KARACHI - Despite aid pledges announced by the international lending institutions to shore up the flood-hit economy, the outlook of inflation for the current fiscal year 2010-11 is seemed to be very gloomy on account of the extensive damage and losses to the agriculture and livestock sectors, which, if not compensated timely as warned by WFO, could lead to a severe food crisis across the country. On the premise of the early assessments and revised macroe-conomic indicators growth targets done by the government in the aftermath of the floods, economists estimate CPI inflation is expected to be in between 15 per cent to 20 per cent in the current fiscal year, up from SBP forecast of 11-12 per cent and the target of 9.5 per cent announced in federal budget 2010-11. This is because of the food crop and the disruption of supply of essential food commodities to various flood-affected parts. This assumption is also evident from the governments chief economic advisor concern that without urgent measures, the impact of the floods may cause inflation to sky-rocket to close to 25 per cent at the end of the prevailing financial year due to price hikes of essential items of consumer goods and services, electricity tariffs and likely rise in the prices of basic commodities at international market. The Ministry of Food, Agriculture and Livestock (MINFAL) estimates losses to the agriculture sector at $2.8b, while another $450m losses are estimated in the livestock sector. This is the one side of the inflation coin but another side (fiscal) is also not a quite bright that is supposed to trigger the rate of inflation comparatively higher than assumed. The governments continued heavy fiscal spending from the banking sources to meet current expenditures come from aggregate demand pressures has been keeping upward pressures on current and fiscal account deficits. The other risk to inflation comes from the governments printing money to finance spending on rehabilitation and reconstruction, adding to the money supply. During the first six weeks of the current fiscal year, the government printed Rs 134b (0.8pc of GDP) of new money from the central bank to finance its deficit, said Sayem Ali, Economist at Standard Charted Bank. Muzzammil Aslam, Research Analyst at JS Global said: Due to limited external receipts, the federal government has opted to finance 80 per cent of the Rs930b deficit through domestic sources, thus exerting pressure on the interest rates and crowding out private credit off take. On the query that after showing some sign of recovery are major economic data creating worst case scenario for the rest of the current fiscal year, specifically in the context of recent massive flooding and tacking back the domestic economy to pre-IMF-funded stand by arrangement programme era (FY09) when the economy owing to facing serious balance of payment crisis was near to become defaulted at international capital market, Sayem Ali replied the tendency of the inflationary pressures had remained high and recorded at 20 per cent in FY09 even after the implementation of IMF support loan programme. There have been some chances of macroeconomic stresses to emerge, but the big difference between this or that situation is the support of international donors to Pak economy at this very crucial moment. The IMF has announced to release $450 million emergency funding under Emergency Natural Disaster Assistance for the funding of flood related expenditures i.e. rehabilitation and reconstruction of the affected areas. According to the NDMA, aid of only $142m has come in, against pledges of $952m made during a recent UN conference. The ADB has committed to a $2b soft loan for reconstruction spending, and the World Bank has committed $1b, Sayem Ali added. However, through effective fiscal tightening and consolidation mainly through phasing out subsidies and implementing tax reforms with support from a tight monetary policy, the stressed economy can be protected from facing any crisis over the short to medium terms, he said. He further said monetary policy will remain hawkish given inflation concerns. The central bank hiked policy rates at its July 2010 meeting in a pre-emptive move to counter inflationary pressures; we see a further 100bps of rate hikes in the current fiscal year. However, the central bank will balance inflation concerns with concerns about the slowdown in growth, and will likely wait to hike further until there is more clarity on the extent of the economic damage from the floods. The economist said the government finances were already in bad shape before the floods hit: the FY10 deficit touched 6.2 per cent of GDP, versus the target of 4.9 per cent. The costs of relief, rehabilitation and reconstruction will be significant. We now expect the fiscal deficit to rise to 6.5 per cent of GDP in FY11, depending on the scale of the damage and the inflow of foreign grants. He suggested that the government will need to create fiscal space to pay for relief, rehabilitation and reconstruction expenditures and limit the build-up of public debt. The immediate measures announced by the govt include freezing investment spending to FY10 levels and allocating Rs 153b (0.9pc of GDP) for flood-related spending. However, the govt will need to undertake significant fiscal reforms; including introducing a sales tax aimed at boosting tax revenues by Rs 86b, to fund reconstruction activity. Power-sector subsidies are also expected to be phased out, bringing an additional savings of Rs 127b (0.7pc of GDP). On the other hand, Aslam believed the GoP to report a deficit in the vicinity of 5.5-6.0pc in FY11.