KARACHI Looking ahead for improved outlook of the domestic economy, the State Bank of Pakistan has projected 2.5 to 3.5 per cent GDP growth rate for the fiscal year, 2009-10. The central bank on Thursday released its annual review report titled 'The State of Economy for the year 2008-09. SBP projections indicate that average CPI annual inflation for FY-10 is anticipated to remain in double digits by dropping to around 12 per cent, which is a little higher than the FY-10 target of 9 per cent whereas, the growth in fiscal deficit may hover between 4.7 to 5.2 per cent and current account deficit, however, is likely to be 4.7 per cent to 5.2 per cent of GDP during entire FY10. 'Exports are projected to stand at over $18 billion while imports would be in the range of $30.5 to $31.5 billion respectively in FY-10. In terms of workers remittances, country is estimated to receive $ 7.5 to $8.5 billion worth in 2009-10, the report added. According to report, a gradual recovery is underway during FY-10, and real GDP growth is likely to be close to the target of 3.3 per cent for the year. However, there are still significant potential risks in the economy that can put upward pressure on inflation number. These risks include: (a) strengthening demand pressures resulting from fiscal stimulus announced in FY-10 budget and subsequent possible pressures on external account ;(b) possibility of strengthening inflationary expectations as a result of broad-based rebound in international commodity prices; (c) prospect of imported inflation if domestic currency weakens; and (d) weak fiscal position. SBP sees growth in LSM production is likely to turn positive during the first quarter of FY-10 on account of resolution of circular debt problem, which would support production activities in oil and energy sectors. 'Also, the anticipated recovery may be supported by the re-stocking of inventories and a small upturn in exports in major economies gathers pace. About agriculture sector, SBP indicates given favourable weather, and in light of high prices of agri-commodities, and supportive government policies, agri-sector performance is expected to be close to the FY-10 target. In the medium to long term however, the upside potential is far greater, with heavy investments required in the sector to improve yields, lower post-harvest losses, improve water management, and increase value addition, it added. The report further said: 'This investment would ensure food security for the country, help contain inflationary pressures, lower the import bill, and offer considerable export prospects, in addition to the considerable potential for employment. Moreover, a sharp fall in inflation in recent months has reduced uncertainty over relative prices and would support increase in investment demand, it said. Giving Economic outlook for FY10, SBP says the external sector too is expected to show a continuation of positive recent trends. Exports are expected to pick-up a little, especially if the energy crisis eases, helped by favourable exchange rate trends. Similarly the strong growth in remittances may continue, aided by the new initiative fostering increased usage of the formal system, and the concurrent crackdown on illegal activities of exchange companies. Recently, as Pakistans macro-economic picture stabilised, portfolio flows have also resumed, the report said. Report warned that some anticipated foreign exchange flows may not be forthcoming or may be delayed. 'Over the longer term, there are significant shifts already underway in international trade and commerce following the onset of the recent international crisis. Many Asian economies that suffered serious output losses due to their earlier focus on major Western economies are raising questions on their export-led growth models and are also increasing focus on regional trade. Pakistan has to be an active participant in this re-alignment, as it will be crucial to developing new trade markets and relations, and to diversify the export base, report added. The report says demands for expenditure continue to rise, even as revenue targets are increasingly looking uncertain in the wake of the economic slowdown and low import growth. 'Thus, the government needs to act aggressively on improving the tax base and reducing the fiscal deficit to sustainable levels. Raising the very low tax-to-GDP ratio will be difficult in a weak economic environment, but it is nonetheless important to make a start sooner rather than later. Moreover, it is imperative that the tax burden be more equitable, spread across different sectors of the economy, particularly services and agriculture, it added. 'A gradual documentation of important economic activities is imperative, particularly in the services sectors such as wholesale & retail trade, hotels & restaurants, consultancy services by all professionals, transportation, etc. Over a period of time, this would enable the creation of a database of approximate sales volumes and incomes of different entities. Report finds more worrisome is the trend in national savings, which is unable to cater even relatively low levels of investment in the country. 'This suggests that low savings rate is a key contributor to macro-economic imbalances in Pakistan. The report said that the problem of high fiscal deficits is compounded by limited options of financing this deficit. 'It must be kept in mind that during FY-09, the governments ability to finance its deficit, without crowding out, was helped by the collapse of private credit demand (and risk averse banks). This state of affairs is unlikely to continue. The resulting urgency to develop a savings culture and foster the development of savings institutions in Pakistan has become even greater in light of the recent international financial crisis. 'Capital flows to developing countries had already begun dropping by FY-07, and likely to remain constrained for some years. Countries such as Pakistan, which still has significant macro-economic imbalances, will face problems in accessing international capital market at reasonable cost. Thus, it is imperative to mobilise domestic savings to finance a greater part of domestic investment. To mobilise savings, it is necessary to build savings institutions that can tap pension and provident funds. In addition, establishment of efficient secondary debt market, particularly for tradable govt paper, is also needed to offer competitive returns on savings and increase public participants. A side benefit of such developments is likely for banking system, and improved monetary policy transmission, the report stated. The report said largely as a consequence of the negative 8.2 per cent annual growth in LSM, real GDP growth for FY-09 dropped to 2.0 per cent - the lowest in the last eight years. The report mentioned, Pakistan saw a sharp reversal of the earlier net portfolio investment receipts, and foreign direct investment flows fell sharply, even as the access to international capital markets disappeared. 'The decline in capital and financial account receipts (net foreign investment declined by 51.1 per cent during FY-09 on top of a 35.3 per cent decline in the previous year), in the face of a widening current account deficit, led to a substantial depletion of the countrys foreign exchange reserves, severe reduction in domestic liquidity, and a further impetus to domestic inflation (as the exchange rate depreciated), it said. The macro-economic stabilisation programme in FY-09 resulted in considerable fiscal consolidation during the year. Specifically, overall fiscal deficit dropped to Rs 680.4 billion during FY-09 from Rs 777.2 billion in the preceding year. As a percentage of GDP, the fiscal improvement led to a reduction in the budget deficit by 2.4 percentage points to 5.2 per cent during FY-09, it added. 'The decline in fiscal spending in FY-09 was mainly evident in the removal of subsidies as well as cut in development expenditures. In particular, government improved the pass-through of international oil price to the domestic economy,and reduced some energy-related subsidies, it said. The report further sought to address the circular debt issue that had led to liquidity shortages in energy sector companies, to the achievement of positive GDP growth in FY-09, as it also provided support to services sector growth, through increased trading, transportation and storage activities. Another positive impact of this remarkable growth was a significant improvement in supply of key staples, which also helped, it added.