All the leading indicators to economic growth tell us that we are entering in a high growth era.

In our opinion Pakistan will easily cross the GDP growth target of 5.5% for 2018, as there can be
seen that due to increase in power supply, manufacturing sector is on the reviving path. We see
that the industrial sector will contribute to the GDP growth to 1.4% in FY18, while we expect the
service sector to contribute 3.6%. Furthermore string economic indicators such as Corporate
Sector Credit Growth (+22% YoY) and growth in power generation (+16% YoY) make our
believes more concrete that there will be strong GDP growth for FY18. The monthly generation
statistics points out that the power generation had reached an huge high of12,410 Gwh during
Aug’17 from the new power plants. Here in Pakistan Per capital electricity consumption is very
low when compared to middle income countries. It stands at 505 KWh in CY17 compared to 514
KWh in CY16.

According to the Global Competitiveness Report of 2017-18 issued by the World Economic
Forum measuring the production and prosperity, Pakistan had enhanced its governance to be
honored a rank of 115 (last year: 122nd) which indicates at higher economic growth in the
coming years.

Growth in Large Scale Manufacturing, has been very broad-based which includes increasing
production of capital goods (like steel, cement, automobiles, glass), Food Products (Sugar,
Ghee), Pharmaceuticals and Consumer Durables.

We increase inflation estimates for FY18 4.2% to 4.6%, because of the increase in international
commodity prices and depreciation impact. Even though the estimates are below 5.5-6.0%,
which is the government target. The major impact of inflation will be seen from Feb’18 onwards,
so the policy rate shall increase in Mar’18 by 50bps. The inflation rates takes into consideration
5.2% PKR depreciation and 8.0% increase in oil prices. In our opinion depreciation will not have
a major impact on general inflation as commodities trading at a premium to international prices
have a higher weight than commodities directly linked with the greenback. Furthermore, three
fourths of the index (76.4% of the commodities)isn’t linked with the international prices and is
mainly dependent on the demand-supply condition domestically; therefore these will not be
affected by the PKR depreciation.
On the external front, we project the PKR to depreciate to PKR 112/USD by Jun ’18 due to
increasing current account deficit because of more volume of machinery and petroleum imports.
To recall, CAD clocked-in at USD 12.1bn at the end of FY17 (~3.8% of GDP) and we project it
to settle at USD 15.1bn by the end of FY18 (~4.5% of GDP). Other factors like increasing
investment and stagnant savings have also played a role in widening the CAD. Following
depreciation of PKR, initially the trade balance is adverse as high exchange rate shall increase
the import bills. However, the demand for cheaper locally produced commodities will rise and
become more competitive against the expensive imported goods in the international markets
therefore accounts for a positive trade balance.

A decline in remittances during FY17 was experienced because of diminishing economy of the
Middle East, which made up of two thirds of the Pakistani remittances. We expect a decrease of
0.4% in FY18.

Due to lesser inflows under financial account as compared to the current account deficit, the
foreign exchange reserves were under pressure. SBP reserves were at USD 16.1bn at the end of
FY17 and are expected to rise to USD 16.2bn during FY18, while banks’ reserves are expected
to reach USD 5.0bn.

Foreign Direct Investment shows an increasing trend due to CPEC, and it is quite evident in form
of increasing share of china in total FDI. During 4MFY18, total net FDI clocked-in at USD
1,146mn, up by 57% YoY. FDI from China stands at USD 837mn (~73% of total FDI) compared
to USD 217mn in same period last year.

There are however challenges to the Pakistan economy. Current account deficit and currency
play a vital role in the Pakistan economy.

There is absence of support from the Remittances. Historically there was a good support to the
Pakistan economy from the Remittances which almost covered the whole of trade deficit. But
since FY17 this coverage declined to 72% , therefore increasing the current account deficit.

There is a rise in trade deficit due to higher imports under machinery and petroleum group. Also
the foreign exchange reserves are under pressure, because of higher current account deficit and
the repayment and servicing of external debt has reduced the size of the FX reserves, to USD
20bn.