2 Real Sector

2.1 Overview
The highlight of the second quarter for FY17 was the recovery in large-scale
manufacturing (LSM) growth to 5.8 percent, from 4.0 percent in the
corresponding period of FY16. As a result, LSM growth for H1-FY17 reached 3.9
percent the same level as last year.

In agriculture, healthier crop production would help the sector rebound from the
decline recorded last year. Meanwhile, we expect the services sector to maintain
last years growth momentum, based on an encouraging picture of wholesale and
retail trade and transport. Thus, in overall terms, the GDP growth for FY17 is set
to exceed last years level.

2.2 Crop sector

While a better harvest of Table 2.1: Wheat Targets for FY17
sugarcane and cotton Area Yield Production
(compared to the last year) (000 hectare) (kg per hectare) (000 tons)
provided a much-needed 3-Year FY17 3-Year FY17 3-Year FY17
avg target avg target avg target
impetus to the crop sector
Punjab 6,940 6,800 2,813 2,868 19,520 19,500
during the kharif season, initial Sindh 1,128 1,150 3,372 3,652 3,802 4,200
reports on the wheat crop KP 765 760 1,726 1,842 1,321 1,400
suggest its production would Balochistan 373 400 2,344 2,250 873 900
remain close to last years Pakistan 9,205 9,100 2,772 2,857 25,516 26,000
level of 25.4 million tons Source: Pakistan Agriculture Statistics; and SUPARCO
slightly lower than the target of 26 million tons for FY17 (Table 2.1).1

Notwithstanding water shortages witnessed during the early part of the rabi season
(Box 2.1), the situation eased considerably in January 2017 after prolonged and
widespread rains throughout the country. This, coupled with extended spells of
low temperature and better availability of other inputs (fertilizer and credit), is
likely to have a positive effect on wheat output.2,3

1
The Annual Plan 2016-17 set the wheat production target at 27.4 million tons, which was later
revised down to 26 million tons by the Federal Committee on Agriculture. This target assumes a
crop yield of 2,857 kg per hectare, which is higher than the average yield of 2,772 kg per hectare
recorded during the past 3 years.
2
In the Federal Budget 2016-17, the government had announced a cash subsidy of Rs 156 per bag on
urea and Rs 300 per bag of DAP, at an estimated cost of Rs 27.16 billion (Rs 17.16 billion for urea
The State of Pakistans Economy

Box 2.1: Water Availability in

Early Rabi Figure 2.1.1: Irrigation Water Aggregate Rainfall
in Punjab & Sindh(oct-Jan) FY16 FY17
The irrigation water shortages and
prolonged dry spell during the early 23 6
rabi season led to some decline in the
sowing area under the wheat crop
21 4.5
(particularly in rain-fed regions of the

million acre feet

000 millimeter
country).
19 3
Specifically, irrigation water supply
to Punjab and Sindh, which together
account for more than 85 percent of 17 1.5
the area under wheat, contracted by
8.1 percent during Oct 2016-Jan 2017 15
(Figure 2.1.1). This was on top of 0
FY13
FY14
FY15
FY16
FY17

Oct

Nov

Dec

Jan
the 5.2 percent YoY decline recorded
during the corresponding period of Source: SUPARCO Source: IRSA
the previous year.
Table 2.1.1: Wheat Performance for Rain-Fed Areas
In the meantime, low precipitation in (Average 2010-11 to 2014-15)
the country further stressed water Rain-fed area Output from Yield of rain-
resources.4 The rain-fed areas under under wheat rain fed area fed area
wheat account for 13.2 percent of total (as % of total (as % of total
(as % of yield
area under the crop, and contribute 6 area under crop) production)
for irrigated
percent to the total output (Table land)
2.1.1). Punjab 10.2 4.7 42.9
Sindh 4.7 1.2 24.8
That said, the subsequent heavy KP 55.9 43.0 59.4
rainfall in January 2017 provided a Balochistan 7.9 4.7 57.1
major relief to the crop sector. Total 13.2 6.0 42.1
Source: Agriculture Statistics of Pakistan, Ministry of National
Food Security & Research
With the expected output
reaching last years level, FY17 may be another year when domestic wheat
production would exceed domestic consumption. This, in turn, would further
augment wheat stocks available with government agencies.5 This situation has
arisen at a time when the Food and Agriculture Organization (FAO) is already
expecting record global wheat output this year. As a result, the wheat glut in the

