KARACHI: The State Bank of Pakistan (SBP) has once again revised down the country’s economic growth projections on Thursday to just 2.0 to 3.0 per cent from last 2.5-3.5pc following incessant fall in industrial output and slowdown in services sector. The central bank released the third (Jan-Mar) quarterly economic review report for fiscal 2008-09 with warnings that economic recovery is not possible
if underlying weaknesses which are hampering growth are not addressed.
“Growth in large scale manufacturing (LSM) has been negative for the tenth consecutive month in March 2009, the longest period in which production continued to shrink,” it said, listing weak domestic demand, power shortages and poor security environment as responsible factors.
The LSM growth dropped 7.6 percent during Jul-Mar 2008-09 compared with a 5 percent rise in corresponding period of fiscal 2007-08, it said.
The consumer durables and automobiles sub-sectors of LSM have been battered by rollback of consumer financing by risk-conscious local banks, it said.
Growth of services sector, which contributes biggest share of 53 percent to GDP, will also fall short of target as result of overall economic slowdown.
Targeted growth of services sector is 6.1 per cent in fiscal 2009 down from 8.2 per cent of previous year.
The agriculture sector, on the other hand, is expected to perform relatively better on back of record wheat and rice harvests. However, SBP said the growth could have been even better if sufficient inputs such as irrigation water, fertilisers and certified seeds were used.
But Pakistan’s increasing expenditure on war with extremist militants and resultant mass displacement of people might put the government in tight position as it scrambles to find sources of funding, SBP cautioned on Thursday.
Up till now the government easily borrowed from commercial banks to plug fiscal deficit without causing interest rates to go up or crowding out the private sector but that room is fast eroding, it said.
“Fiscal deficit for July-Mar FY09 is reported at 3.1 percent of GDP which is consistent with annual target, but there are significant issues with both the sustainability of this trend over full year and the quality of this reduction in deficit,” it said.
The reasons are embedded in projections that tax revenues will slow down in the last quarter of April-June amid a slowing economy.
And resurgence in hitherto lower international oil price exhausts option of collecting differential vis-a-vis relatively higher domestic petroleum product prices as development levy.
But, the SBP said, in its effort to contain fiscal deficit, government has cut development expenditure, which is not desirable.
“Particularly in context of socio-economic conditions that support extremist militants, it is crucial that government increase spending on health, education and strengthening social safety nets.”
The only solution out of this problem is to increase the tax net as decreasing current expenditure, which covers daily expenses of civil and military administrations, is not possible without shrinking the size of government machinery. Whereas, raising the tax rate might encourage tax evasion.
This fiscal year’s original GDP growth target was 5.5 percent. SBP revised it to 2.5-3.5pc in last quarter from 3.5-4.5pc.
Courtesy: The News
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