December 30, 2008	Tuesday	Muharram 01,1430

KARACHI, Dec 29: The State Bank of Pakistan said on Monday that the economy had improved during the first quarter of the current fiscal year and some macro-economic indicators had shown strength after a steep fall in 2007-08.

In its first quarterly (July-Sept) report the SBP expressed the hope that economy would see stabilisation despite lower than expected growth.

“The sense of crisis gripping Pakistan’s economy in the initial months of the financial year 2009 has visibly eased by November 2008, as the government moved to address the most immediate risks and entered into a macroeconomic stabilisation programme to support medium-term reforms under the aegis of the IMF,” the report said.

The fiscal performance improved consequent to the policy shift, with the overall fiscal deficit estimated to have dropped to 1 per cent of the annual GDP. This was consistent with the annual fiscal deficit target set under the IMF stabilisation programme.

The SBP said that reduction in fiscal deficit had been brought about mainly by a drastic cut in development expenditures.

The data available so far show that the government has made a fine start to contain the fiscal deficit. However, the fiscal improvement appeared to be largely based on reduction in oil subsidies and a cut in development expenditure.

According to the July-Sept data, revenue grew by 24.4 per cent compared to 14.8 per cent of the corresponding period of last year. Similarly, exports increased by 12.7 per cent against 6.5 per cent of last year. The money supply was negative 0.2 per cent while it was 4 per cent during the same period last year.

“On a positive note, both fiscal and current account deficits are estimated to improve in FY09,” said the SBP.

Inflation remained the biggest challenge as it was still around 19.1 per cent on a 12-month average, it said.

The central bank expressed concern that despite a sharp fall in global commodity prices, its impact was not passed on to the end consumers. It said the government had substantially reduced the prices of petroleum products, but the transportation cost had not been lowered.

The report pointed out that domestic commodity prices did not decline in tandem with the sharp fall in international prices.

It said one of the biggest challenges for the government would be to ensure the pass-through of the decline in international commodity prices to consumers. While the recent downward adjustments in the administered prices of key fuels was appreciable, the reversal in transport fares and goods transportation charges was almost negligible, the SBP said.

It said consumer awareness, role of the media, quicker settlement of import duties and other taxes might be required to accelerate the dis-inflationary process.

The report said that temporary liquidity shortages with the commercial banks were viewed as signs of financial crisis in the country, leading to a fresh round of speculative attacks on domestic currency.

“Unfortunately, these developments coincided with the global financial and liquidity crises, thus it was perceived that the domestic crisis was also triggered due to the same reasons as faced by western financial institutions,” the report said.

It said the global recession and risk averse behaviour of investors might severely impact international trade and level of forex inflows in the economy.

The SBP’s estimates for both imports and exports have been revised downwards, with a more pronounced effect on imports. At the same time, in the event of a shortfall of external financing, the burden of financing the fiscal deficit will disproportionately fall on the domestic commercial banks, since the government has committed not to borrow incrementally from the central bank.

In addition, the report said, foreign direct investment inflows might be substantially lower than in recent years, in which case pressures on forex reserves could remain strong.

“Both possible developments indicate continuing risk on interest rates and exchange rate, and thus the need for continued vigilance by policymakers,” said the SBP.

“The economy needs effective policies and implementation of reforms in FY09 to regain macroeconomic stability in the midst of a challenging year. Real GDP growth is likely to be significantly lower than the annual target and inflation will breach its target with a wide margin,” the report said.