STATE OF THE ECONOMY FY18E - EY
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STATE OF THE
ECONOMY
FY18E
1
Disclaimer
► This memorandum has been compiled by EY Ford Rhodes (“EY”) based on various
4.0
publically available sources including but not limited to the Economic Survey of
Pakistan 2018, information published on the website of the State Bank of Pakistan and
Pakistan Bureau of Statistics, various news articles and proprietary databases.
► The information and opinions contained in this document are derived from public
sources which we believe to be reliable and accurate but which, without further
investigation, cannot be warranted as to their accuracy, completeness or correctness.
This information is supplied on the condition that EY, and any partner or employee of
EY, are not liable for any error or inaccuracy contained herein, whether negligently
caused or otherwise, or for loss or damage suffered by any person due to such error,
omission or inaccuracy as a result of such supply. In particular any numbers and
schedules contained in this document are preliminary and are for discussion purposes
only.
► This memorandum has been prepared to solely to assist the reader in understanding of
the matters being discussed based on desktop research and should not be construed
as in depth analyses on issues presented herein.
► Mere possession of this document does not convey the right of reliance, nor may
reliance be placed by any reader for any purpose.
► This report should not be considered as investment, tax or accounting advice or a
recommendation to the reader on the future course of action and should not be
construed as an opinion of any kind by EY on the matters being discussed.
► The document may not have considered issues relevant to any third party. Any use that
any such reader may choose to make of this document is entirely at their own risk and
we shall have no responsibility whatsoever in relation to any such use. Accordingly, we
do not owe a duty of care to any reader of this report.
Sources: Pakistan economic survey
2
Consumer Price Index – July to March
CPI remained below the expected 6% at
3.78% (9MFY18 PBS data). Food prices
inflated by 2.00%, whereas non-food items
surged by 5.0%.
ECONOMIC
4.01%
4.01%
2018
3.78%
HIGHLIGHTS
3.78%
Real GDP growth rate (%)
“
13-year high
”
4.0
5.8
Sources: Pakistan economic survey
5.5
5.3
4.5
4.0
4.2
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19F 9M FY17 9M FY18
Trade deficit Foreign Direct Investments
Economy is worth
34.9
Amount in USD billion
more than:
31.0
2.7
USD330bn
Amount in USD billion
2.3
2.1
22.7
1.7
0.9
FY16 FY17 FY18F FY14 FY15 FY16 FY17 9M FY18F
”
Services Industrial Agriculture
Source: dawn.com/news
Trade deficit during the 9 Remittances clocked in at USD
Key growth sectors
6.4%
6.0%
month period was US$ 14.6bn as per 9MFY18 SBP data. 5.6% 5.8%
22.3 billion. FDI crossed USD 2.0bn during 5.8% 5.0%
9MFY18. 3.5%
3.8%
Pakistan ranked happiest
among neighboring countries:
Credit Rating Debt to GDP UN report
0.3%
ratio:
B 66.3% Population Census, 2017
2016 2017 2018
Sources: Pakistan economic survey
3
SOCIAL
INDICATORS
Urban Rural
Population Annual Growth rate:
64%
207 Million 2.4% 36%
Minimum wage rate Median age
PKR 14,000 to • Total: 23.8 years
15,000 per month • Male: 23.7 years
Current poverty rate • Female: 23.8 years
29%
Literacy rate
(percentage of adult
population) Rural Population Urban Population
56.4% 132 Million 75 Million 66 years
Life Expectancy
Sources: Dun & Bradstreet, Census 2017,Tribune
KPK 30.5
Sindh
Population of Pakistan
ICT 2.0 According to the sixth World
1.0 47.9 Happiness Report, Pakistan is 58
(Millions)
points ahead of India, 11 points
ahead of China and 31 points
2.1 15.0
ahead of Iran in its latest ranking
Punjab
110.0
11.1
“Pakistan ranked happiest
among neighboring countries:
UN report
”” Source: dawn.com/news
Karachi Hyderabad Lahore Rawalpindi
Multan Islamabad Quetta Peshawar Population Census, 2017
4ECONOMIC
INDICATORS
Inflation rate (July – March 2018) GDP growth rate (FY18E)
CPEC
3.78% 5.8% Total
investment
Trade deficit $62bn
(2018E)
Current deficit Policy rate
(2018E)
Energy
24 Projects
US$ US$
35bn 15.0bn 6% Transport
infrastructure
Remittance Foreign exchange reserves
