KARACHI: The State Bank of Pakistan has predicted an economic growth rate at 2.5 to 3.5 per cent for the current financial year and average inflation at 10-12 per cent, half of last year’s.

In its annual report for 2008-09 issued here on Thursday, the central bank forecast economic recovery and said increase in imports reflected a rise in domestic demand and the large-scale manufacturing sector growth turned positive in the first quarter of the current fiscal year.

The government has set a Gross Domestic Product (GDP) growth rate of 3.3 per cent for the current year while the International Monetary Fund has predicted a 2 per cent growth.

The SBP said the most sustainable impetus to the economy was expected to come from the farm sector and the country might achieve the agriculture growth target this year.

It said the average CPI (Consumer Price Index) was likely to remain in the range of 10-12 per cent. Last year’s average CPI was over 20 per cent which damaged the investment climate and massively hurt people with fixed income.

‘A sharp fall in inflation in recent months has reduced uncertainty over relative prices and would support increase in investment demand.’

The report, however, warned of significant risks to inflation outlook despite an ease in average inflation.

The central bank said the fiscal and current account deficits were likely to be 4.7 per cent and 5.2 per cent against previous year’s 5.2 per cent and 5.3 per cent, respectively.

It expressed concern over rising debt and liabilities and said Pakistan’s total debt and liabilities (TDL) stock recorded a 27 per cent increase in 2008-09 against previous year’s 27.4 per cent.

‘The continued strong growth in the stock of TDL in FY09, despite a small fiscal deficit, reflects the fact that imbalances in the overall fiscal account as well as the country’s current account are still large,’ the report said.

For the second consecutive year, the target of 2.5 percentage point reduction in foreign debt and liabilities, as per cent of GDP, has not been met.

‘The deterioration in debt indicators necessitates an urgent revisit to the debt management policy for an early return to sustainable debt path,’ the SBP said. Investment-to-GDP ratio declined to 19.7 per cent for the second consecutive year because of heightened security risk and persistent power crisis.

‘Aggregate investments during FY09 declined by 6.5 per cent; largest fall in 40 years,’ the report said, adding that the fiscal measures were also responsible for slowing down private investments in one of the fastest growing sectors of the economy.

It said the services sector grew by 3.6 per cent - ‘the lowest growth in the preceding eight years’.

The sector missed its growth target for the second consecutive year.

The economy was hit by deterioration in the security and law and order situation and lower demand for major consumer durable goods because growth in real incomes weakened and credit contracted.

The report said the structural problems took their toll in the form of severe energy shortages, the circular debt issue, etc.

‘The construction industry registered a sharp decline of 10.8 per cent in FY09 – the largest fall in 37 years,’ it said.

A sharp increase in the prices of building material during the first eight months of the year, besides a significant cut in disbursement of development funds and dearth of financing facilities caused the construction activities to shrink significantly.