WASHINGTON: The International Monetary Fund has warned Pakistan that without fundamental changes in the energy sector untargeted electricity subsidies will remain large, which will further increase the country’s economic vulnerabilities.
Without “fundamental changes in the structure and the management of the sector untargeted electricity subsidies will remain large, at about 2 per cent of GDP which, by all measures, given the resource base in Pakistan, is quite high,” warned Adnan Mazarei, the IMF Mission Chief for Pakistan.
Mr Mazarei said that for creating employment opportunities and raising living standards, Pakistan “first and foremost” needs to raise energy supply.
The IMF has already conveyed its concerns to Pakistan, telling the authorities there that they need to make “structural changes” in the energy sector, “and this does not just mean price increases,” he added.
With unresolved structural problems, especially in the energy sector, Pakistan’s vulnerabilities had increased, the IMF official noted. Underlining the vulnerabilities, he pointed out: Pakistan’s real GDP this year is expected to grow at 3-1/2 per cent well below the 7 per cent that the authorities are legally required to absorb.
The country has two million new labour market entrants every year. And inflation is persistently in double digits. Last year, the fiscal deficit widened to 6.6 per cent of GDP.
In 2011 and 2012, the IMF expects GDP to be about 3.4 per cent, and CPI inflation at about 12 per cent. In the absence of corrective measures, the fiscal deficit is likely to reach 7 per cent of GDP.
“To address these vulnerabilities, a short-term action plan is needed that includes strengthening of public finances, and a tightening of monetary policy if inflation increases,” Mazarei said.
“It is particularly important to address the problems in the energy sector, and also the public enterprises which are consuming a large amount of subsidies and resources every year.”
Pakistan also needs to reduce the state’s footprint in the economy by restructuring loss-making public enterprises, improve the investment climate, make civil service reforms, and also take steps to improve the situation in the financial sector to allow better channelling of savings to borrowers and to investors, Mazarei said.
The IMF official attributed Pakistan’s vulnerabilities in the external sector, in large part, to developments in the international economy.
He noted that prices of cotton and textile had come down drastically, while oil prices remained risky. “And because economic activity is not robust, the demand for Pakistani products is coming down. And this may also affect remittances,” he said.
Mazarei said he could not tell Pakistani authorities when and how to adjust their monetary policies but he pointed out that the government has been borrowing both from the State Bank, and large amounts from the commercial banks.
The State Bank has been injecting large amounts of liquidity into the money markets, “which will push up prices, and eventually raise considerable pressures on interest rates,” he warned.