FINANCIAL MARKETS ASSOCATION

OF PAKISTAN

WORKSHOP
ON

ECONOMIC DATA ANALYSIS

21st September 2006

Conducted
by
Asif Ali Qureshi, CFA
The Objective

• Enhancing the participants’ understanding about the

functioning of economic system and developing a
comprehensive data analysis framework to enable more
informed decision making.
Workshop Design

• An inter-active workshop explaining the concepts and

mechanics of macro-economic system while following a
step-by-step building-up approach.

• Emphasis shall be less on theory and more on

application while identifying and interpreting key
economic data on Pakistan.

• Given participants’ common interests, Monetary Policy &

its Transmission System shall be the focal point of this
workshop.
Variables influencing decision making…

External Account Fiscal Account Growth & Inflation

Implications for Monetary

Policy & FX

These variables are actually inter-related.

Framework of Monetary/FX regime in Pakistan

…The current framework of monetary-cum-exchange rate

policies and the underlying economic analysis in Pakistan can,
thus, be broadly characterized as judgment and discretion based
rather than model or rule based. The main justification for the
current practice is that the economy is undergoing fundamental
structural transformation and thus the behavioral relationships
among the variables and the time lags influencing the behaviour
are in a state of flux and transition…

Dr. Ishrat Hussain

Keynote Address at the SBP Conference on Monetary-cum-Exchange Rate
Regime held at Karachi on 14th November, 2005
Workshop Layout

• Session-1: Basic Monetary Framework (Preamble)

• Session-2: External Accounts

• Session-3: National Income Accounts

• Session-4: Inflation Indicators

• Session-5: Fiscal Accounts

• Session-6: Monetary Aggregates

BASIC MONETARY FRAMEWORK
Monetary equations are like balance sheets

ASSETS
This is the “causative side”
i.e., any change in money
supply is caused by a change
in the asset side.
LIABILITIES
This side shows only the
effects of these changes.
Reserve Money (RM) Equation

NFA of SBP
FX Reserves, etc. SBP Liability

ASSETS LIABILITIES
Net Foreign Assets (NFA) Currency in Circulation

Net Domestic Assets (NDA) Currency in banks’ vaults

Banks’ deposits with SBP

• Financing to Govt.
• Financing to Banks

NDA of SBP
Broad Money (M2) Equation

NFA of Banking
System
FX Reserves, etc. SBP Liability

ASSETS LIABILITIES
Net Foreign Assets (NFA) Currency in Circulation

Net Domestic Assets (NDA) Demand Deposits

Time Deposits
Resident FCY Deposits

• Financing to Govt.
• Financing to Private sector
Banks’ Liabilities
NDA of Banking
System
Money Multiplier

Broad Money (M2)

Currency in Demand and Time

Circulation Deposits

Money
Multiplier
=
Currency Banks’ SBP M2 / RM
Issued Deposits

Reserve Money (RM)

Important Concepts

• Reserve Money (RM) pertains to SBP only

• Currency Issued = Currency in Circulation + Vault Cash

• M2 includes the entire banking system i.e., SBP and Banks

• Each monetary equation has two sides; Assets & Liabilities

• Changes in money are caused by changes on Assets side

which comprises NDA and NFA

• RM = NDASBP + NFASBP

• M2 = NDABANKING + NFABANKING
Case: Building an economic system…

• A group of individuals decide to build an economy, based on

modern political-economic systems, from scratch.

• Four types of economic agents finally emerge

– Government

– Central Bank

– Banks

– Individuals
Stage 0: Beginning of an economy
Stage-1: Individual sells wheat to Govt. for Rs.1,000

GDP growth Fiscal Deficit

wheat T-bill
Central
Individual Government
Bank
Cash Cash
Stage 2: Individual deposits Rs.1,000 in a bank

Increase in bank deposits is not always associated with M2 growth

Stage 3: Bank loans out Rs.800

• Borrower draws down Rs.500 and leaves the remaining

Rs.300 in bank account.

Increase in private sector borrowings causes M2 expansion

Impact of $1.0 million “private” FX inflow
Step-1: $1.0 million remittance received through Bank.

Step-2: Bank sells US$ to SBP, which credits Rs.60 million to the Bank’s
account with SBP ⇒ SBP’s NFA increases by $1.0 million.
Step-3: Bank in turn credits the account of recipient of remittance by
Rs.60 million.

Private FX inflows generate monetary growth

Impact of $1.0 million “Govt.” FX inflow

Step-1: Receipt of $1.0 million Eurobond through SBP ⇒ SBP’s NFA

increases by $1.0 million.

Step-2: Govt. uses the rupee proceeds of Rs.60 million to retire T-bill on
SBP’s balance sheet ⇒ SBP’s NDA reduces by Rs.60 million.

Govt. FX inflow does not generate rupee liquidity. SBP’s NFA

increase offset by its NDA shrinkage.
EXTERNAL ACCOUNTS
What is Balance of Payments (BOP)?

• BOP is a statistical statement that systematically summarizes,

for a specific time period, the economic transactions of an
economy with the rest of the world. Transactions, for the most
part [are] between residents and nonresidents…

(Balance of Payment Manual, 5th Edition; IMF)

The Reporting Framework

• IMF provides the guidelines for compilation of BOP.

• The guidelines are in shape of Balance of Payment Manual

(BPM) covering the

– Conceptual framework

– Structure, and

– Classifications

• Series of BPM releases: 1948, 1950, 1961, 1977, and 1993.

• BPM 5th Edition (BPM5) released in 1993 is the latest one.

Key Reference Documents
SBP is the key data source for BOP data
Key external sector data on SBP
2 Points about Pakistan’s BOP

• SBP has adopted BPM5

– Publishing BOP as per BPM5 since Sep’2004 (FY05)

• Consolidation of Foreign Exchange Companies (FEC)

transactions into BOP accounts

– Since FY04, BOP includes all FX flows through the banking

channels as well as FECs.
BOP (Flows) Equation

Current Capital Financial = ∆ FX

+ + + E&O
Account Account Account Reserves

OR

Current Capital Financial – ∆ FX

+ + + E&O = 0
Account Account Account Reserves
Current Account Break-up

Current Account
Trade Balance Services Income Current Transfers
Exports Transportation Interest Private Transfers
Imports Travel Dividends – Remittances
Govt. Services Profits – Resident FCAs
Others – Others
Official Transfers
Trade Data Puzzle: FBS vs. SBP figures

• There have been significant variations in trade data reported

by SBP and FBS (Federal Bureau of Statistics).

