PRICES The trend of disinflation (a positive, but declining, rate of inflation) in the economy has continued for the

e eleventh consecutive month. Inflation as measured by the Consumer Price Index (CPI) has declined to 10.1 percent yearonyear in September (versus 23.9 percent in September 2008). The rate of inflation (yearonyear) has nearly halved in the past six months. The decline in the rate of inflation has occurred due to both the Food as well as Nonfood categories. Core inflation, measured as the rate of change in NonFood, Non Energy CPI, has decelerated to 11.9 percent in September. In addition to the adoption of prudent macroeconomic policies, a strong base effect has also played a significant role in inducing disinflationary trends in the economy, with the unwinding of the effects of the sharp rise in energy and food prices that occurred during 2008. While monthonmonth CPI inflation has decelerated in September after several months of elevated levels, the environment for price pressures in the economy appears less benign going forward, based on the following factors: The base effect will wash out by December this year; International oil prices have reversed near term course and crossed US$80 as of third week of October, a rise of 15 percent since July 1; The possibility of still higher electricity tariffs under the World Bank/Asian Development Banksponsored power sector reform; The possibility of higher gas tariffs for endusers after the review of wellhead prices in December/January 2010. D. BALANCE OF PAYMENTS The external account position has continued to improve, but prospects for the balance of payments in 2009/10 hinge significantly on the magnitude and timing of external inflows, as well as on the outlook for international oil and commodity prices. The external current account balance swung to a surplus in September (US$174 million) after posting a nominal deficit in August (US$19 million). Lower imports and recordbreaking inflows of worker remittances have contributed most to the turnaround.
Pakistan Economic Update July September 2009

Principal Economic Advisers Wing, Finance Division (7)

After recording an annual increase of 25 percent in 2008/09, remittances have continued to surge in the first quarter of 2009/10, crossing US$800 million for the first time in September. Following a moderation in the rate of decline for five successive months, exports have recorded a fall of 14.2 percent yearonyear in September. However, reflecting a continuous, albeit gradual, improvement in global economic conditions especially in external trade (see Charts below), order books of Pakistani textile and apparel exporters are reported to be full for several months in advance. Chart 2: OECD Composite Leading Indicator Chart 3: Baltic Dry Index
Source: OECD Source: Bloomberg

Improvements in the Real Effective Exchange Rate (REER) since March, coinciding with the Indian Rupees rapid appreciation and a decline in Pakistans inflation rate since, are expected to underpin a firmer trend in the near term in exports. The contraction in imports has accelerated, with headline imports declining 36 percent yearonyear in September, led primarily by a sharp fall in oil payments (lower by US$628 million) and food imports (down by US$340 million). Import of autos in kit form for local assembly (i.e. in Completely Knocked Down, or CKD, mode) has remained 5 percent higher, reflecting the pick up in domestic auto sales and production even in the absence of bank financing.