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UNCLAS SECTION 01 OF 03 ISLAMABAD 002106 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EFIN ETRD ECON PREL PK
SUBJECT: PAKISTAN MISSES MAJOR ECONOMIC TARGETS: HIGHLIGHTS FROM THE 
ANNUAL ECONOMIC SURVEY 
 
¶1. (SBU) Summary:  Finance Minister Naveed Qamar released on June 9 
the Economic Survey for the 2007-08 fiscal year.  The document, 
released one day before the fiscal year 2008-09 budget, reported 
that all major economic indicators for the first ten months of the 
current fiscal year (July 07 to April 08) are currently below 
target.  Economic growth for the year will come in around 5.8 
percent, well below a target of 7.2 percent.  The fiscal deficit is 
projected to be seven percent of GDP versus a target of four 
percent; Government of Pakistan (GOP) borrowing from the State Bank 
of Pakistan (SBP) reached an all-time high of USD eight billion (Rs 
544 billion) for the first ten months of the fiscal year.  As of 
early May 2008, the GOP had USD 13.98 billion in outstanding debt to 
the SBP, or nine percent of GDP.  Pakistan's trade deficit rose to 
USD 17 billion, up from USD 11 billion last year.  Savings and 
investment both declined, further impacting overall GDP growth.  End 
Summary. 
 
¶2. (SBU) Finance Minister Naveed Qamar rolled out the Economic 
Survey for the 2007-08 fiscal year on June 11.  The document, 
released one day before the fiscal year 2008-09 budget, utilizes 
data from the first ten months of the current fiscal year. (Note: 
All data references in this cable cover the first ten months of the 
fiscal year, and comparisons are for the equivalent period during 
the 2006-2007 fiscal year. Pakistan's fiscal year runs from July to 
June.  End Note.) The survey report concluded that Pakistan missed 
all of its major economic targets for the current fiscal year, 
including GDP growth, agricultural production, industrial and 
manufacturing growth, inflation, fiscal and current account deficits 
and the trade balance.  Survey data indicates that economic growth 
for the current fiscal year will come in at around 5.8 percent 
versus an annual target of 7.2 percent. 
 
¶3. (SBU) Referring to last ten months as "challenging," Finance 
Minister Naveed Qamar blamed "unexpected" political and economic 
conditions, both domestic and international, for the below-target 
economic performance.  Qamar stated that the Government of Pakistan 
(GOP) was currently facing dual challenges: "getting economic growth 
back on track" and implementing "correct and viable" economic 
policies that protected Pakistan's most vulnerable groups.  Qamar 
blamed the lack of financial discipline for the country's 
macroeconomic imbalances.  Both growth and investment have declined; 
the current account, fiscal and trade deficits have all risen; and 
decreased foreign exchange reserves have put pressure on the 
Pakistani rupee.  Expressing hope that Pakistan would receive 
increased budgetary support from "friendly countries and 
international donors," Qamar estimated that the GOP would receive 
close to USD three billion by the June 30 end of the current fiscal 
year. 
 
¶4. (SBU) The services sector remained the driving economic force 
during the current fiscal year; 75 percent of annual GDP growth can 
be attributed to gains made by the services sector.  The 
manufacturing sector recorded a modest 5.4 percent growth versus 8.2 
percent growth last fiscal year.  Large-scale manufacturing and 
construction sector growth rates both fell well below target.  The 
rising cost of international commodities, nation-wide energy 
shortages and periodic social and political unrest all contributed 
to below-target manufacturing growth.  The agricultural sector also 
performed poorly, recording 1.5 percent growth versus a target of 
4.8 percent.  A sharp decline in the production of major crops, 
coupled with power and water shortages, is partly to blame for the 
below-target performance. 
 
¶5. (SBU) Inflation, as measured by changes in the Consumer Price 
Index (CPI), averaged 10.3 per cent during the first ten months of 
the current fiscal year.  The Ministry of Finance cited commodity 
price inflation and excessive borrowing from the State Bank of 
Pakistan as being particularly troublesome.  Food price inflation 
for the first ten months of the current fiscal year rose 15 percent 
versus 10.2 percent last year with non-food inflation rising 6.8 
percent. 
 
