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Economy too weak to sustain any shock - LahoreEstate - 06-05-2009 07:10 AM
* SBP report says resurgence in international commodity prices can jeopardise lowering inflation in future
By Mushfiq Ahmad
KARACHI: The State Bank of Pakistan (SBP) on Thursday said the country’s economy was still too weak to sustain any shocks, as major macroeconomic indicators showed underlying weaknesses that could hamper economic recovery if not addressed properly.
Releasing its third quarterly report on the state of the economy, the SBP said growth in large-scale manufacturing (LSM) had been negative for the tenth consecutive month ending in March 2009, the longest continuous period of shrinking production.
It said the LSM growth dropped by 7.6 percent during the July-Mar period in FY09, compared with a 5 percent rise in the corresponding period of FY08.
This was the major drag on the prospects of improving real gross domestic product growth, it added.
The report pointed out that anticipated weaker performance of revenues, and increase in expenditures both pointed to the risk of slippage in the fiscal deficit target, and a contingent increase in financing requirements.
Inflation: Similarly, resurgence in international commodity prices posed risks to the assessment of a continued sharp deceleration in inflation in the months ahead, the SBP said.
In particular, a rise in international oil prices would have dire consequences for domestic inflation as well as the external account balance, it added.
In addition, the report said the international inflows under financial and capital accounts were relatively lower compared to the preceding years, causing a rise in the overall external account deficit.
“While Pakistan’s ability to access international financial market is constrained, any shortfall in external inflows would add to pressures on monetary policy,” the report said.
“In short, limited gains in key macroeconomic indicators should not lead to complacency as the quality of these improvements and challenges to economy are some worrying factors,” it pointed out.
The report said inflation began to decline and the current account deficit narrowed substantially with a corresponding stability in the exchange rate and fiscal discipline was maintained with the fiscal deficit being reported to be 3.1 percent of the GDP for the July-March period in FY09.
It said record wheat and rice harvests combined with the likelihood of good production in minor crops and of fodder increased expectations that growth in the crops sub-sector of agriculture would exceed the FY09 annual target. “A reasonable performance in the livestock sector, supporting all this, will help take the overall agriculture sector growth close to, or over, the annual target,” it added.
Pakistan’s economy showed macroeconomic stability in the third quarter of the current FY09 due to a sharp decline in international commodity prices, the SBP said.
It suggested that a reduction in development expenditure was not desirable, as it would be detrimental for the country’s human and physical infrastructure. “In the medium-term, the only viable way to achieve sustainable improvements in fiscal accounts is to raise the tax-to-GDP ratio through increasing the tax net,” it said.
A substantial reduction in current expenditure is not possible without significant reduction in the size of government machinery, due to inflexible interest payments and expenses under defence and civil administration, it added.
By April 2009, broad money (M2) growth was still quite weak at 1.9 percent year-to-date, down sharply from 8.4 percent in the corresponding period last year, reflecting continued deceleration in domestic demand.
http://www.dailytimes.com.pk/default.asp?page=2009\06\05\story_5-6-2009_pg1_11