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SBP lowers fiscal year 2011 growth

KARACHI   : Forecasting a 2 to 3 percent real GDP growth against the target of 4.  5 percent for FY11, State Bank of Pakistan on Monday said the negative shocks stemming from floods have further exposed the existing structural weaknesses in the economy and to address these will require improvement in macroeconomic discipline as well as continued reforms to improve the resilience of the economy. The State Bank in its Annual Report on the State of the Economy for the year 2009-10, said that the required reforms include: improve productivity, strengthen public institutions, improve economic governance and build social safety nets to protect vulnerable segments of the population.  Referring to recent devastating floods in the country, the report pointed out that various FY11 macroeconomic targets have suffered serious setbacks early in the year as large areas of the country were devastated by widespread rains and unprecedented floods.   It said that even a cursory assessment of the broad contours of the losses indicates that their repercussions will continue to stress the economy for many years.   It is therefore obvious that the economic priorities and targets for FY11, in particular, will see substantial revision and all key macroeconomic indicators will likely to record deterioration, the report observed.  In this backdrop, the report indicated that chief economic targets such as GDP, inflation, monetary growth, fiscal deficit, and current account deficit would be missed.   The report projected that GDP growth is likely to be between 2 percent to 3 percent in FY11, average annual inflation is expected to be 13.  5 percent to 14.  5 percent against target of 9.  5 percent while the fiscal and current account deficits are likely to be between 5.  0 percent to 6.  0 percent of GDP, and between 3.  0 percent to 4.  0 percent of GDP over the target of 4 percent and 3.  4 percent respectively.  Furthermore, it projected that workers remittances are likely to stay between $9.  5 billion to $10.  5 billion while exports and imports are likely to be between $20 billion to $21 billion and $34 billion to $35 billion, respectively.   The macroeconomic framework embedded in the FY11 Annual Development Programme targets have suffered a serious setback early into the year as large areas of the country were devastated by widespread rains and unprecedented floods.   Large parts of the country s agricultural heartland were particularly hit hard by these floods, with significant damages to standing Kharif crops (eg, cotton, rice and, sugarcane) and livestock.  Preliminary assessments in the aftermath of the flood indicate a much lower growth expectation.   Indeed, the agri-sector growth risks turning negative unless Pakistan achieves very good wheat harvest.   Conventional wisdom, would suggest that the improved water availability and increased fertility of alluvial soil (silt) deposited by floods would help support better crop harvests, the report said.  Realising this potential, however, entails a very quick and systematic effort to address key bottlenecks in affected areas, including restructuring of farmers debts, rapid deployment of resources for drainage of low-lying areas, provision of quality inputs (seed, fertiliser, etc), the report suggested.   It must also be recognised that farmers would be inclined to invest first in the provision of shelter for their families and only then in crops, the report said and added that therefore this suggests the need to support farmers with cash grants for rebuilding as well as with the supply of inputs, if production is to be brought back to pre-flood scenario soon.  Industrial growth will also suffer because of obvious direct losses include those of manufacturing units dependant on the cotton, sugarcane, and rice crops, as well as those suffering temporary supply disruptions.   Also significant could be the indirect losses, as aggregate demand weakens, particularly from the flood stricken areas.   Already, it seems likely that the consumer durable industries will see a substantial decline in demand, it added.  Not surprisingly, demands on the public exchequer are expected to rise sharply in FY11 to finance relief and reconstruction activities in the wake of the floods.   The government correctly proposes to extract a temporary enhancement in revenue from the relatively affluent segments of the tax base, but the needs are still likely to exceed any reasonable increase in receipts.   This raises two issues: First, it must be understood that while government interventions, in the terms of resources and policy, are essential to the scale and speed of any recovery, the government has neither the capacity nor the resources to deliver on all public expectations for relief and support.  A large part of the reconstruction effort over the years will therefore depend substantially on private enterprise and on the broad support of civil society.   Second, the expected increase in fiscal pressures in FY11 is also an opportunity to undertake fundamental changes, the report said.  The impact of flood and rain damages and shortages of minor crops are not expected to persist beyond 2 to 3 months as supply line improves and as fresh crops enter the market.   Similarly, for some other products, any rise in domestic prices would be capped by low international prices.   The worsening in most of Pakistan s macroeconomic variables, further complicate the monetary debate in FY11.   On the one hand, there is the argument that the central bank should respond to the rising inflationary pressures and excessive increase in the fiscal deficit, and on the other, the demand shock stemming from the flood damages argues for a countervailing monetary easing to help revive the faltering economy, the report noted.  Finally, although a slight deterioration in the current account deficit was envisaged for FY11, reflecting the rising requirements for food imports (sugar, edible oil, etc) as well as increased imports to support an anticipated improvement in economic activity.   This outlook has deteriorated somewhat, post-floods, it added.

If fears of substantial losses in agricultural production (particularly cotton) prove correct, this could potentially lead to a higher trade deficit, offset only partially by an anticipated increase in current transfers.   However, the report indicated, financing even this moderate increase in the current account deficit may prove stressful for the economy, with rising pressures on the country s foreign exchange reserves and exchange rate.
Major Economic Indicators
                     Annual     SBP
               FY10P    Plan  Projections
Growth rates in percent
GDP               4.  1     4.  5   2.  0 - 3.  0
Average CPI Inflation     11.  7     9.  5  13.  5 - 14.  5
Monetary assets (M2)      12.  5      -  12.  0 - 13.  0
Billion US Dollars
Workers remittances      8.  9     9.  0  9.  5 - 10.  5
Exports (fob-BoP data)     19.  6    20.  0  20.  0 - 21.  0
Imports (fob- BoP data)    31.  0    31.  7  34.  0 - 35.  0
Percent of GDP
Fiscal deficit         6.  3    4.  0*   5.  0 - 6.  0
Current account deficit     2.  0     3.  4   3.  0 - 4.  0
P: Provisional

-- This was announced in the budget; however, this number rose to 5.  2 percent of GDP as per announced consolidated federal and provincial budgets.

Note: Targets of fiscal and current account deficit to GDP ratios are based on Nominal GDP in the Budget document for FY11, while their projections are based on projected (higher) nominal GDP for the year. 


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