AFTER achieving stabilisation and fiscal consolidation in the first half of its tenure, the government’s economic performance is being monitored at home and abroad on the basis of progress on structural reforms for sustaining economic stability.

While giving a general thumbs down on the reform front so far, the International Monetary Fund (IMF) has called for accelerating the pace of removing structural bottlenecks and has presented a case scenario of what these critical corrections meant for Pakistan’s short- to medium-term future.

However, the analysis comes at a time the 36-month IMF programme contracted in September 2013 is in its last leg of completion in August this year. With all the ups and downs, the $6.64bn Extended Fund Facility (EFF) has so far seen around 15 waivers with total disbursements of $4.98bn.

Structural reforms advanced but remain incomplete in critical areas

The 9th review of the programme concluded by the IMF in December entailed two waivers of non-observance of end-September 2015 performance criteria on budget deficit and slippage on an indicative target on revenue collection and net domestic assets of the central bank. In the process, however, the government had to commit nine fresh targets (both performance criteria, structural benchmark) as compensation to conclude the programme on a positive note.

That seems aimed at securing political gain on fulfilling international obligations and then say good bye to the lender of last resort with the usual sloganeering of ‘breaking the begging bowl’ — once again. This would happen at a time the government would be already in a pre-poll preparations phase with expansionist policy and populist mood and shifting towards preference to ‘growth over fiscal tightening’. If the past is an indication, it is for the next government to consider if a new bailout is required at the end.

This has been recognised by the IMF by saying that fiscal policy has achieved a substantial consolidation and needs to solidify these gains. It, however, pointed out that a key medium-term risk could lie in slower reform implementation. “Slowdown or suspension of fiscal consolidation and key energy and other structural reforms could reverse recent stability gains and affect total factor productivity and potential growth”.

Understandably, the IMF staff has pointed out that deterioration of the power sector’s and other SOEs’ financial performance would lead to higher budgetary transfers to compensate for companies’ losses. Together with lower tax revenue, this would reduce the fiscal space for public investment and raise the deficit, potentially crowding out private investment and fueling inflation.

A reversal of stability gains together with slippages in energy sector and other structural reforms would imply that economic confidence and the business climate could deteriorate quickly, with increased instability and resumed power outages in the industry. As a result, medium-term growth could slow to about 3.5pc with increased domestic and external vulnerabilities.

It has predicted that with reforms the country could achieve about 5.5pc GDP growth rate by 2019-20.. Without reforms, the average inflation could increase to 7.5pc in 2019-20 but remain stable around 5pc with reforms.

Also, the IMF staff estimated that fiscal deficit could go beyond 5pc of GDP by 2020 without reforms while reforms could trim it down to just over 2pc of GDP. Moreover, reforms could reduce overall debt below 55pc of GDP which could otherwise stay around 63-64pc by 2019-20.

The IMF said despite a sustained improvement over the past three years, tax revenue is still very low (at 11pc of GDP against its documented potential of around 22pc of GDP) and widening of the tax net remains a challenge. “Little progress has been made in reforming the fiscal federalism system.”

Monetary policy has remained prudent in recent years and, low oil prices and strong remittances helped forex reserves strengthened to 3.8 months of imports in September 2015. “However, progress on enhancing central bank independence and strengthening the anti-money laundering (AML) framework has been partial.”

Structural reforms advanced but remain incomplete in critical areas. For example, quasi-fiscal losses in the power sector — which have accumulated to a stock of about 2pc of GDP — and in large public enterprises continue, calling for accelerated implementation of the privatisation and restructuring agenda for loss-making public enterprises and completing the energy sector reform.

In addition, there is a need to review efforts to strengthen the business climate. The IMF said the current account deficit had dropped from a peak of 8pc of GDP in 2008 to small 1pc, its structure — a large trade deficit (7.5pc of GDP) financed by remittances (7pc of GDP in fiscal 2015) and other transfers — highlighted the importance of strengthening Pakistan’s export competitiveness. Indeed, market shares for Pakistan’s exports have been either stagnant or declining.

Also the structure of the financial account showed reliance on debt issuance rather than on FDI flows, which have significantly declined over the last decade. The net International Investment Position (IIP) has marginally declined. The appreciation of the real effective exchange rate (REER) by 17pc over the past two years, while subject to significant uncertainty, point to overvaluation of varying degrees (between 5-20pc).

Also, the gross reserves have remained below the adequacy level. At $15.2bn as of end-September last year, they are at 67pc of the Assessing Reserve Adequacy (ARA) metric. While gross reserves are broadly in line with projections at the outset of the programme, the SBP spot foreign exchange purchases over the last two years have exceeded the significant windfall from commodity prices and remittances. So, continued accumulation of reserves is needed to further strengthen buffers while also supporting competitiveness.

Published in Dawn, Business & Finance weekly, January 18th, 2016