
transformation in public and private sector, digital components of projects that are not explicitly
works directly under the Prime Minister's named as digital projects.
Office.119 In Kenya, a Digital Economy Source: SBP Staff Estimates based on MoPDSI
Implementation Secretariat is planned with
implementation throughout its various state
membership from all key public and private
departments and agencies.120
sector stakeholders alongside an inter-
ministerial framework to monitor
Nigeria has also re-designated its Federal
Ministry of Communications as the Federal

PM Office Singapore (www.pmo.gov.sg/About-Us, accessed on February 14, 2023.)

119

Kenya Digital Economy Blueprint (www.ca.go.ke/wp-content/uploads/2019/05/Kenyas-Digital-

120

Economy-Blueprint.pdf)

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

Ministry of Communications and Digital of digital transformation also does not

Economy with the mandate of development appear to be pronounced in public sector
and implementation of Digital Economy development spending (Table S1.6).
Policy and Strategy across the country.121
Similarly, Malaysia has formed a National The second area that warrants attention
Digital Economy and 4th Industrial relates to the alignment of sectoral policies
Revolution Council chaired by the country’s with digitalisation agenda. In some cases,
prime minister to accelerate digitisation, such as fintech and e-commerce, policies
accompanied by a strategic change focusing on e-commerce, fintech and
management office which acts as a secretariat financial inclusion contributed to growth in
to the council to drive changes on the ground these start-ups. However, in several other
across the country.122 sectors, policies need to be formed or
updated to facilitate digitalization. For
Unlike these developing and emerging instance, ride-sharing tech start-ups faced
economies, digitalisation agenda in Pakistan legal challenges in Punjab and Sindh because
is not being led by Prime Minister office; nor public transportation laws were not
does it have a dedicated ministry or applicable on them.125 Likewise, except for
secretariat. While the MoITT has drafted the Sindh Telemedicine and Telehealth Act 2021
Digital Pakistan Policy, it does not have the and the draft policy for telemedicine
mandate to institute and monitor Pakistan, there is no e-health policy at the
implementation across the country.123 The provincial or federal level to facilitate health
absence of a strong driving secretariat to tech start-ups. Similar policy and regulatory
steer and coordinate is evident from the fact gaps need to be addressed in other sectors,
that overlapping jurisdictions and lack of including education where the involvement
clarity at the local government level have of ed-tech start-ups may go a long way in
constrained the deployment of fiber optic addressing the gaps in public schooling
cables even in large cities. Moreover, system.
whereas various digitalisation efforts by
different government bodies are in isolation Third, while the Special Technology Zones
and lack the element of interoperability Authority aims to create technology parks,
without policy frameworks for standardized and private and public incubators also
data management.124 Moreover, the agenda organize networking activities, there is a

121 Nigeria National Digital Economy Policy and Strategy (2020-2030) (www.ncc.gov.ng/docman-
main/industry-statistics/policies-reports/883-national-digital-economy-policy-and-strategy/file)
122 Malaysia Digital Economy Blueprint (www.epu.gov.my/sites/default/files/2021-02/malaysia-digital-

economy-blueprint.pdf)
123 MoITT’s role in digitalisation is only that of facilitator with a mandate to develop an action plan in

consultation with relevant ministries and departments who have the lead role in implementation in their
respective domains. Source: MoITT (2018). Digital Pakistan Policy. Islamabad: MoITT
124 Project Information Document (PID) (2020). Pakistan: Digital Economy Enhancement Project (P174402).

Concept Stage, Report No. PIDC29750. Washington, D.C. : World Bank Group
125 Gulf News www.gulfnews.com/business/careem-uber-hope-for-legal-support-in-pakistan-1.1975263,

accessed on February 15, 2023.

