From our vantage point, fiscal and external accounts are likely to remain the two key front runners of macro and monetary improvements in FY11E – FAI recovery, domestic liquidity and Fx reserves.
FY10 has shown cyclical uptick in economic activity (4.1% growth) but productive capacity has suffered as evident in a decline in Inv-to-GDP to 16.6% – 10 yr low.
That said, despite an expansionary fiscal outlay (4.0% deficit) for FY11E, the recovery momentum largely hinges on structural reforms and external inflows (external budgetary financing) – in turn creating room for private sector.
Moreover, IMF holds equal importance as it would help in securing donor’s funding/external inflows and in execution of the desired policy actions (monetary and fiscal) and economic recovery, in our view.
We foresee upcoming IMF review and conformity on external support as the key signpost that would improve macro visibility and shape up policy response.
KASB Securities and Economics Research
5 July 2010
