The adverse impact of flood this year is subdued compared to the havoc witnessed in the previous year - cotton crop size is estimated to be marginally less than its initial target of 12.8 million bales to 12.6 million bales. At the same time, improved wheat and rice crops could boast agri production. Yet despite a higher wheat support price, the improved crop cultivation may not translate into improved farmers' incomes as global commodity prices are receding - cotton price is down by more than 50 percent from its peak in March 2011. The fate of sugarcane market is no different.
This fall in farmers' incomes could, in turn, adversely impact the manufacturing sector, especially the thriving consumer durables industry, according to SBP. Manufacturing sector, which is largely insulated by floods, exhibited a marginal growth of 2.1 percent in the first four months of this fiscal with textile, food, cement, POL and pharmaceuticals leading the way.
But unaddressed structural issues continue to impede the growth momentum - falling prices and sluggish demand are hurting textile sector. Circular debt is the biggest impediment to continued growth in POL. Gas shortage is hurting fertiliser more than any other industry. Improvement in cement sector is primarily driven by base effect while floods kept cement demand in check.
Both demand and supply of credit to the private sector is far from desired levels. Sluggish LSM performance is leading to stifled demand for private loans while the lack of fiscal space and limited avenues to finance the deficit continue to drag liquidity away from private borrowers. Advances to private sector contracted by Rs9 billion (July-November 11) compared to an expansion of Rs74 billion, during the same period last year. The worst hit is on sugar owing to delay in crushing season and telecommunications which appears to be operating in an increasingly saturated market now.
The more worrisome fact is that whatever slim demand there is for credit in the private sector is being generated from working capital requirements while fixed investment loans remain depressed. This haunts the prospects of growth in future and employment generation for the bulging youth population.
Nonetheless, there is some improvement in creating fiscal space; the budget deficit for first quarter of FY12 was at 1.2 percent of GDP as compared to 1.5 percent in the corresponding period last year. The credit goes to FBR for 30 percent growth in its revenues on account of better collection and higher tax revenues on imports. SBP profits and dividends income helped the non tax revenues to grow by 50 percent.
But a closer look at half year numbers depicts that FBR may fall short of its full year target of Rs1952 billion. Proceeds from Coalition Support Fund are highly dependent on Pakistan's relations with the US and this relationship has appeared quite strained in recent weeks.
The sale of 3G licenses as well as the dormant license previously used by Instaphone are likely to materialise in the fourth quarter of this fiscal, but the government may still have a hard time reaching its target of Rs150 billion from non-tax revenues.
Then just like last year, provincial governments are not in sync with the federal government on provincial budget surpluses. Against the budgeted Rs125 billion surpluses for full year, the provinces meagrely registered surpluses of Rs12 billion in first quarter.
Given these circumstances, it is unlikely that the government will contain its fiscal deficit to 4.7 percent of GDP. Pressure on domestic banks for finances will likely increase in coming months as foreign funding is still dwindling.
Good omens appear in the form of checked SBP lending to government and receding commodity prices that have finally brought inflation down to single digits after two years. But hold your enthusiasm; recent weakening of the local currency and upward revision in energy prices may bring the inflation dragon out again. SBP expects full year inflation to fall close to target of 12 percent.
The economy is at a dicey point where despite low current account deficit, sustainability of reserves and currency is under question, mostly because of abysmally low FDI and other external inflows.
So far this year, SBP has been able to lower its policy rate on the back of lower inflation. The persistent weakening of the Pakistani rupee may make that an increasingly difficult option for the central bank in upcoming monetary policy announcements.