KARACHI, May 26: The State Bank has failed to contain inflation as it exceeded the central bank’s revised estimate for 2006-07 and is expected to rise further in the next fiscal year.

“FY07 inflation will be in the range of 7.5-7.8 per cent, above the revised target of 6.5 per cent,” forecasts the third quarterly report of the State Bank presented by Governor Dr Shamshad Akhtar at a press conference here on Saturday.

The report said that a focus on tight monetary policy must continue so that inflationary expectations were contained and second-round impacts of these shocks from high food inflation did not permeate to underlying inflationary pressures in the economy.

It said that at least a part of the deceleration in the private sector credit growth seen in FY07 might not persist in FY08.

“The high reserve money growth in FY07, together with the rising demand for private sector credit, raises the risk to a strong resurgence in excess aggregate demand, and consequently inflationary pressures in 2008,” said the report.

The State Bank looks fixed in a situation which finally leads to undesired monetary results. The report said that a large foreign exchange inflow (both in the government and the private sector) had led to a significant increase in NFA (Net Foreign Assets). If not mopped up, these would force the rupee to appreciate and spur undesirable growth in reserve money. Furthermore, attempts for sterilisation would lead to higher interest rates and further inflows.

The report expressed concerns over the current account deficit during the fiscal year 2006-07 which was expected to rise to 4.8 per cent of GDP, up from the earlier forecast of 4.5 per cent. However, the SBP was satisfied with the strong tax growth and hoped that 4.2 per cent of the GDP fiscal deficit target would be met.

It said the GDP growth would exceed the seven per cent target because of higher agriculture growth. The agricultural growth may cross the annual growth target of 4.5 per cent.

The industrial growth is expected to be stronger than the previous year, although it may not touch the FY07 target. Similarly, the services sector was likely to continue its growth momentum for yet another year.

Considering record subsidised loans for the textile sector, the SBP report said that huge liquidity had diluted the impact of tight monetary policy.

“A total of Rs332.8 billion during Jul-April 28 of FY07 was the gross disbursement from refinancing facility. This support also diluted the monetary stance of the SBP,” the report said.

It suggests that the textile industry needs to be more competitive as it faces increased competition in international markets after the abolition of China-specific textile and clothing safeguards by the EU and the US in 2008.

The State Bank warned that relying on external flows of foreign exchange could be harmful. “It is a source of comfort that the monthly growth in the current account deficit continues to decelerate, and that the current account deficit is likely to be comfortably financed in the short-run, particularly given strong international liquidity flows towards emerging markets,” the report added.

“However, it should also be kept in mind that international capital flows can be volatile, and are sensitive to a host of domestic and global factors (both economic as well as political),” warned the report.