KARACHI (January 13 2010): The real gross domestic product (GDP) growth in the current (2009-10) fiscal year (FY10) is likely to be around the annual target of 3.3 percent. However, inflation, import, export and fiscal deficit targets are difficult to achieve during the current fiscal year.

This was stated by the State Bank of Pakistan in its First Quarterly Report on the State of the Economy for FY10 released on Tuesday. The report said that the major impetus for this growth was expected to come from the services sector, and added that the prospects of returning to macroeconomic stability had improved in the initial months of FY10.

According to projections embodied in the Report, real GDP growth in FY10 is likely to be between 2.5 percent and 3.5 percent--higher than 2.0 percent growth seen in FY09--and around the annual target of 3.3 percent. The country will miss its inflation target, and average Consumer Price Index inflation may remain at 10-12 percent, relative to target of 9 percent for the current fiscal year. Total amount of workers' remittances, likely to be received during FY10 may be 7.8-8.8 billion dollars, against the target of 7 billion dollars.

The report said that the country is unlikely to achieve exports target due to slow external growth and, as per SBP projections, overall exports would be 18.5-19 billion dollars in FY10, against the target of 19.9 billion dollars for the current fiscal year. In addition, imports have been projected at 30.5-31 billion dollars over the target of 28.7 billion dollars for FY10.

Fiscal and current account deficits are likely to be in the range of 4.7-5.2 percent and 3.7-4.7 percent of GDP, respectively relative to target of 4.9 percent and 5.3 percent. It said that data on agriculture and industrial sector was in line with the expectations of a modest recovery in economic growth during FY10. While the performance of major crops during FY10 kharif (April-October 2009) cropping season was below expectations, growth in large-scale manufacturing recovered substantially after recording a 20.6 percent year-on-year decline in March 2009.

It pointed out that while average CPI inflation during FY10 is projected to decelerate significantly from FY09 levels, it is likely to remain higher than the annual target of 9.0 percent for the year. "The adjustment in administered prices of key fuels amid rising international oil prices and cut in electricity subsidies are important factors behind the expected strengthening of inflationary pressures," the Report said.

The Report has asserted that a major challenge in the economy is to improve the tax-to-GDP ratio. "The 0.6 percent Y-o-Y increase in tax collection during July-November FY10 is a source of concern; if this continues, Pakistan's tax-to-GDP ratio will decline from an already low 9.8 percent, seen in FY09," it said, and added that in view of the needs of the structural second-generation reforms in the economy, it is necessary to strengthen the capability of Federal Board of Revenue, increase documentation, reduce exemptions, equal treatment of incomes from different sources, and accelerate the levy of a comprehensive value-added tax.

It said that another challenge in public finance is the increasing level of contingent liabilities of the government. In particular, the energy sector circular debt issue has not been resolved yet, and the government's borrowings for commodity operations have not seen the expected seasonal retirement in Q2-FY10.

"It must be stressed that excessive government involvement in commodity trade/finance, and the interference in market price setting, can be counter-productive and should be avoided," the Report opined, and said that cases of market failure are best handled through effective reforms and strengthening institutions like the Competition Commission of Pakistan. The report said that in the current environment, funding under the Standby Arrangement with IMF has been a key to shore up the country's foreign exchange reserves and to moderate the depreciation of rupee.

Copyright Business Recorder, 2010