KARACHI, April 12: Pakistan economic growth could expand by more than what the government estimates and it could be 7.5 per cent, Merrill Lynch said in a report released on Thursday.

The report did not consider the recent difficult political situation as hinder for the economic growth and expected that the GDP growth to sustain in 2007 and 2008 at 7.0-7.5pc and 6.8pc, respectively.

This will happen owing to robust consumption growth, supported by higher remittances from workers (up 21pc) and foreign investments (up 147pc), it said.

The report said that the investors to remain upbeat in the coming months, backed by withdrawal of expected monetary aggression by State Bank of Pakistan, expected concessions to the corporate sector in the next budget and the government’s decision to reduce its public sector holding through GDR.

The Merrill Lynch’s expectation of GDP growth was more than the State Bank estimates which put it in the range of 6.6 to 7.2 per cent while the government expects 7pc growth.

However, the report said that the likelihood of hitting the upper limit depends on the performance of livestock farming, which comprises approximately 50pc of the agriculture sector.

“Prospects of agriculture growth recovery appear bright on account of the timely rains, sufficient water reservoirs, availability of subsidised agriculture inputs, and higher agriculture commodities support prices,” said the report adding that countrywide rains are likely to boost the output in livestock farming.

“Pakistan’s politics has been in the headlines of international press and we think issues have been exaggerated,” said the report, adding that President Musharraf will remain firmly at the helm of what is the best privatisation and deregulation story in Asia.

The political turmoil seen in the last few months has been unable to hamper investments in the country, as reflected in foreign flows. Foreign inflows surged 147pc to $4.6bn during July-Feb FY07 and are expected to expand further to $6bn (or 4pc of GDP) by the end of this fiscal.

“Despite adversities in domestic politics, foreign private investments have risen by 147pc and continue to be a dominant feature over the last three months. This reflects investors’ confidence on Pakistan’s future economic growth,” said Merrill Lynch.

The report expects that the fiscal deficit to be contained at 4.5pc and current account deficit at 4.8pc of GDP on account of unexpected slowdown in exports.Rising foreign investments should continue to correct macro imbalances and help sustain economic growth, however, rising foreign inflows will continue to pose a challenge for SBP.

The report said that the rupee was overvalued by two per cent against the US dollar.

“In trade weighted index rupee is overvalued by 2pc. We maintain our rupee verses US$ exchange rate forecast of Rs62.20 by June 30, 2007” said the report.

The report said that the robust foreign exchange flows in the past few months have protected exchange rate from downward revision.