KARACHI, May 31: The State Bank has advised the government to take “concrete steps” for resource generation and check expenditure in order to ensure that the economy retains the “high growth momentum” of recent years.

The third quarterly report of the State Bank, released on Saturday, highlighted the depressing features of a challenging economic environment that would put the collective wisdom of the two-month-old coalition government to test.

The report reaffirmed fears of a mild economic slowdown based on latest figures.

“Real GDP growth in FY08 is expected to drop below the six per cent level for the first time in five years, annual inflation is poised to return to double-digit, fiscal deficit is forecast to rise substantially and the annual current account deficit, as a percentage of GDP, is projected to be at all-time high,” the report said.

It attributed increasing signs of pressure on macro-economic indicators to a combination of adverse domestic and international developments.

The SBP does not see the trend of high inflation dissipating in the near future either which, in part, is driven by domestic supply shocks that have compounded the impact of strong aggregate demand and high international commodity prices.

“Even fiscal measures (tariff cuts and subsidies) aiming to at least partially protect the broad populace from rising food and energy prices are likely to prove unsustainable, given the already large fiscal deficit,” the report warned.

“All price indices have moved up significantly so far in FY08 and are significantly higher than the annual averages for the preceding five years. In particular, CPI food inflation reached 25.5 per cent in April 2008.”

The report credited the weakening of the rupee that fell by 7.3 per cent by the first week of May to weakness in the external account.

Both agriculture and large-scale manufacturing sectors performed below the target during the year and the services sector would at best just be on target as growth in finance and insurance sub-sector appeared to have slowed down, the report said.

The dismal performance of the commodity producing sector has been identified as a principal factor pulling the growth rate down.

“The most recent data clearly indicates that the slowdown in the economy during FY08 is principally in the commodity producing sector. For example, the disappointing performance of important major crops contributed significantly to slowdown in agricultural growth during FY08.”

The report said: “Initial prospects of achieving a reasonable growth in the large-scale manufacturing (LSM) sector during FY08 were clouded by aggravating energy crisis coupled with high international commodity prices and political unrest through most of the year. As a result, the LSM sector posted a dismal growth of 4.8 per cent in the first nine months of FY08, compared with nine per cent in the same period of FY07.

“Information for the first nine months of FY08 suggests that the services sector is poised to achieve the annual targeted growth. Main contributors to this performance are wholesale and retail trade, transport storage and communication as well as public administration and defence sub-sectors.”

Elaborating reasons for record high inflation despite tighter monetary policy, the SBP report blamed the government’s fiscal irresponsibility for the trend, particularly leaning on the central bank for financing the current account deficit against the bank’s advice.

“The desired impact of tight monetary stance of the SBP has been neutralised by huge government borrowings. Core inflation, measured by 20 per cent trimmed mean, accelerated to double-digit (14.1 per cent record high level) in April 2008.”

The State Bank, however, has not lost hope and expects reinvigoration of robust growth momentum if the government heeds its advice on fiscal responsibility and put in place a right set of economic policies.

People and the corporate sector expect some relief from the coming budget, but the tight fiscal position offers little manoeuvrability space to the government.