Inflation, trade deficit mar GDP growth
Bureau Report

KARACHI—Pakistan’s economy has grown at an impressive rate of 7 percent during fiscal year 2006-2007, as against 6.6 percent over 2005-2006.This was stated by the Governor State Bank of Pakistan (SBP) Dr Shamshad Akhtar while presenting Central Bank’s annual report for 2006-07 here Monday. She said that this is the fourth successive of sustain high growth in the economy.
Dr Shamshad said that strong growth in services sector at 8 percent was the major contributor to GDP growth, followed by agriculture sector which grew at 5 percent and industry at 6.8 percent during 2006-07. Calling is an investment led growth, SBP Governor said that investment to GDP ratio was at record high of 23 percent during the fiscal year of 2006-07.
It was higher than the target of 21.5 percent of the GDP and also higher than the last year’s 21.7 percent. She noted that record inflow of foreign direct investment (FDI) was the single most important factor behind high investment ratio followed by acceleration in public investment on the back of a higher PSDP. Dr Shamshad pointed out that during World Bank meeting, central bankers of lot of countries praised the impressive achievements of Pakistan’s economy.
She said major crops grew at 7.6 percent against the target of 4.3 percent made a significant contribution to agriculture sector. Similarly, the high performance of large manufacturing sector (LSM) with 8.8 percent helped manufacturing sector to grow at 8.4 percent. In services sector, banking and insurance were the leading force with 18.2 percent growth rate, followed by telecommunication sector. Talking of savings, she said that national savings surged sharply to 19.8 percent, raising their contribution to GDP to 18 percent - the highest in last four years.
Monetary growth also accelerated sharply in the final months of FY07 as a result of a substantial surge in external receipts. The sustained rise in income growth in the last several years has brought some structural changes not only in demand for investment but that of consumption also. Demand for quality products is rising steadily which is inducing additional inflationary pressures in the economy.
This structural shift is bringing to light some micro-macro linkages in the economy which become important in explaining food inflation in developing countries and point to the importance of monetary discipline in these circumstances. A case in point is the milk price behaviour having a significant impact on inflation from demand side. Rise in demand for more hygienic packaged milk has led to a sustained rise in milk prices which have also risen globally.
In the above scenario, although the dominant contribution to inflation is from rising food commodity prices, monetary discipline remains essential. While the administrative supply management measures and policies targeting the collusive behavior of producers and distributors, are generally more effective in controlling food inflation, a tight monetary policy addresses inflationary expectations and prevents the seepage of pressures from rising food prices into the broader economy. A tight monetary posture is all the more important given the exceptional rise in monetary aggregates during FY07.