State Bank of Pakistan (SBP) raised on Monday its fiscal deficit forecast for the 200910 (July-June) fiscal year to between 5.0 percent and 5.5 percent of gross domestic product (GDP).
That compared with the State Bank previous forecast of 4.7-5.2 percent of GDP for the fiscal year.
In a quarterly report on the economy, SBP maintained its GDP growth forecast for this fiscal year at between 2.5 percent and 3.5 percent.
However, it lowered its forecast for the 200910 current account deficit to 3.2-3.8 percent of GDP, from previous estimates of 3.7-4.7 percent.
"FY10 fiscal deficit is estimated to be higher on account of extraordinary defence related spending and weakness in revenue collection," the bank said.
Pakistan's budget deficit for the first six months of the fiscal year was 2.7 percent of GDP.
Pakistan pledged to keep its fiscal deficit at 4.9 percent of GDP in the 200910 fiscal year under a loan agreement with the International Monetary Fund (IMF).
The central bank said that in recent consultations with the IMF, a need for a cut in development spending and relaxation in the fiscal deficit target had been recognised.
"The original FY10 fiscal deficit target of 4.9 percent of GDP looks unachievable even after incorporating the proposed large reduction in development spending," it said.
CA DEFICIT NARROWING
But the State Bank said a better-than-expected export performance in recent months and a rising flow of remittances was encouraging and had resulted in the current account deficit narrowing more than expected.
"Thus, even incorporating relatively less positive trend in months ahead, it seems likely that the full year FY10 deficit will be lower than earlier SBP forecasts," it said.
"Current projections suggest that the FY10 current account deficit is likely to fall in the range of 3.2-3.8 percent of GDP, which represents a 0.5-1.1 percent of GDP improvement from the earlier estimates."
The current account deficit in the first eight months of the 200910 fiscal year was a provisional $2.563 billion, according to central bank data, compared with a deficit of $7.962 billion in the same period of the last fiscal year.
The central bank also said that an above-target recovery in manufacturing and reasonable performance by the services sector would help sustain a modest revival in growth, and kept its earlier growth projection of 2.5-3.5 percent growth unchanged.
On Saturday, while unveiling monetary policy for April-May, the State Bank had voiced concern over the weak fiscal position of the economy, which has been hit hard by battles against Islamist militants in the northwest.
The bank kept its key policy rate unchanged at 12.50 percent for April and May amid worry about persisting inflationary pressure and a widening fiscal deficit.
The central bank also said average 200910 inflation, as measured by the consumer price index (CPI), was likely to remain within the previous estimates of 11.0-12.0 percent.
The bank had said that the full-year CPI would average close to 12.0 percent.