State Bank of Pakistan’s First Quarterly Report on the State of the Economy for current fiscal year said the real GDP growth is likely to be around annual target of 3.3 per cent; higher than 3 per cent growth projected by IMF last week.
International Monetary Funds has revised the inflation from 9 to 11 percent which reflects the rebound in the prices of fuel and a larger second round impact of the increases in electricity tariffs.
Higher remittances and other private transfers have resulted in an improved current account outlook, notwithstanding higher oil and other commodity prices.
The current account deficit is now projected at 4.2 percent of GDP, compared with 4.7 percent. However, the impact on the overall balance of payments will likely be muted by lower Tokyo-related disbursements.
State Bank’s report suggest that the prospects of returning to macroeconomic stability have improved in the initial months of FY10 as most of the key indicators continue positive trends that began in the closing months of the last fiscal year.
A combination of weak economic activity, a shift in the advanced income tax payments from September to October, lower grants, and lower-than-expected receipts from the Coalition Support Fund for reimbursement of certain military outlays resulted in a revenue shortfall of about 0.6 percent of GDP relative to the program target.
On the expenditure side, higher security spending, and the early payment of wages for October ahead of Eid contributed 0.2 percent of GDP to the slippage.
The authorities took several measures to contain the first quarter fiscal slippage. These measures included compression of spending on goods and services and investment and the mobilization of a transfer from the SBP equivalent to about ½ percent of GDP.
Spending in high-priority areas, such as the social safety net and assistance for IDPs, has been lower than expected. The rollout of the strengthened targeting scheme under the Benazir Income Support Program (BISP) continued to be challenged by the implementation capacity. As a result, spending under the BISP amounted only to Rs. 10.4 billion in the first quarter, compared with Rs. 14 billion projected under the program.
However, some additional social spending, mainly through subsidization of basic foodstuffs, was incurred by the provinces. Spending on IDPs was about two-thirds of the Rs. 15.5 billion (about 0.1 percent of GDP) budgeted for the first quarter of 2009/10, as the security situation in Swat stabilized faster than expected.
State Bank expects current account deficits to be between 4.7 per cent and 5.2 per cent.
The SBP discount rate was lowered from 14 percent to 13 percent in August, and to 12.5 percent in November, but real interest rates remained positive. The rate cuts were limited because of concerns about remaining inflation pressures, the fiscal slippage in the first quarter, and the availability of external financing.
In mid-August, the SBP introduced an explicit interest rate corridor of 300 bps and the SBP shortened the periodicity of monetary policy decisions from quarterly to bimonthly in order to facilitate more frequent adjustments of policy rates. Following the introduction of the corridor, fluctuations in the overnight repo rate have fallen significantly.
The SBP has also increased interest rates on its refinancing facilities, with a view to aligning them with market rates over the next two years. To this end, the interest rates on the Export Finance Scheme and the Long Term Financing Facility have been increased to 8 percent and 9.2–10.25 percent (depending on tenor), respectively.
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