KARACHI, Jan 5: All key performance indicators recorded a significant decline during the first quarter of the current financial year and the resulting imbalances could have adverse consequences for the economy, the State Bank of Pakistan said in its quarterly report, released here on Saturday.

The July-September report noted that the political uncertainty ahead of the coming elections was impacting on investor sentiment.

“Risks to the economy are increasing as it is clear that neither the global nor the domestic economic environment is as benign as in the past years,” it added.

The government was relying heavily on borrowings from the State Bank, which added to the reserve money growth, the report said.

“The threat of renewed macroeconomic complications, after five years of good performance would be further heightened if prompt actions are not taken to correct the recent deterioration in fiscal indicators,” the report said.

The fiscal imbalance has already led to a substantial rise in government borrowings from the central bank. The borrowings rose to Rs191.3 billion during the first five months of the current year (2007-08), exceeding both quarterly and annual ceilings and the preceding year’s trend.

“This has enhanced monetary expansion significantly and is likely to fuel inflationary pressures, compounding the impact of the strength in international commodity prices,” warned the SBP.

The 2007-08 growth was also likely to be below the 7.2 per cent annual target, it said.

“The current trend indicates that the fiscal deficit target will not be met unless appropriate corrective measures are taken promptly,” the SBP said.

The report said that all key fiscal performance indicators had deteriorated significantly in Q1-FY08 (July to Sept 2007). The government’s budgetary borrowings from the banking system during July-1st Dec FY08 rose by Rs191.3 billion compared to Rs97.6 billion over the corresponding period in FY07.

“Importantly, the revenue balance moved from a surplus in the first quarters of the preceding years to a deficit in Q1- FY08, despite an impressive growth of 22.3 per cent in total revenues during Q1-FY08,” said the report.

Another challenge was the country’s large external current account deficit. Recent evidence indicated that the modest contraction seen in July-September 2007 was unlikely to continue in months ahead, it said.

The report said the annual current account deficit remained large while the SBP predicted that the annual FY08 deficit could remain at around 5.2 per cent of GDP, very close to the levels seen in the previous fiscal year.

“More troubling is the fact that the high and volatile food inflation is now increasingly influencing core inflation as well. Since May 2007 both measures of core inflation (i.e. non-food non-energy and the 20 per cent trimmed mean) have been trending up.

“These inflationary pressures could rise further, if fiscal imperatives force the government to pass through the impact of the recent oil prices,” the SBP report said.“The domestic economy is now more open and prone to external shocks than ever before which means domestic prices will be more sensitive to the changes in international prices, despite domestic availability. For example, Pakistan had sufficient exportable surplus of rice in FY07, but following a rise in the international prices of rice, domestic prices also increased,” it said.

The report said that the LSM (Large Scale Manufacturing) production data for Q1-FY08 suggested a deceleration in growth that reached only 6.9 per cent, the lowest since FY03 during this period.

The aggregate growth of LSM had decelerated in Q1-FY08, although disaggregate data revealed a mixed picture. The first quarter outcome of a larger number of industries reflected slower growth, said the report.

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