Australia declared on Tuesday more than half of the country`s farmland was now in drought, but Treasurer Peter Costello said there was no need yet to cut economic growth forecasts. Acting Prime Minister Mark Vaile said 44 farm areas had been added to the total area officially in drought, meaning more than half of the country`s farmland was suffering from a lack of rain compared with about a third previously.

To help drought-hit areas, the government will provide an extra A$560 million ($424 million) on top of A$350 million announced a week ago in aid, he said. More than 77,000 farmers are now eligible for financial help. "We are in unchartered waters as far as this drought is concerned," Vaile told reporters on Tuesday.

"We don`t believe the day will ever come when the Australian community will be prepared to turn its back on its farming community, given the significant contribution that they make to our economy and to the culture of Australia." Australia has about 130,000 farms, producing about A$103 billion a year in goods and A$28 billion in exports. Farming makes up about 12 percent of economic activity.

Forecasters say Australia`s wheat crop in the fiscal year to the end of next June is set to fall to less than half of the previous year`s 25 million tonnes. Australia`s wheat exporter AWB Ltd. has suspended exports from the east coast in order to meet domestic needs.

FORECAST
In his May budget, Costello forecast GDP would rise 3.25 percent in the current fiscal year. He acknowledged on Tuesday the drought was worse than expected but said he wasnt ready to cut the growth forecast. "The drought is very well established. It is worse than we expected in May when we were putting together the budget forecasts," Costello told reporters.

"Rural production has had a negative quarter, and I would expect that rural production will have some further negative quarters." But he said other areas of the economy might compensate for the fall in agricultural output and the official forecasts would stand until the scheduled release of the mid-year budget review later in the year.

The International Monetary Fund said on Tuesday interest rates in Australia may need to be raised again due to the risks of underlying inflation after 15 years of economic expansion. The central bank raised its cash rate in May and August, taking it to a five-year high of 6.00 percent, and financial markets are priced for a further rise to 6.25 percent by the end of the year.

Figures on Australian consumer prices for the third quarter are due on Wednesday and are widely expected to show a pick-up in underlying inflation. But Costello said many one-off pressures on inflation, such as high petrol prices and high prices for fruit and vegetables, had passed through Australia`s economy.(US$1=A$1.32)
(By James Grubel, Planet Ark, 25/10/2006)
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