KARACHI: The State Bank of Pakistan (SBP) has further revised the inflation target for the fiscal year 2014-15.

It is now projected to be in the range of 4.5 to 5.5 per cent against the annual target of 8pc. The bank attributed low inflation to falling oil prices primarily.

The central bank issued the first quarter (July-September) report on Tuesday which says the inflation is likely to end up much lower than initial expectations, as government has steadily been reducing retail POL prices in line with international prices.

Headline inflation reached 13-year low of 4pc in November and 4.3pc in December, pushing down the July-December inflation to only 6.1pc, against the full-year target of 8pc.

In addition to fuel prices, low inflation was realised by deflation in some key food items, like wheat, wheat flour, onions and tomatoes, said the report, adding that households anchor their inflation expectations on energy and fuel prices.

“Based on these factors, we expect the full-year inflation to stay within the range of 4.5-5.5pc in FY15,” said the SBP report.

The report also said the prospects of achieving the FY15 GDP growth target was hindered by a slowdown in Large Scale Manufacturing (LSM) and a below-target performance of Kharif crop.

The government envisaged GDP growth of 5.1pc for FY15.

“Preliminary estimates suggest some difficulties in the commodity producing sector. Farmers reduced the area used for sugarcane cultivation due to lower incomes last year, which caused a decline in its production. Although cotton was grown on a larger area this year, production is expected to remain below-target,” said the report.

As far as fiscal sector is concerned, it might be challenging to achieve the consolidation target of 0.6 percentage points during the year, said the report. The government has set the target of reducing fiscal deficit from 5.5pc of GDP in FY14 to 4.9pc in FY15.

“Important reforms are needed to reduce the structural component of the fiscal deficit,” said the report. The government has formulated a medium-term strategy to implement fiscal reforms, ranging from improving revenue generation to promoting private sector participation in loss-making public sector enterprises (PSEs), like PIA and Pakistan Steel.

Plans are also under way to restructure Pakistan Railways and other PSEs but these plans should be fast-tracked, said the report.

The report said that in terms of revenue mobilisation, FBR had envisaged a growth of 24pc in tax collection during the year, but achieved only 13.1pc growth in first quarter of FY15. This leaves much to be done in the next three quarters.

“FBR revenues must increase by 27pc in October-June, if it is to achieve the full-year target.”

The report said Pakistan’s external sector would benefit most from the decline in oil prices, as petroleum directly makes up nearly 35pc of our import bill.

However, other imports have increased to mitigate the positive impact of low oil prices. Telecom-based imports cost an additional $188.3 million to Pakistan’s import bill during Q1FY15.

Steel imports added another $233.3m, whereas textiles (mainly synthetics) and fertiliser together chipped in $166.6m during the quarter.

In overall terms, the country’s imports grew by 11.6pc during Q1FY15, compared to only 3pc in the same period last year.

Published in Dawn, February 18th, 2015

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