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State Bank of Pakistan Half Year Report 2022-23

need to significantly improve the formation timely adoption of digitalisation is needed to

of technology clusters and platforms for be at the forefront of technology. The pace of
interaction between stakeholders operating digital transformation and the ongoing
in the tech industry, especially in smaller fourth industrial revolution is much faster
cities. To this end, formation of sector than earlier technologies, which took decades
specific incubators, development of exchange to develop and spread across countries. This
programmes among clusters and between means the cost for inaction or late action can
start-ups and traditional industries will help be huge.
in community building that is one of the key
factors of success in growth of technology The recent growth in Pakistan's IT exports
startups.126 and start-ups deals may be seen as emerging
signs of digitalisation. However, domestic
Fourth, while federal and provincial market size of IT and software is insufficient
governments have started investing in to help the industry scale up; the firms in the
hardware and software towards sector are very small; and their exports lack
digitalisation of limited number of services, market diversification. The start-up
these efforts are being made in a siloed ecosystem is still very young and
manner, leading to duplication of concentrated only in two sectors: fintech and
investments. The development of these e-commerce. For continued growth in these
parallel systems is costlier for governments areas and to be amongst early adopters of
and time consuming for individuals and digital transformation, if not leaders of
businesses. Although some provincial civil innovative technologies, it is essential that
registries are being automated, such as land individuals, federal, provincial and local
records in Sindh and Punjab, digitalisation governments, and businesses across sectors
needs to be expanded to all registries and embrace latest technologies.
linked with National Database and
Registration Authority (NADRA) whilst With software and start-up led digitalisation
becoming a subject of policy attention
ensuring interoperability, security, single
sign-on and other features of an efficient around the world, the competition for IT
exports and global VC funding for start-up is
system integration.127
expected to increase in the years ahead. This
further underscores the need to grow
S1.4 Final Remarks
domestic demand for digitalisation in
Technological advancement offers Pakistan.
developing economies an opportunity to
The government, as one of the largest IT
leapfrog and catch up with the developed
consumers, can generate demand by
world faster than ever before. However,
digitalizing its services and operations of the

126Ignite (2023). Study for Assessment of Pakistan’s Startup Ecosystem

127World Bank (2022). South Asia’s Digital Opportunity: Accelerating Growth, Transforming Lives
Washington, D.C.: World Bank; World Bank (2023). Pakistan: Digital Economy Enhancement Project. Project
Information Document (P174402). Appraisal Stage, Report No: PIDA31211. Washington D.C.: World Bank;
World Bank (2022). South Asia’s Digital Opportunity: Accelerating Growth, Transforming Lives Washington,
D.C.: World Bank.

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 Pakistan’s Growing IT Exports and Tech Start-ups: Opportunities and Challenges

public sector. This will have a two-pronged capital mindset characteristic of investments
impact. First, it will bring efficiency in in start-ups. This change is especially
government’s own operations, create needed to increase local investments in areas
facilitative business environment, and of edtech, healthtech, and other areas of
improve public services provided to citizens. economy where technology can potentially
Second, it will provide the opportunity for address Pakistan’s long standing challenges,
the typically small domestic IT firms to including those related to savings, insurance,
develop tech-based solutions for the taxation, and documentation of informal
government allowing them to scale up and economy.
professionalize before they can compete in
international markets. The role of fintech in digital transformation
will be critical, given its potential to address
The appetite for technology by businesses, the digital divide and the fact that finance
including SMEs, in the private sector and complements economic transactions.
individuals at large has to increase to expand However, the growth of start-ups, in general,
the addressable market for start-ups and and fintech, in particular, depends on how
further digital transformation. One of the fast the government progresses on ensuring
major hurdles limiting the mass proliferation the availability of enabling technologies and
of IT relates to its affordability and related frameworks such as cloud storage
availability, especially for the rural and computing, cybersecurity, digitisation of
population. To remedy that, the duties and civil registries, credit reporting system
taxes on internet and the devices used to reforms, and ensuring interoperability
access it need to be reduced. Further, the between various government systems and
development of absorptive capacity of the databases.
population is crucial. This can be achieved
by enhancing digital literacy via focused The development of software, technology
initiatives, including through social media start-ups and other IT related sectors is not
platforms, and making digital education a about choosing IT industry as a winner
fundamental part of the curriculum. among others; it’s about digital
transformation of the economy at large and
Educational institutes and training centers enabling leapfrogging. In recognition of this,
must also be proactive and forward-looking a host of policies and regulations by various
in bridging the supply-demand gap of ministries and government organisations
human capital in IT industry, and keep pace have laid the right foundations. However,
with the fast evolving advanced skills. This the fast evolving IT industry and the
is where private sector has a particularly enormous nature of this task requires
important role to play by allocating resources consistent and concerted efforts to be led by
to improvements in human capital and the prime minister office or a dedicated
digital literacy. The private sector, especially ministry to direct, coordinate, and align
local high net worth investors, family funds private and public sector actors, sectoral
and foundations need to develop a patient policies and institutions across the country.

