KARACHI: The State Bank has projected the fiscal deficit as 6.5 per cent of the GDP for the current fiscal year, while it revised the main inflation downward by 0.5 per cent, but said persistent high inflation and pressure on fiscal and current accounts would remain key challenges for economy.

The central bank issued 3rd quarterly (January-March FY12) report on Friday carrying a number of observations, mostly disappointing for the current status of economy, but downed the inflation by 0.5 per cent to keep it in the range of average 10.5 per cent to11.5 per cent.

The report said Pakistan’s economy has shown some recovery in terms of GDP growth, but key macro indicators still remain weak.

“Current information suggests a budget deficit of 4.3 per cent of the GDP for July-March FY12, and it appears that the budgetary gap for the full year will exceed the revised target of 4.7 per cent,” said the report.

The data provide by the State Bank shows that the central bank has projected the fiscal deficit in the range of 5.5 to 6.5 per cent for the current fiscal year.

“The persistently high fiscal deficit remains a major risk to the macro-economy,” said the SBP report.

It said low investment and energy shortages have direct growth implications.

The report said that the large fiscal deficit has resulted in a sharp increase in Pakistan’s debt.

It said that government’s domestic debt recorded an increase of Rs1.2 trillion during July-March 2012 to reach Rs7.2 trillion.

“There is greater reliance on short-term borrowing, which is creating liquidity management problems for the central bank, and rollover and interest rate risks for the government,” said the report.

The State Bank said that despite efforts to reform public sector enterprises (PSEs), operational efficiency of key PSEs has not improved.

This continues to add to the country’s fiscal burden, it said.

Financing this gap, the government relied more on domestic sources as external financing dried up, said the report.

The government borrowed Rs847.5 billion in July-March FY12 from domestic sources, compared to Rs700.1 billion in the corresponding period of FY11; it said and added that lately, this has been increasingly skewed towards borrowing from the central bank.

The report said that with the government’s growing appetite for funding, banks have little incentive to finance the private sector.

“Demand for private sector credit is likely to be dampened this year, as loans to private businesses increased by only 1.8 per cent in July-March FY12 – the lowest growth rate in the past 10 years,” it said, adding that ‘such a borrowing is inflationary and a risk to macro-stability.

The report said the developments in Q3-FY12 in external sector were less adverse than expected. The report further stated that larger inflows of remittances and a lower trade deficit explain this relative improvement.

The current account deficit during July-March FY12 was $3.1 billion, compared to a deficit of $10 million in the corresponding period last year, it said, adding that more importantly, the expected inflows under Coalition Support Fund (CSF); the auction of 3G licences; and arrears from PTCL privatisation, did not materialise during the quarter.