and Rs 10.8 billion for DAP fertilizer). This cost was to be shared equally by the federal and the
provincial governments. In addition, the government also reduced the GST on urea from 17 percent
to 5 percent. These measures pulled down urea and DAP prices by 28 and 27 percent respectively.
3
Gross credit disbursement to agriculture sector grew by an impressive 32 percent in the ongoing
Rabi season both development and production loans contributed to this increase.
4
In Q2-FY17, the country recorded nearly 90 percent less rainfall as compared to the same period
last year.
5
It may be noted that wheat stocks with government agencies have been rising consistently over the
past few years, and reached 8.0 million tons by end-January 2017, from 3.75 million tons at end-
January 2014.

10
 Second Quarterly Report for FY17

international market is likely Figure 2.1: Wheat Prices

to deepen further, with stocks Difference Domestic prices Global prices
projected to reach a record 248 400
million tons by year-end. The
resulting downward pressures 300
on international wheat prices

US$ per mt
will pose a challenge for 200
Pakistan as well, as this will
make it difficult for the
100
country to export the surplus
wheat, even in the presence of
0
sizeable government subsidies Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
(Figure 2.1).6
FY15 FY16 FY17
Source: Pakistan Bureau of Statistics and World Bank
2.3 Large-scale
manufacturing (LSM)
LSM recorded a growth of 3.9 Figure 2.2: YoY Growth in LSM
percent during H1-FY17, the Excluding sugar Overall
14
same level realized last year
(Table 2.2). After a dull first
quarter (Figure 2.2), the
7
recovery in LSM growth in
Q2-FY17 came from food,
percent

steel, cement, pharmaceutical,

0
automobiles and electronic
industries.
-7
Going forward, multiple
Nov-15

Nov-16
Apr-16

Jun-16
Dec-15

Dec-16
Oct-16
Oct-15

May-16
Mar-16
Sep-15

Feb-16

Sep-16
Jan-16
Aug-15

Aug-16
Jul-15

Jul-16

factors are likely to provide

further impetus to LSM
Source: Pakistan Bureau of Statistics
growth. These include
supportive economic policies (low interest rate and higher PSDP spending);
recently announced incentives for export industries;7 improved energy supplies;8

6
The government has permitted the export of 0.9 million tons of wheat, with a subsidy of US$ 120
per ton. So far, no significant exports have taken place, as Pakistans FOB wheat price (even after
adjustment for export subsidy) is still significantly higher than its closest competitors.
7
The government recently announced an export stimulus package of Rs 180 billion (for H2-FY17
and FY18). This package offers several incentives, including removal of duty and taxes on some
raw material and machinery, and rebate on exports, etc.
8
LNG imports increased to 1,004 MT during H1-FY17 against 400 MT during the same period last
year. The new Chashma Nuclear Power Plant (Unit-3) has added 315 MW electricity to the system.

11
The State of Pakistans Economy

strong domestic consumer Table 2.2: YoY Growth in LSM (Jul-Dec)

