U N I T E D B A N K L I M I T E D

Economy Review
Contents
Political Rhetoric Reaching Crescendo 1
Inflation Rampant 2
External Account Remains Stable 3
Higher GDP Growth as a Result of Lower Base 4

UBL Research
May 21, 2010
www.ubl.com.pk
All rights reserved. UBL Research 2010 SEE LAST PAGE FOR IMPORTANT DISCLOSURES
 U N I T E D B A N K L I M I T E D Economy Review – May 2010

Political Rhetoric Reaching Crescendo

Back in our Economy Review of September 2009, we had ascertained
that the President of Pakistan would be an unlikely survivor and will
likely finish his four year term. This was in the backdrop of a politically
successful Friends of Democratic Pakistan summit, which was held
around the same time in New York. Since then, a lot happened. There
was the scuffle between the executive and judiciary over the National
Reconciliatory Ordinance (NRO). There was the passage of the 18th
amendment. There is the Pakistan-Afghanistan situation that remains a
hot topic in the West. And economically speaking, there is the power
crisis and respite in pricing pressures remains yet to be seen. Despite
the obstacles, the Presidency and the current government have till now
navigated the seemingly hot waters with relative ease.

The Heat is on…Again!

And so the list begins. 1) The Interior Minister’s future, after a bail-out
from the President, remains uncertain. 2) The challenge to the
President of holding two offices - leadership of the PPP and the
Presidency - is finding its way in court. 3) The 18th amendment will be
under scrutiny of the full bench of the Supreme Court. 4)
Implementation of Value-Added Tax (VAT) will be from July 1 even
though this has not yet been fully sold to both the general public and
stakeholders. And 5) The latest bomb scare in Times Square, New York
has rekindled the West’s concerns regarding militancy in Pakistan as it
was followed by visits by US President’s national security advisor and
the head of the Central Intelligence Agency (CIA).

Mixed Signals from IMF

The Internal Monetary Fund’s (IMF) Executive Board, in its meeting last
week, accepted Pakistan's request for waivers for non-observance of
two quantitative performance criteria under the program. These
related to non-compliance of overall budget deficit and net government
borrowing limits from the SBP both of which have inflationary
implications. However, recent news reports suggest a deadlock
between the IMF and the Government over next year’s budget target.
The Government is requesting a budget deficit target higher than that of
what the IMF is insisting, which is reportedly 3.9%.

In Hot Waters Forever

It may be that the state of affairs of the country has reached a point
where the only thing it has going for itself is its own rhetoric. Looking
Saad Hashemy back, it took the previous regime four to five years to reach such a
+9221-99033-2241 stage. Prolonged navigation through hot waters in this state can prove
saad.hashemy@ubl.com.pk challenging in the months ahead.

1|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – May 2010

Inflation Rampant
Figure 1 – Consumer Price Indices Non Food Non Energy (NFNE) Inflation Surges up
16%
NFNE Inflation rose by 70 basis points to 10.6% year on year, having
14%
dropped consistently the nine months prior. As NFNE lays greater
12% weight on less volatile negotiated prices, upward movement in the
10% index in the absence of a base effect reveals that market participants
expect inflation to remain high, and hence producers have adjusted
8%
May-10 their asking prices upward as well.
Aug-09
Sep-09

Feb-10

Apr-10

Jun-10
Jul-09

Nov-09
Dec-09
Jan-10

Mar-10
Oct-09

Much of the 1.73% month-on-month spike in April’10 CPI inflation was

CPI Discount Rate attributable to non food non energy subheads, with telecommunication
Projected CPI Average CPI
Non Food Non Energy charges having risen by 37.04%, apparel, medicare, education and
Source: SBP, UBL Research entertainment rising by 2.2%, 2.6%, 2.7% and 10% month-on-month
respectively. Being sticky prices, this is evidence that prices and
Figure 2 – SPI Trend Feb-May’10
expectations are being re-evaluated in the economy, and may continue
2.0%
to do so in the coming months.
1.0%
0.0% Price Pressures: Downturn in SPI shortlived
-1.0% Sensitive Price Index (SPI) started to trend downwards in the second
1-Apr
8-Apr
15-Apr
22-Apr
29-Apr