• Data divergences have grown bigger over the years.

Exports Data are Largely Similar…
18.0
USD Billlion

16.5 16.5
SBP
16.0
FBS

14.5 14.4

14.0

12.5 12.3
12.0

10.0
FY04 FY05 FY06
Imports Data Have Bigger Variances…
30.0
USD Billlion 28.6

27.0
SBP 24.9
FBS
24.0

21.0 20.6
19.0

18.0

15.6
15.0
13.7

12.0
FY04 FY05 FY06
Trade Deficit Shows the Net Impact
14.0
USD Billlion
12.1
12.0
SBP
10.0 FBS
8.4
8.0
6.2
6.0
4.5
4.0 3.3

2.0 1.3

-
FY04 FY05 FY06
What explains these divergences?

• Shipment vs. Payment (timing difference)

– FBS records data on physical movement of goods
– SBP data is based on actual flows of FX

• CIF vs. FOB

– FBS’s import data is on CIF or C&F basis
– SBP’s reports import data on FOB basis

• Coverage Differences (transactions not covered by banks)

– Goods paid for abroad by expatriates
– Purchases from duty free shops
– Land borne imports from Afghanistan
Trend in trade deficit & import growth

1,500 70%
USD Million
1,300 60%

1,100 50%

900 40%

700 30%

500 20%

300 10%

100 0%
May-05

May-06
Aug-04

Aug-05

Aug-06
Nov-04

Feb-05

Nov-05

Feb-06
Trade Deficit Import Growth
Share in import growth

FY05 FY06

USD Mn % Total USD Mn % Total

Food 0.28 6% 0.61 8%
Machinery 1.89 38% 1.21 15%
Vehicles (0.32) -6% 0.75 9%
Oil 0.64 13% 2.86 36%
Textile 0.14 3% 0.14 2%
Chemicals 0.77 15% 0.56 7%
Metals 0.51 10% 0.61 8%
Others 1.09 22% 1.25 16%
TOTAL 5.01 100% 7.99 100%
Composition of Imports (FY06)

Total Imports: USD28.58 Bn

Food,
Misc, 1.92 , 7%
5.77 , 20%
Machinery,
5.88 , 21%
Metals,
1.81 , 6%

Vehicles ,
Chemicals,
1.87 , 7%
4.13 , 14%
Textile , Oil,
0.54 , 2% 6.66 , 23%
Transactions via Exchange Companies

• Since FY04, all flows channeled through Foreign Exchange

Companies (FECs) are reported as part of Current Account.

• However, net impact on current account balance is ‘zero’ as

outflows equal inflows.

• Outflows reflected as part of:

– Net services and Trade balance

• Inflows reflected in:

– Private Transfers
Services outflow through exchange cos.

USD Million FY05 FY06

Travel 997 1,168

Royalties & fees 8 2

Other business services 2,124 2,488

TOTAL 3,129 3,658

Pakistan: Current A/C Break-up

USD Million FY03 FY04 FY05

Trade Balance -359 -1,279 -4,515

Exports (FOB) 10,974 12,459 14,450

Imports (FOB) -11,333 -13,738 -18,965

Services (Net) -2 -1,316 -3,317

Transportation -711 -890 -1,248

Travel -402 -1,034 -993

Comm. Services 230 166 272

Govt. Services 1,014 905 1,052

Others -133 -463 -2,400

Contd…
Pakistan: Current A/C Break-up

USD Million FY03 FY04 FY05

Income (Net) -2,211 -2,208 -2,394

Profit & Dividends -1,211 -1,416 -1,778

Interest -1,069 -839 -764

Others 69 47 148

Current Transfers 6,642 6,614 8,666

Private Transfers 5,737 6,102 8,418

Workers’ remittances 4,237 3,871 4,168

Resident FCAs -12 367 521

Others 1,512 1,864 3,729
Official Transfers 905 512 248
Current A/C: Analytical Adjustments

• Current Transfers include Resident FCAs implicitly suggesting

that this could be used for financing deficits under trade &
services.

• As FCAs are not available for financing BOP deficit, it maybe

appropriate to exclude these from Current A/C for analytical
purposes.

• A second adjustment could be exclusion of Official Transfers

from Current A/C.
 Adjusted Current A/C (USD Bn)
6.0 6.0
4.1 4.1
4.0 4.0
1.8 1.4
2.0 2.0

0.0 0.0
FY03 FY04 FY05 FY06 FY03 FY04 FY05 FY06
-2.0 -2.0
-1.6 -2.1
-4.0 Reported -4.0 Ex.FCA Residents
-5.0
-6.0 -6.0 -5.3

6.0 6.0

4.0 3.2 4.0 3.2

2.0 1.3 2.0 0.9

0.0 0.0
FY03 FY04 FY05 FY06 FY03 FY04 FY05 FY06
-2.0 -2.0
-1.8
-2.3
-4.0 -4.0 Ex.FCA Res. &
Ex.Official Transfers Official Transfers
-6.0 -5.7 -6.0 -6.0
 Adjusted Current A/C (%GDP)
6% 4.9% 6% 5.0%
4% 4%
1.8% 1.5%
2% 2%

0% 0%
FY03 FY04 FY05 FY06 FY03 FY04 FY05 FY06
-2% -2%
-1.4% -1.9%
-4% -3.9% -4%
Reported Ex.FCA Residents -4.1%
-6% -6%

6% 6%
3.8% 3.9%
4% 4%

2% 1.3% 2% 1.0%

0% 0%
FY03 FY04 FY05 FY06 FY03 FY04 FY05 FY06
-2% -2%
-1.6% -2.1%
-4% -4% Ex.FCA Res. &
Ex.Official Transfers
-4.4% Official Transfers -4.7%
-6% -6%
 Current Account: Korea
50.0 14.0%
USD Bn
12.0%
40.0
10.0%
30.0
8.0%

20.0 6.0%

4.0%
10.0
2.0%

0.0 0.0%
1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
-2.0%
-10.0
-4.0%
-20.0
-6.0%

-30.0 -8.0%
Amount %GDP
 Current Account: Malaysia
20.0 18%
USD Bn
16%
14%
15.0
12%
10%
10.0
8%
6%
5.0 4%
2%
0%
0.0
-2%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-4%
-5.0
-6%
-8%
-10.0 -10%
Amount %GDP
 Current Account: Thailand
20.0 14%
USD Bn
12%
15.0 10%
8%
10.0
6%

