SBP Warns against too much reliance on western markets for exports
By Saad Hasan
KARACHI: The State Bank of Pakistan (SBP) on Thursday said that Pakistan’s GDP growth is projected to remain between 2.5 per cent and 3.5 per cent during 2009-10 if the manufacturing and agricultural sectors performed well.
There is already some recovery in the country’s industrial production as the 11-month negative growth in the Large Scale Manufacturing (LSM) sector is likely to turn positive in the first quarter, from July to September, it said in its economic review report for fiscal 2008-09.
However, the crippling factors like energy shortage and inter-corporate circular debt, which pulled down economic growth last year to just 2 per cent, continue to pose serious challenges. While the SBP has not mentioned the repercussions of the recent cut in gas supply to many factories in northern parts of the country, industry people say it will lead to decline in production.
If it had not been for record harvest of three major crops of wheat, rice and maize, the growth would have been negligible last year, the report said, adding agriculture will continue to play a vital role in deciding the growth trajectory.
Growth in the services sector, which is mainstay of the economy, dropped to eight-year low to just 3.9 per cent as transport, storage, communication and financial industry suffered from weak domestic demand.
The double digit CPI inflation averaged at 20.8 per cent throughout 2008-09, eating into the household budgets. It is projected to remain between 10 and 12 per cent this year, the report said.
Last year saw all the macroeconomic indicators sliding down as a consequence of internal and external issues. Rise in international commodity prices swelled the import bill, suicide attacks scared off investors and fiscal deficit increased as the cash-strapped government tried to meet subsidy-laden expenditures.
By end of 2008, the government had no choice but to enter an IMF-sponsored macroeconomic stabilisation programme to avert the balance of payment crisis, which rose following a steep fall in the country’s foreign exchange reserves.
The report shows that the programme did help in contracting fiscal and current account deficit. Fiscal deficit dropped to Rs 680.4 billion during fiscal 2008-09 from Rs 777.2 billion in the preceding year. That was achieved in part by doing away with energy-related subsidies.
However, the SBP said, the government’s move to cut development expenditure was less welcoming as it badly affected the construction-related industries. For the current fiscal year, the SBP has projected the fiscal and current account deficits to remain between 4.7 per cent and 5.2 per cent of GDP. Last year, the two deficits were 5.2 per cent and 5.3 per cent, respectively.
Deficit in the current account, which represents payment receipts between a country and the rest of the world, has improved on back of slump in imports and substantial increase in remittances sent home by expatriates.
The central bank expects the trend to continue as exports pick up and remittances continue to rise. But resurgence in import growth and doubts over foreign exchange flows pose some threat, it added.
The SBP has cautioned the government against too much reliance on Western markets, devastated by the global financial crisis, for the country’s exports. It insisted that regional markets should be explored.
Slowdown in economy should not hinder the efforts to expand the tax base, especially when day-to-day expenditures of the government are expected to rise in the wake of the ongoing war against terrorists, it said.
In the past year, the government easily managed to borrow from the commercial banks without crowding out the private sector because of subdued demand for finances, it said, warning that this state of affairs cannot continue now.
It emphasised on immediate need to foster a culture of savings at home as Pakistan might find it difficult to access international capital markets at reasonable cost. “To mobilise savings, it is necessary to build savings institutions that can tap pension and provident funds,” it added.