KARACHI (April 05 2009): Pakistan's macroeconomic indicators have started to show improvement due to disciplined implementation of the macroeconomic stabilisation program. However, the country will miss the chief economic targets like GDP, inflation, remittances, exports and large-scale manufacturing (LSM) in fiscal year 2008-09, according to the Second Quarterly Report of the State Bank of Pakistan on the State of Economy released on Saturday.
The report pointed out that in the short- to medium-term, it would be imperative for Pakistan to rely on concessional external assistance to finance development expenditure. It underscored the need for greater external assistance for Pakistan as sources of domestic financing are either not available or remain risky due to its vulnerable external accounts position.
It said that while the direct impact of the international financial crisis on Pakistan has been relatively limited so far, there are significant indirect implications. These include a sharp pullback in some domestic asset markets (real estate and equities), constrained investment flows, and a fall in business confidence.
As the global economic environment continues to deteriorate, access to international capital markets looks to become even more difficult, and risks to both exports and remittances have increased. The changing economic environment thus has serious medium-term implications, particularly for growth prospects, given the country's diminished ability to finance even moderate fiscal and external account deficits.
The Report has projected that during the current FY09 fiscal year, the GDP growth would be between 2.5 percent and 3.5 percent, against the annual target of 5.5 percent.
The report said that despite some decline the annualised inflation was expected to be around 19.5 percent to 20.5 percent over the target of 11 percent, whereas overall fiscal and current account deficits were likely to be between 4.3 percent and 4.7 percent and 5.8 percent and 6.2 percent of the GDP, respectively, against the target of 4.7 percent and 7.2 percent.
In addition, the SBP has projected less than target workers' remittances, which would be 7.3 billion dollars in FY 2009 over the target of 7.7 billion dollars. Exports would be 18.5-19.5 billion dollars over the target of 22.9 billion dollars.
However, there are some positive indications, as the fiscal deficit and current account deficit would be as per target. Fiscal deficit would be 4.3-4.7 percent of GDP, and current account deficit would be 5.8-6.2 percent of GDP in FY 2009, it added.
The Report said that all indications are that agricultural growth would be reasonably good during FY09, despite the drag from 18.5 percent decline in sugarcane output during kharif FY09. "This assessment is based on an anticipated record wheat harvest (that would significantly improve the contribution by major crops), above target performance of minor crops and a reasonably good out turn by the livestock sub-sector," it said.
Demand pressures in the economy are easing due to improvement in fiscal discipline, which has complemented a tight monetary policy. "This has improved prospects for low inflation; while inflation is still very high, there is an expectation that it will decelerate sharply in the final quarter of the fiscal year," it said. The Report pointed out that there is a distinct improvement in the external sector, with a fall in the cumulative July-February period of 2008-09 fiscal year (FY09) trade deficit. The narrowing trade deficit and robust remittances have also engineered a reduction in the current account deficit, allowing for a build-up of the country's foreign exchange reserves, it added.
Notwithstanding this improvement, the short-term growth outlook is still difficult, with LSM growth in particular being hit by sharp reduction in demand from both domestic and international factors, Domestic industrial production particularly has been badly affected by energy shortages, deterioration in the law and order situation, and constricted access to finance (as banks became increasingly risk-averse).
The government has already made significant reductions in the fiscal deficit, bringing it down to 1.9 percent of (estimated annual) GDP for H1-FY09 from 3.4 percent of GDP in H1-FY08. Equally important is the capping of the monetisation of the fiscal deficit at end-October 2008 level.
The Report said that it is hoped that a continued compression in the imports, principally attributed to weakness in domestic demand and lower import unit values, will reduce the current account deficit, allowing Pakistan to build up foreign exchange reserves.
The Report said the fiscal consolidation has been a major priority under the macroeconomic stabilisation agenda for FY09 which seems to be having an impact as the fiscal deficit for the first half of FY09 is estimated to have dropped to 1.9 percent of projected annual GDP compared to 3.4 percent in H1-FY08.
"The fiscal deficit for H1-FY09 thus appears to be in line with the annual target set in the budget FY09 as well as that agreed with IMF under the Stand-By Arrangement," it added. The fiscal improvement thus far has largely been brought about by elimination of oil subsidies and a cut in development spending.
Similarly, after a sharp deterioration in July-October period of FY09, overall external account balance improved noticeably in the ensuing months, aided by a sharp fall in the current account deficit and a modest recovery in financial inflows. Consequently, foreign exchange reserves increased and the rupee also recovered part of the losses suffered during July-October FY09. Thus, the aggregate 68.6 percent growth in overall external account deficit during the first eight months of FY09 was accrued essentially during the first four months of the period.
It said that all price indices ie CPI, WPI and SPI, witnessed a clear downtrend in recent months. After showing a continuous acceleration since March 2008, CPI inflation (YoY) started easing from November 2008. It fell to 21.1 percent in February 2009 as against a peak of 25.3 percent in August 2008. However, this inflation is higher compared to 20.5 percent in the preceding month, and 11.3 percent in the same month of last year.