171
Annexure A: Data Explanatory Notes

1) GDP: In case of an ongoing year, for which actual GDP data is yet not available, SBP uses
the GDP target given in the Annual Plan by the Planning Commission in order to calculate
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 (national, urban, or rural)
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 ( Ht) =  i 0
 1  100
 t 1 
  I t 12 i 
 i 0 
 I 
YoY inflation ( YoYt) =  t  1  100
 I t 12 
 I 
Monthly inflation ( MoMt) =  t  1  100
 I t 1 

Where It is consumer price index in tth month of a year. The CPI can be national, urban or
rural.
For detailed information on the methodology, please see:
www.pbs.gov.pk/content/methodology-2

3) Change in debt stock vs financing of fiscal deficit: The change in the stock of gross
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, whereas financing is calculated by
adjusting the government borrowing with its deposits held with the banking system; (ii)
changes in the stock of debt also occur due to movements in exchange rates, both PKR and
other currencies against US Dollar, which affect the rupee value of external debt.

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State Bank of Pakistan Half Year Report 2022-23

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 Bank1: 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). Ways and Means Advance allows
government to borrow up to Rs 100 million at a time 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 (AJK) 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. However, the
Federal Government has taken over from the State Bank of Pakistan (SBP) the business
of direct credit to provincial governments on 29th June 2020. In this regard, the federal
government has executed tripartite agreements with four provincial governments and
SBP (as executer) for extension of Ways and Means loans on account of Federal
Government Central Account No.I (non-food) on 29th June 2020.

Borrowing from scheduled banks: This is mainly through (i) fortnightly auction of 3, 6 and
12-month Market Treasury Bills (MTBs); (ii) monthly auction of 3, 5, 10, 15, 20 and 30
year fixed rate Pakistan Investment Bonds (PIBs); (iii) fortnightly auctions of 2, 3, 5, 10
year floating rate PIBs; (iv) Sukuk and (v) Bai Muajjal of Sukuk (on deferred payment
basis). 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.

1
This was applicable before the amendments in the SBP Act in January 2022. According to Section 9C
(1) of the SBP Act (as amended up to 28 January, 2022), the SBP “shall not extend any direct credits to
or guarantee any obligations of the Government, or any government owned entity or any other public
entity.”

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 Annexure Data Explanatory Notes

5) Differences in different data sources: SBP data for a number of variables, such as
government borrowing, foreign trade, etc – often do 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 have been 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 banking
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).

175
List of Acronyms

AI Artificial Intelligence

ACIS Australasian Conference on Information Systems

ADB Asian Development Bank

ADR Alternative Dispute Resolution Mechanism

ADR Advance-to-Deposit

ADBI Asian Development Bank Institute

AIDES Asian Index of Digital Entrepreneurship Systems

AIIB Asian Infrastructure Investment Bank

AJK Azad Jammu & Kashmir

AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism

APCMA All Pakistan Cement Manufacturing Association

AR Annual Rebasing

ATL Active Taxpayer List

Avg Average

BCI Business Confidence Index

BCS Business Confidence Survey

BDI Baltic Dry Index

BIS Bank for International Settlements

BISP Benazir Income Support Program

BSC Behbood Saving Certificates

BPS Basic Pay Scale

bps Basis Points

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State Bank of Pakistan Half Year Report 2022-23

