Consumer demand to revive economy, says SBP

Inflation greater threat than slowing economy, growth to be stunted this year.

KARACHI: The forces of strong consumer demand and the potential embedded in Pakistan’s economy will overshadow the temporary setback caused by the floods, according to State Bank of Pakistan (SBP) Deputy Governor Yaseen Anwar.

Addressing the Pakistan German Business Forum, he said that domestic demand is virtually inexhaustible and a high propensity to consume keeps aggregate demand perpetually afloat. Therefore, the SBP believes inflation to be the greater detriment to the economy above faltering demand, he said as justification for the hike in discount rate.

The macroeconomic targets set out for fiscal 2011 have suffered a serious setback early into the year as large areas of the country were devastated by widespread rains and unprecedented floods, he said, adding that the SBP expects Gross Domestic Product (GDP) growth to slow down to 2-3 per cent against the target of 4.5 per cent.

The deputy governor cautioned that the agriculture sector’s growth risked turning negative unless the country achieves a good wheat harvest. Industrial growth will suffer too, he added.

Although indirect losses from higher food inflation exist, SBP assessments suggest that the direct impact of the flood-related supply shock is likely to be limited. SBP estimates suggest that average inflation is likely to be in the range of 13.5–14.5 per cent.

Anwar said that the 4.1 per cent growth in GDP seen in the previous fiscal year was essentially led by the secondary and tertiary sectors of the economy.

Encouragingly, preliminary data showed stable consumption expenditure, according to Anwar, who agreed with the proposal to extract a temporary enhancement in revenue from the relatively affluent segments of the tax base.

However, he said that the needs are still likely to exceed any reasonable increase in receipts. Anwar said that this will help reduce the fiscal deficit from 6.3 per cent of GDP.

The current account is expected to deteriorate due to the rising requirements for food and petroleum product imports but these pressures will be offset partially by an increase in current transfers, he said. However, financing even this moderate increase in the current account deficit may prove stressful for the economy.

Published in The Express Tribune, November 4^th, 2010.