IMF predicts stronger growth in 2015

Published May 5, 2015
In its economic surveys, the IMF places the country in a region that includes the Middle East, North Africa, Afghanistan and Pakistan (MENAP).
 — Reuters/file
In its economic surveys, the IMF places the country in a region that includes the Middle East, North Africa, Afghanistan and Pakistan (MENAP). — Reuters/file

WASHINGTON: In Pakistan and other oil-importing countries of the region, growth is expected to strengthen from 3 per cent in 2014 to 4pc this year, the International Monetary Fund (IMF) predicted on Monday.

In its economic surveys, the IMF places the country in a region that includes the Middle East, North Africa, Afghanistan and Pakistan (MENAP).

In its latest economic outlook for the region titled: “MENAP: Oil, Conflicts and Transitions”, the IMF attributes this positive development to a gradual recovery in the euro area, improved domestic confidence, and more accommodative fiscal and monetary policies.

“Lower oil prices are helping, though their impact on near-term growth has been moderated in many countries by incomplete pass-through to retail fuel prices,” the report observes.

It points out that the benefits of lower oil prices are mainly in the form of improved fiscal/quasi-fiscal positions and external vulnerabilities rather than stronger growth.

It urges countries like Pakistan to solidify recent subsidy reforms to help lock in the gains as it can help reduce fiscal and external vulnerabilities where needed.

The report notes that following the 2011 downturn, economic activity has been slow to recover in MENAP oil importers. Growth lingered at 3pc in 2014, and unemployment remained close to 11pc.

In 2014, economic activity was weighed down by disappointing export growth, security concerns, and unresolved supply-side bottlenecks.

In some countries, real exchange rates appreciated as nominal exchange rates rose against the euro, on the back of a strengthening US dollar, against which some countries peg their currencies.

In Pakistan, Egypt and Lebanon, electricity supply disruptions and limited access to bank credit added to headwinds from weak confidence, taking a toll on private sector sentiment. Lower oil prices, due to their appearance late in the year and slow pass- through to local fuel prices, had little effect on reducing production costs and increasing disposable incomes.

In 2015, however, the economic growth is projected to strengthen by 1 percentage point to 4pc in 2015.

The IMF also notes signs of improving confidence in some of these countries, including falling risk premiums, stock market gains, and a pick-up in credit growth.

The oil-importing countries in this region are also benefitting from “advances in political transitions, through elections and new constitutions,” the report observes.

Lower oil prices are likely to support confidence by helping ease fiscal and external vulnerabilities, says the report. However, given the limited pass-through to retail prices across the region as a whole, its direct impact on growth may be modest and offset by intensifying security risks and spillovers from conflicts.

In countries like Pakistan, consumption will continue to be supported by remittance inflows and in others by public wage spending, and subsidies.

Elevated inflation gradually declining: The IMF notes that inflation in oil importing countries is set to decline sharply in 2015 —by 2.5 percentage points to 7pc — largely owing to lower food prices and still large negative output gaps.

In some cases, the removal of energy subsidies, monetisation of fiscal deficits and accommodative monetary policies would help sustain inflationary pressures.

Risks tilted to the downside: Downside regional and domestic risks dominate. Intensified security and social tensions, accompanied by larger spillovers to neighbouring countries and setbacks in political transitions and reform implementation could further undermine trade, confidence, and macroeconomic stability.

External risks are also tilted to the downside. Pakistan could also be affected by lower- than-expected growth in the GCC (Gulf Cooperation Council) countries, which in turn could reduce remittances.

On the upside, a greater-than-expected windfall from lower oil prices or a faster recovery in the euro area could bolster growth.

Cheaper oil reduces vulnerabilities: The report notes that in Pakistan and Lebanon, pass-through to domestic fuel prices is relatively strong and fast. Precautionary saving in response to uncertainty about the duration of the oil price shock and uncertainties amid continuing political transitions, is likely to cause households and firms to save most of the income gains resulting from lower oil prices.

The report, however, warns that the negative confidence effects of intensifying security concerns and regional spillovers can offset the boost to private consumption and investment from the remaining gains across the region.

The IMF also notes reserves coverage remains low — around three months of imports — in the region’s largest economies, Egypt and Pakistan.

Published in Dawn, May 5th, 2015

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