Country's growing economy is once again shrinking into the negative mode after the long growth of five years and it is expected that it will miss major economic indicators during the fiscal year 2008.
The State bank of Pakistan has recently issued its first quarterly report, in which SBP has predicted that country' economy is not going into the right direction and would miss its major economic indicator including GDP growth during the current fiscal year 2007-08.
SBP has predicted that country’s GDP growth at the end of the current fiscal year 2008 would be 6.6-7 per cent as compared to target of 7.2 per cent for the current fiscal year.
While the inflation would also reach 7.5 per cent till June 2008, which would be some one- per cent higher then the target of 6.5 per cent.
In addition SBP said that the current account deficit remains large and would remain at last year's level of 5.2 per cent.
"Pakistan's economy performed reasonably well in the initial months of FY08, coping with the increased uncertainties in the domestic and international economic environment. Nonetheless, risks to the economy are increasing, as it is clear that neither the global nor the domestic economic environment is as benign as was in the past years," report says. The political noise ahead of the upcoming elections is impacting investor sentiment somewhat. While the domestic economy seemed relatively unscathed, like the rest of the Asia, from the turmoil in the international capital markets, the global impact of the sub-prime mortgage crisis is still unfolding.
The threat of renewed macroeconomic complications, after five years of good performance, would be further heightened if prompt actions are not undertaken to correct the recent deterioration in fiscal indicators, central bank said.
SBP warned that, all key fiscal performance indicators have deteriorated significantly in the first quarter of the current financial year. "The current trend indicates that the fiscal deficit target will not be met unless appropriate corrective measures are not taken promptly.
A rising import oil bill and higher import of power generation machinery will offset improvement in export growth during the year as power projects achieve a financial close. SBP fears a further deceleration in textile export growth in the short term, which could adversely impact overall export growth.
While, the fiscal imbalance has already led to a substantial rise in government borrowings from the central bank, which rose to Rs191.3 billion during July-December 1 FY08, exceeding both quarterly and annual ceilings and preceding years trend. This has enhanced monetary expansion significantly and is likely to fuel inflationary pressures, compounding the impact of the strength in international commodity prices. SBP said that the FY08 growth is also likely to be below the 7.2 per cent annual target.
The FY08 Kharif harvest was hurt by the damage suffered by the cotton and rice crop due to floods and pest attacks. While the overall agri-growth target may yet be achievable, this would however require that the impact of the record sugarcane harvest be complemented by an exceptional showing of the rabi crops (especially by a substantially above-target wheat harvest) as well as a robust performance by the livestock sub-sector.
"The aggregate growth of large-scale manufacturing (LSM) has also decelerated during the first quarter, although disaggregate data reveals a mixed picture" SBP said.
However, the outlook for the services sector, which accounts for over half of the value-added in the economy, remains positive.
An acceleration in the retail and wholesale trade (with imports rising), higher profitability of the financial sector, and the robust growth in community services (helped by election-related activities) is expected to lead to strong growth for the sixth successive year report said and added that in short, it appears that despite the likelihood of some deceleration, the FY08 growth outcome is likely to remain reasonable.
Rising global commodity prices is also reflected in the persistence of high domestic inflation. The monetary tightening followed throughout FY07 and FY08 was successful in significantly reducing non-food inflation in Pakistan, but its pass through on headline CPI inflation was offset, particularly in the latter year, by the impact of the sustained increases in global food and energy commodity prices, SBP added. Consumer price index (CPI) inflation rose to 9.3 per cent YoY in October 2007 principally driven by a 14.7 per cent YoY jump in CPI food inflation. A part of this jump reversed in November 2007, with overall CPI inflation coming down to 8.7 per cent, as food inflation reported to be 12.7 per cent, but even this is very high. SBP will maintain a tight monetary instance as core inflation continues to show an upward trend as persistent strong food and energy prices have an impact due to cost-push factors. In November and December the external sectors witnessed deterioration consequently as forex reserves reduced to $15.5 billion with SCRA account seeing an outflow of $173.8 million and the rupee depreciation by 1.4 per cent during July-December compared to 1.1 per cent depreciation in the corresponding period a year ago. SBP report informed that private sector credit in net terms from September 2007 shows reasonably strong demand and there is substantial room for banks to lend and seasonal demand is also picking up, says SBP. However, companies that were earlier borrowing from external sources may revert to domestic markets given the widening spreads overseas. Since a substantial part of the rise in food inflation is a global phenomenon, it tends to restrict the impact of available relief measures. While government is providing relief by the provision of key staples at subsidized rates through utility stores, its options for broader relief are, in the short-term, limited and involve challenging. "Any substantial subsidies involve fiscal costs as well problems in ensuring that it goes only to the vulnerable. For example, traders have the incentive to purchase goods at subsidized rates for re-sale at market prices," central bank said. Subsidies can also raise allocation inefficiencies. Inappropriate subsidies may destroy the economic incentives for producers, ensuring that shortages persist for years, SBP added. SBP said that it should also be remembered that the domestic economy is now more open and prone to external shocks than ever before. This has important policy implications going forward. First, domestic prices will be more sensitive to the changes in international prices, despite domestic availability. After relatively subdued growth in the initial months of FY08, the growth of M2 has accelerated in November 2007 and onwards, pushing the Jul-1st Dec FY08 growth to 4.2 per cent (almost unchanged from that in corresponding period of FY07), report informed. This was led largely by government borrowing, which offset the impact of a moderation in private sector growth. The government 's budgetary borrowings from the banking system during July- 1st Dec FY08 rose by Rs 191.3 billion compared to Rs 97.6 billion over the corresponding period in FY07. Importantly, the revenue balance moved from a surplus in the first quarters of the proceeding years to a deficit in Q1- FY08, despite an impressive growth of 22.3 per cent in total revenues during Q1-FY08. The current trend indicates that the fiscal deficit target will not be met unless appropriate corrective measures are taken promptly. Another challenge is the country 's large external current account deficit. Recent evidence indicates that the modest contraction seen in July-October, 2007 is unlikely to continue in months ahead. The trade deficit remains high, although it did benefit from an export pick up (though growth remained below FY04-06 trends) and an import compression. While the continued growth in remittances by Revenue balance measures the saving capacity of the government and is calculated as the difference between total revenue and current expenditures, SBP report concluded.
