ISLAMABAD: The International Monetary Fund (IMF) says Pakistan’s economic program is subject to an unusual degree of uncertainty associated with security problems and the depth and duration of the global slowdown.
 
In a ‘program note,’ the IMF observes that despite the risk of further deterioration in the global economy, the initial success in stabilizing the economy augurs well for the program’s success.
 
However, to sustain the additional spending in the medium term, it remains crucial that Pakistan raise tax revenue. The mobilization of further external budget support is especially important for broadening the social safety net, supporting additional development expenditure, and rebuilding international reserves, the Fund says.
 
The program aims to restore financial stability through a tightening of fiscal and monetary policies to bring down inflation and strengthen foreign currency reserves, and protect the poor by strengthening the social safety net. The program also simultaneuosly looks to raise budgetary revenues through comprehensive tax reforms to enable the significant increases in public investment and social spending needed to achieve sustainable growth.
 
In late 2008, the government embarked on a stabilization program to address the current crisis, supported by nearly 7.6 billion dollars under 23-month Stand-by Arrangements with IMF. This exceptional financial support was necessary given the country’s sizeable external imbalances and the risk of large capital outflows.
 
The program got off to a good start. Macroeconomic imbalances have shrunk and inflation has fallen. The exchange rate has stabilized and foreign currency reserves have increased from 3.3 billion dollars in November 2008 to about 8.2 billion dollars in May 2009.
 
Demand for treasury bills has increased in response to an initial rise in interest rates by 200 basis points, allowing the government to retire some of its debt to the central bank. As the economic and financial situation improved, the authorities were able to lower the policy interest rate by 100 basis points in April 2009.
 
The note says raising budget revenues, however, has been challenging. Nevertheless, the authorities are maintaining good fiscal discipline by eliminating non-priority spending. The current account deficit has started to narrow, helped by the decline in oil prices. Inflation has fallen and is now expected to drop to about 14 per cent by June 2009. Important steps have been taken to strengthen bank supervision, reform the electricity sector, and improve the social safety net.
 
The global economic environment has deteriorated markedly since the beginning of the current program and Pakistan has not been immune from this process — the impact of the global slowdown on the country’s economy was now being felt.
 
Manufacturing, mainly in the textile sector has declined, with a related drop in exports. The overall economic situation remains difficult. The projection for economic growth for 2008-09 had been revised downward to two per cent and for 2009-10 to three per cent. Foreign investors remain skeptical about Pakistan’s near-term prospects. As a result, Pakistan’s ambitious privatization agenda is being delayed.