December 31, 2002	Tuesday	Shawwal 26, 1423

KARACHI, Dec 30: The State Bank believes that Pakistan economy may grow 4.5 per cent this fiscal year despite a steep fall in LSM (large scale manufacturing) and lower bank credit disbursements in the first quarter.

In its first quarterly report released here on Monday the SBP says that LSM growth fell to 2.2 per cent in July-September this year from 4.8 per cent in July-September 2001 and 6 per cent in the same period of 2000. “In the face of the improved economic environment the weak growth recorded by LSM...is puzzling,” says the report.

While admitting that it is too early to generate expectations for the full fiscal year the report says that an above-target recovery in agriculture sector may compensate for a slowdown in LSM. This may enable the economy to achieve the real GDP growth target of 4.5 per cent.

The report says that better availability of water in Kharif (April-September 2002) raised expectations that barring unforeseen calamities the agricultural sector will achieve the growth target of 2.4 per cent in FY03. Initial data on production of major kharif crops (cotton, rice, sugarcane and maize) also suggest prospects for a strong recovery in the crop sub-sector of the agricultural sector.

Explaining the reasons for a fall in large scale manufacturing the SBP report says one possibility is the change made in the basket of industries: The LSM growth data is based on the working of 70 industries compared to 95 in the past. The report says the picture is still unclear adding that “the apparent slowdown in LSM despite a clear improvement in economic indicators can also be caused by non-economic factors such as political uncertainty.”

The report says that LSM growth may be further pressured by the sugar industry, which is a main contributor to overall large scale manufacturing as production could be hit by delayed cane crushing.

FISCAL DEVELOPMENTS: The report says that the overall budget deficit narrowed down to Rs41 billion in the first quarter of FY 03 from Rs62.7 billion in the corresponding period of FY 02.

The improvement seen was largely due to a 33 per cent growth in total revenues: Tax revenue grew by 22.5 per cent to Rs115.6 billion from Rs94.4 billion and non-tax revenue shot up by 81.8 per cent to Rs38 billion from Rs20.9 billion. Against this the consolidated expenditure of federal and provincial governments rose by 9.3 per cent to Rs194.5 billion in July-September 2002 from Rs178 billion in July-September 2001. What is reassuring is that whereas the current expenditures rose by 16.1 per cent to Rs161.2 billion from Rs138.8 billion the development expenses shot up by 60.7 per cent. In July-September this year development expenditure stood at Rs21.7 billion up from Rs13.5 billion in a year-ago period.

The report says a fall of Rs9.6 billion was seen in interest payments on domestic debt which reflects an all-time low interest rates on the government securities and relatively low government financing needs.

But a Rs7.5 billion increase in defence expenses apparently offset some of the saving on interest payments.

PRICES: During the first quarter of the current fiscal year inflation rate was slightly up because of higher prices of food items. Consumer Inflation Index rose by 3.8 per cent in July- September 2002 on year-on-year basis from 3.7 per cent in a year -ago period. The annualised CPI measured through food items shot up by 5.1 per cent in July-September this year against only 1.5 per cent a year earlier. In a sharp contrast to this the non-food CPI rose moderately by 2.5 per cent as against 5.2 per cent a year ago.

Sensitive Price Index recorded an even sharper increase of 5.2 percent against 2.3 percent. But Wholesale price index recorded a rather lower growth of 3.2 percent against 5.7 percent.

EXTERNAL SECTOR: The balance of payments witnessed a marked improvement in the first quarter of FY 03 over the same period of FY 02. Not only did the current account post a huge surplus of $1.2 billion the capital account also contributed through lower outflows i.e. $67 million only. Workers remittances or the money sent back home by overseas Pakistanis recorded a net increase of $1.05 billion.

The improvement in the current account is unprecedented as all of its constituents contributed in its growth: trade balance improved by 21.5 per cent; net outflow through services sector was 73.5 per cent lower and current transfers that includes workers remittances also increased by a cool 66 per cent.

THE RUPEE AND RESERVES: The report says the rupee appreciated further by 1.5 per cent during the first quarter of this fiscal year. “The gradual rise was in accordance with the SBP policy of avoiding abrupt adjustments. It hinged on a number of factors such as continuing increase in forex inflows, the need to pass on the benefit of a stronger rupee to overall economy and decreasing vulnerability of the exporters.

The overall liquid foreign exchange reserves continued to rise as a result of inflows from international financial institutions; logistics support from the US and reduced payment requirements.

The reserves rose by $1.8 billion to $8.2 billion at end- September this year against a nominal increase of only $76 million in a year-ago period.

“Improvement in foreign exchange reserves is fully reflected in the improvement in the sovereign credit rating for Pakistan,” by Moody’s in March and in the form of a reduced country risk premium by ADB in its political risk guarantee facility. “More recently, Standard & Poors raised Pakistan sovereign rating one notch from B minus to single B.”

CAPITAL MARKETS: During the first quarter of this fiscal year the benchmark KSE index gained 13.1 per cent making it one of the better performing markets in the world. The market rally which started in January was backed by “improvement in fundamentals such as rising corporate profitability, ample liquidity flows towards the equity market and improved geo-political situation.”

Like the equity market the corporate debt market also remained buoyant. Nine new term finance certificates worth Rs5.3 billion entered the market since the beginning of the fiscal year. “With interest rates at record low levels and in the absence of any expectations of a reversal in the medium term rise, additional issuers are poised to enter the market in the near future,” says the report.

BANKING: In the first quarter of this fiscal year the overall deposits of the banking sector rose by a remarkable 4.1 per cent (or Rs57.6 billion): In the first quarter of last fiscal year the deposits of the banking system had rather went down by 0.6 per cent or Rs7.9 billion.

But this huge buildup in the banks deposits did not translate into higher disbursements of credit. Net credit disbursement rather recorded a fall of Rs31.3 billion in July-September this year up sharply from a decline of Rs8.9 billion in a year-ago period.

“This major decline can be explained by both higher (credit) retirements and the slowdown in fresh disbursements,” says the report. But it points out that fresh disbursement figures do not include the foreign currency advances which grew rapidly since the start of 2002. “Another source of concern is the fact that bank net credit even failed to respond to considerably lower lending rates,” laments the report. More surprisingly net credit demand was depressed during the first quarter of this fiscal year “despite a substantial improvement in the economic prospects.”