Mar 31, 2008 (Asia Pulse Data Source via COMTEX) -- -- Karachi, March 31 PPI: Pakistans economy continues to show resilience to domestic and international shocks. Although the shocks have taken their toll, economy is expected to turn in reasonable growth performance during current fiscal year (2007-08), albeit substantially lower than target. This observation was made in Second Quarterly Report for FY08 of State Bank on State of Pakistans Economy released on Monday. SBP estimates suggest FY08 real Gross Domestic Product growth Free Report!The Only 3 Rules You Need To Trade The Market would be in range of 6.0-6.5 percent. This below target growth nonetheless remains strong, it asserted.
An unanticipated strength in international commodity prices is mainly responsible for cost push driven inflationary pressures in economy. These further intensified due to strong aggregate demand amidst a continuing fiscal stimulus. As a result, it is likely FY08 inflation would be in range of 8.0-9.0 percent, significantly above target of 6.5 percent for the year, it added.
The growing macroeconomic imbalances, particularly widening fiscal and current account deficits continued to create complications and add to inflationary pressures. On other hand, Pakistan has so far largely been untouched by continuing turmoil in international credit markets. The rise in fiscal deficit during first half (July-December) of FY08 has more troubling implications than increase in previous year.
The modest increase in fiscal deficit during preceding two years had been relatively less troubling, as (1) revenue growth had remained strong, and (2) rise in spending essentially reflected impact of post-earthquake relief and reconstruction (excluding this, fiscal deficit remained below 4.0 percent of GDP); these substantive expenditures would fall sharply in a few years, it added.
The report said reducing fiscal deficit in remaining part of fiscal year will thus be challenging, but is nonetheless essential. The support to aggregate demand due to fiscal deficit contributed directly to a rise in monetary aggregates, raising inflationary pressures, complicating monetary management, and stoking growth of current account deficit.
The combination of rising fiscal deficit and weak external receipts pushed government borrowings from SBP to a record Rs 359.3 billion during July-1st March FY08, compared to only Rs 25.6 billion in corresponding period of last fiscal year. This has been instrumental in sustaining growth in broad money (M2) for period at 17.6 percent YoY, significantly offsetting central banks efforts to tighten monetary policy, report added.
The information available by mid-February 2008 suggests agriculture sector is likely to record reasonable growth during fiscal year. Prospects of achieving targeted 4.8 percent growth for year, however, remain dim, largely due to disappointing performance of cotton and rice crops.
It said large scale manufacturing (LSM) has been encountering headwinds since start of FY08. Domestic as well as external factors are responsible for relatively slower growth in this sector compared to stellar performance of preceding years. These include: continued strong increases in international commodity prices, domestic energy woes and dampened demand (particularly for textile exports).
Economic losses in aftermath of December 27, 2007 have further weakened chances of meeting annual target. Overall, slowdown in LSM during H1-FY08 was broad based and was seen in 11 out of 15 industrial groups.
Most of indicators for services sector suggest robust growth in this sector in first half of FY08. Wholesale and retail trade seems likely to perform well given a significant increase in imports (which accounts for more than half of value addition in this sub-sector). This sub-sector is also likely to benefit from expansion in network of domestic and foreign chain store, it added.
An unanticipated strength in international commodity prices is mainly responsible for cost push driven inflationary pressures in economy. These further intensified due to strong aggregate demand amidst a continuing fiscal stimulus. As a result, it is likely FY08 inflation would be in range of 8.0-9.0 percent, significantly above target of 6.5 percent for the year, it added.
The growing macroeconomic imbalances, particularly widening fiscal and current account deficits continued to create complications and add to inflationary pressures. On other hand, Pakistan has so far largely been untouched by continuing turmoil in international credit markets. The rise in fiscal deficit during first half (July-December) of FY08 has more troubling implications than increase in previous year.
The modest increase in fiscal deficit during preceding two years had been relatively less troubling, as (1) revenue growth had remained strong, and (2) rise in spending essentially reflected impact of post-earthquake relief and reconstruction (excluding this, fiscal deficit remained below 4.0 percent of GDP); these substantive expenditures would fall sharply in a few years, it added.
The report said reducing fiscal deficit in remaining part of fiscal year will thus be challenging, but is nonetheless essential. The support to aggregate demand due to fiscal deficit contributed directly to a rise in monetary aggregates, raising inflationary pressures, complicating monetary management, and stoking growth of current account deficit.
The combination of rising fiscal deficit and weak external receipts pushed government borrowings from SBP to a record Rs 359.3 billion during July-1st March FY08, compared to only Rs 25.6 billion in corresponding period of last fiscal year. This has been instrumental in sustaining growth in broad money (M2) for period at 17.6 percent YoY, significantly offsetting central banks efforts to tighten monetary policy, report added.
The information available by mid-February 2008 suggests agriculture sector is likely to record reasonable growth during fiscal year. Prospects of achieving targeted 4.8 percent growth for year, however, remain dim, largely due to disappointing performance of cotton and rice crops.
It said large scale manufacturing (LSM) has been encountering headwinds since start of FY08. Domestic as well as external factors are responsible for relatively slower growth in this sector compared to stellar performance of preceding years. These include: continued strong increases in international commodity prices, domestic energy woes and dampened demand (particularly for textile exports).
Economic losses in aftermath of December 27, 2007 have further weakened chances of meeting annual target. Overall, slowdown in LSM during H1-FY08 was broad based and was seen in 11 out of 15 industrial groups.
Most of indicators for services sector suggest robust growth in this sector in first half of FY08. Wholesale and retail trade seems likely to perform well given a significant increase in imports (which accounts for more than half of value addition in this sub-sector). This sub-sector is also likely to benefit from expansion in network of domestic and foreign chain store, it added.
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