1

STATE OF THE ECONOMY

FY18E

2

4.0

Sources: Pakistan economic survey

► This memorandum has been compiled by EY Ford Rhodes (“EY”) based on variouspublically available sources including but not limited to the Economic Survey ofPakistan 2018, information published on the website of the State Bank of Pakistan andPakistan Bureau of Statistics, various news articles and proprietary databases.

► The information and opinions contained in this document are derived from publicsources which we believe to be reliable and accurate but which, without furtherinvestigation, cannot be warranted as to their accuracy, completeness or correctness.This information is supplied on the condition that EY, and any partner or employee ofEY, are not liable for any error or inaccuracy contained herein, whether negligentlycaused 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 andschedules contained in this document are preliminary and are for discussion purposesonly.

► This memorandum has been prepared to solely to assist the reader in understanding ofthe matters being discussed based on desktop research and should not be construedas in depth analyses on issues presented herein.

► Mere possession of this document does not convey the right of reliance, nor mayreliance be placed by any reader for any purpose.

► This report should not be considered as investment, tax or accounting advice or arecommendation to the reader on the future course of action and should not beconstrued 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 thatany such reader may choose to make of this document is entirely at their own risk andwe shall have no responsibility whatsoever in relation to any such use. Accordingly, wedo not owe a duty of care to any reader of this report.

Disclaimer

3

4.0

3.78%

4.01%ECONOMICHIGHLIGHTS 20

18

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19F

4.2 4.

5 5.3 5.

8

5.5

Rea

l GD

P g

row

th r

ate

(%)

13-year high”“

Consumer Price Index – July to March

9M FY17 9M FY18

Sources: Pakistan economic survey

CPI remained below the expected 6% at3.78% (9MFY18 PBS data). Food pricesinflated by 2.00%, whereas non-food itemssurged by 5.0%.

4.01

%

3.78

%

4.0

Pakistan ranked happiest among neighboring countries: UN report

Source: dawn.com/news”

Population Census, 2017

5.6%6.0%

6.4%

5.8% 5.0%5.8%

0.3%

3.5%3.8%

2016 2017 2018

Services Industrial Agriculture

USD330bn

Economy is worthmore than:

Key

gro

wth

sec

tors

34.9

Am

ount

in U

SD

bill

ion

Trade deficit during the 9month period was US$22.3 billion.

Trade deficit

22.7

31.0

FY16 FY17 FY18F

Foreign Direct Investments

Sources: Pakistan economic survey

1.7

0.9

2.3

2.7

2.1

FY14 FY15 FY16 FY17 9M FY18F

Amount in USD billion

Remittances clocked in at USD14.6bn as per 9MFY18 SBP data.FDI crossed USD 2.0bn during9MFY18.

Credit Rating

B

Debt to GDP ratio:

66.3%

4

Pakistan ranked happiest among neighboring countries: UN report

Source: dawn.com/news

According to the sixth WorldHappiness Report, Pakistan is 58points ahead of India, 11 pointsahead of China and 31 pointsahead of Iran in its latest ranking

207 MillionPopulation

2.4%

Life Expectancy66 years

Literacy rate(percentage of adult population)

56.4%

Annual Growth rate:

Urban Rural

36%

64%

Urban PopulationRural Population

75 Million132 Million

”

Sources: Dun & Bradstreet, Census 2017,Tribune

Karachi Hyderabad Lahore Rawalpindi

Multan Islamabad Quetta Peshawar

15.0

2.0

2.1

11.1

47.9Sindh

110.0Punjab

30.5KPK

1.0ICT

“

PKR 14,000 to 15,000 per month

Minimum wage rate

29%Current poverty rate

• Total: 23.8 years• Male: 23.7 years• Female: 23.8 years

Median age

Pop

ulat

ion

of P

akis

tan

(Mill

ions

)

”Population Census, 2017

SOCIALINDICATORS

5

Sources: SBP. PBS , CPEC.gov.pk

Inflation rate (July – March 2018)

3.78%

GDP growth rate (FY18E)

5.8%

US$

35bn

Current deficit (2018E)

US$

15.0bn

Policy rate

6%

Remittance(July – March 2018)

US$

14.6bn

US$

17.95bn

CPEC

Total investment

$62bn

Energy

24 Projects

Transport infrastructure

8 Projects

Gwadar

10 Projects

Annual economic highlights comparison

Current account deficit to GDP (%)

FY18EFY 17

Total debt to GDP (%)

Foreign Direct Investment US$bn

GDP US$bn

GDP per capita US$ p.a

~5%

70.1%

2.1*

330

1,640

4.1%

75.4%

2.6

304

1,463

CPI (%) 4.2% 3.78%*

Trade deficit (2018E)

Foreign exchange reserves(March 2018)

* Based on July – March FY 18

ECONOMICINDICATORS

6

4.55.3 5.8 5.5

FY 16 FY 17 FY 18 E FY 19 F

Gross domestic product

Rea

l GD

P g

row

th r

ate

(%)

