July 19, 2023
ISLAMABAD – The International Monetary Fund (IMF) has predicted that Pakistan’s growth is expected to gradually return to a potential five per cent in the medium term “assuming sustained policy and reform implementation and adequate financial support”.
Last week, the global lender’s executive board had green-lit a $3 billion nine-month standby arrangement (SBA) for Pakistan in order “to support the authorities’ economic stabilisation programme”.
The board had approved the bailout package for the country for an amount of $2.25bn Special Drawing Rights (SDRs) — reserve funds that the institution credits to the accounts of its member nations — the IMF had said in a statement, adding that this amounted to about $3bn, or 111pc of Pakistan’s quota.
According to a 120-page country report released on Tuesday which analysed the country’s macroeconomic outlook, the IMF said: “Assuming sustained policy and reform implementation and adequate financial support from multilateral and bilateral partners, growth is expected to gradually return to its potential, 5pc, over the medium term.”
The report added that growth was likely to “pick up moderately” in the current fiscal year and reach 2.5pc.
The IMF noted that although base effects from post-flood recovery would provide a boost, especially to the agriculture and textile sector, “unwinding of the tight management of imports will take time to percolate through the economy … and continuing external challenges and the need for tight macro policies will limit the recovery.”
On the inflation outlook, the IMF said headline inflation was expected to remain lower from June onwards due to the base effects from last year’s increase in fuel and electricity prices and diminished contributions from food items.
“Price pressures are projected to remain elevated, including as a result of the much-delayed monetary tightening, thus average headline inflation is expected to remain above 25pc in FY24, with end-of-period (eop) inflation falling below 20pc only in FY24Q4.
“Likewise, core inflation is set to recede only very gradually in FY24 on account of elevated inflation expectations and the necessary tightening of policies operating with a lag,” the IMF pointed out.
However, it said the deceleration of headline inflation was set to continue in the next fiscal year and eop inflation would fall to the single digits only in the middle of the fiscal year 2025-26.
Regarding the fiscal outlook, the Fund observed that the fiscal space has been “severely depleted and substantial vulnerabilities remain”.
It recommends that small primary surpluses should be maintained in the coming years, with strong revenue efforts to create space for priority social and development spending and to strengthen debt sustainability.
It pointed out that without such efforts, the fiscal and debt position will “remain fragile and could undermine macroeconomic stability”.
Meanwhile, the lender said it saw the current account deficit (CAD) increasing to around $6.5bn in the current fiscal year with the recovery in exports and imports.
It noted that the CAD would have to “remain moderate at around 2pc of GDP over the medium term, commensurate with projected official and capital flows and efforts to rebuild reserves”.
The IMF also said that risks to debt sustainability had become “more acute” due to the scarcity of external financing and the large gross financing needs that would persist over the coming years, further narrowing the path to sustainability.
The Fund said broad-based reforms would have to continue to improve the country’s fiscal framework such as strengthening revenue administration, enhancing public financial management, strengthening spending transparency and improving debt management.
The IMF also said that strengthening social spending remained “critical” to increase the country’s growth potential, catch up with peers’ level of socioeconomic development, and protect the most vulnerable.
It suggested that fiscal space should be created for “substantially ramping” up social spending, “notably throughout more resolute revenue mobilisation from the more affluent parts of society”.
It said the government should persevere in its administrative efforts to keep the Benazir Income Support Programme running and updated.
“Boosting structural reforms remains key to not only lay the foundation for strong and resilient growth but also create opportunities for all Pakistanis, including the middle class, youth and women,” the report reads.
Further, it said that a tighter monetary policy was “critical” to reduce inflation, re-anchor expectations and support external sector rebalancing through the exchange rate.
“At the same time, improving the monetary transmission and the monetary operation framework will be important,” the report pointed out.
Regarding reducing external imbalances and rebuilding foreign reserves, the IMF said it required “permanently ending” administrative controls and actions to manage the current account and returning to a market-determined exchange rate.
Further, the IMF said heightened monitoring of financial stability risks and efforts in support of governance needed to be sustained and strengthened through safeguarding financial sector soundness and ensuring the effective implementation of the Financial Action Task Force’s Anti-Money Laundering/Combating the Financing of Terrorism measures.
The IMF also noted that restoring viability to the energy sector required “urgent and tangible reform”.
On overall structural policies and resolving the country’s “long-standing structural bottlenecks”, the Fund advised:
- Strengthening governance, transparency, and efficiency of state-owned enterprises to limit their fiscal risk
- Boosting the business environment, job creation, and investment
- Strengthening the effectiveness of anticorruption institutions
- Shoring-up climate change resilience
- Enhancing timely provision of key macroeconomic data
Political economist Uzair Younus, director of the Pakistan Initiative at the Atlantic Council’s South Asia Centre, analysed that to sum up the report, “Pakistan’s economy [is] expected to be in flux for the next two to three years, at least, and faces significant risks.”
The IMF report on Pakistan is out and its has some interesting pointers on where things are and where they are headed.
Some key points in the 🧵.
TLDR — Pakistan’s economy expected to be in flux for the next 2-3 years, at least, and faces significant risks.
— Uzair Younus عُزیر یُونس (@UzairYounus) July 18, 2023
He said gross external financing requirements were projected to be over $80bn in the next three years and successive governments would have to pursue prudent policies to meet them.
Younus said that it was overall a “sobering report on the state of Pakistan’s economy and where it is headed.”
He said that whoever would be in power for the next few years would have “their work cut out” for them.
“…(iv) address high levels of NPLs in some banks through bank-specific plans and to allow for the write-off of fully provisioned NPLs.”
Also says that continued “efforts to tackle pockets of vulnerability in the microfinance bank sector” will be made.
— Uzair Younus عُزیر یُونس (@UzairYounus) July 18, 2023