KARACHI – Expressing “cautious optimism” over a stable rupee and comfortable external accounts despite foreign funding drying up sharply, the State Bank of Pakistan (SBP) reiterated on Friday that the country’s gross domestic product (GDP) growth would range between two and three percent for the current fiscal year.
Concerned over what it called a “disheartening outlook” on inflation, the central bank expressed fears that despite a marginal ease in its Fiscal Year 2011 (FY11) projections for inflationary pressures, the backbreaking price hike was becoming engrained. “Although cotton crop and rice were adversely impacted by floods, the impact was not as bad as initially anticipated.
More importantly, there has been an upside to the floods in terms of the increased area under cultivation for wheat and better recovery from sugarcane,” said the SBP Second Quarterly Report on the State of Pakistan’s Economy for FY11 released on Friday. In the report, the SBP stuck to its earlier projection of GDP growth of two to three percent for FY11, accounting for the catastrophic floods in August last year.
It said that during July-February of FY11, Pakistan’s current account deficit was only $98 million, against $3.027 billion in the corresponding period of the last fiscal year. A strong dollar-denominated export growth of 20.3 percent (on the back of high textiles prices), sluggish manufacturing and consumer demand reflected in the 12.7 percent growth in imports, and strong remittances – up 18 percent over FY10 – were primarily responsible for the improvement, the report added.
A preliminary assessment suggested that the external sector would remain comfortable, the report said, adding that the SBP remained “cautiously optimistic about progress on the fiscal side, as shown by the recent fiscal measures to reduce the gap by Rs 210 billion this fiscal year”. “Having said this, net foreign inflows in the financial account have declined sharply, as the stalled [International Monetary Fund] programme has stopped inflows from other international financial institutions and bilateral donors.
Nevertheless, the improvement in the current account has pushed Pakistan’s foreign exchange reserves to record highs, while the Pakistani rupee remains stable,” the report stated. The report, however, noted with concern that the outlook on inflation was not heartening.
“Although our projections for FY11 have eased marginally to 14.5-15.5 percent, we fear that inflationary expectations are becoming engrained,” the report said, and also pointed out that it was important to make a distinction between administered and non-administered prices. Popular perception regarding inflation tend to focus on administered prices (e.g. retail fuel prices, power tariffs, wheat support price) over which SBP has little control.
“However, we believe fiscal slippages and excessive use of central bank financing – which the public correctly sees as printing currency notes – has become increasingly instrumental in price/wage-setting behaviour. This is where inflationary expectations come into play, in terms of pushing non-administered prices,” the report said.
The report noted that increasing the tax base was without doubt the toughest structural reform to implement, and the one that needed the greatest political will. It said that on the fiscal side, the unending debate about the Revised General Sales Tax (RGST) (and lack of progress) captured the real problem.
It said the SBP maintained its projection that the fiscal deficit for FY11 would be in the range of 5.5 percent to 6.5 percent of the GDP.