5.0 4%
2%
0.0 0%
1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
-2%
-5.0 -4%
-6%
-10.0
-8%

-15.0 -10%
-12%
-20.0 -14%
Amount %GDP
 Current Account: Philippines

8.0 10%
USD Bn
8%
6.0
6%

4.0 4%

2%
2.0
0%
0.0
-2%
1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
-2.0 -4%

-6%
-4.0
-8%

-6.0 -10%
Amount %GDP
 Current Account: India
10.0 4.0%
USD Bn
8.0
3.0%
6.0
2.0%
4.0
1.0%
2.0

0.0 0.0%
1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004
-2.0
-1.0%
-4.0
-2.0%
-6.0
-3.0%
-8.0

-10.0 -4.0%
Amount %GDP
Capital & Financial Account

• What used to be “Capital Account” under previous BPMs was

re-designated as “Capital & Financial Account” under BPM5.
Capital Account

• A transfer in kind is a capital transfer when it consists of

– Transfer of ownership of fixed asset, or
– Forgiveness of liability by a creditor

• A transfer in cash is a capital transfer when it is linked to or

conditional on, the acquisition or disposal of a fixed asset
(non-produced and non-financial).
– Examples: Land, Trademarks, Patents, Franchise, etc
Capital Account

USD Million FY04 FY05 FY06

Capital Account 1,133 82 658

Project Grants 133 62 123

Debt Forgiveness 1,000 0 495

Others 0 20 40

Recurring Capital Account Flows

are relatively small
Current Transfer vs. Capital Transfers

• Current transfers consist of all transfers that are not transfers

of capital.

• Current transfers directly affect the level of disposable income

and should influence the consumption of goods or services.
That is, current transfers reduce the income and consumption
possibilities of the donor and increase the income and
consumption possibilities of the recipient.
Financial Account Break-up

Financial Account
Direct Investment Portfolio Investment Other Investments Reserve Assets

Equity Capital Stock Market Trade Credits Monetary Gold

Retained Profits Special USD Bonds Loans SDRs
Eurobonds Deposits IMF Position
Others FX Reserves
Other Claims

An equivalent amounts shown

as Income outflow in the Current
Account
Pakistan: Financial Account Break-up

USD Million FY03 FY04 FY05

Foreign Direct Investment 798 951 1,525

Equity Capital 674 763 1,211

Reinvested Earnings 124 188 314

Foreign Portfolio Investment -239 314 620

Stock Market 22 -28 151

Special USD Bonds -228 -137 -131

Eurobond/Sukuk -7 496 596

Others -26 -17 4

Direct Investment Abroad -27 -45 -66

Contd…
Pakistan: Financial Account Break-up

USD Million FY03 FY04 FY05

Net Other Investments -1,617 -2,981 -1,655

Trade Credits 0 -335 -343

Loans -1,575 -2,302 103

Currency & Deposits 555 -241 -1,167

Other Liabilities -597 -103 -248

Pakistan: BOP Summary

USD Million FY03 FY04 FY05

Current Account 4,070 1,811 -1,560

Capital Account 1,133 82 658

Financial Account -1,085 -1,761 424

E&O 523 222 -80

Exceptional Financing 620 -55 -55

BOP Balance 5,261 -299 613

Reserve Assets

• Consist of those external assets that are readily available to

and controlled by monetary authorities for direct financing of
payments imbalances, for indirectly regulating the magnitude
of such imbalances through intervention in exchange markets
to affect the currency exchange rate, and/or for other
purposes.
 9.0
10.0
11.0
12.0
13.0
14.0
Jun-03 USD Bn

Sep-03

Dec-03

Mar-04

Jun-04
SBP

Sep-04
Pakistan’s FX Reserves

Total

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06
Import Coverage Vs. SBP Reserves

10.0 12.0
Months 9.4 USD Bn
9.0
8.2
10.0
8.0

7.0
8.0
6.0 5.7
5.0
5.0 4.5 6.0

4.0
4.0
3.0

2.0
2.0
1.0

- 0.0
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06
Import Coverage SBP Reserves (RHS)
FE.25 Deposits & Banks’ FX Reserves
3.6 3.5 3.4 3.5
FE.25 Deposits 3.3 3.2
3.2 3.1 3.1
2.8
2.8 2.7
2.5 2.6
2.3 2.3
2.4

2.0
Dec-03

Dec-04

Dec-05
Jun-03

Sep-03

Mar-04

Jun-04

Sep-04

Mar-05

Jun-05

Sep-05

Mar-06

Jun-06
3.0 2.8 2.8 2.8
Banks FX Reserves
2.5 2.4
2.6 2.4
2.3 2.3
2.2
1.8
1.8 1.7 1.6
1.4
1.4 1.2
1.0
Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06
Forex loans explains trend in banks’ reserves
1.2 1.1 1.1 1.2 1.2
1.0 1.0
Forex Loans
0.8 0.8
0.8 0.7

0.5 0.5
0.4
0.4 0.3

-
Sep-03

Mar-04
Dec-03

Sep-04

Mar-05
Dec-04

Sep-05

Mar-06
Dec-05
Jun-03

Jun-04

Jun-05

Jun-06
3.0 2.8 2.8 2.8
Banks FX Reserves
2.5 2.4
2.6 2.4
2.3 2.3
2.2
1.8
1.8 1.7 1.6
1.4
1.4 1.2
1.0
Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06
Effect of Increase in Forex Loans

• Keeping other things constant, growth in forex loans has

following effects
– Increased supply of USD in inter-bank market ⇒ positive
effect on PKR/USD.
– Increased rupee liquidity as SBP mops up additional USD
inflows.
– Shifting of FX reserves from Banks to SBP

• Vice versa happens in case of un-winding of forex loans.

Factors influencing demand for forex loans

• Exchange Rate Outlook

– Stable currency ⇒ higher demand for forex loans

• PKR – USD Interest Rate Differential

– Large positive differential ⇒ higher demand for forex loans
– Same applies in case of export refinancing rate
External (Interest bearing) liabilities break-up

External Liabilities

External FX
Debt Liabilities

Public Private
Pakistan: External Debt & Liabilities
As of 31-Dec-05 USD Billion
Total External Debt 33.52
Public Debt 30.74
Paris club 12.47
Multilateral 16.02
Euro bonds 1.11
Other bilateral 1.15
Private Debt 1.29
IMF Loans 1.49

Foreign Exchange Liabilities 1.73

Special USD Bonds 0.37
NHA Bonds 0.11
Central Bank/BOC Deposits 1.20
Other Liabilities 0.05

Total External Liabilities 35.25

International Investment Position (IIP)

• IIP is a statistical statement (compiled as of a specific date

such as year-end) of the value and composition of:
– an economy’s claims on the rest of the world, and
– the value of that economy’s financial liabilities to the rest of
the world.

