Pakistan's real Gross Domestic Product (GDP) is likely to grow up to 3 percent in the current Fiscal Year (FY11) according to the First Quarterly Report of the state Bank on the state of the Pakistan's economy which was released on Wednesday.
According to the Report, performance of the commodity producing sectors of the economy is expected to improve in months ahead due to expected better contribution by the services sector, and improvement in the performance by the commodity producing sectors.
However, expectations of a recovery in agriculture will depend crucially on the wheat harvest (including increased production from the rain-fed - "barani"- areas), and the livestock sector. Similarly, large-scale manufacturing growth is expected to turn positive again in the months ahead, as strong agri-prices support demand, and with the additional capacities coming on-line in some industries including fertilizer, cement and steel, the Report added.
The SBP Report said that growing macroeconomic imbalances in the economy are still quite manageable but further delay in implementing critical structural adjustments risks significantly increasing the future costs to the economy.
The Report pointed out that inflationary pressures have strengthened more than anticipated during the first half of FY11.
The Report said that strong prices encourage farmers to invest in higher yields and support domestic demand.
`Therefore, the only sustainable way to protect low income groups from inflation is by targeted subsidies and the creation of ample employment opportunities', the Report added.
`In contrast to inflation, the Current Account Deficit (CAD) is likely to deteriorate in H2-FY11.
A significantly strong growth in imports is expected to more than offset the gains from rise in exports and workers' remittances. The financing of the CAD will be challenging as inflows under financial accounts are likely to be significantly lower.
In this perspective, the continuation of the structural adjustment program of IMF would be helpful in softening the external financial constraints, as well as to enhance the resilience and robustness of the economy', the Report added.
The SBP Report pointed out that the one bright spot in the economy, ironically helped somewhat by the floods, was the strength of the external sector.
"A jump in remittances and aid flows for flood relief, helped by robust growth in exports largely due to sharp increase in the prices of cotton overshadowed the growth in imports, turning the current account for July-December FY11 to a surplus," it added.
However, SBP Report said that uncertainty over the extent of damage to private and public infrastructure and the policy response to floods, direct and indirect impacts of supply disruptions, energy shortages and weak consumer & business confidence, took its toll on the domestic economy during the initial months of the fiscal year FY11.
The SBP Report opined that the fiscal performance remains a source of concern, given the outstanding issues with expenditure management as well as revenue shortfalls.
"The implementation of fiscal reforms and elimination of subsidies in the power sector are likely to broaden the tax net and reduce distortions in the economy.
While, these reforms will induce cost-push inflationary pressures in the economy, in the short run, but these will help sustain high growth in the long run," the Report added.
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