ISLAMABAD: The International Monetary Fund has projected that Pakistan’s economic growth is expected to accelerate to about 3.7pc over the next fiscal year, and to rise further in the medium-term as fiscal adjustment eases and structural reforms alleviate constrains in the energy sector.

In a report for the first review under the Extended Fund Facility (EFF), published on Friday, the IMF, however, cautioned that policy implementation risks could depress growth.

With policy reforms crucial to restoring stable growth, governance issues, capacity constraints, and any warning of the authorities’ commitment or the implementation momentum, would discourage investment.

“In particular, if reserves accumulation is not pursued, or if accumulation process is not managed well, there is a risk of disorderly foreign exchange market conditions which could devolve into broader balance of payments problems,” the IMF report warned.

The report went on to say that external vulnerabilities remain high.

Vulnerability to oil price shocks has risen in recent years; the country is vulnerable to inward remittance spillovers if economic conditions in GCC countries were to worsen or if expatriate workers were to reduce transfers out of concerns about conditions within Pakistan; and a slowdown in global economic activity could weaken exports.

The report says security situation continues to depress investment and growth.

Overall GDP is expected to expand by 2.8pc which represents 0.3pc higher than initial IMF programme forecast.

As reforms in the energy sector take hold, manufacturing sector is expected to expand faster than expected initially, although growth in the agriculture sector, in cotton production, in particular, is projected to be slow.

According to the report, inflation is projected to hover around 10pc in the remainder fiscal year of 2013-14 before easing to around 7pc in fiscal 2014-15, as inflation expectations will be anchored by prudent monetary policy and stable macroeconomic policies.

The current account deficit is expected to be about 1pc of GDP, higher than the initial programme forecast by about 0.4pc of the GDP.

Imports are expected to grow by 8pc, and exports are expected to grow more slowly.

Debt sustainability outlook has remained broadly unchanged relative to the EFF request. External debt is expected to decline to about 22pc of GDP in the medium term under the baseline scenario.

The debt sustainability analysis shows, however, how external debt is susceptible to sharp exchange rate depreciation or current account shock. In the case of Pakistan, the likely drivers of a non-interest current account shock would be a decline in remittances, or a rise in oil prices.