Economy stabilising but recovery still afar

In the recently released regional economic outlook by the IMF, the much higher inflation estimates over and above the governments initial target for this fiscal year may determine the course of upcoming monetary policy reviews. Although, inflation is expected to taper off to single digit this month owing to high base effect, it might start climbing the ladder again in remaining part of the year.
Based on IMFs yearly average target of 13.9 percent, inflation in the last quarter of FY10 may hover around 16 to 18 percent. This will limit the State Banks ability to cut discount rate only in its next months interim policy review, as in the remaining part of year, high inflation will not allow any further relaxation in the money supply.
But, while further quantitative loosening may not be on cards, further tightening isn as well, given expectations of single digit inflation in the next fiscal year. Hence, the central bank is likely to adopt a wait and see policy until July next year, after slashing its policy rate by 50 to 100 basis points next month.
The IMF forecasts broad money (M2) to grow 9.6 percent in FY10. This means that, a flurry of liquidity is expected in the remaining three quarters of this fiscal year, considering that money supply has virtually remained stagnant in the year to date. The expected foreign aid for development, rising portfolio investment with some revival in FDI owing to the spillover effect of global monetary and fiscal stimulus, and growth in export oriented businesses on account of some global recovery may be able to provide liquidity for the much-needed private sector.
However, with sticky supply and heavy government borrowing, this may create demand-pull inflation - as anticipated by the IMF. On the flipside, cost-push are likely to remain subdued with crude oil - Pakistans single biggest import - seen hovering around $70 a barrel, in the short to medium term. Now, with poor administrative measures and fiscal stimulus to meet only the current needs of the government, IMF is bearish on the budgeted target of output growth of 3.3 percent.
The global lender expects Pakistans GDP growth to remain flat at 2 percent in this fiscal year, which is barely a growth considering that Pakistans population increases at the same rate. A short-term revival in the manufacturing sector can be expected in the second and third quarter, on the back of export orders for winter season. But, given the power crisis (whether due to expensive RPPs or power shortage), poor law and order situation and fragile global recovery, the manufacturing growth might not last too long. So, its better to say that Pakistan is in a state of stabilisation, than in a recovery phase.

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IMF Targets (%)              FY09A    FY10P     FY11P

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GDP                            2.0      2.0       3.0

Inflation                     20.3     13.9       9.4

M2                            15.3      9.6      13.0

Fiscal balance*              (7.3)    (4.9)     (4.2)

Govt. Debt*                   58.4     55.9      56.9

Current Acoount Balance*     (8.3)    (5.1)     (4.8)

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