The IMF noted although the major export plants had escaped physical damage, cotton and textiles exports might be lower. — File Photo

WASHINGTON: The International Monetary Fund has projected that during 2010-11 Pakistan will have an average inflation rate of 14 per cent and a real GDP growth of 2.75 per cent.

“The balance of payments is expected to weaken in 2010-11, due in part to the impact of the floods,” said an IMF statement issued in Washington on Tuesday.

“Imports will rise as food and other basic goods will need to be sourced from abroad and imports of capital equipment for reconstruction will increase,” the statement said.

The IMF noted although the major export plants had escaped physical damage, cotton and textiles exports might be lower.

The IMF, however, expects that the higher trade deficit will be compensated in part by rising remittances from Pakistanis abroad. Even so, the current account deficit will likely widen by 0.8 per cent of GDP to 2.8 per cent.

“Given Pakistan's large flood and development needs, additional donor financing would support the government's efforts to finance flood relief and reconstruction as well as raise development and social spending,” the statement.

Already in September, the IMF provided over $450 million in emergency assistance. This was in addition to the current Standby Arrangement.

The IMF noted that additional financing would also reduce the risks to the economy, including from shortfalls in projected capital inflow.

Pakistan will continue to have large gross external financing requirements in the next few years. The floods have added to these needs.

The fund-supported programme can accommodate additional foreign assistance during 2010-11. The macroeconomic effects would be generally favourable, including revived growth.

Provision of external financing on concessional terms or, preferably, in the form of grants will reduce downside risks to debt sustainability. Reducing these risks will enhance investor confidence -- and therefore increase the prospects for private external financing -- and increase growth prospects for the economy.

The fund has been providing Pakistan with policy advice and financial resources.

“We will continue to work together with the authorities towards putting the IMF-supported programme back on track and completing the fifth review of the Standby Arrangement,” said Adnan Mazari, IMF mission chief for Pakistan.

The IMF noted that even before this summer's floods, Pakistan's economy was in trouble, and the floods have sharpened the deterioration.

“Although growth was picking up, inflation was high and persistent,” the statement said. It noted that Pakistan's 2009-10 budget deficit target was missed by a significant margin and the end-June 2010 ceiling on government borrowing from the State Bank of Pakistan was also exceeded. As a result, the fifth programme review could not be completed on time.

“This summer's floods have led to a sharp deterioration in the economic outlook,” the IMF said.

Pakistan's agriculture sector -- which accounts for 21 per cent of GDP and nearly half of employment -- has been hit particularly hard. There has also been substantial damage to infrastructure and private property.

“The floods will dampen economic growth significantly in 2010-11(July-June) and add to pressures on the balance of payments and public finances,” the IMF predicted.

It noted that inflation, especially of food prices, had picked up, compounding the social pains of the recent floods.

Asian Development Bank and World Bank have estimated damage and losses from the floods at about $10 billion.

The IMF statement points out that in 2010-11, Pakistani authorities plan to provide $1.8 billion (1.0 per cent of GDP) in cash transfers to flood victims, most of which is targeted to be spent on house reconstruction.

“The fiscal outcome in the first quarter of 2010-11 was weaker than expected, and the government continued to borrow from the SBP,” the statement said.

The IMF noted that with low revenues and large outlays for provinces and energy subsidies, the deficit reached about 1.6 per cent of GDP. The borrowing from the SBP, together with the shock to food supplies following the floods, helped push inflation in October to 15.3 per cent (year-on-year) from around 13 per cent in August.

The SBP raised interest rates in July and again in September on account of concerns about inflation, the external position, and the need to roll over government paper. Market interest rates have risen by 70-150 basis points since June 2010, reflecting both the increased policy rate and higher inflationary expectations, the statement said.

The IMF, however, acknowledges that despite the floods, the external position and the exchange rate have remained stable so far. The envisaged loss of reserves due to flood-related imports has not materialised; the external current account deficit was only 0.3 per cent of GDP in the first quarter and the SBP reserves increased by $200 million to $13.2 billion. However, considerable risks to the external position remain.

“The authorities know that a swift and robust policy response is needed to manage the pressures existing before the floods, provide relief to flood victims and contribute to reconstruction,” said the IMF mission chief for Pakistan.

“The authorities also recognise the need to manage the economy with considerable caution to preserve macroeconomic stability. Accordingly, they are adjusting economic policies,” Mr Mazari said.

He noted that public finances had been affected by lower revenue collections and higher outlays for humanitarian assistance. A revision of the 2010-11 budget would, therefore, be necessary, he added.