TAHIR AMIN
ISLAMABAD: The International Monetary Fund (IMF) has expressed concern over weakening macroeconomic situation, decline in foreign exchange reserves, and increased risks to Pakistan’s economic and financial outlook and its medium-term debt sustainability.
The IMF Executive Board on March 5 concluded the first post-program monitoring discussions with Pakistan. The Fund released the statement almost one and a half day after the conclusion of its Executive Board meeting.
“Against the background of rising external and fiscal financing needs and declining reserves, risks to Pakistan’s medium-term capacity to repay the Fund have increased since completion of the Extended Fund Facility (EFF) arrangement in September 2016,” it maintained in the statement.
Pakistan’s near-term outlook for economic growth is broadly favorable. Real GDP is expected to grow by 5.6 percent in fiscal year 2017-18, supported by improved power supply, investment related to the China-Pakistan Economic Corridor (CPEC), strong consumption growth, and ongoing recovery in agriculture. Inflation has remained contained, the statement added.
However, continued erosion of macroeconomic resilience could put this outlook at risk. Following significant fiscal slippages last year, the fiscal deficit is expected at 5.5 percent of GDP this year, with risks towards a higher deficit ahead of upcoming general elections.
Surging imports have led to a widening current account deficit and a significant decline in international reserves despite higher external financing. The fiscal year 2017-18 current account deficit could reach 4.8 percent of GDP, with gross international reserves further declining in a context of limited exchange rate flexibility.
The IMF has projected that Pakistan’s gross reserves could slip to $12.1 billion. The budget deficit is expected to widen to 5.5 percent of GDP in 2017-18. IMF has estimated that Pakistan’s overall debt-to-GDP ratio would remain at 69.7%.
According to the statement, directors took note of Pakistan’s favorable growth momentum, but noted with concern the weakening of the macroeconomic situation, including a widening of external and fiscal imbalances, a decline in foreign exchange reserves, and increased risks to Pakistan’s economic and financial outlook and its medium term debt sustainability. In this context, the Fund urged a determined effort by the authorities to refocus near term policies to preserve macroeconomic stability.
Directors welcomed the authorities’ move to allow some exchange rate adjustment last December, but stressed the importance of greater exchange rate flexibility on a more permanent basis to preserve external buffers and improve competitiveness.
They also encouraged the authorities to phase out administrative measures aimed at supporting the balance of payments as soon as conditions allow minimizing potential economic distortions.
Directors noted external sector pressures are in part linked to the fiscal deterioration during the last fiscal year and an accommodative monetary policy stance, as well as the high imports related to the China Pakistan Economic Corridor projects. They called on the authorities to strengthen fiscal discipline through additional revenue measures and efforts to contain current expenditure while protecting pro poor spending. Complementing the recent increase in the policy interest rate the Directors noted that further monetary tightening would be important to address inflationary risks and help reverse external imbalances.
Directors also emphasized the need for prudent debt management and caution in phasing in new external liabilities, and the urgency of tackling rising fiscal risks stemming from continued losses in public sector enterprises.
Directors underscored the importance of accelerating structural reforms to reinforce macroeconomic stability, raise competitiveness, and promote higher and more inclusive growth.
The need to strengthen the fiscal federalism, monetary and financial policy frameworks; further enhance the anti-money laundering and counter-terrorism financing (AML/CFT) regimes; improve the business climate; continue to strengthen governance; achieve cost recovery in the energy sector; and expand social safety nets to protect the most vulnerable was also highlighted.
