Second quarter report:
Agriculture sector props up economy: SBP
economy has shown modest improvements in first six months
(July-December) of fiscal year 2011-12 because of better
performance of the agricultural sector while the services
sector, including retail activities and banks, has also
recorded growth, says the State Bank of Pakistan (SBP) in
its second-quarter report on the state of economy.
However, the report, released on Tuesday, pointed out that
despite these positive developments, risks to macroeconomic
stability have increased.
“Specifically, the position of external sector weakened at a
rate faster than expected, and the fall in financial and
capital inflows exerted pressure both on SBP’s foreign
exchange reserves and on the rupee,” it said.
However, ample availability of key staple crops and
less-than-anticipated supply disruption due to floods helped
contain inflationary pressures in July-December of FY12.
The pickup in government borrowing from SBP complicated
liquidity management whereas energy shortages continued to
plague production activities, especially in the industrial
According to the report, developments in the first half of
FY12 indicated that risks to macroeconomic stability were
stemming from the external sector and continued weaknesses
on the fiscal side.
In terms of real sector, there has been some improvement
since the publication of SBP’s annual report in December
Inflation to remain at 11-12%
“The economy is still expected to grow in the range of 3 to
4 per cent. Inflationary outlook has improved slightly on
account of supply-side factors (food),” the report said.
“It is expected that FY12 inflation will fall within the
range of 11 to 12 per cent, with a bias towards the lower
Fiscal deficit a challenge
The report said in spite of the lower fiscal deficit in the
first half, containing the overall deficit to its revised
target of 4.7 per cent of gross domestic product (GDP) seems
to be challenging.
Quarterly data for previous years has shown that the deficit
remains relatively higher in the second half of the year, it
said, adding the achievement of the revised fiscal deficit
target depends on the realisation of three things.
These are envisaged surpluses from provincial governments,
which are likely to be lower than expected; non-tax
revenues, which depend on inflows into the Coalition Support
Fund and auction of 3G licences; and strict control over
According to the report, the burden of financing this
deficit will fall on the banking system, specifically on
commercial banks. Other than growing concerns about the
supply of credit for the private sector, renewed government
borrowing from SBP entails rising inflationary expectations
in the economy.
On the external front, although the current account deficit
is expected to be in the range of 1.5 to 2.5 per cent of
GDP, there is an upward bias to this prediction.
“Given the fall in financial and capital inflows, funding
this modest current account deficit could be challenging.
Market players are increasingly concerned about whether the
envisaged foreign inflows will materialise in time.
“This, together with the scheduled repayment of IMF loans
($1.1 billion) in H2 (second half), may draw down SBP’s
foreign exchange reserves,” the report added.
Courtesy: The DAWN