KARACHI, Dec 6: The State Bank has painted an unflattering picture of the country’s economy during the current financial year, categorically saying there was no reason to expect an upturn in the growth rate.

It projected economic growth of 3.5 to 4.5 per cent and inflation at 20 to 22 per cent in 2008-09.

In its annual report for 2007-08 released on Saturday, the central bank said: “The sharp slowdown in commodity producing sector and decline in investment demand during fiscal 2008 do not bode well for the output growth in subsequent years. The urgency for macroeconomic stabilisation is now evident throughout the economy.”

In medium-to-long term, the country needed to support investment by removing structural bottlenecks, reducing the cost of doing business and increasing productivity to achieve a sustainable high growth and keeping inflation in check, it said.

The central bank projected the fiscal deficit at 4.3 per cent to 4.8 per cent of the GDP (Gross Domestic Product) for 2008-09 against a target of 4.7 per cent.

The report said that the growing inflationary pressures and rising stresses on macroeconomic sustainability continued to pose serious challenges for the SBP.

“A tight monetary policy remains the only way out,” it said. The SBP has been maintaining a tight monetary policy for the past four years.

The report said that as a result of the stringency, inflationary pressures were likely to ease from the second quarter of FY09, assuming there was no further adjustment in fuel and utility prices and international commodity prices remained stable.

The State Bank projected the current account deficit at 6.2 per cent to 6.8 per cent of GDP for the current fiscal year against 8.4 per cent of last year.

It said that revenue collection in FY08 fell below target, placing Pakistan among countries having the lowest tax-to-GDP ratio. Pakistan’s ratio (10 per cent) stands below the region’s average and is the second lowest in the region, Bangladesh being at the bottom.

The report said that an important contributor to slowdown in the GDP growth was investment demand, reflecting investors’ cautious response to political uncertainty, law and order and inflation expectations.

The FY08 contribution of investment demand to overall GDP remained the lowest at 0.7 per cent during the past four years. The demand was affected by a fall in the investment-to-GDP ratio -- 21.6 per cent in FY08 from 22.9 per cent in FY07.

With savings-to-GDP ratio falling to 13.9 per cent in FY08 from 17.8 per cent in FY07, despite a lower investment demand, the saving-investment gap widened by 3.2 percentage points.

“The decline in savings and investment rates both are sources of concern,” the SBP said.

It said that since the beginning of 2008-09, the government and the central bank had developed a macroeconomic stabilisation package whose implementation was under way and had helped to secure a “buy-in” from the international agencies.

“This programme is now a cornerstone of the stand-by arrangement negotiated with the International Monetary Fund for a 23-month period,” said the report.

It said that setbacks to growth had not been due to interest expenses (as these constitute a very small fraction of the cost of goods sold), but because of inflation that told on input costs as well as wages. In addition, problems of a poor infrastructure and heavy cost of doing business had magnified in the recent years as electricity outages grew.

The report said that industrial sector suffered a mix of economic, political and structural setbacks throughout FY08. Rising fuel and raw material prices and intensifying energy shortages in the country hampered industrial activities in FY08.

“The heightened political uncertainty and law & order issues during the year also took their toll.”

Other than the construction sub-sector, all other industrial sub-sectors performed below their long-term trend in FY08. The manufacturing sector’s growth continued to decline for a third consecutive year and posted lowest growth in six years during FY08.

The SBP said the deterioration in the current account deficit continued for the fourth successive year, touching 8.4 per cent of GDP during FY08.

“This is the highest level in the last thirty years,” said the State Bank, adding the country’s risk perception was heightened by ‘domestic political developments’, which compromised the country’s ability to tap resources from international capital markets.

It said that the gulf between the rich and poor was widening. “A large segment of population hovers around the poverty line. Contrary to the declining trend of absolute poverty in Pakistan, the consumption inequality has increased, reflecting a rise in the rich-poor divide.”