Let's buy SBP's optimism with caution.

Byline: Mohiuddin Aazim

Pakistan's economy may grow three to four per cent during this fiscal year. Annual average consumer inflation may remain in the range of 11-12pc, according to the State Bank of Pakistan (SBP).

The central bank normally projects low and high GDP growth rates with a variation of one full percentage point owing to the fact that underlying performance factors remain volatile in the country.

In 2018-19, for example, the fiscal deficit shot up to 8.9pc against the initial target of 4.9pc, fuelling inflation and warranting rapid interest-rate tightening. High inflation, higher interest rates and overdue correction in the exchange rate amidst a massive fiscal imbalance upset various other projections like public-sector development, private-sector bank borrowings and growth in agriculture, industry and services sectors. All that eventually slowed economic growth to 3.3pc against the initial target of 6.2pc.

So logic demands we should not be too optimistic about economic growth during this fiscal year. We should keep in mind that against the SBP's projection of 3-4pc, the IMF, World Bank and the Asian Development Bank foresee Pakistan's economic growth below 3pc this year.

Meeting the SBP's projected growth of 3-4pc in 2019-20 will depend more on how fast our agriculture sector grows because growth in industrial and services sectors is facing more complex challenges this year. A weaker rupee, high inflation, higher interest rates and the ongoing implementation of the IMF-dictated tax reforms are four key factors that continue to take their toll on the entire economy, including agriculture.

The fiscal deficit may remain high as the government continues to borrow heavily to retire old debts

But by and large major crops are performing better this year owing to a low-base effect. The performance by the livestock sector is also expected to remain on track because of strong export demand for dairy and meat products and domestic demand not yet showing signs of a major decline.

While projecting inflation of 11-12pc for this fiscal year, the SBP relies on a guarded fiscal deficit estimate of 6.5-7.5pc of GDP. If the deficit exceeds, it can not only upset numerous other growth-fuelling performance indicators but also add to inflationary pressures. We should keep in mind that further interest-rate tightening to fight inflation is no more a viable option. According to the SBP's own admission, 'the industrial sector faced a significant...