KARACHI, Jan 4: The State Bank fears that inflation is likely to inch past – at least by one percentage point – the annual budgetary target set for the year 2006-07.

In her first interview with a Pakistani newspaper, State Bank Governor Dr Shamshad Akhtar told Dawn that higher-than-expected food inflation and the government’s inability to pass on the benefits of declining international oil prices to domestic consumers would cause inflation to range between 6.8 per cent and 7.5 per cent.

The government set the annual inflation target for the financial year at 6.5 per cent.

Dr Akhtar, who became Pakistan's first woman central bank governor in January, blamed food price hike on higher consumer price index – a type of inflation that hits domestic consumers most.

Dismissing as speculative reports that Pakistan has been financing its current account deficit by a sale of assets, she pointed out that for the past two years privatisation proceeds accounted for only 13 to 14 per cent of financial account receipts. “It has to be recognised that because of the economy’s structural constraints, an external account deficit is inevitable,” she conceded, adding that government efforts were directed at exploiting cost-effective avenues of funding.

Pakistan witnessed the highest ever current account deficit of $5 billion during financial year 2006 as compared to the deficit of $1.5 billion in the previous year.

She hoped that continued shrinking of the debt to GDP ratio and high economic growth would stablise the country’s external current account.

Responding to criticism that low national saving is a function of abysmally low rate of return to depositors in Pakistan, Dr Akhtar said a whole range of factors were responsible for the country’s low saving rates.

“Pakistani society’s high propensity to consume, predominance of cash economy, people’s reluctance to declare money, lack of access to banking services and lack of resources and saving habits are some of factors responsible for low saving rate,” she said.

“As a percentage of GDP, the saving rate has hovered between 16 per cent to 21 per cent in the past five to six years, which is on the lower side,” she said.

The State Bank governor dispelled public misgivings about the misuse of subsidised loans being provided to exporters under the Export Finance Scheme. She said it was too early to say whether the facility was being misused.

Subsidised loans of Rs140.83 billion were disbursed under the scheme during July 1 to Nov 25, up from Rs123.06 billion during the corresponding period last year.

When asked why growth in the financial sector far outstripped growth in the real sector, she said that with the consolidation of the banking sector over the next three to five years, the anomaly would be removed.

Pinning hopes on Islamic banking, she said it would emerge as a parallel to conventional banking and would capture more than 10 per cent of the market share over the next three years.

The market share of Islamic banking institutions was only 0.5 per cent in 2003. It rose close to three per cent in the financial year with an asset size of over Rs100 billion.