demand;9 and an uptick in Contribution
YoY growth
private sector credit for fixed in growth
investment purposes.10 wt. FY16 FY17 FY16 FY17
LSM 70.3 3.9 3.9
Furthermore, the constraints Textile 21.0 1.0 0.1 0.30 0.04
that inhibited the growth of Cotton yarn 13.0 1.8 0.4 0.36 0.08
some industries in Q1-FY17, Cotton cloth 7.2 0.7 0.2 0.06 0.02
are expected to dilute in the Jute goods 0.3 -22.6 -38.6 -0.08 -0.10
Food 12.4 -0.1 6.9 -0.01 1.16
future.11 Sugar 3.5 -14.2 52.4 -0.43 1.32
Cigarettes 2.1 -10.6 -31.0 -0.23 -0.58
Having said this, a sharp Vegetable ghee 1.1 4.9 2.3 0.07 0.03
revival in LSM might be Cooking oil 2.2 6.4 -0.5 0.24 -0.02
Soft drinks 0.9 4.0 18.8 0.11 0.52
constrained by a number of POL 5.5 6.8 -1.3 0.45 -0.09
factors: Steel 5.4 -8.6 15.6 -0.33 0.53
(1) Most of the industries Non-metallic 5.4 7.1 9.3 0.75 1.02
minerals
Cement 5.3 7.1 9.6 0.75 1.03
that have shown steady
Automobile 4.6 32.4 6.7 1.73 0.45
growth over the past few Jeeps and cars 2.8 47.2 -2.7 1.22 -0.10
years (e.g., cement, autos, Fertiliser 4.4 15.1 3.5 0.90 0.23
steel and pharmaceutical), Pharmaceutical 3.6 7.2 7.9 0.60 0.68
have already achieved high Paper 2.3 -15.6 5.7 -0.64 0.19
Electronics 2.0 -8.2 14.5 -0.14 0.22
levels of capacity Chemicals 1.7 10.8 -2.7 0.27 -0.07
utilization further growth Caustic soda 0.4 26.1 -6.3 0.11 -0.03
would therefore require Leather products 0.9 6.2 -18.9 0.12 -0.38
capacity expansions;12 LSM excl. sugar 66.8 4.4 2.6 -- --
Source: Pakistan Bureau of Statistics

(2) In the textile sector, the recovery in global commodity prices (particularly
cotton) and the recently announced export package are positive developments.
But fully capitalizing on these favorable developments would require a well-

Going forward, 1,320 MW coal fired power projects at Sahiwal and the 118 MW Port Qasim power
project in Karachi would further ease the energy constraints.
9
Several indicators show rising consumer demand in the country, like: (i) a rise in consumer
financing; increase in the sale of consumer durables (automobiles, electronic goods); sharp growth in
fuel consumption, etc. Furthermore, the IBA-SBP Consumer Confidence Index (CCI) recorded its
highest-ever level of 174.9 points in January 2017, showing an increase of 17 points from July 2016.
10
During H1-FY17, the manufacturing sector availed Rs 82.7 billion in fixed investment loans,
against Rs 21.8 billion in the same period last year.
11
Some of these include: withdrawal of the increase in Federal Excise Duty on cigarettes
(announced in the federal budget FY17, which led to a decline in production during Q1-FY17); and
the lifting of a temporary ban on jute exports by Bangladesh (which had adversely affected the local
jute industry). Similarly, the post-Apna Rozgar Scheme drag on car production would fade away
after February 2017 (as car production under this scheme had continued till February 2016).
12
While several firms in cement, steel, automobiles and beverages industries have already planned
capacity expansions, it may take time for them to materialize.

12
 Second Quarterly Report for FY17

thought out strategy and Table 2.3: Key International Raw Material Prices
concerted efforts to resolve Change over (percent)
the endemic issues Commodities US$* 3-months 6-months 12-months
Coal (mt) 87.2 28.9 45.2 76.9
afflicting the sector;13 and
Palm oil (mt) 711.8 2.8 21.8 36.7
Soya bean Oil (mt) 800.3 10.7 19.5 18.2
(3) Global prices of key Cotton (lb) 71 3.1 8.3 8.7
raw materials are Copper (mt) 251 12.9 12.3 16.1
increasing, which may Steel (lb) 633 27.6 2.9 61.9
Iron (mt) 79.7 40.7 41.0 101.4
squeeze margins for
Rubber (kg) 200 43.9 54.8 69.9
manufacturing firms in Crude oil
cement, automobiles, and Brent (bbl) 52.6 16.8 19.0 43.9
cooking oil/ghee sectors WTI (bbl) 54.9 21.5 22.9 47.5
(Table 2.3). Arabian light (bbl) 52.6 23.3 21.6 56.4
* As of 31st December, 2016
Source: Bloomberg, IMF and WB
Sectoral review
Cement
The growth in cement Figure 2.3: Cement Sales (Jul-Dec)
production increased to 9.5 Exports Domestic Total
percent during H1-FY17 from 24
7.1 percent in H1-FY16. This
was mainly a result of robust
18
domestic demand, as exports
million tons

