Pakistan's economy grew by 3.7pc in FY12: State Bank

KARACHI: Pakistan's economy witnessed a modest improvement in the fiscal year 2011-12 (FY12), as real GDP grew by 3.7 percent during the year under review compared with 3.0 percent in FY11, the annual report issued by the central bank said Wednesday.

According to State Bank's Annual Report on the State of the Economy for the year 2011-12 released here Wednesday, the growth was more broad-based compared to FY11 as it was evenly distributed across agriculture, industry and the services sector.

The demand side was more insightful as the growth in FY12 was primarily driven by private consumption, it said, adding that strong worker remittances, a vibrant informal economy and higher fiscal spending, supported consumption growth during the year.

SBP report said that food prices have remained relatively stable during FY12, which helped bring down overall inflation to 11.1 percent better than the 12.0 percent projected earlier.

"It was this easing that allowed the central bank to reduce the policy rate by 200 bps during the year; this was done to partially revive private sector borrowing, encourage banks to improve their intermediation between private savers and borrowers", the report
added.

According to the report, the external front was positive as remittances posted yet another year of strong growth, which not only helped narrow the current account deficit, but also contributed to economic activity.

"In overall terms, the external sector has been less worrying than anticipated at the beginning of the year; however, as financial inflows dried up, the burden of financing the current account deficit and external debt, has fallen on the country's foreign exchange reserves",
the report added.

While services continued to support the economy, commodity producing sectors (agriculture and industry) posted an improvement over FY11, the report noted, adding that the growth in agriculture came from livestock and kharif crops, but minor crops witnessed a decline due to the floods in the first quarter of FY12.

"In our view, with interest rates at current levels, commercial banks may be incentivized to book high-return private assets, rather than just place money with the government. Although SBP does not tell
banks what to do, commercial banks should be cautious about how their balance sheets are evolving and look to diversify their asset portfolio with a long-term view", the report added.

"Since the size of the fiscal deficit last year was mainly due to one-off factors, we are hoping things will be better this year, the report said.

"We are also optimistic that with the opening of NATO supply routes, Coalition Support Fund (CSF) will be realized in a timely manner.

SBP expressed hope that inflows from privatization (Etisalaat) and the 3G licenses will also be realized in FY13".

In making our interest rate decisions, SBP looks closely at the likely impact on the foreign exchange market. One must note that the foreign exchange market's reaction to the discount rate cuts in August and October 2012 was quite muted, the report said, adding that in late November 2012, some pressure, however, appeared, even though the current account posted a surplus in the first four months of FY13.

"In our view, this pressure can be traced to net outflows to the international financial institutions (around $ 1.5 billion during July-November FY13). Although these payments do not impact the foreign exchange market directly, the drawdown of SBP's forex reserves has
impacted market sentiments", the report remarked.

In terms of tradeables, our export projections assume that cotton prices have bottomed-out while Pakistan's low value-added textiles may be insulated from the demand contraction in the OECD, the report
said, adding that we do not expect any spike in imports given the sluggishness in domestic investment, and our view on global commodity prices.

"We also remain optimistic that inward remittances will continue to post strong growth", the report said.

The State Bank Report stressed upon the urgent need to embark on structural reforms in the energy sector, PSEs and public finances.

"This, together with a more balanced deficit financing mix in FY13, would ease a great deal of pressure from domestic sources of financing
especially the commercial banks", the report concluded. (APP)