THE latest review of Pakistan’s economy conducted by the IMF under the ongoing programme is the most candid assessment produced by the lender thus far. After a string of positive reviews, we now have a statement from the Fund’s executive board that warns of “significant risks” facing the fragile recovery.

The statement speaks of “possible revenue shortfalls” in the fiscal framework and calls for more purchase of dollars from the spot markets and for “greater exchange rate flexibility”. It says legislation for greater central bank autonomy is crucial, and that the legislation “should conform to international best practices”.

Also read: Reserves increase

It also calls for continued power tariff reforms (a euphemism for tariff hikes) at a time when the government is busy slashing the power tariffs to pass on the benefit of falling oil prices, as well as for greater efficiency in generation through strict implementation of a merit order list for dispatch.

Gas prices also need to be hiked, particularly through the gas levy, the Fund says, and producer prices need “rationalisation” (also a euphemism for hikes). The privatisation programme may enjoy strong ownership, but faces challenges due to market conditions.

There is no mention in the statement of the rapid fall in oil prices, and what effect this might have on inflation, power subsidies and the current account.

The government is reaping a small windfall in the form of falling oil prices, but the Fund is clearly reluctant to acknowledge any fiscal and forex space that might be opening up as a consequence.

Whether or not this is prudence or just a dour take on the state of public finances will become clearer when the Fund releases its more detailed report soon. In the meantime, it’s enough to note that despite windfalls and strengthening reserves, risks to the economy remain serious and continued vigilance over revenues and expenditures is required.

Government borrowing from the central bank may have declined, but its shift towards market sources, especially longer tenors and external borrowing, highlights the importance of sound debt management practices as well.

Published in Dawn December 20th , 2014