SBP 3Q report

Main economic targets remain unrealised
By Mehmood-Ul-Hassan Khan

Recently, the State Bank of Pakistan released its third quarter report (2007-08). The SBP pinpointed many domestic as well as international actors for slowing of macro-economy. The report is indeed a true reflector of our macro-economyÕs prospects and constraints. All the major macro-economyÕs indicators are going downwards. It is predicted that the country will have to miss its macro-economy targets including GDP growth, exports, imports, fiscal deficit, inflation, monetary growth and current account deficit due to local and international imbalances.

GDP growth during 2007-08 is expected to drop below the 6 percent level for the first time in the last five years. Annual inflation is poised to return to double digits of 11-12 percent against the target of 6.5 percent by the end of current fiscal year. Fiscal deficit is projected to rise substantially which would be a serious problem for the government. The annual current account deficit, as a percentage of GDP, is projected to be at an all-time high of 7.8 percent against the target of 5 percent.

According to the SBP third quarter report, current fiscal year's revenue receipts suggest a significantly large shortfall, indicating that achievement of Rs.1 trillion tax target will be a real challenge. Growth in tax revenue is also lower than the last fiscal year. It stood at 16.3 percent during the first 10 months of current fiscal over the growth of 20 percent in the corresponding period of FY07. The SBP said that during the first 10 months of the current fiscal year, tax receipts stood at Rs.763 billion as compared to Rs.656 billion last fiscal year, however, the receipts during the current fiscal year is 74 percent of the original target of Rs.1,025 billion for FY08.

The fiscal deficit, trade deficit and current account deficit are also much higher than those of the last fiscal year, which have put pressure on the economy and foreign exchange reserves. The SBP has also projected that the budgetary deficit would be 6-7 percent of GDP against the target of 4 percent.

The report said that wheat production in FY08 may also turn out to be substantially below the target and a weak performance by major crops would drag the annual growth substantially below the annual target. Crop insurance, storage facilities, increasing investment in agri-sector infrastructure i.e. water management, electricity, farm-to-market roads, etc. and in value-addition chains e.g. through processing would be instrumental to achieve agriculture targets. The agriculture credit disbursement continued apace with its positive trends. The total agri-disbursements reached to Rs.157.6 billion during Jul-Apr FY08 an increase of 34.9 percent YoY.

The central bank said that during July-March of current fiscal year, Large Scale Manufacturing (LSM) growth declined by some 50 percent to 4.8 percent as compared to 9 percent during the same period of FY07. Acute energy crisis coupled with high international commodity prices and political unrest through most of the year would be harmful for achieving LSM targets. . It appears that energy shortages had a broad-based impact on manufacturing activities. The metal sub-sector, textiles and chemicals especially caustic soda industries were also affected by frequent energy disruptions as well as rising input cost.

According to the report the services sector is poised to achieve the annual targeted growth and main contributors to this performance are wholesale and retail trade, transport storage and communication as well as public administration and defence sub-sectors. Social and personal services seem well placed to contribute positively towards upbeat annual growth in services sector. However, growth in finance and insurance sub-sector

According to the SBP report, inflation is already a serious policy concern for the government with CPI inflation at 17.2 percent YoY for April 2008, the highest level in a month since April, 1995, contributed by both food and non-food sub-groups. In particular, CPI food inflation reached 25.5 percent in April, 2008. The inflows of home remittance have surged to 5.3 billion dollars in 10 months over the remittances of 4.5 billion dollars in same period of FY07. The central bank has also indicated that major key economic target would not be achieved by the end of FY08.

The report has fixed the monetary assets growth target of 13.7 percent. It is projected that it would be 17-19 percent. The export and import targets would also not be achieved and these would be 18.3 billion dollars and 39 billion dollars, respectively, against the target of 19.2 billion dollars and 32.3 billion dollars.

The macro-economy imbalances like twin deficits would be worsen during the 2008.  The report indicates that impact of the heavy government borrowings has been particularly evident in FY08, with the borrowings rising to a record Rs.551.0 billion by May 10, 2008 (compared to only Rs.45.7 billion in the corresponding period of FY07), almost doubling the total outstanding stock of borrowings to Rs940.6 billion.

Integrated policies

According to the central bank report the net foreign direct investment stood at 3.6 or 39.2 percent billion dollars in July-April as compared to 5.9 billion or 47.0 percent dollars during the same period of last fiscal year mainly due to the political uncertainty in the country. However, with 9.6 percent YoY growth during July-January FY08, fall in FDI entirely occurred in the last three months (February-April FY08).