By IANS
Karachi : Key indicators recorded a significant decline during the first quarter of the current fiscal and the resulting imbalances could have adverse consequences for the Pakistan economy, the State Bank of Pakistan (SBP) has said in its quarterly report.
“Risks to the economy are increasing as it is clear that neither the global nor the domestic economic environment is as benign as in the past years,” the SBP July-September report said, adding that the political uncertainty ahead of the general elections was impacting on investor sentiment.
The government was relying heavily on borrowings from SBP, which added to the reserve money growth, the report released on Saturday said.
“The threat of renewed macroeconomic complications, after five years of good performance would be further heightened if prompt actions are not taken to correct the recent deterioration in fiscal indicators,” the report said.
The fiscal imbalance has already led to a substantial rise in government borrowings from the central bank, Dawn reported Sunday. The borrowings rose to Rs.191.3 billion during the first five months of fiscal 2007-08, exceeding both quarterly and annual ceilings and the preceding year’s trend.
“This has enhanced monetary expansion significantly and is likely to fuel inflationary pressures, compounding the impact of the strength in international commodity prices,” SBP warned.
Growth during 2007-08 was also likely to be below the 7.2 percent annual target, it added.
“The current trend indicates that the fiscal deficit target will not be met unless appropriate corrective measures are taken promptly,” SBP said.
The report said that all key fiscal performance indicators had deteriorated significantly during July-Sept 2007.
The government’s budgetary borrowings from the banking system during July-Dec 2007 rose by Rs.191.3 billion compared to Rs.97.6 billion over the corresponding period in 2006-07.
“Importantly, the revenue balance moved from a surplus in the first quarter of the preceding year to a deficit in Q1-FY08, despite an impressive growth of 22.3 per cent in total revenues during Q1-FY08,” the report said.
Another challenge was the country’s large external current account deficit. Recent evidence indicated that the modest contraction seen in July-September 2007 was unlikely to continue in months ahead, SBP said.
“More troubling is the fact that the high and volatile food inflation is now increasingly influencing core inflation as well. Since May 2007, both measures of core inflation (i.e. non-food non-energy and the 20 per cent trimmed mean) have been trending up.
“These inflationary pressures could rise further, if fiscal imperatives force the government to pass through the impact of the recent oil prices,” the SBP report said.
“The domestic economy is now more open and prone to external shocks than ever before which means domestic prices will be more sensitive to the changes in international prices, despite domestic availability. For example, Pakistan had sufficient exportable surplus of rice in FY07, but following a rise in the international prices of rice, domestic prices also increased,” it said.