Economy – Can the govt. afford to remain indifferent

Economy – Can the govt. afford to remain indifferent

Economy in Pakistan seems getting back on to the track as for the fiscal year ending this June, the State Bank of Pakistan (SBP) has envisioned the GDP to grow by 3 to 4 per cent. Given the recent political and administrative scenario
which collectively poses serious threats to macroeconomic stability, the SBP’s report seems overstated, but the central bank of Pakistan claims having witnessed the indicators that support the otherwise “tall” claim.

Given last year’s growth in GDP (stuck at mere 2.4 per cent), and government’s claims for the economy to grow by at least 4.2 percent this year, the figure predicted by the SBP is quite encouraging.

However, as per the country’s premier bank, despite this improvement in GDP growth, not everything about Pakistan economy depicts an encouraging picture. According to the recent stats, the country’s fiscal deficit is likely to
grow significantly and despite frantic efforts made by the economic managers at ministry of finance to make up for the situation, it may continue to grow and end up at 5.5 to 6.5 per cent of the GDP.

This fact has also been acknowledged in a report recently launched by the SBP which states, “Containing the overall fiscal deficit to its revised target of 4.7 per cent of GDP seems to be challenging.”

Controlling fiscal deficit has been a real challenge for the government lately. Planned to be contained at around 4 percent in the ongoing fiscal year, with four months still to go before this financial year will end, the government
has revised it to a moderate 4.7 per cent.  In the backdrop of present economic situation, the figure is likely to go up further by the time the present incumbent presents next year’s budget.

Faced with the challenge to bridge this gap, and after being offered a cold shoulder by the International Financial Institutions, the government will have no other choice but to approach commercial banks for loans – curbing their
ability further to lend money to the already dried up private sector and culminating in choking the growth further.

On external fronts, the SBP perceives the current account deficit to stick around 1.5 and 2.5 per cent of the GDP for the fiscal year 2011/2012. According to the recent available data, the current account deficit has already widened
to $ 2.952 billion in the first eight months of the FY 11/12, which accounts to about 1.26 per cent of the GDP.

While the current account deficit doesn’t seem big at the moment, combined with deficit financing, it too can transform into a major concern. And in absence of lack of external funding resources, the central bank will have rely
on its foreign exchange reserves to finance the deficit.

A blow to forex reserves will add pressure to the already weakening rupee which currently strives to maintain itself little below 91 and has survived from a record low of 91.28 back in January.

According to the State Bank of Pakistan, the inflation is expected to remain between 11 to 12 percent, compared with the government’s target of 12 per cent. However, this too is a rigid figure as according to the economic experts,
the inflation never came down from 18 while touching a maximum of 23 per cent last year. For govt. having significant increase in POL and electricity prices in the days to come on its cards, the figure is likely to swell further.

The writer is a researcher at Sustainable Development Policy Institute (SDPI) and can be reached at fayyaz@sdpi.org

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Posted by Fayyaz Yaseen on Mar 20 2012. Filed under Business, Editorial, Latest News, National, Opinion, Pakistan. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry