Pakistan bank warns on quake cost to govt

KARACHI, Oct 29 (Reuters): Pakistan's central bank said on Saturday the government's fiscal deficit may widen due to the cost of rebuilding after the massive earthquake this month, while reduced agricultural output would trim growth.

It said the quake might boost manufacturing due to rebuilding efforts, but the government faced big bills to rebuild towns and roads, and the cost of caring for the injured.

"The fiscal space will be sorely tested in the aftermath of the recent earthquake that severly damaged the public infrastructure in affected areas," the State Bank of Pakistan (SBP) said it annual report for fiscal year to June 30, 2005.

"This is not an easy task and, moreover, is one that will have to be sustained over a number of years." Pakistani officials have put the quake death toll at 55,000, with 78,000 hurt.

There are fears the toll could jump, with tens of thousands of survivors stuck in mountainous areas with little food and no shelter.

In June, the government forecast a fiscal deficit of 3.8 per cent of GDP this year, compared with 3.3 per cent last year.

It did not give a new deficit forecast on Saturday.

The central bank revised down its growth forecast to 6.3 to 6.8 per cent in the current fiscal year to June 30, 2006, from a previous target of 7.0 per cent growth in gross domestic product, due to lower-than-expected agricultural output.

It did not give a reason for the downbeat farm forecast but quoted market sources as saying Pakistan may struggle to match last year's record output of 14.6 million bales of cotton.

The government has forecast a crop of 15 million bales.

But the rebuilding effort would deliver a significant boost to domestic demand, the central bank added, helping to balance the effect on GDP of reduced output from agriculture - the key sector in the Pakistani economy.

It said manufacturing growth could exceed its target of 13.0 per cent this fiscal year.

Last year, the sector grew by 15.6 per cent.

The central bank said a decline in overall demand could reduce inflationary pressure.

"SBP estimates indicate that inflation will remain close to the 8 percent inflation target," it said.

"However, this expectation is conditional on domestic oil prices remaining unchanged, particularly during the winter." The consumer price index rose 9.3 per cent in the fiscal year that ended on June 30.

However, inflation has eased in recent months due to higher interest rates and an improvement in food supplies.

In the year through September, inflation was 8.53 per cent.