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KARACHI: The State Bank said on Saturday that average inflation by the end of this year was likely to be close to 12 per cent while the country might miss the GDP growth target of 4.2 per cent set for the current financial year.
“While the increase in energy prices, recent weakening of the rupee and the base effect may increase inflation in coming months, the end-year average inflation is likely to fall close to 12 per cent as projected earlier,” said the first quarterly report issued by the SBP.
It noted that realisation of the 4.2 per cent GDP target looked difficult because of gas shortage, high oil prices and decline in global prices for agricultural commodities. However, recent fiscal figures showed that the government had been making some headway towards improving its finances.
“The budget deficit for the first quarter (July-September) of FY12 was 1.2 per cent of GDP, compared to 1.5 per cent during the same period last year,” the report said, adding that the reduced deficit was because of 29.7 per cent increase in the FBR revenue, including 50.4 per cent growth in non-tax revenue.
However, the report added, the amount collected by the end of last month fell short of the revenue needed to meet the annual target of Rs1,952.3 billion.
“The revenue target depends on realisation of the Coalition Support Fund (CSF) and sale of 3G licences (Rs150 billion),” it said, adding that the target cannot be achieved without money from these sources.
During the first quarter of FY12, the provinces managed to show a surplus of only Rs11.6 billion. The federal government set the surplus at Rs125 billon on part of the provinces.
“Any shortfall in contribution by the provinces will make achievement of the fiscal deficit target more challenging,” the SBP noted.
According to the report, the lack of external funding has put a disproportionate burden of financing deficit on the banking system, leading to crowding out of the private sector and dissuading banks from playing their role as financial intermediary.
“As a result the circular debt issue is likely to persist.”
The report said Pakistan was lucky in FY11 because its current account ended up in surplus and, despite the drying up of FDI and other foreign investments, there was a net increase in foreign exchange reserves. “The pace at which the current account deteriorated during the first quarter of FY12 took many by surprise. Specifically, the current account deficit for Sept 2011 alone was over $1 billion,” the report added.
It said financial flows had almost dried up, compounding the country’s economic vulnerability. While some financial inflows are expected, a part of the current account deficit was likely to be financed through reserves as was the case during July-Oct FY12.
“This has important implications for monetary management and price stability,” the report observed, adding that the government was optimistic that the 3G telecom licence fee would be realised. In addition, due to recent developments, there was still optimism that parts of the CSF, bilateral assistance from the US, and privatisation proceeds of PTCL will be received.
“The currency swap arrangements, which were recently formalised with the central banks of Turkey and China, will also facilitate bilateral trade and investment, easing the stress on the country’s reserves,” the report said.
