KARACHI, March 31: All major indicators are going against economic growth and previous government’s huge spending and ‘understatement’ have compounded the situation, says the State Bank’s second quarterly report issued on Monday.

The report presents a grim picture of economy but still sees some hope of achieving 6-6.5 per cent growth as against the targeted 7.2 per cent for the fiscal year 2007-08.

The SBP said the fiscal deficit — the gap between earning and spending — had turned into a threat and the bank found evidence that it was understated.

“The troubling aspect is that the fiscal deficit may be understated. Evidence suggests that at least a part of the subsidy on fuel prices during July-Feb FY08 was not financed from government’s account,” the report said.

Instead of making payment, the government provided guarantees to oil companies which borrowed from banks through these guarantees. This hidden spending will appear next year as fiscal deficit.

Finding reasons for the lower economic growth, the SBP report said that so far principal drag on the year’s growth had been the outcome of Kharif harvests and a slowdown in the LSM (large-scale manufacturing) growth.

The growth in LSM fell to 4.5 per cent during July-December as compared to previous year’s six-month growth of 8.3 per cent. This is alarming, especially in textile sector’s export growth which recorded a fall of 3.4 per cent during this period.

The textile sector earns over 60 per cent of the entire export earnings of the country.

Overall, the slowdown in LSM during the six months was broad-based and was seen in 11 of 15 industrial groups. Of these, paper and board, metals, fertiliser and electronics industries registered a decline in production.

In contrast to these under-performers, pharmaceuticals, POL, cement, engineering and wood industries showed a strong growth.

“Domestic as well as external factors, including continued strong increases in international commodity prices, domestic energy woes and dampened demand (particularly for textile exports), are responsible for relatively slow economic growth in the country,” the report said.

“Economic losses in the aftermath of Dec 27, 2007, have further weakened the chances of meeting the annual target.”

Sighting the inflationary pressure as the real woe to the economy, the report said risks to macroeconomic stability had increased considerably as fiscal and current account deficits turned out to be considerably wider than envisaged in the monetary policy framework.

“The rising fiscal deficit and its financing posed severe complications for the monetary policy framework for FY08,” the report said, adding that it had eroded the impact of monetary tightening measures undertaken in August last year, and increased the risks of a further surge in inflationary pressures.

The decline in country’s foreign exchange reserves, which fell to $14 billion in February from $15.6 billion in June last year, had weakened the Pakistani rupee as it could not hold its grounds against the US dollar and depreciated by 3.5 per cent during Jul-Feb FY08, the report said.The SBP reported that most indicators for the services sector showed a robust growth during the first half of the current fiscal year.

The report showed a strong growth in the electronic media and telecommunication sub-sectors on the back of government’s liberal policy and foreign direct investment (FDI) in recent years.

“In particular, expansion in cellular services is impressive as cellular density has more than doubled during the period between July 2006 and December 2007.”

The report said that the agriculture sector was likely to record a reasonable growth during the current fiscal year. However, prospects of achieving the targeted 4.8 per cent growth for the year remained dim, it added.

The SBP said that record sugarcane and maize harvests, anticipated good wheat harvest and above-target growth in minor crops were unlikely to overcome the drag from the disappointing performance of some major Kharif crops (cotton and rice). The livestock sub-sector, hit by bird-flu virus may see some slowdown in growth, it said.