• IIP is the balance sheet of the stock of external financial

assets and liabilities.
External Debt vs. IIP

• External debt covers non-equity claims external claims on an

economy.

• IPP covers both external liabilities and assets of an economy

– Liabilities are defined broadly to include both debt and
equity claims i.e., external debt plus equity investments
– Assets includes Gold, FX reserves, Overseas Investments,
etc.
Pakistan: International Investment Position
As of 31-Dec-05 USD Billion

ASSETS LIABILITIES

FDI (Abroad) 0.8 FDI 10.5

Portfolio Investment (Abroad) 0.4 Portfolio Investment 2.4
Other Investments 5.2 Equity 0.9
Loans 2.3 Debt 1.5
Currency and deposits 1.7 Other Investments 34.9
Other assets 1.1 Loans 32.4
Reserve Assets 11.1 Currency and deposits 1.0
Gold 1.1 Other assets 1.5
Other FX 10.1

TOTAL ASSETS 17.5 TOTAL LIABILITIES 47.8

Strong private FX inflows are not without costs

• Surging capital inflows can also be something of a double-

edged sword, inflicting rather less welcome and destabilizing
side effects, including a tendency for the local currency to
gain in value, undermining the competitiveness of export
industries, and potentially giving rise to inflation.
Jan-Yuang Lee, Economic Issues 7, IMF
Need for sterilization

PKR
Appreciation! Need for
Sterilization
Large FX Inflows
through Banking
Channel

Increase in Bank
Deposits

Central Bank M2
Intervention Growth

Higher Money Market

Liquidity
Tools used for Sterilization

• Open Market Operations

• Raising Reserve Requirements

• Increasing Discount Rate

• Shifting Government Deposits to Central Bank

• Conducting FX Swaps (SELL/BUY)

• Easing Capital Outflow Restrictions

Each tool has its own limitations

Reference reading on sterilization

Sterilizing Capital Inflows

Jang-Yung Lee
IMF Economic Issues: 7
February 1997
FISCAL ACCOUNTS
Introduction

• Fiscal accounts are statement of government’s revenues,

expenditure and financing flows during a specific period of
time.

• Analysis of fiscal accounts is important as fiscal policy carries

Growth, Inflation and Monetary Policy implications.
Reporting framework

• CBR tax collection figures released on monthly basis.

• Quarterly fiscal accounts released by MOF, 2 months after the

end of each quarter. The accounts are audited by AGPR.
Looking up MOF website for fiscal data

www.finance.gov.pk
Fiscal accounts on MOF’s website
About Consolidated Fiscal Accounts

• Consolidated fiscal accounts reflect combined fiscal balances

after eliminating federal-provinces transfers.

• Fiscal equation:

Fiscal
Revenue – Expenditure = Balance
Components of Fiscal Revenue

TAX REVENUES
CBR Taxes Surcharges Provincial Taxes Other Taxes
– Income/Direct Tax – Gas Surcharge – Stamp Duty – Airport Tax
– Sales Tax – Petroleum Levy – Motor Registration – Others
– Customs Duty – Provincial Excise
– Federal Excise

NON-TAX REVENUES
Taken out of
budget – PSE Dividends
effective FY07 – SBP Profit
– Civil Admin (Logistics Support)
– Others
Composition of Fiscal Expenditure

FISCAL EXPENDITURE
Current Expenditure Development Expenditure
– Debt Servicing – PSDP
– Defense – Net Lending
– General Administration
– Others
Sources of Fiscal Financing

FISCAL FINANCING
Domestic External Privatization
– Bank Borrowing – Multilateral – Domestic and/or Foreign
– Non-Bank Borrowing – Bilateral
– Eurobonds, etc
Fiscal Summary

PKR Billion FY02 FY03 FY04 FY05 FY06

Total Revenue 625 721 794 900 1,077
Tax Revenue 479 556 611 660 804
Non-Tax Revenues 146 165 183 240 273
Total Expenditure 815 898 923 1,117 1,402
Current 700 725 778 943 1,121
Development 126 163 181 253 367
Unidentified -11 10 -36 -79 -86
Budget Deficit -190 -177 -129 -217 -325
External Financing 52 88 -6 121 149
Bank Borrowing 45 -69 63 60 71
Non-Bank 85 147 61 8 8
Privatization 8 11 11 28 97
Fiscal Revenues: Growth

FY02 FY03 FY04 FY05 FY06

GROWTH RATES
Total Revenues 13.0% 15.4% 10.1% 13.4% 19.7%
Tax Revenue 8.4% 16.1% 9.9% 8.0% 21.8%

Non Tax Revenue 31.5% 13.0% 10.9% 31.1% 13.8%

SHARE IN GROWTH
Tax Revenue 51% 80% 75% 46% 81%
Non Tax Revenue 49% 20% 25% 54% 19%

