1.2 Looking Forward

It is evident that Pakistan’s
economy needs effective
policies and implementation of
reforms in FY09 to regain
macroeconomic stability in the
midst of a challenging year.
Real GDP growth is likely to
be significantly lower than the
annual target and inflation will
breach its target with a wide
margin (see Table 1.2). On a
positive note, both fiscal and
current account deficits are
estimated to improve in FY09.
Amongst the biggest
challenges for the government will be to ensure the pass through of decline in
international commodity prices to consumers. In this background, while recent
downward adjustments in the administered prices of key fuels3 is appreciable, the
reversal in transport fares and goods transportation charges is almost negligible.
This behavior is not unexpected given (1) when prices moves upward quickly,
they generally do not come down as fast; and (2) inflationary expectations remain
strong. Moreover, while commodity price shock was quite strong, it was believed
that these prices will remain stubbornly high for at least a decade or so.4
However, these prices have unexpectedly plummeted dramatically due to
deepening global recession. Firms and traders would like to take some time to
adjust their prices and margins in these circumstances. Consumer awareness, role
3 Petrol, diesel, kerosene oil and LPG.
4 http://www.fao.org/newsroom/en/news/2008/1000849/index.html
Table 1.2: Projections of Major Economic Indicators
FY09
FY08 Annual plan
targets Projections
growth rates in percent
GDP 5.8 5.5 3.5 - 4.5
Average CPI Inflation 12.0 11.0 20.0 - 22.0
Monetary assets (M2) 15.3 14.0 11.0 - 12.0
billion US dollars
Workers’ remittances 6.5 7.7 7.5
Exports (fob-BoP data) 20.1 22.9 20.5 - 22.0
Imports (fob- BoP data) 35.4 37.2 33.5 - 35.0
percent of GDP
Fiscal deficit 7.4 4.7 4.3 – 4.8
Current account deficit 8.4 7.2 6.2 - 6.8
Note: Targets of fiscal and current account deficit to GDP ratios
are based on Nominal GDP in the Budget document for FY09,
while their projections are based on projected (higher) nominal
GDP for the year.
The State of Pakistan’s Economy
6
of media, quicker settlement of import duties and other taxes may be required to
accelerate disinflationary process in the economy.
Similarly, global recession and risk averse behavior of investor would likely to
severely impact international trade and level of forex inflows in the economy.
SBP estimates for both imports and exports have been revised downwards, with a
more pronounced effect on imports. At the same time in the event of shortfall of
external financing, the burden of financing fiscal deficit will disproportionately
fall on the domestic commercial banks, since government has committed not to
borrow incrementally from the central bank. In addition, FDI inflows may be
substantially lower than in recent years, in which case, pressures on forex reserves
could remain strong. Both possible developments indicate continuing risk on
interest rates and exchange rate, and thus the need for continued vigilance by
policymakers.