13-May
4-Feb
11-Feb
18-Feb
25-Feb

6-May
4-Mar
11-Mar
18-Mar
25-Mar

half of April’10, on the back of a decrease in food prices. The situation

reversed itself however, as wheat prices, amongst others have once
Week-on-week Month-on-month again started to trend upwards. SPI was again up 41 basis points month
Source: SBP, UBL Research
on month at the end of the second week of May’10.
Figure 3 – T-Bill Auction Cut-off Rates Table 1 - Price Indices: CPI, WPI and SPI - April'10 & SPI Trend April-May'10
12.5% Index ∆ YoY ∆ MoM Week ended SPI index %∆ WoW %∆ YoY
12.3% CPI 13.26% 1.73% 29-Apr 245.76 -0.63% 16.31%
12.1% WPI 21.99% 1.84% 6-May 248.06 0.94% 17.14%
11.9% SPI 16.72% 0.43% 13-May 249.54 0.60% 17.58%
11.7% Source: FBS
11-Mar

25-Mar
14-Jan

28-Jan

22-Apr
8-Apr

6-May

20-May
11-Feb

25-Feb

These factors indicate strong price pressures, and should lead to CPI
inflation for May’10 and June’10 to be between 14.0%-14.1%, averaging
3-M 6-M 12-M
Source: SBP, UBL Research
13.50% for Jan-Jun’10 and 12.0% for Jul’09-Jun’10 period. There may be
some respite however, as international oil prices have declined
Figure 4 – PKRV Trend Jan-May’10 considerably since end of April’10. Respite in petrol and high speed
diesel prices of up to 4% and 1% respectively is expected, which may
12.3%
result in some softening of more volatile prices.
12.1%

11.9%
Will the Status Quo be Maintained in May
11.7%
Demand for shorter term (3 month, 6 month) treasury bills was higher
in the latest auction, pulling down cut-off rates, as the system was liquid
16-Apr
15-Feb

1-Apr

1-May

16-May
1-Jan

17-Mar
2-Mar
16-Jan

31-Jan

and uncertainty prevails regarding future interest rate direction. PKRV

rates also reflect this, with spread between 3-month and 12 month
3M 6M 12M
Source: SBP, UBL Research rates rising to average 30 basis points in May’10. Further, with strong
inflationary pressure as depicted by persistent high CPI index and an
Syed Murtaza Hasnain uptick in the NFNE inflation index, the State Bank of Pakistan (SBP) may
+9221-99033-2898 have to re-asses its status-quo on interest rates.
syed.hasnain@ubl.com.pk

2|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – May 2010

External Account Remains Stable

Table 2 – External Accounts Current Account Deficit Narrowed in Apr’10
USD Millions Apr'10 Chg. Jul'09-Apr'10 Chg.
External account continued to improve in Apr’10 as Current Account
Current Account -185 28 -3,060 5,921
deficit narrowed and foreign inflows remained strong. Monthly current
Trade Balance -969 -334 -9,094 2,042
account deficit declined to USD185million, registering an improvement
Exports 1,835 -34 16,155 339
Imports 2,804 300 25,249 -1703
of USD28million month-on-month. Though trade deficit for the month
Services 8 315 -1,962 1,256 widened to USD969million; reimbursement of USD188million in lieu of
Income -306 -12 -2,570 1,097 Coalition Support Fund (CSF), which is recorded as services inflows, led
Remittances 756 -8 7,307 951 month-on-month reduction in current account deficit. For Jul’09-
Other Transfers 326 67 3,259 576 Apr’10, current account deficit stood at USD3.06billion compared to
Financial Account 560 575 3,703 -630 USD8.98billion in the same period year prior. USD2billion reduction in
FDI 219 -20 1,773 -1,432 trade deficit and USD1.5billion incremental current transfers remain the
FPI 136 23 -46 925
key drivers in the year-to-date recovery in current account.
BOP 238 242 730 4,987
Source: SBP, UBL Research Exports Could Outperform Annual Target
Figure 5 – Exports Break-down
Exports retained their momentum from last month, aggregating to
USD Millions

USD1.84billion in Apr’10. Month-on-month increases in exports of base

2.0 metals (up USD20million) and precious metals (up USD14.2million) were
able to offset seasonal reduction in exports of textiles (down
USD Billions

1.5
USD24.7million) and vegetable products (down USD40.4million). For
the year, country has been able to export goods worth USD16.2billion,
1.0
despite ongoing power crisis and austerity drive. The USD339million
year-on-year increase in exports has been partly facilitated by export of
0.5
raw cotton (up USD107million) and depreciation of PKR. At current
rate, we expect exports to outperform budgeted target of
0.0
USD18.8billion and sum above USD19billion for Jul’09-Jun’10.
Oct-09
Nov-09
Dec-09
Jan-10