(July – March 2018) (March 2018) 8 Projects
Gwadar
US$ US$
10 Projects
14.6bn 17.95bn
Sources: SBP. PBS , CPEC.gov.pk
Annual economic highlights comparison FY 17 FY18E
Current account deficit to GDP (%) ~5%
4.1%
Total debt to GDP (%) 75.4% 70.1%
Foreign Direct Investment US$bn 2.6 2.1*
CPI (%) 4.2% 3.78%*
GDP US$bn 304 330
GDP per capita US$ p.a 1,463 1,640
* Based on July – March FY 18
5Gross domestic product
:A
A ► Growth was led by improvements in agriculture
and services sector
Real GDP growth rate (%)
► The industry was boosted by an elevation in
manufacturing and construction activity
► With respect to the demand side, major
5.3 5.8 5.5 contribution came from a surge in domestic
4.5 consumption followed by a moderate increase
in investment
► Favorable macroeconomic policies continued
to reinforce expansion in the economy
FY 16 FY 17 FY 18 E FY 19 F
The impetus to economic activity particularly
Forecast. Growth is expected to moderate to about 5.5% in the medium came from an accommodative monetary policy
term reflecting declining energy sector investments, moderating confidence, and a consequent increase in private sector credit,
and continued structural reform challenges, although there are significant especially for fixed investment; recovery in farm
downside risks if external and fiscal imbalances are not swiftly addressed. incomes; a steady increase in development
However, growth will be supported by contained inflation, expansion in all spending; and, continuing work on infrastructure
key sectors, encashment of dividends from CPEC investments along with and energy projects under CPEC
improvement in security and power supply.
“…Growth should not be sacrificed, for after a long time we have a 5-6% growth trajectory. If I have to
maintain the tradeoff between the current account imbalance and the growth of 6%, I would opt for the
latter. That is my philosophy.” – Dr. Ishrat Hussain, Former Governor State Bank of Pakistan
SERVICE:
► The service sector was the major contributor towards GDP growth Sectors annual growth rate (%)
► Wholesale and retail trade posted an improvement in growth of 7.5%
against a target of 7.2%
► Transport, storage and communication sub sector demonstrated
3.6% growth; finance and insurance witnessed 6.1% and housing
services saw a growth of 4%
INDUSTRY:
► Output of large scale manufacturing grew by 6.2% and that of small
scale manufacturing rose by 6.1%
► The construction sector grew at the highest pace of 9.1% however
missed its target of 12.1% growth 5.80%
► Construction, slaughtering, power generation, mining were major
contributors
AGRICULTURE:
► The sector performance flourished due to exceptional growth in 6.43%
cotton ginning and major crops
► Production of major crops grew by 3.6% against a target of 2% with
cotton ginning surpassing its target and were growing by 8.7% 3.81%
► Livestock, forestry, and fishing, etc. all contributed positively
AGRI INDUS SERV
Sources: SBP. PBS , IMF
6Inflation
► Inflation fell for the 9MFY18 period compared to
9MFY17. This reduction was driven by a drop in
prices of perishable food items and food & non-
alcoholic beverages and lower than anticipated
Overall, the inflation graph indicates an upward trend
increase in house rents.
but this rate is not expected to accelerate abnormally
► For the current fiscal year, SBP expects that
unless there is a major supply side shock such as
inflation rate would remain below 6% and within the
upswing in the global oil prices.
range of 4.5-5.5%.
4.6 4.8
4.01
3.78
March 2017 March 2018 FY 18 FY 19
Sources: SBP, Oxford Economics, EY analysis
Foreign exchange reserves
20 29
20 20
26
USD Billions
20 20
23
19 19 20
18 18
18
17
Jul-17 Oct-17 Jan-18 Apr-18 FY 19 FY 20 FY 21 FY 22 FY 23
Dollar
Forecast
► There has been a ~12% fall in the reserves since the
start of FY18 from USD ~20bn to USD ~17bn ► As per Oxford Economics, foreign exchange reserves are expected
► Latest data reveals that forex reserve of the central to stabilize on account of CPEC related investment projects
bank is equivalent to 10 weeks of import cover. attracting foreign flows to the country, support from friendly
► The main driver for this decline is the spike in debt countries and expectations of rising exports.
