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State Bank of Pakistan raises 2009/10 GDP growth forecast

Associated Press of Pakistan

Provisional estimates of National Income Account’s Committee suggest that Pakistan’s real gross domestic product (GDP) growth will rebound to 4.1 percent in the current fiscal year (FY10) compared with an anaemic 1.2 percent last year on the back of above-target growth of livestock, large-scale manufacturing and services sectors.

According to the 3rd quarterly report issued by State Bank of Pakistan on state of economy here Tuesday.

The current account deficit has fallen sharply with foreign exchange reserves improving and although the fiscal deficit is expected to be above target, borrowings from the central bank have so far been low relative to past years.

“The resulting improvement in business confidence, together with reasonable harvests, expansionary fiscal stance, and a small recovery in the global economy have fostered growth in FY10,” the report said while outlining reasons behind expected rebound in the economic growth.

It said that projections for the current account deficit indicate an improved picture with the deficit now expected to fall even lower, in the range of 2.2 – 2.8 percent of GDP during FY10, substantially lower from earlier forecasts of 3.2- 3.8 percent of GDP and actual deficit of 5.7 percent of GDP seen in FY09. “This improvement is mainly due to an impressive performance of exports and workers’ remittances,” it added.

However, it pointed out that as far as inflation was concerned, resurgence in inflationary pressures during second half of FY10 was anticipated. The Report said that annual average headline Consumer Price Index (CPI) inflation will be slightly higher than estimated earlier, falling in the range of 11.5 12.5 percent during FY10. “The upward revision in the forecast range indicates that inflationary pressures strengthened in the economy,” it added.

According to the report, after posting a modest recovery in first half of FY10, the LSM growth gathered further pace in the third quarter of FY10. Re-entry of commercial banks in consumer financing helped strengthen the demand for consumer durables, especially automobiles, despite rising cost pressures, it said and added export-based industries, particularly value-added textile, finally picked-up in response to improved global demand as well as domestic policies.

Similarly, it pointed out that agriculture sector is expected to post a below target growth rate mainly due to water shortages and unfavorable weather conditions during most of FY10.

Contrary to expectations that growth by minor crops would be strong due to switch over of area from major to minor crops, recent information suggests that most of the minor crops also suffered from lower winter rains during FY10. It said while a positive development during FY10 was a significant contribution of agriculture in exports, this resulted in relatively higher domestic prices of most surplus agri-produce.

It was also pointed out that the country’s trade deficit contracted by 13.9 percent during July-April FY10 against 15.6 percent

decline recorded in the same period last year. “This contraction in the trade deficit was the result of a 2.8 percent Y-o-Y fall in the imports, which was complimented by an encouraging 8.0 percent Y-o-Y rise in the exports. The Report estimated that countrys overall exports and imports are likely to remain in the range of $19.5 billion to $20 billion and $31 billion to $31.5 billion, respectively in FY10.

However, the Report opined that the fiscal performance has remained lackluster. SBP estimates for fiscal deficit have been revised upwards to 5.1 5.6 percent of GDP, it said and added main factors behind pressures on fiscal accounts are rising current expenditure and a low tax to GDP ratio. Implementation of value added tax (VAT) could be an appropriate remedy if supported by appropriate systems to curtail misuse of VAT refunds, it said and added even though tax collection is likely to drop during the initial phase of implementation, tax collection and documentation in the economy will improve in later years.

It said that the impact of the high fiscal deficit was compounded by shortfall in external receipts and the latter contributed to lower liquidity in the banking system and problems in financing the current account deficit. It said the central bank continued to inject liquidity in the banking system during most of the year to mitigate part of the impact of the pressures from fiscal and quasi-fiscal operations, but overnight rates have remained close to the ceiling during most of the fiscal year. Similarly, despite a sharp decline in the current account deficit, the overall external account position remains vulnerable, since financing receipts have also plummeted, it said and reiterated that the sustainability of the current account depends on a country’s ability to finance it preferably from the non-debt creating inflows.

The SBP report asserted that the country has to move aggressively to attract fresh investment by implementing additional reforms to increase economic efficiency and improve the business environment.

Steps to increase investment must also be accompanied by measures to foster savings, it said and added that the SBP is looking to increase the access of people to the financial system, and also introducing projects to improve the transmission of policy rates to savers.

“The greater impact is likely to be through improving institutional savings, for which there is an urgent need to reform the institutional structure of pension and provident funds in the country, to foster the expansion of the pool of long-term savings,” the report added.

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