KARACHI: The State Bank has predicted 2-3 per cent GDP growth in the current financial year despite severe flood losses. The target set in the budget was 4.5 per cent.
The bank’s annual report for 2009-10 issued on Monday said there was a noticeable improvement in macroeconomic indicators during FY10 with the economy growing at 4.1 per cent, compared to 1.2 per cent in the preceding year.
It projected an average annual inflation in FY11 at 13.5-14.5 per cent and fiscal and current account deficits at 5-6 per cent and 3-4 per cent of the GDP.
The report said the impact of floods had strengthened inflationary expectations and the August CPI showed a 15.6 per cent year-on-year rise in its food component.
However, the direct impact of the flood-related supply shock is likely to be limited and shortage of minor crops may not persist beyond three months as supply line improves and fresh crops reach the market.
The SBP said the fundamental structural weaknesses in the economy remained unaddressed and some key reforms failed to gather traction.
Persistent disagreements led to the deferment of a proposed expansion of the tax net through the introduction of a broad-based GST, the proposed restructuring of public sector enterprises to improve efficiency and lower the fiscal burden did not take place and after some initial work, there was little or no progress in either resolving the energy sector debt chain or substantially improving electricity supply.
The report said various macroeconomic targets had suffered a setback early into the year because of the floods. Large parts of the country’s agricultural heartland were particularly hit hard, with significant damage to standing kharif crops (e.g., cotton, rice and sugarcane) and livestock.
The economy also suffered extensive damage to infrastructure (bridges, road networks, gas/ power plants and some industrial units such as rice mills, ginning factories, etc.), productivity losses from supply-disruptions and large-scale displacement of people, it said.
The SBP said that even a cursory assessment of the broad contours of the losses indicated that their “repercussions will continue to stress the economy for many years”.
“It is therefore obvious that the economic priorities and targets for FY11, in particular, will see substantial revision and all key macroeconomic indicators will likely record deterioration.
“The negative shocks stemming from the floods have further exposed the existing structural weaknesses in the economy.”The State Bank criticised slippages on the expenditure side
There were significant rigidities in government spending, including debt servicing, defence and the salary bill, but there appeared little evidence of efforts to contain the growth in even the discretionary components, it said.
A 10.7 per cent growth in subsidies and losses of public sector enterprises was particularly disappointing, it said.
“In FY10, these expenditures, as a percentage of GDP, were almost equal to the combined total for health and education,” it said, adding that this was by no means an acceptable situation.
The report said the total public debt and liabilities had substantially increased from 68.7 per cent of GDP in FY09 to 69.5 per cent.
It projected that workers’ remittances were likely to stay between $9.5 billion and $10.5 billion, while exports and imports were likely to be $20 billion to $21 billion and $34 billion to $35 billion, respectively.