to Afghanistan fell due to

strong competition from 12
cheaper Iranian cement and
some supply-related issues 6
(Figure 2.3).14 During H1-
FY17, overall cement sales
0
grew 8.7 percent and reached a FY14 FY15 FY16 FY17
record level of 19.8 million Source: All Pakistan Cement Manufacturers Association
metric tons.15

13
Efforts are needed to address the issues, like low investment on R&D, product development,
innovation, branding and tapping of new markets; lack of skill upgradation and resulting low labor
productivity; use of obsolete technology; and high export concentration in low value added products.
14
Due to implementation of border management system and some other issues, the resultant delays
in transportation of cement (which has limited shelf life) has forced Afghan buyers to switch to
Iranian cement.
15
Domestic sales recorded a double-digit growth of 11 percent and reached 16.9 million tons in H1-
FY17. Cement exports, on the other hand, declined by 4 percent during this period.

13
The State of Pakistans Economy

The sizable domestic demand actually allowed manufacturers to enhance their

capacity utilization to over 80 percent. The resulting economies of scales also
improved their margins. The outlook of the industry appears encouraging, as
many cement producers have announced capacity expansions in anticipation of
firm demand (from private housing schemes, rising development spending and
increased focus on CPEC-related projects).16

Steel
Robust construction activities Figure 2.4: Trend in Private Steel Production
in the country also led to an Billets H.R sheets/strips Total
increase in demand for steel 32
and allied products. The
production of steel grew by 24
15.6 percent during H1-FY17
(Figure 2.4). More
percent

importantly, this growth was 16

achieved despite the dumping
of cheaper Chinese imports 8
(which squeezed margins for
the local industry).
0
FY13 FY14 FY15 FY16 H1-FY17
That said, the industry gained
Source: Pakistan Bureau of Statistics
some comfort when a recovery
in global prices offered local players a room to increase their prices as well.17 At
the same time, improved energy supply helped the industry improve its capacity
utilization.

Expecting strong domestic demand going forward, the industry is gearing up for
expansions as well. For example, some large steel producers are doubling their
production capacities, in addition to diversifying their energy mix and minimizing
their dependence on imported raw materials. The outlook for the local industry
has further improved following the imposition of anti-dumping duties on imports
of steel products from China.,18

16
The establishment of the proposed infrastructure finance bank (in partnership with international
financial institutions to finance mega infrastructure projects in the private sector) could prove
instrumental in ensuring the sustainability momentum of construction activities in the country.
17
Following rising international prices, domestic steel prices also increased by Rs 3,000-5,000 per
ton.
18
In February 2017, the National Tariff Commission (NTC) imposed anti-dumping duties on imports
of steel products (galvanised steel coils and sheets), in the range of 6 percent to 40.5 percent. Other
countries have also imposed anti-dumping and countervailing duties on steel imports from China.

14
 Second Quarterly Report for FY17

Automobiles
The automobile sector registered a YoY growth of 6.7 percent in H1-FY17,
compared to an increase of 32.4 percent in the corresponding period last year.
Higher production of vehicles under the Apna Rozgar Scheme last year explains
this slowdown in growth.19 Adjusting for this scheme, the auto industry showed a
reasonable growth of 11.0 percent YoY during H1-FY17 (Table 2.4). This was
largely enabled by higher sales of commercial vehicles (i.e., tractors, trucks and
buses).
Table 2.4: Vehicles Production and Sale
%Growth
H1-FY17 H1-FY16 H1-FY17 H1-FY16
Units Output Sale Output Sale Output Sale Output Sale
Passenger Cars 90,222 85,901 92,514 89,824 -2.5 -4.4 48.0 53.0
Exc. Apna Rozgar Scheme 79,803 76,288 72,847 70,308 9.5 8.5 31.5 35.1
Trucks 3,806 3,304 2,326 2,194 63.6 50.6 31.8 34.7
Buses 669 577 499 451 34.1 27.9 65.8 76.9
LCVs, Vans & Jeeps 12,548 11,427 21,423 21,474 -41.4 -46.8 144.6 164.2
Exc. Apna Rozgar Scheme 2,829 2,533 2,552 2,522 10.9 0.4 20.0 39.9
Farm Tractors 21,336 20,933 13,064 12,375 63.3 69.2 -45.9 -40.7
Motorcycles & Three-
Wheelers 790,240 789,879 657,283 651,338 20.2 21.3 86.2 84.1
Source: Pakistan Automotive Manufacturers Association

