Inflationary risks persist, says State Bank: Current account deficit biggest challenge; economic growth 7pc
By Shahid Iqbal
KARACHI, Oct 29: The State Bank of Pakistan has warned of further inflationary risks and said that the current account deficit is the biggest challenge for the government in the face of soaring oil prices, low export growth and strong import demand.
“Inflationary pressures may be further generated if international food commodity prices remain high or if fiscal compulsions drive the government to pass through a rise in fuel prices in the face of rising international energy prices,” said SBP’s annual report released here on Monday.
Presenting the report at a press conference, State Bank Governor Dr Shamshad Akhtar expressed satisfaction over the economic growth during 2006-07 and said the monetary policy had successfully curbed the inflationary pressure.
“Inflationary risks persist in the economy. A continuing focus on tight monetary policy is needed so that the inflationary expectations are contained and the seepage of pressures from rising food prices into the broader economy is prevented,” said Dr Akhtar.
Appreciating the 7 per cent economic growth, she said it was a high rate just below that of China and India.
“Sound macroeconomic policies have successfully transformed the initial consumption-led growth impetus of a few years back to one with a greater role for investment-led demand,” she said adding that the investment to the GDP ratio rose to a record 23 per cent in FY07.
She said this was contributed by a surge in domestic private investment and record FDI (foreign direct investment) flows. “As a result, the economy looks well-poised to continue on a high growth trajectory in coming years.”
Touching upon the most sensitive issue of current account deficit, she said the deficit, though sustainable in the short term, would remain a key challenge for the economy.
She expressed disappointment over the huge supply of credit on concessional rate to the textile sector. “Disappointingly, the SBP concessional financing did not lead either to a higher export growth or new investments in the textile sector.”
The report said: “In the short term, Pakistan’s current account imbalances had been kept within manageable limits by the compression in import demand manoeuvered through monetary policy tightening and the strong growth in foreign direct investment and remittances.
“Over the long term, sustainability of external account is critically linked to the dynamics of the private-investment gap as well as the behaviour of the fiscal account. Industrial diversification, enhanced competitiveness and access to international markets are the keys to the revival and broadening of the export base. This, in turn, is a key to the reduction in trade deficit, which is likely to come under renewed pressure to serve the import requirements of a vibrant economy.”
The high level of SBP refinancing extended for both working capital and long-term investment to exporters partially offset bank’s measures to tighten liquidity from the inter-bank market, said the report.
The report expressed concern over the large current account deficit and said the size of the current account deficit rose to $7 billion — 4.9 per cent of the GDP.
Three key factors contributed to the widening of external current account imbalance: First, the country’s import bill for petroleum products reached $7 billion and both the service and income accounts deficits (net) rose to $7.5 billion — the former alone is equivalent to the size of the current account deficit.
Second, the exports slowdown was significant in the wake of last three years’ average growth of 14.6 per cent. Third, the income account deficit (net) turned to be another $1 billion — higher than last year’s payment as the payments for interest liabilities on sovereign bonds and other loans, crude oil and profit and dividend transfers, etc. exceeded the inflows in this account, the SBP report said.
It said that the country’s total debt and liabilities (TDL) witnessed substantial increase during fiscal 2006-07. In absolute terms the TDL rose by 10 per cent in FY07 to Rs5,024 billion. This principally reflected the country’s large current account and fiscal deficits.
“The increase in the TDL was contributed by an increase in both domestic and external debt -- domestic debt recorded 11.9 per cent growth to reach Rs2,597 billion, whereas external debt and liabilities (EDL) stock recorded 8 per cent (year-on-year basis) growth to reach $40.1 billion.“The rising share of short-term and floating rate debt in the country’s TDL indicates a relatively greater vulnerability of debt serving costs to adverse future interest rate movements,” the report said.
It widely appreciated the services sector which is dominated by the banking sector.
“The services sector continued its impressive performance for another year, registering 8.0 per cent growth, well above the 7.1 per cent target set for the year.
“The sustained strong growth by the services sector for the last six successive years has contributed to a structural shift in the economy, and the share of the services sector in GDP rose to a new high of 53.3 per cent during FY07.
“Based on preliminary data, at this stage it appears that the economy will grow in line with the projections placed at 7.2 per cent,” it said.