¶6. (SBU) Pakistan's annual fiscal deficit is currently estimated at 
USD 10.9 billion or seven percent of GDP.  The rising cost of 
 
ISLAMABAD 00002106  002 OF 003 
 
 
subsidies, particularly for fuel and energy, and an increased debt 
service burden are mainly to blame.   The current account deficit, 
including official transfers, widened 75.6 percent to USD 11.6 
billion, versus last year's deficit of USD 6.6 billion.  The current 
account deficit currently stands at 6.9 percent of GDP, up from 4.6 
percent during the same period last year.  Total investment dropped 
slightly to 21.6 percent of GDP, down from 22.9 percent last fiscal 
year.  While public sector investment remained steady at 5.7 per 
cent of GDP, private sector investment decreased from 15.6 per cent 
to 14.2 per cent of GDP.  National savings accounted for 13.9 per 
cent of GDP versus 17.8 percent last fiscal year.  National savings 
financed 65 per cent of fixed investment during the first ten months 
of the current fiscal year, down from 77.7 per cent last year. 
 
¶7. (SBU) The State Bank of Pakistan continued to pursue a tight 
monetary policy, raising the discount rate on three occasions and 
increasing both the cash reserve requirement and statutory liquidity 
requirement.  Growth in the money supply slowed from 14 percent to 
nine percent from July 2007 to May 10, 2008.  Credit to the private 
sector grew by 14.9 percent during the first ten months of the 
current fiscal year versus 12.2 percent during the same period of 
last year.  Monetary tightening, which began in April 2005 to curb 
inflation, has also impacted domestic investment, one factor in 
below target manufacturing growth. 
 
¶8. (SBU) Pakistan's trade deficit currently stands at USD 16.8 
billion, up from USD 11 billion last year. Exports grew by 10.2 
percent, totaling USD 15.3 billion with all export categories but 
textiles recording gains.  Textile exports, accounting for 57 
percent of all exports, dropped by 2.5 percent.  Export gains were 
unable to match the rising cost of imports, totaling USD 32.1 
billion.  Imports grew by 28.3 per cent due to the surging cost of 
oil and commodity prices.  Pakistan's total foreign exchange 
reserves, including those held by both the State Bank of Pakistan 
and commercial banks, stood at USD 12.3 billion as of May 2008, down 
from a June 2007 high of USD 15.6 billion. 
 
¶9. (SBU) The Pakistani rupee, after more than four years of relative 
stability, depreciated against the dollar by 6.4 percent during the 
July 2007 to April 2008 period.  Pakistan's external liabilities 
rose USD 5.4 billion during the first nine months of the current 
fiscal year, the largest increase in more than a decade.  Pakistan 
currently owes USD 45.9 billion, 80 percent of which is due to 
bilateral and multilateral lenders.  Almost all of Pakistan's 
external debt is medium and long-term.  Worker remittances remained 
a bright spot, increasing 19.5 percent to a total of USD 5.3 billion 
for July 2007-April 2008. 
 
Comment 
- - - - 
 
¶10. (SBU) This has been a difficult year for Pakistan's economy, as 
it has been buffeted by increases in international commodities 
prices and political pressure to increase spending on subsidies and 
development.  As a result, Pakistan's macroeconomic indicators 
remain worrisome after the fiscal and current account deficits have 
reached an unsustainable seven percent of GDP.  While the GOP 
anticipates USD three billion in additional financial inflows before 
the June 30 end of the fiscal year, Pakistan still faces difficulty 
in financing its deficits. Since the IBRD loan was included in this 
USD three billion anticipated inflow, we expect the GOP will face a 
larger than expected financing gap. 
 
¶11.  (SBU) Comment continued:  Although GDP growth of 5.8 percent 
looks respectable, it is important to note that growth has been 
almost entirely in the services sector.  Past growth has been more 
broad-based, with the agricultural, manufacturing and services 
sectors all contributing.  Despite tight monetary policy, inflation 
remains in the double digits.  The GOP is now forced to make tough 
choices between spending and fiscal discipline.  With all 
macroeconomic indicators continuing to move in a negative direction, 
growth will likely slow further in the coming fiscal year, 
increasing pressure on the government to increase taxes, decrease 
subsidies and stop excessive borrowing from the State Bank of 
 
ISLAMABAD 00002106  003 OF 003 
 
 
Pakistan.  End Comment. 
 
PATTERSON