The annual report of the State Bank of Pakistan (SBP) serves to highlight Pakistan’s disappointing economic situation. According to the report, the major factors that have contributed to this grim state of affairs include the collapse of fixed investment, acute energy shortages, urban violence and lawlessness, poor physical infrastructure and institutional fragility. The report says that the GDP growth of the country is likely to settle in the range of 3-4 percent by the end of fiscal year 2011-12, which means that the economy is faltering and barely ahead of the population growth rate. However, at this time, given the crises in the country owing to natural catastrophes like repeated floods, bad law and order situation, terrorism and rampant corruption, this unimpressive rate of growth is understandable. Pakistan’s economic problems are compounded by the fact that it has come into direct confrontation with the Pakistani Taliban, causing it not just direct financial setbacks in the form of destroyed infrastructure, facilities, or loss of productive civilian life, but also from the atmosphere of fear that has resulted in flight of capital, conspicuous absence of foreign and domestic investment and businesses transferring to other countries. According to the report, the fiscal deficit will be 5.5-6.5 percent for FY12 — 5.5 percent being the optimistic view while 6.5 percent may be closer to reality. It is regrettable that expenditure is not being curtailed by the government despite the fact that the fiscal deficit impacts inflation. The inability of the government to practice financial discipline is keeping the fiscal deficit high. The government covers the fiscal deficit by borrowing from banks and printing more money but both of these measures are inflationary and the former crowds out private sector borrowing. The SBP expects inflation to be within a band of 11.5-12.5 percent in FY12, which is broadly in line with the annual plan target of 12 percent. However, it is arguable that as usual, the official figures of inflation understate the actual situation. Core inflation has been caused by high prices of food, while shortages and ever increasing prices of energy are also fuelling inflation as the increased input cost is being passed on to consumers. The world is still in recession. In an interdependent world, the implications for Pakistan are enormous as exports suffer. A challenging current account deficit of 1.5 to 2.5 percent of GDP is expected, which will bring pressure on the foreign reserves. In this scenario, we await the huge informal sector being brought into the tax net. The balance of payments needs to be managed adroitly as loan repayments are coming up in the first quarter of next year. Since in a low growth, high inflation scenario, citizens suffer the most, better economic management and financial austerity need to be practiced. There should be a vision to pull Pakistan out of this sinkhole and the Planning Commission’s recently revealed growth strategy’s recommendations should be taken into consideration. *