GDP growth accelerated to 7percent in FY07.
Investment to GDP ratio at record 23 percent was complemented by a surge in domestic private investment and record FDI flows.
In proportion to GDP, national savings rose, external debt burden declined, total revenue increased, budget deficit stayed at FY06's level of 4.3 percent of GDP.
-- Central bank chief expresses concern over present tax to GDP ratio.
-- Believes present expansionary fiscal policy poses a dilemma.
-- Underscores the need for developing long-term debt markets.
-- Declares that subsidies are unsustainable given the shrinking space available to government.
Akhtar said that investment to GDP ratio rose to a record 23 percent in FY07 from 21 percent in FY06, which have contributed by a surge in domestic private investment and record foreign direct investment (FDI) flows. As a result, the economy looks well poised to continue on a high growth trajectory in coming years.
However, despite the improvement, the investment to GDP ratio remains low in Pakistan. Governor SBP showed concern over the tax revenue ratio in the GDP, which still stands at 10.2 percent as against the 9.9 percent during FY06.
The present expansionary fiscal policy poses a dilemma. On one hand, the high fiscal deficit in recent years is driven primarily by development spending, particularly on infrastructure, which is quite necessary if the growth in the economy is to be sustained, she said.
Central bank believes that present expansionary fiscal policy poses a dilemma and it is believed that it would further grow the economy, while it underscores the need for developing long-term debt markets.
More specifically, and in proportion to GDP, national savings rose, the external debt burden declined and total revenue increased while the budget deficit stayed at last year's level of 4.3 percent of GDP, she said.
However, key macroeconomic challenges remain to be fully addressed yet. The current account deficit widened further in FY07, the tax to GDP ratio is still very low, and inflation remained stubbornly high, showing only a sluggish decline in FY07, she added.
She said the economy would continue to grow strongly during the 2008 fiscal year 2008, but warned that external current account deficit and inflation would be the key challenges to the economy.
The SBP Governor said that domestic prices of key food staples had already been affected by rising international prices, and if 2008 financial year harvest of food crops remained below expectations, the situation could be aggravated.
Akhtar said that the first quarter data suggested that inflationary pressures were, however, strong, as efforts for reverting the food prices to double digits in September 2007 had not been made.
Key risks to the inflation outlook appeared to be the energy and food staple prices in the wake of rising international prices, enhancing production in 2008 financial year would be critical for easing sonic of the supply constraints, both to ease inflationary pressures as well as to provide for export growth.
"This is expected to keep domestic inflation close to the annual target in 2008 financial year, however, the domestic economy was partially insulated from the rise in international energy prices during 2007 financial year due to the government's decision not to pass on to customers the increase in the prices of key fuels.
"This policy may not be sustainable if energy prices increased further," she added. The SBP Governor said private sector credit off-take had been low in the first quarter, partly reflecting the seasonal trends and partly because the companies are positioning themselves to gear up as the emerging environment unfolds.
"Foreign inflows remained in line with 2007 financial year trends in the first quarter and are likely to gain momentum in the second half of the year," she added.
Given that domestic sugar stocks could be exhausted by November 2007, any such delay in the sugar-crushing season could lead to a price hike. However, administrative measures such as extension in the network of utility stores and pro-active imports would help alleviate any short-term shortages, she said. Pakistan's current account deficit, though sustainable in the short-term, would remain a key challenge for the economy.
Further deceleration in imports growth, together with a small improvement in export growth, and a robust rise in remittances underpinned the projected improvement in the current account deficit for 2008 financial year, while the deficit was expected to be larger than the 2007 financial year figure in absolute terms.
She said that aggressive monetary tightening should help contain demand pressure in the economy, with monetary growth forecast to remain within the indicative targets.
Uncertainly in the global oil prices and increasing commodity prices, which had been on the rise in the last few weeks, an anticipated increase in the import of telecom following China's investment in Pakistan's telecom sector, and the likely rise in power generating machinery imports might put upward pressure on the import bill, she added.
She said that it was likely that the GDP, inflation, imports, fiscal deficit and current account deficit targets would be achieved, while the targets of export, monetary assets would not chase.
Current SBP projections, based on the limited data availability to date, suggested that the growth was anticipated to be broad-based, with the strong contributions expected from agriculture and the services sector, she said.
"It has projected that the GDP growth target would be 7-7.4 percent, inflation 6-7 percent, monetary assets (M2) 13.2-14.2 percent, fiscal deficit around four percent and current account deficit growth would be 4.8 percent during the current fiscal year," she said.
During 2008 fiscal year, export would be 18.3 billion dollars as compared to target of 18.9 billion dollars as per balance of payment, while imports would be 28.9 billion dollars as against the target of 29.6 billion dollars.
"The slowdown in monetary growth is expected to be reflecting mainly through growth in private sector credit, lower government borrowings from the SBP, and slower net growth in net foreign assets (NFA) of the banking system, consequent to changes in the monetary policy framework in 2008 financial year," she said.
Regarding the changes in the financial act by providing some financial regulation responsibilities to the SECP, she made clear that SBP was solely responsible and regulator of the financial sector and would continue to regulate the sector in the future.
Akhtar also said that it was worth mentioning that in the coming years, the country was likely to face higher burden of debt-servicing as repayments of the rescheduled non-ODA Paris club debt stock would resume from 2008 financial year, and the maturities of the Eurobond, issued in 2004 financial year and Sukuk issued in 2005 financial year would become due in 2009 financial year and 2010 financial year respectively.
In addition, interest payments on various Eurobonds, issued recently, were likely to add to debt-servicing burden in coming years. Therefore, to maintain the same debt-servicing capacity, the country 's foreign exchange earnings, and particularly export earnings needed to grow faster, she said.
She said that presently the country's external debt stood 40.1 billion dollars during 2007 financial year and an important feature for 2007 was the sharp rise of 57.1 percent in interest payments on domestic debt. The strongest contribution to the increase was probably from maturing high-cost, zero coupon instruments (DSCs) issued in late 1990s.