19 October 2004	Tuesday	04 Ramazan 1425

KARACHI, Oct 18: Economists at ABN-Amro said in their July-Sept 2004 quarterly report released on Friday that the bank was revising the top end of the country's forecasted economic growth in FY05 to around 6.0-6.2 per cent, from an earlier range of 6.0-6.5 per cent.

The quarterly Economic Monitor of ABN-Amro prepared by Sakib Sherani and Erum Faruqi said that the reason for a downward revision was a higher than forecasted trade deficit for full FY05 (revised upward to around $4.7 billion) and a larger than originally projected magnitude of water shortage. "Despite these pressures, we continue to believe that the hitherto strong underlying fundamentals with regard to investment and growth remain largely intact for FY05", said the economists.

They pointed out that in the recent months, Pakistan's economy had encountered a degree of turbulence. Record world oil prices and torrid domestic demand were generating inflationary pressure, creating stress on the rupee, and inducing a monetary tightening earlier-than-desired by SBP.

As regards the External Account, the economists noted that Pakistan's trade deficit rose to $839m in July-September FY05 from $145m in the same previous period. The sharp increase was due to import growth of 38 per cent compared with export growth of 17 per cent. Import growth was primarily caused by petroleum and capital goods, which increased 38 and 23 per cent, respectively. Exports grew mainly on account of knitwear and cotton cloth, which increased 57 and 16 per cent, respectively.

Exports for July-September FY05 increased 17 per cent to $3,469m, compared with $2,968m in the corresponding period last year. This approximately $500m incremental increase in export earnings was mostly due to higher knitwear exports, which rose by $209m. While most of the increase in exports was concentrated in the textile sector, petroleum products also made a small but significant contribution.

A healthy development was also in the change of fortunes of the readymade garments sector, which experienced an increase of 19 per cent in volumes in July-September FY05 over the same period in FY04. Export value in dollar terms increased by a slightly lower 18 per cent, indicating that the rise had been due more to a quantity effect than a price effect.

Imports for July-September FY05 were up 38 per cent to $4,308m compared with $3,112m in the corresponding period last year. The two largest import categories in July-September 2004 were petroleum and machinery, which made up 22 and 21 per cent of total imports, respectively. Petroleum, the larger of the two categories in dollar terms, stood at $944m, 38 per cent higher than its value in the same period last year. Machinery goods imports were $922m in July-September FY05, 23 per cent higher than its value in the corresponding period last year. "The surge in imports is the main reason why the trade deficit has ballooned", said the economists, adding that roughly 22 per cent of the incremental increase in imports in YTD FY05 was attributable to petroleum imports, 21 per cent to agricultural goods and chemicals, and 14 per cent to machinery. The rest of the increase was diversified amongst the remaining categories.

The ABN-Amro quarterly economic monitor also discussed the inflation and exchange rate in considerable detail. As regards the equities, the Report pointed out that the KSE-100 index had slipped in the last quarter, falling almost 9 per cent from 5,348 on July 1, 2004 to 4,890 on September 22, 2004, its lowest level since March 2004. From its lifetime peak of 5,621 on April 19 to its near-term trough, the KSE-100 index lost 13 per cent in value, before staging a smart recovery in early October. "A number of factors appear to have contributed to the weakness in the equity markets", the economists said, which they thought included the following: News of the phase out of badla (COT financing) and the introduction of margin financing from October 2004. Since according to an InvestCap Report, investment in the badla market stood at Rs24.8bn as of October 5 at an annualized rate of 12.9 per cent, the total investment in the carryover market was the equivalent of 1.7 per cent of the KSE-100 market capitalization, and a sizeable proportion of daily traded value.

Other reasons for a depressed equity market during the quarter included: In mid-September, the government dispelled rumours of the impending removal of the Capital Value Tax (CVT) on share transactions, levied in the budget FY05, which caused the KSE-100 index and turnover to nosedive. Sentiment during this period also appeared to have taken a hit following adverse news flow regarding the law and order situation across the country.

In addition to the above factors, the increasing trend of dollarization witnessed in the last few months, also seemed to have played a progressively more important role. The sustained rise in open market premium since early August looked to have deflated somewhat the KSE-100 index, with investors making a portfolio choice at the margin - away from equities and into USD.

"Similarly, the more recent run-up in the KSE-100 coincides with a deflating of the open market premium, possibly suggesting that some of the liquidity finding its way back into the equity market could have been generated by USD-selling in the kerb", observed the analysts.

In conclusion, the ABN-Amro economists stated that Pakistan's economy had hit a rough patch in the recent past due to surging international oil prices, high domestic inflation and a difficult water situation. The stability of the exchange rate had also been threatened by a torrid pace of increase in imports - which had been driven as much by capital goods as by higher payments for petroleum. "As a result, and in response to inflationary pressures, interest rates have been rising in a more pronounced (but still "measured") manner since July", concluded the economists.