The performance of the economy in two months of this fiscal year has raised questions about the pace of the growth. A key issue is: how would the external sector fare?

Exports are not growing at the desired pace. Foreign portfolio investment has remained negative so far and is unlikely to reach the last year’s level more so because the prospects of generating foreign exchange through euro bonds are not so promising.

The privatisation process has come to a halt. Foreign direct investment and workers’ remittances continue to show a strong growth but the investment may falter because of the political uncertainties. The real sector of the economy has so far shown mixed trends. In agriculture, cotton production is likely to reach 14 million bales despite the attack of mealy bug and curl leaf virus. The production of wheat, rice and sugarcane are also likely to remain strong though rice production might see a nominal decline due to heavy monsoon rains and flooding. Water availability is at its peak and there are no chances of major or minor crops suffering because of its shortage.

In the industrial sector, there are signs that production would decline because of high cost of finance, labour and utilities. In the last fiscal year, large scale manufacturing sector had risen 8.4 against 10.7 per cent a year ago. No data about LSM production for the first two months of this year is available but industrialists say and exports’ volumes suggest that full capacity utilisation is not there.

Statistics on the performance of the services sector are also not available. But banks and financial institutions might continue to show strong results. Despite all moral suasion by the State Bank, the banking spread is still at 730 basis points, far higher than in India and other regional countries. This gives the banks a lot of opportunity to make huge profits. Some banks are likely to earn handsome profits as those which have completed the process of mergers and acquisitions are now geared to enter into new businesses. Two of these areas are agricultural and SME financing.

In July-August FY08 banks’ lending to agricultural sector rose 18 per cent to Rs25.8 billion. Bankers say their farm lending would rise further in coming months but they also realise that recovery of farm loans would be a problem this year. Farmers have suffered cash equivalent losses of billions of rupees because of rains and floods.

Disbursement of bank credit to the entire private sector has slowed down. Bankers and business indicate that the appetite for private sector credit is low due to a slower growth in industrial activity. The banks have also tightened credit appraisals to prevent borrowers from using part of the bank credit in making speculative investment in stocks and real estate.

No data about private sector credit off-take in this fiscal year is available. But the recently released SBP statistics show that in the last fiscal year the private sector borrowed Rs366 billion from banks, down from Rs402 billion a year earlier and below the target of Rs390 billion.

On the other hand, the government borrowing from banks for budgetary support totalled Rs102 billion in FY07 up from Rs67 billion in FY06 but lower than the target of Rs120 billion set for FY07. Fortunately, the government managed a much better borrowing mix in the last fiscal year. It borrowed Rs160 billion from commercial banks and retired Rs58 billion worth of SBP loans, thus mitigating the impact on inflation. A year earlier the situation was in total contrast: the government had borrowed Rs135 billion from SBP and retired Rs68 billion loans of commercial banks thus fuelling the flames of inflation.
From this fiscal year onwards, the government is bound to keep its inflationary borrowing from the central bank within limits determined jointly by the SBP and the ministry of finance. This coupled with the overall tightening of the monetary policy has so far kept inflation below the targeted level of 6.5 per cent for this fiscal year.

But the problem is that food inflation is still much higher than overall CPI inflation, which means that inflation is hitting the poor harder. The mishandling of wheat crisis and the resultant price hike shows that handling of inflation through administrative means remains a far cry.

In the first two months of this fiscal year the rupee remained somewhat firm—thanks to sufficient inflows of foreign exchange through various channels. But in the third month it started to fall more rapidly as the outflows outdid the inflows.

Between July 1-September 28 the rupee shed 23 paisa or 0.4 per cent of its value against the dollar. On September 28 the rupee closed at 60.70 a dollar down from 60.47 on June 30.
— Mohiuddin Aazim