KARACHI – Economy is expected to grow by 3 to 4 percent in the fiscal year to end-June, though risks to macroeconomic stability have increased in recent months, the central bank said on Tuesday.
“The economy is still expected to grow in the range of 3 to 4 percent,” the State Bank of Pakistan said in its second quarterly report for the fiscal year 2011-12.
However, it pointed out that risks to macroeconomic stability have, nevertheless, increased. The risks stem from weaknesses in the external sector and a widening fiscal deficit, which is expected to grow to between 5.5 and 6.5 percent of GDP in the current fiscal year, the SBP said.
“Containing the overall fiscal deficit to its revised target of 4.7 percent of GDP seems to be challenging,” the report said.
The government had originally set a target of 4 percent of GDP for the 2011/12 fiscal deficit, but revised it to 4.7 percent after it hit 2.5 percent in the first half of the fiscal year.
The report pointed out that the achievement of the revised fiscal deficit is dependent on the realisation of envisaged surpluses from provincial governments, which are likely to be lower than expected; the non-tax revenues, which depend on inflows into the Coalition Support Fund, and the auction of 3G licences; and strict control over expenditures.
According to the report, the burden of financing this deficit will fall on the banking system, specifically on commercial banks. Other than growing concerns about the supply of loan-able funds for the private sector, renewed government borrowing from SBP entails rising inflationary expectations in the economy, it said, adding that on external front, although the current account deficit is expected to be in the range of 1.5 to 2.5 percent of GDP, there is an upward bias to this prediction. “Given the fall in financial and capital inflows, funding this modest current account deficit could be challenging,” it said.
According to the latest data available, the current account deficit widened to $2.952 billion in the first eight months of 2011/12 - about 1.26 percent of GDP. Market players are increasingly concerned about whether the envisaged foreign inflows will materialise in time. This, together with the scheduled repayment of IMF loans (US$ 1.1 billion) during H2-FY12, may draw down SBP’s foreign exchange reserves,’ the report added.
“Quarterly numbers indicate that financial/capital accounts posted a deficit of US $0.4 billion during Q2-FY12, which implies that the overall external deficit had to be financed by drawing down foreign exchange reserves.” Hence the SBP’s foreign exchange reserves saw a reduction of US $1.9 billion during H1-FY12 to US $12.9 billion. This decline in reserves was accompanied by a depreciating Pak Rupee, which lost 4.4 percent of its value during the first half of the year, it added.
“The position of the external sector weakened at a rate faster than expected, and the fall in financial and capital inflows exerted pressure both on SBP’s foreign exchange reserves and on the Pakistani rupee.”
Finally, energy shortages continued to plague production activities, especially in the industrial sector, the report said.
However, the report said in terms of real sector, there has been some improvement since the publication of SBP’s annual report in December 2011.
Half way into FY12, the economy is showing signs of a modest improvement. Preliminary data indicates that the commodity producing sector, especially agriculture, is doing better than expected. Services also seem well-placed to gain from robust retail trade activities, besides transportation and increased profitability of the banking sector.
The report said the ample availability of key staple crops and less than anticipated supply disruptions due to floods, played a key role in containing inflationary pressures during the period under review.
Inflationary outlook has improved slightly on account of supply side factors (food). It is expected that FY12 inflation will fall within the range of 11 to 12 percent, with a bias towards the lower boundary, the report said.