servicing and surging trade deficit ► The Government will seek up to $1bn from the country’s expatriates
worldwide to boost its falling foreign reserves in dollar bonds
Sources: SBP, Oxford Economics, EY analysis
7Foreign Direct Investment (Net)
MNCs repatriated ~ USD 1.3bn earnings during the period FDI Inflows
3.2 July-Feb 2018
exacerbating Net FDI. The government should rather
incentivize reinvestments by MNCs and retain FDI 2.6
China
2.1
USD billion
2.0 $1,281mn
UK
$205.5mn
Malaysia
9M FY17 9M FY18 FY19 F FY20 F $121.3mn
► FDI increased by around 4.4% during ► FDI prospects are bright for Pakistan in Saudi Arabia
9M FY18 compared to 9M FY17, the coming years with regards to
mainly due to the massive Chinese flourishing economic activity and with
inflows under CPEC. CPEC bringing in numerous long term
► Pakistan is also attracting non-Sino projects under its belt.
investors to balance the geographical ► Improvements in law and order has also $11.4mn
tilt of the FDI by targeting inflows in the enhanced investment outlook and serve UAE
automobile sector. as an added contributor to supplement a
greater FDI inflator.
$15.4mn
Sources: SBP, Oxford Economics, BOI, EY analysis
Interest rate
► The SBP, after holding interest rates stable
at 5.75% for the past 20 months, increased
the rate to 6% in Jan 2018 due to:
► Ticking cost push inflation (via rising oil
prices);
► PKR depreciation; and
6.00% ► Declining output gap which may lead to
5.75% the economy overheating.
► Per Monetary Policy Statement (MPS)
March 2018, the SBP has decided to
maintain the same rates for the next two
months.
Monetary policy statement (MPS) - March 2018
► Inflation is expected to stay below 6% in FY 18 and close to the same figure in FY19, irrespective of anticipated demand
pressures and oil price recovery
► Growth is expected to rise following improved real sector performance within both agricultural and Large scale manufacturing
sectors relative to last year
► Growth in private sector credit is expected to follow the same trend throughout FY19
► The impact of recent currency depreciation shall result in a lagged impact on the current account balance
► Based on these assessments, the Monetary Policy Committee has decided to maintain the rates at 6%
Sources: SBP, Oxford Economics
8Remittance
30,000 (Million US Dollars)
24,500
Worker’s remittance: 25,000
20,100
20,000
During the 9M FY18 14,400 14,606
15,000
remittances stood at
10,000
USD 14.6bn, 3.6% higher
on a year on year basis. 5,000
0
9M 2017 9M 2018 FY 2018F FY 2019F
Sources: SBP, Oxford Economics
2018 2017
(USD Million) Remittance from Gulf
countries, which have
historically accounted for
1,954
majority of annual
1,773
1,768
1,724
1,694
1,654
1,639
remittances, have dropped
1,618
1,612
1,585
1,577
1,561
1,542
1,488
1,450
drastically triggered by a
1,417
1,360
1,294
fall in crude oil prices and a
tilt towards increasing
localization of labor.
After the end of a six-year
ban on recruitment, which
was lifted in mid-2016,
Bangladesh appears to
have replaced Pakistan as
the main source of labor
force to Saudi Arabia.
Short-term Forecast:
► PKR depreciation against the
dollar will encourage expats
to remit more;
► Similarly, imposition of taxes
on remittances greater than
USD 100,000 in accordance
with the new Amnesty
Scheme will encourage
USD million
expats to remit before the
4,078
3,691
implementation
3,265
3,143
Long-term Forecast:
2,031
1,948
1,739
1,707
1,648
1,658
Expected rebound
rebound in oilinprices
oil
prices triggered
triggered by production
by production cuts
cuts from
from OPEC/Russian
OPEC/Russian and andthe
the remittanceinitiative
remittance initiative under
under
KSA UAE USA UK GCC PRI, both anticipate a boost
boost in in
July - March 17 July - March 18 (Others) future foreign remittances.
9Currency
116
114
112
110
108
106
104
Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18
PKR / USD
► During Mar18, the PKR fell to an all time low of PKR 115.6 against USD in the interbank market.