CAD Current Account Deficit

CBRE Coldwell Banker Richard Ellis

CC Cubic Centimeters

CCS Consumer Confidence Survey

CCT Conditional Cash Transfer

CD Customs Duty

CDS Credit Default Swap

CERT Computer Emergency Readiness Team

CGD Center for Global Development

CIF Cost, Insurance and Freight

CKD Completely Knocked Down

CMR Cash Margin Requirement

CNG Compressed Natural Gas

CoD Collection on Demand

Covid-19 Coronavirus Disease 2019

CPEC China Pakistan Economic Corridor

CPI Consumer Price Index

CVT Capital Value Tax

D
DAP Diammounium Phosphate

DFIs Development Finance Institutions

DPB Data Protection Bill

DRA Disparity Reducing Allowance

178 `
 List of Acronyms

DSC Defense Saving Certificates

DSSI Debt Service Suspension Initiative

EAD Economic Affairs Division

EAP East Asia Pacific

ECA Europe and Central Asia

ECC Economic Coordination Committee

EDS External Debt Servicing

EE Export Earnings

EFF Extended Fund Facility

EFS Exports Financing Scheme

EGDI E-Government Development Index

EMDE Emerging Market and Developing Economy

EPD Exchange Policy Department

EIB European Investment Bank

EMI Electronic Money Institution

ER Exchange Rate

EU European Union

FAO Food and Agriculture Organization

FATA Federally Administered Tribal Areas

FBR Federal Tax Revenue

FD/KA&GB Federally Administered/Kashmir Affairs and Gilgit Baltistan

FEE Foreign Exchange Earnings

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FED Federal Excise Duty

FDI Foreign Direct Investment

FI Fixed Investment

FIFA Federation Internationale de Football Association

FPI Foreign Portfolio Investment

FX Foreign Exchange

FY Fiscal Year

GB Gilgit-Baltistan

GCC Gulf Cooperation Council

GCSI Global Cyber Security Index

GDP Gross Domestic Product

GIS-FRR Government of Pakistan Ijara Sukuk – Fixed Rental Rate

GIS-VRR Government of Pakistan Ijara Sukuk – Variable Rental Rate

GOP/GoP Government of Pakistan

GoS Government of Sindh

GSMA Groupe Speciale Mobile Association

GST General Sales Tax

GEM Growth Enterprise Market

H1 First Half

HBL Habib Bank Limited

HEC Higher Education Commission

HS Harmonized System

180 `
 List of Acronyms

HOBC High Octane Blending Component

HSD High Speed Diesel

HUBCO Hub Power Company Limited

HVA High Value Added

IBA Institute of Business Administration

IBIs Islamic Banking Institutions

ICIMOD International Centre for Integrated Mountain Development and Pakistan

Agricultural Research Council
ICT Information and Computer Technology

IDA International Development Association

IT Information Technology

IH&SMEFD Infrastructure, Housing, and Small and Medium Enterprises Finance

Department
4IR Fourth Industrial Revolution

ILO International Labor Organization

IMF International Monetary Fund

IPPs Independent Power Producers

IsDB/IDB Islamic Development bank

ISP Internet Service Provider

ITA Information Technology Agreement

ITIF Information Technology and Innovation Foundation

ITU International Telecommunication Union

IVAC International Vaccine Access Center

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State Bank of Pakistan Half Year Report 2022-23

