NOTWITHSTANDING the favourable macroeconomic outlook, low inflation, robust growth and broadly balanced risks, the International Monetary Fund is a bit worried over its increasing exposure to Pakistan, apart from legal challenges to reforms and policy slippages.

In its midpoint report card for the $6.4bn Extended Fund Facility, the IMF has noted some key domestic risks, including slippages in policy implementation, particularly on the structural and legislative fronts, and the still-challenging political and security conditions, which could affect economic activity and undermine fiscal consolidation.

Conversely, an improvement in the security situation could boost investment and growth. External vulnerabilities are also there in the shape of a protracted period of slow growth in key advanced and emerging markets, which could weaken exports and hurt remittances.

Reform priorities for the remainder of the programme include reinforcing the gains in economic stabilisation and addressing the longstanding barriers to sustainable, strong and inclusive growth

A persistently appreciating dollar, with limited exchange rate flexibility, could ‘further erode export competitiveness’. And increased volatility in oil prices could affect efforts to reform energy subsidies.

“One key risk relates to a recent court judgement, unfavorable to the authorities, on energy surcharges, which could see the surcharges cancelled and refunded,” said the Fund, and noted that the apex court had suspended the judgement to take its decision in due course.

“In case of a potential negative outcome, the authorities are committed to taking mitigating measures, including tariff adjustments, and, if required, suitable amendments to the Nepra Act.”

And if the tax revenue falls below the IMF’s envisaged level, the authorities will implement additional revenue measures, including bringing forward to this year plans to eliminate tax concessions and exemptions that were originally programmed for fiscal year 2016-17.

The Fund believes that its exposure to Pakistan increased with the disbursement after the sixth review, now exceeding $4.3bn. This exposure will further rise over the next 12 months as new programme disbursements take place. “The materialisation of risks to the economic outlook could erode Pakistan’s capacity to repay to the Fund, particularly in a context where the Fund’s exposure is expected to increase further.

It also noted that the country still lagged behind other emerging markets in key macroeconomic and business climate indicators. These included the lower-than-required growth rate to absorb the growing number of new entrants to the labour market, and the still high public debt-to-GDP ratio, one of the lowest tax-to-GDP ratios, and energy constraints.

The lender of last resort has given good marks to the government for attaining all performance criteria and structural benchmarks so far despite significant political and security challenges. It noted that macroeconomic stabilisation is well under way and the threat of a crisis has significantly receded, while real GDP is expected to grow by over 4pc next year.

The authorities have made significant progress in addressing fiscal and balance of payments imbalances. Fiscal consolidation is on-track; the government has reduced its borrowing from the State Bank; and efforts are being made to diversify financing sources and lengthen debt maturities.

Adequate further fiscal consolidation is being planned, and structural reform efforts are continuing. The fiscal deficit will further decline to 4.3pc of GDP in FY16. Tax revenues are slated to rise by an additional 1pc of GDP, and energy subsidies will be further reduced.

Public investment spending will grow in line with the projected nominal GDP growth, and social protection through the BISP will be further expanded. A new comprehensive strategy has been adopted to fix the still-ailing power sector. And significant reforms are still needed to boost private investment, broaden the tax base, improve tax administration, ease growth bottlenecks, and enhance the economy’s productivity and competitiveness.

Private investment, including FDI, and exports are still much below desired outcomes. Electricity outages continue to be a major restraining factor for competitiveness and growth. In addition, the appreciation of the rupee in real effective terms has been eroding the country’s competitiveness.

Reform priorities for the remainder of the programme include reinforcing the gains in economic stabilisation and addressing the longstanding barriers to sustainable, strong, and inclusive growth.

Despite some negative tax implications, the positive shock to energy prices can also be used to accelerate the reduction in electricity subsides and to tackle the persistent problem of payment arrears in the sector.

The IMF has also welcomed Pakistan’s decision to accelerate the accumulation of foreign exchange reserves, and continuing on this track, supported by appropriately calibrated monetary policy, will be important to further strengthen the country’s financial resilience.

Maintaining the momentum of other structural reforms will also be critical. Sustained, multi-year efforts are needed to strengthen the tax administration and improve revenue collection.

Strong systems for the evaluation, prioritisation, and implementation of public investment projects will be important, including in the context of the China-Pakistan Economic Corridor. The passage of the proposed legal amendments to strengthen the SBP’s independence will address some important shortcomings, but further changes will be needed to bolster the central bank’s governance structure and autonomy.

The Fund added that the privatisation programme should continue, and the authorities’ commitment to improve or privatise ailing PSEs is particularly important.

Published in Dawn, Economic & Business, July 6th, 2015

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