%TOTAL REVENUE
Tax Revenue 77% 77% 77% 73% 75%

Non Tax Revenue 23% 23% 23% 27% 25%

Fiscal Revenues: % GDP

FY02 FY03 FY04 FY05 FY06

Total Revenues 14.2% 14.9% 14.1% 13.7% 14.0%

Tax Revenue 10.9% 11.5% 10.8% 10.0% 10.4%

Non Tax Revenue 3.3% 3.4% 3.2% 3.6% 3.5%

‘Unidentified’ expenses impedes analysis
PKR Billion

FY02 FY03 FY04 FY05 FY06

Current Expend. 722 781 778 943 1,121

Development Expend. 156 107 181 253 367

Unidentified Expend. -6 10 -36 -79 -86

TOTAL Expenditure 872 898 923 1,117 1,402

Unidentified/Total -0.7% 1.1% -3.9% -7.1% -6.1%

Unidentified/GDP -0.1% 0.2% -0.6% -1.2% -1.1%

Fiscal Expenditure: Growth

FY02 FY03 FY04 FY05 FY06

Total Expenditure 11.2% 10.2% 2.8% 21.0% 25.5%

Current 8.4% 3.6% 7.3% 21.2% 18.9%

Debt Servicing 5.1% -19.1% -1.5% 7.1% 12.9%

Defense -5.1% 7.4% 12.5% 17.8% 14.2%

Others 19.6% 20.0% 9.8% 29.6% 23.2%

Development 75.0% 29.4% 11.0% 39.8% 45.1%

Fiscal Expenditure: %GDP

FY02 FY03 FY04 FY05 FY06

Total Expenditure 18.5% 18.6% 16.4% 17.0% 18.2%

Current 15.9% 15.0% 13.8% 14.3% 14.5%

Debt Servicing 5.6% 4.1% 3.5% 3.2% 3.1%

Defense 3.4% 3.3% 3.2% 3.2% 3.1%

Others 6.9% 7.6% 7.1% 7.9% 8.3%

Development 2.9% 3.4% 3.2% 3.8% 4.8%

Budget Deficit & Primary Balance

FY02 FY03 FY04 FY05 FY06

Budget Deficit -4.3% -3.7% -2.3% -3.3% -4.2%

Primary Balance 1.3% 0.5% 1.2% -0.1% -1.1%

Primary budget balance

has slipped into deficit
Financing of Fiscal Deficit

FY02 FY03 FY04 FY05 FY06

Bank 24% -39% 49% 28% 22%

Non-Bank 45% 83% 47% 4% 2%

External 27% 50% -5% 56% 46%

Privatization 4% 6% 9% 13% 30%

NATIONAL INCOME ACCOUNTS
What is GDP?

• It measures the market value of all final goods & services

produced within an economy during a year.

• GDP is measured in Rupee terms rather than in physical units

of output.
Reporting Framework

• GDP is estimated as per

guidelines provided by UN’s
System of National
Accounts (SNA).

• SNA 1993 (released in 1993)

is the latest set of guidelines
and has been adopted in
Pakistan.

• Economy Survey is the

primary source of GDP data.
3 Approaches for Measuring GDP

Production Income/Cost Expenditure

Approach Approach Approach

• Based on value • Based on costs • Based on final

addition by each plus profits of uses of the
producer. each producer. output.

• GDP = total • GDP = total • GDP = C + I + G

value addition costs + profits + (X – M)
by all producers.

A combination of the above three approaches

used in estimation of Pakistan’s GDP
Example: Measuring GDP

Stage of Production Sales Proceeds Value Added

1 Farmer's Wheat
300 300

2 Miller's Flour
700 400

3 Baker's Bread
900 200

4 Grocer's Bread
1,000 100

GDP = 1,000 = 300 + 400 + 200 + 100

3 Main Economic Sectors of Pakistan’s GDP

AGRICULTURE INDUSTRIAL SERVICES

– Crops – Mining & Quarrying – Transport& Comm.
– Livestock – Manufacturing – Wholesale & Retail Trade
– Fishery – Construction – Finance & Insurance
– Forestry – Power, Gas & Water – Public Admin & Defense
– Others
Approaches for measuring GDP

AGRICULTURE Production Approach

INDUSTRIAL Production Approach

SERVICES Income/Cost Approach

Measuring Pakistan’s GDP: Agriculture

Sub-Sector: Crops

Gross Output : Crops Production x Harvest Prices

Seed, Fertilizer, Selling Prices or

Cost of Inputs : x WPI
Pesticides, etc.

Gross Value Added Value added by crop sub sector

Pakistan’s GDP: Sector-wise Break-up

PKR Billion FY02 FY03 FY04 FY05 FY06

Agriculture 968 1,059 1,165 1,377 1,492

Industrial 938 1,031 1,417 1,644 1,945

Services 2,189 2,391 2,669 3,183 3,859

GDP (fc) 4,095 4,481 5,251 6,204 7,295

Nominal GDP
or
GDP at current Factor Costs
Pakistan: Sector-wise share in GDP (FY06)

Agriculture,
Industrial,
21.7%
26.0%

Services,
52.3%
Nominal vs. Real GDP

• Nominal GDP measures the value of aggregate output at

current market prices for the year to which GDP pertains.
– e.g., FY06 nominal GDP shall be based on prices prevailing
during FY06.
– Nominal GDP growth rate: change in nominal GDP value of
FY06 from nominal GDP value of FY05.

• Real GDP measures value of aggregate output at price levels

prevailing in the ‘base year’.
– Assuming FY00 as base year, FY06 real GDP shall be based
on price levels of FY00.
– Real GDP growth rate: change in real GDP value of FY06
from real GDP value of FY05.
Why real GDP growth rate is important?

• As real GDP is based on constant prices, the real GDP growth

essentially measures the volumetric change in the aggregate
output during a year.

• More quantity of output produced ⇒ more goods & services

per capita ⇒ improvement in average living standard.
Pakistan’s GDP: Nominal vs. Constant Prices

PKR Billion FY00 FY01 FY02 FY03 FY04 FY05 FY06

GDP
(Current Prices) 3,562 3,876 4,095 4,481 5,251 6,204 7,295

GDP
(FY00 Prices) 3,562 3,632 3,745 3,922 4,216 4,577 4,879

Nominal GDP and that at

Constant Prices are the same
in the “base year”.
 Pakistan: Real GDP growth rate
9.0%

8.0%
Services
7.0% Industrial
Argiculture
6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%
FY02 FY03 FY04 FY05 FY06
-1.0%
 Pakistan: Sectoral shares in Real GDP growth
100.0%

80.0%

60.0%

40.0%

20.0%

0.0%
FY02 FY03 FY04 FY05 FY06

Argiculture Industrial Services

IMF on Pakistan’s GDP growth: Year Ago

…it is not clear that the current growth acceleration will be

sustained. While the results of this paper confirm that growth
remains highly unpredictable, it does suggest that an increase in
investment—including in water management—would be needed
for growth to remain strong…Meanwhile, inflation has picked up
and, if left unchecked, could undermine confidence and thus
investment and growth.

Is Pakistan’s Growth Acceleration Sustainable?

IMF Country Report No. 05/408, November 2005
IMF on Pakistan’s GDP growth: Current View

• … the prospects for sustained high economic growth in 2006-

07 and over the medium-term remain excellent, with evidence
of a strong pick-up in domestic and foreign direct
investment...

• Continuation of macro-economic stability, market reforms, the

privatization program, trade liberalization, and improvement
in the country's physical and human infrastructure will provide
the right environment to encourage further investment and
increase in productivity, going forward.