The robust growth in tractors was mainly due to an improvement in the purchasing
power of growers due to better prices of rice and cotton; cash disbursement on
account of kissan package; subsidy on basic inputs like fertilizer; and a reduction
in sales tax on tractors. Similarly, the production of trucks and buses segment has
responded to expansion in road infrastructure, and growing trade and economic
activities.

Going forward, the industry is also expected to benefit from the launch of new
models (e.g. Celerio, Alto 660cc, Revo, Fortuner, Ciaz and Vitara) by existing
manufacturers; the revival of dormant players Kia Motors and Hyundai; and the
entry of new players.

Steel manufacturers have also been able to persuade China to cut down its production. As a result,
Chinese steel exports fell during CY-16, providing support to prices in the international market.
19
The effect of the Apna Rozgar Scheme, which had inflated last years growth number for the
passenger car segment, is going to end in February 2017. This will help normalize the segments
growth going forward.

15
The State of Pakistans Economy

Fertilizer
The buildup of large urea inventories last year took its toll on domestic production
this year, as output grew by 3.5 percent during H1-FY17, significantly lower than
the 15.1 percent rise witnessed in H1-FY16.

Despite some recovery in sales during Q2-FY17 (due to lower prices), urea stocks
were still quite elevated at about one million tons by end-December 2016.20 Going
forward, domestic demand is expected to remain strong in response to the
governments decision to maintain subsidy on fertilizer.21 Moreover, production
would also benefit as the industry is getting adequate gas supplies.

Pharmaceuticals
The pharmaceutical industry continued its growth momentum from last year,
rising by 7.9 percent during H1-FY17. A number of factors helped the industrys
growth, like price hikes last year; a decline in raw material costs (due to the euros
depreciation); and ongoing consolidation in the sector.22,23 Multiple factors,
including the current state of health facilities and the governments increased
focus on the sector; higher population growth; more clarity after the drug pricing
policy; and the launch of new products (like the dengue vaccine) can further fuel
the industrys growth.

Electronics
This segment witnessed a sharp turnaround during H1- FY17, recording a growth
of 14.5 percent, against a contraction of 8.2 percent during the same period last
year. Consumer durables like refrigerators (up 25.0 percent) and deep-freezers
(up 54.4 percent) mainly contributed to this improved performance.

Further rise in energy supply in the coming months, increase in consumer

financing in a low interest rate environment, better market access for the rural
population, expansionary plans of leading players, and foreign investment, all
indicate a sustainable trajectory for the industrys growth going forward.24

20
Urea inventories reached 1.3 million tons by end-September 2016.
21
Although the government has allowed the export of 0.3 million tons of urea in FY17, its higher
cost makes exports challenging: domestic prices are still at a premium of 6 percent to international
prices).
22
ICI Pakistan Limited is in the process of acquiring the assets of Wyeth Pakistan Limited, a
multinational pharmaceutical company operating in Pakistan since 1949. And Martin Dow Ltd has
acquired the Pakistani operations of Merck KGaA.
23
The gross margins for the industry crossed 30 percent in H1-FY17 (source: listed companies
financial reports).
24
Turkish firm Arcelik has recently acquired the home appliance company Dawlance Pakistan for
US$258mn.

16
 Second Quarterly Report for FY17

Food
During H1-FY17, the food sector grew by 6.9 percent, after contracting by a
marginal 0.1 percent in H1-FY16. While cigarette-manufacturing continued to
decline (in response to the levying of FED in the FY17 budget), a sharp increase
in sugar production supported the overall growth in the food industry.

