Economy to grow by 3pc: State Bank | Pakistan Today

Economy to grow by 3pc: State Bank

KARACHI – Forecasting Pakistan’s real Gross Domestic Product (GDP) growth at two to three percent, the State Bank of Pakistan (SBP) has said that the country’s external accounts would deteriorate during second half of the current fiscal year. In its first Quarterly Report for 2010-11, the central bank has projected that persistent energy shortages and growing arrears of energy payments would continue to dampen economic activity in the country.
The Report on the state of Pakistan’s Economy was released on Wednesday. Revising its inflation estimates for the country at 16 percent, the State Bank has warned against a further delay in the implementation of critical structural adjustments as it would significantly increase future costs to the country’s economy.
The SBP, revising its Annual Plan Targets for major macroeconomic indicators, said that the GDP growth would range between two and three percent against the targeted 4.5 percent during the current fiscal year. Earlier, the bank had projected the average CPI inflation, workers’ remittances, exports, imports, fiscal deficit and the current account deficit at 9.5, 9.0, 20, 31.7, 4.0 and 3.4 percent of the GDP respectively.
However, SBP’s recent report depicts a different picture as inflation is set to swell up to 15 to 16 percent, workers’ remittances by 10 to 11 percent, exports by 22 to 23 percent, imports by 34.5 to 35.5 percent, fiscal deficit by 6.0 to 6.5 percent and the current account deficit to widen by 1.0 to 2.0 percent of the GDP. The GDP growth is projected to grow between two and three percent due to expectation of better contribution by the services sector and improvement in performance of commodity producing sectors.
According to the Report, performance of the commodity producing sectors is expected to improve in the upcoming months. However, expectations of a recovery in agriculture would depend crucially on the wheat harvest (including increased production from the rain-fed – “barani” – areas), and the livestock sector. Similarly, the report said that large-scale manufacturing growth is forecasted to turn positive again, as strong agriculture product prices are supporting demand.
It said that growing macroeconomic imbalances in the economy are still manageable. The Report pointed out that inflationary pressures had strengthened more than anticipated during the first half of FY11. “A part of this, reflecting post-flood shocks will fade away, as will part of the price rise of sugar, but fiscal expansion, proposed reduction in energy subsidies and prospects of rising imported inflation will continue to drive inflationary expectations.”
“Consequently, SBP estimates for FY11 inflation have been revised upwards from 13.5 percent to 16 percent,” it added. The Report said that strong prices had encouraged farmers to invest in higher yields and support domestic demand. “Therefore, the only sustainable way to protect low income groups from inflation is by targeted subsidies and the creation of ample employment opportunities,” the Report proposed. It said, in contrast to inflation, the current account deficit (CAD) was likely to deteriorate in the second half of FY11.
“A significantly strong growth in imports is expected to more than offset the gains from rise in exports and workers’ remittances.” Financing of the CAD would be “challenging” as the inflows under financial accounts are likely to be significantly lower. “In this perspective, continuation of the structural adjustment program of IMF would be helpful in softening the external financial constraints, in addition to enhancing resilience and robustness of the economy,” it said.
The SBP Report pointed at strength of the external sector, ironically helped by floods. “A jump in remittances and aid flows for flood relief, helped by robust growth in exports largely due to a sharp increase in prices of cotton overshadowed the growth in imports, turning the current account for July-December FY11 to a surplus,” it added.
However, the Report said that uncertainty over the extent of damage to private infrastructure, direct and indirect impacts of supply disruptions, energy shortages and weak consumer and business confidence had taken its toll on the domestic economy during initial months of the current fiscal.
To the State Bank, fiscal performance was still a source of concern given the outstanding issues with expenditure management as well as revenue shortfalls. “Implementation of fiscal reforms and elimination of subsidies in the power sector are likely to broaden the tax net and reduce distortions in the economy.” the Report added.

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