KEL K-Electric

KPK Khyber Pakhtunkhwa

KSA Kingdom of Saudi Arabia

LAC Latin America and the Caribbean

L/C Letter of Credit

LIBOR London Interbank Offered Rate

LNG Liquefied Natural Gas

LMIC Lower middle income countries

LSM Large Scale Manufacturing

LT Long Term

LTFF Long-Term Financing Facility

MMBTU Metric Million British Thermal Unit

MNA Middle East and North Africa

MNFS&R Ministry of National Food Security and Research

MoITT Ministry of Information Technology and Telecommunication

MIT Massachusetts Institute of Technology

MMT Million Metric Ton

MPC Monetary Policy Committee

MSCI Morgan Stanley Capital International

MSP Minimum Support Price

MT Metric Ton

182 `
 List of Acronyms

MTBs Market Treasury Bills

NADRA National Database and Registration Authority

NBER National Bureau of Economic Research

NBFIs Non-Bank Financial Institutions

NCP National Cybersecurity Policy

NCPI National Consumer Price Index

NDA Net Domestic Assets

NDMA National Disaster Management Authority

NEER Nominal Effective Exchange Rate

NEPRA National Electric Power Regulatory Authority

NFA Net Foreign Assets

NFNE Non-Food Non-Energy

NFPSEs Non-Financial Public Sector Enterprises

NHSR&C National Health Services Regulation and Coordination

NIC National Incubation Centre

NITB National Information Technology Board

NPCs Naya Pakistan Certificates

NSS National Saving Schemes

NSTR National Sales Tax Return

NTDC National Transmission & Despatch Company

OCHA Office for the Coordination of Humanitarian Affairs

OCAC Oil Companies Advisory Council

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State Bank of Pakistan Half Year Report 2022-23

OECD Organisation for Economic Co-operation and Development

OGDC Oil and Gas Development Corporation

OGRA Oil and Gas Regulatory Authority

OMO Open Market Operation

PASHA Pakistan Software Houses Association

PAMA Pakistan Automotive Manufacturers Association

PARC Pakistan Agricultural Research Council

PBA Pensioners’ Benefit Account

PBS Pakistan Bureau of Statistics

PBOS Punjab Bureau of Statistics

PCCC Pakistan Central Cotton Committee

PDL Petroleum Development Levy

PE Price Effect

PEDL Public External Debt and Liabilities

PEMRA Pakistan Electronic Media Regulatory Authority

Pepco Pakistan Electric Power Company

PFLs Floating-rate PIBs

PKR Pakistani Rupee

PKRV Pakistan Revaluation

POS Point-of-Sale

PSDP Public Sector Development Program

PSEs Public Sector Enterprises

PSER Pakistan Start-up Ecosystem Report

184 `
 List of Acronyms

PSLM Pakistan Social and Living Standards Measurement Survey

PIBs Pakistan Investment Bonds

PID Project Information Document

PCFP Pakistan Cloud First Policy

POL Petroleum, Oil and Lubricants

PSDP Public Sector Development Programme

PECA Prevention of Electronic Crimes Act

PTA Pakistan Telecommunication Authority

PSO Pakistan State Oil

PSX Pakistan Stock Exchange

PSEB Pakistan Software Export Board

Q1 First Quarter

Q2 Second Quarter

Q3 Third Quarter

Q4 Fourth Quarter

QIM Quantum Index of Large-Scale manufacturing

QTA Quarterly Tariff Adjustment

REER Real Effective Exchange Rate

REIT Real Estate Investment Trusts

R&D Research and Development

RIC Regular Income Certificates

RLNG Regassified Liquefied Natural Gas

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State Bank of Pakistan Half Year Report 2022-23

RPI Retail Price Index

SAR South Asian Region

SBOS Sindh Bureau of Statistics

SBP State Bank of Pakistan

SDR Special Drawing Rights

SECP Securities Exchange Commission of Pakistan

SKD Semi Knocked Down

SNF Specialized Nutritious Food

SNGPL Sui Northern Gas Pipelines Limited

SRO Statutory Regulatory Orders

SSA Sub-Saharan Africa

SSC Special Saving Certificates

SST Sindh Sales Tax

ST Short term

STPED Short Term Public External Debt

SWAPS Synchronized Withholding Administration and Payment System

TEDL Total External Debt and Liabilities

TERF Temporary Economic Refinance Facility

TD Tariff Differential

TTS Track and Trace System

UAE United Arab Emirates

186 `
 List of Acronyms

UK United Kingdom

UCT Unconditional Cash Transfer

UNCTAD United Nations Conference on Trade and Development

UNESCO United Nations Educational, Scientific and Cultural Organization

US/USA United States of America

USC Utility Store Corporation

USD United States Dollar

VE Value Effect

VC Venture Capital/Venture Capitalist

VRR Variable Rental Rates

WALR Weighted Average Lending Rate

Wapda Water and Power Development Authority

WB World Bank group

WC Working Capital

WHT Withholding taxes

WIPO World Intellectual Property Organization

WPI Wholesale Price Index

YoY Year on Year

187