IMF Press Release, September 2006

From GDP to GNP

Total Value
Added by All
Economic Sectors

Indirect Taxes
GDP(fc) + + GDP(mp)
Subsidies
+
Net Factor
Income from
Abroad
National
Income

GNP(mp)
Expenditure wise de-composition of GDP

Net Trade &

Services Balance

GDP = C + I + G + (X – M)

Current Account
Balance

GNP = C + I + G + (X – M) + NFI
Real Growth in Expenditures

16%

12%

8%

4%

0%
FY02 FY03 FY04 FY05 FY06

-4%

-8%
Consumption (C) Government (G) Investment (I)
How are expenditures on GDP measured?

GDP = C + I + G + (X – M)

X–M Trade Data of FBS

G Fiscal Accounts

I Measured independently by FBS

C Residual i.e. GDP – I – G – (X – M)

Two major components of Investment

• Gross Fixed Capital Formation

– Additions to fixed assets e.g., plant & machinery, tube
wells, agriculture machinery, land improvements, etc.

• Change in Stocks (inventory)

– Includes raw materials, work-in-progress and finished
goods
Pakistan: Rising Investment/GDP level

22% 9%
Input Capita-Output Ratio 8%
(ICOR) for Pakistan is
7%
20% about 3.0x
6%

5%
18%
4%

3%
16%
2%

1%

14% 0%
FY02 FY03 FY04 FY05 FY06
Investment/GDP GDP growth (RHS)
Adding perspective…

Current A/C
GNP = C + I + G + CAB Balance

&

GNP = C + G + S

C + G + S = C + I + G + CAB
Savings–Investments
GAP equals Current
Account Balance
S – I = CAB
PRICE INDICATORS
What are Price Indicators?

• Price indicators are indices based on weighted average prices

of underlying basket of items during a given time period in an
economy.

• Inflation is measured as the rate of change in a benchmark

price index.
4 Main Price Indicators in Pakistan

Consumer Price Index Monthly

(CPI)

Wholesale Price Index Monthly

(WPI)

Sensitive Price Index Weekly

(SPI)

GDP Deflator Annual

FBS: Primary source for price indicators

www.statpak.gov.pk/depts/index.html
SBP’s Inflation Monitor provides analysis

• Inflation Monitor is released

by SBP on monthly basis.

• Contains detailed analysis

of price trends on
aggregate as well as
disaggregated basis.
Consumer Price Index (CPI)

• Measures changes in retail prices of a fixed basket of goods

and services in the country.

• Rate of change in CPI is the primary measure of inflation in

Pakistan.

• Covers prices of 374 items in 71 markets of 35 urban cities

across the country.

• Current CPI basket based on Family Budget Survey 2001.

Consumer Price Index (CPI)

• 4 CPI series for different household income groups:

– Up to PKR3,000
– PKR3,001 – PKR5,000
– PKR5,001 – PKR12,000
– Above PKR12,000

• The commonly quoted CPI is the Combined CPI (a 5th series)

which reflects weighted average of all four income groups.
Weights based on Family Budget Survey 2001.

• Various sub indices for each commodity group within each

income group are also maintained.
CPI Break-up: 10 Main Groups

S.No. Group Items Weight

1 Food & Beverages 124 40.3%

2 House Rent 1 23.4%

78.3%
3 Transport & Communication 43 7.3%

4 Fuel & Lighting 15 7.3%

5 Apparel, Textile & Footwear 42 6.1%

6 Cleaning, Laundry & Personal Care 36 5.9%

7 Education 24 3.5%

8 Household, Furniture & Equipments 44 3.3%

9 Medicare 29 2.1%
10 Recreation & Entertainment 16 0.8%
Weights of major food items in CPI

S. No. Items Weight

1 Wheat & Baking 8.7%

2 Milk and Dairy 7.4%

3 Meat 2.7%

4 Vegetable Ghee 2.7%

5 Sugar 1.9%

TOTAL 23.4%
How inflation is calculated?

• Inflation is measured in terms of change in CPI.

• Price change is generally measured on Year-on-Year (YoY)

basis.
– price level for a given period is measured against price
level of same period of preceding year.

• However, price changes between consecutive periods also

provide useful information for analysis
– e.g., Month-on-Month (MoM) or Quarter-on-Quarter (QoQ)
Measuring Inflation

CPI Y-o-Y CPI change in July 2005

Jul-04 117.56
Aug-04 118.25
CPI in Jul-05
Sep-04 118.69 – 1
Oct-04 120.10 CPI in Jul-04
Nov-04 121.44
Dec-04 120.41
Jan-05 121.58 128.13
Feb-05 122.78 – 1
Mar-05 124.37 117.56
Apr-05 126.53
May-05 125.96
Jun-05 126.09
8.99%
Jul-05 128.13
Aug-05 128.18
Measuring Inflation

CPI M-o-M CPI change in July 2005

Jul-04 117.56
Aug-04 118.25
CPI in Jul-05
Sep-04 118.69 – 1
Oct-04 120.10 CPI in Jun-05
Nov-04 121.44
Dec-04 120.41
Jan-05 121.58
128.13
Feb-05 122.78 – 1
Mar-05 124.37 126.09
Apr-05 126.53
May-05 125.96
Jun-05 126.09
1.61%
Jul-05 128.13
Aug-05 128.18
Measuring Inflation

CPI Y-o-Y CPI change in Jul-Aug 2005

Jul-04 117.56
Aug-04 118.25
Average CPI in Jul-Aug’05
Sep-04 118.69 – 1
Oct-04 120.10 Average CPI in Jul-Aug’04
Nov-04 121.44
Dec-04 120.41
Jan-05 121.58 128.16
Feb-05 122.78 – 1
Mar-05 124.37 117.91
Apr-05 126.53
May-05 125.96
Jun-05 126.09
8.69%
Jul-05 128.13
Aug-05 128.18
Base effect can be tricky!