The rising price of oil in the international market came out as yet another problem for policy
makers; making it more expensive in PKR terms due to the depreciation. Same goes for the import
of other commodities including cooking oil, industrial raw material and capital goods which will turn
out to be more expensive following the rupee depreciation. Though the depreciation may succeed
in resuscitating exports and curbing imports, erosion of FX reserves will still persist as an
imperative issue to be catered.
► USD/PKR Parity based on real effective exchange rates has been achieved which may preclude
significant devaluation stemming from technical reasons/currency overvaluation. Demand/Supply
considerations will primarily drive exchange rate movements going forward.
Sources: Investing.com, EY analysis
“Rupee „
has attained its “optimal
further need for devaluation
value”, no
Dr. Miftah Ismail, Advisor to PM for FInance
Sources: Business Recorder
10Debt
External Debt Total Public Debt
Q2 FY 18 FY 18F FY 19F
Total public debt PKR Trillion
PKR 21.4 tn PKR 22.8 tn
USD billion
FY17 Q2FY18
As % of GDP 66.3
67.0
89 93.3 103.3 Debt Servicing
Composition 7.0 6.9
6.1
4% 4%
5% 5.5 5.6
8%
USD billion
2.9
77%
Public External Debt Private Sector Debt
Public Sector Enterprises Banks
Intercompany debt Forex Liabilities 2013 2014 2015 2016 2017 Q2 2018
The rising debt is a result of an expansionary fiscal policy, narrow tax base, failure in enhancement of exports and
attraction of adequate FDI. This has put pressure on the balance of payments which has led to depreciation of
rupee against the US dollar. Furthermore higher than expected budget deficit and increase in cost of debt servicing
has led to increased borrowing by the government.
Forecast
► Arranging financing at favorable rates to meet near term needs could be a challenge against the background of
hiking international interest rates and increased financing needs.
► Pakistan’s external financing requirements are likely to fall over the coming years as trade balance will improve,
once CPEC related imports reduce. This will reduce the requirement of foreign exchange outflows and hence the
need for debt.
► Repayments of CPEC investments could also accelerate the build up of external payment obligations.
Sources: SBP, ESP 2018, EY analysis
11Trade
Balance of Trade in Goods and Services Owing to the magnitude of the deficit
resulting from inelastic imports,
Pakistan is likely to face difficulties in
managing foreign exchange reserves
over the coming months. However,
USD Million
FY17 FY18E
imports related to CPEC related
Deficit: $31 billion
projects (power generation) are
Deficit: $34 billion expected to improve the sustainability
and productive capacity of the
economy. Further, improving energy
supply is leading to a revival in exports
Imports Exports
growth which are higher ~12% YoY
Sources: SBP
“Well, you have to protect your exports, you have to increase your remittances and you have to bring in
more FDI. These are three no debt creating inflows. In my six years [as SBP governor], I only
concentrated on that. My door was open for every exporter. Importers were not allowed to come but
exporters were always welcome..”
– Dr. Ishrat Hussain, Former Governor State Bank of Pakistan
Sources: SBP
USD Billion Exports Imports
4.91
4.89
4.64
4.64
4.44
4.42
4.33
4.33
3.96
2.30
2.16
2.11
2.10
2.06
2.00
1.97
1.82
1.75
JUL-17 AUG-17 SEP-17 OCT-17 NOV-17 DEC-17 JAN-18 FEB-18 MAR-18
(R) (R) (R) (R) (R) (R) (R) (R) (P)
Trade analysis
► Pakistan recorded exports worth ~ USD 18 billion in 9M FY18, compared to ~USD 16 billion during the same period last year
► Imports recorded an increase of 16.6pc to ~USD 40.5 Billion in 9M FY18 compared to the same period last year.
Correlation: Exports and commodity prices
► In 2015, Pakistan’s total and textiles and clothing exports registered the steepest decline of 11% and 6% respectively, when
world cotton prices fell by 16%
► After registering negative growth in 2015 and 2016, Pakistan’s total textiles and clothing exports rose by 10% and 4%
respectively in 2017 when, average world cotton prices also shot up by 16.22%.
Imports
► The rise in the Import bill is attributed to increase in imports of machinery, industrial raw material and petroleum products.
Additionally consumer imports add a significant burden to the current account deficit which the government has been trying
control via imposition of regulatory duties.
12Financial Action Task Force (FATF)
Background
► The Financial Action Task Force (FATF), a global money-laundering watchdog, will place Pakistan on its terrorist
financing watch list (grey list) later this year.