A better sugarcane crop, and Figure 2.5: Trend in Sugar Prices

rising domestic prices of sugar, Domestic International (rhs)
led to an increase in cane 75 30
crushing.25 In addition, the 71 28

US cent per pound

government has allowed the
rupees per kg

export of 0.225 million tons of 67 27

sugar.26 These exports have
63 26
now become increasingly
feasible, given the rise in 59 25
global sugar prices during H1-
FY17 (Figure 2.5). In 55 24
Nov-15

Nov-16
Apr-16

Jun-16
Dec-15

Dec-16
Oct-15

Oct-16
May-16
Mar-16
Sep-15

Feb-16

Sep-16
Jan-16
Aug-15

Aug-16
Jul-15

Jul-16
addition, manufacturers have
increased their focus on power
generation through by- Source: Pakistan Bureau of Statistics and World Bank
products (mainly bagasse and
ethanol).

The soft drink category grew by 18.8 percent during H1-FY17 higher than the
average growth of 16 percent realized in the last five years. A major soft drink
firm recently made a US$ 200 million investment to expand its production and
distribution capacities. On the other hand, volatility in international cooking oil
prices and the drive against hazardous and low quality oil, constrained the
production of vegetable ghee and cooking oil.

Textile
The growth in the textile industry remained subdued at 0.1 percent during H1-
FY17, compared to 1.0 percent in the corresponding period last year. The export
decline and structural bottlenecks constrained the performance of the sector.
While the government has recently announced a generous export package for the

25
While sugarcane output is likely to reach an all-time high of 71 million tons, domestic sugar prices
have risen by 11 percent YoY during Jul-Jan FY17.
26
An inter-ministerial committee would meet in the first week of every month to review the price
and stock/export situation of sugar. In case domestic prices exceed their level on December 15,
2016, the committee would recommend to the ECC to stop further exports of the commodity.

17
The State of Pakistans Economy

sector, it would take some time to make a significant impact on the sectors
performance.

Other sectors
During H1-FY17, POL products witnessed a decline of 1.3 percent, compared to
an increase of 6.8 percent in H1-FY16. The impact of the policy shift towards
upgraded quality petroleum products is holding back growth in this sector. Wood,
engineering, and leather industries are finding it difficult to compete with cheap
imported products.

2.4 Services
As evident from the partial information available so far, the performance of the
services has largely remained on track. For example, the expected recovery in
agriculture, steady growth in large-scale manufacturing and strong growth in
imports, all suggest an encouraging outlook for wholesale and retail trade the
largest subsector in services.

Similarly, in the transport segment, the demand for buses and trucks surged by
27.9 and 50.6 percent in H1 FY17 over the same period in the previous year; this
partially offset the impact of culmination of the Apna Rozgar Scheme. At the
same time, fuel consumption increased sharply in the country: sale of petrol
increased by 20.1 percent YoY in H1-FY17, whereas diesel uptake grew by 15.1
percent both of these suggest an uptick in commercial activities in the country.

On the other hand, most indicators related to the communications remained

subdued, with the exception of the subscription base for 3G/4G services (which
increased by 27 percent during H1-FY17). Furthermore, consolidated accounts of
PTCL show higher net losses (Rs 1.5 billion) during the period, compared to Rs
1.3 billion last year. This was mainly due to losses posted by PTCLs cellular
subsidiary, and additional costs incurred from the voluntary separation scheme.

Within finance and insurance, Table 2.5: Performance of the Banking Sector (Jul-Dec)
the profits (before tax) of the million rupees
banking sector remained lower 2015 2016
than the last year (Table 2.5). Profit/loss before tax 157.8 151.8
That said, advances to the Investments(net) 671.6 -312.2
private sector have recovered Advances(net of provision) 263.7 319.0
Deposits 419.3 773.7
strongly this year.
Source: State Bank of Pakistan

Therefore, in overall terms, we expect the services sector to grow at the same pace
as last year.

18