Inflation may go up by 8.2-8.8pc, says State Bank: GDP growth over 7pc likely

Inflation may go up by 8.2-8.8pc, says State Bank: GDP growth over 7pc likely
By Mohiuddin Aazim (DAWN March 22, 2005)
KARACHI, March 21: Inflation may rise by 8.2-8.8 per cent during this fiscal year, up from about 4.6 per cent in the last year, says the second quarterly report of the State Bank released here on Monday. "Inflationary pressures in the domestic economy remain worrisome," says the central bank and admits that gradual tightening of monetary policy has failed to contain core inflation, adding that further tightening is needed. This indicates that interest rates may now rise at a faster pace. The central bank also admits that the concern about "sustained inflationary pressure is quite real" as it threatens macroeconomic stability and economic growth in the long term. During eight months of the current fiscal year, average inflation has already reached 8.9 per cent. The February inflation has touched an eight-year high of 9.95 per cent. The inflation was initially targeted to increase by 5 per cent during this fiscal year but later on, National Credit Consultative Council, the body that draws up monetary plan, revised it upwards to 7 per cent. The report that covers economic developments of July-December 2004 says that the GDP is likely to grow by 7.4-7.8 per cent during this fiscal year ending in June 2005, higher than the revised target of 7 per cent. The government had set the GDP growth target at 6.4 per cent for the current fiscal year but later on revised it to 7 per cent, up from last year's growth of 6.4 per cent. The central bank says the economy looks set to grow by 7.4-7.8 per cent on the strength of better prospects in agriculture and higher-than-expected performance of manufacturing and services sectors. It says that agricultural growth during FY05 will exceed the target of 4 per cent chiefly due to larger-than-expected cotton crop and timely rains. The SBP report says that cotton production will reach an all-time high of 14.2 million bales during this fiscal year, against the target of 10.7 million bales adding that this would offset the impact of relatively low rice and sugarcane production on overall agricultural growth. Rice production is estimated at 4.977 million tonnes and sugarcane crop at 47.938 million tonnes against their respective targets of 5.114 million tonnes and 50.875 million tonnes. The report gives no estimate of wheat production. The report says that industrial production measured by Index of Industrial Production grew by 15.4 per cent during July-December 2004 surpassing the full fiscal year 2005 target of 9.8 per cent with large-scale manufacturing showing a big growth of 16.1 per cent, far higher than the target of 12 per cent. Explaining reasons for projecting 8.2-8.8 per cent inflation for this fiscal year, up from an earlier estimate of 7.6-8.2 per cent, the central bank says subtly that the revision is rooted in government's inaction. It says that the earlier estimate of inflation was based on the assumption that the government "would continue to shield the domestic economy from large part of the rise in international oil prices and that food inflation would be contained as the government proactively sought to assure ample supplies of key food staples to avoid speculative attacks." But, it points out, that these assumptions have not materialized compelling the central bank to scale up its earlier estimate of inflation.