KARACHI, Oct 29: The State Bank has revised downward major economic targets set for 2005-06 and estimated that GDP growth could drop to 6.3 per cent while current account deficit could enlarge from original 2.2 per cent of GDP to somewhere between 2.9 and 3.2 per cent.
The SBP Annual Report 2004-05, issued on Saturday, has drawn new estimates of economic targets for the current fiscal year.
It notes that the performance of agriculture was extraordinary in 2004-5, a feat which might not be repeated in 2005-06. However, it predicts that large-scale manufacturing might exceed the target of 13 per cent during the current year. The report foresees the performance of services and financial sector to be strong during FY 06.
“The below target cotton crop and the high base set by the FY 05 production of major crops suggests that the FY 06 value addition by major crops is likely to fall short of target,” says the report.
This risk would grow further if water shortages envisaged by Irsa for Rabi FY 06 materialize. The SBP estimates that inflation rate might remain between 7.7 and 8.3 per cent but hastens to add that a further rise in oil prices could push this rate up.
The report says that a demand slowdown is also likely to be reflected in a relative deceleration in import growth. Imports during the year could witness a rise of at least 11.4 per cent as compared to a staggering 32.2 per cent increase seen last year. Exports are likely to increase by 18 to 18.2 per cent, says the report.
“It is now more important than ever to ensure vigilance on expenditures, given the likely increased demand on the exchequer stemming from the growing need for investment in development as well as the urgent requirements of the earthquake-struck regions,” it notes.
All these developments suggest that current fiscal will present a very challenging environment for the conduct of monetary policy. On the one hand, it seems prudent to carefully wean the economy off the monetary overhang generated in the preceding years (when SBP was seeking to stimulate the economy), by keeping the monetary growth below than that of nominal GDP.
On the other hand, the risk of a slowdown in the economy, as suggested by SBP studies, militates against too tight a monetary posture.
“In short, the economy is now delicately poised - on the one hand, the continuation of fiscal discipline, prudent monetary policy and focused attention on improving infrastructure and social sector indicators clearly indicate the possibility that the economy can maintain its long-term growth trajectory.
“On the other hand, if the weakness in key indicators such as lack of buoyancy in taxes, growth in current expenditure, and external sector imbalances are not addressed, the economy could begin to suffer deviations from the growth path so diligently taken in the last four years,” said the report.
The SBP report is bitterly critical of tax collection machinery “which kept pushing down the tax to GDP ratio as it slipped from 11 per cent in 2004 to 10.1 per cent last year”.
“The cause of concern is the weakness in tax effort and overall revenue mobilization despite the collection of Rs900 billion in FY05,” said the report. The weak buoyancy is reflected in the continuing fall in the tax-to-GDP ratio.
“However, it is instructive to note that the FY05 tax-to-GDP figure shows a decline even when adding back the full budgeted PDL (Petroleum Development Levy) revenue for the year.”
