FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
KARACHI STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
General Musharraf will continue to dominate
the political scene. The fact that the army
currently presides over the political framework
ensures a high degree of political stability in a
volatile country in which the military has
traditionally played a political role. Pakistan is
scheduled to hold parliamentary elections by
October 2007, and an electoral college is due
to choose a president in the same year.
To conter the possibility that his supporters
could perform poorly in the parliamentary
elections, in June 2006 General Musharraf
brought forward the date of the presidential
election so that it would be held with the
current assemblies in place, thereby virtually
ensuring his re-election. The opposition,
although weak, is severely critical of his rule.
The government's support of the US-led "war
on terror" will raise political tensions with the
opposition parties, and militant groups in
Waziristan and Baluchistan will continue to try
to undermine federal rule.
Relations between Pakistan and its long-
standing rival, India, have been improving
since a low in 2002, and despite occasional
setbacks and negative statements released
by both sides to the media, relations are
forecast to improve and deepen throughout
the forecast period. Both governments will
continue to go beyond general statements of
their desire for peace to discuss conflict-
avoidance initiatives and deepen relations via
establishing transport, trade, sporting and
people-to-people links. In December 2005
and January this year a new bus service and
rail link were established between Amritsar in
India and Lahore in Pakistan. However, this
positive development was followed by a war
of words over Pakistan's attempt to quell an
insurgent uprising in Baluchistan, and the
core dispute over Kashmir also remains
unresolved.
boost investment provided international aid
commitments are honoured. But higher
interest rates, although helping to rein in
inflation, will constrain GDP growth. Private
consumption growth is estimated to have
slowed to 9.1% in 2005/06 after notching up
exceptionally rapid growth, at 16.8%, in
2004/05, and will decelerate further, to 6.1%,
in 2006/07. The import boom will moderate,
but import growth will continue to outstrip
export growth. The main domestic policy risks
to the economy include a possible reversal of
economic reforms (perhaps caused by a
political crisis) or a much sharper than
expected tightening of monetary policy
(triggered by a surge in inflation).
International oil prices and domestic inflation
are high at present, and could undermine
macroeconomic stability and economic
growth prospects. Action to stem inflation has
come late, and a failure to control consumer
price inflation remains the main policy risk in
2006-07. Inflation apart, Pakistan's
policymakers have in the past few years
created an environment within which the
private sector has begun to thrive.
These policy measures include substantial
privatization, reforms in the banking and
utility sectors and efforts to reduce red tape.
The need to improve Pakistan's social
infrastructure and raise foreign investment
levels are now the focus of the
administration's policy agenda.
Inflationary pressures remain the biggest
threat to economic growth. Monetary
tightening by the State Bank of Pakistan
(SBP, the central bank) in April 2005, when
the bank raised benchmark interest rates by
150 basis points to 9%, have slowly begun to
have an effect on inflation. Year-on-year
consumer price inflation fell from a peak rate
of 11.1% in April 2005 to 6.2% in April 2006,
but rose to 7.7% in June. Meanwhile, core
inflation (excluding food and energy prices)
fell steadily from a peak of 7.9% in April 2005
to 6.3% in June this year. On balance,
consumer price inflation is expected to
average at 10.1% in 2006 and 6.7% in 2007
as efforts by the central bank and the
government to control price rises eventually
begin to bear fruit.*
Economic Performance
Real GDP growth is forecast to slow in
2005/06 and 2006/07, but will still be relatively
strong, at 6.6% and 6.1% year on year in the
two years respectively, driven by the
continued expansion of textile production and
other manufacturing output. The strength of
the industrial sector means that growth in
services output should remain buoyant.
Agricultural growth is expected to be slower
in 2005/06 and 2006/07 than in 2004/05,
which experienced exceptional harvests.
Reconstruction in earthquake-hit areas will
* Economic Intelligence Unit Ltd., July 2006
Key Information Contacts
Government of Pakistan www.pak.gov.pk
Ministry of Finance www.finance.gov.pk
Privatization Commission www.privatisation.gov.pk
State Bank of Pakistan www.sbp.org.pk
Security and Exchange Commission of Pakistan www.secp.gov.pk
2004/05-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a)
2004/05-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (a)
Services
Agriculture
Mining & manufacturing
Electricity, gas & water supply
Construction
21.6
20.2
53.4
2.5
2.3
PAGE 86
Private consumption
Government consumption
Fixed investment & Stockbuilding
Imports of goods & services
Exports of goods & services
80
70
60
50
40
30
20
10
0
-10
-20
80.0
16.9
15.3
7.8
-19.9