SBP fears decline in farm incomes

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Sunday, 29 January 2012 10:41

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RECORDER REPORT

KARACHI: The State Bank of Pakistan fears that farm incomes would decline this year which could have negative implications for the manufacturing sector, particularly for the consumer durable industry.

The central bank issued its first quarterly report on the state of the economy, on Saturday. Fortunately, says the report, manufacturing activity was largely unaffected by floods this year, unlike the previous year. And the major sub-sectors such as textiles, food, cement, POL, pharmaceutical, posted decent growth rates (2 percent) between July and October 2011. However, going forward, growth prospects are relatively uncertain. Textiles could suffer from a falling demand and low international prices; the recent growth in cement is largely driven by base-effect, as floods had kept cement demand subdued during the first quarter of FY-11; fertilizer production is already constrained by gas shortages and can slow down further; and the POL sector could be undermined by the circular debt issue, says SBP.

The floods this year were not as severe as last year’s. And damage to minor crops and cotton in lower Sindh was compensated with improved production in Punjab. Cotton estimates for this year are 12.6 million of bales against target of 12.8 million of bales. A boost in wheat and rice output domestically is accompanied by stronger global production putting a downward pressure on prices. SBP says cotton prices are down by more than 50 percent from their peak in March 2011 while sugarcane growers are struggling to secure fair returns due to a global slump in sugar prices. Even though wheat support price was increased to Rs 1050 per 40kg, the government is yet to announce its procurement targets. SBP fears that government’s borrowing needs would stretch further if it sets too ambitious a target. This, in turn, could create complications in terms of coverage, forcing some farmers to sell wheat to middlemen at lower than support price.

In terms of loans to private sector businesses, sugar and telecommunication experienced the sharpest slowdown because of a delayed crushing season and possible saturation in the telecom business, says the report.

As in the past, most of the loans were availed to meet working capital requirements while fixed investment loans remained depressed, the report added.