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SBP
annual report 2008-09
Some of
Pakistan’s most serious economic issues
By Syeda Majeeda
Aqeel
On 29th October, 2009, the State Bank of
Pakistan released its annual report on the state of Pakistan’s economy
2008-09. The report claimed that due to the rigid macroeconomic
stabilisation programme initiated in November 2008, the government
succeeded to drop the fiscal deficit to Rs680.4 billion during FY09 from
Rs777.2 billion in the previous year and the budget deficit reduced by 2.4
percentage points to 5.2 per cent during FY09. Last year the government
applied the tight macroeconomic stabilisation programme, with the support
of an IMF stand-by arrangement, because of the growing macroeconomic
disparities and fast diminishing of the foreign exchange reserves.
Previous year saw demand pull inflation which rapidly
eroded the purchasing power of the people as real income was reduced
constantly. That further impacted the production sector which was already
fragile by the ongoing energy crisis, an uncertain law and order
situation, and increasingly conservative lending by domestic banks. The
main reasons of high inflation were high cost of living and high prices of
food commodities in the international market, Offsetting impact of renewed
increase in prices of some key food staples like milk, sugar, ghee, wheat,
meat, pulses etc.
Increase in crude oil prices further increased the
food prices due to demand for bio-fuel. SBP anticipated that average
annual inflation for FY10 is likely to drop to around 10-12 per cent.
While, this is a little higher than the FY10 target of 9 per cent, it
still represents a significant improvement over the 20.8 per cent figure
for FY09.
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SELECTED MACROECONOMIC INDICATORS
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FY08
FY09
FY09
Targets Actual
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Per cent
Real GDP (at factor cost)
4.1
5.5
2.0
Agriculture
1.1
3.5
4.7
Manufacturing
4.8
5.5
-3.3
Services sector 6.6
6.1
3.6
Exports (f.o.b.)
12.2
16.0
-6.7
Imports (c.i.f.) 30.9
6.5
-12.9
As per cent of GDP
Total investment
22
21.5
19.7
National savings
13.4
14.3
14.3
Total revenue
14.6
14.7
14.1
Budgetary expenditure
22.1
19.5
19.3
Budgetary deficit 7.6
4.7
5.2
Foreign debt
27.0
29.5
-31.5
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Source: SBP Annual Data 2008-09
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The SBP annual report 2009 projected the significant
factors that can affect the rates of food commodities are the global
warming and changing weather cycles. SBP admitted that the present
investment to GDP ratio is significantly low as compared to other
developing countries.
According to the report, the key contributor of the
positive GDP growth was the agriculture sector due to which trading,
transportation, and storage activities increased which raised the
employment opportunities.
Major crops (wheat, rice and maize) witnessed a
remarkable growth of 7.7 per cent in FY09 against the target of 4.5 per
cent due to record harvest. Minor crops such as canola, onions, mangoes
and some pulses also showed prominent growth of 3.6 per cent against the
target of 2.0 per cent. The reasons behind the prominent agriculture
sector were favourable weather conditions and high prices of agri-commodities.
Livestock sector also exhibited an impressive growth
of 3.7 per cent against the target of 3.2 per cent. The causes were the
firm prices and demand for the livestock products, favourable weather
conditions, no major record of virus attack in poultry (bird flu etc) or
livestock animals in the country and better availability of fodder in
non-irrigated fields following extended monsoon and winter rains.
As said by the report, industrial sector failed to
resist the adverse internal and global developments and recorded momentous
reduction of 8.2 per cent in manufacturing. Sharp boost in prices of
construction materials was a major cause to shrink the construction
activities remarkably. Besides this, the other local and international
factors were continued energy shortages, deterioration in the law and
order situation, high political risk, shortage of corporate financing,
lack of trust among local and foreigner investors and high rates of
utility bills.
The recovery seen in mining & quarrying sector
during FY08 proved short-lived as the sector continued its downtrend in
FY09 with growth declining by 3.1 percentage points for the year, the
lowest in 11 years.
According to the SBP report the service sector
recorded a weak growth, as compared to the last eight years. The main
reason was the slow growth in the industrial sector as well as decline in
finance & insurance.
Due to rise in security risk and the on going energy
crisis, investment to GDP ratio reduced for the second successive year to
19.7 per cent. The responsibility goes to the tight fiscal measures.
In 2009, the SBP reduced its interest rate two times
by 100 bps each time in April and August 2009. SBP lastly started monetary
easing because of the declining of inflationary pressures in the country,
with indication of a reducing aggregate demand and evident narrowing of
the twin deficits.
The whole report is a blend of predictions and
restrictions. Some indicators showed a satisfactory result but overall the
economic picture is still pathetic, and could be terrible in short run by
adverse shocks or any failure in the disciplined implementation of
supportive reforms. As said earlier, there are many factors involved in
the economic slow down but the main reason is the worsening law and order
situation and fear of security.
The SBP report could not explain why it failed to plan
wise monetary control without curtailing growth that could check
inflation. State bank is using a different approach to tackle inflation
without trying other options. SBP lowered the interest rates in April 2009
and in August 2009 by 100 bps each, but still the existing interest rates
curb greater money flow in the market and so discourage the production
activity.
Besides the other limitation, when the central bank
raises the interest rates, then instead of lending to the people, the
commercial banks prefer to invest in government securities. On the other
hand, banks would go for higher returns by preferring private sector to
keep their current margins if the central bank lowers the policy rate and
so the result would be the enhancing growth.
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