THE CENTRAL BANK SEES A DROP IN THE GDP GROWTH FROM ITS TARGET OF 7.2 PERCENT TO 6.6 PERCENT
ALL KEY FISCAL PERFORMANCE INDICATORS DETERIORATED
A TIGHT MONETARY STANCE TO BE MAINTAINED
EXPORT GROWTH TO BE OFFSET BY RISING OIL BILL, IMPORT OF HEAVY MACHINERY: The revenue balance (ie the total revenue less current expenditure) has moved from a surplus in the first quarter of the preceding year to a deficit despite a 22.3 percent growth in total revenues, says the SBP's first quarterly report issued on Saturday.
The central bank also sees a drop in the GDP growth from its target of 7.2 percent to 6.6 percent for FY08 with the political noise ahead of the upcoming elections adversely impacting investors sentiment. SBP said that the annual current account deficit remains large and would remain at last year's level of 5.2 percent.
Improvement in export growth during the year will be offset by a rising import oil bill and higher import of power generation machinery as power projects achieve a financial close. SBP fears a further deceleration in textile export growth in the short term which could adversely impact overall export growth.
The report says almost the entire contribution in the 7.5 percent rise in export is on account of "other manufactures" and "all other items" while major categories recorded either negative or nominal growth with textiles mustering only one percent growth.
This rise, says SBP, was in the low value added category of synthetic textiles and in knitwear exports. Garments, bedwear and towels experienced a fall. Export to US was down 3.9 percent whereas to EU it was higher by 1.2 percent.
"The detailed classification of imports showed that imports of consumer products fell by 11.6 percent during July-October 2007 while the imports of capital goods and raw material continued to register positive growth during this period," says SBP.
In November and December the external sectors witnessed deterioration consequently as forex reserves reduced to $15.5 billion with SCRA account seeing an outflow of $173.8 million and the rupee depreciation by 1.4 percent during July-December compared to 1.1 percent depreciation in the corresponding period a year ago.
SBP will maintain a tight monetary instance as core inflation continues to show an upward trend as persistent strong food and energy prices have an impact due to cost push factors "were it not for monetary tightening that helped curb demand pressures, and kept core and headline inflation in check, inflationary trends would have been more significant in both FY07 and FY08," the report adds.
Private sector credit in net terms from September 2007 shows reasonably strong demand and there is substantial room for banks to lend and seasonal demand is also picking up, says SBP. However, companies that were earlier borrowing from external sources may revert to domestic markets given the widening spreads overseas.
The raising of its policy rate by 50 bps to 10 percent in August 2007 coupled with effective liquidity management has led to a substantial slowdown in reserve money growth to 6.3 percent during July-November 2007 compared to 11.8 percent in corresponding period of FY07. However, broad money aggregate (M2) remained at 4.22 percent during July-1st December FY08; almost of same level of 4.20 percent a year ago.
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Major Economic Indicators
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FY08
Provisional Original SBP
FY07 targets projection
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Growth rates (percent)
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GDP 7.0 7.2 6.6- 7.0
Inflation 7.8 6.5 6.5- 7.5
Monetary assets (M2) 19.3 13.7* 13.5- 14.5
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billion US Dollars
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Exports (fob-BoP data) 17.1 18.9 18.3
Imports (fob- BoP data) 27.0 29.6 28.9
Exports (fob-Customs data) 17.0 19.2 19.2
Imports (cif-Customs data) 30.5 32.3 32.3
Workers' remittances 5.5 5.8 6.0- 6.5
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percent of GDP
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Budgetary balance -4.3 -4.0** -4.0
Current account balance -5.3 -5.0 -5.2
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(*) ANNOUNCED IN MPS JULY-DECEMBER FY08; (**) BUDGET ESTIMATES: