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Pakistan economic scenario

1. March 2010

The global financial crisis has provoked a liquidity crunch in Pakistan. This means that investment, which was previously a crucial driver of economic expansion, is set to grow by just 1.5% in 2009/10. Private consumption will provide support to the economy, growing by 3.7% in 2009/10 and remittance from overseas Pakistanis rose to record levels in September 2009. The forecast shows that real GDP will grow by just 2.9% in 2009/10—slightly below the government's target of 3.3%, but within 2.5%-3.5% range projected by the SBP. Economic expansion will accelerate to 4.2% in 2010/11 as growth picks up in both private consumption and investment.

Because of war against militancy and subsequent higher spending fiscal deficit target of 4.9% will be missed and is expected to widen to 5.6% of GDP in 2009/10, from 5.2% in 2008/09, before narrowing to 4.8% in 2010/11.Weaker domestic demand and lower commodity prices will ensure that inflation does not return to the record levels that it reached in 2008. Government borrowing from the SBP has fallen significantly which will also reduce inflationary pressures. The benchmark interest rate, the discount rates were unchanged in January, after having lowered it by 50 basis points, to 12.5%, in November. The monetary policy will continue to be loosened cautiously in 2010-11, assuming that inflationary pressures subside.
Rising Utilities Prices and higher import duties and the weak fiscal position will present further inflationary risks in 2010-11. Export growth will be slow, as a broad range of structural factors will impede Pakistan’s ability to expand its exports. As a result, the trade deficit will widen in 2010-11, to an annual average of US$13.4bn. The current-account deficit will expand to an average of US$4.1bn a year in 2010-11, compared with an estimated US$2.3bn in 2009.
Pakistan’s acceptance of emergency financing from the IMF means that it will lose a considerable degree of autonomy in the area of economic policy.
National security will remain the most pressing issue on the domestic political agenda, but there is little chance that the battle against Islamist militancy will be won decisively in the medium term. Also Pakistan's leading politicians will continue to spar, despite the range and gravity of the challenges that the country is facing.