► The Pakistani Prime Minister’s Advisor on Finance Miftah Ismail has confirmed that Pakistan is going to be
officially placed on FATF’s watch list in June, when the forum meets for its next scheduled meeting.
Threats
► The grey-listing may squeeze Pakistan’s economy and make it harder for the country to meet its mounting foreign
financing needs, including potential future borrowings from the International Monetary Fund.
► The grey-listing could lead to a downgrade in Pakistan’s debt ratings, making it more difficult to tap into the
international bond markets and stash plans to raise more through Eurobonds and Sukuks.
► The United States is acting to squeeze Pakistan’s finances: the Trump administration suspended assistance of
over $1 billion, which included military assistance and the release of Coalition Support Funds (CSF), money which
the United States owes to Pakistan for military operations.
Possible Impact
► Factual evidence, both historic and current, suggests that these assertions are incorrect. Pakistan was on
the FATF grey-list from 2012 to 2015, a period during which it successfully completed an IMF program and
successfully tapped global capital markets.
► During this period Pakistan’s imports and exports remained stable, evidence that the grey-listing did not
raise any significant barriers to trade.
► The reaction of the bond markets to the FATF’s decision has also been muted. Ten-year bonds issued by
the country in 2017, for instance, have had a decline in their yield from a high of almost 7.4% on February
14, 2018 to below 7.1% on February 26, 2018.
Sources: The Diplomat, Dawn, EY analysis
Pakistan Credit Rating
Moody’s S&P Fitch
B3 B B
CDS spreads on Pakistan’s sovereign debt have been < 400bps demonstrating
confidence of investors and protection sellers in Pakistan’s ability to repay its
obligations. As of April 2018, CDS spreads stand at ~341bps.
Sources: Bloomberg, Business Recorder, EY analysis
13Major development projects during the year
April 2018
Completed at cost of around $5 billion, the power project comprises
four units with generation capacity of 242.25 MW each. After the
first unit has been inaugurated today, COD of three successive
units is expected by June 2018. November 2017
Source: The News
The terminal is operating at the designed capacity of 600
mmcfd and has been tested at 750 mmcfd. The first LNG
terminal, also at the Port Qasim, has been running for the
past more than 2.5 years
April 2018
Source: Tribune
South Korean industrial conglomerate Lotte Group, has achieved
another huge milestone by launching its new, state-of-the-art
factory built on 20 acres in Kasur District, Punjab
Source: Profit
October 2017
The terminal was completed at a cost of $285 million early
this year, according to a press statement, and has so far
provided berths to 12 coal ships.
September 2017 Source: Tribune
Air Sial is owned by Sialkot Chamber of Commerce
which also formed the first private airport in the city.
Source: PCQ
March 2018
MOL’s US$ 150 million Tolanj Gas Processing Plant will
produce 20 million cubic feet gas per day, besides
contributing USD 31 million revenue annually to the
national kitty
April 2018
Source: The Nation
CCI Pakistan inaugurated its Greenfield bottling plant in
Faisalabad. Set up with an investment of $45 million, the
facility is CCI Pakistan’s 6th plant in Pakistan
Source: Profit
14Major development projects during the year
January 2018
The government has given Greenfield investment status
to five vehicle manufacturing companies
Source: Tribune January 2018
16km-long elevated thoroughfare which runs along the Lyari
River, completed at a cost of PKR 11 billion, 16 years after
construction start.
January 2018 Source: Tribune
Installed by the China overseas port holding company to supply
drinking water to people in port city with capacity of 254,000
gallons.
Source: Tribune March 2018
The US-based oil and gas company, Exxon Mobil Corp,
has partnered with a Pakistani consortium to build and
supply the nation’s third liquefied natural gas (LNG)
terminal.
Source: Energy Digital
March 2018
PPP chairman inaugurated KTDC worth PKR 4,100mn
Source: INC Pak
March 2018
OMV has agreed to sell its upstream business in Pakistan
to Dragon Prime Hong Kong Ltd
March 2018 Source: epmag
The project is among the largest gas-fired combined cycle
plants in the country, expected to add up to 1,230
megawatts (MW) to Pakistan’s national grid March 2018
Source: GE Newsroom
The campus has been established at a cost of Rs 96.2mn
and Rs 995mn has been approved for it’s first year of
operation.
Source: Tribune
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