Economy shows resilience despite shocks: SBP

KARACHI—Pakistan’s economy continues to show resilience to domestic and international shocks. Although these shocks have taken their toll, the economy is expected to turn in a reasonable growth performance during the current fiscal year (2007-08), albeit substantially lower than target. This observation was made in the Second Quarterly Report for FY08 of the State Bank on the State of Pakistan’s Economy which was released Monday.
The Report said the State Bank estimates suggest that FY08 real Gross Domestic Product growth would be in the range of 6.0-6.5 percent. “This below target growth nonetheless remains strong,” it asserted. It said an unanticipated strength in international commodity prices is mainly responsible for cost push driven inflationary pressures in the economy and added these pressures further intensified due to strong aggregate demand amidst a continuing fiscal stimulus. “As a result, it is likely that FY08 inflation would be in the range of 8.0-9.0 percent, significantly above the target of 6.5 percent for the year,” it added. The Report noted that the growing macroeconomic imbalances, particularly the widening fiscal and current account deficits continued to create complications and add to inflationary pressures. On the other hand, Pakistan has so far largely been untouched by the continuing turmoil in the international credit markets. It said the rise in the fiscal deficit during first half (July-December) of FY08 has more troubling implications than the increase in the previous year. The modest increase in the fiscal deficit during the preceding two years had been relatively less troubling, as (1) revenue growth had remained strong, and (2) rise in spending essentially reflected the impact of post-earthquake relief and reconstruction (excluding this, the fiscal deficit remained below 4.0 percent of GDP); these substantive expenditures would fall sharply in a few years, it added.
Reducing the fiscal deficit in the remaining part of the fiscal year will thus be challenging, but is nonetheless essential, the Report said and added that support to aggregate demand due to fiscal deficit contributed directly to a rise in monetary aggregates, raising inflationary pressures, complicating monetary management, and stoking the growth of the current account deficit.
The Report said the combination of rising fiscal deficit and weak external receipts has pushed the government borrowings from SBP to a record Rs 359.3 billion during July-1st March FY08, compared to only Rs 25.6 billion in the corresponding period of last fiscal year. “This has been instrumental in sustaining the growth in broad money (M2) for the period at 17.6 percent YoY, significantly offsetting the central bank’s efforts to tighten monetary policy,” the Report added.
The Report said the information available by mid-February 2008 suggests that agriculture sector is likely to record reasonable growth during the fiscal year. Prospects of achieving the targeted 4.8 percent growth for the year, however, remain dim, largely due to disappointing performance of cotton and rice crops.

—Agencies