Inflation declined in Pakistan in FY2006 but is still high at 8 percent. A significant decline in food inflation was in part offset by higher oil prices, said South Asia Economic Report of Asian Development Bank.
The report said tight monetary policy and measures, such as liberalised imports of food and other essential items in short supply helped combat inflation. Slower growth in money supply in FY2006 and continued tight monetary policy should reduce inflation to 6.5 percent in FY2007.
ADB report said that Pakistan's GDP growth slowed in FY2006 (July 1, 2005 to June 30, 2006) to 6.6 percent, largely because of the impact of adverse weather conditions on the major crops. This significantly reduced growth in the agriculture sector and in agro-based industries, particularly cotton, textiles and sugar. Recovery in the agriculture sector, higher private investment, and increased development spending are projected to boost economic growth to 7.0 percent in FY2007.
The report mentioned that the State Bank of Pakistan (SBP) maintained a tight monetary policy stance in FY2006, and the rate of increase in broad money was below the growth in nominal GDP. SBP kept liquidity tight through open market operations without significantly raising the benchmark 6-month Treasury-bill rate. In July 2006, SBP accelerated the monetary tightening by raising the cash reserve requirement, the statutory liquidity requirement, and its policy rate by 50 basis points to 9.5 percent. The government continued with its expansionary fiscal policy initiated in FY2005, aimed at increasing development spending and accelerating growth.
In FY2006 development expenditure increased by 37.8 percent, to 4.1 percent of GDP compared to 2.8 percent two years earlier. In FY2006 the fiscal deficit increased to 4.2 percent of GDP, including expenditures amounting to 0.85 percent of GDP on earthquake relief and rehabilitation.