Forecast. Growth is expected to moderate to about 5.5% in the mediumterm reflecting declining energy sector investments, moderating confidence,and continued structural reform challenges, although there are significantdownside risks if external and fiscal imbalances are not swiftly addressed.However, growth will be supported by contained inflation, expansion in allkey sectors, encashment of dividends from CPEC investments along withimprovement 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

AGRI INDUS SERV

3.81%

5.80%

6.43%

SERVICE:► The service sector was the major contributor towards GDP growth

► 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

► Construction, slaughtering, power generation, mining were major contributors

AGRICULTURE:► The sector performance flourished due to exceptional growth in

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%

► Livestock, forestry, and fishing, etc. all contributed positively

Sectors annual growth rate (%)

Sources: SBP. PBS , IMF

A:

►Growth was led by improvements in agriculture and services sector

►The industry was boosted by an elevation in manufacturing and construction activity

►With respect to the demand side, major contribution came from a surge in domestic consumption followed by a moderate increase in investment

►Favorable macroeconomic policies continued to reinforce expansion in the economy

A

The impetus to economic activity particularlycame from an accommodative monetary policyand a consequent increase in private sector credit,especially for fixed investment; recovery in farmincomes; a steady increase in developmentspending; and, continuing work on infrastructureand energy projects under CPEC

7

Inflation

► 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 increase in house rents.

► For the current fiscal year, SBP expects that inflation rate would remain below 6% and within the range of 4.5-5.5%.

Overall, the inflation graph indicates an upward trend but this rate is not expected to accelerate abnormally unless there is a major supply side shock such as upswing in the global oil prices.

Foreign exchange reserves

4.013.78

4.6 4.8

March 2017 March 2018 FY 18 FY 19

Dollar

► There has been a ~12% fall in the reserves since the start of FY18 from USD ~20bn to USD ~17bn

► Latest data reveals that forex reserve of the central bank is equivalent to 10 weeks of import cover.

► The main driver for this decline is the spike in debt servicing and surging trade deficit

Forecast

► As per Oxford Economics, foreign exchange reserves are expected to stabilize on account of CPEC related investment projects attracting foreign flows to the country, support from friendly countries and expectations of rising exports.

► 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

Sources: SBP, Oxford Economics, EY analysis

20 2020 20

19

20

1918

1817

Jul-17 Oct-17 Jan-18 Apr-18

US

D B

illio

ns

1820

2326

29

FY 19 FY 20 FY 21 FY 22 FY 23

8

Foreign Direct Investment (Net)

2.0

2.1

2.6

3.2

US

D b

illio

n

► FDI increased by around 4.4% during9M FY18 compared to 9M FY17,mainly due to the massive Chineseinflows under CPEC.

► Pakistan is also attracting non-Sinoinvestors to balance the geographicaltilt of the FDI by targeting inflows in theautomobile sector.

► FDI prospects are bright for Pakistan inthe coming years with regards toflourishing economic activity and withCPEC bringing in numerous long termprojects under its belt.

► Improvements in law and order has alsoenhanced investment outlook and serveas an added contributor to supplement agreater FDI inflator.

FDI InflowsJuly-Feb 2018

China

$1,281mnUK

$205.5mnMalaysia

$121.3mn

Saudi Arabia

$11.4mnUAE

$15.4mn

Interest rate

► Inflation is expected to stay below 6% in FY 18 and close to the same figure in FY19, irrespective of anticipated demandpressures and oil price recovery

► Growth is expected to rise following improved real sector performance within both agricultural and Large scale manufacturingsectors 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%

Monetary policy statement (MPS) - March 2018

► The SBP, after holding interest rates stableat 5.75% for the past 20 months, increasedthe rate to 6% in Jan 2018 due to:► Ticking cost push inflation (via rising oil

prices);► PKR depreciation; and► Declining output gap which may lead to

the economy overheating.► Per Monetary Policy Statement (MPS)

March 2018, the SBP has decided tomaintain the same rates for the next twomonths.

Sources: SBP, Oxford Economics, BOI, EY analysis

Sources: SBP, Oxford Economics

MNCs repatriated ~ USD 1.3bn earnings during the periodexacerbating Net FDI. The government should ratherincentivize reinvestments by MNCs and retain FDI

9M FY17 9M FY18 FY19 F FY20 F

5.75%6.00%

9

Remittance

Long-term Forecast:

Expected rebound in oilprices triggered by productioncuts from OPEC/Russian andthe remittance initiative underPRI, both anticipate a boost infuture foreign remittances.