Mar-10
Aug-09
Jul-09

Sep-09

Apr-10
Feb-10

FDI Down 45% Year-on-Year

Textiles Vegetables Minerals Others Foreign Direct Investment (FDI) continued to decelerate in Apr’10 as
Source: SBP, UBL Research
country attracted USD219million (down USD20million month-on-
Figure 6 –Foreign Direct Investment Jul’09-Apr’10 (USD Millions)
month). Likewise, USD1.77billion FDI received in Jul’09-Apr’10 is down
by a half from USD3.2billion inflows recorded in same period last year.
E&P
During the year, Oil and Gas exploration industry has been top recipient
of FDI, receiving USD605million, followed by communications sector
Communications
605
(USD222million) and Financial sector (USD133million). Amongst various
463 Finance other factors, deteriorating security situation and macroeconomic
222 balances are the main reason behind reduction in FDI.
Transport

79 133 Construction Outlook - Positive on Foreign Inflows

81 86 104
Paper Coalition Support Fund (CSF) payment of USD488million, which was
Chemicals received in May, and lower effective oil prices will likely facilitate a
current account surplus for the current month, which coupled with
Others
disbursement of IMF’s 4th tranche of USD1.13billion will boost external
Source: SBP sector standing for entire fiscal year. Current account deficit for Jul’09-
Asim Jahangir Jun’10 is expected at 2.2% of GDP (USD4billion) compared to earlier IMF
+9221-99033-7036 projection of 4.2% of GDP (USD7.5billion).
asim.jahangir@ubl.com.pk

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 U N I T E D B A N K L I M I T E D Economy Review – May 2010

Higher GDP Growth as a Result of Lower Base

Figure 7 – Historical GDP Growth & Initial & Revised Target The government has revised the 2007-08 and 2008-09 GDP growth rates
downward to 3.7% and 1.2% respectively, in what has become a trend
prior to budget announcement in recent years. As a result, current
9%
year’s growth estimate has been adjusted upward from 3.3% to 4.1% as
7% a result of a lower base.
5% The adjustments have been made based on reconciled data for the last
3% two years. Previously, GDP growth rates for 2007-08 and 2008-09 stood
at 4.0% and 2.0% respectively.
1%
Table 3 – Initial & Revised Growth Estimates 2009-10
2006
2003

2004

2005

2007

2008

2009

2010E

Initial Estimate Revised Estimate Change

Agriculture 3.8% 2.0% -1.8%
Previous Revised Industry 1.7% 4.9% 3.2%
Large-Scale Manufacturing 1.0% 4.3% 3.3%
Source: Economic Survey, News Reports Small-Scale Manufacturing 3.0% 7.5% 4.5%
Services 3.9% 4.6% 0.7%
Figure 8 – Sectoral Share in GDP Growth GDP 3.3% 4.1% 0.8%
Source: News Reports
7%
6%
Improvement in Industrial Sector
5%
4% Based on provisional data for current year and taking into account the
3% downward revisions in previous years, industrial sector seems to be the
2% prime beneficiary of the revised lower base. Industry is expected to
1% grow by 4.9% against the initial target of 1.7%. Small-scale
0% manufacturing growth has been revised to 7.5% compared to initial
-1% estimates of 3.0% while large-scale manufacturing’s (LSM) growth has
2006 2007 2008 2009 2010 2010 been revised to 4.3% for the current year. However, LSM growth for the
Initial Revised period Jul’09-Mar’10 has already surpassed that target as it stood at
Agri Manufacturing Services 4.36%.
Source: Economic Survey, UBL Research
Figure 9 – YoY LSM Growth & 2010 Estimates Agricultural Output Weak
11% Agricultural sector is expected to grow by 2.0% as compared to the
initial target of 3.8%. Output of all the major and minor crops, except
7%
cotton, has declined as compared to last year. Cotton output at 12.7
3% million bales is 7.4% higher as compared to last year. The 2.0% targeted
growth is primarily because of livestock, which has proven to be the
-1%
saving grace once again, growing by 4.1% in the current year.
-5%
Outlook
-9% Although this development can be considered a positive one as it may
Sep-09

Feb-10

Apr-10
2006
2007
2008
2009
Jul-09
Aug-09

May-10
Jun-10
Nov-09
Dec-09
Jan-10

Mar-10
Oct-09

change perceptions and future expectations, the economy still remains

extremely vulnerable to several international and domestic variables.
Actual Initial Revised Slow recovery in developed world can hurt external demand, while
Source: FBS, UBL Research unavailability of power and finances can limit domestic output.

Farhan Firdous Ali

+9221-99033-7007
farhan.firdous@ubl.com.pk

4|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – May 2010

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