KARACHI - Country's economic growth rate during the 2007-2008 fiscal year is expected to range between 3.5 to 4.5 percent while the inflation rate is to vary between 20 to 22 percent, the central bank said Saturday. In its annual report for the fiscal year (July 2007 - June 2008), the SBP said that the economic growth rate during the year was originally planned at 5.8 percent, short of the target by 1.3 percent. The projected growth rate is in line with forecasts from the International Monetary Fund, which last month granted Pakistan 7.6 billion dollars in credit in its first rescue in Asia since the global financial crisis began. Report disclosed that the domestic production was hit by energy shortages, low produce of some key cash crops and policy uncertainty during the transition of governments. Consequently, real GDP growth declined to 5.8 percent in FY08, down considerably from the 6.8 percent growth recorded in the previous year. Weaker domestic production coupled with strong domestic demand and commodity prices shocks led directly to enhance inflationary pressures, a widening current account deficit, declining foreign exchange reserves, rising public debt, a depreciating rupee, etc. The monetary expansion growth is expected to remain between 12 to 13 percent. The fiscal deficit for FY09 is projected in the range of 4.3 to 4.8 per cent while the current account deficit is likely to decline in the range of 6.2 to 6.8 percent of GDP during the period of 2008/09. The report also predicted that the inflow of remittances from the Pakistani expatriates is feared to fall short by $200 million to $7.50 billion from the targeted $7.70 billion in 2008-09. Exports are expected to remain in the range of $21.50 billion to $23 billion while imports are projected to surge above $35 billion for the current financial year. Report pointed out that the pressures on economy had only intensified in the initial months of FY09, as seen in all key macroeconomic indicators, and downgraded country's sovereign credit ratings. Inflation was persisting at 25 percent levels in October 2008, with food inflation touching a staggering 31.7 percent YoY. The inflationary pressures appear to be supported by the continued monetisation of the deficit; government budgetary borrowings from the central bank during Jul-Nov FY08 reached Rs 378.9 billion, as compared to Rs 74.7 billion in the same period last year. The growth of external account deficit had also accelerated sharply. It grew 98 percent YoY to reach almost US$ 6 billion during Jul-Oct FY09, as compared to $3 billion in the corresponding period last year. At the same time, international financing flows have also dropped sharply to a mere $1.1 billion from $3.1 billion in Jul-Oct FY08, reflecting weakening fundamentals of the domestic economy and the deepening international financial crisis. The drain on the country's foreign exchange reserves therefore accelerated. After declining by US$5.1 billion in the eight months from the end-October 2007 peak of US$16.5 billion by end-June 2008, the reserves dropped to US$6.8 billion by end-October 2008 - a fall of US$4.6 billion in just four months. The falling reserves put substantial pressure on the exchange rate, and drained liquidity from the inter-bank rupee market (as the central bank mopped up domestic currency against the provision of forex liquidity). So great was the liquidity drain that interest rates in the money market spiked, triggering rumours of a runs on banks. The SBP therefore moved promptly to diffuse the liquidity risks by easing statutory reserve requirements and taking other measures. The recent broad-based decline in international commodity prices appears to offer significant relief on the external account in months ahead. The prices of key commodity imports such as petroleum products, edible oil, wheat, steel, etc all have seen substantial decline (often ranging between 35 to 45 percent) from their recent peaks. Accordingly, as newer import deals are inked, Pakistan's import bill is expected to decline sharply. However, as the decline in international commodity prices reflects the expectation of substantial economic slowdown in key exports markets, there is a risk that the overall trade deficit may not shrink as sharply as anticipated. Indeed, if exports weaken substantially, and/or remittances from the weakening economies (eg the US) slow, the overall external current account deficit could widen. Also, lower international commodity prices could not help reduce inflation. This was because the substantial depreciation of the rupee in recent months would raise import prices in rupee terms. During FY08, the government borrowed Rs 688.7 billion from SBP for budgetary support which is around 90 percent of the total financing requirement of the government for the year. The unpredictable rise in government borrowings resulted in high growth in reserve money and weakened the transmission of policy rates to retail rates. The government has now widely acknowledged the inflationary impact of its sizeable borrowings from the central bank.