(Million US Dollars)

Sources: SBP, Oxford Economics

1,5

42 1

,95

4

1,2

94 1

,65

4

1,5

77

1,7

24

1,6

39

1,4

50 1

,77

3

1,3

60 1

,76

8

1,6

12

1,5

61

1,6

18

1,5

85

1,4

88

1,4

17 1,6

94

2018 2017

Short-term Forecast:

► PKR depreciation against thedollar will encourage expatsto remit more;

► Similarly, imposition of taxeson remittances greater thanUSD 100,000 in accordancewith the new AmnestyScheme will encourageexpats to remit before theimplementation

(USD Million) Remittance from Gulfcountries, which havehistorically accounted formajority of annualremittances, have droppeddrastically triggered by afall in crude oil prices and atilt towards increasinglocalization of labor.

After the end of a six-yearban on recruitment, whichwas lifted in mid-2016,Bangladesh appears tohave replaced Pakistan asthe main source of laborforce to Saudi Arabia.

4,0

78

3,1

43

1,7

39

1,6

58

1,7

07

3,6

91

3,2

65

1,9

48

2,0

31

1,6

48

KSA UAE USA UK GCC(Others)

US

D m

illio

n

July - March 17 July - March 18

Worker’s remittance:

During the 9M FY18remittances stood atUSD 14.6bn, 3.6% higheron a year on year basis.

14,400 14,606

20,100

24,500

0

5,000

10,000

15,000

20,000

25,000

30,000

9M 2017 9M 2018 FY 2018F FY 2019F

Long-term Forecast:

Expected rebound in oil pricestriggered by production cutsfrom OPEC/Russian and theremittance initiative underPRI, both anticipate a boost infuture foreign remittances.

10

104

106

108

110

112

114

116

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 policymakers; making it more expensive in PKR terms due to the depreciation. Same goes for the importof other commodities including cooking oil, industrial raw material and capital goods which will turnout to be more expensive following the rupee depreciation. Though the depreciation may succeedin resuscitating exports and curbing imports, erosion of FX reserves will still persist as animperative issue to be catered.

► USD/PKR Parity based on real effective exchange rates has been achieved which may precludesignificant devaluation stemming from technical reasons/currency overvaluation. Demand/Supplyconsiderations will primarily drive exchange rate movements going forward.

Currency

Sources: Investing.com, EY analysis

Sources: Business Recorder

Rupee has attained its “optimal value”, nofurther need for devaluationDr. Miftah Ismail, Advisor to PM for FInance

“ „

11

Debt

Total Public Debt

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

FY 18FQ2 FY 18 FY 19F

External Debt

93.3

US

D b

illi

on

89 103.3

Total public debt PKR Trillion

As % of GDP67.0 66.3

FY17 Q2FY18

PKR 21.4 tn

77%

8%

5%4% 4%

Composition

Public External Debt Private Sector DebtPublic Sector Enterprises BanksIntercompany debt Forex Liabilities

Debt Servicing

6.1

7.0

5.5 5.6

6.9

2.9

2013 2014 2015 2016 2017 Q2 2018

US

D b

illio

n

PKR 22.8 tn

12

FY17 FY18E

Imports Exports

Sources: SBP

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.

1.82 2.10

1.75 1.97 2.16

2.00

2.11

2.06 2.30

4.64

4.33

3.96 4.

44 4.64

4.42 4.

91

4.33 4.

89

JUL-17 (R)

AUG-17 (R)

SEP-17 (R)

OCT-17 (R)

NOV-17 (R)

DEC-17 (R)

JAN-18 (R)

FEB-18 (R)

MAR-18 (P)

Exports ImportsUSD Billion

“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

Deficit: $34 billionDeficit: $31 billion

US

DM

illio

n

Owing to the magnitude of the deficitresulting from inelastic imports,Pakistan is likely to face difficulties inmanaging foreign exchange reservesover the coming months. However,imports related to CPEC relatedprojects (power generation) areexpected to improve the sustainabilityand productive capacity of theeconomy. Further, improving energysupply is leading to a revival in exportsgrowth which are higher ~12% YoY

Balance of Trade in Goods and Services

Trade

Sources: SBP

13

Financial 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 whichthe 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 andsuccessfully tapped global capital markets.

► During this period Pakistan’s imports and exports remained stable, evidence that the grey-listing did notraise any significant barriers to trade.

► The reaction of the bond markets to the FATF’s decision has also been muted. Ten-year bonds issued bythe country in 2017, for instance, have had a decline in their yield from a high of almost 7.4% on February14, 2018 to below 7.1% on February 26, 2018.

B3

Moody’s S&P

BFitch

B

Pakistan Credit Rating

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

Sources: The Diplomat, Dawn, EY analysis

14

Major development projects during the year

Source: The News

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.

April 2018

November 2017

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

Source: Tribune

April 2018

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.

Source: TribuneSeptember 2017

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

Source: The NationApril 2018

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

15

Major development projects during the year

Source: Tribune

The government has given Greenfield investment statusto five vehicle manufacturing companies

January 2018

January 2018

16km-long elevated thoroughfare which runs along the LyariRiver, completed at a cost of PKR 11 billion, 16 years after construction start.

Source: TribuneJanuary 2018

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 DigitalMarch 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

Source: epmagMarch 2018

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

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: GE Newsroom

Source: Tribune

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