SBP Quarterly Report on State of Pakistan’s Economy: The News

By Saad Hasan

KARACHI: The State Bank of Pakistan (SBP) has raised the fiscal deficit forecast for the current financial year 2009/10 (July-June) to between 5.0 and 5.5 per cent of the gross domestic product (GDP) from the targeted 4.9 per cent in the wake of high defence spending and low revenue collection.

The SBP in its Second Quarterly Report on the State of Pakistan Economy maintained its GDP forecast for FY10 at between 2.5 and 3.5 per cent, but lowered its projection for the current account deficit to 3.2 to 3.8 per cent from the previous estimates of 3.7 to 4.7 per cent.

“The fiscal outlook appears especially challenging,” the SBP said in its Second Quarterly Report (October-December) for FY10 on the State of Pakistan’s Economy. “Existing rigidities in current expenditures have been exacerbated in FY10 by the strong build-up in domestic and external debt, and rising military spending on anti-terrorist operations.”

The growing energy sector circular debt and the government’s controversial policy of paying higher-than-market price to farmers for certain commodities also contributed to widening of the fiscal deficit, the bank said.

Analysts say that keeping the fiscal deficit target at 4.9 per cent remains one of the key conditions of the International Monetary Fund (IMF) under its $11.3 billion Standby Agreement with Pakistan.

Hamad Aslam, head of research at BMA Capital Management, however, said that the widening of fiscal deficit would have little impact on the Standby Agreement with the IMF. “In practice these numbers have been shared with IMF officials so it won’t0 be much of a problem for the governmentÖ But, the rising current expenditure on the large government machinery should be bothering the IMF.”

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