SBP quarterly report: Rising global oil prices fuel major concerns

Central bank maintains economic growth outlook at less than 3 per cent.


Mobin Nasir April 09, 2011

KARACHI:


The State Bank of Pakistan has warned that the government’s inability to bridge its fiscal deficit means that the country is likely to be more adversely affected by rising oil prices than its regional peers.


In its second quarterly report, released on Friday, the central bank’s survey of the economy maintained a growth outlook of between 2 and 3 per cent of gross domestic product (GDP) for the fiscal year ending June 30, 2011, largely due to the negative impact of the 2010 summer floods.

The report warned that while high international commodity prices have boosted exports by 20 per cent – largely due to higher cotton prices affecting textile prices – Pakistan’s  status as an energy-importing nation meant that the country is exposed to the threat from higher oil prices, which can drive up inflation.

Rising oil prices are also expected to worsen an already chronic energy crisis, according to the central bank. The government’s inability to change prices in accordance with international shifts, coupled with the government’s lack of fiscal space to subsidise energy, means that the energy sector’s circular debt crisis may worsen.

The central bank’s expectations of inflation, however, were marginally lower than in the first quarter of fiscal 2011. The SBP now expects full-year inflation to end at between 14.5 and 15.5 per cent. The central bank cautioned that the prolonged incidence of high inflation was becoming a serious problem.

“We fear that inflationary expectations are becoming engrained,” said the report.

The State Bank is most optimistic about the agriculture sector. Despite the “staggering humanitarian cost of the August 2010 floods,” the SBP appears confident that agricultural output of cotton, wheat and sugarcane will likely improve because of an increase in cultivable land. Higher prices are also expected to be a boon to the rural economy.

Larger than expected snowfall is also expected to help the autumn harvest, since the snow will melt and result in a greater-than-usual supply of water, which should boost output. Rural consumer spending appears to be on the rise as a result of the increased prices of agricultural commodities.

The SBP highlighted four factors that it believes will be instrumental in the country’s growth prospects in coming months. These include the stand-by agreement with International Monetary Fund (IMF) and the resulting fiscal pressures, the lending behaviour of commercial banks, agricultural output in the rabi season and the international price of oil.

Record levels of remittances sent by expatriate Pakistanis residing abroad as well as increases in the country’s exports on the back of rising international prices of cotton has meant the country’s current account deficit dropping 97 per cent compared to the same period in the previous year.

In terms of long term problems, the single biggest concern for the State Bank is the government’s inability to raise revenues. The report asserted that “consistent cutting in development spending to meet deficit targets” is narrowing the government’s range of options.

“Exceptional steps to increase fiscal revenues, reforming loss-making public sector enterprises and eliminating end-user subsidies” have been cited as the few remaining alternatives to reign in the widening gap between government’s revenues and expenses.

The SBP has called on political parties to take bold steps to broaden the tax net and revenues adding that, “we also remain concerned that recent political support given to populist demands may further undermine the reform process.”

Published in The Express Tribune, April 9th, 2011.

COMMENTS (2)

Ammar | 12 years ago | Reply @TightDhoti: Masses of Pakistan always remain patriotics except politicians. Due to high class difference, which is mainly created by evacuting taxes, is big concern of the couintry.
TightDhoti | 12 years ago | Reply Its hight time all patriotic Pakistanis put their money where their mouth is. Pay your taxes and pay your bills.
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