November 27, 2007	Tuesday	Ziqa’ad 16, 1428

KARACHI, Nov 26: The State Bank sees higher inflation during the current year, sighting the global higher commodity prices and oil prices as reasons fueling inflationary pressure.

“The inflationary pressures can rise since fiscal imperatives now demand for government to pass on the impact of recent oil prices that reached close to $100 per barrel in the international market,” said Dr Shamshad Akhtar, SBP governor on Monday.She expressed her views while briefing businessmen and industrialists in Karachi on “Pakistan’s Economic Outlook and Perspectives” at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

The SBP governor said inflation currently is a global phenomenon and driven largely by commodity price trends, both in energy and food.

Higher inflation expectations have become self-fulfilling as they have impacted wage setting and pricing decisions now, she said.

Inflationary pressures are likely to persist as international wheat prices are up by 50 to 60 per cent because of Australian drought, low world stock and continued high demand.

Similarly, palm oil prices are up by 94pc in international markets and soybean by 57pc.

“But for tight monetary policy that curbed demand pressures and kept core and headline inflation in check, inflationary trends would have been more significant in Pakistan,” she added.

Dr Akhtar pointed out that some emerging trends could have implications for economic outcome of the current 2007-08 fiscal year.

She said on production side growth is likely to be impacted by setback to two major crops (cotton and rice) as they were hit by pest attacks and other problems, adding, however, part of the agriculture crop shortfalls could be offset by higher than expected other crops. For instance, sugarcane harvest is likely to touch new high level of 62.3 million tons – up by 13.5pc relative to last year.

The SBP governor said the July-October 2007 data for industrial production reflects mixed picture as production growth in construction-related industries appears reasonable, including cement, wood, paints and varnish units, followed by fertiliser, pharmaceuticals, petroleum refining and few metal and engineering goods.

While demand remained strong, slowdown in manufacturing sector emerged because of combination of reasons, including demand for import substitutes (as government relaxed import of automobile), slowdown in export demand and increase in raw material prices, such as palm oil which recorded a 73pc growth in value of imports, she said.

The governor said both local manufactures and government need to take measures to improve competitiveness of domestic goods, the governor said, and added that ensuring quality through innovation, skill development and technological up-gradation, reducing costs through scale, diversifying product-line in line with the market demand, and achieving self- sufficiency in raw material are some of the areas where entrepreneurs need to concentrate.

She said that the country’s economic prospects remain strong despite recent turmoil in the international financial markets and upsurge in global oil prices.

Dr Akhtar said the resilience of country’s economy due to underlying financial health and strong macroeconomic fundamentals helped Pakistan remain “untouched” by external shocks, like US sub-prime mortgage market crisis, depreciation of dollar and rising international oil prices.

“Pakistan’s financial markets have remained by and large insulated from financial market turmoil as it did not have exposure to mortgage or other asset-backed securities,” she added.

She, however, said external sector which has so far been manageable could see some spill-over impact of the US slowdown if it turns out to be more severe.

She said the USD/PKR exchange rate continued to be market-determined, and any market intervention is always aimed at moderating the rate of change or diluting any excessive volatility in the exchange rate, rather than establishing any level for it.