136 Apr-05 12%

Inflation @ 11.1%
11%

132
10%

Apr-06 9%
128 Inflation @ 6.2%
8%

7%
124

6%

120 5%
May-05

May-06
Mar-05

Oct-05

Mar-06
Feb-05

Feb-06
Apr-05

Jul-05
Aug-05
Sep-05

Nov-05
Dec-05

Apr-06
Jan-05

Jun-05

Jan-06
CPI Index YoY Change
Composition of Inflation

Weight Jul-04 Jul-05 Inflation Break-up

General 100.0% 117.56 128.13 8.99% 8.99%

Food 40.3% 120.68 132.64 9.91% 4.00%

House Rent 23.4% 114.13 127.53 11.74% 2.75%

Transport & Comm. 7.3% 120.14 136.36 13.50% 0.99%

Fuel & Light 7.3% 123.02 130.19 5.83% 0.42%

Clothing 6.1% 110.21 115.76 5.04% 0.31%

Cleaning 5.9% 114.16 117.60 3.01% 0.18%

Education 3.5% 115.74 121.45 4.93% 0.17%

Furniture 3.3% 114.40 120.67 5.48% 0.18%
Medicare 2.1% 107.52 108.95 1.33% 0.03%

Entertainment 0.8% 105.92 105.63 -0.27% 0.00%

Contribution to Inflation

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06

Food Energy House Rent Others

Core Inflation

• The persistent component of measured inflation that excludes

volatile and controlled prices. Reflects the normal supply and
demand conditions in the economy.

• Two methods of computation:

– Non-food, Non-energy inflation (NFNE inflation); it is
computed by excluding food and energy items from the CPI
basket.
– 20% trimmed-mean inflation i.e., 20% of the items showing
extreme changes (10% on each side) are excluded.
Headline vs. Core Inflation
12.0%

11.0% Stable core inflation though

rising headline inflation!!!
10.0%

9.0%

8.0%

7.0%

6.0%

5.0%
May-05

May-06
Dec-05
Mar-05
Apr-05

Jul-05

Oct-05
Nov-05

Mar-06
Apr-06

Jul-06
Jan-05
Feb-05

Jun-05

Aug-05
Sep-05

Jan-06
Feb-06

Jun-06

Aug-06
Headline Core (NFNE) Core (Trimmed)
Things to know about House Rent

• Biggest component of core inflation.

• Unlike other items included in CPI, the house rent component

is NOT based on survey of actual house rents.

• It is actually a 24 months geometric average of an index of

construction costs.

• Major construction costs include

– Cement
– Steel
– Labor, etc.
Trend in House Rent Inflation

13.0%

House rent tends to be

12.0%
less volatile than CPI.

11.0%

10.0%

9.0%

8.0%

7.0%

6.0%
May-05

May-06
Feb-05
Aug-04

Nov-04

Aug-05

Nov-05

Feb-06

Aug-06
CPI House Rent
Wholesale Price Index (WPI)

• Measures the directional movements of prices for a set of

selected items in the primary and wholesale markets.

• Covers prices of 425 items in 18 urban cities (1 market per

city) across the country.

• Items covered in the series are those which could be precisely

defined and are offered in lots by producers/manufacturers.

• Prices used are generally those, which conform to the primary

sellers realization at ex-mandi, ex-factory or at an organized
Wholesale level.
WPI Break-up

S.No. Group Items Weight

1 Food 106 42.1%

2 Manufactures 227 25.9%

3 Fuel & Lighting 17 19.3%

4 Raw Material 25 8.0%

5 Building Material 50 4.7%

WPI vs. CPI

• All items included in WPI are based on current market prices,

unlike CPI wherein HRI is a 24 months geometric average.

• Moreover, WPI (425) includes more items than CPI (374).

• Is WPI a better indicator of inflation?

 5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
Jan-05

Feb-05

Mar-05

Apr-05
WPI vs. CPI

May-05
than WPI

Jun-05

Jul-05

CPI
CPI peaked sooner

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06
WPI
Mar-06

Apr-06

May-06
increased

Jun-06
CPI declined in
FY06 while WPI

Jul-06

Aug-06
Sensitive Price Index (SPI)

• Computed on weekly basis to assess the price movements of

essential commodities at short intervals so as to review the
price situation in the country.

• Covers prices of 53 items in 53 markets of 17 major cities

across the country.

• Food items have predominant share in SPI.

GDP Deflator

• It is the broadest measure of inflation reflecting average price

levels for all goods & services comprising the GDP.

• GDP Deflator series is estimated by dividing nominal GDP

amount for a year with constant price GDP amount for the
same year.
GDP Deflator: Calculations

GDP (Current GDP (FY00

Prices) Prices) GDP Deflator

PKR Billion PKR Billion Index Change

FY00 3,562 3,562 100.0

FY01 3,876 3,632 106.7 6.7%
FY02 4,095 3,745 109.4 2.5%
FY03 4,481 3,922 114.3 4.5%
FY04 5,251 4,216 124.5 9.0%
FY05 6,204 4,577 135.5 8.8%
FY06 7,295 4,879 149.5 10.3%
GDP Deflator vs. CPI

14.0%

Divergent trends in FY06

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%
FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06
CPI GDP Deflator
MONETARY ACCOUNTS
Reporting Framework

• SBP is responsible for

collection, compilation and
dissemination of all monetary
data relating to Pakistan.

• Monetary data reported by SBP

is compliant with the guidelines
provided by the Monetary and
Financial Statistics Manual
(MFSM) released by IMF.
Looking up SBP’s website for monetary data
Key monetary data on SBP website

► Monetary Sector
□ Monetary Aggregates Jul 20, 2006
□ Monetary Aggregates (Growth Rates) Jul 20, 2006
□ Profile of Monetary Assets Jul 20, 2006
□ Government Budgetary Borrowings from Banks Jul 20, 2006

► Analytical Accounts of Banking Sector

□ Pakistan Monetary Survey (excel version) Aug 30, 2006
□ Analytical Accounts of State Bank of Pakistan (excel version) Aug 30, 2006
□ Analytical Accounts of Scheduled Banks (excel version) Aug 30, 2006
Quick review of some basic concepts…

• SBP and Scheduled Banks constitute the monetary system.

• Reserve Money (RM) pertains to SBP only.

• M2 includes the entire banking system i.e., SBP & Banks.

• Each monetary equation has two sides; Assets & Liabilities.

• Changes in monetary aggregates are caused by changes on

Assets side which comprises NDA and NFA.

• RM = NDASBP + NFASBP

• M2 = NDABANKING + NFABANKING

• Differentiate between NDA and NFA of SBP and Banking.

Distinction between Stocks and Flows

• Distinction needs to be made between:

– Stocks of monetary aggregates, and
– Flows in monetary aggregates

• Stocks of monetary aggregates (RM, M2) and their constituents

(NDA, NFA, etc.) show the outstanding balance of each.

