ADB Wants Pakistan to Cut Deficit, Inflation
The Asian Development Bank has urged Pakistan to lower its fiscal deficit and inflation with a view to further improving the-country's economy.
Pakistan's overall fiscal deficit could increase to five per cent of GDP in 2006-07, including expenditures related to earthquake reconstruction, equivalent to 0.6 per cent of GDP, it further stated.
In its latest "South Asia Economic Report (SAER)", the bank also termed "still high" eight percent inflation in the country. It said that inflation declined in 2005-06 and that significant decline in food inflation was in part offset by higher oil prices. Tight monetary policy and measures, such as liberalized imports of food and other essential items in short supply helped combat inflation.
However, the ADB believes that Pakistan would be able to achieve seven percent GDP growth during the current financial year because of the recovery in the agriculture sector, and higher private investment and increased development spending ire projected to boost economic growth.
When contacted adviser to the ministry of finance Dr. Ashfaque Hasan Khan did not agree with the ADB report and insisted the government would achieve its 4.2 percent fiscal deficit target in 2006-07. Likewise, he said that earthquake related expenditure would also remain under the target.
Dr. Khan said that inflation stood at 7.9 percent and not eight percent as was claimed in the ADB report. He said the government was hopeful to achieve its inflation target of 6.5 percent in 2006-07, which would further come down to 5.5 percent during 2007-08.
The report said the budget 1006-07 continued the growth oriented policy stance, and development spending was projected o increase to 4.9 percent of JDP. The budget also aims at increasing revenues through broadening the tax base, and the tax to GDP ratio is projected to rise by 0.4 percent of GDP.
It said that Pakistan's GDP; growth had slowed in the fiscal year 2005-06 to 6.6 percent, largely because of the impact of adverse weather conditions on major crops. This significantly reduced growth in the agriculture sector and in agro-based industries, particularly cotton textiles and sugar.
"Slower growth in money supply during the last financial year and continued tight monetary policy should reduce inflation to 1.5 percent in 2006-07," the report said.
The State Bank of Pakistan maintained a tight monetary policy stance in 2005-06, and the rate of increase in broad money was below operations without significantly raising the bench-mark six-month Treasury bill rate. In July 2006, the SBP accelerated the monetary tightening by raising the cash reserve requirement, the statutory liquidity requirement, and its policy rate by 50 basis points to 9. …