Thanks primarily to weak international oil prices, the International Monetary Fund has improved Pakistan’s growth forecast to 4.3pc and lowered its inflation expectation to 5pc for this fiscal. Earlier, it was expecting 4pc GDP growth and 8pc inflation.

On the downside, the IMF, which indicating an easing in risks, highlighted a few internal and external factors that could hamper economic growth, investment climate and structural reforms. For example, slippages in policy implementation could discourage investment, weaken growth prospects and delay needed reforms.

Also, the challenging political and security conditions could impact economic activity, discourage investment and undermine fiscal consolidation. Conversely, an improvement in the security situation could boost investment and growth.

Despite some negative tax implications, the positive shock to energy prices can also be used to accelerate the reduction in electricity subsidies and to tackle the persistent problem of payments arrears in the power sector, without increasing prices for consumers

Moreover, external vulnerabilities, including a protracted period of slower growth in key advanced (Europe and Japan) and emerging market economies could impair exports and hurt remittances. And a surge in global financial volatility or a market reassessment in sovereign risk could make debt issuance more difficult and costly.

Increased volatility in oil prices could destabilise investment or efforts to reform energy subsidies. And the dollar’s appreciation, with limited exchange rate flexibility, may also erode export competitiveness.

On the positive side, persistently low oil prices could help improve the current account balance, ease energy supply bottlenecks, improve macroeconomic performance, and boost growth.

In fact, the IMF staff has asked the government to take advantage of the historic oil price dip. “The recent sharp decline in oil prices has presented Pakistan with a historic opportunity to strengthen buffers against future economic shocks and to address longstanding structural barriers to sustainable higher growth,” it said. It also welcomed the government’s decision to accelerate the accumulation of foreign exchange reserves.

Despite some negative tax implications, the positive shock to energy prices can also be used to accelerate the reduction in electricity subsidies and to tackle the persistent problem of payments arrears in the power sector, without increasing prices for consumers.

While much progress has been made in reducing budgeted subsidies, the problem of the off-budget ‘circular debt’ still generates around 1pc of GDP in losses per year and periodically threatens the functioning of the energy system. The Fund put the latest circular debt stock at Rs540bn, or around 2pc of GDP.

It also demanded an ambitious approach for reducing these losses to improve energy supplies, fiscal sustainability and place the economy in a position for sustained higher growth.

The IMF has also reported the government’s willingness — i.e. change in its longstanding stance to resist ‘a state within the state’ — to submit a revised draft State Bank of Pakistan Act in parliament, incorporating the Fund staff’s comments as a prior action, and then to enact the legislation by end-June as a structural benchmark.

This is also against the previous government’s stance, which could not dictate the parliament to legislate a specific law and that too under a deadline.

The government has now given in to the demand that the SBP law should strengthen the central bank’s autonomy through full operational independence with the pursuit of price stability as the primary objective, governance structure and strengthened personal autonomy of SBP board members and the financial autonomy of the SBP.

“The amendments should also establish an independent decision-making committee to design and monitor implementation of monetary policy.”

The Fund also expressed concerns over the postponement of new consumer gas price notifications till another time — now planned for July — and urged the authorities to allow the unification of determination and notification of gas pricing with the Oil and Gas Regulatory Authority (Ogra), even though the regulator is now legally non-existent.

The authorities have also committed to fully pass on the cost of imported LNG into the end-user purchase price, including that of CNG.

The IMF has forecast the country’s current account deficit at around 1.2pc of GDP this fiscal due to declining oil prices and strong remittances.

However, underperforming export growth will partly offset the positive impact of lower oil prices because of the appreciation of the real exchange rate and declining cotton prices.

The lender has also estimated a significant build-up of foreign exchange reserves by end-June, supported by the oil windfall, SBP interventions, multilateral and bilateral disbursements, and privatisation proceeds.

The IMF noted that a 60pc plummet in oil prices from $105 in June 2014 to less than $50 in January and a baseline projection for average crude prices from $88 to $68 a barrel would have a positive terms-of-trade shock, and expected it to reduce Pakistan’s import bill, ease inflation pressures and provide a boost to consumer and investment spending.

It estimated the country’s net oil imports to drop by $2.8bn during this fiscal, and by $12bn on a cumulative basis over the next three years.

The largest effects will be felt with a lag, in fiscal 2016-17 and 2017-2018 (0.7 and 0.9pc of GDP respectively) once oil prices reach their minimum levels.

And while remittances are expected to continue to grow, there is a tangible risk that those from the GCC countries might decelerate, further reducing the windfall from the oil price plunge.

Gains from lower energy subsidies will partially offset lower energy-related tax collection.

Without compensatory measures, the fall in oil prices would worsen Pakistan’s fiscal position, since price changes do not automatically affect the amount of energy subsidies but lead to a marked decline in oil-related tax revenues, the IMF said.

This justifies the increase in tax rates on various oil products in recent months.

Published in Dawn, Economic & Business, April 13th, 2015

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