• Flows show net changes in monetary aggregates and their

constituents. Flows itself reflect the impact of:
– Transactions
– Revaluation
– Exchange rate
– Other changes
Example-1: Reserve Money (RM)
PKR billion

STOCKS FLOWS
Jun-05 Jun-06 Amount %

Currency Issued 709 793 84 11.8%

Bankers' Deposits 200 213 13 6.5%

Reserve Money (RM) 909 1,006 97 10.7%

NFA SBP 555 639 83 15.1%

NDA SBP 354 367 13 3.7%
Example-2: Broad Money (M2)
PKR billion

STOCKS FLOWS
Jun-05 Jun-06 Amount %

Currency in Circulation 666 741 75 11.2%

Demand & Time Liab. 2,299 2,674 375 16.3%

Broad Money (M2) 2,965 3,415 450 15.1%

NFA BANKING 687 737 50 7.3%

NDA BANKING 2,279 2,679 400 17.5%
The concept of “Net” in NDA and “NFA”

• SBP and Banks carry several other items on their balance

sheets that are not financing the monetary aggregates.

• Examples:
– Liabilities Side: Equity Capital, Revaluation Reserves,
Other Liabilities
– Assets Side: Fixed Assets, Other Asset

• NDA and NFA therefore “nets off” the non-monetary liabilities

from domestic and foreign assets.
SBP Analytical Accounts
As of 30-Jun-06 PKR billion
ASSETS LIABILITIES

Gold 78 Currency Issued 793

RM
FCY Assets 783 Banks' Deposits 213

Claims on Banks 219 IMF Loan 96

Claims on Govt. 543 Other FCY Deposits 126
Claims on NBFIs 16
Other Assets 57 Govt. Deposits 158

Other Liabilities 310

TOTAL ASSETS 1,696 TOTAL SOURCES 1,696

Pakistan Monetary Survey*
*As of 24-Jun-06 PKR billion
ASSETS LIABILITIES

Gold 78 Currency in Circulation 745

Foreign Assets 936 Demand & Time Deposits 2,677

Claims on Govt. 1,247 IMF Loan 96

Claims on PSE 135 Other FCY Deposits 155
Claims on NBFIs 110
Claims on Pvt. Sector 1,960 Govt. Deposits 457
Other Assets 526 Other Liabilities 862

TOTAL ASSETS 4,992 TOTAL LIABILITIES 4,992

Possible reasons for increase in ‘Other Items’

• Other Liabilities
– Increase in banks’ capital
– Profitability of banks
– Revaluation of assets e.g., Gold
– Increase in other liabilities (accrued expenses, bills
payables, etc)

• Other Assets
– Fixed assets
– Other receivables, etc.
Example: Impact of change in bank’s capital

Sponsors of Bank-2 borrow PKR1,000 from Bank-1 to subscribe to rights

share issuance of Bank-2.

NDA BANKING = Private Sector Credit + (Other assets – Other Liab)

NDA BANKING = 1,000 + (0 – 1,000) = 0

Example: Impact of Gold Revaluation by SBP

SBP revalues its stock of gold by PKR5,000.

RM = NFA SBP + NDA SBP

RM = 5,000 – 5,000 = 0
RM growth slowed considerably in FY06

20.0%

17.0%

14.0%

11.0%

8.0%

5.0%
FY01 FY02 FY03 FY04 FY05 FY06
RM Growth Nominal GDP Growth
Composition of RM (Stocks)

PKR Billion FY01 FY02 FY03 FY04 FY05 FY06

RM 533 585 669 773 909 1,005

NFASBP -19 134 501 557 555 639

NDASBP 552 451 169 215 354 367

Claims: GOP 336 279 29 91 249 384

 Composition of RM (Stocks)

100%

80%

60%

40%

20%

0%
FY01 FY02 FY03 FY04 FY05 FY06

NFA NDA
-20%
Change in government borrowing from SBP

200
PKR Bn
150

100

50

-
FY01 FY02 FY03 FY04 FY05 FY06
(50)

(100)

(150) Change in GOP

Borrowing from SBP
(200)

(250)

(300)
Composition of RM (Flows)

PKR Billion FY01 FY02 FY03 FY04 FY05 FY06

RM 35 51 85 103 136 96

NFASBP 36 153 367 57 -2 83

NDASBP -1 -101 -282 47 138 13

Claims: Govt. -55 -56 -251 63 158 135

NDA increase small

despite large increase in
government borrowings!
M2 Growth – Nominal GDP Spread

24%
Average Spread = 420bp
21%

18%

15%

12%

9%

6% Why did the

spread widen
3% Average Spread = 10bp post FY01?
0%
FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06
Nominal GDP Growth M2 Growth
…acceleration in M2 growth!

21%

18%

15%
Did low interest rates
12% cause fast credit
growth?
9%

6%

3%

0%
FY00 FY01 FY02 FY03 FY04 FY05 FY06

M2 Growth T-bill Yield

…not before FY04

600 120%
PKR Bn
Govt. Borrowing
500 Private Credit
100%
%M2 growth
400
80%
300
Paradox?
200 60%

100
40%
-
FY00 FY01 FY02 FY03 FY04 FY05 FY06
20%
(100)

(200) 0%
Private FX flows drove M2 in FY02 & FY03

Reverse Capital Flight

4.0 USD Bn

2.5
1.0
-0.5
FY00 FY01 FY02 FY03 FY04 FY05 FY06
-2.0
-3.5
Current A/C
-5.0

500
PKR Bn
400 NFA

300 NDA

200

100

0 FY00 FY01 FY02 FY03 FY04 FY05 FY06

M2 Breakup (Flows)

PKR Billion FY01 FY02 FY03 FY04 FY05 FY06

M2 126 235 317 408 480 450

NFA 73 206 309 44 54 51

NDA 53 29 8 364 426 399

GOP Borrowing -47 22 -78 58 96 91

Pvt. Sector Credit 56 53 168 325 438 402

Using ‘broader’ money definition: M2 + NSS

23.0%

20.0%

17.0%

14.0%

11.0%

8.0%

5.0%
FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06
Nominal GDP Growth M2 Growth (M2+NSS) Growth
Need for change in money supply definition?

• Structural changes in financial markets and emergence of

new financial instruments often lead to breakdown of
relationships between monetary aggregates and
macroeconomic variables.

• There have been various revisions in definitions of monetary

aggregates in western countries.
Reference Text