KARACHI, March 20: The State Bank of Pakistan has warned of “some financial consequences” for Pakistan’s economy — from the US-led war against Iraq, depending on its “intensity, duration and collateral damages”.

The warning is contained in State Bank’s second quarterly report for the current fiscal year released on Thursday, coincidentally the day when the US launched its offensive against Iraq.

Under the amended State Bank of Pakistan act 1956, the State Bank has to release, a detailed analytical review of the government’s economic performance for submission to the National Assembly.

Under the most likely scenario, the report quotes, the government estimates a loss of $1 billion due to higher oil import bill. This, the report says, can be absorbed “without much serious disruption”.

“It is at times such as these that the benefits of accumulating large liquid foreign reserves become quite apparent” the SBP observes while making an oblique reference to the swelling of the country’s foreign exchange reserves to over $10 billion.

The report describes the year 02-03 “a watershed for Pakistan’s economy” while pointing out that three years’ consistent and focussed efforts have led to macro economic stability and, the much-dreaded inflation, now estimated at about 4 per cent in the current fiscal year, has been brought under control.

Budget deficit in the first half of the current fiscal year has been estimated at Rs65.7 billion which is 1.6 per cent of the GDP. The budget deficit in the same period last year was Rs99.9 billion — 2.7 per cent of the GDP.

In the first half of the current fiscal year (July to December 02-03), the State Bank notes with satisfaction, the revival of the industrial growth to 5.2 per cent, agriculture well-poised to end up with 2.6 per cent growth, export up by 16.6 per cent and remittances maintain a robust rise.

The private sector credit demand from banks jumped very sharply, reaching Rs76.8 billion by end December 02 reflecting an improvement in the investors’ perception about the country’s political stability and a sharp cut in domestic interest rates.

The SBP has expressed strong optimism about Pakistan ending up with an economic growth of 4.5 per cent in the current fiscal year mainly because of the revival in the large-scale industry and agriculture. The government has set a growth target of 4.5 per cent for the current fiscal year which now looks achievable.

“The revival of growth in large-scale manufacturing is noteworthy and a welcome development of the second quarter of 03” observes the report.

The report cautions against a steady rising trend of the WPI (Wholesale Price Index) in both, annualized and marginal rates, mainly because of the rising energy prices. The CPI (Consumer Price Index) inflationary pressures have remained subdued despite a strong rise in the demand of bank credit. The SBP estimates CPI inflation in the first half of 2002-03 at 3.6 per cent and is expected to remain at around 4 per cent by the year end. It is little higher than 2002-03.

A good fiscal outturn during the first half of the current fiscal year is “another bright spot for the economy” noted the SBP report as fiscal deficit has been contained to 1.6 per cent of the GDP, which is comfortably within the annual target of 4 per cent of the GDP.

“The new government has remained committed so far to good governance and continuity of economic reforms” the SBP observes, while expressing that the continuation of this tendency will strengthen domestic investors’ confidence, reduce uncertainties, and help reinforce the economic revival process.

The report warns that if there is any indication about the perceived political instability or, relaxation in the fiscal or monetary discipline, or a slowdown in either CBR reforms, or regulatory reforms, or restructuring of Wapda, the KESC or privatization, it will exacerbate these uncertainties and render unviable the achievements of the last three years.

REAL SECTORS: The report notes a strong recovery by the agriculture sector during the current fiscal year as shown by the good harvest of kharif crops and bright prospects for rabi crops. It attributes this recovery to improved canal water availability. While all major crops show improvement in output, cotton production is slightly lower than last year.