UPDATE 1-Pakistan c.bank cuts economic growth forecast

Sat Jan 5, 2008 5:01pm IST

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KARACHI Jan 5 (Reuters) - Pakistan cut its economic growth forecast on Saturday, citing weakness in farm production, but virtually ruled out an interest rate cut because of inflation.

The central bank cut its growth forecast for 2007/08 (July-June) to 6.6-7.0 percent from an original 7.2 percent, a figure that was already in doubt in the minds of many economists given Pakistan's slide into political crisis in 2007.

Foreign investment slowed last year, which began with a judicial crisis and ended with last week's slaying of opposition leader Benazir Bhutto which in turn sparked off violent unrest.

"Risks to the economy are increasing as it is clear that neither the global nor the domestic economic environment is as benign as in past years," the State Bank of Pakistan said in its latest quarterly report.

"All key fiscal performance indicators have deteriorated significantly," it said, referring to the quarter ended Sept. 30.

Inflation was also under pressure, not just from rising crude oil and food prices but also from expansion of money supply, the bank said. To help fund its fiscal deficit, the government has been borrowing money from the central bank.

The bank said annual inflation was likely to average 6.5-7.5 percent in 2007/08, compared with its target of 6.5 percent.

"The emergence of a widening inflationary spiral in Pakistan, as a result of the high commodity prices, suggests that a tight monetary stance remains appropriate," it said.

The central bank also sounded a warning about the country's widening current account deficit and fiscal shortfall, saying they exposed the country to funding risks at a time when the U.S. subprime crisis was troubling global credit markets.

"The threat of renewed macro-economic complications, after five years of good performance, would be further heightened if prompt actions are not taken to correct the recent deterioration in fiscal indicators," the quarterly report said.

The bank forecast a current account deficit of 5.2 percent of gross domestic product for 2007/08.

In 2007/08, the budget deficit is targeted at 4.0 percent of GDP, but it has already reached 1.6 percent in the first quarter.

Pakistan's farm sector, a major contributor to the recent strong run of economic growth, has hit problems as its cotton and rice crops have been hit by floods and pest attacks. (Reporting by Faisal Aziz and Mark Bendeich, editing by Mike Peacock)

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